Judgments - Investors Compensation Scheme v. West Bromwich Building Society  continued

(back to preceding text)

      I/we understand that, subject to section 3(b) below:-


    2.      [I.C.S.] in its capacity as administrator of the Scheme will take over my rights and claims against [F.P.S.] and other third parties on the payment of any compensation as described in the Transfer of Rights at Section 4 of this form. Any amount received will be paid direct to [I.C.S.] and any amounts (less costs and interest) which exceed the compensation payment will be paid to me/us."

      Section 3(b), which has given rise to all the difficulty, read, as follows:

     "I.C.S. agrees that the following claims shall not be treated as a 'Third Party Claim' (as defined in Section 4 of this form) for the purposes of this agreement and that the benefits of such claim shall enure to you absolutely:


     Any claim (whether sounding in rescission for undue influence or otherwise) that you have or may have against the [W.B.B.S.] in which you claim an abatement of sums which you would otherwise have to pay to that Society in respect of sums borrowed by you from that Society in connection with the transaction and dealings giving rise to the Claim (including interest on any such sums)"

    Finally, section 4 contained a statement that:

     "I/we, the Claimant, agree and acknowledge as follows:


    1.      I/we agree that my/our rights against [F.P.S.] in respect of the Claim shall pass to [I.C.S.] on payment of compensation . . .


    2.      I/we agree that we will accept the sum of £ . . . from I.C.S. in satisfaction of my/our entitlement to compensation under the Rules in respect of the Claim.


    3.      I/we acknowledge that under the Rules on payment of the amount of £ . . . I/we will no longer have the right to make a claim against [F.P.S.] in respect of the Claim and that any such right will be vested in I.C.S. pursuant to the Rules, and I/we further acknowledge that any sums which would otherwise be payable to me/us in respect of the Claim by [F.P.S.] . . . shall be paid instead to I.C.S.


    4.      So far as any rights in respect of the claim would otherwise remain vested in me/us, I/we agree that I/we assign those rights to I.C.S. to the extent of the amount of the said compensation and Scheme interest paid.


    5.      I/we agree that in the event of my/our receiving any moneys or assets in respect of the Claim from [F.P.S.] . . . I/we will forthwith pay or transfer them to I.C.S.

    6.      I/we hereby assign absolutely to I.C.S. each and every Third Party Claim and the benefit thereof.


    7.      I.C.S. agrees and acknowledges that in the event that it recovers any monies in respect of a Third Party Claim, it will pay to you a sum equivalent to the aggregate of:--(a) the moneys which I.C.S. has recovered in respect of the Third Party Claim; and (b) any monies which I.C.S. has recovered in respect of the Claim; and (c) any monies which I.C.S. has recovered pursuant to clause 5 or 6 above;




        (i) the amount of compensation which I.C.S. had paid to you; (ii) such amount in respect in respect of interest as I.C.S. considers just; and (iii) the costs which I.C.S. has incurred in effecting, or in attempting to effect, any such recovery.


    8.      I/we agree that I/we will provide all reasonable co-operation and assistance that I.C.S. asks me/us to give in connection with any pursuit by I.C.S. of claims corresponding to the Claim and of any Third Party Claim, including the provision of documents, the provision of statements, the swearing of affidavits and the attendance at court to give oral evidence.


    9.      I.C.S. may give a good receipt to any person in respect of any Third Party Claim the benefit of which is assigned by this document.


    10.      I.C.S. will conduct all proceedings and settlement negotiations regarding claims assigned by you reasonably and with due regard to your interests as well as its own.


    11.      I.C.S. will re-assign to you at your request any claim which it and, if relevant its insurers decide at any time not to pursue or to pursue further.


    12.      In this document, "Third Party Claim" means any right, claim or cause of action which the claimant has or may have against any person other than [F.P.S.] or against any fund or property in the hands of any person other than [F.P.S.] and arising out of the circumstances giving rise to the Claim or otherwise relating to the Claim, whether such claims shall arise in debt, breach of contract, tort, breach of trust or in any other manner whatsoever . . ."

