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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 >> Berghoff Trading Ltd & Ors v Swinbrook Developments Ltd & Ors [2009] EWCA Civ 413 (19 May 2009) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2009/413.html Cite as: [2009] EWCA Civ 413, [2009] 2 Lloyd's Rep 233

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IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN'S BENCH DIVISION COMMERCIAL COURT
MR JUSTICE TEARE
2008/199

		Royal Courts of Justice Strand, London, WC2A 2LL
		19/05/2009

Lord Justice Rix :

1. The question which arises on this appeal is whether a limited partnership in which its partners sold their equity interests to new buyers was and remains subject to any obligation to pay a common law indemnity or contribution to its erstwhile partner or was otherwise subject to repay to that partner a loan which, if it existed, did so only contingently before the sale and emerged into existence only after the sale. The judge, Mr Justice Teare, has decided the issues arising out of that question in favour of the partnership and its buyers and has therefore given summary judgment in respect of them.

The parties, their contracts, and their disputes

2. The partnership in question is Caspian Energy Group LP ("Caspian"). Prior to its dissolution on 11 June 2008 Caspian was a Scottish limited partnership. It owned a 51% share in Shirvan Oil Limited, a joint venture company established in Azerbaijan with rights in an oil field in Azerbaijan. The partners in Caspian before the sale were Rosserlane Consultants Limited ("Rosserlane") and Swinbrook Developments Limited ("Swinbrook"). Rosserlane was the general partner, and Swinbrook was the limited partner, of Caspian. The value of Caspian's interest in the oil field at the relevant time may, for the purposes of these proceedings, be assumed to have been at least US $500 million. Effectively, Rosserlane owned all but a miniscule part of the equity in Caspian. In turn, Dr Zaur Leshkasheli, a citizen of the Republic of Georgia, was the ultimate owner of both Rosserlane and Swinbrook.
3. Rosserlane, Swinbrook and Dr Leshkasheli are defendants in these proceedings. It is Rosserlane's counterclaim which is in issue.
4. On 15 February 2008, Rosserlane and Swinbrook sold their interests in Caspian for US $245 million. The purchasers were Berghoff Trading Limited ("Berghoff") and GEA Holdings Limited (together the "buyers"). Caspian thereupon moved from the defendants' stable to the buyers' stable. Thus the buyers and Caspian have found themselves together as claimants in these proceedings, and the previous owners (direct or indirect) of Caspian are ranged against them as defendants. We are concerned with a counterclaim which Rosserlane seeks to bring against the claimants, principally against Berghoff, which has unlimited liability for the debts of Caspian. The judge, Mr Justice Teare, has given summary judgment against Rosserlane on the ground that it has no real prospect of success on its counterclaim. Rosserlane appeals.
5. The sale agreement was made in the name of Rosserlane and Swinbrook by Credit Suisse ("the bank") under a power of attorney granted to it in connection with a loan and associated arrangements. The sale was referred to in the documentation as a "mandatory sale" or "forced sale". The defendants had at best only some twenty-four hours' notice of it. The loan agreement was dated 14 December 2006. Under it Caspian was described as the "Borrower" and the three defendants (inter alios) were described as both "Guarantors" and "Obligors". The sale proceeds were received under the sale by the bank and were used by it to discharge all of the obligations of the defendants and Caspian under the loan agreement. There remained a small surplus.
6. There is a potential dispute between the defendants and the bank relating to this sale which may result in other proceedings. Rosserlane's counterclaim in these proceedings is, so to speak, an attempt to make the new owners of Caspian responsible for the discharge of the loan.
7. I say "so to speak", because the matter is more complicated than that. Rosserlane submits that under the loan agreement it was no more than a secondary party, at any rate vis a vis Caspian, in respect of its obligations to the bank: and that, as a result, it is entitled to an indemnity, or, at worst and even if it is a primary party along with Caspian, a contribution as a co-obligor, from Caspian. Alternatively, it submits that the indemnity solution was reinforced by a resolution which Rosserlane made, allegedly as general partner on behalf of Caspian, dated 5 January 2007, to the effect that, on any sale of Caspian, its debt to the bank would be repaid by it with the help of Rosserlane making it an interest free loan out of the proceeds of the sale.
8. On the sale of the holdings in Caspian, that is to say of Rosserlane's and Swinbrook's partnership interests in it, Caspian was sold with its liabilities as they were: and there were no representations or warranties given to the buyers as to such liabilities. However, by a "deed of assumption and retiral and assignation of partnership interests" of the same date as the sale agreement, Rosserlane (i) assigned all its rights in Caspian to the buyers' new general partner, (ii) retired as general partner, and (iii) gave up all further rights or claims and was released from all obligations as partner.
9. In sum, the dispute between the parties is as follows. Rosserlane submits that as guarantor of Caspian's obligations under the loan agreement to the bank, it is entitled under common law and/or in equity to be indemnified by Caspian to the extent that the proceeds of its sale of its partnership interest in Caspian were used by the bank to pay off Caspian's borrowings. Alternatively, Rosserlane submits that, even if it is a primary obligor together with Caspian under the loan agreement, it is entitled under common law and/or in equity to a proper contribution from Caspian in as much as the whole of Caspian's debt to the bank was paid off by using the proceeds of the sale of its partnership interest. As a further alternative, Rosserlane submits by reference to the Resolution that it has a direct contractual claim against Caspian for repayment of its interest free loan made to Caspian, post sale, out of the proceeds of the sale, thereby permitting Caspian to repay the bank. Rosserlane submits that these obligations, or one or other of them, survived the sale, and remain the obligation of Caspian's new owners.
10. On the other side, however, the buyers of Caspian submit that these claims are bad and can be summarily dismissed. They submit (i) that there is no guarantor's right of indemnity, because Rosserlane was a primary obligor alongside Caspian; (ii) that the Resolution is a fictitious document, but in any event does not seek to bind Caspian, only Rosserlane; and (iii) that any possible liability arising under the Resolution cannot bind Caspian in any event: either because it was itself assigned and/or released under the sale transaction, or because it post-dated the transfer of the partnership interests in circumstances where Rosserlane no longer had any power to bind Caspian.
11. The judge found in favour of sufficient of these submissions to enable him summarily to dismiss Rosserlane's counterclaim.

