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Making Assumptions Makes For Dangerous Drafting

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15/10/2013

Many a young lawyer is taught early on that making assumptions is dangerous. The Buckingham Gateway litigation is a rare, but valuable, example of a party getting away with what could otherwise have been a very costly mistake in reliance upon incorrect assumptions.

The Litigation

Crowborough Properties Limited (Crowborough), a company owned by Mr and Mrs Kaushal, had borrowed £29 million from Lloyds TSB Bank plc (the Bank) to develop land in Slough. The land would be developed to include a hotel, offices, shops and a basement car park. The overall site was made up of fifteen separate titles, some of which were owned by Crowborough, and some by Mr and Mrs Kaushal. Mr and Mrs Kaushal had given personal guarantees to the Bank in respect of Crowborough’s borrowing worth up to £25 million. The personal guarantees were secured by charges in favour of the Bank over the land owned by Mr and Mrs Kaushal. However, the charges secured only Mr and Mrs Kaushal’s liability as sureties.

Crowborough fell into financial difficulties and the Bank sought to enforce its security. The parties settled those proceedings and entered into a Tomlin Order on 25 May 2011 (the Tomlin Order). One of the terms of the Tomlin Order was that, in return for the payment of £500,000, Mr and Mrs Kaushal would be released from their personal guarantees. The drafting of the Tomlin Order was based on mistaken assumptions that the charges over land held by the Kaushals themselves would remain in place and that the charges secured Crowborough’s indebtedness, not merely the Kaushals’ liability as sureties. Subsequently, the Bank realised that the release of the personal guarantees pursuant to the Tomlin Order would result in the discharge of the charges over the land owned by Mr and Mrs Kaushal.

The Bank sought rectification of the Tomlin Order on the basis that the parties’ common intention was that it was to be entitled, in respect of Crowborough’s indebtedness, to look to the securities over all the charged properties, including those registered in the names of Mr and Mrs Kaushal themselves.

A Narrow Escape

The Bank was initially unsuccessful at first instance. The High Court held that there was no common intention between the parties that the Bank was to have a separate charge to secure Crowborough’s debt.

However in February 2013 the Court of Appeal allowed the Bank’s appeal and granted rectification [1]. Lewison LJ said that: “The Bank’s right was to sell all the charged properties and apply the proceeds of sale towards the discharge of Crowborough’s indebtedness. That on the evidence, and indeed on the judge’s findings, was plainly the right that both parties intended the Bank to retain” [2].

The Court of Appeal considered how to characterise the parties’ rights. At first instance, they had been characterised on the basis that there was only one legal means of achieving the solution that both parties thought was necessary, by creating a fresh charge enabling the Bank to sell the properties and apply the proceeds against Crowborough’s debt. However, the Court of Appeal held that this view was too narrow, as the Bank’s rights could be characterised in more commercial terms. That objective could also be achieved, for example, by changing the wording of the Tomlin Order, or by a covenant by the Bank not to enforce liability under the personal guarantees, except by sale of the charged properties.

Lewison LJ found that the fact that the cause of the drafting error was reliance on erroneous assumptions: “[did] not remove the drafting error from the reach of rectification” [3].

Mr and Mrs Kaushal sought permission to appeal the Court of Appeal’s decision, but the Supreme Court refused because: “the application does not raise an arguable point of law of general public importance which ought to be considered by the Supreme Court at this time bearing in mind that the case has already been the subject of judicial decision and reviewed on appeal”. [4].

WM Comment

This case is a good example of the courts adopting a sensible, commercial approach to resolution of a dispute. It will no doubt be reassuring for parties and legal representatives alike, that the Court of Appeal has confirmed that the doctrine of rectification can assist to correct bad drafting – even in a Tomlin Order – where assumptions that are erroneous but easily identified have given rise to mistakes. This reassurance should not give rise to complacency, however. It will be crucial, in such cases, that clear evidence exists as to parties’ intentions in spite of those assumptions, and that workable, commercial solutions can be found to reverse any damage caused.

Whilst not a ‘Jackson’ [5] case per se, this case is also demonstrative of the courts’ ever-increasing tendency, post-1 April 2013, to consider justice in the wider context – not just from the point of view of the parties to discreet litigation. In the post-Jackson litigation landscape, where the Overriding Objective has been amended to include the proviso that cases must be dealt with “at proportionate cost” [6], there is now inevitably an element of trade-off between justice and cost. The weighing of wider interest and efficiency concerns in the assessment of individual cases is a trend which seems set to continue.

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[1] [2013] EWCA Civ 107
[2] paragraph 64
[3] paragraph 69
[4] UKSC 2013/0062
[5] The ‘Jackson Reforms’ to civil litigation, in effect since April 2013 following Sir Rupert Jackson’s detailed review on civil litigation and costs and the Legal Aid, Sentencing and Punishment of Offenders Act 2012
[6] Civil Procedure Rules 1.1 (1)