[Home] [Databases] [World Law] [Multidatabase Search] [Help] [Feedback]
	Scottish Court of Session Decisions
You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Societe General SA v Lloyds TSB Bank Plc & Anor [1999] ScotCS 221 (17 September 1999) URL: http://www.bailii.org/scot/cases/ScotCS/1999/221.html Cite as: [1999] ScotCS 221

[New search] [Help]

In this action the pursuers, who have taken the place of the original pursuers, Hambros Bank Limited, represent the interests of certain financial institutions which are creditors of companies within the Oakstead Group (to which we will refer as "the Group"). We will refer to the first defenders and their predecessors, Lloyds Bank plc, as "Lloyds". The second defenders are one of the companies in the Group, and are a wholly owned subsidiary of Oakstead Holdings Limited. Until May 1996, when administrative receivers to the Group were appointed, the second defenders and other companies in the Group carried on business in which the main activity was the retailing of petrol at about 120 sites. On 26 February 1998 the Lord Ordinary, after hearing proof in the action - in which the second defenders did not participate - assoilzied the first defenders. The pursuers have reclaimed against his interlocutor. Lloyds have not pursued a cross-appeal.

Before coming to the matters at issue in this reclaiming motion, it is convenient to set out a history of the events which led up to the granting of the securities with which this action is concerned. For this purpose we will adopt parts of the narrative set out by the Lord Ordinary in his Opinion, and add a number of matters which were also established by the evidence. For a number of years prior to 1995 Oakstead Holdings Limited had a number of institutional investors, including Investors in Industry ("3i") which held a 20% shareholding. 3i also provided certain financial facilities to the Group. About five other banking institutions were also providing financial facilities to the Group. These included Lloyds, which was the Group's clearing bank. The facilities provided by Lloyds included an Overdraft Facility and a Revolving Dual Option Credit Facility ("Revolving Credit Facility") to certain members of the Group. The latter comprised a loan facility to the second defenders and Oakstead Developments Limited, and a bonding facility in respect of obligations to a petrol supplier to the second defenders.

The facilities provided by Lloyds were reviewed annually, usually in September. The review which commenced in about September 1994 led to Lloyds issuing two letters of offer dated 11 January 1995, each of which was subsequently accepted.

One letter offered an Overdraft Facility, stating that the maximum amount outstanding under the overdraft was not to exceed £1,250,000 at any time. The Overdraft Facility was concerned mainly with the Group's short-term cash requirements. The letter also stated that the amounts from time to time owing under the overdraft were repayable on demand "but it is Lloyds' present intention to make the overdraft available until 30 September 1995 or such later date as may from time to time be advised in writing by Lloyds". As regards security, the letter stated:

It may be noted that Annexes 1 and 2 were two styles of mortgage in English form, each of which bore to be an "all sums" security, covering all money and liabilities due or to become due by the borrower to the lender. Annex 3 was a style of side letter which enabled the borrower to exercise certain powers notwithstanding the security. Attached to the offer letter were a number of "exhibits". These included Exhibit 3 (not referred to in the letter), which listed two sites, namely a leasehold filling station at Cheshunt in Hertfordshire and a freehold filling station at Prestatyn in Wales. These sites had been charged to Lloyds some years earlier in connection with the then Overdraft Facility, on what bore to be "all sums" mortgages. They continued to be so charged.

The other letter related to the Revolving Credit Facility, which was concerned with providing a medium term loan and performance bond facilities. That letter listed a number of legal charges which had been granted over properties by companies within the Group. All these charges took the form of "all sums" mortgages. Further property could become a charged security. This required the designation by the borrowing company. Other than with Lloyds' written consent, a borrowing company could not designate a property as part of the charged security if it was already charged to Lloyds as security for amounts outstanding under any other facilities made available by Lloyds. The charge required to be substantially in the form of an "all sums" mortgage. Clause 7(e) provided:

The Revolving Credit Facility was expressed to expire at 30 September 1998.

According to evidence given by Mrs Susan Tobbell, Finance Director of the Group, and accepted by the Lord Ordinary, the provision in such facility agreements whereby the charges were in general to secure only obligations in respect of a particular facility had been negotiated in about 1990 and had been continued at each renewal. Such a restriction was unusual. It was regarded by directors of the Group as being important. While the allocation of properties to particular borrowings had certain disadvantages for the Group, including a tendency for advances made under the Revolving Credit Facility to be significantly over-secured, it permitted better financial management of the security arrangement for borrowings, including a succinct and clear allocation of securities to obligations and a readier ability to switch securities as circumstances required.

