Question of duty owed by creditor to guarantor–Preliminary issue–Sale by bank as mortgagee of security consisting of leasehold interest–Sale alleged to be at undervalue–Bank claims against guarantors–Question whether mortgagee’s duty of care to mortgagors under Cuckmere Brick Co decision extends to sureties–Held that it does not
This was an
action by Barclays Bank Ltd for £11,161.68 alleged to be due from the
defendants under a guarantee executed by them on April 28 1971, whereby they
guaranteed, subject to the terms thereof, the payment on demand of all sums due
and owing to the bank from F A Thienel Shipping Ltd. The defendants, Geoffrey
Frank Thienel and Daphne Ethel Thienel, of Leigh Hall Road, Leigh-on-Sea,
Essex, pleaded, inter alia, by way of defence that the plaintiffs, in
disposing of the security, which consisted of a leasehold interest, owed a duty
to sureties to exercise reasonable skill, care and judgment so as to get the
best price reasonably obtainable, and had failed to perform that duty.
At the request
of both parties his Lordship tried as a preliminary issue the question
whether the
fact, if established, that in selling as mortgagees thereof the leasehold
interest of the company Thienel Shipping Limited in the premises known as Unit
5c, Thames Road, Silver-town, London E16, referred to in the reamended defence,
the plaintiffs may have failed to exercise reasonable skill, care and judgment
to obtain the best price reasonably obtainable for such premises, has the
effect in law of distinguishing, reducing or otherwise affecting the
defendants’ liability to the plaintiffs under their guarantee pleaded in the
statement of claim.
Alan Steinfeld
(instructed by Lake, Parry & Treadwell) appeared for the plaintiff bank;
Nicholas Patten (instructed by Piper, Padfield & Derby, of Ilford)
represented the defendants.
Giving
judgment, THESIGER J said that it was agreed that the plaintiffs had at all
material times been acting as bankers at 27 Knightsbridge, London, and that F A
Thienel Shipping Ltd was a customer at that branch. By a contract in writing
between the plaintiffs and the defendants, and also one G T Stables, dated
April 28 1971, the defendants and Mr Stables, for the consideration therein set
out, agreed jointly and severally to guarantee payment on demand of all sums of
money from time to time due and owing to the plaintiffs from Thienel Shipping,
such sums to include interest, expenses and bank charges on a full indemnity
basis.
The plaintiffs
put forward that contract in its standard form. It was alleged, but not yet
admitted, that in pursuance of that contract the plaintiffs had made advances
to Thienel Shipping with the result, so it was alleged, that on November 7 1975
the shipping company was indebted to the bank for such advances, together with
interest and bank charges, for a sum of over £11,000. The plaintiffs now
claimed against the two defendants. Mr Stables had paid some of the amount
claimed and was no longer a defendant.
Paragraph 4 of
the defence alleged that from 1971 onwards any sums outstanding from the
shipping company to the plaintiffs were secured in the plaintiffs’ favour by a
charge over the shipping company’s leasehold interest in premises known as Unit
5c, Thames Road, Silvertown, London E16. Early in 1975 the plaintiff bank exercised,
or purported to exercise, its power of sale in respect of such leasehold
interest, and was supposed to have realised thereby a sum of about £6,500
gross. Paragraph 5 asserted that it was the plaintiffs’ duty to the first and
second defendants as guarantors, as a matter of law, and/or by a term
necessarily implied in the contract of guarantee to exercise reasonable skill,
care and judgment to obtain the best price reasonably obtainable, upon any
exercise of a power of sale. By paragraph 6, following upon that allegation of
duty, it was said that the plaintiffs failed to exercise such skill, care or
judgment.
At the request
of both parties his Lordship had made an order under Order 33, rule 3 of the
Rules of the Supreme Court for trial of the preliminary issue as to whether
such a duty existed. The preliminary issue depended on the terms of the
guarantee, which was in the plaintiff’s standard form put forward to the
proposed guarantor or surety by the bank as principal creditors. The guarantor
thereby undertook to pay all sums of money which might thereafter from time to
time fall due or owing, including the usual banking charges, the guarantee to
be in addition to, and not to prejudice or be prejudiced by, any other
securities or guarantees which they might then or thereafter hold from or on
account of the principal. The vital words were that the guarantors authorised
the bank to ‘accept compositions from and make any other arrangements with the
principal or any persons liable to you in respect of securities held or to be
held by you; to give up, modify, exchange, or abstain from perfecting or taking
advantage of or enforcing any securities, guarantees or other contracts, or the
proceeds of any of the foregoing, and to discharge any parties thereto and to
release any securities in such manner as you may think expedient.’
These words
were, it was submitted by the plaintiffs, quite clearly, unambiguously and
conclusively directed to getting rid of obligations or duties to the guarantor
or surety, ie to the two defendants.
