Den Danske Bank A/S and others v Skipton Building Society and others

Mortgage indemnity insurance — MIG policy and lending agreement — Whether proviso in policy a condition precedent — Breach of agreement — Negligence — Restitution — Whether lender’s agent strictly liable for breach of lending criteria — Whether lender contributorily negligent in approving loans in breach of criteria — Whether right of action in plaintiffs — Whether plaintiffs failed to mitigate losses The third defendant (KB) provided the first defendant (SBS) with a fund of £50m, which SBS was to lend as agent for KB on the security of small commercial properties in accordance with pre-agreed lending criteria. The broking deed between KB and SBS stipulated that SBS must refer all loans in excess of £300,000 to KB for its ‘specific approval’ to the making of the loan. The second defendant, E, an insurance company, wrote two policies of insurance: one a ‘block’ policy insuring against losses all loans made up to 60% of value ‘provided that the[y] … have been granted in accordance with the criteria’, and the other (MIG insurance) similarly insuring any funds advanced in excess of 60%. The broking deed provided that SBS ‘must procure that each loan when made is covered by the Policy’ and that if loans were made which ‘[do] not comply with the Criteria then (unless the breach of the Criteria was specifically authorised by [KB]) [SBS] undertakes by way of liquidated damages for the breach of contract to pay to [KB] the amount by which the Proceeds fall short of the Outstanding Debt and Costs’. SBS made a number of loans from the fund, some in excess of £1m which were specifically approved by KB, in some cases after KB had made further inquiries and obtained further information about the borrower and/or the security. In all cases (as found on the facts), the loans were made in breach of at least one of the criteria. After all the loans had been made, KB sold and conveyed part of the book of loans to the first and second plaintiffs, who made a deed of novation with SBS in relation to the broking deed obligations. Later, the remainder of the book was sold and conveyed to the third and fourth plaintiffs using a transfer machinery set up by the broking deed. KB remained registered as proprietor of the legal charges. After some of the loans defaulted, claims were made under the insurance policies and E made payments under the policies in excess of £368,000. E made payment believing that there were probably breaches of criteria, but without having had the time to audit the loan files. After this payment, further claims were made in respect of other defaulting loans, and E declined cover contending that the loans were made in breach of criteria. The plaintiffs sued E for payment under the policies and SBS for liquidated damages in the alternative in case of a breach of criteria. KB was joined to perfect the title to sue and in the event of claims over. E counterclaimed for restitution of the money paid out as under a mistake of fact. Held: 1. The proviso in the policies was a strict condition precedent to cover (or promissory warranty), which was breached in respect of each of the unpaid loans, and E was entitled to decline to pay. 2. E had not paid in respect of the first group of loans under any mistake of fact but, aware of the possibility of breach of criteria, had decided to pay when it could have investigated further and refused to make payment. E’s counterclaim was accordingly dismissed. 3. SBS had assumed a strict contractual liability to ensure that the loans were made in accordance with the criteria, even in the case of loans over £300,000 which were referred for KB’s specific approval, and to procure that the loans were protected by valid insurance cover. Thus, even if the reasons for the defaults on the loans were unconnected with the breaches of criteria, SBS was liable to pay the shortfall arising from E’s declinature, the liquidated damages clause being genuine and not a penalty. 4. KB’s ‘specific approval’ of the loan was not a specific authorisation of a breach of criteria, within the liquidated damages clause, even when the loan approved was in breach of criteria and KB ought (in some cases) to have realised this. 5. On the facts of those cases, KB was negligent in approving the making of the loans and the negligence did contribute to the losses incurred, but because SBS had a strict contractual obligation breach of which did not depend on a failure to take reasonable care, the defence of contributory negligence under the Law Reform (Contributory Negligence) Act 1945: Vesta v Butcher [1986] 2 Lloyd’s Rep 179; Barclays Bank plc v Fairclough Building Ltd [1995] 1 All ER 289. 6. The effect of the novation agreement between SBS and the first and second plaintiffs was fully retrospective, and SBS was therefore liable to them in respect of the breaches of contract which occurred when the loans were advanced, even though KB’s right to sue for breach of contract had not been assigned with the benefit of the loans and the mortgages. On their true construction, the deeds of transfer between KB and the third and fourth plaintiffs were effective to convey the accrued rights of action in relation to the remainder of the book; alternatively, KB held such rights on trust for the third and fourth plaintiffs and title to sue was perfected by the joinder of KB. 7. Prima facie, the plaintiffs had not failed to mitigate their losses in failing to require KB to sue solicitors and valuers who were alleged to have been negligent in relation to the obtaining of valuable security for individual loans unless it could be shown that the case against them was simple and unlikely to be contested to a full trial: Pilkington v Wood [1953] Ch 770 applied. In any event, because the damages payable were liquidated damages, there was no room for argument about mitigation of loss: Abrahams v Performing Rights Society [1995] IRLR 486. The following cases are referred to in this report. Abrahams v Performing Right Society [1995] IRLR 486, CA 156 Aiken v Stewart Wrightson Members Agency Ltd [1995] 1 WLR 1281; [1995] 3 All ER 449; [1995] 2 Lloyd’s Rep 618 Amalgamated Investment & Property Co Ltd (in liquidation) v Texas Commerce International Bank Ltd [1982] QB 84; [1981] 3 WLR 565; [1981] 3 All ER 577, CA Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd; The Good Luck [1992] 1 AC 233; [1991] 2 WLR 1279; [1991] 3 All ER 1; [1991] 2 Lloyd’s Rep 191, HL Barclays Bank plc v Fairclough Building Ltd [1995] QB 214; [1994] 3 WLR 1057; [1995] 1 All ER 289 Beresford v Royal Insurance Co [1938] AC 586 Beswick v Beswick [1968] AC 58; [1967] 3 WLR 932; [1967] 2 All ER 1197, HL Black King Shipping Corporation v Massie; The Litsion Pride [1985] 1 Lloyd’s Rep 437 Boscawen v Bajwa; Abbey National plc v Boscawen [1996] 1 WLR 328; [1995] 4 All ER 769; (1995) 70 P&CR 391, CA Bradley and Essex & Suffolk Accident Indemnity Society, Re [1912] 1 KB 415; 81 LJKB 523; 105 LT 919; 28 TLR 175 Caparo Industries plc v Dickman [1990] 2 AC 605; [1990] 2 WLR 358; [1990] 1 All ER 568, HL Cassel v Lancashire & Yorkshire Accident Insurance Co (1885) 1 TLR 495 Chaloner v Bolckow (1878) 3 App Cas 933; 47 LJQB 562; 39 LT 134; 26 WR 541, HL Chandris v Argo Insurance Co [1963] 2 Lloyd’s Rep 65 CIN Properties Ltd v Barclays Bank plc [1986] 1 EGLR 59; (1985) 277 EG 973 Clydebank Engineering & Shipbuilding Co v Don Jose Ramos [1905] AC 6 Coleman’s Depositories and Life and Health Assurance Association, Re [1907] 2 KB 798; 76 LJKB 865; 97 LT 420; 23 TLR 638 Commercial Union Assurance Co v Margeson (1899) 29 SCR 601 Darlington Borough Council v Wiltshier Northern [1995] 1 WLR 68; [1995] 3 All ER 895 de Meza v Apple [1974] 1 Lloyd’s Rep 508 Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 Farr v Motor Traders Mutual Insurance Society Ltd [1920] 3 KB 669 Forsikringsaktieselskapet Vesta v Butcher [1986] 2 All ER 488; [1986] 2 Lloyd’s Rep 179 Glengate-KG Properties Ltd v Norwich Union Fire Assurance Society [1995] 1 Lloyd’s Rep 278 Group Josi Re (formerly Groupe Josi Réassurance SA) v Walbrook Insurance Co Ltd [1996] 1 WLR 1152; [1996] 1 All ER 791; [1996] 1 Lloyd’s Rep 345, CA Henderson v Merrett Syndicates Ltd [1995] 2 AC 145; [1994] 3 WLR 761, [1994] 3 All ER 506; [1994] 2 Lloyd’s Rep 468, HL Hiscox v Outhwaite (No 2) [1992] 1 AC 562; [1991] 3 WLR 297; [1991] 3 All ER 641, HL Investors Compensation Scheme v West Bromwich Building Society unreported, June 17 1997 Kelly v Solari (1841) 9 M&W 54 Leggott v Barrett (1880) 15 Ch 306 Linden Garden Trust v Lenesta Sludge Disposals; St Martin’s Property Corp v Sir Robert McAlpine & Sons [1994] 1 AC 85; [1993] 3 WLR 408; [1993] 3 All ER 417, HL Lipkin Gorman (a firm) v Karpnale Ltd [1991] 2 AC 548; [1991] 3 WLR 10; [1992] 4 All ER 512, HL Liverpool City Council v Irwin [1977] AC 239; [1976] 2 WLR 562; [1976] 2 All ER 39; (1976) 74 LGR 392; [1976] 1 EGLR 53; [1976] EGD 282; 238 EG 879, HL M (a minor), Re [1994] 2 AC 424; [1994] 3 WLR 558; [1994] 3 All ER 298; (1994) 92 LGR 701, HL Martin-Baker Aircraft Co Ltd v Canadian Flight Equipment Ltd [1955] 2 QB 556; [1955] 3 WLR 212; [1955] 2 All ER 722 Newcastle Fire Insurance Co v Macmorran & Co (1815) 3 Dow 255 Nickerson v Barraclough [1981] Ch 426; [1981] 2 WLR 773; [1981] 2 All ER 369, CA Northways Flats Management Co (Camden) Ltd v Wimpey Pension Trustees [1992] 2 EGLR 42; [1992] 31 EG 65, CA Norwegian American Cruises A/S v Paul Mundy Ltd; The Vistafjord [1988] 2 Lloyd’s Rep 343, CA Omega Trust Co Ltd v Wright Son & Pepper [1997] 1 EGLR 120; [1997] 18 EG 120 Orakpo v Manson Investments Ltd [1978] AC 95; [1977] 3 WLR 229; [1977] 3 All ER 1, HL Philips Hong Kong Ltd v Attorney-General of Hong Kong (1993) 61 BLR 41; (1993) 9 Const LJ 202, PC Pilkington v Wood [1953] Ch 770; [1953] 3 WLR 522; [1953] 2 All ER 810 Prenn v Simmonds [1971] 1 WLR 1381; [1971] 3 All ER 237, HL Punjab National Bank v DeBoinville [1992] 1 WLR 1138; [1992] 3 All ER 104; [1992] 1 Lloyd’s Rep 7, CA Roberts v Anglo Saxon Insurance Association (1927) 27 Lloyd’s Rep 313; 96 LJKB 590; 137 LT 343 Rowe v Turner Hopkins & Partners [1980] 2 NZLR 550 Sneyd, Re, Robertson-Macdonald v Sneyd [1961] 1 WLR 575; [1961] 1 All ER 744; (1961) P&CR 284 Society of Lloyd’s v Clementson [1995] Lloyd’s Re LR 307 South Australian Cold Stores Ltd v Electricity Trust of South Australia (1957) 98 CLR 65 Tarrabochia v Hickie (1856) 1 H&N 183 Thomson v Weems (1884) 9 App Cas 671 Trans-Pacific Insurance Co ‘Australia’ Ltd v Grand Union Insurance Co Ltd (1989) 18 NSWLR 675 Ultramares Corporation v Touche (1931) 174 NE 441; 255 NY 170 Yorkbrook Investments Ltd v Batten [1985] 2 EGLR 100; (1985) 276 EG 545, CA Youell v Bland Welch & Co Ltd [1992] 2 Lloyd’s Rep 127, CA Anthony Mann QC and Angus Moon (instructed by Wedlake Bell) appeared for the plaintiffs; Christopher Symons QC and Timothy Fancourt (instructed by Herbert Smith) represented the first defendant; Gavin Kealey QC and David Bailey (instructed by Freshfields) represented the second defendant; Andrew Baker (instructed by Clifford Chance) represented the third defendant. Giving judgment, THOMAS J said: The first defendants (Skipton) are a building society. Apart from lending on domestic residential properties, Skipton had for several years been lending on commercial properties, such as public houses, where there was part residential accommodation. After the enactment of the Building Societies Act 1986 (which came into force on January 1 1987), the amount that a society could advance on commercial properties was more precisely regulated. The classification of owner-occupied commercial premises (such as public houses) as residential properties was more restrictive and a limit on such loans of 10% of a society’s assets was initially imposed. This limit was increased to 17.5% on January 1 1990. In 1986, the commercial property market had started to rise and the rising market had continued into 1988. Skipton became concerned that they might reach the limits for commercial loans imposed under the Act. In the summer of 1988, they began discussions with the third defendants (KB) for a way in which they might continue to expand their commercial lending without breaching the limits imposed by the Act. In those discussions, a proposal emerged under which KB would make available to Skipton a facility of £50m which Skipton could use to make individual loans of up to £1m on behalf of KB secured on commercial properties at the smaller end of the market; the underwriting was to be on the basis of agreed lending criteria and the loans were to be insured on the basis of mortgage indemnity insurance. As KB would be the lender, the loans would be taken on to KB’s balance sheet and not on Skipton’s and therefore the limits imposed by the Building Societies Act not breached. Negotiations then ensued with the second defendants (Economic) for mortgage indemnity insurance. On July 6 1989, Skipton and KB executed a broking deed giving effect to the arrangements agreed between them for Skipton to underwrite loans secured on commercial properties for the period to March 31 1990 on the basis of agreed lending criteria; appended to the broking deed was a pool insurance policy underwritten by Economic, which provided mortgage indemnity insurance on loans made in accordance with the lending criteria. On August 11 1989, the first loan was made under the facility. The last offers of loans on new properties were made in March 1990. It was envisaged that KB might wish to sell the mortgages made under the facility to other financial institutions. In May 1990 KB sold some of the mortgages to the first and second plaintiffs (Den Danske and Nomura) and on August 7 1990, KB sold other mortgages to the third and fourth plaintiffs (Soc Gen and Tokyo). The loans were all made during the period of a buoyant property market; there were defaults on several of the loans and substantial losses were incurred by the plaintiffs as the market in commercial property declined severely. The defaults and losses were notified to 157 Economic and claims made. In November 1991 and May 1992 Economic made payments in respect of six loans. They then carried out an audit. In October 1992, they declined to make further payments and demanded repayment of the sums paid in respect of the six claims. They contended there had been breaches of the lending criteria and declined to pay any further claims. On December 1 1994 these proceedings were brought by the plaintiffs against Skipton, Economic and KB. They sought payment of the amount of the claims that should have been paid under the insurance; they contended that if the amount payable under the pool policy in respect of a loan was not due from Economic because there had been a breach of the lending criteria, it was due from Skipton for making loans that were in breach of the lending criteria. In the action as originally began, KB were joined as parties to perfect the plaintiffs’ title to sue Economic and, as a precaution, in respect of their title to sue Skipton. Subsequently, KB became more directly involved in the action as claims over were made against them by the plaintiffs. On December 6 1996 an order was made that the issues between the parties be tried by reference to a number of sample loans to be identified and agreed; after the case had been opened, it became clear that it was unnecessary to try the issues by reference to as many as 14 loans and that in any event it would be difficult to deal with so many in the time available; I therefore decided that the sample be reduced to 10 loans. A considerable part of the time at the trial was concerned with the question of whether there had been a breach of the lending criteria in respect of the 10 loans. It was necessary to consider them in some detail; my findings and conclusions in relation to each of these loans are set out in an appendix to this judgment. However a number of important general issues also arose in relation to the lending criteria, the meaning of the broking deed, the insurances, title to sue and other matters. Before turning to those general issues, it is necessary to outline the background and the operation of the facility in a little more detail. Background and the operation of the facility (a) Skipton’s commercial lending department Skipton had set up a commercial lending department in July 1988 to centralise commercial lending which had previously been carried out through the branches. Mr Gerald Hey, who had been employed by Skipton from 1965, was appointed the commercial mortgage development manager to market this part of Skipton’s activities. Mr Ivan Rhodes was appointed to assist him. In connection with this part of the business, Skipton drew up its own commercial lending criteria. Mr Hey’s immediate superiors were Mr Gordon Jolly, the assistant general manager (operations) and Mr Arthur Jeanes (general manager and secretary). The administration in Skipton’s commercial lending department was headed by Mr David Smith. KB were interested in an arrangement with Skipton that might enable them to lend funds, utilising Skipton’s expertise in commercial lending at the smaller end of the market; KB usually dealt with much larger loans on a relatively short term basis and had no experience of small commercial loans secured by long term mortgages, although they had schemes with other building societies. (b) Emergence of the lending criteria appended to the broking deed When negotiations with KB commenced in August 1988, they were conducted by Skipton’s senior management, particularly by Mr Ian Hepworth, a general manager (finance) of Skipton. KB were told by Mr Hepworth that conservative lending policies similar to those of Skipton would be adopted and KB were provided with the criteria used by Skipton for its own commercial lending. There was some uncertainty in the evidence as to how this came about; this is hardly surprising as memories about what had happened in 1988 had dimmed. It was Mr Hey’s evidence that he was asked to attend a meeting with Mr Bowen, then an assistant director of KB, and Mr Peter Lucas, a manager at KB, on October 19 1988; at that meeting he handed over the commercial lending criteria used by Skipton. Skipton, however, accepted that Mr Hey had been mistaken about the date at which he had met Mr Bowen and Mr Lucas and that this must have occurred later. On December 8 1988, Mr Palmer, a manager at KB, sent Mr Hepworth an initial proposal which included a set of lending criteria. These proposals were reviewed internally at Skipton by those concerned (including Mr Hey) and a response made to KB. Further negotiations ensued and there was a further meeting on January 30 1989 attended by Mr Bowen and Mr Lucas of KB and Mr Hepworth and others from Skipton; the note of the meeting prepared by KB records that Mr Hey was introduced to them at this meeting. Skipton therefore contended that as Mr Hey had described a meeting at which he was introduced to Mr Lucas, it must have been at this meeting (and not on the date given by Mr Hey) that Mr Hey had handed over a copy of Skipton’s lending criteria; Mr Lucas had no recollection of Mr Hey doing so, but would not deny that he did. It may well be that Skipton’s criteria were handed over at that meeting; they had in any event been sent to KB by fax in August 1988. By early February 1989, the principles of the facility were agreed between Skipton and KB. In accordance with KB’s internal procedures, a submission of the proposals for the facility was put before KB’s credit committee. On February 6 1989 KB’s credit committee approved in principle the granting of a facility under which loans could be made up to a total of £50m. On February 8 1989 Mr Lucas of KB sent Mr Hepworth a formal offer, subject to contract, to provide a facility; this was accepted by Mr Hepworth on February 15 1989. The detailed terms of the facility were prepared and set out in a draft of a formal document called ‘The Broking Deed’; negotiations followed on the draft. The criteria that had been the subject of the negotiations formed appendix 1 to that draft deed. (c) Mortgage indemnity insurance Skipton had made use of mortgage indemnity insurance on its own book of commercial loans and had arrangements with Economic, which was then part of the Hafnia group. On February 6 1989, Skipton’s insurance department wrote to Mr Gordon Campbell, a development manager employed by Economic for the North of England; they asked for a quotation and sent him some details of the facility for a total of £50m that they proposed to obtain from KB under which loans were to be made up to a maximum of 70% of valuation of the property that was to form the security for the loan. For such loans they envisaged: · traditional building society mortgage indemnity insurance (MIG insurance) to cover the loan between 60% and 70% of the valuation; · a pool policy to cover the loan below 60% of valuation on a mortgage indemnity insurance basis (the pool insurance); · a retention of 1% by Skipton at their own risk on the basis of an aggregate first loss provision. The letter asked for quotations for the MIG insurance and the pool insurance and inquired whether it was possible for Skipton to insure the 1% aggregate first loss retention. Mr Campbell passed the inquiry to Mr Derek Hammond Giles, the managing director of Economic. Economic did not itself wish to retain the risk on this business, but it was attractive to them as they saw it as a means of retaining a close relationship with Skipton and therefore of obtaining buildings insurance on Skipton’s residential mortgage book; they therefore looked for reinsurance in respect of the pool insurance. On about February 20 1989 Economic provided a quotation over the telephone; they quoted a rate of 0.45% for the pool insurance to be calculated on the estimated maximum loss under that insurance. On the assumption that the estimated maximum loss was £20m, the insurance for the pool would be £90,000. They quoted a rate of 5% on the MIG insurance, though this was subsequently increased to a rate of 6%. The quotation was accepted by Skipton. A draft of a policy for the pool insurance was prepared and negotiations took place during which drafts of the criteria to be appended to the broking deed were supplied to Economic. On June 14 1989 Mr Lucas of KB wrote to Economic sending the agreed final 158 draft of the broking deed with the lending criteria as appendix 1. A final draft of the pool policy was sent to KB on July 4 1989. (d) Signature of the broking deed and pool policy On July 6 1989, the broking deed was executed with lending criteria set out in appendix 1 to the deed; these are set out at pxxx below. An unsigned pool policy (effective July 6 1989) with minor manuscript amendments was annexed to the deed as appendix 3. Mr Hepworth and Mr Dawson, an assistant general manager, witnessed the deed for Skipton. KB sent the final version of the broking deed to Economic on July 11 1989, adding in the letter that the appendices were not entirely in their final form, though all the relevant information was there. The signed copy of the pool policy (with the corrections in manuscript on the draft annexed to the broking deed made to that typescript) was sent by Economic to KB under cover of a letter of July 20 1989 to which I will need to refer in greater detail later. Under the pool policy KB were insured, subject to an aggregate first loss provision of 1% of the outstanding loans, for the shortfall between the amount realised from the sale of the mortgaged property and the amount outstanding on the loan, outstanding interest and other sums. There was an issue between the parties at trial as to whether it in fact covered the amount of the loan not merely up to 60% of valuation, but the entire loan up to the maximum permitted of 70% of the valuation. During the time the facility was operated and claims made on Economic in 1991–1992, there was no such dispute as the pool policy was treated as the insurance for which the quotation had been obtained to cover the loan only up to 60% of the valuation. (e) Facility as envisaged by the terms of the broking deed The facility agreed between Skipton and KB, as set out in the broking deed, was to operate in the following manner. Skipton was to use its branch network and existing contacts to obtain applications for loans. The applications were to be made on a standard form that was adapted from the one Skipton used for its own commercial lending. Skipton were then obliged to consider the adequacy of the information set out in the form and whether the lending criteria had been satisfied (clause 6). If the information was adequate and the criteria (which included a requirement that a valuation be obtained) were wholly satisfied, then Skipton was to make inquiries about the property and the borrower in accordance with the criteria. If Skipton considered that as a result of making those inquiries and obtaining the valuation that the lending criteria had been satisfied (clause 7(1)), then Skipton’s authority to make the loan on behalf of KB depended on the amount of the loan: • if the loan was under £200,000 then Skipton could make an offer without reference to KB; • if the loan was over £200,000 but under £300,000, then Skipton had to advise KB of the details and give its recommendation; unless Skipton heard to the contrary within one business day, it could then make an offer; • if the loan was over £300,000, then Skipton had to advise KB of the details and make its recommendation, an offer could only be made with the specific approval of KB. (see clause 7(3)) The reason why loans over £300,000 had to be referred to KB was disputed; I consider that question below. Skipton were to set the rate of interest charged to the borrower and then make an offer by a letter in an agreed format to the borrower. The broking deed provided that Skipton could only make that offer (and subsequently make the advance of the loan), if the loan was to be insured under the pool policy. Three provisions emphasised this: • Clause 7 (4): 7 Offer (4)   Notwithstanding anything else in this Deed, [Skipton] has no authority to make an offer on behalf of [KB]:         (a) unless at the time of the offer the Loan when made will (subject to payment of the relevant premium) be covered by the Policy; or         (b) unless the obligations of Economic Insurance Company Limited under the Policy are covered by a current guarantee of Hafnia Insurance Company Limited; or · (c) if (in accordance with Clause 4) [KB] is not committed to making such an offer. · Clause 12(2):         Subject always to the terms of the Policy [Skipton] may delegate the administration of the Loans • Clause 20(1): 20    Default insurance (1)   [Skipton] must procure that each Loan when made is covered by the Policy and [Skipton] must pay the premium for each Loan in accordance with the Policy (3)   In administering the Loans [Skipton] will comply with all the requirements imposed on the Bank on the Policy and do nothing (including omitting to do anything) which causes the Policy to be avoided. Once the offer had been accepted by the applicant, then solicitors were to be instructed to produce a report on title which Skipton were to review to see if it was satisfactory. KB were then to transfer the necessary funds to Skipton at Skipton’s request and Skipton was to disburse the amount to the solicitor. Skipton were thereafter to administer the loans for KB and collect the interest and capital payments; a detailed arrears procedure was specified. The broking deed provided for: • a collection account into which the funds paid by the borrowers by way of interest and repayment were held for KB (clause 13); • a buffer account into which the fees earned by Skipton under the facility were to be paid until it reached £100,000 or 1% of the total amount of the principal of the loans outstanding (clause 11). (f) MIG insurance between 60% and 70% of valuation: the master policy As I have mentioned, in addition to the pool insurance to cover the loan up to 60% of the valuation, there was a request to Economic to quote for MIG insurance to cover the loan between 60% and 70% of value. It is necessary to describe in a little more detail how the MIG insurance was arranged, as there is a dispute as to when it became effective. On July 26 1989 Mr Campbell wrote to Skipton’s insurance department confirming that the pool insurance had been arranged up to 60% of the valuation at a premium of £90,000 and sending an invoice of the same date for that amount. This was a block premium. The letter continued: With regard to guarantees for mortgages that exceed 60% of valuation, I confirm that these will be dealt with on a bordereau basis at a rate of 6% on the valuation over 60%. As agreed, [Skipton] to provide details of the offers when made and submitted with the appropriate bordereau. Thirty percent commission will be allowed on this cover. Mr Campbell attached to the letter the wording for a policy for the MIG insurance between 60% and 70% of the valuation. This was entitled ‘Master Policy’ and that term was used at the trial and is used in this judgment. The letter stated that in addition there would be an individual commercial mortgage indemnity policy which would be the wording on which Economic would assume cover and which would apply in the event of a claim; the wording of the individual policy was an appendix to the master policy. The main importance of the master policy in this trial has resulted from the fact that it contained its own criteria applicable to loans which were in some respects more onerous than the criteria appended to the broking deed with which the loans to be insured under the pool policy had to comply. On July 28 1989 Mr Hughes of Skipton’s insurance department sent the wording of the master policy to Mr Jolly and to Mr David Smith for review. Either on, or shortly before, August 11 1989, the wording was discussed between Mrs Pat Grindrod of Skipton’s insurance department and Mr Campbell and detailed comments were made by Skipton on the wording (including on the additional criteria imposed by the master policy); these were recorded in a note of August 11 1989 that Mr Campbell passed to Mr Hammond Giles. His note concluded: 159 The individual contract requires similar amendment if it is to be utilised. [Skipton] have made it perfectly clear that they will not be issuing this document so it is not necessary for us to provide it. The comments were acceptable to Economic, but there was no document that evidenced any communication of that acceptance to Skipton. Mr Campbell’s evidence was that he considered that the amendments were to be treated as accepted unless challenged by Economic; he thought that Mr Hammond Giles might have told him they were acceptable and that he might then have passed this on to Skipton, but he could not actually recall doing so. In any event, beginning in September or October 1989 Skipton utilised the master policy to insure the part of the loan where it was in excess of 60% of valuation and charged the borrowers for the cost of that insurance. This involved them in sending declarations to Economic on a regular basis and debiting the borrowers with the premium. There was no further communication about the terms of the master policy after Skipton had ceased making offers for loans on new properties. On April 18 1990 Mrs Grindrod of Skipton’s insurance department sent the draft policy wordings to Economic for signature. Her letter stated: I enclose the two draft policy wordings. These have been checked and approved by the Commercial Lending Department. Please arrange for these to be signed and returned to us. The policy was returned to Skipton duly signed by Economic on May 15 1990. By its terms the policy took effect from July 6 1989: (7) Inception Duration and Cancellation This Commercial Mortgage Indemnity Master Policy commenced on the 6th July 1989 and is concluded for an indefinite period … (g) Criteria used internally by Skipton and sent to Economic and KB Just before the broking deed was signed, Skipton decided at an internal meeting on July 4 1989 that their branches needed a ‘KB pack’ including application forms, a brochure and a ‘KB lending manual covering procedures and lending criteria’. A ‘Mortgage Manual’ was then prepared; it is not certain when this was started, but there was a draft by July 14 1989. Included within this manual were two pages entitled ‘KB Commercial Lending Criteria’; these pages were prepared before July 