Neutral Citation Number: [2009] EWHC 1590 (Comm)
Case No: 2008 FOLIO NO 528
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 15/07/2009

Before :

MR JUSTICE DAVID STEEL
- - - - - - - - - - - - - - - - - - - - -
Between :

	INVESTEC BANK (UK) LIMITED	Claimant	
	- and -		
	(1) ARNOLD ZULMAN
(2) DAVID ZULMAN	Defendant	

- - - - - - - - - - - - - - - - - - - - -
- - - - - - - - - - - - - - - - - - - - -

Paul Downes (instructed by Mc Clure Naismith) for the Claimant	
Stuart Adair (instructed by Radcliffes Le Brasseur) for the Defendants

Hearing dates: 11 - 21 May 2009
- - - - - - - - - - - - - - - - - - - - -

Judgment
Mr Justice David Steel : 
Introduction
1.	The Claimant bank (“the Bank”) pursues a claim for £577,752.70 under a guarantee executed by both the Defendants on 4 May 2005 in support of a loan by the Bank to a confectionary business, Ashbury Confectionery Ltd (“Ashbury”).
2.	The two Defendants (“AZ” and “DZ”) owned and controlled Ashbury. DZ was the Managing Director and AZ was a joint chairman and non-executive director.  AZ was semi-retired and played only a limited role in the day-to-day management of the company.
3.	The original advance to Ashbury was in the sum of £2,030,000.  It was made on 29 July 2004 pursuant to the terms of a facility letter dated 21 July 2004 (“the Facility Letter”). This loan was in part secured by a cash deposit provided by AZ.
4.	In May 2005 the Bank agreed to advance a further £500,000.  This additional advance was governed by the terms of the Facility Letter as varied by a side letter (“the Side Letter”) dated 4 May 2005.
5.	The additional loan was on terms that it would be secured by a deed of guarantee from the Defendants (“the Guarantee”).  Clause 3 of the Guarantee as signed provided:
“3	Limitation
The Guarantor’s liability shall be limited as follows:
3.1	the Guarantor shall only be liable under this Guarantee to the extent that the Debtor’s liability to the Bank at the time of the making of demand by the Bank under this Guarantee exceeds £2,000,000, all of which is secured by a debenture in favour of the Bank and of which £1,000,000 is further secured by a deposit; and
3.2	the maximum amount of the Guarantor’s liability shall not exceed a principal amount of £500,000 plus interest,
and any costs and expenses relating to enforcement of the Bank’s rights under this Guarantee.”
6.	In February 2007, in response to a request from the Bank, AZ applied the cash deposit amounting to £1 million in reduction of Ashbury’s liabilities.  This was in the wake of a variation letter (“the Variation Letter”) dated 31 January 2007 by way of amendment to the Facility Letter and Side Letter.
7.	The Variation Letter contained the following paragraph:
“GUARANTEE AMENDMENT
The maximum amount of the Guarantor’s liability shall not exceed a principal amount of £500,000 plus interest regardless of the principal amount outstanding for both loans.  This amendment renders clause 3.1 of the side letter dated 4 May 2005 null and void.  For the avoidance of doubt the guarantee relates only to the loan of £534,300 repayable on 31st December 2008”
8.	This Variation Letter was signed by DZ and another director on behalf of Ashbury. Ashbury went into administration on 4 January 2008.  Despite demands made under the Guarantee no payment has been made.
The issues
9.	The primary issues that arose for determination at the trial were as follows:
“(1)	Whether, on its true construction, the effect of clause 3.1 is to preclude any liability on the part of the Defendants if the indebtedness of Ashbury is less than £2,000,000;
(2)	Whether the Claimant is entitled to rectification of clause 3.1 of the Guarantee;
(3)	Whether, in or around January 2007, the parties concluded an oral agreement that the Guarantee would be varied to disapply clause 3.1;
(4)	Whether David Zulman’s initialling of the 31st January Letter was effective to vary the Guarantee;
(5)	Whether David Zulman had authority to vary the Guarantee on behalf of David Zulman; and
(6)	Whether Arnold and/or David Zulman are estopped from relying on the limitation of their liability contained in clause 3.1 of the Guarantee.”
Witnesses
10.	The Bank called the following to give oral evidence:
i)	Leon Blitz.  He was joint head of the Private Client banking team from 2004 to mid 2006.
ii)	David Renwick.  He had been a member of the Private Client Investment banking team from late 2003 to September 2005. He reported initially to Leon Blitz and thereafter to Avron Epstein.
iii)	Joanne Canning.  She was an associate solicitor with Eversheds who acted as solicitors for the bank.
iv)	Avron Epstein.  He took over from Leon Blitz in August 2006.
v)	Adam Querido.  He became the bank’s account manager for Ashbury in August 2006 reporting to Avron Epstein.