In the course of 1995 the second defenders granted an "all sums" Standard Security in favour of Lloyds in respect of heritable subjects at 505 Aikenhead Road, Rutherglen. This was the first occasion on which a Scottish property was used as security in respect of any facility granted by Lloyds to a company in the Group. It arose out of the Group drawing down £975,000 under Clause 7 of the current Revolving Credit Facility which was the subject of the relevant letter of 11 January 1995. The solicitors who attended to the drafting of this security deed were provided with copies of the two facility letters and were instructed to use a form of security which was as nearly as might be in the form of the attached English style of mortgage.

By the Autumn of 1995 the Group was experiencing trading and financial difficulties as a result primarily of an abortive property transaction and of the impact on petrol sales of the "Price Watch" campaign initiated by its rival, Esso Petroleum. The campaign operated only in Scotland and north-east England between August 1995 and January 1996. According to Mrs Tobbell the campaign decimated the Group's profit margin and severely hit their volume of sales. The effect was fairly immediate. However, the values of the properties at Cheshunt and Prestatyn were not directly affected by it at that time. The date for the expiry of the Overdraft Facility, namely 30 September 1995, passed without any demand for repayment being made by Lloyds. However, the Group's financial position, and the future support which Lloyds might continue to give, were discussed at a meeting on 14 November 1995. This meeting was attended by certain directors of the Group and two representatives of Lloyds, including Mr Christopher Richardson who was a senior manager of their Debt Management Unit. He had become involved due to the financial difficulties being experienced by the Group. At that meeting the representatives of Lloyds indicated that an Overdraft Facility could be continued but would be capped at a significantly lower figure than £1,250,000. However, no offer was made at that meeting.

By letter dated 17 November 1995 Lloyds made a formal offer of an Overdraft Facility. This was in identical terms to that of 11 January 1995, subject to the important qualification that the amount of the overdraft was not to exceed £600,000 and there was a revised rate of interest. Attached to the letter were a number of exhibits, which again included an Exhibit 3 identifying the Cheshunt and Prestatyn properties. Once more the letter made no reference to that exhibit. The Overdraft Facility which was offered was stated to be available only until 24 November 1995 or such later date as Lloyds might advise in writing. In evidence Mrs Tobbell described herself as "shattered" by that letter. As the Lord Ordinary observes in his Opinion, the short timescale was clearly designed to concentrate minds on securing a longer term arrangement.

On 1 December 1995 Mr Richardson wrote a letter to the Group in which he confirmed that Lloyds were pleased to continue to make available banking facilities on the same terms as set out in the letter dated 17 November 1995, with certain amendments. In respect of the amount of overdraft, he stated that the maximum outstanding at any time should not exceed £700,000. In respect of availability, he stated that amounts from time to time owing under the overdraft were repayable on demand, but that it was Lloyds' present intention to make the overdraft available until further notice. An increased rate of interest was specified. In regard to security, the letter stated that the security conditions and exhibits referred to in the letter dated 17 November 1995 remained unaltered. The letter also stated that other conditions as outlined in the letter dated 17 November 1995 remained unaltered. Additionally the overdraft was subject to certain requirements including the following:

Formal confirmation of acceptance was sought. On 7 December 1995 the relevant companies in the Group, with some reluctance, accepted the amended offer. The agreement constituted by the letter of 17 November, as amended by that dated 1 December, and the companies' acceptance remained in force throughout the succeeding months.

On 7 December 1995 in a telephone conversation with Mrs Tobbell, Mr Richardson stated that he had agreed with Mr Alastair Morrison of 3i that the Group should be supported on a "phased approach basis", subject to certain conditions being met, Lloyds and 3i taking security "for additional facilities supplied".

Over the Christmas and New Year period there was normally an increase in the level of the Group's overdraft. This was due to the fact that, while the Group's debts to its suppliers continued to be drawn from its account by direct debit, its cash receipts were, as a result of bank holidays, delayed in being credited to that account. Mrs Tobbell was apprehensive that during the Christmas and New Year period of 1995/96 there was a risk of the £700,000 cap being breached. That could give rise to other obligations becoming due, with a consequent risk of the financial collapse of the Group. She was also apprehensive that, if provision was not made for a temporary increase in the Overdraft Facility, there was a risk that the directors of the Group might become involved in trading unlawfully.