14 1989 by Mr David Smith. His evidence was that he was given a document by one of the senior management at Skipton — either Mr Hepworth, Mr Jeanes or Mr Jolly. He was told the document contained the lending criteria from the broking deed. He went through it with a member of the commercial lending department, Ms Decia Lord, and Ms Maureen Procter in another department, and put it into a format similar to that used by Skipton for their own commercial lending; it was intended to reflect the criteria in the broking deed and not replace it. The draft was then sent to Mr Dawson, one of the assistant general managers who was also a solicitor, for checking; he had been involved in the drafting of the broking deed. He made some amendments in manuscript (including amending the loan to value ratio to 70%). The amended version was then incorporated into the branch manual and dated July 14 1989; it is convenient to refer to the criteria contained in this document as the ‘KCLC’ — the mnemonic used in the trial. The KCLC, however, were in some respects different to the criteria appended to the broking deed; the material differences are described below. It was clear from the evidence of Mr Hey and Mr Rhodes that those at Skipton within the commercial lending department who operated the facility on a day to day basis did so on the basis of the KCLC and not on the basis of the criteria appended to the broking deed. Mr Hey, for example, had on his desk a copy of the KCLC, not the criteria appended to the broking deed. It was his evidence that he was told by Mr Hepworth that these were the applicable criteria. Mr Dawson, though present in court for much of the trial, did not give evidence. I therefore received no explanation as to how it came about that the criteria used by those who operated the facility were not the criteria appended to the broking deed that formed the basis of the agreement with KB and Economic. It was clear from the evidence of Mr Smith that they were never intended by Skipton to replace the criteria appended to the broking deed in substance, but merely to be in a format that was easier for those at Skipton to follow and contrast with their own lending criteria. However, although intended only as an internal document, they were sent to Economic. On July 20 1989 a copy of the KCLC were faxed by Skipton to Economic’s office at Leeds; that office then forwarded them by fax to Mr Hammond Giles under a cover sheet that merely stated that this was information supplied by Skipton. It was Mr Hammond Giles’ evidence that although he could not recall indicating to Skipton or KB that these criteria were acceptable to Economic, he believed he would have done so or asked Mr Campbell to do so; he thought it more likely the approval would have been communicated through Mr Campbell. He assumed that these were the criteria upon which Skipton was lending. Mr Hammond Giles sent the KCLC to the reinsurers; a copy of the KCLC was bound into Economic’s working copy of the reinsurance agreement. By letter of July 20 1989, Mr Hammond Giles sent to Mr Peter Hale, a manager at KB, the pool policy wording ‘together with the underwriting submission details for attachment to your Broking Deed’; the enclosures were Skipton’s letter to Economic of February 6 1989 and the KCLC. Given the differences between the criteria attached to the broking deed and the KCLC, one of the issues between the parties was which were the applicable lending criteria that Skipton had to utilise when making loans under the facility and insuring the loans under the pool policy. (h) Operation of the facility Towards the end of July 1989 KB visited Skipton and saw some of the documentation relating to the first loans that Skipton were considering making under the facility. The first loan was made on August 11 1989. The general procedure adopted in relation to the loans was as follows: • One of Skipton’s branches or a broker contacted Skipton’s commercial lending department at head office at Skipton with a proposal. • The commercial loan application form was completed; this was based on Skipton’s form, but adapted for the facility. It required details of the applicant, business details, details of the property, its occupation and use, the valuation arrangements, details of bankers and existing loans and other information. Question 15 listed the enclosures required, such as accounts, budgets and cash flow forecasts. • The form and the accompanying information were reviewed. Mr Hey or Mr Rhodes tried generally to see the prospective borrower and assess his suitability on the basis of the information provided. • The staff in the commercial lending department made credit and other checks. • A valuation was obtained. • If the member of the commercial lending department was satisfied then, he and a colleague signed the following declaration on the commercial loan application form:         I endorse this application having verified all references and information in line with the Commercial Lending Manual. The advance strictly conforms to Mortgage Policy unless stated below.         The declaration was then countersigned by another member of the commercial lending department or a more senior person at Skipton’s head office. • If the loan was under £200,000, then it was treated as approved. If it was between £200,000 and £300,000, it was notified to KB; if KB did not notify them to the contrary, it was approved. If it was over £300,000, the application form and accompanying papers were sent to KB for their approval. 160 • Once approved, an offer letter was sent out setting out the amount of the loan offered, the term and rate of interest, any conditions that were imposed, any retention required, and the cost of cover under the master policy if the loan was over 60% of value. • Arrangements were then made for the report on title to be obtained from the borrower’s solicitor and the legal documentation prepared. • At the appropriate time, the funds were drawn down from KB by Skipton. When Skipton applied to draw down the funds they submitted a document that included the statement: We confirm that the loans are to be made in accordance with the criteria This wording was not required by the broking deed, but seems to have been devised by Skipton. (i) Role of KB in relation to the loans over £300,000 All loans over £300,000 which had to be submitted for approval to KB were generally dealt with by KB as follows. Skipton sent to KB all the information they had gathered in a package together with: • the commercial mortgage application form, with the declaration set out above completed, signed and countersigned; • the commercial loan recommendation sheet. This was a single page document which highlighted the main features of the loan — the type of business, the valuation, the amount of the loan, any secondary borrowings, references, details about the accounts of the business and relevant experience. It concluded with comments and recommendations. When the package was received by KB it was reviewed by one of the account officers — Mr Gladen or Mr Rogers, using a single page form devised by Mr Gladen, which after setting out details of the prospective borrower and security contained the following: Criteria Acceptable/satisfactory Yes No A Type of property B Status of borrower C Risk concentration D Loan to value ratio E Loan size F Pool insurance G SBS authorisation H Other points The headings against A-F corresponded with the paragraphs of the criteria appended to the broking deed. The check list form then provided space for the approval of the manager (to whom the account officer reported) and a director. Mr Gladen or Mr Rogers reviewed the information, liaised with Skipton, if more information was required, and completed the form, checking, so far as they were able, whether the criteria had been complied with. KB did not contact the prospective borrower, valuers or solicitors; they did not undertake site visits. They obtained all the information from Skipton and were dependent on that. Their review was not a detailed review — it took a few hours or up to a day. The papers were then reviewed by the manager, Mr Hale or Mr Lucas, who countersigned the form. Mr Lucas’ evidence was that his review would take no more than 15–20 minutes. They would rely on the work of Mr Gladen or Mr Rogers, but deal with anything that was either brought or came to their attention. The loan was then approved by a director; Mr Lucas’ evidence was that the director’s review would take between 5 and 25 minutes. Several directors were involved in the different approvals — Mr Defriend, Mr Bowen and Mr Wake-Walker. Sometimes when the loan was reviewed by the manager or director, more information would be required from Skipton; this was obtained by the account officer or the manager. Once the approval of the director was obtained, Skipton was informed. On occasions, the approval was given on terms specified conditions were met. It was the initial evidence of KB’s witnesses that the purpose behind the requirement of their approval was for KB to control the loan book, in particular by ensuring that there was a sufficient spread of loans over different types of property, different geographic areas and that there were not too many loans of a large size. It was said that KB did not consider that it was their responsibility to see that the criteria had been complied with. KB also submitted that this reason for the reference of loans to them could be deduced from the criteria. I do not consider that the precise purpose for which the broking deed required submission of loans over £300,000 to be submitted to KB for approval can be deduced from the broking deed. It could have been control of the book, but it could have been other purposes. What in fact took place during the operation of the facility showed that control of the book was not the only purpose for which KB required submission to them of these loans; they received information for that purpose in weekly reports that were submitted by Skipton. KB in practice examined the papers in much more detail and in accordance with the procedure I have set out. It is clear from the evidence of Mr Lucas and Mr Rogers and from the format of the check list form which contained headings corresponding to the paragraphs of the criteria appended to the broking deed that the account officers at KB checked, in so far as they could ascertain from the information before them, whether the criteria had been complied with. Once KB’s approval had been communicated to Skipton and any condition of the approval satisfied, Skipton were authorised to make the loan. It was, however, Skipton’s decision whether in fact to make the loan. When Skipton requested the funds from KB, they submitted the same form as that used in respect of all loans which stated: We confirm that the loans to be made are in accordance with the criteria In effect, on loans over £300,000, it was Skipton who did the underwriting; KB had no experience of this type of lending and were reliant on Skipton. KB’s role was limited to a review of that decision on the information supplied and carried out on the assumption that Skipton had checked for compliance with the criteria. Under the terms of the broking deed it was indeed Skipton’s responsibility to see the criteria had been satisfied before sending the papers for approval of the loan. It was clear on the evidence before me that, although Skipton thought that KB were conducting a review of the proposed loans, they knew that the review carried out by KB was dependent on the information supplied by Skipton. (j) Economic’s involvement during the operation of the facility Various queries were raised by Economic on eight loans and Mr Campbell met Skipton to discuss them in early September 1989; the comments were forwarded to reinsurers on September 21 1989. It is not necessary to refer to the details in the judgment. In so far as the inquiries are relevant to the sample loans, they are considered in the appendix. (k) Amendments to the criteria On September 27 1989, Skipton issued an internal circular which, after noting the amount of commercial mortgages being dealt with, stated: Can I once again emphasise how imperative it is to [Skipton] that the [KB] tranche is successfully used up as soon as possible, and certainly by the end of November. With the general slow down in residential business, which we now appear to have achieved with our rate changes, the main thrust of your immediate development activities should be aimed at moving the KB funds On October 6 1989 a further Skipton circular noted the need for discussions with KB to extend or relax the criteria. On October 17 1989 there was a meeting at Skipton between Mr Lucas and Mr Rogers of KB and Mr Jolly and Mr Smith of Skipton to review the operation of the facility and to discuss amendments. It was common ground that these would have to be formulated so that they could be approved by KB’s credit committee. It was also agreed that the amendments would have to be put to Economic. KB prepared a list of proposals which they then submitted for internal approval by their credit committee which was given on November 13 1989 on the basis that KB was fully covered by the insurance provided by Economic. 161 On November 22 1989 Skipton issued a circular to its branches saying that the amendments had been made and could be introduced with immediate effect. This should not have been issued by Skipton as the amendments had not been made to the criteria, as approval had not been given by Economic. In the week before November 27 1989, Mr Smith asked Mr Campbell of Economic to approve the amendments to the lending criteria; these were forwarded to Mr Hammond Giles on November 27 1989. Mr Campbell’s evidence was that he thought he had told Skipton that unless they heard to the contrary, the amendments could be considered approved; he had no recollection of advising Skipton subsequently of their approval. Mr Hammond Giles contacted reinsurers with the proposals sometime in December and forwarded his comments to the reinsurers on December 21 1989, saying in effect that they were agreeable to Economic. Reinsurers responded on the same day stating that they agreed. Mr Hammond Giles’ evidence was that it was inconceivable that they did not relay this to Skipton. It is not clear what Skipton told KB, though that does not matter as far as communication by Economic to Skipton was concerned; certainly in early January 1990, KB were still reviewing the loans referred to them on the basis that the criteria had not been amended: see for example the loan to Majortown Ltd considered in the appendix to this judgment [not reproduced here] in relation to the loan to Virvale Ltd, one of the sample loans. On February 27 1990, Mr Campbell sent to Mr Ludlow at Economic’s underwriting centre a memorandum stating that KB had agreed to the amendments which were to be effective more or less at once; he said in the memorandum that he trusted that this was in order. Mr Campbell was told that these had to be approved by reinsurers. The amendments were therefore again forwarded to reinsurers on March 6 1990. No response was received. (l) Loans made Although a large number of loans were made totalling about £20m, I have only had to consider in detail the following 10 sample loans: Borrower Application Loan Amount Loss Claim paid 1. Staffordshire Country Clinics Sep 89 Feb 90 £750,000} £836,233 Jul 90 Oct 90 £240,000} 2. Mr and Mrs Rowley Oct 89 Nov 89 £364,000 £580,502 3. Glintpatch Ltd Jan 90 Mar 90 { £600,000} £1,497,031 { £600,000} 4. GCS:Turnpike Inn Jul 89 Nov 89 £325,000 £37,971 Paid 5. GCS:Offices at Bagley Lane Jul 89 Sep 89 £162,000 £122,872 Paid 6. Messrs Wood, Kelly & Wood Sep 89 Dec 89 £192,500} £83,562 Paid Retention Jun 90 £10,000} Retention Mar 91 £7,500} 7. Mr Cordingley Oct 89 Dec 89 £170,000} £192,706 8. Mr Yates & Mr Green Nov 89 Jan 90 £231,000} £196,891 9. Virvale Ltd Dec 89 Feb 90 £108,000 £55,595 Retention Apr 90 £20,000 10. Mr Wharton/ Mrs Cheadle Dec 89 Apr 90 £210,000 £113,723 (m) Subsequent events The offer of new loans ceased in March 1990, though the actual advances were made thereafter. There was at least one second loan requested and made after March 1990 and at least two loans were reorganised. On February 27 1990 Mr Hey left Skipton and joined the Scarborough Building Society. Mr Richard Mashiter was appointed in his place. He was brought in to solve problems that had arisen; he changed the roles of some of the personnel, including Mr Rhodes. Although there was a subsequent internal review by Skipton of the operation of the facility, any points of relevance are considered in relation to the individual loans. Otherwise nothing of material relevance occurred, save for the sale of the loans to the plaintiffs and the making of claims made on Economic. The facts in relation to both these matters are more conveniently considered in relation to the issues which arise. General issues The general issues that arose and which are considered in this main part of the judgment are: (1) Which were the applicable lending criteria? (2) Were the criteria amended? (3) What were the consequences of a breach of the criteria as regards the obligations under the pool insurance and the broking deed? (4) The scope and requirements of the master policy and the declarations and insurances under the master policy. (5) Are Economic entitled to recover the claims they have paid? (6) Do the plaintiffs have title to sue? (7) Were KB negligent and if so, what was the consequence? (8) Claims over against KB. (9) The consequences of professional negligence. As can be seen, they cover an extensive area of fact and law. I am greatly indebted to the assistance of all counsel and their teams for very considerable assistance. Issue (1) What were the applicable lending criteria? Central to the facility granted by the broking deed and the insurance arrangements were the lending criteria. Despite the fact that the broking deed and the pool policy defined the criteria as those set out in appendix 1 to the broking deed, there was considerable dispute at the outset of the trial as to whether these criteria or the KCLC were the applicable criteria. After the evidence, the position of the various parties was somewhat simpler. (a) Criteria appended to the broking deed It was not disputed that the criteria set out in appendix 1 to the broking deed were the starting point for determining which criteria were applicable criteria; they were the subject of negotiation and the contractually agreed criteria not only between Skipton and KB but also for the purposes of the pool policy. Clause 2 of the pool policy required the loan to have been granted ‘in accordance with the criteria disclosed in Appendix 1 of the Deed’. In view of the importance of these criteria it is necessary to set them out: A. Type of property Acceptable properties will include small business premises of the types specified below being owner-occupied or fully-let investment properties. Where an investment property comprises units occupied by several businesses, the majority must be of an acceptable type as set out in Appendix 1. Premises of a generally acceptable type must, where owner-occupied, satisfy the following additional criteria: — (i)    the business must be well-established and in a suitable area; (ii)   the premises must be capable of alternative uses without requiring costly conversion. In the case of investment property, all units must have a good history of rents being paid on time. The properties must be in England or Wales. B. Status of borrower Current businesses must provide at least 2 years’ satisfactory audited accounts or, if not incorporated, management accounts with accountant’s report. In the case of investment properties, the Borrower’s income (including other unencumbered income) must cover at least 150% of mortgage payments. Where the loan is to be made to a new business, the individuals must normally have previously carried on a similar business which is either expanding or changing location. If this is not the case the application must be referred to [KB] together with reasonable evidence of the viability of the proposed businesses and the competence of the individual intending to run it. C. Risk concentrations In order to avoid undue concentrations of risk on any one type of property a maximum percentage may be specified by [KB] from time to time for the aggregate amount of loans (as a percentage of the current portfolio) secured on a particular type of property. 162 Upon the portfolio reaching £2,500,000 the following limits are to apply: — Pubs: 20% Nursing Homes: 20% D. Loan to value ratios The minimum property value will be £30,000. For wholly commercial properties loans may not exceed 80% of valuation. All loans over 60% of valuation will require mortgage guarantee indemnity insurance by an insurance Company approved by [KB] covering the excess. Loans include fees, premiums, etc debited to the Borrowers’ account. Valuations will be carried out by a qualified person (RICS or ISVA) from a firm on the Originator’s approved panel of valuers (excluding any sole practitioners) and must not include any value attributable to fittings or stock. The firm providing the valuation must not have any other financial interest in the property or the transaction. E. Maximum Loans (Clause 7(3)) All loans exceeding £200,000 should be referred to [KB]. Loans between £200,000 and £300,000 to be referred for information only. Loans exceeding £300,000 to be specifically approved by [KB] prior to disbursement of loan proceeds. F. Minimum Loans £20,000 G. Pool Insurance All loans must be covered by the Policy. H. Further advances Further advances may be made to existing Borrowers so long as the further advance, if an original loan, would comply with the criteria set out above, and so long as the original loan and the further advance, when taken together, comply with the criteria set out above. There are two points on these criteria which were not in issue at the end of the trial. • Although there is a reference in para A to the property of an acceptable type set out in appendix 1, there was no list appended to the broking deed. KB contended that the list was to be found in appendix 1 to the offer letter from KB to Skipton on February 8 1989; Economic contended it was the list set out in KCLC. The lists are broadly similar, but the list in the KCLC also contains an exclusion ‘Development finance not acceptable’. Although no point arises on the difference between the two lists in respect of the sample loans, the relevant list is, in my view, appendix 1 to the letter of February 8 1989; this was the only list that was in the documents that passed between KB and Skipton prior to the signature of the broking deed and was part of the formal offer; it was clearly omitted accidentally. • Although in the second subparagraph of para D the loan to value ratio was set out as 80%, all the parties acted on the assumption that it was 70%. Economic and KB were agreed that there was an estoppel by convention that the loan to value ratio was 70%. Skipton also accepted that there was an estoppel by convention to this effect; they, however, contended that it also had the consequence in relation to the provision in para D that fees, premiums and other items debited to the borrowers account were to be considered within the amount of the loan, that the fees, premiums and other items did not have to be within the 70% figure. That issue is more conveniently considered below. There is one other qualification that operated in respect of the criteria; on August 10 1989, Mr Hepworth wrote to Economic seeking clarification on two points in relation to the criteria; the first related to concentration of risks; the second was in the following terms: Non-accountants tend not to differentiate between audit reports on limited companies and accountants reports on unincorporated businesses. When assessing unincorporated businesses we ask for an accountant’s report rather than an audit report. In the result nothing turned specifically on this point, although the weight that could be attached to accounts would, to some extent, be affected by the question of whether they had been audited or not. (b) Position of the parties on the applicable criteria KB throughout the trial adopted the position that the criteria appended to the broking deed (as qualified in the respects set out) were the applicable criteria for the purposes of the facility and the insurance arrangements. Economic contended in their pleadings and in their opening that the applicable criteria were those appended to the broking deed, but that, as they submitted was recognised by the parties, the effect of the KCLC was to supplement or vary the criteria attached to the broking deed which otherwise continued to apply. However in their final submissions, they contended that the criteria attached to the broking deed alone applied (as amended in the two respects to which I have referred) and that the KCLC had no contractual or other effect between the parties. It was Skipton’s initial position that the relevant criteria were those set out in the KCLC. As those at Skipton who had dealt with the making of the loans under the facility had used the KCLC and not the criteria appended to the broking deed, Skipton maintained their position that the KCLC were the applicable criteria; they also contended that if the KCLC were not the applicable criteria, then as against Economic the criteria appended to the broking deed applied, but where equivalent criteria in the KCLC were less stringent than the criteria in the broking deed, then Economic could not insist on performance in accordance with the more stringent criteria. As I understood their argument, they did not contend that where there were more stringent criteria in the KCLC, then those applied in place of the less stringent criteria appended to the broking deed. (c) Differences between the KCLC and the criteria appended to the broking deed It is now clear to the parties that there were differences between the KCLC and the criteria attached to the broking deed. The significant differences included: • In the case of a new business, the proposal was to be referred to the ‘Commercial Lending Manager’ (para A3.1.1); the criteria appended to the broking deed (para B) required such a proposal to be submitted to KB. • The loan to value ratio was to be ‘70% of the purchase price or valuation whichever is the lower’ (para A2); the criteria appended to the broking deed (as varied) referred to 70% of the valuation (para D). • The requirements as to the status of the borrower (para A3) were the following: A.3 Status Assessment of both the Borrower’s business expertise and the business being purchased must be made. The borrower must produce all or a combination of the following, dependent on circumstances of the individual case: — 2 years Audited Accounts of his own business; — 2 years Audited Accounts of business being purchased; — Current Management Accounts of business being purchased; — Budget and cash flow forecasts of business being purchased. A.3.1 Investment Properties The total rental income and other unencumbered income must cover at least 150% of the mortgage payments. A.3.1.1. If New Business is to be Created The proposal in principle must be referred to Commercial Lending Manager together with evidence of the viability of the proposed business and the competence of the individuals intending to run it. It might be thought that this requirement might possibly be less stringent than the requirements in para B of the criteria attached to the broking deed. In practice, in the sample loans I have considered there was no significant difference as the result of applying para B or this paragraph of the KCLC. This is perhaps not surprising as, given the origins of the KCLC, these paragraphs of the KCLC were meant to reflect para B. (d) Did the less stringent provisions of the KCLC apply through estoppel by convention? It is clear that the criteria applicable as a matter of contract both under the broking deed and under the pool policy were the criteria appended to the broking deed and not the KCLC. My reasons for that conclusion can be more briefly summarised after setting out the 163 matters that are material to Skipton’s contention that Economic could not insist on performance of the criteria appended to the broking deed where they were less stringent than those in the KCLC. Skipton based this contention upon an estoppel by convention in reliance on Amalgamated Investment & Property Co Ltd v Texas Commerce International Bank Ltd [1982] QB 84 and the well known passages in the judgments of the Court of Appeal. • Lord Denning MR said, at p121C:         If parties to a contract, by their course of dealing, put a particular interpretation on the terms of it — on the faith of which each of them — to the knowledge of the other — acts and conducts their mutual affairs — they are bound by that interpretation just as much as if they had written it down as being a variation of the contract. There is no need to inquire whether their particular interpretation is correct or not — or whether they were mistaken or not — or whether they had in mind the original terms or not. Suffice it that they have, by the course of dealing, put their own interpretation on their contract, and cannot be allowed to go back on it …         When the parties to a contract are both under a common mistake as to the meaning or effect of it — and thereafter embark on a course of dealing on the footing of that mistake — thereby replacing the original terms of the contract by a conventional basis on which they both conduct their affairs, then the original contract is replaced by the conventional basis. The parties are bound by the conventional basis. Either party can sue or be sued upon it just as if it had been expressly agreed between them …         When the parties to a transaction proceed on the basis of an underlying assumption — either of fact or of law — whether due to misrepresentation or mistake makes no difference — on which they have conducted the dealings between them — neither of them will be allowed to go back on that assumption when it would be unfair or unjust to allow him to do so. If one of them does seek to go back on it, the courts will give the other such remedy as the equity of the case demands. • The judgments of Eveleigh and Brandon LJJ (p126 and pp130–131) expressly approving the passage in Spencer Bower & Turner on Estoppel by Representation:         This form of estoppel is founded, not on a representation of fact made by a representor and believed by a representee, but on an agreed statement of facts the truth of which has been assumed, by the convention of the parties, as the basis of a transaction into which they are about to enter. When the parties have acted in their transaction upon the agreed assumption that a given state of facts is to be accepted between them as true, then as regards that transaction each will be estopped against the other from questioning the truth of the statement of facts so assumed. It is clear from The Vistafjord [1988] 2 Lloyd’s Rep 343*, at pp350–354 and Hiscox v Outhwaite (No 2) [1992] 1 AC 562 (HL) that although there must be a common mistaken assumption or a coincidence between the parties’ states of minds as to the mistake, there must also be some conduct that crosses the line between the parties in the sense of being mutually manifested. Although it is not necessary that the source of the representee’s belief in the mistaken assumption is derived from the alleged representor, some conduct that crosses the line is necessary before it can be said that the alleged representor’s participation in the conduct can be relied upon by the representee as the basis of an estoppel. It is necessary that there be a common assumption which is acted upon. *Editor’s note: Norwegian American Cruises A/S v Paul Mundy Ltd. i Skipton’s own position The starting point must be Skipton’s own position. It is clear from the evidence of Mr Smith, the only person called by Skipton to explain the origin of the KCLC, that it was never Skipton’s intention that the KCLC should replace the criteria appended to the broking deed. Given that was the only evidence of Skipton’s intention and the fact that Skipton chose not to call Mr Dawson, though he sat in the court for much of the trial, it is the inevitable inference that those at Skipton who had negotiated the facility with KB never believed that the criteria appended to the broking deed which formed the basis of the facility and the insurance were replaced or modified by the KCLC or were intended to be replaced or modified by the KCLC. It is significant that when Mr Hepworth wrote to Economic on August 10 1989 with a question about the interpretation of the criteria, he must have been referring to the criteria attached to the broking deed because the question on risk concentration can only have referred to those criteria as risk concentration is not covered in the KCLC; it would not be necessary for it to be included in a document intended for use at branch level. A brochure was produced for marketing loans under the facility; it is clear from the language that this was done using the criteria appended to the broking deed and not the KCLC. On their face it was clear that the KCLC were internal for use at a working level at some point within Skipton; it was clear that they were not the criteria by which a loan had finally to be assessed. Furthermore the KCLC did not contain some of the criteria that Skipton actually operated and which those at Skipton dealing with the loans knew were requirements: • They referred new businesses to KB — not a requirement of the KCLC. • They referred loans over £200,000 to KB for information and those over £300,000 for approval — not requirements of the KCLC, though referred to in an internal document prepared by Skipton in early June 1989 setting out proposed procedures for use at head office; it was unclear on the evidence whether this document was ever finalised, but it may have formed part of a procedures manual used at head office. • They had to consider risk concentration — not a requirement of the KCLC. In my view, Skipton did not begin to establish the basis of estoppel by convention because those at Skipton who had negotiated the facility and the insurance never considered the KCLC to be of any external significance either as regards Economic or KB; those that operated the facility on the basis of the KCLC did so because they were told by those at Skipton who had negotiated the facility, and in consequence of what they were told honestly believed that the KCLC were the criteria that had been agreed with KB and Economic. No one at Skipton ever believed that there had been a variation from the agreed criteria which were set out in the KCLC. I find that Skipton never in fact had the mistaken belief that they now claim. They deliberately decided not to call the witnesses who knew what the true position was; it is clear they did not call them because it would have been impossible for them to give truthful evidence that they believed the KCLC had replaced or varied the criteria appended to the broking deed, and that it was permissible to make loans that complied with the KCLC and not with the criteria appended to the broking deed. They knew that the KCLC was purely an internal document and any erroneous belief Mr Hey or Mr Rhodes had was due to the error of the senior management at Skipton. As can be seen from the facts relating to the sample loans set out in the appendix to this judgment, Mr Jeanes, a general manager and secretary, countersigned the application form for at least one of the loans. He did not give evidence. Although he no longer worked for Skipton, there is no reason why he could not have been called. He must have known that the operative criteria were those attached to the broking deed. Although that is sufficient to dispose of the argument on estoppel, I will set out my findings in relation to KB and Economic for the sake of completeness. ii Position between Skipton and KB In their closing submissions, Skipton made it clear that they did not advance any estoppel against KB or the plaintiffs. However, it is important to set out my findings in relation to the position as between KB and Skipton, as it has a bearing on the position between Skipton and Economic. I was satisfied on the evidence that although KB were provided by Economic with the KCLC there is no evidence to suggest that KB ever had a belief or assumption that the KCLC modified, let alone replaced, the criteria appended to the broking deed. 164 · No real significance attaches to the provision of Skipton’s lending criteria at the meeting on January 30 1989; provision of Skipton’s own criteria only showed that KB were told precisely what Skipton’s own criteria were at that time. It quite clearly did not establish that those criteria were the criteria applicable as between Skipton and KB when other criteria were specifically negotiated and appended to the broking deed executed in July 1989; nor would they be the criteria applicable under the insurance policy for the same reasons.         