11.	Both Defendants gave oral evidence.
12.	By and large I felt confident that the witnesses were doing their best to assist the Court.  I certainly reject the submission that DZ gave dishonest evidence.  My primary reservation relates to Mr Epstein in regard to the events leading up to Variation Letter at a time when Mr Querido was away.  My impression was that Mr Epstein was somewhat evasive and unwilling to face up to the difficulties of reconciling his evidence with the contemporary material. 
13.	But impressions can be very misleading, particularly where there was a tendency to argue the merits of the case through the medium of the oral evidence.  Furthermore I have very much in mind that the trial was taking place some time after the material events occurred.  The actual recollection of witnesses must inevitably have dimmed, giving rise to some gaps in the story and a degree of inconsistency. 
14.	In these circumstances I respectfully endorse the observations of Lord Justice Robert Goff in The Ocean Frost [1985] 1 Lloyds Rep. 1 p. 57 to the effect that “where there is a conflict of evidence such as there was in the present case, reference to the objective facts and the documents, to the witnesses’ motives and to the overall probabilities can be of very great assistance to a judge in ascertaining the truth.” 
15.	There was a wealth of documentary material. Indeed this included one unusual category namely transcripts of various landline calls made to and from the bank which were recorded.  It is against that background that I propose to set out the broad history of the loans as emerges from the contemporary documentary material as a foundation to the resolution of the issues before me.
The background
16.	By early 2004, Ashbury had borrowings of about £7 million from Venture Finance Plc (“Venture Finance”) which were secured by fixed charges and a first debenture.  AZ and DZ decided to look for a further loan of about £2 million and duly approached the Bank.
17.	The negotiations were led on the Ashbury side by DZ assisted by David Gee, the Finance Director.  The principals on the Bank’s side were Leon Blitz and David Renwick.
18.	It is not necessary to record the details.  A proposal for £2.5 million of mezzanine financing was prepared by the Bank on 18 March 2004 “subject to credit approval and due diligence”.  This was further refined on 30 March 2004 after discussion with the Defendants at which time it was contemplated that they would provide a personal guarantee in the sum of £1 million in “support” of the loan.
19.	On 31 March 2004 the Bank’s credit committee sanctioned a facility in the sum of £1.5 million only, albeit it would give consideration to a further loan of £1 million subject to performance criteria.
20.	Messrs. Blitz and Renwick then put a variation on this theme to the credit committee, constructed as follows:
i)	£2 million initial facility with a further £500,00 subject to performance and further approval
ii)	£1 million cash deposit in place of any personal guarantee
iii)	Option to purchase 20% of Ashbury’s share capital.
21.	This proposal was duly approved by the credit committee on 25 May 2004 on the basis that there would be a first charge over the cash deposit.  A lower margin was set for that part of the loan which was backed by cash.
22.	Heads of Terms “subject to contract” reflecting this proposal were sent to AZ on 2 May 2004.  The security specified included a second legal charge on the assets of Ashbury together with “£1,000,000 cash deposit to be charged to the Bank to support operational loses (to be reviewed on an annual basis).”
23.	The terms of the Facility Letter (together with some of the supporting documentation) were forwarded on 29 June 2004. 
24.	The Facility Letter was signed on or about 30 July by DZ and Mr Gee by way of acceptance of the offer contained within it.  At the same time the other associated agreements and deeds were executed including the Deposit Agreement whereby Ashbury covenanted as “Depositor” to discharge the liabilities of Ashbury out of funds in a specified bank account (which presumably was to hold the £1 million cash deposit).
25.	Trading of Ashbury over the next 6 months proved to be very disappointing and well short of budget.  Indeed by March 2005 Ashbury was in breach of its loan covenants.
26.	On 29 March 2005 Mr Gee put to Messrs. Blitz and Renwick a proposal for further funding by way of release of £500,000 out of the monies on deposit as working capital and/or provision of the second tranche of the 2004 loan despite the shortfall on performance.
27.	On 12 April 2005, the Bank prepared a credit application for a “short term facility” for working capital of an additional £500,000 on the security of the existing package and personal guarantees from the Defendants.  As the authors (Messrs Blitz and Renwick) perceived it the current net exposure was, in the light of the deposit agreement, £1 million with a 20% warrant.
28.	The credit committee gave their approval on 13 April 2005 on the basis that joint and several guarantees from DZ and AZ for £500,000 be held until the performance was in line with forecasts for at least 3 months.  (The interest rate was later reduced from 3% to 2% by reason of the Guarantee.)   Outline terms were sent to Ashbury on 15 April 2005.  The proposal was expressly subject to execution of a facility letter and other loan documentation.  This documentation was sent out in draft on about 20 April 2005.
29.	The subsequent history of the drafting process is recorded without prejudice to the question whether the material is admissible and, if so, for what purpose.   The initial draft of the Guarantee provided:
“3 Limitation
3.1 The total amount recoverable by the Bank from the Guarantor under clause 2 shall not exceed the sum of £500,000 plus interest, costs and expenses.”