A meeting was held on 12 December 1995 at the offices of 3i in London. It was attended by Mrs Tobbell and two other representatives of the Group and by Mr Richardson and a representative of 3i. At that meeting the Chairman of the Group explained that negotiations had been taking place with an oil company and with Shell. The former had shown an interest in acquiring the Group, the latter in purchasing a number of its filling stations. He expressed the view that if either of those negotiations were to come to fruition, it was anticipated that the general financial difficulties facing the Group would be resolved. Mr Richardson stated that, in the light of the Group's forecast cash flow, Lloyds were prepared to accommodate an increased overdraft up to £1,200,000 until the end of January 1996, on certain conditions being accepted. Those included the immediate instruction of Messrs Arthur Andersen to carry out an investigation into the Group's financial affairs, and an immediate re-valuation by Messrs Weatherall Green & Smith of the properties currently secured to Lloyds. Mr Richardson noted that one of the other conditions which he mentioned was as follows: "We would need to have additional security as necessary to ensure that our increased exposure was fully secured." Mrs Tobbell and Mr Richardson were aware at that time that the values of the two sites at Cheshunt and Prestatyn were likely to be less than the valuations which had previously been obtained in respect of them. At that meeting the directors of the Group declined to agree that the investigation and re-valuation stipulated by Mr Richardson should be instructed immediately. They considered that, in view of the state of negotiations with the oil companies, it was unnecessary to incur that expense. (It may be added that after the meeting Mr Morrison, who represented 3i, told Mr Richardson that he believed that there was a prospect of such a deal proceeding). In these circumstances no agreement was reached about the proposal made by Mr Richardson, other than that a decision on that matter should be deferred. Since the directors of the Group remained concerned about the risk of the cap of £700,000 being breached during the holiday period, they indicated at the meeting that there were two uncharged sites in Scotland which they were prepared to make available as additional security. The meeting ended without any agreement being reached on the terms of any temporary accommodation, but with the prospect that securities would be granted to Lloyds over those properties and that, in the event of that being done, Lloyds would favourably consider permitting the overdraft to exceed, over the holiday period, the stated limit of £700,000 up to a maximum of £1,200,000.

On the following morning the Group's property development director sent a letter to Mr Richardson in which he identified the two Scottish sites, "further to our meeting yesterday afternoon at 3i's offices regarding the charging of two Scottish sites to secure further overdraft funding". The letter concluded:

On the same day Mr Richardson spoke to Mr Harvey-Jamieson, a partner of Messrs Murray Beith Murray who acted as Lloyds' solicitors in Scotland. The Lord Ordinary states in his Opinion that Mr Harvey-Jamieson gave evidence, which he did not find reason to doubt, that in the course of that telephone conversation Mr Richardson was quite clear that the securities to be provided were not to be tied to any particular facility. Mr Richardson also sent a letter by fax to Messrs Murray Beith Murray with instructions to act on behalf of Lloyds in this matter, along with a copy of the fax from the Group's property development director. He referred to the Aikenhead Road transaction and stated that he believed that the documentation should be similar for the two new garages to be charged.

Following the preparation by the respective solicitors of the draft documents, on 20 December 1995 the second defenders granted in favour of Lloyds a Standard Security over a site at 84 Hamilton Road, Cambuslang and a second Standard Security over a site at 67/79 Westwood Road, Newmains (to which we will refer as "the two securities"). In each case "the Debtor" was defined as meaning the second defenders, Oakstead Developments Limited and Oakstead Holdings Limited. The "Proprietor" was defined as the second defenders. Each document opened with the following:

In each case there was a clause which applied the Standard Conditions specified in Schedule 3 to the Conveyancing and Feudal Reform (Scotland) Act 1970 as amended and as varied and extended by certain identified documents and any other lawful variation thereof operative for the time being.

The minutes of a meeting of the board of the second defenders on 20 December 1995 stated:

It may be noted that, when originally drafted by Messrs Murray Beith Murray, the text referred to the Revolving Credit Facility in respect of each transaction. The text was revised by solicitors of the second defenders so as to refer to the Overdraft Facility. In returning the draft to Messrs Murray Beith Murray, the partner in those solicitors stated:

Following the meeting on 12 December Mrs Tobbell was concerned that the Group had received nothing in writing from Lloyds to cover the situation should the cap of £700,000 be exceeded during the holiday period. She had a telephone conversation with Mr Richardson on 20 December. In the course of that conversation he agreed to provide her with a letter which, among other things, would confirm that, in view of the provision of the two securities, it was the intention of Lloyds to permit excesses on the overdraft up to the amount of £1,200,000. On the same day he drafted a letter which was subsequently typed, dated and faxed on 21 December. That letter referred to the terms and conditions of the current Overdraft Facility and to the current forecast cashflow. It bore to set out the main terms which Mr Richardson had outlined at the meeting on 12 December on which Lloyds were prepared in principle to agree to increase the overdraft limit. These were stated to be "the main conditions over and above the normal conditions expressed in our letter dated 17 November". The letter then recorded that, in the light of the continuing negotiations with the oil companies, it had been agreed to defer a decision on the increased overdraft financing pending the outcome of negotiations in the short term. The letter continued as follows:

In the course of the same conversation Mrs Tobbell told Mr Richardson that representatives of the British Linen Bank, which was another of the banks which was providing financial facilities to the Group, had given her "a very hard time" in an interview in which they had asked many detailed questions in a rather aggressive fashion, and that the concern of that Bank seemed to focus on the value of their security. At about this time Mrs Tobbell disagreed with a proposal made by Lloyds' solicitors that the security which had already been granted in regard to the site at Aikenhead Road should be varied so as to include collateral securities granted by companies in the Group which were borrowers under the Overdraft Facility. Mr Richardson did not insist on this, as he was prepared to leave the Dual Option Facility in place for the time being.

In the course of 21 December Mrs Tobbell received, by fax, the letter from Mr Richardson. She did not reply to it. Although its terminology was not entirely to her liking, she considered that in substance it achieved her objective in relation to the immediately anticipated cash requirements of the Group. This was how matters stood during the holiday period. In the event, contrary to expectation, the overdraft did not in that period in fact exceed £700,000. However, the position of the Group deteriorated thereafter, leading to the appointment of administrative receivers to the companies in the Group in May 1996.

In this case parties are at issue as to whether the pursuers are entitled to obtain declarator in terms of the first conclusion, which is in the following terms:

The companies referred to in Schedule 2 are Oakstead Developments Limited and Oakstead Service Stations Limited. The title of the pursuers to sue in the present action is no longer in dispute. The question is whether, as they contend, the two securities were qualified to the effect referred to in the conclusion, or whether, as Lloyds contend, they secured any monies owed to them by the companies in the Group which fell within the definition of the debtors under those securities.

One of the points which is in issue in this case is whether, as a matter of law, the terms of Clause (iv) are admissible as a qualification of the terms of the two securities. For the time being we will put that point to one side, and assume that it does not present any obstacle to the pursuers.

From the pleadings and the arguments which have been presented in this case it appears that the pursuers have sought to argue their case as to the facts in two ways. The first conclusion proceeds on the basis that the second defenders granted the two securities in terms of the letters of 17 November and 1 December 1995. The proposition which is advanced by the pursuers in their first plea-in-law is that they are entitled to declarator in terms of the first conclusion "the Standard Securities being qualified by prior agreement of inter alia the first and second defenders and that agreement never having been varied, all as averred". It is reasonably plain from their averments in Article 6.1 that the "prior agreement" refers to the letter dated 17 November, as amended by that of 1 December 1995 (which as we have already noted, was accepted on 7 December 1995). They also aver in Article 5.1 that after the last mentioned date Lloyds and the Group "continued to negotiate for a further increase in the Overdraft Facility to £1.2million, which increase was ultimately agreed", and that in the course of these negotiations the second defenders granted Lloyds the two securities. Although it does not appear that this was the way in which the pursuers' case was presented to the Lord Ordinary, some of the submissions which were made by counsel for the pursuers, and in particular junior counsel, in the course of the reclaiming motion appeared to rely on this approach.

The Lord Ordinary held that the two securities were proffered by the Group with a view to Lloyds tolerating breaches of the existing overdraft limit of £700,000, which remained in force. Mr Richardson was prepared to instruct solicitors, and, in the event of the two securities being made available, to give favourable consideration to the Group's cash requirements over the holiday period. While the short term arrangements were made within the context of the Overdraft Facility, and against the background of the prior practice, the application of Clause (iv) was not, by any document or by any express oral agreement, extended to the two securities. Neither property was identified in an exhibit in the way in which the English properties had been identified with reference to the contractual terms of the Overdraft Facility.

In this reclaiming motion the pursuers' second ground of appeal claims that the Lord Ordinary was in error in finding that the short term arrangements applied to the two securities. They found on the fact that those arrangements were expressed by Mr Richardson in his letter of 21 December 1995 as not being legally binding. In any event the two securities had been granted before that letter was received by Mrs Tobbell.

