Individual contracts do not usually make headlines, but a recent case is the exception since it involved major institutions and a lot of money. By Sandi Murdoch
? A non-recourse agreement is interpreted in a controversial way |
The interpretation of an individually negotiated contractual document does not usually make legal headlines since it will not set parameters for future cases.
However, where the probable sum of money at stake approaches £2m, the central players are a major institution and two
A three-sided arrangement
Prudential involved the familiar tale of a landlord pursuing former tenants following the insolvency of the current tenant. Such claims are commonplace and rarely reach the courts because the liability of the defendant is normally clear-cut. However, closer examination shows that the present case was far from usual.
The seeds of the dispute were sown by the deal under which the respondents, who were partners in a
Where property is owned by an ordinary partnership, it is normally held in the name of between two and four of the partners. As a result, they become personally liable to the full extent of all their assets (but will be entitled to be indemnified by the other partners). In the present case, A&G made it clear from the outset that the assignment had to be in the name of the firm and that it should not include a right of recourse against individual partners.
As Moore-Bick LJ commented, the principle of this unusual arrangement was acceptable to the appellant and the respondents and “was not the subject of any significant negotiation” this was almost certainly because A&G was regarded as a cast-iron tenant. The only debate was how, legally, to structure the deal. Three critical documents were executed: a licence to assign, an assignment and a non-recourse agreement. The licence was executed by the landlord, the tenants and the assignee. It incorporated, as is usual, an authorised guarantee agreement (AGA) under which the outgoing tenants agreed to indemnify the landlord in the event of any default by the assignee. The assignment was, again, in standard form and was executed by the tenants and the assignee. This included a normal covenant by the assignee to comply with the lease obligations and to indemnify the tenants against any claims in that respect.
The third and critical document was the non-recourse agreement, executed by the landlord and the assignee. This was intended to be the basis of the protection for the partners in A&G. It provided that the liability of A&G, as tenant under the lease, was limited to partnership assets and was not to extend to the personal assets of individual partners.
The document also provided that “any recovery by the landlord against the tenant or any previous tenant shall be limited to the assets of the partnership”, as was its right to any distribution in the event of the bankruptcy of A&G.
An ill-fitting suite
Once exposed to the harsh reality of A&G’s insolvency in 2006, it became obvious that these legal arrangements had been fundamentally flawed. The AGA appeared to give the landlord an unlimited right to recover its losses from the outgoing tenants, the respondents. Their indemnity from A&G seemed to give them an unlimited right to recover their resulting losses from that partnership. A&G, which had throughout made it clear that it intended to protect the personal assets of its partners, had an agreement with the landlord that looked as though it limited the latter’s right of recovery from either A&G or the respondents to partnership assets.
When the landlord sued the former tenants for rent arrears of £1.5m plus interest, this ill-fitting suite of agreements inevitably unravelled. The trial judge concluded that the non-recourse agreement, although poorly drafted, had clearly limited the landlord’s right to recover against A&G to the amount of the partnership assets and that this limitation had been extended to the landlord’s right to recover against the defendants in order to prevent a back-door claim under the latter’s right of indemnity.
Although the respondents had not been a party to this contract, they could take its benefit under the Contracts (Rights of Third Parties) Act 1999.
Court of Appeal’s solution
The Court of Appeal concluded that this agreement could have been intended to affect the position of the respondents in one of two ways.
It could have been beneficial by limiting the landlord’s right of recovery against them. Although conflicting with the AGA, this obligation was one that the landlord was free to undertake, albeit that it could be enforced by the respondents only through the medium of the 1999 Act.
Alternatively, by taking the view that the words “or any previous tenant” had been inserted in the wrong place, the agreement could be read as seeking to limit the respondents’ right to recover against A&G. Such an interpretation not only ran contrary to the unlimited indemnity given by A&G, it was also not a legal promise that the landlord could make to be effective it would have been necessary to make the respondents a party to the agreement.
Swayed by the belief that the landlord could not have intended, via the non-recourse agreement, to dilute the effects of its AGA (but apparently unmoved by the thought that A&G could not have intended to expose its partners’ personal assets to a full indemnity claim by the respondents), a unanimous Court of Appeal plumped for the interpretation that would have no legal effect over the one that, although commercially foolish, could at least work.
The truth is that all three parties, and their lawyers, failed to think through the full ramifications of the deal. As a result of the Court of Appeal’s efforts, the buck will stop with the individual partners of A&G (assuming that they have sufficient assets). However, since the one certainty in this tangled web was that all parties had agreed that the deal was conditional on this not being the case, some might think that the result is far from fair.
Sandi Murdoch is an honorary fellow at Reading University