      Although the form was obviously trying not to use too much legalese, it could not have been easy for the ordinary retired home owner to understand. It referred to technical concepts like "sounding in rescission" and "in debt, breach of contract, tort, breach of trust or in any other manner whatsoever." I.C.S. therefore also provided an Explanatory Note which was a model of clarity:

     "1.      Under this document, once you have received your compensation from I.C.S., you will not be able to sue the 'Participant Firm' mentioned above in relation to the claim which led to that compensation. This is because your claim is being met by I.C.S. instead. (Paragraphs 2 and 3).


    2.      But I.C.S. in turn may wish to recover some or all of its outlay to you by suing the firm, and you promise to help I.C.S. if I.C.S. decides to do so (Paragraph 8).


    3.      Further, since you are being compensated in relation to this claim, you should not expect any more money for it from the firm (or liquidator) (second half of paragraph 3); and any money sent to you because of it (e g by the liquidator) is really due to I.C.S. instead of to you, so you must pay the money to I.C.S. (paragraph 5).


    4.      You also agree that I.C.S. should be able to use any rights which you now have against anyone else in relation to the claim. Examples might be directors of the firm or other persons also responsible for causing the loss for which you are being compensated. You give up all those rights and transfer them to I.C.S. (paragraph 6)."

Before I turn to the question of construction, I must provide some of the background to how this litigation has come about. A number of the home owners instructed a firm of solicitors called Barnett Sampson to negotiate their claims. The rules provided that claims were to be met "only where the management company considers that it is essential in order to provide fair compensation to the investor." I.C.S. decided that it would not pay compensation in respect of various heads of claim: in particular, that it would not reimburse money which the homeowners had given away or spent on themselves, or fees paid to lawyers and other professionals, or damages for illness, anxiety and stress. Barnett Sampson's clients challenged this decision in proceedings for judicial review but this House decided in Reg. v. Investors Compensation Scheme Ltd., Ex parte Bowden [1996] A.C. 261 that I.C.S. had acted within its powers.

      I.C.S. then commenced proceedings against various building societies for compensation for breach of statutory duty under the Act of 1986 and damages for breach of duty at common law, claiming to sue as assignee of the investors. In proceedings against the Cheltenham and Gloucester PLC (previously the Cheltenham & Gloucester Building Society) the Society took the point that section 3(b) of the Claim Form reserved to the investor all claims against the Society and that I.C.S. therefore had no title to sue. Evans-Lombe J. ordered this question to be tried as a preliminary issue and on 1 November 1995 gave a judgment in which he held that the only right reserved by section 3(b) was the right of the mortgagor, on rescission of the mortgage, to an adjustment of the mortgage debt as part of the mutual restoration of benefits consequent upon rescission. The assignment of the investor's right to damages for misrepresentation or breach of duty was unaffected. A year later the same point came before Evans-Lombe J. in proceedings by I.C.S. against W.B.B.S. By this time, I.C.S. had also commenced proceedings against a large number of firms of solicitors who had acted for investors in connection with the Home Income Plans. A number of investors represented by Barnett Sampson ("the Alford plaintiffs") and another firm of solicitors ("the Armitage plaintiffs") had also commenced separate proceedings against W.B.B.S. for rescission of their mortgages and damages. Evans-Lombe J. therefore directed preliminary issues on the question of who, as between I.C.S. and the investors, had the title to sue W.B.B.S. for damages. These are the proceedings which are the subject of this appeal to your Lordships' House.

