3PLR – AMALGAMATED INVESTMENT AND PROPERTY CO LTD (IN LIQUIDAZION) V. TEXAS COMMERCE INTERNATIONAL BANK LTD
POLICY, PRACTICE AND PUBLISHING, LAW REPORTS 3PLR
[PDF copy of this judgment can be sent to your email for N300 only. Just order through lawnigeria@gmail.com and info@lawnigeria.com or text 07067102097]
AMALGAMATED INVESTMENT AND PROPERTY CO LTD
(IN LIQUIDAZION)
V.
TEXAS COMMERCE INTERNATIONAL BANK LTD
COURT OF APPEAL, CIVIL DIVISION
30 JUNE, 1, 2, 3, 6, 7, 31 JULY 1981
LN-e-LR/1981/6 (CA)
OTHER CITATIONS
[1981] 3 ALL E.R. 577
BEFORE THEIR LORDSHIPS:
LORD DENNING MR,
EVELEIGH AND
BRANDON LJJ
REPRESENTATION
Andrew Morritt QC and Paul Walker for the plaintiff.
Anthony Colman QC and Mark Hapgood for the defendant.Solicitors: Allen AND Overy (for the plaintiff);
Nabarro Nathanson (for the defendant bank).
Henrietta Steinberg Barrister.
MAIN ISSUES
BANKING AND FINANCE: Banking practices – Two separate loan grants – Primary debtor acting as guarantor for subsidiary company abroad – Use of off-the-shelf entities or nominees abroad to grant loans guaranteed at home by way of property – Whether bank can appropriate surplus funds from sale of asset used as security by primary debtor to offset liability as guarantor due to shortfall from sale of assets of the nominee company
BUSINESS AND INDUSTRY: Company with subsidiary company abroad – Liabilities arising from acting as guarantor for loans of subsidiaries- Estoppel – Parties agreeing and assuming certain facts to be true – Parties assuming that loan made by bank to company’s subsidiary would be repaid by company – Whether company estopped from denying liability to repay loan.
DEBTOR AND CREDITOR: Winding up – Recovery of bank loan against guarantor being compulsorily wound up – Where guarantor is also a debtor to the same creditor as primary debtor – Whether surplus amount from sale of property used as security for debt can be applied to offset the outstanding arising from liability as guarantor
INTERNATIONAL TRADE: International project financing – Use of Special Purpose Companies to circumvent municipal restrictions – Nominee companies and off-the-shelf corporate entities – Legal effect
Cases referred to in judgments
Brogden v Metropolitan Railway Co (1877) 2 App Cas 666, HL, 12 Digest (Reissue) 60, 3130.
Crabb v Arun District Council [1975] 3 All ER 865,[1976] Ch 179,[1975] 3 WLR 847, CA, 21 Digest (Reissue) 6, 48.
DHN Food Distributors Ltd v London Borough of Tower Hamlets [1976] 3 All ER 462,[1976] 1 WLR 852, 74 LGR 506, 32 P AND CR 240,[1976] RVR 269, CA, Digest (Cont Vol E) 84, 165a.
Grundt v Great Boulder Pty Gold Mines Ltd (1937) 59 CLR 641.
Hollier v Rambler Motors (AMC) Ltd [1972] 1 All ER 399,[1972] 2 QB 71,[1972] 2 WLR 401,[1972] RTR 190, CA, 3 Digest (Reissue) 439, 2971.
Kendall (Henry)AND Sons (a firm) v William Lillico AND Sons Ltd [1968] 2 All ER 444,[1969] 2 AC 31,[1968] 3 WLR 110, sub nom Hardwick Game Farm v Suffolk Agricultural AND Poultry Producers Association Ltd [1968] 1 Lloyd’s Rep 547, HL, 2 Digest (Reissue) 163, 993.
McCutcheon v David MacBrayne Ltd [1964] 1 All ER 430,[1964] 1 WLR 125,[1964] 1 Lloyd’s Rep 16, 1964 SC (HL) 28, HL, 8(1) Digest (Reissue) 46, 265.
Miller (James) and Partners Ltd v Whitworth Street Estates (Manchester) Ltd [1970] 1 All ER 796,[1970] AC 583,[1970] 2 WLR 728,[1970] 1 Lloyd’s Rep 269, HL, 11 Digest (Reissue) 462, 776.
Spurling (J) Ltd v Bradshaw [1956] 2 All ER 121,[1956] 1 WLR 461,[1956] 1 Lloyd’s Rep 392, CA, 3 Digest (Reissue) 447, 3007.
Sutton AND Co v Grey [1894] 1 QB 285, 63 LJQB 633, 69 LT 673, 9 R 106, CA, 26 Digest (Reissue) 100, 564.
Wallersteiner v Moir [1974] 3 All ER 217,[1974] 1 WLR 991, CA, 16 Digest (Reissue) 24, 223.
Watcham v Attorney General of East African Protectorate [1919] AC 533,[1918–19] All ER Rep 455, 87 LJPC 150, 120 LT 258, PC, 17 Digest (Reissue) 50, 564.
Cases also cited
Balkis Consolidated Co Ltd v Tomkinson [1893] AC 396, HL.
Bolsom (Sidney) Investment Trust Ltd v E Karmios AND Co (London) [1956] 1 All ER 536,[1956] 1 QB 529, CA.
Calgary Milling Co v American Surety Co of New York [1919] 3 WWR 98, PC.
Canadian Superior Oil Ltd v Paddon-Hughes Development Co Ltd (1970) 12 DLR (3d) 247.
Central Newbury Car Auctions Ltd v Unity Finance Ltd [1956] 3 All ER 905,[1957] 1 QB 371, CA.
Combe v Combe [1951] 1 All ER 767,[1951] 2 KB 215, CA.
De Tchihatchef v Salerni Coupling Ltd [1932] 1 Ch 330,[1931] All ER Rep 233.
Eaves, Re, Eaves v Eaves [1939] 3 All ER 260,[1940] Ch 109, CA.
Edgington v Fitzmaurice (1885) 29 Ch D 459,[1881–5] All ER Rep 856, CA.
Habib Bank Ltd v Habib Bank AG Zurich [1981] 2 All ER 650,[1981] 1 WLR 1265, CA.
Hopgood v Brown [1955] 1 All ER 550,[1955] 1 WLR 213, CA.
M’Cance v London AND North Western Railway Co (1864) 3 H AND C 343, 159 ER 563.
McCathie v McCathie [1971] NZLR 58.
Moorgate Mercantile Co v Twitchings [1976] 2 All ER 641,[1977] AC 890, HL.
Ramsden v Dyson (1866) LR 1 HL 129, HL.
Ruben v Great Fingall Consolidated [1906] AC 439, [1904–7] All ER Rep 460, HL.
Sarat Chunder Dey v Gopal Chunder Laha (1892) LR 19 Ind App 203, PC.