The contractual documents

12. With that introduction, it is necessary to set out substantial parts of the contractual documents.

(a) The Loan Agreement

13. The Loan Agreement was originally dated 14 December 2006. It was itself part of a linked series of documents, which included a security agreement and an "equity upside agreement" also known as a "participation agreement" of the same date. Under these agreements the bank provided a loan facility of $127 million (in two tranches) for the short period of one year and contemplated a sale of the partnership interests in Caspian within that period: either by Rosserlane and Swinbrook of their own motion or by the bank by way of forced sale. Depending on the price of the sale, the bank would earn an equity upside or participation in various amounts. As stated above, Caspian was described as "Borrower" and Rosserlane and Swinbrook and Dr Leshkasheli were described as "Guarantors" and "Obligors".
14. The Loan Agreement was amended by a letter dated 14 May 2007 and further amended and extended by a deed of amendment and restatement dated 13 December 2007. The final repayment date was pushed back (for a price) to 15 February 2008. Thus it became a 15-month facility. In the event, the bank arranged a forced sale which was ultimately dated and completed on 15 February 2008 itself, the final repayment date of the Loan Agreement.
15. The following provisions are relevant:

"THIS LOAN AGREEMENT…

BETWEEN

CASPIAN ENERGY GROUP…(the Borrower)…acting by its general partner Rosserlane…(the General Partner)…

ROSSERLANE…(Rosserlane)…

WHEREAS

The Borrower wishes to borrow, and the Lenders wish to make facilities available in an aggregate sum of up to…(US$ 127,000,000)…

1. DEFINITIONS AND INTERPRETATION

1.1 Definitions

Beneficial Owner means Dr. Zaur Leshkasheli…

Equity Owner means the Beneficial Owner,…Swinbrook, Rosserlane and the Borrower…

Equity Upside Agreement means the participation agreement…

Funds Flow Statement means the statement prepared by the Borrower…

Guarantors means the Borrower,…Swinbrook…Rosserlane…and "Guarantor" means any of them…

Indebtedness means any obligation for the payment or repayment of money, whether as principal or as surety and whether present or future, actual or contingent…

Obligors means the Borrower and the Guarantors and Obligor means any of them…

"Sale" means

(a) a disposal…

(i) of any Equity Interest (including by way of trade sale…Forced Sale (as defined in Clause 4 of the Equity Upside Agreement)…

1.3 Construction of Certain terms…

(c) a "guarantee" also includes any other obligation (whatever called) of any person to pay, purchase, provide funds…for the payment of, indemnity against the consequences of default in payment of, or otherwise be responsible for, any Indebtedness of any other person…

THE LOAN

2.1 Loans

The Lenders…agree to lend:

(a) The First Loan…($115,000,000) to the General Partner (acting on behalf of the Borrower)…

(b) The Drilling Plan Loan…($12,000,000) to the General Partner (acting on behalf of the Borrower)…

2.2 Purpose

The First Loan is provided by the Lenders to the Borrower for, and the Borrower shall apply all amounts borrowed by it under the First Loan [for,] the purposes of…

4. DRAWDOWN OF THE LOAN

4.1 Drawdown

The Borrower may request the disbursement of the First Loan by…

5. INTEREST

5.1 Interest

…The Borrower shall pay accrued interest on the Loans on the last day of each Interest Period.

5.2 Default Interest

If any Obligor fails to pay any amount payable by it to the Finance Parties under the Finance Documents on its due date, interest shall accrue on the overdue amount from the due date…

7. FEES

The Borrower shall pay to the Arranger an arrangement fee in the amount and at the times agreed in a Fee Letter.

8. PREPAYMENT AND CANCELLATION

…

8.2 Mandatory prepayment

If a Sale occurs, the Borrower shall promptly notify the Agent upon becoming aware of that event and the outstanding Loans, together with accrued interest, and all other amounts accrued under the Finance Documents shall become immediately due and payable.

8.3 Voluntary prepayment

The Borrower may by giving not less than ten (10) Business Days' prior written notice to the Agent, prepay the full amount of the Loans (but not any part thereof)…

9. REPAYMENT

9.1 The Borrower shall, repay the First Loan in full on the Final Repayment Date…

10. JOINT AND SEVERAL OBLIGATIONS

The obligations of the Obligors to repay the Loans and to pay interest on the Loans, the fee specified in Clause 7 (Fees) and any other amounts under the Finance Documents are joint and several obligations.

11. EXPENSES

11.1 Transaction expenses

The Borrower shall promptly on demand following production of an invoice reimburse the Agent and the Arranger the amount of all costs and expenses…

11.2 Stamp and other duties

The Borrower shall pay and, promptly on demand, following production of an invoice indemnify each Finance Party…

11.3 Enforcement expenses

The Borrower shall, promptly on demand, indemnify each Finance Party against any loss or liability…reasonably incurred by the Finance Parties in connection with the occurrence of any Event of Default…

13. PAYMENTS AND CALCULATIONS

13.1 Payments by the Obligors

(a) All payments by the Obligors under the Finance Documents shall be made in full, without any set-off…

16. COVENANTS

Each Obligor agrees to be bound by the covenants set out in this Clause relating to it…

[There follow detailed covenants relating to the provision of information, disposals, indebtedness, acquisitions, loans and guarantees, corporate records, encumbrance, security documents, authorisations, compliance, change of business, preservation of assets, accounts, share capital, distributions, partnership matters, etc.]