30.	Following some comments from DZ this clause was revised to read as follows:
“3. Limitation
3.1	The total amount recoverable by the Bank from the Guarantor under Clause 2 shall not exceed the sum of £500,000 plus interest and any costs and expenses relating to enforcement of the Bank’s rights under this Guarantee.”
31.	On receipt of this draft DZ set up a conference call with Mr Renwick and the Defendants’ legal advisor Mr Lyddon Simon.  The transcript includes the following exchange:
“MR SIMON:	And David, I’ve got one slight problem with this document.
MR RENWICK: 	Sure.
MR SIMON: 		I mean I’ve sort of picked up one or two small things, but the essence of it is this. As I understand it at the moment, at the moment the total borrowings from the bank by the company are 2 million.
MR RENWICK:	Yeah.
MR SIMON:		Of which 1 million is secured by a bank deposit.
MR RENWICK:	Yeah.
MR SIMON:		The other million is unsecured and if this further loan is made it will be secured by guarantee.
MR RENWICK:	Correct.
MR SIMON:		The point is this. Let us take say - so when I talk about the unsecured money I’m talking about a million and a half, okay. It’s only secured by the guarantee.
MR RENWICK:	Yeah.
MR SIMON:		So if you take that million and a half, then I suppose that the company’s indebtedness to the bank was reduced down to say a million.
MR RENWICK:	Yeah.
MR SIMON:		Then there should - then the guarantee should lapse. 
MR RENWICK: 	Well you see, what we would do in this instance, there will almost be a separate loan, so in other words - and this - which is this loan, this £500,000. And that would be the loan which is repaid first. And when that gets down to zero, the guarantee falls away.
MR SIMON:		That’s right. But I don’t think we’ve done that, that’s the problem.”
32.	Shortly after that conversation Mr Simon sent an email to Joanne Canning of Eversheds:
“I refer to the draft Guarantee dated 26 April and our telephone conversation today.
We are all agreed that the Guarantee applies only to the advance now to be made by the Bank to Ashbury in the sum of £500,000 and not to any other sums which are outstanding. In order to achieve this I suggest as follows:
1.		That a Recital be added to the draft Guarantee as follows: 
“Whereas the debtor’s liability to the Bank may from time to time exceed the sum of £1 million and the Bank has agreed to advance to the Debtor a further sum of £500,000…” 
Clause 3.1 would then read as follows: 
The Guarantor’s liability hereunder is limited as follows: 
3.1.1	The sum of £500,000 
3.1.2	To the extent to which the Debtor’s liability exceeds £1 million at the time this Guarantee is called 
I believe that if we amend the document in this way there should be no room for confusion in the future.
I await to hear from you with an amended draft.”  
33.	Ms Canning duly incorporated amendments along these lines in the next version of the Guarantee but shortly afterwards, on the Bank’s suggestion, the figure of £1 million was “corrected” to £2 million.  Later the same afternoon Mr Simon proposed a further variation so that the final version was as follows: 
“3.1	the Guarantor shall only be liable under this Guarantee to the extent that the Debtor’s liability to the Bank at the time of the making of demand by the Bank under this Guarantee exceeds £2,000,000, all of which is secured by a debenture in favour of the Bank and of which £1,000,000 is further secured by a deposit”.
34.	Ms Canning then spoke to Mr Renwick:
“MR RENWICK:	Have you - have we agreed on form? 
JOANNA:		We’ve agreed it, we’ve got it agreed now, he’s just sent it through now, and it looks fine. Basically he wants to make some reference in the guarantee to the fact that of the 2 million pounds - 
MR RENWICK:	Yeah. 
JOANNA:		- all of that 2 million pounds debt owed to Investec is secured by a debenture, and of which a million pounds is further secured by a deposit. Well I’ve got no problem referring to the security that we’ve got because we’ve got that security. Whether he somehow thinks that it gives the client further comfort that they have got other security for this and that, you know - 
MR RENWICK:	But the client knows that. 
JOANNA:		It doesn’t change the position at all, because yes, we have got that security, and we’ve made it very clear that this guarantee only relates to the £500K anyway.”
35.	The Side Letter was executed by AZ and Mr Gee on 4 May accepting the terms of the additional facility.  The same day the Guarantee was executed by both AZ and DZ.  It contained an endorsement by Mr Simon to the effect that he had explained the effect of the document to the signatories.
36.	The next event of any significance was a letter dated 1 December 2005 from DZ and Mr Gee as directors of Ashbury saying that the sum of £1 million sent to the Bank on 23 August 2004 had been incorrectly treated as being the funds of Ashbury.  The letter confirmed that that payment represented repayment of monies due to AZ and should have been credited accordingly.
37.	This led in turn, on the Bank’s insistence, to the execution of a Deposit Agreement by AZ on 12 December 2005 in place of the earlier agreement dated July 2004.
38.	Trading continued to be disappointing through 2006.  By now Adam Querido had taken over from Mr Renwick and Mr Epstein had taken over from Mr Blitz.  AZ began to make requests for further financial help with a focus on possible release of the £1 million deposit. 