Simm v Anglo-American Telegraph Co (1879) 5 QBD 188, CA.
Sohio Petroleum Co v Weyburn Security Co Ltd (1970) 13 DLR (3d) 340.
Spiro v Lintern [1973] 3 All ER 319,[1973] 1 WLR 1002, CA.
Syros Shipping Co SA v Elaghill Trading Co, The Proodos C [1981] 3 All ER 189.
Taylor Fashions Ltd v Liverpool Victoria Trustees Co Ltd, Old AND Campbell Ltd v Liverpool Victoria Trustees Co Ltd [1981] 1 All ER 897,[1981] 2 WLR 576.
Western Fish Products Ltd v Penwith District Council [1981] 2 All ER 204, CA.
Willmott v Barber (1880) 15 Ch D 96.
HISTORY AND SUMMARY OF FACTS
An English property company arranged with an English merchant bank that the bank should lend it $3m on the security of properties in England owned by the company and should also lend $3,250,000 (‘the Nassau loan’) to a wholly-owned Bahamian subsidiary of the company on the security of an office building in Nassau owned by the subsidiary and a guarantee provided by the English company. On 23 September 1970, in a letter to the subsidiary, the bank confirmed the arrangements made and expressly referred to the security of the guarantee. Under the guarantee, which was signed on 28 September 1970, in consideration of the bank from time to time making loans or advances or giving credit to its Bahamian subsidiary, the English company covenanted to pay the bank on demand all moneys at any time owing or payable to the bank by the subsidiary. On the same date, by a letter to the bank, the English company acknowledged the completed guarantee, the letter being expressed to be in relation to the proposed loan of $3,250,000 secured on the Nassau building by the company’s Bahamian subsidiary. In order to circumvent Bahamian restrictions on foreign banks trading in the Bahamas, the bank purchased an ‘off the shelf’ Bahamian subsidiary (‘the Bahamian bank’) and on 31 December 1970 the Nassau loan was effected by the bank making a loan to the Bahamian bank which in turn advanced the same sum to the company’s Bahamian subsidiary. The mortgage of the Nassau building was executed between the Bahamian bank and the subsidiary, but the guarantee was never amended and remained a guarantee by the English company in respect of money owing to the bank rather than to the Bahamian bank. In the course of dealings between the parties, however, it was apparent that both the bank and the English company believed the guarantee to be binding and effective and to cover the liability of the English company in respect of the Nassau loan. Sometime later the English company got into financial difficulties and was ordered to be compulsorily wound up. Both the bank and Bahamian bank exercised their respective powers as mortgagees and sold the Nassau building and the English properties owned by the English company. That left some $750,000 outstanding on the Nassau loan while the bank held a credit balance of about the same amount after the sale of the English properties. The bank thereupon applied the credit balance to discharge the amount owing on the Nassau loan claiming that under the guarantee it was entitled to do so. The liquidator of the English company issued a writ seeking a declaration that the English company was under no liability to the bank under the guarantee in respect of the amount still owing on the Nassau loan. The bank contended (i) that the Bahamian bank was no more than a nominee of the bank and the relationship between the two was close that the guarantee ought to apply to the Nassau loan made by the Bahamian bank, and (ii) that the English company was estopped from contending that the guarantee did not cover its subsidiary’s liability to the Bahamian bank, because the English company had actively acquiesced in and encouraged the bank’s assumption that it had certain legal rights against the company and it would be unjust or unconscionable for the company subsequently to deny the existence of those rights. The judge ([1981] 1 All ER 923) dismissed the claim for a declaration, holding that the English company’s conduct estopped it from denying that it had given an effective guarantee to the bank in respect of money owed by the company’s Bahamian subsidiary to the Bahamian bank, even though on the natural and ordinary construction of the guarantee it applied only to the money owing to the bank and not to the money owing to the Bahamian bank. The English company appealed.
Held – The appeal would be dismissed for the following reasons—
(1) The guarantee was to be construed in the general context of the parties’ transaction, rather than as a separate document in isolation, and it was clear from the context of the transaction as a whole (a) that, as evidenced by the correspondence, the English company was not merely a guarantor brought in after the formation of the principal contract but had initially requested the English bank to make the loan, had negotiated the terms, and was itself financially interested in the transaction,(b) that the parties always intended that the English company would be responsible for seeing that the Nassau loan was repaid, and (c) that the Bahamian bank through which the loan was effected was entirely the creature of its parent company, the English bank, and was no more than a conduct through which the loan was channelled. Accordingly, the English company was contractually bound to the English bank, on the basis of the guarantee, to discharge any moneys owing by the company’s Bahamian subsidiary to the Bahamian bank (see p 582 c to g, p 585 b, p 586 e to j, p 588 b, p 590 a and p 592 a, post).
(2) In any event, the conduct of the parties took place on the basis of a state of affairs namely that the guarantee given by the English company would cover repayment of the Nassau loan by the company’s Bahamian subsidiary, which was agreed and assumed by both parties to be true and on the basis of which they had entered into the loan transaction and the guarantee. That gave rise to an estoppel by convention which estopped each party as against the other from questioning the truth of the facts assumed by them to be true. The English company was therefore estopped from denying that by the contract relating to the Nassau loan it had undertaken to repay the loan (see p 582 h, j, p 583 c d, p 584 a to p 585 b, p 587 h to p 588 b, p 591 c to e and j to p 592 a, post).
Per Brandon LJ. Although a party cannot in terms use an estoppel as a sword or found a cause of action on an estoppel, he may, as a result of being able to rely on an estoppel, succeed on a cause of action in which but for being able to rely on the estoppel he would necessarily have failed (see p 591 h, post).
Decision of Robert Goff J [1981] 1 All ER 923 affirmed on other grounds.
Notes
For guarantees, see 20 Halsbury’s Laws (4th Edn) paras 101–148, and for cases; on the subject, see 26 Digest (Repl) 370–395, 127–139.
For estoppel by conduct, see 16 Halsbury’s Laws (4th Edn) paras 1609–16 9), and for cases on the subject, see 21 Digest (Repl) 411–461, 1310–1601.
Appeal
The plaintiff, Amalgamated Investment AND Property Co Ltd (in liquidation), appealed from the judgment of Robert Goff J ([1981] 1 All ER 923,[1981] 2 WLR 554) given on 16 May 1980 whereby he dismissed the plaintiff’s claim for declaratory relief against the defendant, Texas Commerce International Bank Ltd. The facts are set out in the judgment of Lord Denning MR.