19. GUARANTEE

19.1 Guarantee

In consideration of the Finance Parties entering into the Finance Documents and making the Loans available to the Borrower, the Guarantors jointly and severally and irrevocable and unconditionally:

(a) guarantee to each Finance Party punctual performance by any Obligor of their respective obligations under the Finance Documents;

(b) agree to pay as if they were the primary obligor from time to time immediately on demand the full sum or sums of money which any Obligor is at any time liable to pay to any Finance Party under or pursuant to the Finance Documents (including for breach of any warranty, representation or covenant) and which has become due and payable but has not been paid at the time such demand is made;

(c) agree as a primary obligation to indemnify each Finance Party (on an after Tax basis) from time to time on demand from and against any cost, loss or liability incurred by any Finance Party as a result of any obligation guaranteed by it becoming void, voidable, unenforceable, invalid or illegal or otherwise ineffective against any Obligor for any reason whatsoever…

19.4 Waiver of defences

The obligations of the Guarantors under this Clause 19 (Guarantee) will not be affected by any act, omission, matter or thing which, but for this clause, would reduce, release or prejudice any of its obligations under this Clause 19 (Guarantee) (without limitation and whether or not known to it or any Finance Party (or any agent or trustee on its behalf) including:

(a) any time, waiver or consent granted to or composition with any person…

19.8 Joint and several obligations of the Guarantors

The obligations of the Guarantors under this agreement are joint and several obligations."

(b) The Security Agreement

16. The Security Agreement of the same date, 14 December 2006, made provision for security for the loan advanced by the bank. Each of the obligors under the Loan Agreement was made a chargor under the Security Agreement. It stated in relevant part as follows:

"WHEREAS:

(A) The Lenders have agreed to make available to the Chargors certain loan facilities (the Facilities) on and subject to the Loan Agreement.

(B) It is a condition precedent to the Lenders making the Facilities available that the Chargors enter into this Security Agreement…

COVENANT TO PAY

2.1. Covenant to pay

Each Chargor, as primary obligor and not merely as surety, covenants with the Security Agent that it will on demand pay and discharge (on an after-tax basis) the Secured Liabilities on the date or dates on which such Secured Liabilities are expressed to become due or apply and in the manner provided in the Finance Document."

(c) The Participation Agreement

17. The Participation Agreement, also dated 14 December 2006 (but subsequently amended and restated on 13 December 2007), provided for the sale of the partnership interests of Rosserlane and Swinbrook in Caspian, and for the "equity upside payment" which on such sale was to be payable to the bank, depending on the price of the sale, and for the manner in which the proceeds of sale were to be applied. Clause 4 (below) provided that if a sale had not taken place voluntarily by 14 August 2007, the bank could force a mandatory sale. Under the Participation Agreement those interested in any way in any assets of the Shirvan oil concession were described as "Equity Owners". They were listed in schedule 1 and included Caspian, Rosserlane, Swinbrook and Dr Leshkasheli. The Participation Agreement provided in relevant part as follows:

"3. EQUITY UPSIDE PAYMENT

3.1 If a Sale occurs and the amount of the Sale Proceeds are within the Low Range, the Selling Equity Owner shall ensure (and each of the other Equity Owners shall procure) that the Sale Proceeds are paid directly to the Bank at completion of the Sale for application by the Bank in the following order:

(a) firstly, payment to the Finance Parties of all outstanding principal, interest and other amounts due and owing to them (or any of them) under the Relevant Finance Documents;

(b) secondly, payment to the Selling Equity Owner of any amount remaining of the Sale Proceeds after the deduction of the Payments under Clause 3.1(a).

3.2 If a sale occurs and the amount of the Sale Proceeds are within the Mid Range, the Selling Equity Owner shall ensure (and each of the other Equity Owners shall procure) that the Sale Proceeds are paid directly to the Bank at completion of the Sale for application by the Bank in the following order:

(a) firstly, payment to the Finance Parties of all outstanding principal, interest any other amounts due and owing to them (or any of them) under the Relevant Finance Documents;

(b) secondly, to the Bank of 33.0% of the Sale Proceeds in excess of $180,000,000; and

(c) thirdly, to the Equity Owner of any amount remaining of the Sale Proceeds after the deduction of the payments under Clauses 3.2(a) and 3.2(b).

3.3 If a Sale occurs and the amount of the Sale Proceeds are within the Top Range, the Selling Equity Owner shall ensure (and each of the other Equity Owners shall procure) that the Sale Proceeds are paid directly to the Bank at completion of the Sale for application by the Bank in the following order:

(a) firstly, payment to the Finance Parties of all outstanding principal, interest any other amounts due and owing to them (or any of them) under the Relevant Finance Documents;

(b) secondly, to the Bank of 33.0% of the Sale Proceeds in excess of $180,000,000 and equal to or less than $400,000,000;

(c) thirdly, to the Bank of 12.0% of the Sale Proceeds in excess of $400,000,000 save that one-sixth of such payment will not be payable pursuant to this Clause if a Sale of the Equity Interest or the Assets is made to the Oil and Natural Gas Corporation Limited of India and fully and irrevocably completes prior to 1 March 2007; and

(d) fourthly, to the Equity Owner of any amount remaining of the Sale Proceeds after the deduction of the payments under Clauses 3.3(a) to (c)…

3.6 If at any time on or before the Expiry Date, any Equity Owner (or any person on its behalf) receives any Sale Proceeds it shall promptly pay all amounts received to the Bank for distribution in accordance with Clauses 3.1 to 3.4 and pending such payment shall hold those amounts on trust for the Bank…

4. MANDATORY SALE

4.1 If by the date which falls eight months after the date of this Agreement (the "Trigger Date"), no sale of 100% of the Equity Interests of one of the Equity Owners or of 100% of the Assets has been completed, the Bank shall be entitled to force the Equity Owners to Sell, or procure the Sale of, the Equity Interests or the Assets (in whole or in part) to any purchaser provided that the Sale Proceeds from such Sale are not less than $180,000,000 ("Forced Sale").