39.	The concept was broached at a meeting between all four on 8 December 2006.   The issues were taken further in long telephone conversation between AZ and Mr Querido on 11 December.  The Bank was anxious to reduce its exposure by setting off the £1 million deposit against the loan.
40.	It appears that AZ had not hoisted in the full implications of the deposit agreement.  As he put it to Mr Querido there was little point in borrowing £2 million whilst in the same breath providing an on-demand set off of £1 million cash.  Furthermore in his view the 20% warrant could only be justified in the context of the higher loan figure (a proposition to which the Bank were apparently sympathetic).
41.	The proposal then made to the credit committee was as follows:
i)	Reduce loan by £1 million using cash deposit;
ii)	Reduce warrant to 11%;
iii)	Maintain repayment date of July 09;
iv)	Covenant regarding performance failing which option to call in loan.
42.	This was approved by the credit committee on 13 December 2006.  A draft variation letter was prepared on 21 December 2006 which reflected the proposed reduction of the loan to £1,604,000 (inclusive of £104,000 of rolled up interest).  It was as usual addressed to Ashbury for signature by two authorised signatories.  It had been prepared by a Mr Burch of the Bank’s legal department.  It was forwarded to DZ on 21 December and to Mr Gee on 28 December.  Mr Querido was about to go on holiday.  He sent a copy to Mr Epstein who thought there were some matters which needed attention but said that they could await Mr Querido’s return.  DZ responded on 3 January 2007 to the effect that the variation letter looked fine but he wanted to discuss it with AZ on his return to the office on 8 January 2007.
43.	It appears that shortly thereafter it occurred to the Bank that the Guarantee might need to be amended to reflect the change of circumstances contemplated by the draft variation letter.  An amendment to the Guarantee was prepared on 12 January by Mr Burch.  The draft struck out the recital and varied clause 3.1 to read: 
“3.1 The total amount recoverable by the Bank from the Guarantor under Clause 2 shall not exceed the sum of £500,000 plus interest, costs and expenses”
 (i.e. reverting to the first draft produced in April 2005).
44.	On his return from holiday Mr Querido raised the topic of the Guarantee in a telephone conversation with AZ on 22 January without descending to any detail.   AZ said he would look at it and discuss it with DZ.  On 24 January 2007, Mr Querido forwarded a new version of the Variation Letter together with the revised Guarantee to DZ. This draft of the letter had the section headed Guarantee Amendment mentioned above.
45.	On 26 January 2007, there was a further telephone conversation between Mr Querido and DZ to discuss both documents.  DZ asked for an extension of the £500,000 loan to December which Mr Querido accepted as a realistic proposal to put to the credit committee.   As regards the Guarantee, DZ queried the fact that interest was covered over and above the £500,000 principal sum.  Mr Querido assured him that such was also provided for in the previous guarantee, as indeed was the case. 
46.	Steps were put in hand to arrange for the release of the £1 million deposit.  A letter of authorisation was signed by AZ on 1 February 2007.  The Variation Letter was signed by DZ and Mr Gee on 22 February 2007 on behalf of Ashbury.  This was all pursuant to authority granted by the board of Ashbury recorded in minutes of the same date. 
47.	The Variation Letter addressed to Ashbury read as follows:
“Facility Letter dated 21 July 2004 and side letter dated 4 May 2005 made between Investec Bank (UK) Limited (“the Bank”) and Ashbury Confectionery Limited (“the Borrower”) hereafter referred to as the “Facility Letter”. 
We refer to the Facility Letter and hereby record variation of the terms and conditions of the Facility Letter which have been agreed between us. 
Save for the variation set out in this letter, the Facility Letter will remain in full force and effect and each party will be entitled to rely on the terms and conditions of it. 
This offer will lapse if this letter is not accepted within 14 days of its date. 
AMOUNT AND TYPE OF FACILITIES 
Loans: £2,703,472 (Two million seven hundred and three thousand, four hundred and seventy two pounds sterling) reducing to £1,703,472 (One million seven hundred and three thousand, four hundred and seventy two pounds sterling.) 
Loan 1 of £534,300 is repayable on 31 December 2009, with the balance remaining due in 21 July 2009. 
In the Facility Letter the principal amount(s) for the time being outstanding under the facility is referred to as “the Loan”. 
ADDITIONAL FINANCIAL COVENANTS 
The Borrower is to achieve EBITDA for 2007 of a minimum of £2,000,000. 
The Borrower is to achieve EBITDA for the six months to 30 June 2007 of £380,000.  
GUARANTEE AMENDMENT 
The maximum amount of the Guarantors’ Liability shall not exceed a principal amount of £500,000 plus interest regardless of the principal amount outstanding for both loans. This amendment renders clause 3.1 of the side letter dated 4 May 2005 null and void. For the avoidance of doubt the guarantee relates only to the loan of £534,300 repayable on 31 December 2008.  
CONDITIONS PRECEDENT 
The Borrower is to reduce the current exposure by the sum of £1,000,000 by the 31 January 2007. 