It was suggested by Mr Hey in his statement that the criteria he handed over came back with amendments; I cannot accept that evidence as reliable, but even if such a document had been handed back, it was done in the context of negotiations that led to an executed agreement which contained the agreed lending criteria appended to it. These would have superseded any draft passed back some months earlier. • It appears that KB placed the documents received from Economic under cover of the letter of July 20 1989 (which included the KCLC) in the safe and that they took one or two copies of the KCLC sent to them by Economic. However there is nothing to suggest that they attached any significance to the KCLC. Indeed they would have no reason to treat it as of any contractual significance when received in late July 1989. First, it was described as part of the underwriting submission details and accompanied by Skipton’s letter to Economic of February 6 1989; this was in fact a mistaken description as the KCLC did not exist then. Second, it was received at the same time as the signed original of the pool policy which expressly referred to the applicable criteria as those contained in appendix 1 to the broking deed. • The staff at KB who reviewed the loans over £300,000 sent to them under the provisions of the facility did so by reference to the criteria attached to the broking deed. Their check list forms were drafted by reference to it as was the note on the proposed amendments in October/November 1989. Indeed when consideration was given to the amendments, although Skipton may have used the KCLC, KB did not; indeed when both Skipton and KB considered the issue of risk concentration (item 5 of the proposals), this could only have been by reference to the criteria attached to the broking deed. Furthermore, although Skipton’s note used the phrase development finance (in respect of item 1) consistently with the phrase in the KCLC, KB’s formulation of the same item used the phrase ‘Construction finance’; again this indicated that KB were not working from the KCLC. • Although no list of acceptable properties was attached to the broking deed, though such a list was contained within the KCLC, there is nothing to show that KB worked from the KCLC rather than the list appended to the letter of February 8 1989. Even if it were to be assumed that KB worked from the list in the KCLC on the basis that they would work from a final document rather than a draft produced in the course of negotiations, this was never known to Skipton. There was nothing that crossed the line. Even if it had, it would not have amounted to participation in a common assumption that Skipton could satisfy the criteria by reference to the KCLC rather than the criteria attached to the broking deed or that the criteria attached to the broking deed were modified where the criteria in the KCLC were less stringent. I am satisfied that KB therefore did not use the KCLC and did not and had no reason to regard the document sent to them as having any contractual significance. They therefore had no belief or assumption that the criteria appended to the broking deed were in any way modified by the KCLC. They did nothing that crossed the line. They did nothing that in any way suggested or represented to Skipton that the KCLC were of any significance in the operation of the facility. When Mr Hey or Mr Rhodes discussed with KB queries they had on the criteria, Mr Hey and Mr Rhodes did so in a way in which it did not become apparent they were working from the KCLC (and the additional requirements such as risk concentration of which they were aware) and KB were working from the criteria attached to the broking deed; that is not surprising given the similarity between the two sets of criteria. I am also satisfied that as between Skipton and KB there was no mutual mistaken understanding about the status of the KCLC; both Skipton (at the level of its senior management) and KB believed that the operative contractual criteria were those appended to the broking deed. Even though KB had a copy of the KCLC, they never attributed any significance to it and never considered that it in any way modified the criteria set out in the broking deed. iii Position as between Skipton and Economic It was clear that the KCLC were only sent to Economic on July 20 1989 after the broking deed with the criteria appended to it had been executed on July 6 1989; indeed the KCLC were not in existence at the time the broking deed was executed. However Skipton’s case on estoppel was founded upon Mr Hammond Giles’ apparent acceptance in cross-examination that he assumed the KCLC were the basis upon which Skipton were making the loans and that he thought that Skipton were told the KCLC were acceptable to Economic. Furthermore, Skipton also relied on the evidence of Mr Gordon Campbell (whom they called) that he had never seen the criteria appended to the broking deed and he believed that the KCLC were the only criteria, though an internal Skipton document; his evidence was that the KCLC or something very similar was always understood to be the basis on which Skipton would make the loans. However, considering the whole of Mr Hammond Giles’ evidence, it is clear to me that the KCLC were sent to him, without any request, after the facility had been finalised and solely for Economic’s information; that he considered that it was an internal document which appeared to him to be a précis of the lending criteria and which he did not understand to be a document intended to replace or modify the broking deed criteria. He therefore never had an assumption or belief that the KCLC were a set of criteria that modified the broking deed criteria. As to the evidence of Mr Gordon Campbell, he was not involved in the negotiation of the pool policy (save to pass information between Skipton and Economic); that negotiation was done by Mr Hammond Giles. It is perhaps not unsurprising that he did not see the criteria attached to the broking deed; I do not accept his evidence that the KCLC or a similar document was understood by Economic to be the basis on which Skipton would lend. The KCLC only came into existence after the arrangements had been finalised and the broking deed executed; nearly eight years later he cannot credibly have recalled the existence of a similar document so as to be able to differentiate it from a draft of the criteria appended to the broking deed. Although it appears from Mr Hammond Giles’ evidence likely that Skipton were told by Economic that the KCLC were acceptable to them, there is nothing to suggest that Economic did anything that indicated to Skipton that these were to replace the criteria appended to the broking deed or that either Skipton or Economic believed that they did so. Indeed it would have been quite extraordinary, if a few days after the criteria (which formed the basis of the facility and of the pool insurance) had been incorporated into the broking deed and referred to in the pool policy, the criteria had been understood to have been varied or modified in such a way. There are two other matters I must mention. In his statement Mr Hey said that he understood that Skipton’s existing commercial lending criteria (or that document with some amendments or the KCLC) had been shown to KB and to Mr Hammond Giles to ensure they were happy with it; his evidence was unclear as to what Economic had seen and how he knew this; I could not place any reliance on his evidence in this respect. Skipton also relied on the fact that the KCLC were bound into a bundle containing Economic’s copy of the reinsurance agreement and that Mr Hammond Giles accepted that the KCLC were likely to have been used as the only immediate source of information about which properties were acceptable or unacceptable; that if used to check that, 165 they might be used for other purposes as well. However Skipton knew none of this at the time; there was nothing that crossed the line. Finally, I consider that there would have been nothing inequitable in allowing Economic to rely on the broking deed criteria as the applicable criteria under the pool policy for loans made. As between KB and Skipton, the evidence established that the contention initially put forward by Skipton that the KCLC were the applicable criteria as between them and KB was completely untenable; it was equally clear that there was no basis for an estoppel by convention between them. Throughout the evidence, KB asserted that the criteria appended to the broking deed were the applicable criteria as between them and Skipton. As the assured under the insurance were KB, it would follow that although as between KB and Skipton the relevant criteria were those attached to the broking deed, KB were relying on the assertion of Skipton that different criteria were in place as between Economic and Skipton. Given therefore: (1) the clear position between KB and Skipton that the criteria appended to the broking deed applied; (2) that on all loans over £300,000 KB’s approval had been given on the basis of those criteria; (3) that the KCLC were prepared by Skipton with the intention they reflected the criteria appended to the broking deed; and (4) nothing was said to Economic to suggest that the KCLC were intended to vary the criteria that they had just agreed, I would not have considered it inequitable to allow Economic to rely on the criteria appended to the broking deed, if I had been of the view that the other elements to found an estoppel had been present. Issue (2) Were the criteria amended? I have set out an account of the evidence. Although it is curious that if consent had been communicated to Skipton in late November or late December 1989 consent should have been sought again, I consider that on the balance of probabilities consent was communicated by Economic at the end of December once it had been obtained from reinsurers. The likely explanation for the fact that consent was sought again is that no record had been made and Mr Campbell had forgotten. As all that was required to make the amendments effective was the consent of Economic and its communication to Skipton, the amendments to the criteria appended to the broking deed became effective at the end of December 1989. They were: 1. Construction Finance, where subject property is up and running as a business to fund extensions/improvements whilst still operating. Propose to consider up to 70% of brick and mortar value during construction finance to be released in stages subject to valuation. [This is something of a ‘clarification’ point to enable up to 70% of valuation as stage payments rather than on the completion of extension/improvement.] 2. Rest homes, proposed up to 50% of valuation providing they are of a high professional standard; have medical facilities and would easily convert to alternative use. [Currently residential rest homes are outside criteria but Skipton would have normally considered good quality cases with low Loan to Value.] 3. Investment Properties. Income requirement at least 150% of mortgage payments has become difficult to achieve with recent rises in interest rates. Skipton’s experience using just 100% has been satisfactory and a relaxation to 120% is proposed. 4. Shops. Criteria presently specifies that shops must have living accommodation. On occasions applications are received for lock-up shops in shopping centres. Skipton therefore wishes to drop the requirement for living accommodation. It is intended to restrict geographic location and only accept quality securities. Suitable buildings and contents insurance cover will be required. 5. Risk Concentration. Upon £2.5 million being advanced the amount lent on Pubs & Nursing Homes is limited in each case to 20% of the total portfolio. Skipton would like to see this extended to a third for each category. It is believed that this is rather generous and it is therefore proposed that upon the portfolio reaching £5.0 million the following limitations should apply: (a) Pubs: up to 30% (b) Nursing Homes: up to 25% (c) Investment Properties: up to 25% Issue (3) What were the consequences of a breach of the criteria as regards the obligations under the pool insurance and broking deed? (a) Approach to the question of construction and the regulatory background It is self evident that the pool policy and the broking deed had to be construed by reference to each other; they were an integral part of the arrangement between the original parties. That arrangement had important features which can be summarised: • A main object of the arrangement was for Skipton to expand its commercial lending without taking the loans on to its balance sheet. The lending was reflected in KB’s capital adequacy ratios and not Skipton’s. • For assuming the risk KB wanted stringent indemnities and full security. • KB were not looking merely to the mortgages for their security; it was an integral part of the arrangement that the loan be insured. Even the 1% aggregate first loss provision was secured as it was payable from the buffer account on confirmation from Economic that the loss had been accepted: see clause 11(7)(d)(ii). There was, however, an issue as to the extent to which it was relevant to have regard to the regulatory background. The applicable principles have recently been reiterated in the speech of Lord Hoffmann in Investors Compensation Scheme v West Bromwich Building Society unreported June 17 1997: The principles may be summarised as follows: (1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. (2) The background was famously referred to by Lord Wilberforce’s the ‘matrix of fact’, but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man. (3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them. (4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meaning of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax: see Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] 2 WLR 945. (5) The ‘rule’ that words should be given their ‘natural and ordinary meaning’ reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one could nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in The Antaios Compania Neviera SA v Salen Rederierna AB [1985] 1 AC 191, at p201: ‘… If detailed semantic and syntactical analysis of words in commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense’. These are not, I think, new principles, but a distillation of the authorities from Prenn v Simmonds [1971] 1 WLR 1381 onwards. The form of lending used in the facility had been the subject of regulatory comment from the Building Society Commission in Prudential Note 1988/2: Capital requirements for off balance sheet 166 mortgage lending. This Prudential Note sets out the features of off balance sheet schemes which would satisfy the commission without the need for capital to be retained to cover any credit or interest risks, though a society was advised to consult the commission before entering into any off balance sheet schemes. The features of permissible schemes included provisions under which: • the society was not to bear any credit or interest rate risk, but that was borne by the lender; • the society was to assess mortgages according to a policy predetermined by the lender and the society was not to be presented to the borrower as being responsible for determining policy on the loan; • the society was not to be under an obligation to take back the loans or have the option to do so in the case of non-performing loans save where:         the agreement gives the society the option of taking back mortgages which it was subsequently discovered did not comply with the criteria agreed with the new lender at the outset and as such the society is subject to a possible claim for breach of warranty • the arrangement had to be structured:         to ensure that the society does not bear any credit or interest rate risk         if the society was to treat the loan as outside its capital adequacy ratios; however it was accepted that the society was inevitably subject to the risk of suit for negligence or maladministration. It suggested that societies consider insuring against such risks. Skipton said that the Prudential Note formed part of the factual matrix to the agreements. It was always the common intention of the parties that the arrangement would be within the regulatory framework and that, in accordance with the Prudential Note, it was the intention Skipton would not have to bear any interest or credit rate risks; Skipton was therefore under no absolute obligation to comply with the criteria. During the course of the trial, I raised the question as to whether the regulatory background and the Prudential Note should be taken into account. It concerned me that as between KB and Skipton, a significant degree of risk was in fact assumed by Skipton, but that this was not reflected in Skipton’s capital adequacy ratios, whereas little by way of risk was being actually assumed by KB, though the loans were all reflected in its capital adequacy ratios as monitored by the Bank of England. It may be that it was thought that the risk was minimal as it was lending secured on property in a buoyant market and the risk in the diminution in the value of the security was being assumed by Economic. Furthermore, any risk that Skipton was taking in relation to non-compliance with the criteria could have been (and I understood was in fact) covered by other insurance obtained by Skipton. It has been clear that matters to be taken into account are matters known to both the parties or reasonably available to them; in Youell v Bland Welch & Co Ltd [1992] 2 Lloyd’s Rep 127, at p133, Staughton LJ summarised the principle: what the parties had in mind, and … what was going on around them at the time when they were making the contract. This applies to circumstances which were known to both parties, and to what each might reasonably have expected the other to know. The first question to be considered is whether the Prudential Note was part of the common background. No one involved in the detailed negotiations on the part of Skipton gave evidence nor did anyone of any seniority at Skipton give evidence; however, it would be a proper inference to make that they must have been aware of this note as it came from their regulator. The only evidence of actual knowledge on the part of KB was given by Mr Wake-Walker; he said that it was not known to KB. A note of a meeting between KB and Skipton on January 29 1989 records that Mr Hepworth of Skipton raised the question of whether an obligation to repurchase a loan where a breach of warranty was discovered would cause a problem in the light of the rulings of the Building Society Commission on off balance sheet treatment. Although Mr Bowen and Mr Lucas gave evidence, this point was never explored with them. Although it would be a proper inference that KB must have known the broad outlines of the regulation of building societies as set out in the Building Societies Act, it would not be right on the evidence to infer that they had any knowledge of this Prudential Note, let alone the detailed terms on which Skipton rely, or that that Prudential Note ought reasonably to have been available to them. Thus, although I accept it must have been the common intention of the parties that the agreement was to take effect under the general regulatory background, the details of the Prudential Note were not known to KB; nor can they reasonably be expected to know of them or have that Prudential Note reasonably available. For this reason, the Prudential Note does not form a relevant part of the factual matrix. In any event, even if the Prudential Note could be said to have been within the common knowledge of the parties or reasonably available to them, it would not have followed that it would have had the effect for which Skipton contended. It was only a guideline and without evidence of how the Building Societies Commission viewed such schemes, it would be difficult to say that the arrangements between KB and Skipton should be looked on only in the light of the guidelines, not the firm regulatory background about which there was no evidence. However, even if the Prudential Note was part of the factual matrix and it was the relevant regulatory provision, the Prudential Note did specifically refer to the obligation to take back a mortgage where the building society did not comply with the agreed criteria and was subject to possible claims for breach of warranty. Although the Prudential Note also referred to the risks of suits for negligence and maladministration, a breach of warranty would be understood as meaning the breach of a strict contractual duty. Strict contractual duties not dependent on fault would therefore not be inconsistent with the type of arrangement that the Building Societies Commission considered to be within the regulatory framework; nor would the assumption of strict duties be viewed as the assumption of credit risks, even though they did in fact result in the risk being in reality left with a society on a very substantial scale. I therefore conclude that the Prudential Note was not part of the matrix and that even if it had been, it would not have been of assistance in the construction of the agreements. (b) Was the requirement under the pool policy that loans were made in accordance with the criteria a condition precedent? Clause 2 of the pool policy insured KB against the deficiency, arising on a default under the loan, between the proceeds of sale and the outstanding debt and costs as defined in the policy: Provided that: (1) the relevant loan should have been granted by the Insured [KB] in accordance with the criteria disclosed in Appendix 1 of the Deed. (2) in the event of default by a Mortgagor, the procedures in the Deed shall have been observed unless otherwise agreed by [Economic]. (3) the management of the relevant Loan has remained with [Skipton] or [KB] unless [KB] shall have obtained the prior agreement of [Economic] such agreement shall not be unreasonably withheld. The issue between the parties is as to the nature of this term. Skipton, KB and the plaintiffs contend as against Economic that it is a term, the breach of which gives rise to damages in the event that Economic can prove that the breach of the criteria caused the loss. It is Economic’s case that the term rendered compliance of lending criteria a condition precedent to cover; if loans were made that did not comply with the criteria, they were not within the scope of the cover. Skipton contended that compliance was not a condition precedent; if there was a breach of the criteria, Economic could not avoid payment unless it proved that the breach of the criteria caused the loss; the breach would give Economic a right of action for damages limited to the extent to which the loss was caused by breaches of the lending criteria. They contended that this was clear as a matter of language and was at the heart of the commercial arrangements between the parties. 167 In Tarrabochia v Hickie (1856) 1 H&N 183 at pp187 and 188, it was made clear that an intention to make any particular stipulation a condition precedent should be clearly and unambiguously expressed: No doubt it is competent for the parties, if they think fit, to declare in express terms that any matter shall be a condition precedent, but when they have not so expressed themselves, it is necessary for those who construe the instrument to see whether they intended to do it. Since, however, they could have done it, those who construe the instrument should be chary in doing for them that which they might, but have not done for themselves. In Re Bradley and Essex & Suffolk Accident Indemnity Society [1912] 1 KB 415, the principle that a contract must make clear those conditions which are conditions precedent to liability was applied to the insurance policy in issue: see the judgments of the Court of Appeal at pp421–422, 430 and 433. The further authorities on this point were reviewed by Hirst J in The Litsion Pride* [1985] 1 Lloyd’s Rep 437 (at pp462–471) where he applied the well established principle: see p469. It has been followed in Australia: see Trans-Pacific Insurance Co ‘Australia’ Ltd v Grand Union Insurance Co Ltd (1989) 18 NSWLR 675 at pp687–688. *Editor’s note: Black King Shipping Corporation v Massie It is not uncommon in insurance policies to find conditions precedent expressed in the form of a proviso: see for example Glengate-KG Properties Ltd v Norwich Union Fire Assurance Society [1995] 1 Lloyd’s Rep 278, [1996] 1 Lloyd’s Rep 614, where it does not seem to have been in issue that the proviso in that policy was a condition precedent to cover: see p286 of [1995] 1 Lloyd’s Rep. In Cassel v Lancashire & Yorkshire Accident Insurance Co (1885) 1 TLR 495, a proviso requiring the giving of notice of the occurrence of an accident was considered to be a condition precedent to liability. However, I do not attach great importance to these cases, as the language of each policy must be considered in relation to the other terms of that policy and in its own factual matrix. I was also referred to various landlord and tenant cases: Yorkbrook Investments Ltd v Batten [1985] 2 EGLR 100*, CIN Properties Ltd v Barclays Bank plc [1986] l EGLR 59† and Northways Flats Management Co (Camden) Ltd v Wimpey Pension Trustees [1992] 2 EGLR 42‡. These were in a very different context and of little assistance in construing the agreements with which I am concerned; however in Yorkbrook, the Court of Appeal (at p104) cited with approval the following passage as denoting the proper approach of the courts in landlord and tenant cases: *Editor’s note: Also reported at (1985) 276 EG 545 †Editor’s note: Also reported at (1985) 277 EG 973 ‡Editor’s note: Also reported at [1992] 31 EG 65 The question whether liability in respect of one covenant in a lease is contingent or not upon the performance of another is to be decided, not upon technical words, nor upon the relevant position of the covenants in the case, but upon the intentions of the parties to be gathered from the whole instrument. I therefore first consider the natural and ordinary meaning of the words as used in the pool policy; in my view, it is to make compliance with the criteria a condition precedent to cover. As a matter of language that is the plain meaning; the use of the words ‘provided that’ and ‘shall’ make this quite clear. Its importance was emphasised in the text by the use of block capitals. Skipton contended that the other subclauses of the proviso were not conditions precedent to liability; I do not agree. Proviso (2) required compliance with the procedures set out in the broking deed to be observed; by its reference to procedures, it mirrored clause 18 of the broking deed. It meant that Skipton had to have in place a system to operate the procedures set out in appendix 7 to the broking deed; these were detailed procedures set out in a complex flow chart which required specific steps to be taken on specified events; for example, at various specified stages specific letters were to be sent. Proviso (2) did not mean that if there was a failure in an individual case to send a specific letter that there was a breach of the proviso, provided the procedures were in place. Proviso (3) required the management of the loan to remain with Skipton or KB, unless Economic agreed otherwise. The matters encompassed by provisos (2) and (3) were of considerable significance in ensuring that the loans were managed by those whom Economic were prepared to accept and that in the event of default, procedures would be followed that might help contain or even reduce the liability to which Economic would thereupon be exposed. But even if provisos (2) and (3) were not conditions precedent, proviso (1) was of such overriding importance to the scheme of the facility that I would still consider that it was. The fact that it was a condition precedent to liability would also be and was the obvious meaning that would be understood by a person having the common knowledge of the parties to these transactions; such a meaning alone would give effect to the commercial purpose of the policy. When a loan became insured under the pool policy, Economic were not to be given any information which would have enabled them to assess whether it was in compliance with the criteria; they were obliged to insure loans underwritten under the facility. They charged a block premium. The risk which they agreed to run for that premium was undertaken on the basis that the loans had been made in accordance with the criteria. They were not running the risk in respect of loans that were made in breach of the criteria. If the criteria were not complied with then, there was no cover. If there was a default on a loan that was not covered, then that was a matter for Skipton, unless there had been authorisation within the meaning of clause 30(A) (which I consider in more detail below). Skipton, however, relied (in support of their argument that a liberal construction should be given to this proviso) on the fact that clause 30(A) excepted Skipton from liability under the terms of that clause if KB had authorised the breaches of criteria; they contended that it was not envisaged that approval of a breach by KB would result in loss of insurance cover. I consider that this is incorrect. Clause 30(A) was concerned with Skipton’s liability in the event of a loan being made in breach of criteria; the fact that KB may have authorised the breach was a reason why there should be no liability to KB for the consequence of the breach; it is no reason why Economic should have to insure the loan unless they had agreed to a variation of the criteria in respect of that loan. The arrangements did not give Skipton and KB a licence to depart from the criteria and compel Economic in ignorance of that departure to insure the loan. The language of the agreements did not provide for this and the proposition put forward by Skipton that it did is contrary to commercial reality. On Skipton’s submission on the meaning of the proviso Economic’s remedy for a breach of the criteria would necessitate them having to prove not only a breach of the lending criteria but also to prove the loss that flowed from the breach. I have already set out my view as to why I consider that Economic were relying upon compliance with the criteria as a precondition to insuring any loan. That view is reinforced when that is contrasted with the consequences of the alternative submission. It is, in my opinion, clear that Economic were relying on compliance with the criteria as a precondition of cover rather than looking to them as a source of remedy in damages upon breach. That this is a material consideration appears from the judgment of the Supreme Court of Canada in Commercial Union Assurance Co v Margeson (1899) 29 SCR 601: The question whether stipulations are to be held to be dependent or independent is to be determined by the intention of the parties as it appears on the instrument, and by the application of common sense to each particular case; to which intention, when once discovered, all technical forms of expression are to give way. Stavers v Curling 3 Bing NC 355 Where, from a consideration of the whole instrument, it appears that the one party relied upon his remedy and not upon performance of the condition by the other, the performance is not a condition precedent; but where it appears that the intention most probably was to rely substantially upon the performance of the condition rather than upon a remedy in damages for its breach, then the reasonable view is that performance is a condition precedent. Roberts v Brett 18 CB 561. 