A cautionary tale on construction arguments

Discussing the judgment in Barclays Bank v Landgraf, John Brisby QC and Alexander Cook, barristers at 4 Stone Buildings and counsel for the defendant, predict that the case will stand as a cautionary note to parties seeking a speedy and summary resolution of disputes based on construction arguments.

Original news

Barclays Bank Plc v Landgraf [2014] EWHC 503 (Comm), [2014] All ER (D) 05 (Mar)

Barclays Bank contended that Mr Landgraf was liable for repayment of a loan paid to a United States law firm of which he was a partner and sought summary judgment. Mr Landgraf contended that the loan was to the firm and, alternatively, he was a guarantor.

The Commercial Court, in dismissing the application, decided that Mr Landgraf might establish that his obligations were those he had identified when seen against the background of the particular circumstances in which the contractual documents had been signed and the factual matrix as to the true purpose of the transaction.

What is the background to the case?

This case concerns an action by Barclays Bank for repayment of monies alleged to be owed to it under a loan agreement which was signed in May 2010 by Mr Landgraf, a former partner in the well-known and now bankrupt law firm, Dewey & LeBoeuf (the firm).

Barclays applied for summary judgment in respect of two of Mr Landgraf’s defences, namely that the loan agreement ought to be treated as a loan between the firm and Barclays or alternatively that, on a true construction of the loan documents, he was liable only as guarantor of the firm’s liability to Barclays under the loan.

What did the court decide regarding the overriding objective?

Although Barclays had applied for summary judgment in respect of two paragraphs of Mr Landgraf’s defence, Mr Landgraf had pleaded a further defence and a counterclaim. These additional matters, which were going to trial in any event, relied on the same facts and matters pleaded in support of the two defences which Barclays sought to strike out.

Mr Landgraf therefore took a preliminary point, relying on Williams & Humbert Ltd v W & H Trade Marks (Jersey) Ltd, Rumasa SA v Multinvest (UK) Ltd [1986] AC 368, [1985] 2 All ER 619, that the court ought not to hear argument on the application because it would provide no saving in time or costs, and that the argument could well be addressed at the trial, which was listed for five days in December 2014.

Mr Justice Popplewell rejected this submission, deciding that:

• the argument was not prolonged or complex
• the overriding objective required the court to deal with cases as expeditiously and efficiently as possible
• if Barclays was correct as to the proper construction of the documents, the court should grasp the nettle and decide those issues, even if this did not result in any overall saving in time or costs (unless there was any positive disadvantage or prejudice, such as increased costs)
• summary judgment in this case might save some time and costs because the alternative defence that Mr Landgraf was only a guarantor gave rise to a number of additional factual issues
• summary judgment might encourage the parties to settle, and
• summary judgment might help to inform and resolve other disputes between Barclays and some 50 other former partners of the firm, based on the same loan documentation, against whom litigation was ongoing or threatened

How did the court approach the relationship between Mr Landgraf, Barclays and the firm?

Considering the application on the merits, Mr Justice Popplewell formed the view that Barclay’s case on the true construction of the loan documents was not suitable for summary judgment, and raised several triable issues.

True purpose

Mr Landgraf’s evidence of the closeness of the relationship between Barclays and the Firm, and Barclay’s actual or probable knowledge of the firm’s precarious financial position, raised ‘a real issue’ as to whether Barclays knew that the true purpose of this particular loan was not, as stated, to enable Mr Landgraf to make a capital contribution to the firm, but rather to finance the firm’s general indebtedness, including to Barclays itself.

Agency relationship

The evidence adduced by Mr Landgraf as to the circumstances in which the loan was requested, including the closeness of the relationship between Barclay’s and the firm, the lack of any direct involvement between Mr Landgraf and Barclays, gave rise to a triable issue that Barclays had delegated to the firm the task of signing Mr Landgraf up to the loan agreement, and that this made the firm the agent of Barclays for that limited purpose. If established, this would bring the firm’s knowledge of the true purpose of the loan agreement into the ‘factual matrix’, even if this was not something of which Barclays had actual notice.

