Close Brothers v Ridsdale [2012] EWHC 3090 (QB)

Enforcement of guarantees

The facts of this case are all too familiar. Mr Ridsdale had been a successful property developer. He was the first defendant and his wife was the second defendant. Mr Ridsdale carried out his property development through a company, the third defendant. Close Brothers lent money to the company under a facility letter for a development in the charmingly named Puddletown, a small rural village in Dorset. Mr and Mrs Ridsdale personally guaranteed £350,000.

The first 12 month facility letter was dated 9 June 2008. The Ridsdales signed their guarantee on 1 July 2008, in Mrs Ridsdale’s case against the advice of her solicitor. The development was behind schedule by March 2009. Mr Ridsdale therefore needed to extend the facility, but between June 2008 and March 2009, the economic climate had changed dramatically. Mr Ridsdale’s other developments were facing problems too. As a result, the negotiations over the extended facility were more difficult than either party had expected or experienced in the previous 5 years of the relationship. Crucially, Mr Ridsdale was looking for, but did not get, an assurance from the bank that it would not call in the loan until the project was complete.

The facility was extended three times: on 10 July, 28 October 2009 and 4 February 2010. It is important to note that the alternative to an extension was to allow the facility to expire in a market where it was improbable that that the same facility would be available elsewhere. If a facility was available, it would almost certainly have been on less favourable terms. There were a number of issues for determination:

Issue 1

Whether a fundamental change was made to the original facility letter by the extended facility letters, and, if so, had Mr and Mrs Ridsdale consented to that change? The principle was clear and of long authority that a guarantor would be released from liability under a guarantee if there was a material or ‘not unsubstantial’ change to the underlying agreement in respect of which the guarantee has been given. The Judge accepted that there had been such a material change principally because, under the extended facility, the bank only committed itself to funding the first phase of the project, whereas originally the bank had committed itself to funding the whole project. However, the Judge found that the Ridsdales had consented to that change by signing the new facility letters.

The judge also noted (at paragraph 106) that the authorities made clear that a guarantor would not be discharged from liability if the change, whilst material, cannot be otherwise than beneficial to the guarantor. This point had not been argued before him, but the judge felt that the extension may well have been better than any other deal in the market. On that basis, it must have benefited the Ridsdales.

Issue 2

Whether clause 3 of the guarantee was ineffective to preserve the validity of the guarantees in the face of the change represented by the first extended facility agreement?

Clause 3 was a standard, bank friendly provision to avoid a guarantee being rendered ineffective by a change in the agreement between the parties to the underlying transaction being guaranteed.

Where a change was not in substance a variation or amendment to the original underlying transaction but was on the contrary a new agreement outside the general purview of the original guarantee, then the guarantors would not be liable in respect of that new agreement. The Judge found that in this case, the extended facility was not outside the purview of the original guarantees given by the Ridsdales. The extension of the facility was precisely the sorts of change to the facility which clause 3 was intended to anticipate.

Therefore, while the Ridsdales could persuade the Judge that there had been a fundamental change to the original facility, they could not persuade him that there was a new agreement outside the general purview of the original guarantee.

The bank had a back up argument if it lost on either of the above issues: there was fresh consideration flowing to the Ridsdales for each extension so they would remain liable under each of them. On this analysis, the bank only has to establish the validity of the last in time. The Judge said that this was a novel argument not addressed in any authority, and although he did not have to decide it, it had much to commend it. It is a development of the point that the Ridsdales had an interest in continuing the development to see if the project could be rescued; the alternative was an insolvency. That commercial reality was a key theme of the decision.

Gibson & Co.

November 2012

This is a victory for David over Goliath, and the facts are intriguing.

As its name suggests, the claimant is a spread betting bookmaker.  It offered to accept bets on the movements in prices of various commodities including gold, silver and crude oil.  Mr Cochrane visited the claimant's website in October 2010.  He provided brief details of his means and bank account and then specified a password and memorable question and answer.  This took him to a screen that enabled him to view and therefore read various documents including the "Customer Agreement".  The screen stated "Once read and understood, please click on `Agree' to signify your agreement to the terms".  A phone number was offered for any questions.  This was followed by a button marked "Submit".

Mr Cochrane clicked on `Agree' and `Submit', and was able to trade immediately.  In fact, he did not do so until the following month (November 2010).  However, between 9 November 2010 and 2 May 2011, Mr Cochrane made more than £60,000.

On the morning of 2 May 2011, he went online at his girlfriend's house.  As he made his trades, he explained to his girlfriend's son that he was playing a kind of guessing game.  At about 2.15pm, he went out leaving the computer on.  He was unexpectedly away from the house for about two days during which time his mobile phone battery ran out.  When he recharged his phone he found messages from the claimant.  When he returned those calls, he was told that his account had lost almost £50,000.  When he got back to his girlfriend's house, he found that there had been numerous trades on his account in his absence.  His girlfriend told him that her son had been playing games on the computer.

Spreadex applied for summary judgment contending that Mr Cochrane had no arguable defence.  Spreadex said that it did not matter whether Mr Cochrane or someone else made the trades after 2.15pm on 2 May, relying on clause 10(3) of the Customer Agreement which stated:

"Your password must be declared, together with your account number, when you wish to access your account.  You will be deemed to have authorised all trading under your account."

Spreadex's application failed for two reasons.  First, Donaldson J held that clause 10(3) could only assist if it bound the customer because it formed part of a contract.  The Judge found that the Customer Agreement was not a contract in itself and it did no more than set out the terms which would form part of a contract created each time a particular trade was entered into.  He found that there was no contract that gave effect to clause 10(3) for those trades not carried out by Mr Cochrane.  He decided this chiefly because there was no consideration for any such contract.  Interestingly, the Judge found that the provision of a facility on which to offer trades was no adequate consideration, because Spreadex had a unilateral right to remove the facility.

Second, (and if the Judge was wrong about the existence of a binding contract) the relevant terms of the Customer Agreement (including clause 10(3) were unfair within the meaning of the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR) and therefore not binding on Mr Cochrane.  One compounding factor on which the Judge relied was that, if a customer chose to view the Customer Agreement, he was faced with 49 pages of closely printed complex paragraphs.  "It would have come close to a miracle if he had read the second sentence of Clause 10(3), let alone appreciated its purport or implications, and it would have been quite irrational for the claimant to assume that he had" (Judgment at paragraph 19).

Two points strike us.  First, if there is a weakness in the Judge's analysis, it is that the provision of the facility was not adequate consideration because Spreadex could have withdrawn that facility.  The ability to withdraw a facility does not mean that it was not made available in the first place; arguably the Judge could have found that the offering of the facility did in fact amount to consideration.  If Spreadex withdrew the facility, then (on the Judge's analysis) there could be no contract, but prior to withdrawal the customer did have the ability to trade.  Second, this case must be a concern for retailers who contract with customers online.  The usual practice appears to be to try to incorporate the retailer's standard terms by offering the consumer the opportunity of reading them.  Experience tells us that very few consumers do so.  This case seems to spell trouble for the retailer trying to enforce such terms.

Gibson & Co.

September 2012