168 Looking at the nature of the requirement here, and the close connection between its performance and the principal obligation of the company, it does not seem at all likely that the company was stipulating for an independent advantage, or intending to rely on what in any event must prove a barren remedy. The more reasonable construction is that performance was meant to be a condition of the obligation which in the body of the policy was expressly stated to be subject to it; not that these latter words would of themselves suffice to make of a stipulation a condition precedent, unless upon consideration of the whole contract such appears to be its effect. The loans, the subject-matter of the facility, were not large; a review of the loan files would demonstrate whether the criteria had been complied with. That was something that the parties would have envisaged. On the other hand, if the effect of the breach was to be examined, there would have to be a lengthy investigation into the question as to the causative effect of the breach. There would be no material readily available to do that. An inquiry would have had to be undertaken as to why the loan was in default and why the property had to be sold. No one would have contemplated that. It would rightly have been envisaged as time consuming and expensive; it would have been seen as usually involving an examination by an accountant or similarly qualified person into the business history of the venture before and after the loan had been made to determine what had caused the failure. It would usually be very difficult to reach a firm view. It was suggested by Skipton that this was not in fact so. They relied by way of illustration on one of the loans — that to Mr and Mrs Rowley who had obtained a loan to purchase the ‘Steamboat Inn’ on the banks of the Trent. Skipton said that the default and loss resulted from the fact that the solicitors had failed to check the right to use a car park which was necessary for access to the Steamboat Inn; when right to use the car park was curtailed, the level of trade had fallen below that which was anticipated. The circumstances of the loan are dealt with in section 2 of the appendix to this judgment. I have not investigated the question of causation on any loan, but even in relation to Mr and Mrs Rowley, I do not consider that there is evidence the difficulty over access was the real cause, let alone the only operative cause of the loss; it is equally likely that the default could have occurred anyway because Mr and Mrs Rowley assumed a level of debt that the business could not in any event sustain, even if the problem over access had not arisen. To reach a concluded view of what caused the default, a detailed factual inquiry would be necessary. Nor can it be simply said that the loan would not have been made to Mr and Mrs Rowley if the position as to access had been ascertained; for the reasons given in the appendix to this judgment, the loan would not have been made, if Skipton had complied with the criteria — whether they be the criteria appended to the broking deed or the KCLC. Economic also submitted that I should take into account the contemporaneous views of the parties (as for example set out in para 7 of Mr Hepworth’s memorandum of January 30 1989) and their views in cross-examination (as for example in Mr Smith’s evidence) as to what they understood about the nature of obligation to comply with the criteria. However none of this was admissible in aid of construction and I have not taken it into account. (c) Obligations under the broking deed in relation to the criteria I have set out the terms of the broking deed which required Skipton to procure insurance. It is quite clear that the obtaining of insurance by Skipton was essential to the operation of the facility; for the reasons I have given, compliance with the criteria was a condition of valid insurance in respect of any loan. It is against this background that the clauses of the broking deed relating to compliance with the criteria must be examined. The terms of the broking deed emphasised the importance of compliance with the criteria. Clause 2 made clear it was Skipton’s responsibility to introduce borrowers who satisfied the criteria. The provision of clauses 6 and 7 required Skipton to ensure that the criteria had been complied with at two stages: (1) after receipt of the application form; and (2) after the inquiries required had been made. Skipton contended that this was absurd, as they could not see the point of examining the application twice. Quite apart from the fact that this is what the language of the deed required, it makes good banking sense. First, the application was to be reviewed to see if the information contained in it complied on its face with the criteria; if it did not, then it would be taken no further. Once the checks were made and the necessary verifications obtained, it was to be checked again for compliance. These provisions merely emphasised how critical it was to the operation of the facility that there was compliance with the criteria and a double check was made to try and ensure this. (d) Standard of compliance with the criteria Skipton contended that if any breach of the criteria enabled Economic to avoid payment under the pool policy, the criteria must be construed in a liberal manner and with ‘common sense’. Economic said that the criteria should be interpreted as qualitative criteria meeting an objective standard and the words given their ordinary meaning. KB accepted that if there was any ambiguity in the interpretation of the criteria, then as between Skipton and KB, that ambiguity should be resolved in favour of Skipton, but contended that as between KB and Economic, it should be resolved against Economic. In my judgment, the criteria have to be given their ordinary meaning and interpreted, where necessary, objectively by the standard of a prudent lender in the small commercial loans market in 1989–1990. I do not consider it makes any difference whether I take the prudent lender to be a bank or a building society for these purposes. I accept the evidence of Mr Malin, a banker of considerable experience in relation to property lending who was called as an expert by KB, that at the material time there was no relevant distinction between the standards applied by lending institutions; if anything building societies were considered more conservative. This standard of the prudent lender or banker is of materiality only in considering terms in the criteria such as ‘satisfactory audited accounts’ or ‘businesses must be well established and in a suitable area’; whether accounts are satisfactory or whether a business is well established has to be determined by me objectively on the evidence applying the standards of the prudent lender in that market. Implicit in this is that the prudent lender will consider such questions with due diligence. Economic pleaded that implicit in the criteria was a requirement that the criteria be applied with due diligence or alternatively there was an implied term to that effect. In their closing submissions, Economic made it clear that they were merely contending that where a judgment was required in the application of the criteria, that judgment had to be made after the exercise of due diligence. This does not, in my view, add anything to the application of the standard of the prudent lender where the criteria call for judgment such as in the requirement for ‘satisfactory accounts’. However a loan only had to comply with the criteria; it is important to emphasise that it did not have to satisfy a general requirement that it was one a prudent lender would make. If it complied with the criteria, it could be made. The standard of a prudent lender only applied where on the express terms of the criteria, a judgment was required such as in the case of ‘satisfactory accounts’ and only to determining by that standard whether the requirement had been satisfied. However, in assessing a loan and in particular questions where judgment was an element, I accept Skipton’s submission that any prudent lender would have regard to his personal knowledge of the borrower and his assessment of the borrower in interview. I have taken that into account. I also accept Skipton’s submission that I should take into account the fact that the security of the mortgage was the key element in the loans made and that Skipton were lending on more conservative loan to value ratios in comparison with others in the market who were lending up to 80% or more. (e) Were there breaches of the criteria? Mr Challinor, another banker of considerable experience who had held senior positions with the Midland Bank plc at regional level, gave expert evidence on behalf of Economic on the question of whether there were breaches of the criteria; he was not cross-examined by Skipton. Although Skipton served an expert report of Mr Park, another experienced banker who had also worked for building societies, he was 169 not called and it was common ground that I should have no regard to his report. The expert evidence of Mr Challinor was in general of appreciable assistance in helping me reach my conclusions. In considering the issue of whether there were breaches of the criteria, I have had to have regard to the fact that the witnesses unsurprisingly did not have a clear recollection of transactions entered into seven to eight years before they gave their evidence. Much of their evidence in relation to the individual loans was inevitably based on reconstruction from the documents that are available; the loans were largely routine transactions and it was very difficult for witnesses to recall much by way of detail save by reference to the documents. I have however taken into account the evidence of Skipton’s witnesses that the files before me are to an extent incomplete and the witnesses had forgotten information made known to them. Evidence was given in relation to this by Miss Tracey Walker, an employee junior to Mr Hey in Skipton’s commercial lending department. For reasons given in the appendix in relation to Miss Tracey Walker’s evidence about the loan to Mr Yates and Mr Green, I have treated with caution all her evidence. I therefore treat with caution the evidence that she gave that all notes, yellow stickers and scraps of paper were removed and destroyed prior to the files being microfiched as an explanation why some important information was not now available. No doubt some information that was obtained is not now available for that reason, but from my own examination and consideration of the files, it does not generally appear that much of significance is missing. I have also taken into account that Mr Hey or Mr Rhodes in most cases met the borrower and made an assessment of him. Assessing the borrower is always an essential part of the decision as to whether to lend or not, but in the circumstances of this case it was not a substitution for ensuring that the criteria were complied with, though it would be, for the reasons given, an important element where judgment was involved. I have also taken into account the fact that Mr Hey was not well when he gave his oral evidence and there had been a significant deterioration in his health between the time he made his first statement in September 1996 and when he made his further statement in January 1997. I have attached greater weight in those circumstances to his 1996 statement than to his oral evidence and his subsequent statement. It was the evidence of Mr Hey and of Mr Rhodes that neither proceeded with a loan unless it appeared to them to comply with the criteria from which they were working; however no one made a sufficiently detailed formal check within Skipton before the offer was sent out that the loan complied with the criteria. They utilised a commercial loan recommendation sheet which did contain headings for some of the information required by the criteria and an application processing check list; the application would go through various stages, but no final check was made. Furthermore, there was generally no record of a review of the information to ensure the accounting and other financial information complied with the requirements of para B of the criteria — the status of the borrower. Economic attacked Mr Hey’s style of lending. I am not concerned with that because this was not a case about prudent lending, but compliance with the criteria. Mr Hey and Mr Rhodes did do their honest best, but the issue before me was whether the criteria were complied with on the loans which they underwrote. That issue is considered in detail in the appendix, but it would I think be right to observe that it would be unfair that the main blame should rest on those directly involved in the lending — Mr Hey, Mr Rhodes and Mr Smith. In so far as it is possible to make a general observation, they did not, it seems to me, have the benefit of being provided by those more senior to them with a proper system or adequate supervision to ensure that they were operating the facility in the manner required by the broking deed, the pool policy and, where material, the master policy. As set out in the appendix, I have concluded there were breaches of the criteria in respect of each of the sample loans. The issues that arise are specific to the particular loan, but there is one general point that arises in relation to several loans with which it is convenient to deal. (f) Adding the cost of the premiums and surveys to the loan. Where the amount of the moneys advanced to the borrower was in excess of 60% of the valuation of the property, Skipton made a declaration in almost every case under the master policy and debited the premium payable under the master policy to the amount of the loan account secured by the mortgaged property. Their standard practice, as appeared from the evidence, was to give the borrower details of the premium payable under the master policy in the offer letter and automatically to debit the premium to the borrower’s account at the time of the advance. However, Skipton gave the borrower until the end of the year to pay the amount of the premium before charging interest on the premium. Although Skipton therefore allowed the borrower up to a year’s grace on interest on the amount of the premiums, it is clear that the premiums were automatically debited to the account. In the case of several loans, the advance to the borrower was 70% of the valuation and the effect of the debiting of the premium under the master cover was to exceed that figure. Economic contended that this was in breach of the term of the criteria appended to the broking deed under para D that specified that loans must not exceed 70% of valuation; that paragraph also stipulated that loans included fees, premiums, etc debited to the borrower’s account. The KCLC provided that the maximum lending was to be 70% of the valuation; those criteria did not contain the provision that loans included fees and premium. It was not disputed that it was common practice in the later 1980s among lenders to debit the premiums and fees to the borrower’s account. Skipton contended that this practice should be taken into account. However the terms of the criteria appended to the broking deed were clear; for the purposes of the loan to value ratio, the loans were to include fees and premiums debited to the borrower’s account. Thus, for the purposes of the loan to value ratio, the premiums and fees debited to the borrower’s account had to be added to the amount advanced to the borrower for the purposes of calculating the loan to value ratio. There was an important consideration that supported this clear meaning. Under the terms of the pool policy, the ‘outstanding debt and costs’ which were to be taken into account in arriving at the difference with the sale proceeds were the: principal, interest, and other sums due to the insured from the relevant mortgagor at the date of the receipt of the proceeds of sale As the fees and premiums added to the borrower’s account were to be taken into account in calculating what was recoverable from Economic (and have been included in the calculations), then, if it were permissible to ignore them when calculating the loan to value ratio, the exposure of Economic was increased beyond that which it had agreed. In reaching this conclusion I have had no regard to the antecedent negotiations of the parties which were relied on by Economic. Although, in my judgment, the meaning of the criteria is clear, Skipton relied on the evidence of Mr Hammond Giles that, if Skipton had exceeded the loan to value ratio by the small amount of the mortgage indemnity insurance premium, then Economic would not treat this as a breach of the criteria, but consider that there was cover only up to the loan to value ratio and not the excess. Although that was his opinion, it is not relevant to the question of construction I have to consider and there was no basis for an argument based on estoppel. Skipton also contended that if, as I have concluded, the loan to value ratio was not the 80% set out in the criteria appended to the broking deed but by convention between the parties only 70%, then the convention between the parties would also mean that the loan to value ratio was to be calculated without reference to premiums. There is no evidence before me that establishes that further convention and it did not follow from the convention by which the loan to value ratio of 80% set out in the appendix to the broking deed was treated as 70%. (g) Claims under the broking deed for breaches of the criteria I have concluded, for the reasons set out in the appendix to this judgment, that Economic are entitled to decline to pay claims on the grounds that there have been breaches of the criteria. It is therefore 170 necessary to consider the remedies which the plaintiffs claim were available under the terms of the broking deed against Skipton in that eventuality. Skipton contended that the terms of the broking deed imposed no liability on them in the circumstances; they also contended that, as the plaintiffs had no title to sue, they were in any event under no liability to them. It is first convenient to consider whether Skipton were under any liability under the terms of the broking deed, before considering as issue (6) the separate question of whether the plaintiffs could bring a claim under the terms of the broking deed. The plaintiffs claimed in respect of the breach of the criteria under four clauses of the broking deed: • clause 30(A) • clause 20(1) • clause 23(2)(a) • clause 23(2)(c) They also contended that there was an implied term of the broking deed and claimed for breach of that. They made no claim under clause 7(4)(a), but KB said that Skipton were in breach of that clause and breach of that provision was therefore relevant to the plaintiffs’ claims over against KB. In the way in which the plaintiffs’ claims over against KB were refined during the trial (see issue 8), it did not seem to me that the question of whether Skipton were in breach of clause 7(4)(a) was any longer relevant as a separate issue, though the clause was relevant to the construction of clause 20(1). I will consider each of the other clauses in turn. (h) Primary claims against Skipton: clause 30(A) The plaintiffs’ primary claim was made against Skipton under the terms of clause 30(A). That clause provided: Breach of Criteria (A)   If a loan is made which does not comply with the Criteria then (unless the breach of the Criteria was specifically authorised by [KB]) [Skipton] undertakes by way of liquidated damages for the breach of contract to pay to [KB] the amount by which the Proceeds fall short of the Outstanding Debt and Costs. Subclause (B) provided the mechanism by which the amount payable under subclause (A) was to be calculated and paralleled the calculation of the indemnity payable under terms of the pool policy. Subclause (C) gave Skipton the option to buy from KB a mortgage in respect of which the loan did not comply with the criteria, in so far as that was permitted by the Building Societies Act. In my view, the meaning of clause 30(A) was clear in the light of the fundamental importance of obtaining pool insurance in the overall scheme under the facility; it provided a clear obligation on Skipton to meet the shortfall on any loan if there had been a breach of criteria. The clause operated independently of fault. It applied to all loans, including those over £300,000. That all was very clear on the natural and ordinary meaning of the language of the clause. The only circumstance where Skipton was not liable was where KB had specifically authorised the breach of the criteria. Three specific points arose on the clause: i Application to loans over £300,000 Skipton contended first that the clause could have no sensible application to loans over £300,000 as such loans had to be specifically approved; I do not agree. The language of the clause did not have so limited a scope; it applied to all loans. If it had been intended to limit the clause in the manner contended by Skipton, it would have been easy so to provide. Thus, on the plain language of the clause, it clearly applied to loans over £300,000. Furthermore, there was no commercial reason to give the clause a meaning other than that which it clearly had. It was envisaged that Skipton would gather the information and supply it to KB; it was obviously possible that Skipton might not pass on the information which would have disclosed a breach of the criteria on a loan KB approved. There would be nothing uncommercial in providing for Skipton to bear the loss. However the more important consideration was that KB were granting a facility to Skipton to lend their money on terms that exposed KB to minimal risk; viewed in this light, there was no reason not to give effect to clear language. Skipton contended that it did not have a delegated underwriting mandate for such loans over £300,000; however Skipton had to seek out all the information, check on compliance with the criteria and it was only if the loan met the criteria that it could be submitted to KB; when the loan was submitted, Skipton were obliged to certify that it had verified all the information and compliance with the criteria and that the loan conformed to the insurance policy. Even though approval had to be given by KB to loans over £300,000, Skipton’s obligations as regards the criteria were extensive. There was no commercial reason for limiting the scope of clause 30(A), even though the ultimate decision to approve the loan was that of KB. After approval, Skipton were not even obliged to make the loan; that decision was theirs. The clause provided for only one exception to Skipton’s liability; it was only in those cases where KB approved a loan in circumstances that amounted to a specific authorisation of a breach of criteria that Skipton had no liability under this clause in respect of a loan that did not comply with the criteria. There was nothing uncommercial in the exception to Skipton’s liability being that limited in scope. ii Was it a penalty clause? Skipton next contended that clause 30 was a penalty clause on the basis that the amount of the payment was not a genuine pre-estimate of the loss within the principles set out in the speech of Lord Dunedin in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79. I do not accept that contention. The clause was not objectionable under any of the considerations set out in the speech of Lord Dunedin. • It was clear that the purpose of the clause was to provide an indemnity if the pool policy did not pay because there had been a breach of the criteria. Because the terms of clause 30(B) provided a measure of calculation of the amount due under clause 30(A) in a way that parallelled the terms under which the indemnity under the pool policy was to be calculated, it was intended to compensate KB in the same amount as KB would have been indemnified if the policy had paid. • Skipton pointed to certain circumstances in which apparently the clause might provide a payment unrelated to the loss suffered. In considering such circumstances, the approach to be followed is that set out in the opinion of the Privy Council in Philips Hong Kong Ltd v Attorney-General of Hong Kong (1993) 9 Const LJ 202 at p209:         Except possibly in the case of situations where one of the parties to the contract is able to dominate the other as to the choice of the terms of a contract, it will normally be insufficient to establish that a provision is objectionably penal to identify situations where the application of the provision could result in a larger sum being recovered by the injured party than his actual loss. Even in such situations, so long as the sum payable in the event of non-compliance with the contract is not extravagant, having regard to the range of losses that could reasonably be anticipated it would have to cover at the time the contract was made, it can still be a genuine pre-estimate of the loss that would be suffered and so a perfectly valid liquidated damage provision. The use in argument of unlikely illustrations should therefore not assist a party to defeat a provision as to liquidated damages. As the Law Commission stated in Working Paper No. 61 (p. 30):         ‘The fact that in certain circumstances a party to a contract might derive a benefit in excess of his loss does not … outweigh the very definite practical advantages of the present rule upholding a genuine estimate, formed at the time the contract was made, of the probable loss’.         — see also p212 of the opinion.         As one of the circumstances where the clause provided for a payment unrelated to the loss suffered, Skipton pointed to the availability of claim under clause 30(A) where no indemnity would have been payable under the pool policy because the aggregate first loss provision had not been exhausted. In my view, this circumstance would have fallen within the kind of circumstances to which the Privy Council referred and would not have operated to make clause 30(A) a penalty; but I am not persuaded that this was in any event such a circumstance as a loss would have been suffered by KB and should have been recoverable from Skipton in any event. KB would have the right to make such a claim under clause 30(A) or possibly from the buffer account under clause 11(7)(d)(ii), though it would be unlikely that payment would be due on the terms of that clause, as payment from the buffer account was dependent on acceptance of the claim by Economic. • Skipton also contended that if KB or the plaintiffs obtained an indemnity under clause 30(A) they would receive the amount of the outstanding amounts due without any credit being given for the value of KB’s continuing right to claim against the borrower or the guarantor or against a negligent professional for any loss he had caused. In the kind of loan which was the subject of this facility, the parties are unlikely to have contemplated that there were rights of any value against the borrower; a borrower in a failed business venture of the type covered by this facility was not usually likely to be worth pursuing, though there might be rights of some value against the valuer or other professional. I will assume therefore the rights had some value and the parties might have contemplated this. However, if Skipton paid under clause 30(A), it would, in my opinion, be entitled to the benefit of the rights against the borrower or the guarantor or valuer or other professional by reason of an implied term. They might also have been entitled to such rights by subrogation. Such a term would be implied not for the purpose of preventing clause 30(A) from being a penalty, but as matter of necessity to give effect to the obvious, but unexpressed, intention of the parties as to what was to happen in the event Skipton made a payment under the clause.         