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	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Barclays Mercantile Business Finance Ltd v Marsh [2002] EWCA Civ 948 (25 June 2002) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2002/948.html Cite as: [2002] EWCA Civ 948

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IN THE SUPREME COURT OF JUDICATURE
CIVIL DIVISION
ON APPEAL FROM THE HIGH COURT
QUEEN'S BENCH DIVISION
BIRMINGHAM DISTRICT REGISTRY
MERCANTILE LIST
(His Honour Judge Perrett QC)

		The Royal Courts of Justice The Strand London Tuesday 25 June 2002

Tuesday 25 June 2002

1. LORD JUSTICE DYSON: This is an appeal by the claimant from the decision of His Honour Judge Perrett QC who, sitting in the Mercantile Court, Birmingham on 10 December 2001 allowed an application by Mr Marsh to amend his defence. Before I come to the amendment itself, I need to set out some of the rather complicated background to the application on which the judge ruled.
2. Barclays Mercantile Business Finance Ltd ("Barclays Mercantile") claims against Mr Marsh the sum of £106,393.21, interest and costs under a personal guarantee and indemnity ("the guarantee") dated 25 April 1995. Barclays Mercantile is a finance company. The guarantee was intended to provide it with security for the performance by Soundalive Tours Ltd ("STL") of its obligations under the leasing agreement that was executed on 1 June 1995. Mr Marsh was a director of STL. About 23 May 1995 STL entered into a subleasing agreement ("the subleasing agreement") with English Heritage to lease 730 Interpreter Wands at £12 per wound per month for five years for use at Stonehenge and Battle Abbey. In order to finance the transaction, STL entered into a leasing agreement with Barclays Mercantile dated 1 June 1995 ("the leasing agreement"), whereby STL leased the 730 Interpreter Wands from Barclays Mercantile (they having been purchased by Barclays Mercantile from STL), for a period of five years from 30 June 1995 at £9,033 per month, followed by a final payment of £36,500, payable on 31 May 2000. The leasing and subleasing agreements were "back to back". On 5 June 1995 STL entered into an assignment and charge of the subleasing agreement with Barclays Mercantile, whereby it gave a charge over STL's entitlement under the subleasing agreement with English Heritage. Barclays Mercantile collected the payments due under the subleasing agreement, which included a monthly sum in respect of the maintenance, service and certain insurance of the equipment, and paid STL this monthly sum, retaining for itself the monthly rentals. There came a time when Barclays Mercantile stopped collecting payments from English Heritage; or, at all events, payments from English Heritage ceased. On 13 October 1999 English Heritage entered into some new hire agreements with a company called Soundalive Ltd (a different company from STL) in respect of the equipment at Battle Abbey and Stonehenge. It is unclear why English Heritage stopped paying Barclays Mercantile.
3. It is necessary to refer to the principal terms of these agreements. The leasing agreement provided, so far as material, as follows. By clause 2.1 STL were to:

"Pay the rentals specified overleaf punctually at the times specified overleaf, without previous demand, to no-one but us without our prior written consent .... .

6.3(i) This agreement will be deemed to have been repudiated by you [that is STL] (whereupon you will cease to be in possession of the equipment with our consent so that we may then repossess it at any time) on the occurrence of either of the following events

(a) a default by you in the payment of any money due under this agreement for a period of 10 days (unless we elect in our absolute discretion to accept late payment) ....

(iii) The leasing of the equipment will terminate automatically (whereupon you will cease to be in possession of the equipment with our consent so that we may then repossess it at any time) if you repudiate this agreement.

6.6. The rentals specified overleaf include the cost of maintenance to be provided by the supplier and we shall account to the supplier for such cost, but shall not be liable to service or to maintain the equipment."

