Amalgamated Investment & Property Co Ltd (in liquidation) v Texas Commerce International Bank Ltd

[1981] 3 All ER 577

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(Judgment by: Brandon LJJ)

Amalgamated Investment & Property Co Ltd (in liquidation)
v Texas Commerce International Bank Ltd

Court:

Judges: Lord Denning MR
Eveleigh

Brandon LJJ

Hearing date: 30 JUNE, 1, 2, 3, 6, 7, 31 JULY 1981
Judgment date: 31 July 1981

UK

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Judgment by:
Brandon LJJ

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 & 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.

hose 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.