The plaintiffs contended that subrogation was recognised to be a remedy available in a wide variety of circumstances: see the speech of Lord Diplock in Orakpo v Manson Investments Ltd [1978] AC 95, at p104, Goff and Jones: The Law of Restitution 4th ed at pp591–594 and p600 and the more recent decision in Boscawen v Bajwa [1996] 1 WLR 328 at pp338–339. As clause 30(A) effectively put Skipton in the place of the insurers under the pool policy, Skipton would, in my view, be subrogated in the same way as the insurers would have been subrogated to KB’s or the plaintiffs’ rights against the borrowers, their guarantors or others. Subrogation is undoubtedly a flexible remedy and is applicable to arrangements which provide for an indemnity and not merely contracts of insurance; as Skipton would in effect be in the position of a party providing an indemnity, I see no reason why the remedy of subrogation should not also be extended to be available to them. If it were not available, then in my view, the implied term would in any event achieve the same result. • It is, in my view, immaterial that the breach of the criteria might not have been causative of the diminution in the value of the security or might have been unrelated to the failure of the borrower to pay; the clause related to the pool policy under which the payment of a claim was dependent upon compliance with the criteria. • The opinion of the Privy Council in Philips drew attention to views expressed in other jurisdictions as to the relative importance of the conflicting principles of upholding bargains freely entered and protecting against oppression. In this jurisdiction, this has been expressed in the view that a court should not be astute to find that a clause is a penalty clause or adopt an approach that would defeat the useful purpose of such clauses. I see no commercial or other reason in this case to view this as a penalty clause; it had an important commercial purpose in the commercial bargain entered into by two substantial financial institutions. • It is apparent from the genesis of clause 30(A) in the negotiations (which it is permissable to examine: Clydebank Engineering & Shipbuilding Co v Don Jose Ramos [1905] AC 6 at p13), that the clause was an important part in the bargain; it was not the holding out of something in terrorem. The plaintiffs suggested that the principles applicable to penalty clauses did not apply as the clause operated independently of any breach by Skipton of the broking deed. I do not consider that this is correct; the clause itself speaks of the payment as being a payment of liquidated damages for breach of contract; Skipton were under an obligation to see the criteria were met and insurance obtained; the amounts payable under this clause were for breach of those obligations. iii What had to be specifically authorised? Skipton finally contended that they were in any event not bound to provide an indemnity under the clause, if the loan was specifically approved or authorised by KB after it had been referred under the provision of clause 7(3) and para E of the criteria appended to the broking deed or referred to them on an ad hoc basis. It was not, they submitted, necessary for them to show that the breach of criteria had been authorised by KB; if KB specifically approved the loan, then KB must be taken to have authorised the breach of any criteria which in fact existed at that time or at any rate was apparent from the documents sent to KB. They maintained that KB could not say that they had approved the loan on the basis that it complied with the criteria and subsequently say that, if a breach of the criteria was proved, then they had not specifically approved that breach. However, in my view, the fact that KB approved the loan did not mean that they also approved a breach for the purposes of clause 30(A), assuming that it existed at the time of the approval or was apparent from the papers submitted to KB; the language of clause 30(A) was very clear. It required specific authorisation of the breach of the criteria. Clause 7(3), on the other hand, referred to KB’s specific approval of the loan. If approval of the loan had been intended to be sufficient for the purposes of clause 30(A), the agreement would have used that language and not the term ‘unless the breach of the criteria was specifically authorised’. By using that language, the draftsmen was contrasting specific approval of a breach with more general approval; that is a matter of ordinary language, but if authority is needed it can be found in the speech of Lord Hatherley in Chaloner v Bolckow (1878) 3 App Cas 933 at p938. But my conclusion is not solely based on language. As I have said, the obtaining of insurance was central to the operation of the facility and compliance with the criteria was essential if insurance cover was to be available and a claim paid. It was Skipton’s responsibility under clauses 6 and 7 of the broking deed to see at two stages that the criteria were satisfied before submitting the loan to KB for approval. It was clearly intended in these circumstances that if there was a breach of the criteria, that had specifically to be approved. Furthermore, this conclusion accords with general practice in lending; I accept the evidence of Mr Malin that it would be the usual practice for any departure from criteria to be specifically identified by the person submitting the loan for approval. The sound commercial sense of this is obvious. There are two further points I should briefly mention. Had KB given approval to a breach of the criteria, the question would then have arisen as to whether it was implicit in that approval that Skipton had to obtain Economic’s consent so that the loan was covered under the policy. As no such approval was given in respect of any of the loans that I have considered, that issue does not arise and is not capable of determination without reference to the specific circumstances in which it might arise. The second matter to mention is that I have not had regard in construing this provision to what KB actually did during the course of the operation of the facility. (j) Second claim against Skipton: clause 20(1) The next term relied upon by the plaintiffs, though in the alternative to their primary claim under clause 30(A), was clause 20(1). This was their first alternative to their primary claim under clause 30(A), as they contended that the obligation under this clause was an absolute one. Under the terms of clause 20(1), Skipton was obliged to procure that each loan was covered by the pool policy. KB and the plaintiffs claimed that this was an absolute obligation to obtain valid and 171 enforceable insurance; if Skipton failed to perform the obligation, they were liable in damages. Skipton maintained that the clause was part of the series of clauses dealing with the administration of the facility and therefore a clause that imposed on them an administrative duty to declare the loan under the insurance and pay the premium. The fact that the heading of this part of the broking deed is ‘Administration’ is not material, clause 47 provides that the headings are for convenience and do not affect construction. Nor, in my view, is assistance to be derived from subclauses 20(2) and 20(3); these covered Skipton’s obligation to make claims and, in administering the loans, to comply with the terms of the policy and to do nothing that would cause the policy to be avoided. In my judgment, these clauses do not point to the entire clause being concerned with administration; subclauses (2) and (3) imposed important obligations; in any event even if those two subclauses had one effect, that fact would not detract from the clear meaning of another subclause of the same clause. I do not accept that clause 20(1) had so limited a scope as Skipton claimed; all loans were covered by the pool policy without a declaration being necessary; declarations were only necessary for the master policy. Any loan was insured as a result of the payment of the lump sum premium, as long as the loan complied with the criteria. Given the fact that pool insurance was central to the facility, the obligation to procure that the loans were covered by insurance must, in my view, have been meant to impose some obligation that needed to be performed in relation to the insurance. As no declarations were necessary and the premium had been paid in a lump sum, the principal matter to which Skipton’s attention was necessary was compliance with the criteria. I see no reason to read the clause other than in the sense that it naturally bears and not to hold that it imposed on Skipton the obligation to procure that there was in fact cover for each loan by ensuring that the criteria were complied with. This is entirely consistent with the other terms of the broking deed and in particular clause 7(4); although no breach of this clause is alleged by the plaintiffs, the clause made it clear, in my view, that there was no authority to make a loan unless it was covered by the pool emphasising the need to ensure compliance with the criteria. Skipton contended that on this construction, liability might be imposed on them where there was no other breach or fault on their part. However, there is nothing uncommercial about this for the reasons that I have given as to the nature of the facility and the central importance of ensuring that the loans were in fact covered by the pool insurance. Furthermore, this obligation applied in respect of the loans over £300,000 that KB approved; nothing they said or did in relation to their approval of the loans discharged Skipton from compliance with their obligations in respect of the insurance under clauses 7(4) and 20(1). Approval of a loan by KB was only approval; Skipton retained the discretion whether to make that loan; approval was not, for the reasons I have given, approval of any breach of the criteria. This is what the broking deed required as a matter of language and in the context of the facility accorded with its commercial purpose. As I have already mentioned, if KB had specifically approved any breach of the criteria, then a question would have arisen as between Skipton and KB about obtaining the approval of Economic. That never happened and it is not possible, as I have said, to determine the question save by reference to the specific circumstances. As regards the obligation imposed by this clause, it is my preliminary view that it would have remained Skipton’s responsibility to see to it that the loan was covered by insurance, but I would have been surprised if in such circumstances there had not been some ad hoc arrangement for dealing with the position that both parties appreciated had to be dealt with, as the consent of Economic would have had to have been obtained. (k) Third claim against Skipton: clause 23(2)(a) The plaintiffs next rely, again in the alternative to their claim under clause 30(A) and clause 20(1), on the terms of clause 23(2)(a); this was very much a second alternative in the way the case was put. This was because it was a claim that depended not on an absolute obligation, but one where the level of obligation was a contractual duty of due care. The clause provided: 23:   Warranties and Undertakings by [Skipton] (2)   [Skipton] undertakes that:– (a)    it will perform its functions and obligations under this Deed with the same care and skill as if it were performing the functions on its own behalf and will exercise the same care and skill in endeavouring to procure that all Loans are repaid in a timely manner with interest and that all of the terms of the Loans (and Security and other documents related thereto) are observed and performed by the parties liable under them and in providing, equipping and maintaining adequate office space and staff properly to perform its obligations under this Deed; The plaintiffs, as I have said, accepted that the level of duty imposed on Skipton under this clause was a contractual duty of care. However, the fact that that level of duty was imposed under this clause did not derogate from the stricter duties imposed under the other clauses in relation to compliance with the criteria. The plaintiffs contended, if they needed to rely on this clause, that because the pool insurance was so important to the facility, Skipton owed a high duty of care to see that the lending complied with the criteria and that, if they were in any doubt about compliance, the loan should not have been made. That was a standard that they should have observed in their own affairs where mortgage indemnity insurance used and the same should apply to this facility. I would have agreed with that submission, had I not held that the duties were stricter under other clauses, because of the central importance of the pool policy and compliance with the criteria. I need not consider it in any greater detail in view of my conclusions on the other clauses. Had this clause been relevant, the reasoning set out would have been a fortiori. The plaintiffs made it clear that they were not alleging that the lending was negligent; that is not an issue that arises at all under any issue at the trial. The plaintiffs’ contention went to the degree of care that was necessary to comply with the criteria so that the loans were covered by the insurance. In the appendix to the judgment, I consider the issues in relation to the criteria. It is self evident that in the case of almost all of the breaches that were relied on by Economic and where I have found that there were breaches, such breaches could have been avoided by the use of care. For example: • The clear breach of the criteria in relation to exceeding the loan to value ratio by adding the premiums under the master policy could have been avoided by the simple exercise of reducing the loan. It was no excuse that others in the industry added the premiums; the criteria specifically dealt with the point. • If there was any doubt as to whether the criteria in para B relating to the status of the borrower were met, the loan need not have been made or the approval of KB and Economic could have been sought. In view of the conclusions to which I have come, it is not, in my view, necessary to burden this long judgment and its appendix with further detailed findings that are in any event self evident from the findings I have made in relation to this head of claim which only arises as the plaintiffs’ third alternative. (l) Other claims against Skipton (i) Implied term The plaintiffs contended that it was an implied term of the broking deed that Skipton would take due care so as to avoid adversely affecting the indemnity provided by the pool policy; that duty was owed in law to KB and to KB’s successors to the pool policy. The plaintiffs accept that if the terms of clauses 20(1) and 23(2)(a) were to be construed as I have held, then no term need be implied. The question of implying a term does not therefore arise. Had I come to a differing view about clause 20(1) or that the obligation under clause 23(2)(a) was not sufficiently wide, I would have found that a term was to be implied to the effect that Skipton 172 would take due care so as to avoid adversely affecting the indemnity provided by the pool policy. Such a term would have satisfied the condition of necessity required for its implication: see Liverpool City Council v Irwin [1977] AC 239; Society of Lloyd’s v Clementson [1995] Lloyd’s Re LR 307 at p330. For the reasons that I have already given, compliance with the criteria was the precondition of pool insurance for any loan; pool insurance was fundamental to the operation of the scheme under the facility and, in my judgment, Skipton were bound therefore to take due care so as to avoid adversely affecting the indemnity provided by the pool policy. (ii) Indemnity under clause 23(2)(c) Finally, the plaintiffs relied on clause 23(2)(c) for the very limited purpose of providing them with an indemnity in the event any claim was made against them; the claim for such an indemnity arose in connection with Economic’s claim to be repaid the sums that they had paid in respect of certain claims (issue 5). Clause 23(2)(c ) provides: [Skipton] will indemnify [KB] on a full and unqualified basis against all costs, claims, demands and expenses whatsoever made against or incurred by [KB] which arise out of or in consequence of the negligent or wrongful act direction performance or non-performance of its obligations under this Deed by [Skipton] or any of its officers employees or agents. This indemnity shall not apply to costs claims demands and expenses incurred either as a result of [Skipton] acting in accordance with specific additional instructions given by [KB] or as a result of any actions or omissions of valuers or solicitors properly instructed on behalf of [KB]; I have decided that Economic are not entitled to maintain their counterclaim and so it is not necessary to consider the scope of this clause, though I deal with one further aspect — the negligence of valuers and solicitors — issue 9. KB did refer to this clause in relation to their defence to a claim over by the plaintiffs, but given the more limited scope of the way that claim was finally made, the issues arising on clause 23(2)(c) in relation to ‘specific additional instructions given by KB’ did not, in my view, arise. Issue (4) Scope and requirements of the master policy and the declarations and insurances under the master policy No claim is advanced by the plaintiffs under the master policy or the declarations and insurances made under it. However issues arose in relation to it because Economic contended that they were not bound to pay under the pool policy because there had been a breach of a clause in para D of the criteria appended to the broking deed. That clause of para D of the criteria appended to the broking deed provided that all loans over 60% of the valuation required mortgage guarantee insurance by an insurance company approved by the bank covering the excess. It was Economic’s contention that, although Skipton made timely declarations under the master policy in respect of almost all the loans over 60%, the loans were never in fact covered by the master policy because the loans did not comply with the separate criteria set out in the master policy. Two main issues arose. • Did the pool policy by its terms cover loans over 60% so that no further insurance was necessary under para D of the criteria appended to the broking deed? • If further insurance was necessary under the master policy, did Skipton have to comply with the criteria of the master policy to comply with the criteria appended to the broking deed? The second issue raised a number of subissues. (a) Did the pool policy by its terms cover loans over 60% so that no further insurance was necessary? Skipton contended that on the wording of the pool policy, the indemnity provided was not limited to the part of the loan that had been 60% or less of the valuation; indeed there is nothing in the express terms of the pool policy to limit recovery in such a way. Thus, Skipton contended, the pool policy provided the indemnity required by the criteria. However the pool policy has to be read in the context of the entire arrangements of which it formed part; the proviso expressly referred to the criteria appended to the broking deed. It is clear from the criteria appended to the broking deed that the pool policy was understood as being limited to that part of the loan that was up to 60% of the valuation. This is the only way that para D (which required loans over 60% valuation to be covered for the excess by MIG insurance by an insurance company approved by KB) can be read with G of the criteria (which required the loan to be covered by the pool policy); if the pool policy, which was also an appendix to the broking deed, covered the loan up to 70% of the valuation, then the requirement in para D was meaningless. The pool policy required compliance with the criteria and therefore a different policy to cover the loan which was in excess of 60% of the valuation. That can only have been a requirement on the basis that the pool policy was limited to recovery of 60%. Thus on the construction of the pool policy, it covered the loss up to 60% of the valuation. Economic also relied on the following: • Quotation for the policy. From this it was clear that Skipton had asked for cover up to 60% of the valuation under the pool policy and the premium had been quoted on that basis. • Premium paid. The premium had been invoiced on the basis of the quotation (see the letter of July 26 1989 which confirmed that the pool insurance had been arranged up to 60% valuation). The premium was paid on this basis on August 8 1989. • Conduct of Skipton in utilising the master policy. Thereafter Skipton charged applicants for loans a premium for insurance for the amount of the loan above 60% and made declarations to Economic. • Agreement on the terms of the master policy. Skipton and Economic agreed on the terms of the master policy; the wording as agreed was sent to Economic for Economic to sign and return. Thereafter the policy was issued to Skipton. Economic contended that despite the fact that they had made no plea of rectification, they could rely on these matters in aid of construction of the pool policy issued on July 6 1989; they relied upon the passage in the speech of Lord Hoffmann in Investors Compensation Scheme (supra). These matters would, it appears to me, be unanswerable points in relation to a claim for rectification, but that claim has not been made. I accept that it is clear beyond any argument on the evidence that KB, Skipton and Economic all shared a common understanding that the pool policy was limited to 60% of the value; indeed Skipton set out a provision in the KCLC that separate mortgage guarantee insurance was required for loans in excess of 60%. There must, however, be language in the agreement which gives effect to that understanding; an understanding is not enough and I reject Economic’s argument that the passage in the speech of Lord Hoffmann in Investors Compensation Scheme permits such a clear departure from established principles. However, in the circumstances of this case, there is language in the agreement which gave effect to that understanding. Thus, in my judgment, Skipton were under an obligation to obtain cover under mortgage indemnity insurance for all loans over 60% of the valuation for the excess over 60%. This they in fact did for most of such loans by making declarations under the master policy. (b) Operation of the master policy The master policy was not an easy document to follow as it contained both the terms of the master policy and the terms of the individual policies that were to be issued consequent upon declarations made under the master policy. The first page provided as follows: Commercial mortgage indemnity policy no mpe 184551 [Economic] hereby agrees to irrevocably indemnify [KB] against the individual Net Ascertained Loss(es), as defined in Schedule 1 condition C2 hereto attached, provided that all the terms, conditions, warranties and exclusions of the individual policies issued as a consequence of acceptances made according to the terms, conditions, warranties and exclusions of this Commercial Mortgage Indemnity Master Policy have been fully complied with. 173 [Economic] subject to Conditions A(1) (2) (3) and (4) herein agrees to accept all individual declarations made by the Insured subject to the terms, conditions, warranties and exclusions of this Commercial Mortgage Indemnity Master Policy … The page was then signed by Economic. The next section was entitled: Schedule 1 Conditions warranties exclusions and definitions applicable to commercial mortgage indemnity master policy This section then sets out first a series of conditions: Conditions (A) Obligations of the Insured (1) Declarations The Insured will provide the Insurer with a written declaration of the details of each individual Mortgage. The Insurer will be under no obligation to insure an individual declaration which does not comply with the lending criteria or other limits as stated herein attached. In the event that a declaration does not comply with such limits and/or the Insurer is not agreeable to insuring the accepted declaration the Insured will be notified to such effect within two working days of the Insurer receiving the declaration. (2) Insurers Acceptance The issuance of this Commercial Mortgage Indemnity Master Policy does not imply the Insurers acceptance, such acceptance will not be unreasonably withheld provided all the terms conditions and exclusions of this Commercial Mortgage Indemnity Master Policy are complied with and that none of its warranties are breached, of all individual declarations made according to the terms of this Commercial Mortgage Indemnity Master Policy. (4) Individual Declarations/Policies All declarations accepted under the terms, conditions, warranties and exclusions of this Commercial Mortgage Indemnity Master Policy will be individually insured by the insurer according to the terms, conditions, warranties and exclusions as described in Appendix 1 (Individual Commercial Mortgage Indemnity Policy) hereto attached. (5) Late Declarations The Insured may submit written details of individual mortgages subsequent to the completion of the Mortgage Agreement. The Insurer will treat all such late declarations as if they were received in the normal manner prior to the formal commitment of the Insured to the granting of the relevant individual Mortgage. There then followed conditions that specified further criteria with which the insured was to comply when making loans; I have set out the relevant criteria below. The master policy then specified other conditions to which it is not necessary to refer. Then followed the warranties and exclusions: Warranties … (3) Loan Criteria Warranted that the Insured has made all mortgage advances, declared and individually insured under the terms and conditions of this Commercial Mortgage Indemnity Master Policy, in accordance with the Lending Criteria as stated herein. Exclusions … (4) Breach of warranty Any loss resulting directly or indirectly from any breach of warranty, of this Commercial Mortgage Indemnity Master Policy … whether express or implied The next part of the policy document was appendix 1. This set out in the form of the individual commercial mortgage indemnity policy that was to be issued under condition A(4) of the master policy. The opening words of the policy set out in appendix 1 were: [Economic] in consideration of the payment of the premium and subject to the terms, conditions, warranties and exclusions of this Individual Commercial Indemnity Policy, as attached, hereby irrevocably indemnifies [KB] against the Net Ascertained Loss as herein defined up to but not exceeding the amounts as stipulated in Schedule A, as attached hereto, arising solely and directly … This was signed and dated by Economic. Attached were a set of conditions, but these did not contain any lending criteria. No individual policies were, however, issued. The declarations were made by Skipton sending the offer letters to Economic and premium was thereafter paid. Mr Campbell’s evidence was that the first declaration was made in September or October 1989. (c) Did Skipton have to comply with the criteria of the master policy to comply with the criteria appended to the broking deed? Economic contended that it was not enough that Skipton made the declarations which Economic did not reject. In order to comply with the criteria appended to the broking deed for loans in excess of 60% of the valuation, there had to be in place valid MIG insurance covering that excess. The only MIG insurance was the master policy which required declarations. For there to be valid insurance under that policy, the loans in respect of which declarations were made had to comply with the further criteria set out as conditions in the master policy. The material criteria (set out as part of conditions (A) in schedule 1 to the master policy some of which I have set out above) were the following; these were conveniently referred to at trial as the ‘master policy criteria’. (6) Readvances Readvances and further advances are to be treated separately and new declarations are to be made and accepted by the Insurer according to the terms and conditions of this Commercial Mortgage Indemnity Master Policy … (8) Insured Loan Financial Parameters The insured will limit the value of all mortgages declared under the terms and conditions of this Commercial Indemnity Master Policy to: Maximum: £1,000,000 any one property and £50,000,000 in aggregate (9) Loan to Value Ratio The Insured will not declare any mortgages under the terms and conditions of this Commercial Mortgage Indemnity Master Policy which exceed 70% of the value of the property calculated in accordance with the Royal Institute of Chartered Surveyors guidance notes or 70% of the purchase price whichever is the lesser, subject to a maximum of 100% of the going concern value of the property to be acquired … (17) Credit Checking The Insured will effect the appropriate credit referencing checks on all Mortgagors including but not necessarily limited to: Info-Link CCN cais enquiries And the Electoral Role, County Court judgements etc. (18) Debt Servicing Coverage The Insured will take all reasonable steps to ensure that, in addition to the property providing adequate security for the mortgage, borrowers and guarantors demonstrate that commitments to other creditors will not impeach their ability to service their mortgage obligations including both the payment of interest and the repayment of capital outstanding within the original term of the facility, as well as meet the cost of the relevant insurance/assurance premiums. Economic contended that if the master policy criteria were not met, then there was no binding declaration under the master policy and no insurance. In that case, para D of the criteria appended to the broking deed was not met and therefore a breach of the criteria and no insurance under the pool policy. If Economic are right, then Skipton not only had to comply with the criteria specifically negotiated for the broking deed and pool policy, but with the further set of criteria set out in the master policy. I have set out in the appendix to the judgment my findings in respect of the alleged breaches of the master policy criteria as applicable to the individual loans and have found that there were breaches of these criteria. However KB, Skipton and the plaintiffs all contended that breaches of the criteria contained in the master policy did not affect their right of recovery under either the pool policy or the master policy. A further number of issues arose in relation to this. (i) Were the conditions of the master policy agreed or known to Skipton when the loans were made? The first issue arose on Skipton’s contention that at the time the loans were made, the conditions set out in the master policy were not 174 agreed and therefore they could not have been under an obligation to comply with the master policy criteria of which they formed part. However, it was clear that by August 11 1989, Skipton had reviewed the terms of the master policy and made their comments, which were relayed to Mr Hammond Giles. These were all minor comments and by August 11 Skipton clearly knew what all the significant terms were. There is no written record to show what happened over the next several months. Mr Campbell thought he might have received Economic’s acceptance of the comments made by Skipton in August 1989, but could not recall. However the conduct of Skipton shows that they must have been told that the comments had been accepted. Although their conduct in making declarations and paying the premiums might possibly be argued to be consistent with the existence of cover without the imposition of the conditions, it is difficult to see why they requested the issue of the signed policy in the terms of the draft they sent unless they knew those terms were the applicable terms and Skipton had agreed to their amendments. I did not hear evidence from Mr Hughes or Mrs Grindrod of Skipton’s insurance department who were those who dealt with the wording in August 1989 and sent the letter in April 1990. On the balance of probabilities, I find that Skipton were told by the beginning of September 1989 that the amendments were acceptable and from that date they clearly knew what all the terms of the master policy were, though by August 11 1989 they had known and agreed to all the material and significant terms. Economic contended that when Skipton sent the wording with an inception date of July 6 they were agreeing that the terms all operated from that date. I do not accept that submission. In Re Coleman’s Depositories and Life and Health Assurance Association [1907] 2 KB 798, the defendant insurers had issued a cover note on December 28 without any conditions attached; on January 2 an accident occurred; on January 3 the insurers sealed and on January 10 delivered the policy to the insured with conditions which included a requirement to give immediate notice of any accident; the insurers repudiated liability on the ground that