For the avoidance of doubt, the Warrants on this facility have reduced from 20% to 11%. 
Please confirm your acceptance of the variations set out above to the terms and conditions of the Facility Letter by signing and returning to the Bank the enclosed copy of this letter.”
	The revised guarantee was never executed.
48.	The performance of Ashbury continued to be unsatisfactory so as to impinge on its solvency.  In the result the Inland Revenue presented a winding-up petition.  In response the Defendants proposed to Venture Finance that the business and assets of Ashbury be sold to a new entity backed by the existing directors and shareholders.  The Bank was accordingly asked to release their various charges.  Given the terms of the Deed of Subordination the Bank had little option but to agree.
49.	Ashbury sought to persuade the Bank to roll over the £500,000 loan for the benefit of the new company, maintaining the personal guarantee.  This suggestion was not accepted and the Bank was left with an exposure in the region of £1.7 million.  Accordingly the Bank went on to call on the Guarantee in an attempt to recover part of this exposure.
Meaning of clause 3.1
50.	As might be expected, it is the Defendants’ submission that since Ashbury’s indebtedness fell below £2 million when the £1 million cash deposit was used to reduce the loan in February 2007, the claim under the Guarantee failed by virtue of the express terms of clause 3.1.  Indeed, as the account of the background reveals, it was appreciated by the Bank in January that it was necessary to amend the Guarantee or at the very least desirable to do so to clarify matters. 
51.	If the revised version had been executed, these proceedings would not have been required.  But somehow the Bank failed to ensure that the new version of the guarantee was executed by the Defendants.   In the circumstances the Bank is left in the awkward position of having to contend that any such amendment was not in fact needed.   The basis for that submission is put forward in various ways:
i)	on its proper construction, clause 3.1 entitled the Bank to recover £500,000 together with interest, despite the transfer of the deposit; or
ii)	that the Defendants are estopped from contending otherwise; or
iii)	the Guarantee should be rectified to achieve this result.
52.	Before dealing with those submissions I must deal briefly with two other contentions.  The first was that the parties had entered into a binding oral agreement either on 8 December 2006 or, possibly, at some later stage, to the effect that the £1 million would be transferred in reduction of the loan but that the personal guarantee would “remain in place” in the sense that £500,000 of the residual balance would be secured by the original guarantee thereby nullifying the effect of clause 3.1.
53.	There are a number of difficulties with this submission:
i)	The pleaded case on the date and content of the agreement was remarkably uncertain;
ii)	The contemporary notes of the meeting on 8 December (and the recollection of those attending) did not suggest that there had been any discussion whatsoever about clause 3.1 of the Guarantee;
iii)	In any event, it is clear that the earlier negotiations for the two loans were “subject to contract”: prima facie any negotiations for amendment of the terms of the loan and/or Guarantee were on the same basis: indeed the Bank’s witnesses accepted that this was the case;
iv)	The correctness of that view was confirmed by the Variation Letter itself which stated in terms that “this offer will lapse if this letter is not accepted within 14 days of its date”. 
It follows that I reject the contention.
54.	The second point that can dealt with briefly at this stage is this.  The Bank submitted that the execution of the Variation Letter by DZ on 22 February was effective to vary the Guarantee by way of disapplying clause 3.1 both on his behalf and on behalf of AZ.
55.	In my judgment this is not arguable:
i)	Given the documentary structure of the loan, the existence and presentation of a revised form of Guarantee is inconsistent with any intention that the amendments to the guarantee would be effected by the Variation Letter itself;
ii)	The Variation Letter was addressed to Ashbury and expressly stated that it recorded the “variations of the terms and conditions of the Facility Letter”: in turn the Facility Letter was defined as being the original Facility Letter and the subsequent Side Letter;
iii)	As required, it was signed by two authorised signatories of Ashbury being DZ and Mr Gee: they did so by way of acceptance on the part of Ashbury of the amendments of the Facility Letter and Side Letter without reference to the Guarantee;
iv)	This acceptance was accomplished pursuant to the authority granted to DZ and Mr Gee, by the minutes of a meeting of the board of Ashbury dated 22 February 2007, in a form presented by the Bank again without reference to the Guarantee;
v)	The letter of authorisation of the transfer was drafted by the bank for AZ and was duly signed by him;
vi)	The terms of both the existing Guarantee and the draft amended Guarantee required the signatures of both DZ and AZ following explanation of the documents by a solicitor.
56.	This conclusion makes it unnecessary to consider two follow-on issues first as to whether DZ had authority to execute a variation to the Guarantee on his father’s behalf and second as to whether an amendment to the Guarantee executed by one guarantor had the effect of vitiating the entire agreement.
Construction
57.	I had the benefit of extensive submissions on the relevant principles of construction contra proferentum.   It was the Bank’s case that the provisions contained within the recital and clause 3.1 of the Guarantee were to be construed against the Defendants as being the proferens either in the sense that they had originally put forward the clause or were the persons for whose benefit the clause was drafted.   It was the Defendants’ case that, in common with a contract of indemnity, the Guarantee was to be construed against the Bank as the creditor.  In the event I have not found it necessary to resolve this issue.  In my judgment the meaning of the Guarantee is clear and unambiguous and there is no need to resort to the principle on either basis.