Mr Sellar, junior counsel for the pursuers, emphasised that the primary obligations were created by the Overdraft Facility which, as the Lord Ordinary held, was still in force. The granting of further security was ancillary to that Facility. Mr Richardson had conceded in evidence that his understanding was that his letter to Mrs Tobbell dated 21 December 1995 did not innovate on the existing arrangements between Lloyds and the Group. Mr Sellar also pointed out that in his telephone conversation on 7 December 1995 Mr Richardson had referred to Lloyds taking security for additional facilities supplied, and had made a note to a similar effect about the meeting on 12 December 1995. In his letter to Mr Richardson dated 13 December 1995 the Group's property development director referred to the charging of the two Scottish sites as being "to secure further overdraft funding". In their revisals to the draft board minutes of the meeting on 20 December 1995 the Group's solicitors had made it clear that the two securities were being granted, not in connection with the Revolving Credit Facility, but in connection with "an Overdraft Facility which has not yet been documented". All of this pointed to the two securities being granted in respect of an increased level of overdraft. Mr Sellar emphasised that, while the Group had a problem in December 1995, it was not a crisis. If there had been a crisis Mr Richardson would not have tolerated breaches of the overdraft limit with or without security. He would have insisted on the appointment of Arthur Andersen and Weatherall Green & Smith and called up the Overdraft Facility. On the contrary there was, in his belief, a reasonable prospect of the deal with an oil company proceeding, and it was to be noted that he was prepared to leave the Revolving Credit Facility as it stood. In these circumstances counsel for the pursuers submitted that the arrangements which were made by Mrs Tobbell and Mr Richardson anticipated that the two securities would come within the scope of the existing Overdraft Facility.

We are satisfied that this approach to the pursuers' case is not well-founded. It is plain that the Group and Lloyds never reached the point where the conditions set out by Mr Richardson at the meeting on 12 December, and recapitulated in his letter of 21 December, were met. It is plainly incorrect to say that an increase in the overdraft limit to £1.2 million was agreed at any stage. The two securities were not in any sense governed by, or arranged under, the existing Overdraft Facility. They were proffered by the Group, as the Lord Ordinary held, with a view to Lloyds tolerating breaches of the existing overdraft limit which remained the sole contractual arrangement for the time being. Accordingly we reject the criticism that the Lord Ordinary was in error in linking the granting of the two securities to such short term arrangements, which were distinct from the existing contractual arrangements for an Overdraft Facility.

The second approach adopted by the pursuers, and the one which was presented by them to the Lord Ordinary, was that by the time when the two securities were granted there had come into existence a legally binding agreement between the Group and Lloyds by which the two securities were subject to the terms of Clause (iv) of the letter of 17 November 1995. Before the Lord Ordinary it was conceded that no such agreement had been entered into by the close of the meeting on 12 December 1995. It was contended before him that the agreement came into existence over the days following the meeting by reason of the granting of the two securities and the informal allowance by Lloyds of the drawing by the Group on the overdraft account during the holiday period in excess of the existing limit of £700,000.

The Lord Ordinary's conclusion was that it was not possible to infer there was a legally binding agreement to that effect. At the close of the meeting it was common ground to the extent that the Group would arrange for additional security to be granted, and that in the event of it being granted, Lloyds would consider what provision it could make in relation to the anticipated need for a temporary Overdraft Facility beyond £700,000. There was no undertaking by Lloyds that, in the event of the two securities being granted, a temporary Overdraft Facility would be granted. Nor was there any undertaking that, in the event of such securities being granted, they would be treated as securing only the overdraft.

The contention for the pursuers, as advanced in their first ground of appeal, is that, while there was no express agreement to that effect, documentary or oral, it arose from a combination of circumstances, namely (i) the clear and consistent course of dealing that securities granted in respect of the Overdraft Facility and the Revolving Credit Facility were restricted to that facility and not pooled; (ii) the absence of any agreement to depart from that course of dealing (which would have been contrary to the Group's need to continue to act in an even-handed way towards their five other lenders); (iii) the fact that prior to the granting of the two securities, Lloyds had given no legal commitment to increase the overdraft limit beyond £700,000; (iv) the attitude of the Group's solicitors to the terms of the draft board minutes, and the fact that neither Lloyds nor their solicitors objected to the amendment made by them; and (v) the fact that the negotiations in December 1995 related only to the Overdraft Facility.

As part of the same ground of appeal the pursuers maintain that the Lord Ordinary was in error in applying the test of necessary implication in deciding whether Clause (iv) was incorporated in any agreement between Lloyds and the Group. The pursuers contend, under reference to the speech of Lord Reid in McCutcheon v David MacBrayne Ltd 1964 SC (HL) 28 at page 35, that the correct test was what each party was reasonably entitled to conclude was the intention of the other in all the circumstances, including in particular any established course of dealing between them.