the insured had failed to give notice. The majority of the Court of Appeal held that the insurers were liable; it was to be inferred that the insurers never imposed the condition as regards the risks that resulted in a claim before the insured had knowledge of the condition. In other words, the insurers were covering the risk without imposing the conditions until the insured knew of them. Skipton did not know what any of the terms were until the draft policy was sent to them on July 26 1989 and it was not until shortly before August 11 that they had an opportunity of reviewing them and raising the minor comments they did. In these circumstances, Economic could not have maintained that conditions applied to the cover for declarations made prior to August 11. By agreeing to the inception date of July 6, all Skipton was doing for KB was agreeing that cover incepted on that date; they were not agreeing that the conditions should have retroactive effect to a date at which they had neither seen nor agreed to the conditions. However by August 11 1989 Skipton knew what the conditions were and, subject to minor amendments, considered them acceptable. In my judgment, the conditions did apply to all loans and declarations made from that date. Skipton contended that KB (who were the insured) did not know of the terms of the master policy, though it was accepted by their witnesses that they should have been aware of them. There was little evidence about KB’s knowledge of the terms of the master policy, but I will assume that they did not know of its terms. I do not consider any lack of knowledge on the part of KB of the terms of the master policy is relevant. In dealing with Economic and agreeing to the terms of the cover, it is clear that Skipton were acting as agents for KB; it is therefore the knowledge of Skipton that is relevant and it is immaterial to Economic’s position that KB did not know. (ii) Was there insurance of the loans even if the master policy criteria were breached? The second issue concerned the question of whether once Economic had accepted a declaration under the master policy, there was, under the terms of the master policy, insurance on the terms of appendix 1 [not reproduced here]. Therefore the material requirement in para D of the criteria appended to the broking deed was satisfied, even if there had been a breach of the master policy criteria. Issues Condition A(1) in the schedule to the master policy required Skipton to provide Economic with a written declaration of the details of each loan; Economic was not obliged to insure any loan that did not comply with the lending criteria set out in the master policy. If Economic was not agreeable to providing insurance it was to notify Skipton within two days. If it did not, the insurance would then take effect upon the terms of the individual insurance policies set out in appendix 1 (condition A(4)). KB put forward the clear and straightforward contention that in the case of most loans, declarations were made in 1989–1990 and accepted; the insurance for the excess over 60% of the valuation therefore took effect on the terms of the individual policies set out on the terms of appendix 1. No breaches of the terms of the individual policies were alleged by Economic and they had not sought rescission. Insurance was therefore clearly in place for the excess of 60% and the criteria appended to the broking deed complied with, though a claim under the insurance granted under this insurance might not succeed because of the breach of the master policy criteria. Economic however contended that not only was their acceptance of a declaration subject to the conditions set out in schedule 1 to the master policy and in particular to the master policy criteria, but the insurance cover itself in respect of accepted declarations was subject to the master policy conditions including the master policy criteria. Economic relied on clause (3) of the warranties in schedule 1 to the master policy under which KB gave a warranty of compliance with the lending criteria of the master policy. Was Economic bound by its acceptance of a declaration? There is one shorter issue that it is convenient to consider before turning to consider Economic’s arguments on the nature of the warranty. Skipton put forward an argument that because the warranty was in the terms that KB ‘has’ made all the mortgage advances declared and insured in accordance with the master policy criteria, that it was inapplicable to any loans made after the master policy came into force on July 6 1989; after that date, Economic had to consider before it made its decision on a declaration whether the criteria had been complied with. Once Economic had failed to reject a declaration in accordance with the terms of clause A(1), Economic could not rely on the fact that a loan did not comply with the master policy criteria. Economic could not rely on the fact that they had only received the brief details set out in the offer letters, for Economic could have sought much more information. I do not accept this argument. Under the scheme of the master policy, Economic were given two working days to consider whether to accept or reject a declaration; it would be almost impossible for them to check whether the master policy criteria had been complied with without considering the entire loan proposal. In any event, this would have entailed considerable time and resources. Looking at the background knowledge of the parties and the commercial purpose of the arrangements, it can never have been intended that they should satisfy themselves that the criteria had been complied with before accepting a declaration. For that reason warranty (3) was included in the master policy. I reject the suggestion that it had no application to loans made after July 6 1989; the parties knew that there would be no such loans before July 6 as the broking deed was only executed on that day and it was on that day it took effect. There would be no commercial sense in a warranty applicable to loans that the parties knew had not been made. It is plain that it was applicable to the loans to be made and in respect of which declarations were to be made; all that may have happened was that the parties may have made a grammatical error as regards tense: cf the observations of Lord Templeman in Re M (a minor) [1994] 2 AC 424, at p440 and of Staughton LJ in Group Josi Re v Walbrook Insurance Co Ltd [1996] 1 Lloyd’s Rep 345, at p363. 175 I therefore consider that the warranty in the schedule to the master policy did apply to loans and declarations made after July 6 1989 and turn to consider the consequences. Economic put forward two contentions: • Their primary case was that this was the type of warranty that denoted the scope of the cover or defined the risk that they were prepared to insure. • Their secondary case was that it was a promissory warranty — a promise by KB that had to be fulfilled. In general terms, a breach of a promissory warranty would discharge the insurer from liability under a policy; if, however, the warranty was merely descriptive of the risk, then the insurers would be generally liable under the policy, but the insurers would be off cover for that part of the risk encompassed within the description in the warranty. In the case of this master policy Economic contended that the same result was achieved — there was no insurance under the master policy for loans that did not comply with the master policy criteria. It is necessary to refer to these arguments in a little more detail as they are significantly different. Was the warranty descriptive of the risk that could be insured? As their primary argument, Economic contended that the meaning of the warranty was that they only undertook to provide insurance to KB under the terms of the individual policies if a loan complied with the lending criteria in the master policy; if any one of the criteria was not complied with then the loan fell outside the scope of what Economic was prepared to insure. It therefore could not be covered under the master policy and no declaration could be made so as to insure the individual loan and provide an individual policy. As the warranty was descriptive of the risk, there would be no entitlement to cover for a loan that did not meet the criteria. In Farr v Motor Traders Mutual Insurance Society Ltd [1920] 3 KB 669, the court held that it was a question of construction in each case whether the clause in question was descriptive of the risk or a promissory warranty which if broken discharged the underwriters. Economic referred me to a short passage in the judgment of Scrutton LJ in Roberts v Anglo Saxon Insurance Association (1927) 27 Lloyd’s Rep 313. A motor policy contained the warranty that a car was to be used for commercial travelling only. It caught fire when being used for a Sunday drive with passengers. The Court of Appeal considered that the warranty was descriptive of the risk. Scrutton LJ observed: that is a promissory declaration as to the risk. ‘I will insure you under certain circumstances, but only under certain circumstances’. It is the same as the well known warranty or promise in marine insurance, ‘warranted no St. Lawrence between Oct. 1 and Mar. 31,’ which means that if you go into the St. Lawrence and are lost between those dates you do not recover under the policy because that is not the risk that the insurance company have undertaken. Reading the whole of the master policy against the background of the arrangements made between Skipton, KB and Economic, I do not consider that the clause ‘warranty (3)’ was descriptive of the risk that was insured. The second paragraph of the opening words of p1 of the policy made it clear that Economic would accept declarations provided that they were made in accordance with the terms of the master policy. The schedule in which the terms of the master policy were set out imposed express obligations in terms of the master policy lending criteria. If the lending criteria were not complied with (and this was apparent to Economic on receipt of the declaration) then by the terms of condition A(1) and (2) Economic were not obliged to accept the declaration. If they did accept the declaration, then the loan would become subject to the terms of the insurance in appendix 1, but the clause ‘warranty (3)’ applied in respect of the breach of the criteria. In my judgment, ‘warranty (3)’ was promissory. It was a promise by the insured that the loan in respect of which a declaration has been made is in conformity with the master policy criteria. The question then arises as to the effect of a breach of the warranty. Consequences of a breach of warranty It was Economic’s contention that it was a promissory warranty in the sense of a promissory condition precedent referred to by Lord Goff in The Good Luck [1992] 1 AC 233*, at p262: *Editor’s note: Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd … it becomes readily understandable that, if a promissory warranty is not complied with, the insurer is discharged from liability as from the date of the breach of warranty, for the simple reason that fulfilment of the warranty is a condition precedent to the liability of the insurer. This moreover reflects the fact that the rationale of warranties in insurance law is that the insurer only accepts the risk provided that the warranty is fulfilled. This is entirely understandable; and it follows that the immediate effect of a breach of a promissory warranty is to discharge the insurer from liability as from the date of the breach. In the case of conditions precedent, the word ‘condition’ is being used in its classical sense in English law, under which the coming into existence of (for example) an obligation, or the duty or further duty to perform an obligation, is dependent upon the fulfilment of the specified obligation. If this case had concerned an ordinary policy insuring a life or a single property, and there was a failure to comply with a condition precedent before or at the time of attachment, it would follow that the risk never attached. This appears from the speech of Lord Ellenborough in Newcastle Fire Insurance Co v Macmorran & Co (1815) 3 Dow 255, at p259, and the speech of Lord Blackburn in Thomson v Weems (1884) 9 App Cas 671, at pp682 and 683: see also Clarke: Law of Insurance Contracts 2nd ed pp513–514. Economic contended that in the case of the master policy, the effect of the warranty as a promissory warranty was that if there had been a breach of the master policy criteria in respect of a particular loan prior to the declaration being made, then that declaration did not take effect and there was no individual insurance on the terms of appendix 1; from that it followed that there was no compliance with para D of the criteria appended to the broking deed and thus no pool insurance as well. I did not, however, understand them to contend that a breach of the warranty in respect of one declaration would discharge the entire master policy. I do not accept Economic’s argument. In my view, if a declaration was made of a loan, then there was individual insurance, even if there was a breach of the warranty as to the loan complying the terms of the master policy criteria. This follows from condition A(4) in the schedule to the master cover which provided there was to be that individual insurance from an accepted declaration. It was not contended that a breach of the master policy criteria would have no consequences and exclusion (4) in the schedule to the master policy made this clear, consistently with the conclusion I have reached about the effect of a breach of warranty: Any loss resulting directly or indirectly from any breach of warranty, of the Commercial Mortgage Indemnity Master Policy … whether expressed or implied. This excluded any loss that arose from any declaration where a loan was made in breach of the master policy criteria, because the warranty that the loan complied with the criteria had been broken; the consequence of that breach was that insurance which was provided should never have been provided and therefore the loss under the insurance which had been provided directly or indirectly flowed from the breach of warranty and was not recoverable. There would have been little point in such an exclusion if the loans were never insured. Furthermore, the master policy has to be construed in relation to and against the background of the whole of the arrangements between the parties. The parties specifically negotiated a set of criteria for loans under the facility set out in the broking deed. One of those required the insurance that was provided under the arrangements comprised in the master policy; the effect of the construction put forward by Economic of that master policy is that in respect of all loans over 60% of value, the set of criteria in the master policy applied not only to the risk covered by the insurances issued under the master policy, but to the risk covered by the pool policy. No one concerned with such a scheme can have intended such an uncommercial result. Furthermore, the conclusion to which I have come is consistent with Economic’s contentions as to the reason why the master policy contained these further criteria. They contended these further criteria were required because the cover under the master policy was dealing with a higher level of risk and so more stringent terms were necessary. Indeed there was no requirement that the insurance over 60% be effected with Economic and, had there been insurance with another insurer, the criteria insisted upon by that other insurer might also have been more stringent. There is force in this contention. But the construction I have put on the master cover gives effect to those criteria as breach would mean that Economic were not liable for the loss on the insurance provided in consequence of a declaration under the master policy. However that construction does not have the effect of automatically creating a breach of the criteria under the broking deed. Thus, in my judgment, if a proper declaration was made by Skipton in respect of a loan over 60% of valuation, the terms of para D of the criteria appended to the broking deed were complied with, even if the loan was in breach of the master policy lending criteria. (d) Late declarations Shortly before the trial, Skipton made declarations on January 31 1997 under the master policy in respect of two loans they had overlooked: • Staffordshire Country Clinics Ltd (the further advance) • Virvale Ltd On February 7 1997, Skipton made declarations in respect of loans in respect of which it was contended by Economic that the effect of the rearrangements to the loans had resulted in new loans being made: • Messrs Wood Kelly & Wood • Mr Yates and Mr Green; Mr Yates and Mr Sutton Economic refused to accept these declarations on the basis that they were far too late in circumstances where they contended: • these were made several years late • these were made some years after the borrowers had defaulted • Economic had declined liability under the pool policy • Long after the reinsurers had become insolvent In my judgment, Economic were entitled to reject declarations made at that time. Their consent under condition A(2) was not unreasonably withheld, given the circumstances in which the declarations were made — years late and after some of the borrowers had defaulted. Furthermore, although condition A(5) of the master policy permitted Skipton to make declarations subsequent to the completion of the mortgage agreement with the borrower, it was an implied term that such declarations be made in a reasonable time; on any of the tests for implication of a term, such a term meets the test of necessity. Issue (5) Are Economic entitled to recover the claims they have paid? (a) Economic’s claim On December 23 1991, Mr Powell, Economic’s claims manager, sent Skipton £54,700 in settlement of three claims under the master policy, including the claim under the loan to GCS in respect of the Turnpike Inn; no payment was made under the pool policy as the aggregate first loss provision had not been exceeded. On May 8 1992 Mr Powell sent Skipton a further £313,347 in settlement of claims under the master policy and pool policy including GCS in respect of the Turnpike Inn, GCS in respect of the offices at Bagley Lane and Messrs Wood Kelly & Wood in respect of the Oakwood Hotel at Bowness on Windermere. These were paid without reservation of rights. Economic contended that they were entitled to the repayment of these sums as they had been paid under a mistake of fact. It is therefore necessary to examine in more detail the circumstances in which the claims were paid. (b) Notification of claims to Economic and their investigations On September 10 1990 Economic were notified of the first possession order that Skipton had had to obtain in respect of the KB portfolio and thus of a potential claim; this was not in respect of one of the sample loans that I had to consider. This notification was acknowledged by Economic on September 24 1990. As arrears on other loans began to mount, Skipton notified Economic of these regularly from the end of 1990. On April 17 1991, Economic were notified of five further possession orders in addition to the first one notified in September 1990; these included Virvale. During 1991, further claims were notified including GCS in respect of the offices at Bagley Lane and GCS in respect of the Turnpike Inn. By the autumn of 1991, given the very sharp down turn in the property market, Economic’s general book of mortgage guarantee insurance was causing them considerable concern. This was a concern common to all insurers who had written a book of such business. On November 18 1991, Mr Powell presented a report to the executive committee about Economic’s exposure on this type of insurance. Mr Powell’s evidence was that Economic had decided by that time to pay only those claims which were acceptable and to refuse others; they wanted to delay payment so that they could conduct an audit. As regards the portfolio of loans under the KB facility, they had it in mind to audit all the loans on which there were claims and to examine whether they complied with the criteria, but that portfolio was not high on their list of priorities. At about the end of 1991 or in the first part of 1992, they formed an audit team including Mr Powell and Mr Lusted, an assistant manager in Economic’s commercial underwriting department. At the end of December 1991 Economic were notified informally about the loan to Messrs Wood Kelly & Wood and of an offer to purchase the property. In early January 1992 Mr Powell sought information about various loans that had been notified. Information was supplied and further claims made. After the second payment in respect of claims had been made on May 8 1992, Economic carried out an audit at Skipton between May 18 and 22 1992; this was undertaken to review the residential loans insured by Economic; however they also looked at the loans under the KB facility as they had time to do so. Mr Powell’s evidence was that they were half expecting to find arguable breaches of the criteria and were therefore not surprised to find them. A report noted in respect of the KB loans: It appears that [Skipton] neglected very basic guidelines in those cases which were examined and all 6 were found to be outside the lending parameters. Economic had submitted a claim to their reinsurers on May 26 1992. Nothing was said about any reservation of rights or anticipated claim to recover from KB, particularly in the light of their initial findings on the audit. Economic conducted a further audit between June 29 and July 3 1992. They reached the following conclusion: Audit of 40 cases has shown that the agreed parameters for virtually all of these loans have not been adhered to. We have therefore decided to seek Freshfields’s advice on avoiding the contract completely On July 13 1992 Mr Ludlow of Economic wrote to Mr Jolly at Skipton; his letter stated the following in relation to the KB facility: Detailed parameters were agreed for the commercial lending, which is inherently more risky than residential lending. The standards of investigation fell far short of that expected with most emphasis being on the value of the buildings and little regard taken of the income to support the debt. Accounts and projections were ignored, or so poorly presented that it is impossible to take cognisance of them in determining whether the loan is serviceable from the income generated. A detailed report on each loan is being prepared, but in the meantime, we must reserve our rights under this contract. On October 20 1992 Economic wrote to KB; they stated that they were shocked to discover from their audit that all the loans were outside the criteria; Skipton had not investigated the ability of the 176 borrower to service the loan as required by the criteria. They stated that the claims in respect of which payment had been made were not valid and asked for repayment. (c) Mistake relied on by Economic It is first necessary to identify the mistake relied on by Economic: two quite distinct and separate mistakes were relied on: • Economic pleaded that the mistake of fact was:         that the criteria and the additional lending criteria applicable to the Pool Policy and/or the Master Policy criteria and conditions had been fulfilled. The said criteria and conditions had, in fact, been breached or not been complied with.         In their final submissions they clarified their contention; the mistake, they said, was the prima facie assumption that the lending criteria had been complied with. • Economic also contended in their final submissions that Mr Powell mistakenly thought that when the claims were audited, the payments could be adjusted if breaches of the criteria were subsequently discovered; he thought he had reserved the position. The payments were therefore made on the mistaken belief that Economic had reserved this right to make an adjustment. This mistake was not pleaded. It was common ground that in determining what Economic’s position was at the time they paid, I should consider the position of Mr Powell. In his statement, Mr Powell said that when the payments were made, he assumed that the lending criteria had been complied with; he was cross-examined extensively about this statement and his general state of knowledge. I find that although he did not actually know that the criteria had not been complied with, he suspected that they may not have been complied with in respect of any of the loans on which claims were paid. He did not therefore have the assumption or belief that the criteria had been complied with; his suspicion was that in the case of many of the loans, they had not been complied with. He did not make further inquiry before payment, as he assumed that these matters would be investigated in due course during an audit. Although he clearly had doubts and suspicions about the claims, he decided that the claims should none the less be paid. (d) Relevant state of mind The plaintiffs submitted there are four possible states of mind that can exist in relation to a mistaken belief: • Payment where the payer acts under a clear mistake. In such a case the payment can be recovered. • Payment where the payment is made under a clear mistake, but that mistake is the consequence of the payer’s negligence. Again the payment can be recovered. • Payment where the payer does not know what the true position is, but pays not caring what the position is. The payment cannot be recovered. • Payment where the payer knows that investigation might reveal the true position, but pays without undertaking the investigation. In this last case, the plaintiffs submitted that the payment cannot be recovered; they relied on a short passage in the judgment of Lord Abinger in Kelly v Solari (1841) 9 M&W 54 at p58: There may also be cases in which, although he might by investigation learn the state of the facts more accurately, he declines to do so, and chooses to pay the money notwithstanding; in that case there can be no doubt that he is equally bound. That circumstance is not referred to in the other judgments. The researches of the many counsel in this case, however, revealed its application by the High Court of Australia in South Australian Cold Stores Ltd v Electricity Trust of South Australia (1957) 98 CLR 65 at p74. Economic did not accept that there was this differentiation; they submitted that if the payment was made under a mistake of fact, then it could be recovered unless the payer was waiving all inquiry into those facts. They relied on the expression of principle in Park B’s judgment in Kelly v Solari at p59: If, indeed, the money is intentionally paid, without reference to the truth or falsehood of the fact, the plaintiff meaning to waive all inquiry into it, and that the person receiving shall have the money at all events, whether the fact be true or false, the latter is certainly entitled to retain it. They contended that a failure to inquire into the facts was an example of negligence and did not debar the right to recover unless that payer intended to waive all inquiry into the facts. The basic principle for recovery is stated in Goff & Jones: The Law of Restitution, 4th ed p111, in the following terms: what is critical is whether the payer has been mistaken as to some assumption of fact which proved false and which caused him to make the payment There is, in my judgment, a relevant distinction between a person who has a mistaken assumption about a fact (whether or not that mistake arises from negligence, forgetfulness or some other) and a person who appreciates the fact might be true or might be false, but none the less pays without making the investigation which he appreciated would enable him to learn the facts, but postponing that until a later time. In the former case, he is acting under a mistake of fact and is entitled to repayment. In the latter case, he is not; the payer is not acting in consequence of an assumption about a fact which has proved to be false; he simply has decided that he will pay without availing himself of the opportunity to discover the facts. A distinction was made by Lord Abinger and the principle he laid down has been applied by the High Court of Australia. I will therefore apply it. (e) Conclusion on Economic’s knowledge In my judgment, Mr Powell did not make the payments on behalf of Economic on the mistaken assumption of fact that the criteria had been complied with; he knew that they might not have been complied with, but none the less paid. Thus, Economic have failed to establish the mistake of fact in relation to compliance with the criteria on which they relied in their pleading (whether as pleaded or clarified in their final submissions). Furthermore, the circumstances in which the payments were made fall within the principle set out by Lord Abinger and are therefore not repayable. If contrary to the view I have expressed, waiver of all inquiry is necessary, then at the time the payments were made Mr Powell did not make any inquiry. He did intend to review the files at a future audit, but, in my opinion, that is not relevant. What is relevant is his state of mind at the time of payment; at that time he paid waiving all inquiry into the circumstances. In any event, what caused Mr Powell to make the payment was his belief that, if an audit revealed breaches of the criteria, the money would be repaid, even though the letter he signed did not reserve any such right. It was that belief which caused him to make the payment, not any mistake as to whether there had been compliance with the criteria. Economic, as I have set out above, raised and relied on this in their closing submissions as a further mistake entitling them to recover. It was never pleaded and no application was made to amend; the other parties made clear that such an amendment would be resisted. In the circumstances, Economic cannot maintain such an argument, even if it could be said that this was a mistake of fact. (f) Change of position The counterclaim was made against KB. KB however paid the sums paid by Economic to Nomura who had acquired the relevant loans. There was, until shortly before the close of the oral argument at the end of the trial, an issue as to whether Economic’s claim would fail in such circumstances, as KB contended that they had changed their position and it was inequitable to require them to repay the moneys. However it was accepted in the course of those oral submissions that if Economic had paid the claims under a mistake of fact, then the claim would not be defeated by KB’s payment to Nomura as the funds would have to be repaid by Nomura. It is therefore not necessary for me to examine the written submissions made on whether KB’s change of position as a result of their payment to Nomura was such that it would have been unconscionable to require KB to repay Economic (see Lipkin Gorman (a firm) v Karpnale Ltd [1991] 2 AC 548, at 177 p579) nor to analyse the rights and obligations as between the parties; they were agreed in the result. Economic would have received the repayment, albeit they arrived at that conclusion by differing routes. Issue (6) Plaintiffs’ title to sue Skipton Although initially there were issues between the parties that would have required a more detailed examination of the circumstances of the sale of the loans to the plaintiffs and the obligations under the agreements, the issues were narrowed. It is only necessary to consider the agreements in relation to the issue between Skipton and the plaintiffs on title to sue and in relation to any claim over by the plaintiffs against KB. (a) Agreements and the transfers: May and August 1990 It was always anticipated by Skipton and KB that KB might sell the loans on to other financial institutions by way of securitisation; clause 32(2) of the broking deed made express provision for this: [KB] shall be entitled to sell any mortgage to any person A mechanism was set out in the clause 32(4) and appendix 9 for transfer by means of transfer certificates. However the agreements and documentation produced on the sale to the plaintiffs in 1990 altered these arrangements. KB probably always intended to sell the mortgages and decided that they would do so in early 1990. They prepared an information memorandum in February 1990 setting out particulars of the proposed sale; this was sent to Skipton on February 15 1990 for comment. No sale took place until Skipton had ceased