58.	In the recital to the Guarantee as executed it is recorded that the liability of Ashbury to the Bank might exceed the sum of £2 million.  This reflected the impact of the further advance of £500,000 on top of the figure of £2 million making up the original loan.  By definition the size of the loan was being treated as fixed without regard to any potential credit that might arise from realisation and transfer of the cash deposit.
59.	Clause 3.1 is similarly structured.  This refers to a liability of £2 million, partly secured by a deposit of £1 million.  On the face of it the underlying threshold to the Guarantee continues to be the loan figure of £2 million. The fact that the deposit might be used to reduce the loan does not reduce that threshold.  Indeed the deposit was to be reviewed on an annual basis.  It was the underlying assumption that no such transfer would take place before any call on the Guarantee was made since the loan was expressly treated as secured by the deposit.  This is made all the clearer by the phrase added by Mr Simon: “all of which is secured by a debenture in favour of the Bank and of which £1,000,000 is further secured by a deposit”.
60.	It is obviously unusual for a cash deposit to be made to secure a loan.  It was that consideration which AZ thought militated against any right on the Bank’s part to set the sum off.  If, as he put, he wanted Ashbury to borrow only £1 million, he would have arranged it that way.  But in fact, as I understand his evidence, which on this topic was unchallenged, the Bank regarded £2 million as the minimum level of loan they were minded to make.  The additional phrase explains why, despite the additional loan, the Guarantee would only bite on the excess of the outstanding sum over £2 million.
61.	In short I conclude that on its ordinary and natural meaning Clause 3.1 operates precisely as the Defendants contend.  There is nothing inconsistent with business sense.  Nor do I conclude that anything has gone wrong with the language.  In particular, I reject the submission that on its proper construction clause 3.1 contained a proviso to the effect that any sums over £2 million were recoverable “so long as” the cash deposit remained in situ but otherwise the sum recoverable was any sum not exceeding £500,000. 
62.	The Bank contended that a different outcome emerged from consideration of some of the negotiations leading up to the loans and the associated guarantee. This led in turn to a dispute about the admissibility of this material.  The Bank in this regard sought to advance two propositions:
i)	The communications between the parties following the stage at which the parties were ad idem (and were merely left engaged in a joint enterprise to record the agreement in writing) are admissible and that such material demonstrates that the Guarantee was to cover any part of the loan which was otherwise unsecured.
ii)	The communications between the parties throughout the negotiations were admissible given the ambiguity in clause 3.1 and reveal that the parties were using the words in an agreed manner.
63.	The first proposition is in my judgment contrary to authority.  But, even if correct, faces the insurmountable problem that the material relied upon reflects what was in fact a continuation of the substantive negotiations which in large part were left to the lawyers.  There was no stage at which, as submitted by the Bank, the parties were simply “recording the crystallised agreement” and not involved in any negotiations at all.
64.	As already recorded the first draft of the Guarantee was prepared by Eversheds.  It was forwarded by the Bank to Mr Gee on 22 April 2005 with the comment that it needed to be reviewed by the Bank’s Risk Department and to be consented to by Venture Finance.
65.	It was duly considered by DZ who sent an email on 26 April making various comments.  Version 2 was immediately prepared by Eversheds.  There was then the tripartite conversation between DZ and Mr Simon (on the one hand) and Mr Renwick on the other about the implications of the deposit.  Mr Renwick suggested that the £500,000 loan would be repaid first at which time the Guarantee would fall away.  Mr Simon thought that was right.
66.	This led to Mr Simon’s email which made substantive proposals for revision to avoid “confusion” given that the Guarantee, as he put it, applied only to the advance now to be made.  Mr Simon’s proposed wording is then accepted for revision 3.  The draft is altered twice more: once at the Bank’s suggestion to replace £1 million with £2 million: and once by Mr Simon on behalf of the Defendants to refer to the security already available for the £2 million loan.  These were inserted in version 4.
67.	These exchanges provide a paradigm example of negotiations leading not just to the form but to the content of the Guarantee as executed.  Before these exchanges, the Guarantee was at large.  At that stage it was not contemplated that any part of the original loan would be repaid first.  In the result it simply covered the sum of £500,000.  Mr Simon on the Defendants’ behalf successfully obtained a provision that the Guarantee would only apply to any sums in excess of £2 million as that sum was already secured.  Whether the Bank might sensibly have sought provisions for the impact of realising the cash security is not to the point. 
68.	In any event this analysis, insofar as it is suggested that it throws light on the meaning of clause 3.1 (and I do not think it does) is misconceived.  In ICS v West Bromwich [1998] 1 WLR 896, Lord Hoffman confirmed that the negotiations of the parties are to be excluded from the background material for ascertaining the meaning of a contract.  Whatever may be the doubts about the boundaries of this exception, the material relied upon by the Bank falls fairly and squarely within the exception.  It amounts to no more than the suggestion that, in the process of purporting to interpret the Guarantee, it is legitimate to have regard to the negotiations so as to rectify it. 
