Rayford Homes Limited v Bank of Scotland plc [2011] EWHC 1948 (Ch)
Rayford Homes financed itself by way of loans from BoS and its trustee shareholder, both of which took security over the company's assets. In the inter-creditor agreement provided by the Bank, there was a definition of "BoS Priority" which was defined as meaning "BoS Debt not exceeding £[ ] together with interest...". The definition was not referred to in the operative part of the ICA and the amount was left blank. The ICA was derived from a Bank of Scotland standard form, but it was not clear how the defined term came not to be used. After signing, BoS agreed to make further advances to Rayford Homes. The original ICA was circulated with handwritten amendments; the amount of £4m was inserted in the definition of BoS Piority and initialled. £4m happened to be the amount of BoS's facility at that date. Later, the amount lent by BoS increased considerably. Rayford Homes went into administration and part of the matters in dispute was whether the definition had any meaning, i.e. whether the £4m figure limited the priority that BoS's charge had as against that of the trustee.
BoS argued that the definition had no meaning and was merely descriptive of the amount of the loan facility at the time that the change was initialled. The reasonable reader of the amended ICA, with relevant background knowledge, would not conclude that the insertion of £4m in the definition of BoS Priority was intended to give the definition a life it did not otherwise have.
In contrast, the trustee argued that the definition imposed a specific financial limit on the extent of BoS's priority. Even though the agreement itself did not effect the limitation (because the definition was not used), the deliberate addition of the limit to the definition should reasonably and properly be read as effecting an agreement that the inserted limit should apply to BoS's priority. As the ICA was a standard form of agreement, BoS must have deleted the words containing the defined term. The later insertion of the limit showed that the deletion was not intended. The clear purpose for the defined term was, once the limit was inserted, to limit BoS's priority. The Bank's construction deprived the amended definition of any contractual effect, contrary to the basic proposition that the court should seek to give effect to all provisions of a contract. It was inconceivable that the amendment would have been made if the parties intended for there to be no limit.
The Judge found for the trustee. He said that there was no single commercially sensible construction. Both unlimited priority for BoS and a limited priority were entirely plausible. In his view, this was one of the many cases in which commercial plausibility was of no real assistance into construing the parties' agreements. Using the Chartbrook principles for construction of an agreement, the Judge rejected the argument that the purpose of the insertion was simply to state the facility limit as at the date of the initialling. He could think of no good reason why the parties should wish to include a statement of the thencurrent facility. The clear construction of the ICA was that, without the insertion, the priority was unlimited. The purpose of the definition was by its terms to limit BoS's priority. He accepted the trustee's suggestion that only a small change was required to include the definition in the body of the agreement (addition of the words "to the extent o the BoS Priority" at the end of the one of the first clauses).
At first blush, one might think that a "dangling definition" would be of no effect and serve no relevance in the interpretation of a contract. This case shows that this is not always so, especially where a change is subsequently made to the definition.
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