4. The supplier in this case was STL itself.
5. The guarantee was between STL as "customer", Barclays Mercantile as "the company" and Mr Marsh as the "individual guarantor":

"2.1. The guarantor unconditionally and irrevocably hereby undertakes to the company:

(i) that the guarantor will on demand in writing made to the guarantor pay or discharge to the company all monies and liabilities which shall for the time being (and whether on or at any time after such demand) be due, owing or incurred to the company by the customer whether actually or contingently and whether solely or jointly with any other person and whether as principal or surety and including interest thereon and

(ii) that the guarantor will on demand in writing made to the guarantor perform and comply with all other obligations of the customer under or in respect of any contracts from time to time entered into between the company and the customer which obligations the customer has failed to perform or comply with and

in respect thereof to pay the legal and other costs and expenses of the company with value added tax (if any) thereon.

2.2. In addition to and without prejudice to clause 2.1 above the guarantor unconditionally and irrevocably hereby undertakes to indemnify and keep the company indemnified against any loss or damages and the legal and other costs and expenses with value added tax (if any) thereon suffered or incurred by the company as a result of the failure of the customer to meet any of its liabilities or perform any of its obligations to the company.

4. The liability hereunder of the guarantor shall be as a primary obligor (as between the guarantor and the company) and not merely as a surety and (without prejudice to the generality of the foregoing) shall not be impaired or discharged by reason of any time or other indulgence granted by the company to the customer or by reason of any arrangement entered into or composition agreed by the company modifying (by operation of law or otherwise) the rights and remedies of the company or of any omission on the part of the company to enforce any of its rights against the customer or by the withdrawal by the company of any facilities from the customer or by the substitution of any goods for those originally let to the customer by the company.

5. The company shall be at liberty without thereby affecting its rights under this deed at any time and from time to time, at its absolute discretion, to release, discharge, compound with or otherwise vary or agree to vary any other securities held or to be held by the company for the liabilities or obligations of the customer or the liability of the guarantor under this deed or to make any other arrangements with any one or more guarantor and no such release, discharge, composition, variation agreement or arrangement shall prejudice or in any way affect the rights and remedies of the company against any other guarantor."

6. The assignment and charge of subleasing agreements provided as follows:

"2. The company [that is STL] as beneficial owner assigns to the Lessor [Barclays Mercantile] all its rights, title and interest in the Specified Sub-Agreements .... to hold the same unto the Lessor absolutely, subject only to the proviso for re-assignment set out in clause 4 below.

3. The Company as beneficial owner charges in favour of the Lessor as a first fixed and specific charge of all its rights, title and interest in the Sub-Agreements ....

4. When:-

(a) all sums payable by the Company, and

(b) all liabilities (whether actual or contingent) of the Company

to the Lessor under the Principal Agreements shall have been respectively paid and discharged, the Lessor will at any time thereafter at the request and cost of the Company re-assign or release the Property Charged to the Company."

7. Before I come to the pleadings, I need to refer to a little more of the story. On 18 July 1997 STL entered into an assets and liabilities sale agreement with Soundalive Ltd, the Part 20 defendant, ("Soundalive"). Under this agreement STL sold its assets and liabilities, including the benefit of the leasing agreement and the subleasing agreement. Mr Marsh's case at one stage was that the leasing agreement was the subject of a novation pursuant to which Barclays Mercantile agreed to accept Soundalive as obligor in place of STL. That case is, however, no longer pursued.
8. Barclays Mercantile's claim is straightforward. It pleads that STL were struck off the register of companies on 28 September 1999; that in breach of the leasing agreement it, Barclays Mercantile, did not receive any further monthly rentals after 10 December 1999 and that on 5 April 2000 it accepted STL's repudiation, whereupon the leasing agreement was terminated. By letter dated 5 April 2000 Barclays Mercantile gave notice of termination of the agreement to Mr Marsh and made formal demand of payment under the terms of the guarantee.
9. By his original defence Mr Marsh, as I have said, alleged that there was a novation, whereby Barclays Mercantile accepted performance of STL's obligations from Soundalive. He then sought permission to amend his defence. It was this application that came before the judge on 10 December. The material parts of the draft amended defence read as follows:

"12. The Claimant has neglected to enforce the securities (or quasi-securities) held by it that has increased the Defendant's prospective liability to the Claimant and/or has released the said securities and/or otherwise neglected them as particularised hereunder.