Estoppel
69.	Before turning to the claim for rectification there are two further arguments in the Bank’s armoury.  They are both based on species of estoppel.  The first is based on the decision of Kerr J in The Karen Oltman [1976] 2 Lloyd’s Rep. 708.  This was to the effect that evidence of what the parties said in negotiations is admissible to show that the parties negotiated on an agreed basis that the words used bore a particular meaning.
70.	In my judgment there is no basis in the present case for such a “private dictionary” approach which, on the facts, would again simply elide the principles of construction with those of rectification.  It was not, as I understand it, an example such as in The Karen Oltman where the relevant words bore two possible meanings and the parties had negotiated on the basis that they bore one of them rather than the other.  Indeed I was never entirely clear what the alleged “agreed basis” as regards the words used was.  
71.	The second estoppel based plea is raised in paragraph 9(d) of the reply:-
“In the course of the discussions in December 2006 and January 2007 the Claimant made plain to the Defendants that it would not countenance any change in the facilities offered to Ashbury which would have the effect of increasing the Claimant’s exposure.  The Defendants accepted this condition and all parties proceeded on the assumption that the application of the £1m deposit to reduce the £2m borrowing would not affect the Defendants’ personal liability in respect of the additional £500,000 and that clause 3.1 of the Deed of Guarantee would cease to have any legal effect.   The Claimant acted upon this shared and common assumption in agreeing to the application of the £1m deposit to reduce the borrowings of Ashbury.  
The Claimant further acted to its detriment in reliance upon the assumption in executing a deed of release in relation to a debenture over Ashbury’s assets and sending it to solicitors acting for Ashbury (at the Defendants’ request) on 4th January 2008.  The said assumption continued until 6th February 2008 when Mr Lyddon Simon, solicitor for the Defendants, first challenged the subsisting liability of the Defendants under the guarantee in a letter to the Claimant’s solicitors sent on that date.
It is now unconscionable for the Defendants to deny this assumption and in the premises the Defendants are estopped from relying on clause 3.1 of the Deed of Guarantee as a defence to the Claimant’s claim in relation to the Defendants’ agreement to guarantee and indemnify the Claimant in respect of the £500,000 additional advance and interest.”
72.	The difficulty with this submission is that the pleaded “assumption” is not made out.  It is true that the Defendants accepted that the original Guarantee would remain in place following the transfer of the deposit.  But that consideration was quite independent of any consideration of the legal effect of Clause 3.1.  The reality is that the Defendants did not hoist in the implications of the payment on the scope of the Guarantee.
73.	In stark contrast, the penny did drop as far as the Bank was concerned.  A revised form of guarantee was prepared by the Bank and presented to the Defendants for their approval.  In the event the Bank simply forgot to obtain its execution. There was no question of the Bank relying on anything other than the execution of the proposed amended guarantee in agreeing the transfer.
74.	The suggestion that the same assumption led to the execution of the deed of release of the debenture is also not made out.  The reality is by that stage the Bank had received legal advice in regard to the Guarantee which at its lowest threw doubt on the enforceability of the Guarantee.  In any event the decision to execute the deed of release was in effect Hobson’s choice given the terms of the subordination agreement with Venture Finance.   
Rectification
75.	The principles of rectification can be summarised quite shortly:
i)	It is a form of relief for the purpose of correcting a written agreement because it does not reflect the terms of the true agreement at the time it was made.
ii)	The true agreement need not have been a concluded and enforceable contract but there must have been a continuing common intention in regard to relevant provision reflected in an outward expression of accord down to the execution of the written contract.
iii)	The failure to record the agreement must be as a consequence of a mistake: either
i.	a mistake common to both parties whereby the written agreement does not record the terms as both intended; or
ii.	a unilateral mistake in the sense that one party is mistaken as to the failure to incorporate the agreement in the documents and the other party aware of the mistake fails to draw attention to it.
iv)	It must be established that the agreement, if corrected as claimed, would accurately represent the true agreement of the parties at the time of execution.
v)	In that regard convincing proof is required to counteract the cogent evidence of the parties’ intention as displayed by the contact itself: see The Nai Genova [1984] 1 Lloyd’s Rep 353; Burroughs v. Abbott [1922] 1 Ch 86;.Joscelyne v. Nissen [1970] 2 QB 86; Thomas Bates v. Wyndham’s Ltd [1981] 1 WLR 505.
76.	The Bank’s difficulty in regard to this issue is exemplified by the manner in which the point was pleaded and thereafter developed in argument.  In the Particulars of Claim, having referred to Mr Simon’s email of 27 April 2005, it was pleaded that clause 3.1 was drafted “to give effect to” the agreement referred to and thus “should be construed in this light”: alternatively it should be rectified in line with this construction.  In the Defence the Defendant simply pleaded:
“7(4) The assertion that Clause 3.1 of the Guarantee should be rectified is inadequately pleaded and embarrassing and the Defendants reserve the right to plead further to this assertion if and when it is adequately pleaded and particulars are provided.”