MAIN JUDGMENT
Cur adv vult
31 July 1981. The following judgments were delivered.
LORD DENNING MR. This case is complicated beyond measure by the existence of wholly-owned subsidiaries. These are the dramatis personae: a property company registered in England called Amalgamated Investment AND Property Co Ltd (now in liquidation). I will call it ‘Amalgamated’. It had a wholly-owned subsidiary registered in the Bahamas called Amalgamated (New Providence) Property Ltd. I will call it ‘ANPP’. Also a merchant bank registered in England called Texas Commerce International Bank Ltd. I will call it the ‘bank’. It had a wholly-owned subsidiary registered in the Bahamas called Portsoken Properties Ltd; I will call it ‘Portsoken’.
Treating the wholly-owned subsidiaries as one with their parent companies, the facts in broad outline are these. There was a building site in the centre of Nassau in the Bahamas. It was ripe for development. Amalgamated wanted to raise $US3,250,000 in order to erect a building on the site. They borrowed it from the bank. Amalgamated mortgaged the property to the bank to secure the loan. As further security Amalgamated also gave a guarantee to the bank. It is on that guarantee that the whole case depends. I will call it the ‘guarantee’. The loan was not repaid. The property was sold. It realised $2,500,000, leaving a deficit of $750,000 unpaid, for which the guarantee was the only security.
Amalgamated also owned properties in England which they had mortgaged to the bank. These were ‘all money’ mortgages covering all moneys owing to the bank by Amalgamated on any account whatever. These mortgages covered, not only the moneys advanced by the bank on the English properties, but also the moneys owing by Amalgamated on the guarantee in the Bahamas.
Amalgamated defaulted on the English loan. The English properties were realised. These more than covered the English loan. There was a surplus of $750,000 in the hand of the bank. The bank claimed to apply that surplus to wipe out the $750,000 unpaid on the guarantee.
A year later Amalgamated went into liquidation. The liquidator looked into the papers. He contended that the guarantee did not cover the deficit of $750,000 on the Nassau loan. He said that Amalgamated were entitled to the surplus of $750,000 which was realised on the sale of the English properties. The liquidator claimed that it should be paid over to him.
The liquidator bases his case on the introduction into the story of wholly-owned subsidiaries. He says that the guarantee only covered the sums which Amalgamated owed to the bank: and that it did not cover the sums which were owed by their wholly-owned subsidiary, ANPP, to the bank. The bank say that it did cover them: or alternatively that Amalgamated were estopped from saying that it did not cover them. The full facts are set out by Robert Goff J ([1981] 1 All ER 923,[1981] 2 WLR 554). I will only set out such details as are necessary for the points of law.
The execution of the guarantee
The guarantee was signed on 28 September 1970. It is to be construed together with these two letters. On 23 September 1970 the bank wrote to ANPP:
‘We confirm that we will be pleased to make available to ANPP a facility of US $3,250,000 for a period of five years from the date that the borrowing is taken …
The borrowing will be secured by a legal mortgage in respect of the freehold property, The Harrison Building, Marlborough Street, Nassau, Bahamas, together with a guarantee for US $3,250,000 from Amalgamated Investment AND Property Co Ltd.’
On 28 September 1970 Amalgamated replied:
‘Proposed Eurodollar Loan—US$3,250,000—Harrison Building—Amalgamated (New Providence) Property Ltd. Thank you for your letter of the 23rd instant wherein you enclose a guarantee which has been completed and is returned herewith.’
The guarantee was on a printed form. It was addressed to the bank with blanks filled in type (here shown in capitals):
‘We, AMALGAMATED INVESTMENT AND PROPERTY CO LTD 9–10 GRAFTON STREET, LONDON, W1X 4DA,(hereinafter called “the Guarantor”), in consideration of your from time to time making or contributing loans or advances to or otherwise giving credit or affording banking accommodation or facilities to AMALGAMATED (NEW PROVIDENCE) PROPERTY LTD of PO BOX 868, NASSAU, BAHAMAS (hereinafter called “the Principal”), hereby unconditionally guarantee to and agree with you as follows:
‘1. The Guarantor will pay to you on demand all moneys which now are or shall at any time or times hereafter be due or owing or payable to you on any account whatsoever by the Principal, either solely or jointly with any other person, firm or company, together with all … banking charges and expenses which you may in the course of your business as bankers charge against the Principal … provided nevertheless that the total amount recoverable from the Guarantor here under shall not exceed US$3,250,000 …
‘10. For all purposes including any legal proceedings a copy of the account of the Principal in your books signed by any of your officers shall be accepted by the Guarantor as conclusive evidence of the state of such account …
‘17. This Guarantee is to be governed by and construed according to English Law and the Guarantor submits to the jurisdiction of the English Courts.
‘Dated this 28th day of SEPTEMBER 1970.’
At that date, 28 September, 1970 as the covering letters show, the facilities were to be made available by the bank to ANPP.
The interposition of a subsidiary
The judge describes the introduction of a wholly-owned subsidiary of the bank ([1981] 1 All ER 923 at 927,[1981] 2 WLR 554 at 559). It was a Bahamian company called Portsoken Properties Ltd (‘Portsoken’). This was done for exchange control purposes. It was a channel through which money passed. The position was well stated in a letter by the bank’s solicitors to the Controller of Exchange in the Bahamas on the 15 December 1970. The wholly-owned subsidiary (Portsoken) was to—
‘1. Receive the US dollar funds from its parent company and lend them to ANPP in US dollars without conversion into Bahamian dollars or sterling. 2. Take a Mortgage from ANPP expressed in US dollars. 3. Maintain a US dollar bank account for the purpose of handling payments of principal and interest in connection with this back-to-back loan.’
The transaction of 31 December 1970
On 31 December 1970 ANPP executed a mortgage on the Harrison Building in favour of Portsoken for securing $3,250,000. That sum was entered in the books as a loan by the bank to Portsoken and then as a loan by Portsoken to ANPP. And likewise with interest paid by ANPP to Portsoken: and by Portsoken to the bank. On many occasions, however, the interest was paid direct by ANPP to the bank.
Note the important point. The guarantee was not touched. It still remained dated 28 September 1970. It still remained a guarantee of moneys owing to the ‘Principal’, that is, to the bank. The judge considered this to be ‘a crucial defect’. He said ([1981] 1 All ER 923 at 928,[1981] 2 WLR 554 at 560).
‘… there was a crucial defect in these arrangements; the guarantee furnished by [Amalgamated] to the bank was not amended; it remained a guarantee in respect of money due or owing or payable to the bank, not to Portsoken.’
Was it a crucial defect?
I take a different view from the judge. He has construed the guarantee in its strict literal sense, all by itself without regard to the letters which accompanied it and without regard to the surrounding circumstances or the ‘factual matrix’ to use the modern equivalent.