PARTICULARS

(i) English Heritage and/or the Part 20 Defendant were unable to return 192 Interpreter Wands (which had a value of £220 each);

(ii) the Part 20 Defendant and its directors caused, permitted and/or allowed the remaining 528 Interpreter Wands to be gutted, interfered with and/or used so as to provide 'new' equipment leased to English Heritage under a rental agreement dated October 13, 1999 so as to diminish the value of the Equipment returned to a nominal value;

(iii) the Claimant has neglected and/or refused to bring proceedings against English Heritage, the Part 20 Defendant and/or its directors under the Torts (Interference with Goods) Act 1977.

(iv) the Claimant has paid moneys to the Part 20 Defendant (on its own case, under a mistake of fact that it was STL) in respect of the maintenance and repair of Interpreter Wands that had gone missing by that time and/or to cover the cost of insuring the same (when the Part 20 Defendant did not in fact arrange such insurance). In the premises, the Claimant can recover the moneys paid to the Part 20 Defendant as moneys had and received and/or in respect of which there has been a total or partial failure of consideration.

(v) the Claimant neglected and/or failed to exercise its rights under the Assignment and Charge of Sub-Leasing Agreements dated June 5, 1995 so as to recover moneys due from English Heritage under the Sub-Leasing Agreements dated May 23, 1995.

(vi) the Claimant expressly and/or impliedly released English Heritage from further performance of its contractual obligations under the Sub-Leasing Agreements and/or failed to exercise its rights under the Assignment and Charge of Sub-Leasing Agreements aforesaid to prevent such release, prior to the expiry of the 60 month (5 year) term agreed.

13. For the avoidance of doubt, English Heritage entered into a new hire agreement with Soundalive Ltd on October 13 1999 and English Heritage ceased making payments to the Claimant on December 10 1999 although by that date substantial arrears had accrued. The moneys due under the Leasing Agreements from English Heritage amounted to £8,760 plus VAT per month. The Claimant purported to terminate the Leasing Agreement on April 5 2000.

14. By reason of the matters pleaded at paragraphs 12 to 13 above, the Defendant is discharged from liability under the Guarantee, alternatively the Defendant is entitled to a pro tanto reduction in his liability under the Guarantee to the recovery that reasonably could have been achieved against the parties named aforesaid."