4.2 For the purposes of effecting a Forced Sale, each of the Equity Owners:

4.2.1 hereby irrevocably appoints the Bank as its attorney to execute and do in its name or otherwise and on its behalf all documents, acts, deeds and things which the Bank shall in its absolute discretion consider necessary or desirable in order to implement the Forced Sale…"

(d) The Sale and Purchase Agreement

18. The bank exercised its right to force a sale, which it completed on 15 February 2008, the final date for repayment of the loan. The first and second claimants were the buyers, and Rosserlane and Swinbrook were the sellers, for a total of $245,000,000. The sale and purchase agreement provided in relevant part as follows:

"WHEREAS…

(C) Credit Suisse, acting solely in its capacity as attorney for Rosserlane and Swinbrook, wishes to effect the sale of, and the Buyer wishes to purchase, Rosserlane and Swinbrook's respective partnership interests in the Partnership…

1. INTERPRETATION

1.1…

"Proceeds Bank Account" means an account in the name of Credit Suisse…

"Rosserlane Partnership Interest" means the partnership interest held by Rosserlane as a general partner in the Partnership

"Sellers" means Rosserlane and Swinbrook…

2. SALE AND PURCHASE

2.1 Upon the terms and subject to the conditions of this agreement, the Sellers shall sell and the Buyer shall purchase, on behalf of itself and the Buyer's Nominee, the Partnership Interests, with effect from Completion, free from any Encumbrance together with all accrued benefits and rights.

2.2 The consideration for such sale and purchase shall be the sum of…(US$241,026,747.41) to be satisfied in cash on Completion.

2.3 In addition to the amount payable pursuant to Clause 2.1, the Buyer shall procure the discharge of an outstanding debt of the Partnership owed to an affiliate of Credit Suisse in the amount of…(US$3,973,252.59) (the "Relevant Debt") by payment to Credit Suisse on Completion…

2.4 The Buyer shall be the new general partner of the Partnership…

3. COMPLETION…

3.2 On Completion all (but not some only) of the steps set out below shall take place…

(a) The Sellers shall deliver to the Buyer:

(i) the duly executed deed of assumption and retiral and assignation of partnership interests in respect of Rosserlane as general partner in the Partnership and the Rosserlane Partnership Interest in the form attached as schedule 3…

(b) The Buyer shall:

(i) pay…(US$245,000,000)…into the Proceeds Bank Account…"

(e) The Deed of Assumption and Retiral and Assignation

19. This deed was made between Rosserlane as "Assignor" and Berghoff (the first claimant) as "Assignee". It provided in relevant part as follows:

"3. ASSIGNATION

In consideration of the payment by the Assignee to the Assignor of…(US$245,000,000) under the Sale and Purchase Agreement…the Assignor HEREBY ASSIGNS its whole right, title and interest in and to the Assigning Interest to the Assignee.

4. ASSUMPTION OF OBLIGATIONS

The Assignee hereby acknowledges the assumption of the obligations of the Assignor under the Partnership Agreement in respect of the Assigning Interest and agrees to be bound by the terms of the Partnership Agreement as if it were an original signatory as a general partner thereto.

5. RETIREMENT AND RELEASE OF ASSIGNOR

Immediately following the assumption of the Assignee as a general partner of the Partnership and assignation to the Assignee of the Partnership Interest, the Assignor retires from the Partnership and ceases to be a partner of the Partnership in all respects and thereafter shall have no further rights or claims, or obligations as partner of the Partnership. The Assignee and the Limited Partner hereby consent to the retiral of the Assignor and release the Assignor from all obligations under the Partnership Agreement in respect of the Assigning Interest."

(f) The Resolution

20. The Resolution is dated 5 January 2007, but was first mentioned in a letter dated 1 April 2008 from Rosserlane's solicitors to the buyers' solicitors. The Resolution reads as follows:

"CASPIAN ENERGY GROUP (the "Partnership")

WRITTEN RESOLUTION of Rosserlane Consultants Limited as the General Partner of the Partnership ("Rosserlane") dated 5 January 2007

WHEREAS:

(A) A Loan Agreement was concluded between the Partnership and Credit Suisse Bank, London Branch, on 14 December 2006. The General Partner is interested in the transaction as a result of its interest in the capital of the Partnership;

(B) The Loan was concluded by the Partnership in order to meet certain short term funding objectives of the Partnership;

(C) The fundraising took the form of a loan made, inter alia, to the Partnership by Credit Suisse London Branch ("Credit Suisse") in a principal aggregate sum of US$127,000,000 (the "Loan") the terms of which were provided for in the loan agreement entered into between, inter alia, Credit Suisse and the Partnership on 14 December 2006;

(D) The Partnership is seeking to conclude a sale by way of its partners, Rosserlane Consultants Limited and Swinbrook Developments Limited.

IT IS RESOLVED THAT:

On the conclusion of the sale of the Partnership, the debts of the Partnership in respect of the Loan and all related interest and costs are to be repaid from the proceeds of the sale, as an interest free loan from Rosserlane to the Partnership. If such a sale is concluded on the basis that no liabilities pass to any eventual purchaser, then it is agreed that the partnership will not repay this loan. If such a sale is concluded on the basis that liabilities will pass to any eventual purchaser, then it is agreed that the Partnership will repay this loan to Rosserlane.