The guarantee of 28 September 1970 was of no effect by itself. It only took effect on 31 December 1970 when the sum of $3,250,000 was advanced. That sum of $3,250,000 is the connecting link which joins everything together. It was the ‘facility’ which the bank promised on 23 September 1970 to make available to ANPP and which was to be supported by a mortgage on the Harrison Building; and by a guarantee from Amalgamated to the bank. It was the ‘banking facilities’ contained in the guarantee itself. It was the ‘facility’ which was in fact granted on 31 December 1970 and supported by a mortgage. The words of the printed form must, in my opinion, be subordinated to the express provisions of the correspondence which brought it into being. That correspondence shows, beyond doubt, that the guarantee was intended to cover the $3,250,000 lent by the bank to ANPP, even though it was done through the channel of its wholly-owned subsidiary, Portsoken.
Apart from this, I think that this is one of those cases where a wholly-owned subsidiary is to be regarded as the alter ego of the parent company. We have often lifted the corporate veil so as to show forth the realities of company life. This wholly-owned subsidiary was the creature of the parent company. It did exactly what the parent company told it to do. It was nothing more nor less than a conduit pipe through which payments were made and received. It received no fees. It made no profits. It sustained no losses. Its transactions were all paper transactions, all book entries, recording the sums in and out. It was a puppet which danced to the bidding of the parent company just as Dr Wallersteiner’s companies did (see Wallersteiner v Moir [1974] 3 All ER 217 at 238,[1974] 1 WLR 991 at 1013), and as the ‘three in one’ companies did in DHN Food Distributors Ltd v London Borough of Tower Hamlets [1976] 3 All ER 462,[1976] 1 WLR 852. If we regard Portsoken as the alter ego of the bank, the moneys owing by ANPP to Portsoken (a wholly-owned subsidiary) are moneys owing to the bank. They are therefore covered by the guarantee.
Then again there is the conduct of the parties at the time of the transaction. This may be very relevant (see Miller (James) and Partners Ltd v Whitworth Street Estates (Manchester Ltd [1970] 1 All ER 796 at 805,[1970] AC 583 at 611). In this case just look at the time when the $3,250,000 was advanced by Portsoken to ANPP. The parties must have thought that the guarantee covered the loan. Otherwise they would surely have amended the guarantee so as to cover it.
In my opinion, therefore, the guarantee given by Amalgamated covered the moneys owing by ANPP to Portsoken which was the wholly-owned subsidiary of the bank. If this be correct, it is the end of the case. But as the judge thought the guarantee did not cover the loan, I shall go on to consider subsequent conduct.
Subsequent conduct
For many years I thought that when the meaning of a contract was uncertain you could look at the subsequent conduct of the parties so as to ascertain it. That seemed to me sensible enough. The parties themselves should know what they meant by their words better than anyone else. In this I was supported by Watcham v Attorney General of East African Protectorate [1919] AC 533,[1918–19] All ER Rep 455, a Privy Council case which was applied repeatedly in my early days in the common law courts. But it was always repudiated by the more logical minds in Chancery. Eventually the logicians prevailed. In James Miller James) and Partners Ltd v Whitworth Street Estates (Manchester) Ltd [1970] 1 All ER 796 at 798,[1970] AC 583 at 603 Lord Reid said:
‘… it is not legitimate to use as an aid in the construction of the contract anything which the parties said or did after it was made. Otherwise one might have the result that a contract meant one thing the day it was signed, but by reason of subsequent events meant something different a month or a year later.’
I can understand the logic of it when the construction is clear; but not when it is unclear. Still, we must accept it. Nevertheless a way of escape was left open by Viscount Dilhorne in that very case when he said ([1970] 1 All ER 796 at 805,[1970] AC 583 at 611): ‘… subsequent conduct by one party may give rise to an estoppel.’
So here we have available to us, in point of practice if not in law, evidence of subsequent conduct to come to our aid. It is available, not so as to construe the contract, but to see how they themselves acted on it. Under the guise of estoppel we can prevent either party from going back on the interpretation they themselves gave to it.
The conduct here
The evidence is overwhelming to show that, from the very moment when the $3,250,000 was advanced to ANPP, all the parties thought that it was secured not only by the mortgage of the Harrison Building but also by the guarantee of Amalgamated. In pursuance of that belief the bank embarked on a course of conduct, rearranging their portfolio of investments, releasing properties and moneys to Amalgamated which they would not have done except on the basis that the guarantee of Amalgamated covered the loan to ANPP. The judge tells the story ([1981] 1 All ER 923 at 929–934,[1981] 2 WLR 554 at 562–568).
Now assuming that this belief was mistaken (and the judge thought it was but I do not) a question arises about the law of estoppel. The mistake by the bank was self-induced. They had overlooked the wording of the guarantee. They thought it applied to moneys owing to Portsoken as well as moneys owing to the bank. This was the bank’s own mistake. It was not induced by Amalgamated. Nor did Amalgamated do anything to contribute to it or to reinforce it, except this: they did not contradict it. They did not tell the bank that it was mistaken. But then, it is said, how could Amalgamated be expected to contradict it, when they were under the same mistake? So runs the argument on behalf of Amalgamated. The bank made a mistake of its own; everything it did followed from its own mistake. So it should put up with the consequences.
The judge put this telling point: suppose that Amalgamated knew that the bank were under a mistake, and did not tell the bank but took advantage of it for their own benefit. Could Amalgamated then take advantage of it? Clearly not. Then what difference does it make that Amalgamated were under the same mistake?
Course of dealing
Although subsequent conduct cannot be used for the purpose of interpreting a contract retrospectively, yet it is often convincing evidence of a course of dealing after it. There are many cases to show that a course of dealing may give rise to legal obligations. It may be used to complete a contract which would otherwise be incomplete: see Brogden v Metropolitan Railway (1877) 2 App Css 666 at 682 per Lord Hatherley. It may be used so as to introduce terms and conditions into a contract which would not otherwise be there: see J Spurling Ltd v Bradshaw [1956] 2 All ER 121,[1956] 1 WLR 461, and Henry Kendall AND Sons (a firm) v William Lillico AND Sons Ltd [1966] 1 All ER 309 at 322, 327–329,[1966] 1 WLR 287 at 308, 316, CA;[1968] 2 All ER 444 at 462, 474–475, 481,[1969] 2 AC 31 at 90, 104, 113(per Lord Morris, Lord Guest and Lord Pearce in the House of Lords all disapproving the dictum of Lord Devlin in McCutcheon v David Macbrayne Ltd [1964] 1 All ER 430 at 437,[1964] 1 WLR 125 at 134) and Hollier v Rambler Motors Ltd [1972] 1 All ER 399 at 403–404,[1972] 2 QB 71 at 77–78 per Salmon LJ. If it can be used to introduce terms which were not already there, it must also be available to add to, or vary, terms which are there already, or to interpret them. If parties to a contract, by their course of dealing, put a particular interpretation on the terms of it, on the faith of which each of them to the knowledge of the other acts and conducts their mutual affairs, they are bound by that interpretation just as if they had written it down as being a variation of the contract. There is no need to inquire whether their particular interpretation is correct or not, or whether they were mistaken or not, or whether they had in mind the original terms or not. Suffice it that they have, by the course of dealing, put their own interpretation on their contract, and cannot be allowed to go back on it.
To use the phrase of Latham CJ and Dixon J in the Australian High Court in Grundt Great Boulder Pty Gold Mines Ltd (1937) 59 CLR 641 the parties by their course of dealing adopted a ‘conventional basis’ for the governance of the relations between them, and are bound by it. I care not whether this is put as an agreed variation of the contract or as a species of estoppel. They are bound by the ‘conventional basis’ on which they conducted their affairs. The reason is because it would be altogether unjust to allow either party to insist on the strict interpretation of the original terms of the contract when it would be inequitable to do so, having regard to dealings which have taken place between the parties. That is the principle on which we acted in Crabb v Arun District Council [1975] 3 All ER 865,[1976] Ch 179. It is particularly appropriate here where the judges differ as to what is the correct interpretation of the terms of the guarantee. The trial judge interpreted it one way. We interpret it in another way. It is only fair and just that the difference should be solved by the course of dealing, by the interpretation which the parties themselves put on it and on which they have conducted their affairs for years.
So I come to this conclusion: when the parties to a contract are both under a common mistake as to the meaning or effect of it and thereafter embark on a course of dealing on the footing of that mistake, thereby replacing the original terms of the contract by a conventional basis on which they both conduct their affairs, then the original contract is replaced by the conventional basis. The parties are bound by the conventional basis. Either party can sue or be sued upon it just as if it had been expressly agreed between them.
Conclusion
The doctrine of estoppel is one of the most flexible and useful in the armoury of the law. But it has become overloaded with cases. That is why I have not gone through them all in this judgment. It has evolved during the last 150 years in a sequence of separate developments: proprietory estoppel, estoppel by representation of fact, estoppel by acquiescence and promissory estoppel. At the same time it has been sought to be limited by a series of maxims: estoppel is only a rule of evidence; estoppel cannot give rise to a cause of action; estoppel cannot do away with the need for consideration, and so forth. All these can now be seen to merge into one general principle shorn of limitations. When the parties to a transaction proceed on the basis of an undefying assumption (either of fact or of law, and whether due to misrepresentation or mistake, makes no difference), on which they have conducted the dealings between them, neither of them will be allowed to go back on that assumption when it would be unfair or unjust to allow him to do so. If one of them does seek to go back on it, the courts will give the other such remedy as the equity of the case demands.
That general principle applies to this case. Both Amalgamated and the bank proceeded for years on the basis of the underlying assumption that the guarantee of Amalgamated applied to the $3,250,000 advanced by the bank for the Nassau building. Their dealings in rearranging the portfolio, in releasing properties and moneys, were all conducted on that basis. On that basis the bank applied the surplus of $750,000 (on the English properties) in discharge of the obligations of Amalgamated under the guarantee. It would be most unfair and unjust to allow the liquidator to depart from that basis and to claim back the $750,000 now. That was ultimately the paramount reason why the judge rejected the liquidator’s claim. He summed up his view in this one sentence ([1981] 1 All ER 923 at 938–939,[1981] 2 WLR 554 at 574):
‘… I am satisfied that [Amalgamated’s] conduct, though of course completely innocent, so influenced [the bank’s] conduct, as to render it unconscionable on the part of [Amalgamated] now to take advantage of the bank’s error.’
And the judge speaks of it as being ‘unconscionable’ for the representor to go back on his representation. In those phrases the judge is applying the general principle of estoppel which I have stated. I agree with his analysis of the cases and with his conclusion. I would dismiss the appeal.
EVELEIGH LJ. The obligations assumed by Amalgamated, the plaintiffs, and the bank, the defendant, in my opinion clearly emerge from the correspondence between the parties. There would have been no problem had there not been injected into their agreement a standard banking form which has been treated in argument as being the guarantee. The phrase ‘being the guarantee’ would be more appropriate in the case where the guarantor has no other interest in the transaction than to guarantee the obligations of another. In such a case the document alone is treated as the agreement between the parties. As in all written contracts, however, it can embody terms previously agreed by other means. But to satisfy the Statute of Frauds (1677) it is put into writing as a written note or memorandum necessary for the enforcement of a contract of guarantee.
Where the guarantee does not stand alone but is part of a larger transaction, even an oral promise of guarantee is enforceable (see Sutton AND Co v Grey [1894] 1 QB 285). Not unnaturally, however, businessmen like to have written evidence of their agreements whether the Statute of Frauds requires it or not.
I make these preliminary remarks because at times it seemed that we were in danger of treating the bank’s printed form as though it stood alone and was to be construed in isolation as if it required the strictness of construction appropriate to commercial documents such as bills of lading which have a universally recognised character which is of importance to a number of people other than those concerned in the original contract.
Amalgamated did not come into this matter simply as guarantors after the formation of a principal contract. They and the bank were the principal negotiators in reaching an agreement whereby the bank at the request of Amalgamated agreed to provide money to be used in connection with property development in the Bahamas in which Amalgamated had a great financial interest. The Harrison Building was charged to Barclays Bank. At the request of Amalgamated the bank offered on 11 July 1969 to make available a facility of $3,000,000 for a period of five years to Gleniston Gardens Estate Ltd, a subsidiary of Amalgamated. They wrote:
‘The borrowing would be secured by a legal mortgage in respect of the freehold property, the Harrison Building, now in the course of erection at Marlborough Street, Nassau, Bahamas, together with a guarantee for the full amount of the facility from Amalgamated Investment Property Co Ltd. … Your company would be responsible for the bank’s legal fees, stamp duty, etc.’
It is not clear who actually owned the Harrison Building at that stage. It does not matter. The building was charged to Barclays Bank to secure a loan and the intention was that the defendant bank should provide facilities for Barclays to be paid off and for the balance of the agreed sum to be made available to Gleniston who would be the owners of the Harrison Building. Amalgamated accepted the offer ‘on behalf of Amalgamated and the Gleniston Gardens Estate Ltd’. They signed a standard guarantee, the printed terms of which were clearly appropriate.
Amalgamated themselves were asking for the money. The bank was agreeing to provide it and to allocate it as Amalgamated requested. Amalgamated were clearly undertaking to see that the defendants were repaid.
Subsequently Amalgamated asked for ANPP to be substituted for Gleniston and for the loan to be increased to $3,250,000. Amalgamated wrote to the bank on 12 May 1970: ‘As discussed, I confirm that Mr Harrison wishes to transfer the Harrison Building from the Gleniston Gardens Estate Ltd to another wholly owned subsidiary of ours in the Bahamas, Amalgamated (New Providence) Property Ltd.’ On 23 September 1970 the bank wrote confirming their agreement to the variation. In setting out the terms that had been agreed they stated that the borrowing would be secured by a legal mortgage in respect of the Harrison Building together with a guarantee from Amalgamated. They stated that the guarantee completed in relation to Gleniston Gardens Estate Ltd had been cancelled. Amalgamated signed another standard guarantee form which, in so far as is material, read as follows:
‘We, AMALGAMATED INVESTMENT AND PROPERTY CO LTD 9–10 GRAFTON STREET, LONDON, W1X 4DA,(hereinafter called “the Guarantor”), in consideration of your from time to time making or contributing loans or advances to or otherwise giving credit or affording banking accommodation or facilities to AMALGAMATED (NEW PROVIDENCE) PROPERTY LTD of PO BOX 868, NASSAU, BAHAMAS (hereinafter called “the Principal”), hereby unconditionally guarantee to and agree with you as follows:
‘1. The Guarantor will pay to you on demand all moneys which now are or shall at any time or times hereafter be due or owing or payable to you on any account whatsoever by the Principal …’
Then, for exchange control reasons and as the judge explains in detail, the bank, to use its own solicitor’s word, ‘channelled’ the loan through Portsoken Ltd, a paper company brought into action solely for the purpose. No new standard form guarantee was signed.
Ignoring the existence of the guarantee form, in my opinion the agreement reached between the parties orally and evidenced by or contained in (it matters not) the correspondence was clearly to the effect that Amalgamated would be responsible for seeing that the bank was repaid. The subsequent negotiations between Amalgamated and the bank after the money was made available on 31 December 1970 and up to 1976 in which Amalgamated clearly recognised this obligation provides admissible and strong evidence of this. Are we driven to arrive at a different conclusion because of the existence of the standard guarantee form containing the name of ANPP?
It might have been possible to have approached this case on the basis that the form was not introduced into the final contract. In that case the position would be as I have stated above. However, this case has been argued on the basis that it formed part of the final agreement. In that case the undertaking by the guarantor must be construed in the general setting of the transaction. It was a document that had been used by the bank to secure its own position in relation to the facilities it was affording. I think that the reference to ‘all monies … payable to you … by the Principal’(ie ANPP) can only refer to the facility which the bank was affording. In the context of the whole transaction, it can in my opinion have no other meaning. The fact that the money could be legally demanded in the first instance by Portsoken does not rob it of its character of moneys payable to the bank, and the fact that Portsoken would first receive it and hand it over to the bank does not rob it of the description of moneys payable by ANPP. To deny this result by an analytical examination of the different legal liabilities engendered by the form which the transaction ultimately took is to deprive the words of the guarantee of a wider meaning which they are fully capable of bearing. It runs counter to all principles of construction to give the words a meaning that would defeat the clear intention of the parties as revealed by the rest of the relevant evidence of the agreement. I too am of the opinion that Amalgamated’s claim fails on this ground.
As the question of estoppel has been argued before this court, I think I should say a few words on that matter on the assumption that the guarantee was so worded as not to cover the transaction. After 31 December 1970 changes were made in the arrangements by which a number of properties had been charged to secure to the bank two separate loans, namely one of $US3,000,000(called the UK loan) and one of $3,250,000 (the Nassau loan). These loans were quite independently secured, the UK loan by a number of properties and the Nassau loan by the Harrison Building. It seems probable that the bank at all times thought that the charges were related in that they supported an all moneys guarantee covering both loans. The negotiations which took place and the subsequent agreements arrived at were clearly based upon the common understanding that the guarantee in relation to ANPP made them liable to the bank in respect of the Nassau loan. In so far as it is said that the bank acted to its detriment in relying on that assumption, I find it difficult to say that Amalgamated were responsible, therefore, simply on the basis that their mistake might be said to have strengthened the bank’s assumption. Furthermore, I find it difficult to see how the substitution of properties in the list of those charged to the bank and their revaluation was detrimental to the bank’s interests. The only property charged to secure the Nassau loan was the Harrison Building. The revaluation showed that that building would no longer realise an amount sufficient to cover the loan. The bank required a 150% cover on the joint value of the two loans. A variation in the list of properties was designed not only to release some at the request of Amalgamated but also, on the bank’s insistence, to provide that 150% overall cover. Ex hypothesis, the ANPP guarantee being worthless, the only guarantee which the bank was entitled to enforce, namely in respect of the UK loan, now became more firmly secured. Therefore the guarantee position was more favourable to the bank than it had been. However, in the later stages of the negotiations the bank refrained from calling in the loan, and in particular the Nassau loan, at a time which might have been more favourable from its point of view and also extended the time for repayment so that increased interest charges were incurred. In this respect it can be said that the bank acted to its detriment. With some hesitation, I think it may be right to conclude that when Amalgamated asked for further time they were asserting that they themselves were ultimately liable for the Nassau loan and can be said to have induced the bank to act to their detriment partly as a result of their assertion, and therefore a case of estoppel in pais can be made out. However, I would prefer to treat this case as one of estoppel by convention.
Counsel for the bank referred us to a passage in Spencer Bower and Turner on Estoppel by Representation (3rd Edn, 1977, p 157):
‘When the parties have acted in their transaction upon the agreed assumption that a given state of facts is to be accepted between them as true, then as regards that transaction each will be estopped against the other from questioning the truth of the statement of facts so assumed.’
It is clear that the parties negotiated on the agreed assumption that Amalgamated guaranteed the Nassau loan. The detailed negotiations are set out in the judgment of the judge. Suffice it to say that there came a time when the parties agreed that all the properties should be available to secure both the liability of Amalgamated in respect of the UK loan and also their liability in respect of the Nassau loan, which latter liability was assumed to exist. The bank sold the properties. They claimed the right to appropriate the proceeds of both loans. As I have said, the proceeds of the Harrison Building would not satisfy the Nassau loan. Amalgamated challenge this, saying that the properties were charged to secure their liability and that they were not liable under the guarantee for ANPP. In my opinion, they cannot be allowed to say this. The bank had been given the right to sell the properties and satisfy both loans on the agreed assumption that Amalgamated were liable for the Nassau loan. The bank sold and appropriated the proceeds on that assumption. Amalgamated cannot deny the truth of it.
It is important to appreciate that the transaction with which we are concerned is the realisation of the securities by the bank. We are not concerned to decide whether Amalgamated would have had a defence to an action on the ANPP guarantee itself if the security had proved insufficient. For myself I do not think that the bank could have succeeded in a claim on the guarantee itself. Estoppel operates so as to prevent a party from denying a representation or an assumed state of facts in relation to the transaction supported by that representation or assumed state of facts. The estoppel does not go beyond the transaction in which it arose. The representation or assumed state of facts are not to be held irrefutable beyond the purpose for which the representation or assumption was made. In the present context the representation is not made for the purpose of establishing its own truth but as a part of the whole transaction. An assumption is not to be treated as having the effect of an assumpsit.