10. The judge allowed the amendment in full. He said that he thought it was unlikely that the argument would succeed at the end of the day, but that it ought nevertheless to be argued out fully at trial.
11. I shall now explain how Mr Yell puts his case in support of the amendment. His essential point is that Barclays Mercantile has neglected to enforce against English Heritage and/or released English Heritage from the securities held by it in respect of the subleasing agreement; with the result that Mr Marsh has lost his right to enforce those securities by way of subrogation. The legal effect as between Barclays Mercantile and Mr Marsh is that Mr Marsh, as surety, is discharged from liability to make payments under the guarantee.
12. Mr Yell submits that it is necessary to look at the entire basket of agreements as a whole. Viewed in that light, he says, the agreements provided that Barclays Mercantile would enforce the subleasing agreement. It was always contemplated by the parties that English Heritage would make its monthly payments to Barclays Mercantile and that Barclays Mercantile would not look to STL for rental payments under the leasing agreement. He further submits that it was an implied term "of the agreements as a whole" that Barclays Mercantile would take reasonable care (1) not to release English Heritage from its obligations under the subleasing agreement, and (2) to enforce the security which it enjoyed as a result of the assignment and charge of the subleasing agreement. Mr Yell submits that in so far as Barclays Mercantile may rely on clauses 4 and 5 of the guarantee, Mr Marsh can trump such reliance by invoking sections 2(2) and 3(2)(a) and (b) of the Unfair Contract Terms Act 1977.
13. On behalf of Barclays Mercantile, Mr Underwood QC submits that the proposed basis for defending the claim has no real prospect of success and that permission to amend should be refused. First, he submits that Mr Marsh is not a surety under a guarantee but an indemnifier and therefore a primary obligor. He relies on clauses 2.2 and 4 of the deed of guarantee. Thus, even if Barclays Mercantile did neglect to enforce, or wilfully released English Heritage from, the obligations under the Sub-Leasing Agreement, that could not discharge Mr Marsh from his liability to pay under the guarantee.
14. Secondly, even if Mr Marsh's liability was secondary as a surety, he does not, either in his proposed pleading or elsewhere, point to any evidence that English Heritage has been released from its liability under the subleasing agreement. The law is clear: a surety is not released by the loss of a security, unless that loss is brought about by the wilful act of the creditor or by his neglect to take some step which the surety has stipulated he should take (see Rowlatt on Principal and Surety, 5th Edition, paragraphs 9-13 and 9-14; see also the discussion in Andrews and Millett, Law of Guarantees, 3rd Edition paragraphs 9.41-9.44). A surety is not discharged, whether absolutely or pro tanto, unless the creditor has acted or neglected to act so as to lose or diminish the benefit of the security. There must be some fault on the part of the creditor. As Lord Templeman said in China & South Sea Bank Ltd v Tan [1990] 1 AC 536, 545H, a surety will be discharged if the creditor has done an act injurious to the interests of the surety or has acted inconsistently with the surety's rights, or breached any obligation. But if the creditor has done no more than not exercise his right to enforce a security, he has not done any of these things and the surety is not thereby discharged.
15. I would accept both of Mr Underwood's submissions. First, it seems to me that it is clear that this was a contract of indemnity and not one of guarantee. Clauses 2.2 and 2.4 of the guarantee could not be clearer. I shall deal with the Unfair Contract Terms Act points in a moment. Secondly, even if the contract is to be regarded as one of guarantee, Mr Marsh has not pleaded any deliberate acts of release, or negligent omissions which have given rise to a release. So far as the pleading goes, all that is alleged in relation to the release point is that Barclays Mercantile has failed to enforce English Heritage's obligations under the subleasing agreements. In my judgment, that is not enough to discharge the obligations of Mr Marsh as guarantor under the guarantee.
16. I should add that in all the material that has been placed before us, there is no evidence that English Heritage has been released by Barclays Mercantile from its obligations under the subleasing agreement. All that Mr Yell can point is to is the fact that in late 1999 or early 2000 English Heritage stopped paying. Despite their best efforts, those representing Mr Marsh have not been able to obtain evidence to show that the cessation of payments was attributable to some wilful act or negligent omission on the part of Barclays Mercantile.
17. Mr Underwood also relies on clauses 4 and 5 of the guarantee. Mr Yell responds by relying on the 1977 Act. In particular he relies on sections 2(2) and 3(2) of that Act. As regards section 2(2), in my view this cannot avail him, since it applies only to terms which purport to restrict or exclude liability for negligence. Neither clause 4 nor clause 5 of the guarantee purports to do that. I would reject Mr Yell's suggested implied term that Barclays Mercantile should take reasonable care along the lines that I indicated earlier in this judgment. It seems to me that such an implied term is entirely inconsistent with clauses 4 and 5. Nor is such a term necessary to give business efficacy to the agreement. Mr Marsh could have protected himself again the full rigours of clauses 4 and 5 either by refusing to accept them, or by obtaining a counter-indemnity from English Heritage. He did neither. Nor, in my view, does section 3(2) assist him in this case.
18. I ought to set out the terms of section 3. They are as follows:

"(1) This section applies as between contracting parties where one of them deals as consumer or on the other's written standard terms of business.

(2) As against that party, the other cannot by reference to any contract term --

(a) when himself in breach of contract exclude or restrict any liability of his in respect of the breach; or

(b) claim to be entitled --

(i) to render a contractual performance substantially different from that which was reasonably expected of him, or

(ii) in respect of the whole or any part of his contractual obligation, to render no performance at all,

except in so far as (in any of the cases mentioned above in this subsection) the contract term satisfies the requirement of reasonableness."