It was agreed
by both sides that until 1971 it was uncertain in law whether a mortgagee owed
any duty, even to a mortgagor save a duty not to act in bad faith, when
discharging a security. However, the decision of the Court of Appeal in Cuckmere
Brick Co Ltd v Mutual Finance Ltd [1971] CH 949 established that the
duty of a mortgagee to a mortgagor went further than had been supposed, and
involved a duty to take reasonable precautions to obtain a true market value
for the mortgaged property. But this was not, so the plaintiffs submitted, a
case of a mortgagee and mortgagor, nor between principal creditor and debtor.
It was a case of a guarantee by a guarantor or surety. The plaintiffs admitted
that a surety had had in the past, and still had, certain rights, but only if
an entitlement to those rights was given, and not taken away, by the contract.
Here, they submitted, the contract expressly, clearly and unambiguously did not
give, but took away, entitlement to any relevant rights.
Counsel for
the plaintiffs had cited Chitty on Contracts volume 2 (Specific
Contracts) 24th ed. paras 4850 and 4851, distinguishing Strange v Fooks,
there cited and reported fully at (1863) 66 ER 765. He referred especially in
that case to a passage on p 767 where it was clearly held that a surety was
entitled to that which clause 10 of the contract in the instant case expressly
took away.
Mr Steinfeld
distinguished Wulff v Jay (1872) LR 7 QB 756. He also referred to
the work of the late Romer LJ on principal and surety, edited by Mocatta J,
which expressed the principle that if the surety had rights they were
independent of the contract. But that did not apply, submitted counsel, in this
case, because there was a contract in which clause 10
Mr Patten’s
argument for the defendants was that the Cuckmere Brick case had now
established that there was a duty of care in the case of a mortgagee owed to a
mortgagor to obtain the true market value on disposing of a security. It would
now be a sensible development of the law, he submitted, to extend that
obligation or duty to all those who, it should reasonably be foreseen, would be
affected by the mortgagee’s acts, and that would obviously include, it was
submitted, a surety. He conceded that this duty could be limited or excluded,
but only by express terms clearly stated in the document above his signature.
He referred to the principles adopted by the courts in considering cases where
the terms of a contract excluded liability where there would otherwise be a
duty to take care. He referred to the first volume of Chitty on Contracts
(24th ed), paragraphs 813 and 815, and Gillespie Brothers & Co Ltd v
Roy Bowles Transport Ltd [1973] 1 QB 404 at p 409. He also referred to
the second volume, paragraph 4824, and submitted that once one treated the
question as one of exemption from liability for negligence in a contract
proferred by a party, one found support for putting a strict construction on
clauses exempting him from liability. He referred to Eastern Counties
Building Society v Russell, reported at first instance at [1947] 1
All ER 500, and on appeal at [1947] 2 All ER 734, and particularly at 736F. He
submitted that so far as the words ‘give up’ were concerned, there was a clear
difference between giving up the security to a mortgagor or principal debtor
who could be resorted to by the surety, and disposing of the security to a
stranger who could not be resorted to by the surety. He cited Thomas v Nottingham
Incorporated Football Club Ltd [1972] Ch 596. He submitted that the words
of clause 10 should not be construed as allowing disposal at a negligently low
price to a third party. Nor, he said, was this a case of giving up a security
to a principal debtor to whom the surety could have recourse.
Mr Steinfeld
submitted, and his Lordship thought rightly, that the Cuckmere Brick
case dealt with a mortgagee’s duty to the mortgagor: a duty to get the best
price he could in realising a security. His Lordship did not think any breach
of duty to a guarantor was to be implied. Clause 10, read carefully, make it
clear that, far from implying any such duty, it expressly gave the plaintiff
bank certain rights and was not in any way giving a guarantor or surety (the
defendants) the benefit of any security held by the principal creditor, or any
right to complain about disposal of the security having taken place without due
care, skill or judgment.
His Lordship
did not think that extending the Cuckmere Brick principle to any case of
principal creditor and surety would be justified, nor would it be justified by
way of some analogy to a case where there was prima facie a duty of care
because the courts had chosen to interpret an ambiguous exemption clause very
strictly. He therefore answered the question in the preliminary issue in the
negative. If the decision had been the other way, both parties agreed that an
investigation would have had to take place at a much later date and at
considerable expense.
Judgment was
given for the plaintiffs for £10,258.86. A stay of execution was granted on an
undertaking by the defendants to use their best endeavours to serve notice of
appeal within four weeks. The stay was to continue, unless the court otherwise
ordered, until the end of term, and if notice of appeal were given it was to
continue until the hearing of the appeal. The plaintiffs were awarded costs,
the order not to be enforced without leave; the defendants were granted a legal
aid taxation.