making loans under the facility; the last loan was agreed in March 1990, though the actual advances were not made until April. Thereafter, there were one or two further advances agreed in specific circumstances, but the general operation of the facility to make loans had ceased. On March 28 1990 KB sent Skipton drafts of the sale agreement and a draft of ‘the Owners Deed’ for comment, saying that they expected the sale to take place on the next account day, May 7 1990. Den Danske and Nomura expressed interest in buying some of the loans; these were allocated by KB about May 4 1990 and Skipton told of the identity of the purchasers on May 3 1990. The first tranche of loans was sold to Den Danske and Nomura and the documentation executed on May 8 1990; it comprised: • Sale agreements between KB and Den Danske and KB and Nomura • Transfer deeds (each with a transfer certificate) between KB and Den Danske and KB and Nomura • An owners deed between KB, Nomura, Den Danske and Skipton The second tranche of loans was sold to Soc Gen and Tokyo. The documentation was all executed on August 7 1990 and comprised: • Sale agreements between KB and Soc Gen and KB and Tokyo • Transfer deeds (each with a transfer certificate) between KB and Soc Gen and KB and Tokyo The sale agreements and the transfer deeds were all in the same form. (b) Plaintiffs’ claims against Skipton The plaintiffs’ claims against Skipton were: • Claims under clause 30(A) of the broking deed. • Claims in respect of breaches of the terms of the broking deed other than clause 30(A) — the claim for breach of clause 20(1) and 23(2)(a); all of these breaches had occurred before the sale to the plaintiffs, save in relation to releases of retention and the specific further advances. The plaintiffs accepted that the causes of action for breaches that had occurred before the sale to the plaintiffs had accrued as a matter of law. No point arises on clause 23(2)(c) as no claim arises under it. • Claims in tort for negligence. (c) Scope of the issue in respect of the claims in contract It was Skipton’s primary contention that the plaintiffs had no title to sue either in contract for breaches of the broking deed occurring before they acquired the mortgages or under clause 30(A) and no rights in tort for any negligence prior to that time. They also contended that the issues in the action were not wider than this and I should not determine whether KB retained any rights to sue Skipton; the question of KB’s rights did not arise as there were no claims by KB subsisting against Skipton at the close of the trial. KB had claimed an indemnity against Skipton in the event that Nomura did not have to repay KB in the event Economic’s counterclaim succeeded; once Nomura conceded that they would do so, then the claim for an indemnity by KB against Skipton was no longer an issue. The plaintiffs did not accept that the scope of the issues was so narrow; they said it was not possible to determine the question of their rights against Skipton save in the wider context of whether KB retained those rights against Skipton. It appeared that on Skipton’s contentions KB retained no effective rights which they could exercise for the benefit of the plaintiffs or assign to them. No one could have intended when drafting the agreements that the rights against Skipton should simply have been discharged. That, they contended, was a very powerful consideration when considering whether they had title to sue under the agreements. Skipton maintained that if the issue did arise as to whether KB had retained any rights, then they submitted that KB did not hold any rights on trust for the plaintiffs; nor were there any rights to substantive damages which they could assign because KB had suffered no damage in consequence of any of the breaches of contract as they had received full value for the mortgages transferred to the plaintiffs. If, as they contended, the plaintiffs had no title to sue them in contract, then this had arisen because of deficiencies in the transfer mechanism and documentation and the loss should lie where it fell. (d) Nature of the rights in issue In approaching the question of whether rights were transferred to the plaintiffs so they could sue Skipton, I accept that it would have been an unlikely commercial objective to transfer to the plaintiffs the mortgages, the benefits under the pool policy and the right to sue Skipton for breaches of obligations under the broking deed in respect of any breaches after the plaintiffs acquired the mortgages, but leave the plaintiffs without the right to claim against Skipton if they were responsible, by reason of specific breaches of the terms of the broking deed, for any deficiency in the security or any inability to recover under the insurance if the breach had occurred before the plaintiffs acquired the mortgages. More important, however, is the question of the rights under clause 30(A). It is difficult to understand how the parties can ever have contemplated an arrangement under which the benefit of the claims under the pool policy were transferred to the plaintiffs, but the benefit of rights under clause 30(A) against Skipton if the pool policy did not pay were not also transferred. In the argument before me, the question arose as to when the cause of action accrued for the purposes of clause 30(A). The plaintiffs contended that, as the amount payable under clause 30(A) was payable by reference to the proceeds of sale or the value at the date of foreclosure, then the cause of action under clause 30(A) did not accrue until after the sale or foreclosure, as the right to claim under it could not have arisen until then. Skipton submitted that as the clause provided for a liquidated measure of damages payable on breach, the cause of action arose on breach — either not making the loan in accordance with the criteria or failing to take due care to comply with the criteria; thus the breach occurred when the loan was made. It did not matter when the damage was suffered as all the terms of clause 30(A) did was to provide a measure of damages to be determined when the sale or foreclosure took place. They relied on Chandris v Argo Insurance Co [1963] 2 Lloyd’s Rep 65 where it was held that the cause of action for an indemnity under a contract of marine insurance accrued when the damage insured against occurred, not when the quantum was adjusted. In my view, the question of when the cause of action accrued under clause 30(A) was not the relevant question; the relevant question was which rights were transferred under the agreements to the plaintiffs. This is best considered in relation to each of the various agreements under which the plaintiffs put their case. 178 (e) Routes by which the plaintiffs make their claims in contract There are five routes that have to be considered: (i)      Claim under the owners deed (ii)     Claim under the transfer certificates (iii)    Claim under as equitable assignees (iv)    Claim under a trust (v)     Claim under the principles in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85 As the documentation in the second sale in August 1990 did not make Soc Gen and Tokyo parties to the owners deed, it is convenient to consider first the way Den Danske and Nomura advance their claims under the owners deed in respect of the breaches of the obligations in the broking deed and under clause 30(A) of the broking deed. (i) Contractual claims of Nomura and Den Danske under the owners deed. The claim made by Nomura and Den Danske was primarily put forward under the owners deed to which Skipton and KB were also parties. It was common ground that under this deed it was intended to novate the obligations in the broking deed; although there was no express language that made it clear that there was a novation, it was implicit in the deed that its effect was to create rights and obligations that existed in the broking deed directly as between the plaintiffs and Skipton. There was, however, a dispute about the scope of the novation. These plaintiffs contended that the effect of the owners deed was to novate as between them and Skipton rights in respect of both past and future breaches of obligations under the broking deed and the rights under clause 30(A). They accepted that there were no express words to which they could point that made this explicit, but said that this was clear from and implicit in the owners deed as a whole. Skipton contended that no accrued rights in respect of past breaches nor any rights under clause 30(A) in respect of breaches of the criteria prior to May 8 1990 were transferred; these remained vested in KB. I approach this question on the basis of the principles set out in Investors Compensation Scheme, giving the words their natural and ordinary meaning and taking into account by way of context that which was known to the parties at the time. The owners deed did not contain any general words explaining its effect or purpose or making any general novation, assignment or transfer. There were particular provisions that are relevant, but before referring to them it is necessary to refer to the fact that KB’s position in the deed was complex as they were was a party to the deed in three identified capacities. The deed provided that: • where the words ‘The Trustee’ were used, those were defined as a reference to KB in their capacity as trustees; KB’s position as trustees included their position as holders of the legal title to the mortgages, the policy and other assets; • where the words ‘the Agent’ were used, those were to be a reference to KB in their capacity as agents; • where the words ‘the Owners’ were used, these were to be a reference not only to Nomura and Den Danske, but also to KB in their capacity as owners of any mortgage; KB were no longer to be owners in respect of any mortgages where they had transferred the whole of their interest to a transferee.         The relevant clauses therefore have to be read with these definitions in mind: • Clause 2 provided for a transfer of the mortgages by means of the transfer certificates: the relevant parts of this clause are set out below where I consider the rights under transfer certificates. • Clause 3 effected a trust of the mortgages; subclause (4) provided: Each Owner confirms the call options granted to Skipton by Clause 30(C) of the Broking Deed and undertakes to do all such acts and execute all such documents as may be necessary to enable the Trustee to comply with its obligations under that sub-clause whenever Skipton exercises such an option Clause 4 effected a trust of the collection account (into which Skipton paid the amounts collected in respect of the loans); clause 7 effected a trust of the pool policy. Clause 7(2) provided: The Policy is held by the Trustee upon trust to make a claim under the Policy when permitted by the Policy and to pay each Owner who suffers a loss in respect of a Loan owned by it the proceeds (if any) received by the Trustee under the Policy in respect of that loss. It is by reason of that trust that the claim is being maintained by the plaintiffs against Economic; as KB have been joined as defendants, Economic take no point on the ability of the plaintiffs to maintain the claim. • Clause 8 which governed the relationship between KB in its capacity as agent and these plaintiffs provided: (1) Each Owner irrevocably authorises the Agent on such Owner’s behalf to perform such duties and to exercise such rights and powers under the Broking Deed and … to exercise any discretion as are given to the Owners by the terms of the Broking Deed (other than Part II) as its agent, together with such rights and powers as are reasonably incidental thereto … (3) The Agent shall have only those duties and powers which are expressly specified here and in the Broking Deed. The Agent’s duties hereunder (save in relation to …) are solely of a mechanical and administrative nature … (9) The Agent shall not be required to ascertain or inquire as to the performance or observance by Skipton of the terms of the Broking Deed or any other document in connection therewith … I have set out the relevant part of clause 8(5) below as it arises in connection with the issue in relation to trusts. • Clause 9(2) provided for word substitution in the broking deed. This very important clause must have been intended to create obligations in that way between these plaintiffs and Skipton and KB: In relation to the Broking Deed, Skipton, [KB] and the Owners agree: (d) In Parts III [clauses 12–47] … every reference to ‘the Bank’ shall be read as a reference to the Owners in relation to the Loans owned by them respectively except for clauses … 20(2) and (3), 30(A) and (C) — in the phrase ‘specifically authorised by the Bank’ and … In … clause 30(A) and (C) the phrase ‘specifically authorised by the Bank’ shall mean specifically authorised by the Agent. It was Skipton’s contention that there was nothing in the language of any of these clauses that transferred accrued rights of action for breaches of contract or rights under clause 30(A) for breaches of the criteria prior to May 8 1990. However, in my judgment, that ignores the affect of clause 9(2). It is convenient to examine the rights under clause 30(A) of the broking deed first. If substitution is effected in clause 30(A), it would read as follows: (A) If a loan is made which does not comply with the Criteria then (unless the breach of the Criteria was specifically authorised by [KB], [Skipton] undertakes by way of liquidated damages for the breach of contract to pay to [Den Danske, Nomura or KB as the case may be in respect of the loans owned by them] the amount by which the Proceeds fall short of the Outstanding Debt and Costs. Read in this way and with clause 3(4) of the owners deed (which provided for the actual owner of the mortgage to respond to the call option under clause 30(C) of the broking deed), it seems clear that Skipton were undertaking a direct obligation to the plaintiffs in respect of loans that did not comply with the criteria; there is nothing, simply on a reading the language of the clause, to suggest that this did not apply to breaches of the criteria that had occurred during the making of the loans. It would make little sense if it was read in that way. But much more significant are the following: • By the time the owners deed was executed, no new loans were being made under the KB facility; the facility was expressed to last until March 31 1990 and its term had expired. The information memorandum supplied to Nomura and Den Danske (which Skipton had seen) stated: The lenders commitment to make new advances expires on 31 March 1990 It appears to have been agreed between KB and Skipton that offers made before March 31 would be honoured and completed by June 30 179 1990; on April 25 1990 Economic confirmed that these loans would be covered by them. They added: It is further understood that in the event of second or additional loans being requested and granted then existing guarantees or indeed new guarantees can be arranged to fall in line with the current underwriting criteria There is no evidence that this was shown to the plaintiffs, but I will assume that it was. All this contemplated was the possibility of there being a second loan or some rearrangement of existing loans, not new loans. The facility had in effect come to an end. • There would be little commercial sense in KB divesting thereselves of the loans and the mortgages (even though they kept an administrative role), yet retaining the right to bring claims against Skipton in respect of past breaches or being concerned about them; the costs basis of a transaction such as this would not allow for expenditure of that kind. • The information memorandum supplied to Nomura and Den Danske referred to one of the obligations under the broking deed in these terms:         Requirement for Skipton to meet any shortfall or any loan made outside the lending criteria, unless authorised by [KB] • The sale agreements between KB and each of Den Danske and Nomura also can be considered as part of the background because a draft was sent to Skipton for comment on March 28 1990; it provided by clause 2(2)(e) that each mortgage was to be sold:         Subject to and with the benefit of the Broking Deed and Scheme Agreement         The benefit of the deed is not a phrase that would naturally be taken to be restricted to future rights in such circumstances. It is permissible to take this document into account in construing the owners deed: see the judgment of James LJ in Leggott v Barrett (1880) 15 Ch 306 at p309. • There would be little sense in providing that these plaintiffs, by virtue of clause 3(4) of the owners deed, were to be subject to the call option under clause 30(C) of the broking deed in respect of the mortgages transferred to them, if that was an option that would in practice never be exercised, as there would be no point in Skipton doing so if they were under no liability under clause 30(A). Against that background of matters known to the parties, it is clear that the parties must have intended the obligation owed by Skipton under clause 30(A) of the broking deed to these plaintiffs (in so far as they owned the relevant loan) to include breaches of the criteria in respect of the loans which were being transferred. It is, in my view, implicit in the agreement as a matter of construction that the obligation included past breaches of the criteria. This does not require the implication of a term (and none is pleaded), but is implicit in the language of the deed as a matter of construction: see the approach of the House of Lords in Beresford v Royal Insurance Co [1938] AC 586, at pp594–595, of McNair J in Martin-Baker Aircraft Co Ltd v Canadian Flight Equipment Ltd [1955] 2 QB 556, at p578, and the Court of Appeal in Nickerson v Barraclough [1981] Ch 426, at pp440–441. The same, in my judgment, must follow in respect of breaches of the other clauses of the broking deed which are relevant — clauses 20(1), 23(2)(a) and 23(2)(c). Under clause 23 of the broking deed, the obligations in clause 23(1) are expressly stated as being owed to KB — ‘[Skipton] warrants to [KB] …’; the obligations in clause 23(2) are expressed in terms ‘[Skipton] undertakes’, without expressly saying that the obligations are undertaken to KB; in my judgment, that is implicit in the language. The effect of the word substitution by clause 9(2) of the owners deed, is to novate all the obligations in clause 23(1) and (2) as between Skipton and the plaintiffs. Similarly in clause 20(1) of the broking deed, the obligation to procure insurance is not expressed to be owed to KB, but, in my judgment, that is implicit; the effect of the owners deed is to effect a similar novation. Taking into account the factors that I have referred to in relation to clause 30(A) of the broking deed, I consider that, if it is necessary for the plaintiffs to rely on breaches of clause 20(1) and clauses 22(2)(a) and (c) of the broking deed which occurred before the mortgages were transferred to them, they have the right to do so. The plaintiffs argued, in the alternative in respect of clause 30(A), that if they were not correct in their principal submission that the obligation under clause 30(A) was an obligation owed to them after the execution of the owners deed, then there was an obligation owed to KB by Skipton to pay the plaintiffs under the terms of clause 30(A); they contended that this obligation was enforceable under the principle established in Beswick v Beswick or by virtue of a trust of the promise held by KB for the benefit of the plaintiffs. The arguments in relation to a trust of the benefits under this specific clause are much the same as the arguments in favour of a more general trust which I consider below. (ii) Claims of Soc Gen and Tokyo under the transfer certificates As I have mentioned, the mechanism originally envisaged in clause 32(4) of the broking deed for transferring the mortgages to the person to whom KB sold them, was a transfer certificate in the form set out in appendix 9. It was decided to retain the mechanism of a transfer certificate, but the owners deed modified the form of the certificate and the provisions under which a certificate was to operate so that when the transfer certificates to Soc Gen and Tokyo were executed, they operated under clause 5 of the owners deed rather than clause 32 of the broking deed. The transfer certificates therefore operated in conjunction with the owners deed (to which Soc Gen and Tokyo were not parties) as the means by which rights and obligations were created between Skipton and each of Soc Gen and Tokyo; whether this was by novation or by analogy to the principles established in Beswick v Beswick [1968] AC 58 or otherwise does not matter, as the parties were all agreed as to the effect of what had been achieved. It was common ground that a claim against Skipton for breaches of the broking deed subsequent to transfer of the mortgages could be made by these plaintiffs under the transfer certificate, but Skipton contended that the transfer certificates did not operate to enable a claim to be made for past breaches. The transfer deed and transfer certificate between KB and each of the plaintiffs was in the same form; by the transfer deed: 1. . . . KB as beneficial owner hereby conveys and transfers to the Purchaser all its right title and interest in and to and the benefit of the Mortgages 2. KB as beneficial owner hereby conveys, transfers and assigns to the Purchaser all its right title and interest in and to and the benefit of the Other Security to the extent that it is not conveyed transferred to or assigned by a separate conveyance, transfer or assignment. For the purposes of the transfer deed, the mortgages were those identified in the transfer certificate and ‘Other Security’ bore the meaning in the sale agreements ‘every security of whatsoever nature which in addition to a Mortgage secures repayment of a Loan’. The transfer certificate took effect by its express terms under the owners deed: by clause 2 of the transfer certificate, the plaintiff requested Skipton and KB to accept the transfer so that it took effect under clause 2(5) of the owners deed and instructed KB to hold the transferred mortgages and other rights belonging to KB under or in connection with them on trust in accordance with clause 2 of the deed. By clause 2(5) of the owners deed: (5) Upon delivery to the Agent of a duly completed and duly executed Transfer Certificate: (a) to the extent that in such Transfer Certificate the Owner seeks to transfer its rights and/or obligations to a Transferee, the Owner and Skipton shall be released from further obligations to each other under this Deed and the Broking Deed and their respective rights and benefits against each other shall be cancelled (such cancelled rights, benefits and obligations being referred to in this Clause as ‘Skipton discharged rights’) but without prejudice to any rights and obligations accrued or incurred up to the date of delivery to the Agent of such Transfer Certificate; (b) Skipton and the Transferee shall each assume obligations towards and/or acquire rights and benefits from each other which differ from the Skipton discharged and obligations only in as much as Skipton and the 180 Transferee have assumed and/acquired them in place of Skipton and the Owner; Skipton, relying on the words of clause 2(5)(b), contended there were only novated rights and benefits: which differ from the Skipton discharged rights and obligations only inasmuch as Skipton and the transferee have assumed and/or acquired them in place of Skipton and the Owner Under the last few words of clause 2(5)(a) the discharged rights were the obligations between KB and Skipton under the broking deed and the owners deed which were cancelled upon the transfer being made: but without prejudice to any rights or obligations accrued or incurred up to the date of delivery to the Agent of such Transfer Certficate Skipton therefore contended that no accrued rights were transferred under the transfer certificates; these included the rights under clause 30(A) as well as any accrued rights to sue for breach of the other terms of the broking deed. It is quite clear that if the transfer had been made under the provisions of clause 32(4) of the broking deed, this argument would not be open to Skipton as the language of clause 32(4)(i) is in all material respect identical to clause 2(5)(a) and 2(5)(b) of the owners deed save for the last phrase in clause 2(5)(a) on which Skipton’s argument alone rests. As the broking deed formed part of the matrix, it is relevant to consider whether there could have been a reason for making this change. I can think of none. The plaintiffs contended that there was no commercial sense in making the change if it had the effect of leaving the rights vested in KB. I agree. They therefore submitted that the last phrase had been added by the draftsmen out of abundance of caution in an attempt to prevent any accrued rights being accidentally discharged, given the complexity of the owners deed arising from the differing capacities that KB had under that deed. I agree that these words seem to have been added out of abundance of caution; there was no other point in so doing and it may well be that the phrase was not as felicitously positioned in the clause as it might have been. However, reading subclauses (a) and (b) together, the words in (a) relied on by Skipton, in my view, qualified the effect of the cancellation of the rights but did not qualify the definition of what was being transferred — the discharged rights. Therefore the rights transferred under the transfer certificates included rights in respect of past breaches. The plaintiffs contended in the alternative that the terms ‘accrued rights’ and ‘obligations incurred’ should not be read in a technical sense. It was clear they submitted that the word accrued need not always be given its technical meaning; they referred to the decision in Re Sneyd, Robertson-Macdonald v Sneyd [1961] 1 WLR 575; that was a case where in considering for the purposes of entitlement under a trust to compensation payable under planning legislation, Pennycuick J held that the word ‘accrue’ in the legislation did not have its strict meaning. In view of the conclusion I have reached about the meaning of the phrase on which Skipton relied, it is not necessary to reach a concluded view on this. If I had to consider the meaning of the last phrase in clause 2(5)(a), I would have to have had in mind the factors to which I have referred to above as a relevant part of the matrix; in addition, no one knew of any breaches of the criteria and so did not have in mind that there were rights which may have accrued against Skipton in the technical sense of the word. As regards the rights under clause 30(A), no one considering the context of the transfer would have looked on those rights as ‘rights accrued’; they were rights that the transferees would wish to exercise if the pool policy did not pay and there would be little commercial sense in regarding those rights as ‘rights accrued’ at the date of delivery of the transfer certificate. I would therefore have accepted the plaintiffs’ arguments. What of the rights of action for breaches of the other terms of the broking deed which were unknown about at the time of the transfer. Could it be said that these were ‘accrued’ within the meaning of the owners deed? This is more difficult. However I would have seen great force in the argument that the word ‘accrued’ should not be given its technical meaning; and that in the context of this transaction, it did not include rights in respect of breaches of the broking deed that were unknown to the parties. (iii) Claim as equitable assignees under the sale agreement All the plaintiffs entered into sale agreements in the same terms and all relied on the terms of the sale agreement as providing for an equitable assignment of the benefit of the broking deed. They relied in particular on the terms of clause 2(2)(e) which I have set out above. Skipton contended that none of the plaintiffs could rely on the sale agreements because the sale agreements were contracts to sell land at a future time, with the rights that the purchasers were to acquire being specified; clause 4(1) of the sale agreements provided for completion to take place. They therefore contended that the contract merged in the conveyance of the interest under the owners deed and the transfer certificates and no rights under the sale agreement survived. The plaintiffs accepted that by the general principle of merger, where completion takes place by a separate deed, the rights under the sale agreement merged into the conveyance and the source of obligations was derived from the conveyance alone — see Emmet on Title para 8.056. However that rule gave way to a contrary intention and in the circumstances of these agreements, there was a contrary intention that could be ascertained. Under the sale agreement, there were obligations that were intended to continue, particularly those under clauses 5 and 6; the transfer by either the owners deed and/or the transfer certificate or the transfer certificate alone was not intended to encompass all the obligations in the sale agreement. I therefore consider that there was a contrary intention and the doctrine of merger did not apply. (iv) A trust of the causes of action It was Den Danske and Nomura’s alternative contention that if they did not have the legal right to sue Skipton, then the right to sue must be held in trust for their benefit by KB. Soc Gen and Tokyo put forward similar arguments. This way of putting the claim was not pleaded, but none the less I heard argument on it. In view of the conclusions to which I have come, the plaintiffs do not need this way of putting their claim and I will therefore deal with it briefly, but leave open to Skipton the opportunity of relying on the fact this is not pleaded and therefore arguing that it does not give rise to a basis for recovery. Skipton pointed to the fact that the owners deed expressly declared a trust of the mortgages, the pool policy and collection account; if it had been intended that there be a trust of existing rights of action, would not this also have been dealt with? This is a powerful argument, but, in my judgment, would not have prevailed had I concluded that right to sue in respect of past breaches had not been transferred. No doubt the parties did not have at the forefront of their mind that there had been any breaches, particularly breaches of criteria; if they had, it is highly unlikely that the plaintiffs would have proceeded with the transaction. However, it was plainly intended that the plaintiffs have the benefit of the broking deed; if, contrary to the view I have reached, they were not entitled to enforce the obligations under that deed directly, then the parties would plainly have intended that KB would hold the benefits under that deed in trust for these plaintiffs. However, there is another term in the documentation giving effect to the sale and transfer that is relevant. Skipton relied on clause 8 of the owners deed entitled: ‘The Agent and the Owners’. Clause 8(5) provided: The relationship between the Agent and each Owner is that of principal and agent only. Nothing in this Deed or the Broking Deed shall constitute the Agent a trustee (except where expressly stated to the contrary therein) or fiduciary for any Owner or any other person. They contended that this provision negated any trust. In the owners deed KB is defined not only as the agent, but also as the owner and the trustee. Clause 8(5)(a) is applicable to KB solely in its capacity as agent. It is true, as Skipton point out, that the two other capacities in 181 which KB were parties to the deed — owner and trustee (as defined) — are not relevant either. But the question remains as to whether the terms of clause 8(5)(a) were intended to negative KB holding the benefits of the broking deed for the plaintiffs in circumstances where there had been a failure to transfer the rights to the plaintiffs. On the view to which I have come of the owners deed, the question does not arise. Had I not concluded that the deed did enable the plaintiffs to claim, then I would have concluded that this provision did not have the effect of preventing a trust arising. It was a provision only intended to have application to the capacity of KB as ‘Agents’ and not generally. (v) Claim under