Counsel for the pursuers founded on the fact that the Lord Ordinary was satisfied that dealings between Lloyds and the Group had shown a consistent practice for a considerable period prior to December 1995, by which "all sums" styles of mortgage had been used in the formal security documents, with the parties regularly agreeing by other writings that the formal documents should secure only particular obligations. Further, he found that there was no evidence that a security had been made available for the Revolving Credit Facility otherwise than by being properly designated for that facility alone, such as in the case of the site at Aikenhead Road. The Lord Ordinary was of the view that there was no acceptable evidence that anything was said or done in the course of the dealings or discussions in December 1995 to evince an intention to depart from that practice in relation to any temporary arrangements over the holiday period. He observed that if a pooling arrangement had been expressly proposed Mrs Tobbell would have noticed it. It would have run contrary to the established practice which she regarded as important. She was also concerned not to prefer one bank to another and had received legal advice in this respect. Accordingly she was acutely conscious of the need to deal even-handedly with all the lenders to the Group. The Lord Ordinary observed that although the Group's anticipated requirement for an extended cash facility over the holiday period was very pressing, the directors of the Group would even in such circumstances have hesitated before offering a pooled security. Had it been raised, they would undoubtedly have reacted to it. There was no evidence that they did. The Lord Ordinary did not accept the evidence of Mr Richardson in so far as it suggested that at the meeting on 12 December 1995 he had indicated that Lloyds were looking for additional security of an effectively pooled character. On the other hand the Group did not expressly state that the two securities would be made available exclusively in security of the overdraft. It may be added, for what this may be worth, that the Lord Ordinary was satisfied that at the meeting and throughout subsequent dealings, Mrs Tobbell believed that the two securities would secure and, when granted, had secured the overdraft and that alone. He also concluded, but with some hesitation, that Mr Richardson probably had in mind that the two securities would provide security for existing borrowings, as well as the overdraft. In evidence he said that he assumed that the two securities would employ "all sums" wording as Lloyds were in a very strong negotiating position. They had been taken as additional security to cover their existing claims and were not part of any new facility which had been agreed. The Lord Ordinary accepted the evidence of Mr Harvey-Jamieson that he understood that the two securities were not tied to any particular facility.

Senior counsel for the pursuers, Mr McNeill, Q.C., emphasised that if Lloyds were correct in their contentions the Group gained nothing but a "letter of comfort" in return for the granting of the two securities, while Lloyds did not increase its debt exposure. He accepted that there had been a significant change in the position of the Group by December 1995, but it was not clear that it was "going under". Lloyds did not say so. He accepted that the risk of this happening was increasing, but Lloyds did not withdraw their facilities. If they had indicated that they were going to do so, Mrs Tobbell would have taken legal advice and she might have sought to provide further security. Then she and Mr Richardson would have had to deal with the other lenders to the Group. Lloyds were not in a unique position. Mrs Tobbell gave every indication that she was working within existing parameters. At the time of the meeting her impression was that, if the Group could provide further securities, the increased overdraft exposure would be forthcoming thereafter. There was, he submitted, a new agreement that the two securities should be granted to allow the overdraft to continue while Lloyds would consider the matter of an increased exposure on the overdraft. There was no indication at the meeting that the provision of the two securities was to be otherwise than in accordance with the terms of the existing Overdraft Facility. The agreement was concluded by conduct, in respect that the securities were handed over and accepted, without any indication on either side that the terms of the existing Overdraft Facility were not to apply. If Lloyds were correct, there would have been ancillary documents showing that the two securities were to cover all borrowings. All this took place against the background of the parties' prior arrangements. There was no question here of a different type of facility letter being issued. Parties chose to express the securities in the form which they took. Mr McNeill also pointed out that it could be assumed that Lloyds' solicitors were comfortable with the prior arrangement, in the absence of their seeking rectification or amendment of the terms of the charges. He maintained that it would have been a different matter if it was said that another document had extended the scope of the two securities.