      My Lords, I start with the construction of Section 3(b). Evans-Lombe J. followed his own decision in the earlier Cheltenham and Gloucester case and I shall first summarise his reasoning and then that of Leggatt L.J. in the Court of Appeal. Evans-Lombe J. focused on the words "any claim (whether sounding in rescission for undue influence or otherwise) that you have . . . against the . . . Society in which you claim an abatement of sums which you would otherwise have to repay to that Society . . ." According to ordinary rules of syntax, "any claim" is the antecedent of "that you have" and the words "or otherwise" in the adjectival parenthesis mean that it does not limit the breadth of "any claim." It follows that claims of any description are reserved as long as they amount to claims for an "abatement" of what is owing to the Society. There are various ways in which the amount owing might be abated but one would be on account of a set-off against the Society's liability for damages. Thus the syntax of the words following "any claim" points to a wide meaning of "abatement" which includes the effect of cross-claims.

      Evans-Lombe J. then turned to the background against which the language in the Claim Form had been used. Two features seemed to him odd. First, the building society and the solicitors were the only solvent parties against which the investors were likely to have any claim. As between the building society and the solicitors, the former would certainly be the prime target. It had profited from the Home Income Plans by lending money at enhanced rates of interest on safe security (maximum of 50 per cent. of value) at a time when lenders were falling over themselves to lend as much money as possible. One might expect that I.C.S., having paid compensation to the investor, would take over his claim against the building society. If not, the investor might well be over-compensated. Other provisions of the form, like clause 7, seemed to assume that I.C.S. would do the suing and account to the investor for the net recovery in excess of the compensation paid. But there was no provision for the investor having to pay anything back to I.C.S. This pointed to I.C.S. being entitled to any recoverable damages.

      Secondly, the parenthesis seemed very strange against the background of the law. If it was exhaustive, why was "sounding in rescission for undue influence" singled out? What about rescission on other grounds, or claims for breach of statutory or common law duty? It was rather like providing in a lease of a flat that the tenant should not keep "any pets (whether neutered Persian cats or otherwise)." Something seemed to have gone wrong.

      Considerations of this kind led the judge to conclude in the Cheltenham and Gloucester case that the wider construction of "any claim" and "abatement" led to a "ridiculous commercial result which the parties to the Claim Forms were quite unlikely to have intended" and that it was clear that "the drafting of the second paragraph of Section 3(b) was mistaken." He therefore concluded that the meaning intended by the parties was that the investor should retain any claim for an abatement of his debt which arose out of a claim for rescission, whether for undue influence or otherwise. This could be fitted easily into the scheme of the law because the old equitable remedy of rescission included, as part of the restitutio in integrum, an accounting for benefits and indemnity against liabilities which could result in an abatement of the mortgage debt. Such a remedy was quite separate from a common law action for misrepresentation or breach of statutory duty. But the learned judge seems to have had some misgivings about his interpretation: he said that was doing violence to the natural meaning of the words and altering the drafting of the paragraph in a way "more appropriate to rectification than the process of construction." In the present case, however, the judge adhered to his construction and gave some additional reasons.

      In the Court of Appeal, Leggatt L.J. said, on the authority of Alice Through the Looking Glass, that the judge's interpretation was "not an available meaning of the words." "Any claim (whether sounding in rescission for undue influence or otherwise)" could not mean "Any claim sounding in rescission (whether for undue influence or otherwise)" and that was that. He was unimpressed by the alleged commercial nonsense of the alternative construction.

      My Lords, I will say at once that I prefer the approach of the learned judge. But I think I should preface my explanation of my reasons with some general remarks about the principles by which contractual documents are nowadays construed. I do not think that the fundamental change which has overtaken this branch of the law, particularly as a result of the speeches of Lord Wilberforce in Prenn v. Simmonds [1971] 1 W.L.R. 1381, 1384-1386 and Reardon Smith Line Ltd. v. Yngvar Hansen-Tangen [1976] 1 W.L.R. 989, is always sufficiently appreciated. The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of "legal" interpretation has been discarded. 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 as 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 meanings 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 W.L.R. 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 would 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 S.A. v. Salen Rederierna A.B. 19851 A.C. 191, 201:

     ". . . if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense."