Amalgamated Investment & Property Co Ltd (in liquidation) v Texas Commerce International Bank Ltd
[1981] 3 All ER 577(Judgment by: Lord Denning MR)
Amalgamated Investment & Property Co Ltd (in liquidation)
v Texas Commerce International Bank Ltd
Judges:
Lord Denning MREveleigh
Brandon LJJ
Judgment date: 31 July 1981
UK
Judgment by:
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 & 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 & 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 in type (here shown in capitals):
'We, AMALGAMATED INVESTMENT & 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 & Sons (a firm) v William Lillico & 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 underlying 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.