In reply Mr Tyre, Q.C., and Mr Keen, Q.C., for Lloyds emphasised that the terms of the two securities were comprehensive in referring to "all sums". The pursuers' case involved ignoring the personal obligation in the two security deeds, and substituting a different one which was derived from incorporation of the terms of Clause (iv) from the earlier letter. The position, however, was that, standing delivery of the two securities, Lloyds were minded to tolerate breaches of the existing overdraft limit up to £1.2 million. As regards the site at Aikenhead Road, this was a solitary case in which the debt for which it was a security was restricted. In the case of the two securities, there was no question of the Group having and exercising a right to restrict the borrowings to which they could be applied. They did not become "charged property" for the purposes of the Revolving Credit Facility. Mr Tyre submitted that, prior to the execution and delivery of the two securities, it was not possible to identify any agreement which was capable of incorporating the terms of Clause (iv). This might explain why the pursuers did not seek rectification. In any event, there was no such agreement which was subject to the terms of that Clause. He also maintained, in regard to the significance of prior dealings, that there were significant departures in form and in substance in December 1995. The two securities were not granted in terms of the Overdraft Facility letter. Mr Richardson's letter of 21 December merely confirmed what he had said to Mrs Tobbell already. What was done was different from what had gone before. There was ample evidence that as at 20 December 1995 the Group was in financial difficulties. There was a loss of £75,000 per week. No trading solution was in sight. There was a long term as well as a short term problem. Mr Richardson was sceptical about the offer by the foreign oil company. In due course the company was seen to be in trouble from which it could not extricate itself. The oversight of Lloyds' relationship with the Group had been transferred to Mr Richardson who dealt with problems of debt management. The hopes of the Group were pinned on the sale of the whole Group or sale of a number of petrol filling stations. It was recognised both by Lloyds and the Group that their relationship had changed. Because the Group had insisted on deferring investigation and re-valuation, they did not obtain a new Overdraft Facility from Lloyds. However, they still needed an immediate comfort. Even if the rest of the conditions were "put on hold", they could offer the two securities in return for an informal tolerance of a breach of the existing overdraft limit, and so hope to avoid the automatic return of cheques and keep the Group alive. It followed that what happened before was no indication of what parties should be taken to have intended in December 1995. The critical moment was when Mrs Tobbell telephoned Mr. Richardson on 20 December. The fact that the earlier arrangements for restricting the scope of charged property to the debt due under a particular facility were unusual was all the more reason why the terms of Clause (iv) were not incorporated. Nothing turned on the exchanges in regard to the terms of the draft minutes. Lloyds' solicitors had been mistaken in referring to the Revolving Credit Facility rather than the Overdraft Facility. It did not follow that the two securities could only be applied in regard to the overdraft debt. There was no evidence that the taking of two securities had implications for the other lenders. In the circumstances Lloyds were able and entitled to look after their own interests without reference to the other lenders.

In our view the pursuers' submissions are not well founded. It is plain that there is no suggestion that the two securities did not correctly express what the parties had intended them to state. There is no claim that their terms fall to be rectified. Nothing was said at or subsequent to the meeting on 12 December 1995 to the effect that these securities were nonetheless to be restricted so as to cover only the debt due on the overdraft. It does not follow from the fact that the discussions and dealings between the parties arose out of the Group's concern that the overdraft limit of £700,000 might be exceeded during the holiday period that the two securities were to be restricted to securing the overdraft debt only. That would increase the overall risk to Lloyds and it is plain that Lloyds were concerned about the overall value of the property which was charged to them.

It is understandable that the pursuers seek to bring what was done in December 1995 into alignment with the previous agreements in regard to the Overdraft Facility. However, the difficulty for this line of argument is that, for the reasons advanced by Lloyds in their submissions, there were significant differences between the situation in December 1995 and what had gone before, both in regard to the form of any arrangement between the parties and in regard to the factual background to those arrangements. It was because there was no agreement reached at the meeting on 12 December 1995 for an increase in the limit under the existing Overdraft Facility, let alone any fresh Overdraft Facility, that Mrs Tobbell sought assurance from Mr Richardson. In these circumstances the Group proffered the two securities on the strength of the prospect that Lloyds would tolerate breaches of the existing limit during the holiday period. It may also have been the case that Mrs Tobbell regarded the granting of the two securities as one step in the direction of arriving at a new agreement in regard to an increased overdraft limit. However, that never came to pass. Against that history there does not seem to us to be sufficient to enable what happened in December 1995 to be treated as one of a series of similar dealings between the parties. In McCutcheon Lord Reid at p.35 said:

Lord Reid went on to refer to what one party is reasonably entitled to conclude from the attitude of the other in the context of whether certain conditions were intended by the other party to be part of the contract. However, in the present case there does not appear to us to be an adequate basis of evidence for that in regard to the incorporation of Clause (iv). Nothing was said or indicated by either party or their legal representatives as to whether or not that clause, or indeed any other part of the Overdraft Facility letter of 17 November, as amended by that of 1 December, 1995 formed the part of any arrangement in connection with the granting of the two securities.

For these reasons we consider that the pursuers have failed to establish that the terms of Clause (iv) qualify the use to which the two securities could be put. In these circumstances it is not strictly necessary for us to deal with the question of whether the terms of Clause (iv) would, as a matter of law, have been admissible as a qualification of the comprehensive terms in which each of the two securities was expressed. However, we will briefly express our views in regard to that question.