Duly authorised for and on behalf of

Rosserlane Consultants Limited, General Partner

Of CASPIAN ENERGY GROUP

(Signature of Dr Leshkasheli)

Dr Zaur Leshkasheli

Director

For and on behalf of

Rosserlane Consultants Limited"

21. It will be observed that this Resolution is the document of Rosserlane, not of Caspian. It is not said expressly to be the resolution of Caspian, by its general partner, Rosserlane. On the contrary, it is said to be the resolution "of Rosserlane". On the other hand it is headed "Caspian Energy Group (the "Partnership")", and it is signed by Dr Leshkasheli for Rosserlane described as "General Partner of Caspian Energy Group". It also refers to an agreement between Rosserlane and Caspian in its terms ("it is agreed"). There was evidence before the judge that in Scots law, which it was common ground governed the Resolution, a unilateral promise was binding; and that the Resolution was "valid as an instrument of Caspian".
22. Nevertheless, the buyers submitted to the judge, and do so again on this appeal, that the Resolution is ineffective as the instrument of Caspian because Rosserlane did not purport in making it to be acting for and on behalf of Caspian. The judge described this argument as "very persuasive" but felt that he was unable to be persuaded to that effect on a summary judgment application in the light of the evidence of Scots law before the court.
23. The buyers also dispute the authenticity of the Resolution, suggesting that it was created after the forced sale. It is accepted that this dispute cannot be resolved on the buyers' summary application. Therefore, subject to the limited point argued before the judge, the Resolution must for present purposes be given its purported effect, in the light of the other relevant documents. The buyers submitted that as such the Resolution at best created a right (to repayment of the interest free loan by Caspian to Rosserlane) which was an accrued benefit or right which was sold and assigned to them or released by Rosserlane under the Sale and Purchase Agreement and/or the Deed of Assumption. Rosserlane, however, submitted that it was only Rosserlane's rights as general partner of Caspian which were so assigned or released, and that the interest free loan under the Resolution was not such a right of Rosserlane as general partner, because it only arose following sale by which time Rosserlane had ceased to be Caspian's general partner. Since the sale was one under which liabilities passed to the buyers (there being no exclusion of them), in the terms of the Resolution, "it is agreed that the Partnership will repay this loan to Rosserlane".

Issue 1: Is Rosserlane entitled to recover from Caspian an indemnity or contribution?

24. It is common ground that under general principles of law and/or equity a guarantor is entitled to an indemnity by way of restitution from a primary obligor of the amount of the latter's liability which the guarantor has been called upon to pay. This is an example of a situation where liability for the same debt rests upon two people, and one of them is forced to discharge it: but as between those two, only one is primarily liable to pay. Similarly, if both are liable to pay as between those two, as in the case of co-obligors in respect of the same debt, but only one is called upon to pay, the payer may obtain a contribution from the other. Other things being equal, that contribution will be 50%: but that may depend on other matters.
25. In the case of guarantors, the contract of guaranty with the creditor may often make the guarantor into a primary obligor, in order to avoid the pitfalls of guaranties, such as their discharge by waiver and so on. In the normal case, however, the fact that the guarantor is a primary obligor vis a vis the creditor does not ordinarily mean that he ceases to have only a secondary liability vis a vis the debtor. As Chitty on Contracts, 30^th ed, 2008, puts it at para 44-003 (Vol II):

"It is by no means unusual for a party to a contract to be a principal debtor as against the creditor, but a surety as against another debtor. Such an arrangement is commonly entered into where the creditor wishes to avoid the technical rules relating to contracts of suretyship under which the surety may become discharged from liability in various circumstances. In this event, the transaction takes effect according to its terms, that is to say, there will be a contract of suretyship between the principal debtor and the surety, but there will be no contract of suretyship between the surety and the creditor. The creditor is accordingly entitled to treat the surety as a principal debtor in every respect."

26. A leading authority in such matters is Duncan Fox & Co v. North and South Wales Bank (1880) 6 App Cas 1, where Lord Selborne LC explained how everything may depend on the nature of the particular agreements which have been made between the three categories of persons concerned, namely creditor, debtor and surety, or, in the absence of any contract of guaranty, between the two categories of persons concerned, namely co-obligors between whom one has a primary and the other only a secondary liability.
27. The question in the present case is whether, as between Caspian and Rosserlane, they engaged or contracted with one another on the basis that only Caspian had the primary liability to repay the bank.
28. If one puts aside for the present the Resolution, there is nothing outside the series of agreements made with the bank originally on 14 December 2006 from which the intentions of the parties can be discerned. Those agreements all involve not only Caspian, which is described as the Borrower, but also its general partner, Rosserlane, which owned practically 100% of the immediate equity interest in Caspian, and also the ultimate owner of the equity in the real assets concerned, Dr Leshkasheli.
29. As the judge observed, it was common ground that if this matter proceeded to trial there would be no further background or factual matrix, beyond that which was already before the court, which might inform the decision. In these circumstances, the judge preferred the submissions of the buyers to those of Rosserlane. He reasoned the matter as follows:

"29. The difficulty with this submission, as it appears to me, is that the contractual structure of the Loan Agreement, to which both Caspian and Rosserlane were party, is that each Obligor, including Caspian and Rosserlane, is jointly and severally liable to repay the debt and each Guarantor, including Caspian and Rosserlane, is also jointly and severally liable to guarantee to the bank performance by each Obligor of its obligations. Thus, each party (save the bank) is at one and the same time an obligor and a guarantor. Since this is the effect of the Loan Agreement and Caspian and Rosserlane are both parties to the Loan Agreement it is not possible, in my judgment, for Rosserlane to say that, as between Rosserlane and Caspian, Rosserlane was only a guarantor of Caspian's obligations as the primary obligor. They both agreed that each was a primary obligor and a guarantor. Rosserlane is not able to contend that there is any difference between the nature of its liability to repay the loan and the nature of Caspian's liability to repay the loan because Rosserlane and Caspian have agreed that these obligations are identical."

