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Cite as: [2002] ScotSC 213

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Bibby Factors Scotland v. Brady [2002] ScotSC 213 (04 December 2002)

CA120/02

JUDGMENT OF SHERIFF PRINCIPAL EDWARD F BOWEN QC

in the cause

BIBBY FACTORS SCOTLAND LIMITED

PURSUERS

against

JOSEPH BRADY

DEFENDER

Act: Ms Stuart, Bermans, Solicitors.

Alt: Parratt, Advocate, instructed by Allan Findlay & Co, Solicitors.

GLASGOW, 4 December 2002.

The Sheriff Principal having resumed consideration of the cause, refuses the appeal and adheres to the sheriff's interlocutor dated 30 July 2002; finds the defender and appellant liable to the pursuers and respondents in the expenses occasioned by the appeal and remits the account, when lodged, to the auditor of court to tax and report; remits to the sheriff to proceed as accords.

NOTE:

[1] This action involves a claim for payment by the pursuers of £56,617.47. It is founded on the terms of a document headed Guarantee and Indemnity which was signed by the defender on 25 January 2001 and addressed to the pursuers. The opening provisions of the document are in the following terms:

"A In this Guarantee and Indemnity 'the company' means Investfast Limited trading as Mailstream Packaging having their Registered Office at 20 Springkell Drive, Glasgow G41 4EZ.

B In consideration of your agreeing at my/our request to conclude an agreement with the Company to purchase the Debts of the Company or continuing to purchase the Debts of the Company and/or approving any Debt under the terms of any existing agreement between you and the Company (either of which agreements are herein called 'Factoring Agreement') NOW the Indemnifier HEREBY:

1 Guarantee to you the due and punctual performance of all obligations by the Company to you under the Factoring Agreement.

2 Undertake to pay you on demand all money now or at any time owing to you by the Company.

3 Indemnify you from all losses costs damages expenses claims and demands of whatever nature arising from your purchasing the Debts (as that word is defined in the Factoring Agreement) of the Company and in particular (without prejudice to the generality of the foregoing) those arising out of the non-performance or breach by the Company of any of its obligations under the Factoring Agreement".

[2] According to the averments of the defenders the pursuers advanced sums of money "believed to be in the order of £50,000" to Investfast Limited which did not fall within the terms of the Factoring Agreement. The pursuers deny this averment, and contend that they did not make any advances other than against trade debts of the company, but in any event they challenge the relevancy of the defenders' averments, maintaining that the defender was obliged, by the plain terms of Clause B2 above to pay any sums which might be owing to the pursuers by Investfast Limited regardless of whether these were advanced under the Factoring Agreement or otherwise.

[3] The learned sheriff upheld the pursuers' submission and restricted proof to the question of quantum only. He took the view that Clause B2 was clear and unambiguous, and that the pursuers' construction fell to be upheld. In the present appeal counsel for the defender and appellant contended that the sheriff's approach was wrong. He advanced three propositions in support of the appeal, namely, (1) that construction of a commercial contract in every case required to be carried out by reference to recent authorities, notably those in the House of Lords, which supported a broader approach than the old method of restricting construction to the literal meaning of words. He contended that it was necessary in every case to look at surrounding circumstances or what is known as the "factual matrix". (2) Alternatively he contended that where a contractual term was ambiguous it required to be interpreted according to the principles above indicated. (3) In any event he contended that Clause B2 constituting as it did a cautionary obligation should be construed contra proferentem. On any of these approaches, he argued the guarantee in Clause 2 fell to be construed as applying only to monies due to the pursuers in terms of the Factoring Agreement.