However, I too would dismiss this appeal.
BRANDON LJ. In this judgment I shall refer to the various parties concerned by the same abbreviations as those used by Robert Goff J in his judgment. That is to say, I shall refer to Amalgamated Investment and Property Co Ltd as ‘AIP’; to Gleniston Garden Estates Ltd as ‘Gleniston’; to Amalgamated (New Providence) Property Ltd as ‘ANPP’; to Burston and Texas Commerce Bank Ltd (later renamed Texas Commerce International Bank Limited) as ‘the bank’; and to Portsoken Properties Ltd as ‘Portsoken’. I shall also, like the judge, refer to the two loans made by the bank as ‘the Nassau loan’ and ‘the UK loan’ respectively.
The nature of the action, and the circumstances out of which it arises, are set out in detail in the full and comprehensive judgment of the judge, and no useful purpose would be served by my repeating his account of these matters in my own judgment. The important thing which I consider that it is necessary to do, in order to consider the appeal which is before us, is to formulate with as much precision as is possible the two questions which arise for decision in it.
Those two questions should, in my view, be formulated as follows. First, did AIP, by the contract which it made with the bank in relation to the Nassau loan, undertake to the bank that it would discharge any indebtedness of ANPP to Portsoken? Second, if AIP did not so undertake, is it nevertheless estopped from denying that it did so by reason of the basis, accepted by both the bank and AIP, on which the transactions between them were later conducted during the period from 1974 to 1976?
The first question is raised by the respondent’s notice dated 16 September 1980. The second question is raised by the appellant’s notice of appeal dated 26 August 1980. It is, however, logical to examine the two questions in the order in which I have stated them.
The making of the contract between AIP and the bank in relation to the Nassau loan took place in four stages. At the first stage, which occurred in July 1969, it was agreed, first, that the amount of the loan should be $US3,000,000; second, that the loan should be made directly by the bank to Gleniston, one of AIP’s wholly-owned subsidiaries in the Bahamas; third, that the full amount of the loan should be taken up by 30 June 1970; and, fourth, that the loan should be secured in two ways, first by a mortgage on a property in Nassau known as the Harrison Building, and, secondly, by a guarantee to be given by AIP.
At the second stage, which occurred in April 1970, it was agreed that the date for taking up the loan in full should be postponed from 30 June 1970 to 31 December 1970.
At the third stage, which occurred between May and September 1970, it was agreed that the contract should be varied in two respects. The first variation was that there should be substituted for Gleniston as the borrower another wholly-owned subsidiary of AIP in the Bahamas, namely ANPP. The second variation was that the amount of the loan should be increased from $3,000,000 to $3,250,000. At this third stage, on 28 September 1970 there was signed on behalf of AIP, by way of security for any indebtedness of ANPP to the bank, a standard printed form of the bank entitled ‘GUARANTEE’.
At the fourth stage, which occurred in December 1970, it was agreed that, instead of the loan being made directly by the bank to ANPP, it should be channelled by the bank through Portsoken, a wholly-owned subsidiary of the bank in the Bahamas. The effect of so channelling the loan through Portsoken was that the bank first lent the money to Portsoken and Portsoken then re-lent it to ANPP. The sole reason for this change was that, if the bank had made the loan directly to ANPP as previously arranged, it would under Bahamian law have been obliged to register itself as trading in the Bahamas, and this would have involved it in complications in which it was not willing to be involved. There was no other purpose whatever for the change.
When the fourth stage in the making of the contract just described occurred, it would have been sensible for the bank to have required AIP to have signed on its behalf a fresh guarantee, the express terms of which would have covered beyond doubt the indebtedness of ANPP to Portsoken instead of its indebtedness to the bank. It is quite clear that, if the bank had required AIP to do this, AIP would willingly have complied with such requirement. In fact, however, the matter was overlooked by the bank, and the original document entitled ‘GUARANTEE’, which had been signed on behalf of AIP at the third stage on 28 September 1970, and which I shall call ‘the guarantee’, remained, ostensibly at any rate, unchanged.
Following the fourth stage, the bank (by certain indirect methods which are not material) lent the sum of $3,250,000 to Portsoken and Portsoken immediately re-lent it to ANPP. At the same time, by way of security for the loan made by Portsoken to ANPP, ANPP mortgaged the Harrison Building, of which it had by that time become the owner, to Portsoken. All these transactions took place on 30th and 31 December 1970.
The guarantee, which is addressed to the bank, provides so far as material as follows:
‘We, AMALGAMATED INVESTMENT AND PROPERTY CO LTD … (hereinafter called “the Guarantor”), in consideration of your from time to time making or contributing loans or advances or otherwise affording banking accommodation or facilities to AMALGAMATED (NEW PROVIDENCE) PROPERTY LTD … (hereinafter called “the Principal”), hereby unconditionally guarantee to and agree with you as follows:
‘1. The Guarantor will pay to you on demand all moneys which are now or shall at any time or times hereafter be due or owing or payable to you on any account whatsoever by the Principal …’
It was contended on behalf of the liquidator of AIP in the court below that, having regard to the terms of the guarantee as set out above, AIP never became contractually bound to the bank to discharge the indebtedness of ANPP to Portsoken, but only the indebtedness of ANPP to the bank. Robert Goff J accepted this contention as correct. In my opinion, for reasons which I shall develop, the judge was in error in the conclusion which he reached on this matter.
The contract between the bank and AIP did not reach its final form until the fourth stage in the negotiations in December 1970, when it was agreed that the loan should be channelled from the bank to ANPP through Portsoken. It follows from this that the guarantee, which formed part of the contract, falls to be interpreted by reference to the situation which then existed, rather than the situation which existed earlier when the guarantee was signed on behalf of AIP at the third stage on 28 September 1970.
What then was the situation which existed when the contract between the bank and AIP relating to the Nassau loan was at last finalised in December 1970? It was that it had been decided that the bank should not make the loan available directly to ANPP as originally arranged, but indirectly through the medium of its wholly-owned subsidiary Portsoken, in such a manner that any indebtedness of ANPP to Portsoken was accompanied by an exactly corresponding indebtedness of Portsoken to the bank. It is by reference to that situation that the words in para 1 of the guarantee, ‘moneys due or owing or payable to you on any count whatsoever by the Principal’, fall to be construed. In my opinion, when those words are construed by reference to the situation which I have just described, they are wide enough to include moneys due or owing or payable by ANPP to Portsoken, which Portsoken are then immediately required to pass on, without deduction of any kind, to the bank.
On that ground it is my view that AIP did become contractually bound to the bank, on the basis of the guarantee, to discharge any indebtedness of ANPP to Portsoken. I would, therefore, answer the first of the two questions which I formulated earlier in the affirmative.