30. On this appeal, Mr Stephen Phillips QC on behalf of Rosserlane has revisited the arguments which had been put below. He stressed that only Caspian is described as the "Borrower" and has imposed on it the obligations as such, to pay fees and interest and to repay and so forth (see clauses 5/9 and 11). These obligations are only imposed on Rosserlane and the other "Guarantors" as a secondary party. Even though, in clause 10, all parties, qua "Obligors", are said to share in these obligations as joint and several obligations, they remain the secondary obligations of guarantors. In this respect, Mr Phillips withdrew the concession which had been made below, that, at any rate as between Rosserlane and other such guarantor "Obligors" and the bank, Rosserlane had become a primary obligor. He submitted that the critical words in clause 19 (the "Guarantee" clause) were that the Guarantors "agree to pay as if they were the primary obligor" (clause 19.1(b), emphasis added). That was, he said, recognition that as guarantors they were not primary obligors, but only secondary obligors: however, for the standard purpose of eliminating the normal defences of a guarantor, they agreed to be treated as if they were primary obligors. Thus, returning to clause 10, he submitted that "The obligations of the Obligors to repay the Loans" etc were not primary obligations, and were not said to be primary obligations, but were the obligations found elsewhere in the Loan Agreement, viz in clause 19 so far as the Guarantors were concerned. By reason of clause 19, Guarantors could be treated, together with Caspian, the Borrower, as if they were primary obligors of the bank and thus as owing obligations to the bank which could be described as "joint and several obligations": but the language of the Loan Agreement itself, on top of describing their obligations in terms of those of guaranty, emphasised their essential secondary status by use of the expression "as if". If that remained the formal position between Rosserlane as guarantor and the bank itself, a fortiori it remained the position between Rosserlane and the true primary debtor, Caspian.
31. Mr Phillips also submitted that nothing turned on describing Caspian itself as a guarantor. This was because each Obligor bound itself to observe the covenants contained in clause 16: and to this extent Caspian itself became the guarantor of the other parties' obligations.
32. In my judgment, if the documentation had stopped there, I would have considered the argument to be somewhat poised: between the buyers' submission that overall the Loan Agreement demonstrated there to be no substantial difference intended between the position of Caspian as Borrower and that of any other Obligor or Guarantor; and on the other hand Rosserlane's submission that the difference between the primary obligation of Caspian and the merely assimilated obligation of Rosserlane was retained. On balance, I would have been inclined to favour the latter submission. But the documentation does not stop there.
33. First, there is the Security Agreement, by clause 2.1 of which each Chargor (which expression includes both Caspian and Rosserlane) covenants that "as primary obligor and not merely as surety…it will on demand pay…" That is express language whereby Rosserlane is said to accept a primary obligation and not merely a secondary obligation as guarantor. That is an agreement which binds Caspian and Rosserlane, and not merely Rosserlane and the bank. Even so, even that might not be enough to exclude a true relationship of primary debtor and guarantor where that can otherwise be proved: see Heald v. O'Connor [1971] 1 WLR 497 (per Fisher J at 503D).
34. Of especial importance, however, is the Participation Agreement. This in its way is the focus of the whole arrangement. The loan is a short-term loan, originally for one year only and marginally extended, designed to enable the partners, ie essentially Rosserlane, to sell their equity in Caspian and thereby repay the bank. The partners have eight months to sell of their own accord, and after that the bank becomes entitled to exercise a forced sale on their behalf. From beginning to end of the arrangement, therefore, and whether the sale were to be voluntary or forced, it was always contemplated and expressly provided for that the loan (and any equity uplift under the Participation Agreement) would be paid out of the proceeds of sale, directly to the bank's own account. Since the proceeds would come from the sale of Rosserlane's partnership interest in Caspian, it would follow that the loan would be repaid by Rosserlane, not by Caspian. This therefore is not the normal situation where a guarantor's right of indemnification or reimbursement from the principal debtor is designed to ensure that the guarantor does not lose out merely from the choice of the creditor as to the source of his payment. This is not the normal situation where as between a principal debtor and his guarantor it is agreed or understood that the debt is only that of the former and that if the guarantor is called upon to pay, he will be reimbursed. This is an entirely special case where, from beginning to end, the funds with which to repay the loan were to come from the partners, ie from Rosserlane.
35. In such a case it seems to me to be impossible to say, in the absence of express agreement between Caspian and Rosserlane, that Caspian is to have any further liability to reimburse Rosserlane. After all, Rosserlane has an equity interest in Caspian, the value of which has to reflect Caspian's debt to the bank. It makes no difference to Rosserlane (fiscal and other such considerations apart) whether Caspian repays the loan (and ancillary obligations) and Rosserlane receives any remaining equity value, or whether Rosserlane receives the gross value of Caspian, but itself provides the bank with what is owed to it. In these circumstances, it is impossible to believe that it was nevertheless an essential part of this transaction that Rosserlane retained a right to be reimbursed by Caspian. On the contrary, this would have made no sense. There is only one egg, the value of Caspian's interest in the Shirvan oil field, and that egg is to be used to repay the loan, for the benefit, and not the burden, of all those, such as Rosserlane or ultimately Dr Leshkasheli himself, who have an equity interest in, and thus a responsibility to the bank to support the indebtedness of, Caspian.
36. Thus Rosserlane's counter-example (designed to underline the importance of its submission) whereby Caspian receives the loan on day one and Rosserlane is called upon by the bank to repay the loan on day two, leaving Caspian enriched by the loan and Rosserlane impoverished by its guaranty, is beside the point, and rather demonstrates how very different is the factual scenario of the present case. The sale, on terms that the proceeds of it will go to discharge Caspian's obligations to the bank, means that the proceeds of the sale are enhanced by the value of those obligations. For otherwise, if Caspian were liable to discharge those obligations, its value to a buyer would have been reduced by a correlative amount.
37. In my judgment, therefore, the Participation Agreement disposes of both ways in which Mr Phillips seeks to put the point of Rosserlane's common law rights. Whether Rosserlane seeks the complete indemnification of a guarantor or the contribution of a co-obligor, the answer in either case is provided by the parties' contract. Rosserlane's partnership interest will be sold, the proceeds will discharge all liabilities to the bank, and the parties' agreement as to the disposal of those proceeds is a complete answer to any further suggested cross-liabilities between Caspian and its partners.
38. For these purposes, the submission of Rosserlane that the structure or potential value of the sale of Rosserlane's partnership interest makes any difference is misconceived. It is suggested that the partnership interest sold was worth more than the $245,000,000 obtained, possibly up to a minimum of $500,000,000; and that because the sale was done on an "as is" basis, without any representations or warranties as to existing liabilities, therefore it was to be assumed that the buyers were factoring into their price of $245,000,000 the potential liability to Rosserlane arising out of it discharging Caspian's liabilities to the bank. However, this is all beside the point. No one for present purposes knows that greater value could have been extracted on a sale of the partnership interests in the circumstances in which it was sold. Apparently other litigation may arise between the partners and the bank in which the partners may say that the bank did not achieve a proper price for what it sold. So be it. But it is not suggested in the present proceedings that anything depends on investigating the facts underlying the sale to the buyers. All that one can say, in theory, is that the buyers under a forced sale without representations or warranties as to Caspian's business are going to offer less than might otherwise have been obtained: (a) because the sale is a forced sale by a bank rather than by a seller who has a choice in the matter; and (b) because the sale is on an "as is" basis.

Issue 2: What is the effect of the Resolution?

39. Rosserlane relies on the Resolution as a side agreement or binding unilateral promise on the part of Caspian under which it made itself liable for reimbursement of Rosserlane's secondary liability.
40. For present purposes it must be assumed, subject to the buyers' respondents' notice, that the Resolution represents an obligation of Caspian to Rosserlane on its own terms.
41. The first point is raised by that respondents' notice. On behalf of the buyers Mr George Leggatt QC submits that the judge was wrong to reject the submission that the Resolution is only Rosserlane's document, not Caspian's. He points out that it speaks only of being the authorised document of Rosserlane, and that the reference to "General Partner of Caspian" is mere description. In my judgment, however, against the background of the current evidence of Scots law, the judge was right to say that he was unable to deny Rosserlane's argument a real prospect of success. It can be observed (a) that the document is headed "Caspian Energy Group (the "Partnership")"; (b) that Rosserlane is designated the "General Partner of Caspian"; and (c) that the body of the Resolution refers to it being "agreed" between Rosserlane and Caspian that certain consequences will follow a sale of the Partnership. In the light of the Scots law evidence, I agree with the judge that this point cannot be summarily decided.
42. The second point is to ask what if any light the Resolution throws on issue 1 above. It is not contemporaneous with but subsequent to the Loan Agreement and its ancillary documentation, but it is perhaps significant that it does not proceed on the straightforward common law basis that the use of the proceeds of sale to repay the bank will leave Caspian with a liability to reimburse (or to contribute to) Rosserlane's payment to the bank. On the contrary, it proceeds on the different basis that the repayment of the bank from the proceeds of the sale will be achieved by Rosserlane granting an interest free loan to Caspian, presumably with which to discharge Caspian's liability to the bank. That, however, ignores how the Participation Agreement is structured, which is that the proceeds are paid directly to the bank, at its own account, as its own moneys (see clause 3.6, which says that any money received by an Equity Owner is held on trust for the bank), for application by the bank first in discharge of anything outstanding under the Loan Agreement. Nothing gets paid to Caspian by anyone, nor does Caspian pay the bank anything. It is simply not contemplated that anything will pass to or through Caspian's hands at all. Thus the Resolution ignores the structure of the parties' agreement.
43. Moreover, the Resolution also ignores Rosserlane's submissions as to how the common law rules of indemnification (or contribution) are supposed to work in Rosserlane's favour. The Resolution does not reflect those rules. If it did, it would provide that on payment of the sale proceeds (or some of them) to the bank in repayment of the loan, Caspian would owe an obligation to Rosserlane to indemnify it (or to contribute). Thus the Resolution offers no support to Rosserlane's primary argument.
44. Given the structure of the Participation Agreement, it is not apparent to me how the Resolution could possibly work. Rosserlane, whose proceeds of sale are to be paid to the bank, will never have any funds to lend to Caspian until the loan has already been repaid.
45. It may be that some such point was debated before the judge, for he said:

"44. It was said that in any event the right to repayment pursuant to the Resolution was inconsistent with the Loan Agreement which was restated on 13 December 2007 after the date of the Resolution and therefore could not be effective. I agree that Caspian's obligation to repay the interest free loan to Rosserlane is contrary to the scheme and business sense of the Loan Agreement but I am not persuaded that on that account it cannot be effective as between Rosserlane and Caspian. If this had been the only point I would not have said that there was no real prospect of the counterclaim succeeding on account of it."

46. On appeal, this matter was not revisited, and in any event the second point under this heading of my judgment was not the subject-matter of any submissions. It is not clear to me that the matter considered by the judge and the matter about which I have just expressed my views are the same, for he speaks of the Loan Agreement and I refer to the Participation Agreement. But in any event, I do not treat this point as decisive. It does however support, and certainly does not detract from, the answer which I have given to issue 1 above.
47. The third point is the consequence of any possible liability on the part of Caspian to repay the interest free loan, on the assumptions that the Resolution is binding on Caspian according to its terms, and that the structure of the Participation Agreement did, contrary to my view, enable Rosserlane to make an interest free loan to Caspian in the first place. That raises issues under the Sale and Purchase Agreement and/or the Deed of Assumption.
48. On behalf of the buyers, Mr Leggatt raised arguments to the effect that the existence of the Resolution was not disclosed to the buyers for the purpose of the sale. If that is correct, it certainly does not improve the merits of Rosserlane's submissions, but on the other hand the sale was made without representations or warranties, and such due diligence as the bank permitted the buyers to perform by means of disclosure through the operation of a virtual "Data Room", whether adequate or inadequate, would be an uncertain basis upon which to lay blame on Rosserlane.

Issue 3: What is the effect of the Sale and Purchase Agreement and the Deed of Assumption?

49. Assume that I am wrong so far, so that upon the sale of Rosserlane's partnership interest to the buyers, Caspian would, other things being equal, be under an obligation either (i) to indemnify Rosserlane against its liability as Caspian's guarantor; or (ii) to contribute to Rosserlane its share of what Rosserlane has paid the bank as co-obligor with Caspian; or (iii) to repay the interest free loan contemplated by the Resolution.
50. The question would then arise as to whether any such liability on the part of Caspian would survive the terms of the sale?
51. The judge accepted the buyers' submissions that the Sale and Purchase Agreement, by its clause 2.1, transferred to the buyers, as "accrued benefits and rights", any rights that Rosserlane might have had to repayment of the loan under the Resolution. The judge also accepted the submission that in any event any such rights were released under clause 5 of the Deed of Assumption. He said:

"39. Counsel for Rosserlane submitted that the right to repayment was not an accrued benefit or right. Firstly, it was said not to be an accrued benefit or right. It would only accrue when the sale price had been paid and the interest free loan made by Rosserlane to Caspian. Secondly, it was said not to be a partnership benefit or claim because it was a claim against Caspian. Thirdly, the means by which effect was given to the sale was the Deed of Assumption and all that was assigned was "the Assigning Interest" which, it was common ground, did not include the (assumed) right to repayment pursuant to the Resolution.

40. I am not persuaded by any of these points. I do not consider any of them has a real prospect of success. Firstly, either the right to repayment accrues on sale (because the making of the loan occurs simultaneously with the paying of the price) or, if there is a scintilla of time between the paying of the price and the making of the loan, it cannot have been intended that such a scintilla of time would prevent the right being described as having accrued on sale. Secondly, the rights which are transferred are those which Rosserlane has as general partner. The right to repayment was a right of Rosserlane as general partner because that was the capacity in which it had made the loan. Thirdly, the fact that the Deed of Assumption does not refer to the sale of the accrued benefits and rights does not prevent them passing pursuant to the terms of the Sale Agreement.

41. If I am wrong in concluding that the right to repayment was an "accrued benefit or right" then it was released pursuant to clause 5 of the Deed of Assumption. That clause provided that Rosserlane "shall have no further rights or claims, or obligations as partner of the Partnership." In response it was said that the right to repayment was not a partnership right. However, it seems to me that it was clearly a right which Rosserlane had as partner of the Partnership. The interest free loan had been made because Rosserlane was the general partner."

52. Many of these submissions were raised again on appeal. In my judgment, the effect of the sale was to assign the accrued rights and to prevent the accrual of any further rights after sale. Nothing else makes any sense. Therefore, if, at the point of sale, the loan was an accrued right, it was assigned. If, however, it was not an accrued right as at that point, it was too late for Rosserlane, who was after all no longer general partner, to accrue any further right thereafter. To that extent I would agree with the judge.
53. As at the completion of the sale, the assumed loan to Caspian (which could not have occurred, see above, but that is another matter which I leave out of account) had not of course yet taken place. Ex hypothesi, it could only take place out of the proceeds of the sale. Therefore, however little amount of time thereafter it might be supposed to have occurred, it was not an accrued right or benefit of Rosserlane at the moment of sale. Therefore it was not assigned. To that extent, I would respectfully disagree with the judge. On the other hand, when thereafter the loan was granted to Caspian out of Rosserlane's proceeds of sale (the argument is that the loan was granted to Caspian in order to permit Caspian to repay the bank, but of course the bank had already been repaid, but that again is another matter which I leave out of account), the loan which then came into place for the first time was not, in my judgment, a loan made by Rosserlane to Caspian as its general partner, because ex hypothesi Rosserlane had, upon sale, already sold and assigned its partnership interest to the buyers. Therefore, the loan could not have been made as general partner.
54. It is true that the Resolution, assuming it to have been the resolution of Caspian made by Rosserlane as its general partner, was made at a time when Rosserlane was general partner, and thus the agreement which that Resolution evidenced and authorised was an agreement between Caspian and Rosserlane as the former's general partner. Any right that such an agreement might have given to Rosserlane must have been an accrued right which passed under the sale to the buyers and which Rosserlane could not thereafter enforce. Moreover, ex hypothesi it was an agreement which could only take effect after sale, when Rosserlane was no longer general partner. Even on the assumption that Rosserlane could bind Caspian in this way, proleptically, looking forward to a time when it would no longer be general partner, nevertheless the loan was made and the obligation to repay it was incurred at a time when the partnership link had been severed. In these circumstances and at such a time "the Assignor…thereafter shall have no further rights or claims". Yet that is exactly what Rosserlane on its counterclaim is seeking to advance, a further right or claim. In my judgment, it cannot do so.
55. If, on the other hand, as the judge thought, the right to repayment of the interest free loan was an accrued right, then it was transferred.
56. In his submissions, Mr Phillips on behalf of Rosserlane was concerned to make the point that the interest free loan had not been made by Rosserlane as general partner. It will have been seen that I agree. But it follows, in my judgment, that Rosserlane cannot recover from Caspian in respect of it. The loan has to fall on one side of the line of the sale or on the other side of that line. It cannot straddle it. Mr Phillips would prefer to say that it falls on the other side of that line, that is to say post-sale. But whichever side it falls on, Rosserlane cannot pursue a right to recover.
57. If, alternatively, attention is switched to an assumed right of indemnity or contribution, this right must be viewed, in my judgment, as an accrued right, for it arises at the very moment of sale, when Rosserlane's proceeds are paid, under the terms of the sale and of the Participation Agreement, to the bank as its own moneys, for it to dispose of in accordance with the terms of the Participation Agreement. Therefore, at and by the time of the sale, Rosserlane's prima facie right to receive the proceeds of sale had already been transmuted into the obligation to permit the bank to receive the proceeds primarily to repay itself what it was owed under the Loan Agreement. If, contrary to my conclusions above, that left any right in Rosserlane to receive an indemnity or contribution from Caspian, that right was in that instant (and not a scintilla thereafter) transferred to the buyers themselves.

Conclusion

58. For these reasons, I would dismiss this appeal. Rosserlane has no real prospect of succeeding at trial on its counterclaim.

Lady Justice Arden :

59. I agree.

Sir Anthony Clarke, MR :

60. I also agree.