77.	There matters rested until the trial got underway.  The Bank then furnished voluntary further information on the topic.  This contended that there had been an agreement that “the guarantee should make it clear that if the further advance was repaid the guarantee would be released and would not be relied upon as security for the full advance.”  The draft form of wording, it was asserted, was intended to achieve this “objective”.  If, the reasoning went on, such an objective was not achieved, the Guarantee as executed was entered into on a mistaken basis and it would be unconscionable for the Defendants to rely on the contract wording.  The pleading went on:
i.	The genesis of the Agreed Wording was put forward by the Defendants by way of the First Wording.  The proximate cause of the Agreed Wording being present in the Deed of Guarantee was thus the Defendants’ suggested First Wording.
ii.	The First Wording was put forward by the Defendants for their benefit in order to achieve the Agreed Objective.
iii.	The parties agreed to the Agreed Wording on terms that it was to achieve the Agreed Objective.
iv.	In the email of 27th April 2005 the Defendants justified the introduction of the First Wording (which became the Agreed Wording) on the basis that it was to achieve the Agreed Objective.
v.	The Defendants knew and intended that the Claimant’s legal advisors would accept the justification in the email dated 27th April 2005 for the First Wording and therefore accepted the Agreed Wording on the basis that it achieved the Agreed Objective.
vi.	At all material times up to and including the execution of the Deed of Guarantee the parties were proceeding on the basis that a loan of £2m secured by a legal charge over a cash deposit of £1m was equivalent to a loan of £1m (i.e. a net advance of £1m) and that the Agreed Wording was to exclude the guarantee from being enforceable save in relation to sums in excess of the net advance of £1m.  Thus since the cash deposit of £1m has now been applied to the loan of £2m, leaving a net sum outstanding of £1m; it is unconscionable for the Defendants to assert that the guarantee is not still enforceable as against the further advance of £500,000.
78.	Various features of this lengthy and convoluted pleading are noteworthy:
i)	The true agreement between the parties was said to be to the effect that the Guarantee was enforceable for sums in excess of £1 million.
ii)	The Defendants had furnished the first drafts which referred to £1 million as being the loan.
iii)	It was thus unconscionable for the Defendants to rely on the actual wording which referred to a loan of £2 million (despite that change having been suggested by the Bank).
79.	In the circumstances it is not easy to understand whether there had been any mistake and if so whether it was common or unilateral.  Nor is any indication given as to how the Guarantee should read if the mistake was corrected. 
80.	In any event matters moved on and in the Bank’s closing submission an elaborate schedule purporting to analyse the Bank’s case on rectification was provided as part of the written closing argument.  This formulated a rather different case.  It identified the common intention as either:
i)	That the Guarantee would apply only to the further advance of £500,000 and not the original advance of £2 million; or
ii)	That the Guarantee would only be enforceable for sums in excess of the net advance of £1 million.
81.	For the first time the Bank put forward its case on the proposed correction to the Guarantee. Again this was in the alternative:
“Rectification
1. Delete existing 3.1.2 and replace with: “For the avoidance of doubt the Guarantee applies only to the advance now to be made by the Bank to Ashbury in the sum of £500,000 and not to any other sums which are outstanding.” 
2. Recital change to: “Whereas the Debtor’s liability to the Bank may from time to time exceed the net sum of £1 million and the Bank has agreed to advance to the Debtor a further sum of £500,000.” 
Clause 3.1 change to: “The Guarantor’s liability hereunder is limited as follows: 
3.1.1 To the sum of £500,000
3.1.2 To the extent to which the Debtor’s liability exceeds the net advance of £1 million at the time this Guarantee is called.”
82.	In my judgment the Bank has fallen well short of establishing (let alone providing convincing proof) that there was a mistake in the drafting process and that had been a common intention at the time of the execution of the Guarantee that it would be enforceable regardless of the balance on the underlying loan or, in the alternative, that the underlying loan was to be treated as only £1 million:
i)	Although a cash deposit had originally been required, it is clear that it was being treated as evidence of commitment on the part of the Defendants which might be released in the event of satisfactory performance;
ii)	Neither party had viewed the original loan as being for only £1 million: indeed the Bank would not make a loan at that level and the Defendants had no cause to structure a loan which was in effect to borrow £1 million but treat it as a loan for £2 million;
iii)	Neither party was contemplating at that stage that the deposit would be transferred to the loan account;
iv)	When that proposal was later made and accepted, it is clear that the Bank were not proceeding under some mistaken understanding as to the wording or effect of the Guarantee but were insisting on an amendment to it;
v)	The Guarantee associated with the supplementary loan was carefully negotiated with the assistance of lawyers and went through four drafts.
Conclusion
83.	In these circumstances there must be judgment for the Defendants.