The Lord Ordinary applied what he referred to as the supersession rule. He referred to the following words of Lord Watson in Lee v Alexander (1883) 10R. (H.L.) 91 at page 96:

He considered that for this purpose he should not differentiate between a conveyance of heritable property and a heritable security when each followed upon a written contract. Accordingly the doctrine applied, in his view, to the two securities. The application of the rule had the result that a provision in a contract in furtherance of which a standard security was granted was ineffectual to qualify a matter which was expressly dealt with in the security deed. He also observed that even if the supersession rule was not directly applicable, the general principle which rendered inadmissible evidence of negotiations and other prior communings constituted the deeds as the only expression of the true scope of the obligations secured to which regard might legitimately be had.

Counsel for the pursuers submitted that, on the basis of their third ground of appeal, the Lord Ordinary had fallen into error. It was recognised that the rule as expressed in Lee v Alexander was subject to a number of exceptions, one of which was the case where there was an agreement in writing either in the missives or in a separate document or in the disposition itself that a personal obligation included in the missives would subsist and remain in force even if it was not included in terms in the disposition (Winston v Patrick 1980 SC 246, per Lord Justice Clerk (Wheatley) at page 249). In any event there was no sound reason for extending the rule to the relationship between a modern loan agreement and a standard security. The latter was ancillary to the former which was intended to, and did, define the primary obligations of the parties. For example, a purchaser of the security holder's interest would require to find out what were the relevant debts and the basis upon which they rested. Counsel founded on the statement in Gloag on Contract, 2nd ed., at p.369, under reference to Scottish Union Insurance Co v Marquis of Queensberry's Trs. (1842) 1 Bell's App. 183, that "it is perfectly competent to prove, by the evidence of prior writings, that a disposition or conveyance, apparently unqualified, was in reality granted in security or in trust", and, under reference to the speech of Viscount Cave in Claddagh Steamship Co v Steven 1919 S.C. (H.L.) 132 at page 137, that it was competent to prove "that the actual contract between the parties was not embodied or intended to be embodied in the formal document, but that the latter was a mere piece of machinery obtained as subsidiary to and for the purpose of the verbal and only real agreement." Counsel emphasised that the purpose of the rule was that, when there was a finalised document, reference to negotiations which led up to it should be excluded (see e.g. Lord Wark in Norval v Abbey 1939 S.C. 724 at p.729). The letter dated 17 November 1995 was not a prior communing in the sense of the rule. There was no reason why the letter should not be treated in the same way as a back letter, which could qualify the formal deed even though it was written before it. There was no reason why it could not be effective in providing that, as between the parties, the rights of the security holder were to be applied differently from the way in which they were expressed in the formal deed.

Counsel for Lloyds disputed that there was in this case anything in the nature of a non-supersession clause which would constitute an example of a recognised exception to the rule. In any event, if the pursuers' argument was that the terms of Clause (iv) found their way into an agreement between the parties by reason of their past actings, they could not do so without involving a direct contradiction of the terms of the formal deed. Express provision excluded any room for implication to a different effect (Gloag on Contract p.289; and Cummings v Charles Connell & Co (Shipbuilders) Limited 1968 S.C. 305).

If the question for this court had been whether the terms of Clause (iv) qualified the rights of Lloyds, in a question with the Group, in regard to the debts to which a hypothetical security identified in or by means of the Overdraft Facility letter dated 17 November 1995 might be applied, there would, in our view, have been much to be said for an affirmative answer to that question. It does not appear to us that that letter was in any real sense part of a series of negotiations or communings which led up to such a formal deed which covered all the matters with which it dealt, and hence might reasonably be presumed to express the final intentions of the parties. The letter showed that it was intended that its terms were to be given effect notwithstanding the terms of the formal security deed. There may be a question as to whether this would apply to a security granted after the letter. It certainly would apply to one which had been granted before, or was granted at the same time as, the letter provided, of course, that the security was identified. We are inclined to the view that there is no sound reason why the same would not also apply to a later security, provided once more that it was clear that the parties intended that it should be treated as governed by the terms of the letter.

However, the same cannot be said in the circumstances of the present case. As we have already held, the two securities were not governed by the terms of the existing Overdraft Facility agreement. The pursuers have failed to prove any contractual link between the granting of the two securities and the existing Overdraft Facility agreement. If on the other hand the pursuers' case is that parties evinced an intention in all the circumstances, including their past dealings, to incorporate the terms of Clause (iv) into an agreement into which they entered after the meeting on 12 December 1995, this could not be done without a direct contradiction with the terms in which the two standard securities were expressed. In these circumstances we would have considered that such an incorporation was inadmissible.

Accordingly we will refuse the reclaiming motion and adhere to the interlocutor of the Lord Ordinary.