Linden Gardens v Lenesta Sludge I turn finally to consider the argument raised as to whether the plaintiffs could rely on the decision of the House of Lords in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85. If they were wrong on all the other points, the one matter the parties cannot have contemplated was that the rights against Skipton had been simply discharged. If the effect of the documentation had been that KB retained the rights, it would be astonishing if they were unable to make any recovery for the benefit of the plaintiffs because they themselves had suffered no loss as they had received full value from the plaintiffs for the loans. Skipton said that if the arrangements the parties had made did not achieve the result of the plaintiffs being able to bring a claim, as this was a result open to the draftsmen, it would not be right for the courts to come to their aid. In view of the conclusions to which I have come, it is not necessary for me to express a final view on whether this would have been a case to which the principle in Linden Gardens v Lenesta Sludge could, by a small incremental step, be extended. The principle was extended a little further by the Court of Appeal in Darlington Borough Council v Wiltshier Northern [1995] 1 WLR 68 — see the judgment of Dillon LJ at pp73–74 and Steyn LJW at pp79–80. However, I see considerable force in the plaintiffs’ argument that they should be, if the need arose. If effect could not be given to the reasonable expectations of the parties by the views as to the construction of the various agreements to which I have come then, in my opinion, there is great force in giving effect to them in this way. No party contemplated Skipton being fortuitously discharged from its responsibilities and no legal system would readily acquiesce in such a result. (f) Claim in tort In advancing a claim in tort, the plaintiffs did not rely on any assigned rights; they claimed that Skipton owed them a direct duty of care for what was done by Skipton in making the loans and obtaining the insurance in 1989 and 1990 prior to the transfers to them. They accepted that if they had title to sue in contract, then this claim was not necessary, because on the facts there would not be a breach of the duty of care if there was not also a breach of the duties in contract. Nor did any limitation points arise. The plaintiffs relied on a duty in tort solely to cure any defect in title to sue in contract. It was accepted by Skipton that there were parallel duties owed to KB in tort and contract; they denied they owed any duty to the plaintiffs for their actions prior to the transfers. The plaintiffs, in support of the argument that Skipton owed them a direct duty of care during that period, relied on the fact that it was always contemplated that KB might wish to sell the mortgages. They therefore contended that it was foreseeable that such purchasers would be affected by the negligence of Skipton in relation to the criteria and the pool policy. In Caparo Industries plc v Dickman [1990] 2 AC 605, at p621, Lord Bridge referred to Cardozo CJ’s classic words in Ultramares Corporation v Touche (1931) 174 NE 441, at p444, about subjecting a person to: liability in an indeterminate amount for an indeterminate time to an indeterminate class To this the plaintiffs responded: • the liability was not indeterminate; on the assumption that the loans were completely irrecoverable and the insurance void, the liability would never exceed the amount of the loans and interest; • that although the identity of the purchasers would not be known, they were not an indeterminate class; the precise identity and number of purchasers was not material as the liability related to each loan. Thus they contended that as sale was contemplated in the structure of the original arrangements, the persons who would in reality suffer the loss were the purchasers and that it was just and reasonable that a duty of care should extend to them. They accepted that this was to take the decided authorities further than they have gone at present, but they submitted that this was merely a justifiable increment to the recognised category of case where a duty existed; in Omega Trust Co Ltd v Wright Son & Pepper [1997] 1 EGLR 120*, the Court of Appeal left over for decision the question of whether a valuer’s report could, in the absence of the usual disclaimer, be relied on by others to whom it was not addressed. The plaintiffs therefore relied on Punjab National Bank v DeBoinville [1992] 1 WLR 1138 and Aiken v Stewart Wrightson Members Agency Ltd [1995] 1 WLR 1281. *Editor’s note: Also reported at [1997] 18 EG 120 In Punjab National Bank, the Court of Appeal held (pp1152–1154) that it was a justifiable increment to hold that an insurance broker’s duty of care in tort extended to a specific person, who although not his client, was to become an assignee of the policy that was being broked by him and where the assignee was, to the knowledge of the broker, concerned in giving instructions in relation to that insurance. It is clear that in that case, the increment was small as the specific person was actively involved in the placing of the contract and known to the tortfeasor. He had a close and immediate contact with the transaction when it was being carried out. Of much greater assistance to the plaintiffs is the decision of Potter J (as he then was) in Aiken. A managing agent of a Lloyd’s syndicate placing reinsurance of liabilities under previous years was held to owe a duty of care not only to the members of the syndicate whose liabilities were being directly reinsured, but those who would become members of the syndicate in subsequent years and become responsible in respect of those liabilities through ‘reinsurances to close’. The key factors in that incremental extension were: • the fact that the amount of the reinsurers’s liability would not vary according to the number of new members of the syndicate; it was determined by the extent of the reinsured liabilities, not by the future size of the syndicate; • the clear intention was to benefit those who were members of the syndicate when and if the liabilities eventuated in future years; that was clear from the way Lloyd’s carried on its business at that time; • the existence of that reinsurance would be relied on by those members in future years in calculating their own liabilities under the ‘reinsurance to close’ arrangements current then at Lloyd’s. In making the increment in that case, Potter J had clear regard to the very special circumstances surrounding a Lloyd’s syndicate and the way it did its business; and also to the particular relationship between a managing agent and the members of his syndicate and its continuing duty to those who constituted the syndicate from time to time. In many senses the syndicate as it existed in the 1980s could be seen in commercial terms as a continuing entity. Potter J emphasised this at p1312 F: In my view, the duty, which I have found to exist is the logical and reasonable outcome of the workings of the Lloyd’s market, whereby the market is the Syndicate, as the sum of its Names from time to time, it being the duty of [the managing agent] to manage and promote the interests of the Syndicate as a whole. While the Syndicate is not truly a corporate body, … managing agents are in reality concerned to deal on behalf of the Syndicate, protecting its interests without regard to the identity of its Names. The circumstances here are very different. Unlike in Punjab National Bank, these plaintiffs had no involvement in the original transactions and were wholly unknown to Skipton until all the loans 182 had been made. Unlike the position in Aiken, the loans were not being made when Skipton was acting for those who might buy them from KB; they were acting for KB and their relationship was in reality with them and them alone. Although KB had the right to sell the loans on, it was not inevitable that they would do so. There is a further consideration which had it become relevant, I would have had to consider. Until the transfer, Skipton owed KB parallel duties in contract and tort. The clear scheme of the broking deed envisaged an elaborate mechanism to transfer rights and obligations under clause 32 and the original form of transfer certificate. I agree with the plaintiffs that if the form of transfer certificate appended to the broking deed had been used, then the arguments advanced by Skipton in relation to there being no title to sue in contract could not have been made. If, the plaintiffs are correct in their contention (as I consider to be the case) that the original contractual scheme for transfer would have transferred the contractual rights arising under the broking deed, then the arrangements contemplated contractual duties being created as between Skipton and the transferees at the time of transfer which would include rights in respect of past events. It was established in Henderson v Merrett Syndicates Ltd [1994] 3 All ER 506 (pp531–532) that the fact that there is or might be a contractual route for liability is not material to ascertaining whether there is a tortious duty; it is necessary to ascertain the question of whether a tortious duty exists independently of the existence of a contractual liability and only then to consider whether any contractual duty narrows the scope of the tortious duty that exists under the general law. That I have done and found there was no general duty. Where the transferee could be an unidentified person within a large class (in this case any of a large number of financial institutions) and there was a mechanism to provide that person with contractual rights, it would be unusual and have wider implications if a duty in tort for things done prior to the transfer was owed to that person as well as the transferor. There are many types of commercial transactions where it is contemplated that rights will be transferred by a contractual mechanism to an unidentified class, and I would have wished to examine the impact of the plaintiffs’ argument on that common position had I otherwise been persuaded to accept that there was a duty owed in tort. (g) Advances after the date of the transfers A second loan was requested by Staffordshire Country Clinics Ltd after the transfer to Nomura and an advance subsequently made; the details are set out in the appendix. There was some dispute whether the claim in respect of this loan was covered by the pleadings, but it was agreed that it was and that I should deal with it, save for the issue as to whose money was advanced. The loan is therefore considered in the appendix to this judgment, save for the issue in relation to the funding of the loan which is reserved to a further hearing, if necessary. Issue (7) Were KB negligent and if so, what was the consequence? (a) Scope of the issue It was common ground that if clause 30(A) applied to loans over £300,000 and was not a penalty, then the defence of contributory negligence was not available to Skipton in the principal way in which the claim was made against them. The first alternative to that claim was the claim under clause 20(1); I have held that this clause imposed an absolute obligation on Skipton to procure that the loans were covered by insurance. Again the defence of contributory negligence is not available to that claim. Skipton contended that if, contrary to the conclusions to which I have come: (a) I found that clause 30(A) was not applicable or enforceable; or (b) that clause 20(1) did not impose an absolute obligation; and (c) if I came to the conclusion that Skipton had a responsibility in respect of the breaches of criteria for such loans, then the plaintiffs’ damages fell to be reduced by reason of the negligence of KB in approving the loans over £300,000. As this issue only arises in relation to clause 23(2)(a) and only if I am wrong in the view to which I have come that all the claims can be brought under clause 30(A) or 20(1), I will express my views shortly. (b) Nature of duty under clause 23(2)(a) Skipton contended that their duty in respect of the lending criteria was a duty of care; this they said was clear on the terms of clause 23(2)(a); it was accepted by the plaintiffs that the level of duty under this clause was a duty of care, but, for the reasons I have given, the fact that the level of care under this clause was only a duty of care did not mean that the duties under the other clauses were affected. Skipton also relied on the terms of clause 23(2)(c), but for the reasons given, I consider this was a clause that was narrow in its scope. Skipton contended that its duty to comply with the criteria was a duty of care and identical to its duty to KB in tort. In my judgment, this contention can only be advanced in respect of clause 23(2)(a) and not in respect of the claims under clause 30(A) or 20(1). Skipton therefore contended that the defence of contributory negligence was available in response to claims under that clause. KB did not accept this analysis; they maintained that any obligation to exercise care that the criteria appended to the broking deed were complied with was an obligation that arose under the broking deed alone and was not an incident of the general relationship of principal and agent created by the broking deed. The action under clause 23(2)(a) had to be framed in contract and could not be framed in tort. For the purposes of analysing a contractual provision, the categorisation of duties set out by Hobhouse J in Forsikringsaktieselskapet Vesta v Butcher [1986] 2 Lloyd’s Rep 179, at p196, has been generally adopted (see for example Barclays Bank plc v Fairclough Building Ltd [1995] 1 All ER 289 at p301); that categorisation is: (1) Where the defendant’s liability arises from some contractual provision which does not depend on a failure to take reasonable care. (2) Where the defendant’s liability arises from a contractual obligation expressed in terms of taking care but which does not correspond to a common law duty to take care which would exist independently of the contract. (3) Where the defendant’s liability in contract is the same as his liability in the tort of negligence independently of the existence of any contract. It is clear from decisions of the Court of Appeal that in category (1), the plea of contributory negligence is not available (Barclays Bank plc v Fairclough) whereas it is available in a category (3) case (Vesta v Butcher [1989] AC 852, [1988] 1 Lloyd’s Rep 19 (CA)). There is no binding authority on a category (2) case. Two questions therefore arise in the present case. Is the duty under clause 23(2)(a) a category (2) or category (3) case? If it is a category (2) duty, is the plea of contributory negligence available? In my judgment, it is a category (2) duty. The duty imposed by clause 23(2)(a) was a duty to perform obligations with care and skill. Some of the duties under the broking deed which were to be performed with due care were the same as duties that would exist in tort; other duties were purely contractual. It is therefore necessary to see whether the duty and conduct complained of would give rise to a duty and liability in tort. In essence the duty and conduct complained of was failing to use due care to comply with the criteria, and not failing to use due care in lending. The obligation to use due care in lending money would be a duty existing concurrently in contract and tort (in the same way as the concurrent duty in respect of underwriting considered in Henderson v Merrett [1994] 3 All ER 506 especially at pp523–533); that is a broad duty that must exist as it does in professional relationships. The duty under clauses 6 and 7 to see that the proposed loans complied with criteria specified in the broking deed was a contractual duty, though one to be exercised with reasonable care, and not a broad or general duty of care. If Skipton had merely been under a general duty of careful lending, that would not have required due care in complying with the criteria. For example, if Skipton had been under a general duty of care, it could have been contended that lending on a loan to value ratio of 75% was prudent; 183 however such a loan would have been in breach of the criteria and Skipton had, on the assumption being made, at least a duty of care to comply with the criteria. Thus their duty was not co-extensive with the duty in tort, but extended beyond it. This may be a fine distinction, but one that it is necessary to draw given the development of concurrent liabilities in English law. (c) Availability of the defence of contributory negligence Having reached the conclusion that it was a type (2) duty, I turn briefly to consider whether the defence of contributory negligence is available. In de Meza v Apple [1974] 1 Lloyd’s Rep 508, Brabin J held the plea available in respect of a duty which Hobhouse J considered in Vesta v Butcher should be classified as a category (2) duty. Since that decision, the two decisions of the Court of Appeal in Vesta v Butcher and in Barclays Bank v Fairclough have clarified the analysis of Law Reform Contributory Negligence Act 1945 and I do not regard the decision in de Meza as one that I should therefore necessarily follow. In my judgment, the definition of ‘fault’ in section 4 of the Act clearly points to the view that it is only where there is a tortious duty that is concurrent with the contractual duty that the defence of contributory negligence can arise. Moreover, as was emphasised by Beldam LJ in Barclays Bank v Fairclough (at p302), a contracting party is entitled to rely on the performance by the other contracting party of his obligations. I do not wish to lengthen this judgment by considering the issue at length, given the consideration that it does not arise on the view of the broking deed to which I have come. However, I consider the Act does not apply. The analysis of Pritchard J in Rowe v Turner Hopkins & Partners [1980] 2 NZLR 550 provides a compelling argument that the Act only applies to duties that exist concurrently in contract and tort and not to duties that arise solely out of the contract and I agree with it. It is significant also that the Law Commission concluded in Law Commission Paper: 219 Contributory Negligence as a Defence in Contract (Law Com 219): At one time it was thought that the Act could apply where the defendant was in breach of a duty of care owed only in contract … Although the law might have developed so as to allow apportionment in a wider category of cases, we thus consider that it is now clear on the authorities that such development of the law is not possible under the 1945 Act. A similar conclusion is reached by the editors of Chitty, 27th ed at para 26-019. (d) Were KB negligent? It is clear from the evidence, as I have found, that KB checked the information they received on the loans over £300,000 referred to them for approval to see if the proposed loan complied with the criteria. They appreciated the importance of compliance with the criteria in relation to the insurance. Thus when they looked at the information, they plainly must have appreciated the consequences of a breach of criteria and would have been anxious to check and see, to the extent that they could in the nature of their review, whether there had been compliance. Indeed it appears that on occasions, KB did discuss issues on the criteria with Economic, but none of those was relevant to the issues on the criteria as they finally emerged. I have set out in the appendix to this judgment my findings as to whether there was contributory negligence in relation to the loans over £300,000. (e) Relevance of this issue to the plaintiffs’ claims against Skipton The plaintiffs accepted that if their title to sue Skipton was based on their enforcement of KB’s claims against Skipton through either equitable assignment or a trust, then Skipton could rely on any contributory negligence it could establish against KB. However the plaintiffs submitted that there was no defence of contributory negligence to the claim by them where they relied on novation, as they did, in respect of the owners deed and transfer certificates. Given the conclusions on other matters to which I have come, this is such a remote contingency, that it is not necessary for me to consider it at present. Issue (8) Claims over against KB (a) Claim by the plaintiffs under clause 5 of the sale agreements Although at the outset of the trial, the plaintiffs claimed both in contract under the sale agreements and in tort, they made clear in their closing submissions that they no longer pursued the claim for misrepresentation or in tort. The claim in contract was made under the warranty in clause 5(c) of each of the sale agreements: Prior to the making of such advance the Criteria were, so far as KB was aware from the information in its possession after due enquiry, satisfied. At the conclusion of the trial, it was clear that the criteria referred to in this clause were the criteria appended to the broking deed. The plaintiffs confined their claim under this clause to any loan where (1) Economic were not liable to pay under the pool policy and (2) Skipton were not liable either (a) because KB had given its approval under clause 30(A) or (b) because KB were contributorily negligent. The plaintiffs’ claim was simply and attractively put. They contended that for Skipton not to be liable because of KB’s approval under clause 30(A), Skipton would have had to show specific breaches of criteria were approved; it would therefore have followed that KB must have known of the breaches of the criteria. If KB were found to have contributed to the loss through its own negligence in the way Skipton alleged, then again KB were either aware or ought to have been aware from information in their possession of breaches of the criteria. I accept this approach. The warranty in clause 5(c) of the sale agreements was not confined to circumstances where KB were subjectively aware of a breach of criteria; in the commercial context of the sale arrangements, KB were providing a warranty that by the standards of a prudent banker, KB were unaware of breaches of criteria to the extent that information was in their possession; the phrase ‘after due inquiry’ plainly pointed to this objective standard. KB relied on the submission to them of the forms on drawdown that stated that the criteria had been complied with. They maintained that whatever might have been their state of knowledge at some prior occasion they were entitled to rely on these statements as confirming that the criteria had been complied with. They contended that it amounted to ‘verification’ that the loan in question complied with the criteria. At the time of the advance, therefore, as far as KB were aware on the totality of the information in their possession, the criteria had been complied with. I accept that it is necessary to have regard to the totality of the information in the possession of KB at the time the loan was made and account must therefore be taken of the form used on drawdown. But that form must be seen in context and considered in circumstances in which there was an awareness of the breach of the criteria and the obligation of ‘due inquiry’. The plaintiffs did not contend that KB ought to have obtained information they were not provided with. They contended that, if KB had specifically authorised a breach criteria or were or ought to have been aware from the information they had when approving a loan that there had been a breach of the criteria (even if that had not been specifically authorised), they could not rely upon a form that was submitted for operational and administrative purposes to discharge the duty of due inquiry to see what had happened after their review. There was some evidence that the form was considered by KB, as, for example, on the second loan to Staffordshire Country Clinics Ltd. However, if KB were or ought to have been aware of a breach of the criteria at the time they considered the loan application, in my view, they cannot rely on this form as sufficient to change their state of knowledge. Such an administrative document could not and did not do that. (b) Second loan to Staffordshire Country Clinics The second loan to Staffordshire Country Clinics was applied for and made after the sale to Nomura. There can therefore be no liability under clause 5(c) of the sale agreement. 184 (c) Claim over by KB against Skipton KB claimed over against Skipton in certain eventualities; by the end of the trial that claim over was confined to an indemnity in respect of any funds that KB might have to pay in respect of Economic’s counterclaim. In the light of the conclusions to which I have come, the contingency on which such a claim could arise is remote and it is not necessary for me to deal with it. Issue (9) Consequences of professional negligence In respect of three of the loans (Rowley (loan 2), Glintpatch (loan 3), GCS Partnership in respect of the offices at Bagley Lane (loan 5)), Skipton contended that the losses were caused by professional negligence of solicitors or valuers. The facts in relation to the issues of professional negligence were not tried in the issues raised before me; they will be tried if necessary hereafter. I was asked however to make a preliminary determination on the basis of the following assumptions of fact: (1) the solicitors or surveyors were negligent; (2) one of the parties in whom was vested the requisite cause of action could have recovered judgment for substantial damages against the solicitor or valuer; (3) the negligence was such that the solicitor or surveyor would not have had an arguable defence on liability. (i) Effect of clause 23(2)(c) of the broking deed The express terms of the indemnity provided for under clause 23(2)(c) made it clear that the terms of the indemnity did not apply to costs, claims, demands and expenses incurred as a result of any actions or omissions of valuers or solicitors properly instructed on behalf of KB. However the limitation in this clause only applied to the indemnity claimed under the clause; the plaintiffs were, however, only claiming an indemnity under this clause in respect of Economic’s counterclaim. Of the six claims in which Economic sought recovery, only the claim in respect of the GCS Partnership’s offices at Bagley Lane involved an allegation of professional negligence. In the event, no claim for an indemnity arises as Economic’s counterclaim has failed. However, if I had held that Economic’s counterclaim succeeded, and the plaintiffs or KB had been unable to recover under clause 30(A), then a claim under this clause would have arisen and the issue of causation in relation to that claim would have had to have been tried. As appears from the appendix, there is a real issue as to whether the loss resulted either from the fact that Skipton were under a misapprehension as to the property or from the negligence of the professionals. (ii) Causation: Did the negligence of the solicitors/surveyors cause the loss claimed? Skipton contended that in the case of each of the loans, the loan would not have been made if the solicitor/surveyor had advised carefully; for example in the case of the loan to Mr and Mrs Rowley, if the solicitor had advised of the difficulty in relation to access to the Steamboat Inn, then that would have affected the trading projections for and value of the Steamboat Inn. The loan would therefore never have been made. However the principal claim advanced by the plaintiffs is under clause 30(A) of the broking deed; that is a claim for liquidated damages where the criteria had not been complied with and no indemnity was received under the pool policy. The negligence of the solicitor or surveyors relied on by Skipton is immaterial to that claim. Economic would have had to pay irrespective of any such negligence. For example, the criteria specified a ratio of loan to valuation, not actual value. If the valuation was too high as a result of negligence, the loan would be within the criteria, even though the property was not in fact of a value sufficient to satisfy the loan to value ratio. Economic would, however, on general principles, had they otherwise been obliged to pay under the insurance, have been subrogated to the rights against the surveyors. Thus in respect of the claim under clause 30(A), the negligence of the professional was immaterial to the claim, though, for the reasons I have given, Skipton would have been entitled to the benefits of such rights against the professionals. As to the plaintiffs’ claims under clauses 20(1) and 23(2)(a), those are again claims for losses caused by the failure to obtain insurance; had the criteria been complied with, then Economic would have had to pay the claims under the policy. Thus any negligence by the surveyors and solicitors was not causative of the loss claimed. The loss was not caused by the inadequacy of the security to cover the amount outstanding; that loss would have been covered by the insurance. (iii) Mitigation: should the losses have been reduced by suing the professionals? Skipton contend that, on the assumptions I have been asked to make, a claim against the surveyors was not speculative and therefore the plaintiffs should have brought proceedings or required KB to bring proceedings against the solicitors/surveyors. Had they done so, then substantial damages would have been recovered. As they had failed to do this, they had failed to mitigate their losses. The plaintiffs’ principal claim under clause 30(A) is a claim for liquidated damages; in Abrahams v Performing Right Society [1995] IRLR 486, the Court of Appeal held that as a matter of principle where there is a valid liquidated damages clause, there is no room for argument on mitigation of damages as that was a concept relevant only in cases where the damages are at large. Thus the issue of mitigation did not arise in relation to the main claim. The plaintiffs accepted that a duty to mitigate could in theory have arisen in relation to the claims they advanced under clauses 20(1), 23(2)(a) and the implied term of the broking deed and for negligence. However, they contended that in view of the fact that the loss claimed was in respect of the unavailability of the recoveries under the insurances, they were not obliged to mitigate by proceedings against the solicitors/surveyors. The obligation on a plaintiff is to take all reasonable steps to mitigate the loss he has suffered. In Pilkington v Wood [1953] Ch 770, Harman J had to consider whether a purchaser of property who was suing his solicitor for failing to ascertain a defect in the title to the property was obliged to sue the vendor. In that case, the solicitor had offered an indemnity, but Harman J held in the circumstances of that case that: I am of opinion that the so-called duty to mitigate does not to go so far as to oblige the injured party, even under an indemnity, to embark upon a complicated and difficult piece of litigation against a third party … it is no part of the plaintiff’s duty to embark on the proposed litigation in order to protect his solicitor from the consequences of his own carelessness. In my view, the question whether in the circumstances of this case the plaintiffs were obliged to bring proceedings against the professionals has to be considered in the light of several factors: • their claim against Skipton was in respect of the non-payment of the insurance claims; • they themselves had no right to sue the valuers/solicitors; the rights against the valuers/solicitors had not been assigned; if a claim was brought in the name of KB, the valuers/solicitors might have put forward the arguments Skipton canvassed in this trial and contended that they had suffered no loss as the mortgages had been sold. • time and resources that would have had to have been devoted to bringing separate claims outside this complex litigation. These are all factors that point against it being the duty of the plaintiffs to bring proceedings. However, the ultimate decision would depend on the precise circumstances of the claims against the solicitors/surveyors and that information is not before me. My preliminary view is that, unless there is some special feature of the claims against the surveyors or solicitors in respect of the three loans which would demonstrate that the claims were ones that were simple and unlikely to be contested to a full trial, I do not consider that the plaintiffs were obliged to bring proceedings against the solicitors/surveyors.