[4] In support of these submissions counsel for the defender referred in some detail to the recent line of authority on the approach to interpretation of contract commencing with Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd, 1997 AC 749 (in particular to the remarks by Lord Hoffman at pp 774, 775 and 779), and proceeding through Investors Compensation Scheme v West Bromwich Building Society, 1998 1 WLR 896 and Napier & Ettrick (Lord) v R F Kershaw Ltd, 1999 1WLR 756. The broader approach to interpretation espoused by Lord Hoffman which emphasised the importance of surrounding circumstances had been followed in Scotland; Bank of Scotland v Dunedin Property Investment Co Ltd, 1998 SC 657; Howgate Shopping Centre Ltd v G L S 164 Ltd, 2000 SLT 820; Lonergan v W & P Food Service Ltd, 2002 SLT 908; Glasgow City Council v Caststop Ltd, 2002 SLT 47 and Waydale Ltd v D H L Holdings (UK) Ltd (No 2), 2002 SLT 224. Counsel also referred to the case of Loudonhill Contracts Ltd v John Mowlem Construction Ltd, 2002 SCLR 1111 which is referred to in the sheriff's Note. In relation to the decision in Bank of Scotland v Dunedin Property Investment Co Ltd counsel observed that the judges of the First Division had adopted varying approaches to the issue of interpretation which faced them. The Lord President (Roger) had adopted the approach of seeking the "commercially sensible construction" following the guidance of Lord Steyn in Mannai Investment Co Ltd v Eagle Star. Lord Kirkwood by contrast had approached the matter having regard to "surrounding circumstances" which in his view required the court to know "the commercial purpose of the contract and...in turn...knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating" (see p 670B-D). Lord Caplan's approach was to "attempt to extract from the language what parties must in all the circumstances have intended" (see p 676G). Counsel postulated this broad approach to the interpretation of commercial contracts as a background to arguing that one required to look at the commercial realities of the situation as well as to the context in which the words under consideration appeared.

[5] Counsel referred to the terms of the preamble to Clause B from which there was no doubt that the defender undertook obligations in consideration of the pursuers entering into a Factoring Agreement with Investfast Ltd. Whilst he advanced certain criticisms as to whether Clause B1 had real meaning, he accepted that both it and Clause B3 were restricted to obligations arising out of the factoring agreement and that, he said, "made sense". It made no sense, however, for B2 to be open ended both in terms of scope and duration. Applying the fifth test set out by Lord Hoffman in Investors Compensations Scheme Ltd (supra) one was entitled to "conclude from the background something must have gone wrong with the language". Applying the "commercial sense" test it made no sense for a shareholder of a company to grant a guarantee of the company's obligations on an open-ended basis. What did make sense was for Clause B2 to be qualified by the words "in terms of the Factoring Agreement".

[6] Counsel for the defender was correct, in my view, in submitting that in construing a contractual term the task of the court is not confined to examining that term and nothing else. The recognised approach to construction is set out concisely by Lord Hamilton in Waydale Ltd v DHL Holdings (supra) at p 229K where he says:

"Any exercise of interpretation of a contractual instrument is, broadly stated, an attempt to ascertain objectively the mutual intention of the parties to it from the language which they have used, viewed in the setting in which they have used it".

[7] Notwithstanding the broader approach which the courts have taken to construction the starting point remains "the language...used" and I agree with the judgment of the sheriff when he states that "the plain and ordinary meaning of Clause B2 is that the defender has undertaken to pay to the pursuers on demand all money now or at any time owing to them by Investfast Ltd howsoever that indebtedness arises". The Clause itself is unambiguous and the case of Loudonhill Contracts Ltd was properly referred to by the sheriff as authority for the view that, as a matter of general approach, words which are wide and unambiguous should be given their literal meaning and not restricted by a contrived ambiguity extracted from the particular context.

[8] Having said that there is nothing in the context in which Clause B2 appears which in my judgement creates any ambiguity. Whilst the preamble to Clause B indicates that obligations are undertaken "in consideration of" the pursuers entering into a Factoring Agreement it does not follow that those obligations are necessarily confined to matters arising from that agreement. Indeed it is difficult to derive from the overall terms of the Guarantee and Indemnity any conclusion other than that Clause B2 was specifically intended to cover a wider range of obligations than Clauses B1 and B3. There is no obvious reason why B2 should not have been qualified by the use of the words "under the Factoring Agreement" if that had been intended. Clause B6 which refers to a certificate "of the amounts due hereunder or under the Factoring Agreement" points clearly to an intention that the defender should have liability for a wider range of debt than sums strictly arising under the Factoring Agreement.

[9] The matter does not, however, end there because if one then moves on to seek a "commercially sensible" construction there is no reason why such construction should be "sensible" only from the point of view of one party. Whilst counsel's argument highlighted the lack of wisdom of a shareholder guaranteeing a wide range of obligations owed by a company that argument is one which is more pertinent to the provisions of Clause B1. It does not affect the "commercial sense" of the pursuers in obtaining a general cautionary obligation in respect of advances when entering into a financial arrangement with a company which, on any reasonable view, was one with which the defender clearly had a close relationship.

[10] I accordingly support the approach taken by the sheriff and refuse the appeal.