Execution of a guarantee
and debenture does not have to mean a deal was reached, says Greg
Standing.
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Where negotiations between
parties for leasing, or any other contract, have proceeded on the
basis that agreement has to be reached on several matters under
discussion before anyone is bound, those discussions stand or fall
together.
Until everything is agreed,
either side can withdraw. The exchanges between the parties must be
looked at objectively to determine whether any agreement was
reached and what the parties intended.
In Destiny 1 Ltd vs
Lloyds TSB Bank PLC, the parties entered into negotiations
regarding the provision by Lloyds of a guarantee to Destiny’s
wholesalers so that it could purchase stock, an overdraft facility
and a refinancing of existing debt.
Security was to be given by a
debenture over Destiny’s assets, a personal guarantee from
Destiny’s owner, K, and charges over properties owned by him.
Lloyds wrote to K confirming that it would provide the guarantee,
subject to the satisfaction of certain conditions. K agreed to
those conditions in writing.
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By GlobalDataThe personal guarantee and
the debenture were executed and the latter was registered by
Lloyds. However, Lloyds subsequently decided not to proceed with
the refinancing of Destiny’s debt and the whole transaction
collapsed.
Destiny sought damages for
breach of contract. It alleged that K’s agreement to Lloyds’
conditions regarding the guarantee to the wholesalers had given
rise to a binding agreement to issue that guarantee. Lloyd’s
failure to do so had caused it loss.
Lloyds argued that its letter
in relation to the guarantee had set out the conditions on which
the guarantee would be issued, if and when all the other elements
of the financing package were agreed.
Since the negotiations for
the refinancing did not come to fruition, Lloyds argued they never
became bound to issue the guarantee.
The Court of Appeal agreed
with Lloyds. The court held that where there is a series of oral
and written exchanges over a period of time, those exchanges have
to be viewed as a whole when determining whether agreement has been
reached or not and, if so, on what terms.
The law views negotiations
objectively rather than considering the parties’ subjective
intentions or understandings. It was clear that throughout the
discussions and correspondence, the parties were intending to reach
agreement on a package of financial measures and securities, not
just the guarantee.
They were all inextricably
linked. The fact that K’s personal guarantee and the debenture had
been executed did not mean an agreement had been
reached.
When placed in the context of
the broader negotiations, these were simply steps taken towards the
completion of the arrangements.
Things to
consider
If agreeing a whole raft of
financial and security provisions, it’s best to make it very clear
from the correspondence and documentation that the package is just
that, and that no individual contract will be formed until
everything is agreed and in place.
This will help should the
court ever need to look at the circumstances objectively, and
determine what a reasonable person would have understood the
communications between the parties to relate to.
Greg Standing is a
partner in Wragge & Co’s finance litigation
team