I turn now to examine the second of the two questions which I formulated earlier. That question is whether, supposing my answer to the first question is wrong, and AIP did not, by the contract which it made with the bank in relation to the Nassau loan, undertake to the bank to discharge any indebtedness of ANPP to Portsoken, AIP is nevertheless estopped from denying having done so by reason of the basis, accepted by both AIP and the bank, on which the transactions between them were conducted during the period from 1974 to 1976.
The judge answered this question in the affirmative and dismissed the claim of AIP in liquidation on that account. He based his decision on the question of estoppel on three matters. The first matter was that, from 1974 to 1976, both the bank and AIP conducted the transactions which took place between them in what must for present purposes be regarded as the mistaken belief that the guarantee relating to the Nassau loan effectively bound AIP to discharge any indebtedness of ANPP to Portsoken in respect of that loan. The second matter was that, although it had originally been due to the bank’s own error that it came to hold its mistaken belief, AIP, being under the same mistaken belief itself, by its conduct encouraged and reinforced the mistaken belief held by the bank. The third matter was that the bank, in reliance on the mistaken belief concerned, accorded various indulgences to, and refrained from exercising various rights against, AIP in a way which, but for the bank’s mistaken belief, it would never have done.
The judge has set out in detail in his judgment all the primary facts relevant to the question of estoppel. In what follows I shall adopt his account of those facts in its entirety, without doing more than is absolutely necessary by way of repeating or summarising such account.
The Nassau loan was not the only loan made by the bank at the request of AIP. Following negotiations between AIP and the bank which took place during January, February and March 1970 the bank made a loan to AIP in England of $US3,000,000 for a period of five years (the UK loan). That loan was secured by mortgages or sub-mortgages on a large number of properties in England, the value of which was thought to be such as to comply with the general practice of the bank to require 150% security for any loans which it made.
Nothing significant with regard to the UK loan occurred until June 1974, when a series of developments relating to it began and continued until 1976. These developments are set out in detail by the judge ([1981] 1 All ER 923 at 929–932,[1981] 2 WLR 554 at 562–566). The account there given fully substantiates the judge’s finding that from 1974 to 1976 the bank and AIP conducted transactions between them in relation to the overall liability of AIP in respect of the UK and Nassau loans in the mistaken belief, common to both of them, that the guarantee relating to the Nassau loan bound AIP to discharge any indebtedness of ANPP to Portsoken in respect of that loan. It further fully substantiates his finding that the bank, in reliance on that mistaken belief, granted various indulgences to, and refrained from exercising various rights against, AIP in a manner which, but for such belief, it would never have done.
Two main arguments against the existence of an estoppel were advanced on behalf of AIP both before Robert Goff J and before us. The first argument was that, since the bank came to hold its mistaken belief in the first place as a result of its own error alone, and AIP had at most innocently acquiesced in that belief which it also held, there was no representation by AIP to the bank on which an estoppel could be founded. The second argument was that, in the present case, the bank was seeking to use estoppel not as a shield, but as a sword, and that that was something which the law of estoppel did not permit.
I consider first the argument based on the origin of the bank’s mistaken belief. In my opinion this argument is founded on an erroneous view of the kind of estoppel which is relevant in this case. The kind of estoppel which is relevant in this case is not the usual kind of estoppel in pais based on a representation made by A to B and acted on by B to his detriment. It is rather the kind of estoppel which is described in Spencer Bower and Turner on Estoppel by Representation (3rd Edn, 1977, pp 157–160) as estoppel by convention:
‘This form of estoppel is founded, not on a representation of fact made by a representor and believed by a representee, but on an agreed statement of facts the truth of which has been assumed, by the convention of the parties, as the basis of a transaction into which they are about to enter. When the parties have acted in their transaction upon the agreed assumption that a given state of facts is to be accepted between them as true, then as regards that transaction each will be estopped as against the other from questioning the truth of the statement of facts so assumed.’
Applying that description of estoppel by convention to the present case, the situation as I see it is this. First, the relevant transactions entered into by AIP and the bank were the making of new arrangements with regard to the overall security held by the bank in relation to both the UK and Nassau loans. Second, for the purposes of those transactions, both the bank and AIP assumed the truth of a certain state of affairs, namely that the guarantee given in relation to the Nassau loan effectively bound AIP to discharge any indebtedness of ANPP to Portsoken. The transactions took place on the basis of that assumption, and their course was influenced by it in the sense that, if the assumption had not been made, the course of the transactions would without doubt have been different.
Those facts produce, in my opinion, a classic example of the kind of estoppel called estoppel by convention as described in the passage from Spencer Bower and Turner on Estoppel by Representation and so deprive the first argument advanced on behalf of AIP of any validity which, if the case were an ordinary one of estoppel by representation, it might otherwise have.
I turn to the second argument advanced on behalf of AIP, that the bank is here seeking to use estoppel as a sword rather than a shield, and that that is something which the law of estoppel does not permit. Another way in which the argument is put is that a party cannot found a cause of action on an estoppel.
In my view much of the language used in connection with these concepts is no more than a matter of semantics. Let me consider the present case and suppose that the bank had brought an action against AIP before it went into liquidation to recover moneys owed by ANPP to Portsoken. In the statement of claim in such an action the bank would have pleaded the contract of loan incorporating the guarantee, and averred that, on the true construction of the guarantee, AIP was bound to discharge the debt owed by ANPP to Portsoken. By their defence AIP would have pleaded that, on the true construction of the guarantee, AIP was only bound to discharge debts owed by ANPP to the bank, and not debts owed by ANPP to Portsoken. Then in their reply the bank would have pleaded that, by reason of an estoppel arising from the matters discussed above, AIP were precluded from questioning the interpretation of the guarantee which both parties had, for the purpose of the transactions between them, assumed to be true.
In this way the bank, while still in form using the estoppel as a shield, would in substance be founding a cause of action on it. This illustrates what I would regard as the true proposition of law, that, while a party cannot in terms found a cause of action on an estoppel, he may, as a result of being able to rely on an estoppel, succeed on a cause of action on which, without being able to rely on that estoppel, he would necessarily have failed. That, in my view, is, in substance, the situation of the bank in the present case.
It follows from what I have said above that I would reject the second argument against the existence of an estoppel put forward on behalf of AIP as well as the first. It further follows, from my rejection of both arguments against the existence of an estoppel, that I would answer the second of the two questions which I formulated earlier by holding that, if AIP did not, by the contract relating to the Nassau loan, undertake to the bank to discharge any indebtedness of ANPP to Portsoken, it is nevertheless estopped from denying that it did so by reason of the basis, accepted by both the bank and AIP, on which the transactions between them were later conducted during the period from 1974 to 1976.
Since I have, for the reasons which I have given, answered both the questions which I formulated earlier in my judgment in the affirmative, it follows that, in my opinion, the appeal of AIP in liquidation fails and must be dismissed.
Appeal dismissed. Leave to appeal to the House of Lords refused.