19. I shall assume in Mr Marsh's favour that the terms of the guarantee were Barclays Mercantile's standard terms of business.
20. So far as section 3(2)(a) is concerned, it seems to me that Mr Yell is not in a position to point to any breach of contract on the part of Barclays Mercantile relevant to the defence which he seeks to advance. I have already rejected his suggested implied term.
21. So far as section 3(2)(b) is concerned, in my view that is directed at contracts which provide that a party may render contractual performance substantially different from that which was reasonably expected of him. This guarantee is not that sort of contract at all. It does not require any contractual performance from Barclays Mercantile at all. Even if it were legitimate, as Mr Yell submits, to look at the entire contractual package in order to determine what contractual performance was reasonably to be expected of Barclays Mercantile, section 3(2)(b)(i) could not avail Mr Marsh. The simple fact is that Barclays Mercantile's contractual obligations were very limited indeed. They did not include any obligation to enforce the subleasing agreement. Quite the contrary: the guarantee entitled Barclays Mercantile to release English Heritage from its obligations under the subleasing agreement altogether.
22. Alternatively (and this is his final submission) Mr Yell submits that Mr Marsh would be entitled to equitable relief from an unconscionable bargain. The unconscionability of which he submits that Mr Marsh is entitled to complain is that he could not reasonably have anticipated that Barclays Mercantile, a reputable financial institution, would exercise its contractual entitlement in the oppressive manner that has occurred in this case. In my view this point simply does not get off the ground. Clauses 4 and 5 are by no means unusual clauses in guarantees such as the one with which we are concerned. Mr Marsh is a businessman. This was an ordinary commercial transaction. The guarantee was entered into as part of that transaction. In my view there is simply no role for the exceptional doctrine of unconscionable bargains to play in this case.
23. For all these reasons I would allow this appeal.
24. LORD JUSTICE BROOKE: I agree. Mr Yell started his submissions by taking a procedural point to the effect that this court should be unenthusiastic about entertaining this appeal because it was a decision of a judge at a case management conference shortly before the trial. If the matter had not come to the Court of Appeal, the trial could have taken place and the point been decided then.
25. When the point was raised before Judge Perrett, he expressed the view (page 42 of the transcript) that the argument was "unlikely to succeed"; and (page 41 of the transcript) "It seems unlikely that this point can be successfully argued". Miss Broadfoot of counsel, who appeared for the bank at that hearing, said that she was instructed to ask for permission to appeal because the bank was quite clear that any conduct that "we have done is completely covered by the terms of the indemnity in the guarantee". In due course a skeleton argument, countersigned by leading counsel, came before the Court of Appeal. On 13 February Schiemann LJ granted permission to appeal on the basis that "The appeal has a real prospect of success".
26. In the ordinary course of events, this court would be very reluctant to take an appeal from a decision made at a case management conference shortly before a trial, if the trial is going to proceed in any event. If the matter goes wrong in law at the trial, then the court can set the law right on appeal afterwards. The philosophy of the Woolf reforms is to ensure that trials take place timeously without the delays caused by ancillary litigation which were a feature of the regime before the Woolf reforms came into force.
27. This was a clear point of law on the interpretation of this guarantee and indemnity form. If the pure point of law is decided in the bank's favour, it is common ground that the defendant had no defence to the action and that judgment could be entered against him and there would be nothing to try. In those circumstances it appears to me that this is one of those exceptional cases in which Schiemann LJ was wholly justified in granting permission to appeal, and this court is wholly justified in giving an authoritative ruling on the point which the bank wished to it to decide.
28. Subject to that point, I am in entire agreement with the judgment of Lord Justice Dyson, and I agree that this appeal should be allowed.
ORDER: Appeal allowed. The order of Judge Perrett to be set aside and judgment entered in favour of Barclays Mercantile Business Finance together with interest at the contractual rate to date and costs on the indemnity basis. (Order not part of the approved judgment)