Estoppel

If the agency relationship was established, the representations made by members of the firm to Mr Landgraf (including that the burden of repaying the loan lay with the firm and not with its individual partners) might support an estoppel by which Barclays was bound.

Financial position of the firm

It was arguable that Barclays was aware that the firm’s precarious financial position, the status of the capital accounts of other partners in the firm, and its level of indebtedness might have constituted an ‘Event of Default’ under the loan documentation. If established, this would provide evidence that Barclays did not intend to enforce various clauses of the loan agreement and was accordingly ‘capable of supporting the submission that the terms of the contractual documents were to some extent a sham’.

The judge accordingly dismissed Barclay’s application and permitted these defences to go to trial.

What guidance does this judgment give in terms of the construction of contractual documents?

This judgment reaffirms that the approach when construing a contractual document will be to consider the language used, and to ascertain what a reasonable person, having all the background knowledge which was reasonably available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant (Investors’ Compensation Scheme Ltd v West Bromwich Building Society, Investors’ Compensation Scheme Ltd v Hopkin & Sons (a firm), Alford v West Bromwich Building Society, Armitage v West Bromwich Building Society [1998] 1 All ER 98, Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] AC 1101 and Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2012] 1 All ER 1137).

The decision particularly underlines the importance of the ‘factual matrix’, and confirmed that it is not necessary to find some ambiguity in the language before having regard to it—effect could be given to the meaning which the parties would reasonably be taken to have intended, despite the fact that it was not, according to conventional usage, an ‘available’ meaning of the words or syntax which they had actually used. The court noted that the general objective to be achieved by the inclusion of a provision in a contract may inform the way in which a reasonable person in the position of the parties would approach the task of interpreting that provision (Investec Bank (Channel Islands) Ltd v Retail Group plc [2009] EWHC 476 (Ch), [2009] All ER (D) 162 (Mar)).

The judgment also confirmed that extrinsic evidence is admissible to prove the true nature of the agreement or the legal relationship of the parties, even though this may vary or add to the written instrument, and that the court may conclude that the terms of the document do not represent the true intention of the parties (Mutual Loan Fund Association v Sudlow (1858) 5 CBNS 449 and AG Securities v Vaughan, Antoniades v Villiers [1990] 1 AC 417, [1988] 3 All ER 1058).

How might this decision affect future cases?

This case will stand as a cautionary note to parties seeking a speedy and summary resolution of disputes based on construction arguments. The court may feel that, in order to adequately consider the relevant factual matrix, it will require full evidence on factually contentious matters, thereby raising triable issues which are not suitable for summary determination.

In this case, Barclays relied on the existence of claims which it has against some 50 former partners of the firm as a reason for granting summary judgment in its favour. The rejection of this application is likely to deter Barclays from making any such similar application in respect of these other cases.

John Brisby QC’s practice encompasses company and commercial law, insolvency and restructuring, financial services, banking, civil fraud, asset recovery and international trusts. He is a seasoned litigator, with substantial experience of heavy trials both in the Chancery Division and the Commercial Court, as is known as a formidable cross-examiner in court.

Alexander Cook has a litigation-focused, commercial Chancery practice, specialising in particular in commercial disputes (before both Commercial Court and Chancery Division), corporate insolvency, shareholder actions and proceeds of crime. He is regularly instructed in multi-million pound cases, involving leaders both in and out of chambers, as well as substantial disputes as sole counsel.

As counsel for the defendant, John and Alexander were instructed by Andrew Dunn, a partner at boutique litigation firm Candey LLP, who is also representing several of the other former Dewey & LeBoeuf partners in litigation with Barclays.

Interviewed by Kate Beaumont.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

This article was first published on Lexis®PSL Dispute Resolution on 13 March 2014. Click here for a free one week trial of Lexis®PSL.