Circumstances in which doctrine applicable - Loan used to pay off existing debt to third party

Ibrahim and Barclays Bank plc and another: Chancery Division (Mr Justice Vos): 21 July 2011

The claimant was a businessman whose company had distribution rights for vans produced by LDV Ltd, a vehicle manufacturer. LDV Ltd was indebted to the first defendant bank. The second defendant Secretary of State for Business, Innovation and Skills (the secretary of state) agreed to guarantee a new monies facility under which £1.4m was advanced by the first defendant to LDV Ltd, on the basis that recoveries in LDV Ltd's insolvency would be split equally between the first defendant and the secretary of state, up to the value of £3.2m.

LDV Ltd entered into a counter-indemnity, by which it agreed to reinburse the secretary of state for any monies he paid to the first defendant under his guarantee. The secretary of state asked the claimant's company to back his guarantee in case it was called. In response to a request from the claimant, UBS (Singapore) (UBS), a business providing financial solutions, issued a standby letter of credit (the letter) in favour of the secretary of state payable to him.

The letter stated that it would be payable on certification that the 'amount demanded represents and covers the unpaid sums due' to the secretary of state from LDV Ltd. The wording of the letter did not make it payable on proof that the secretary of state had paid the first defendant under his guarantee. The claimant indemnified UBS against any sums it had to pay under the letter. In due course, the first defendant called just over £1.4m under the secretary of state's guarantee, and the secretary of state called for payment by UBS under the letter. The claimant ultimately indemnified UBS. The claimant issued proceedings, seeking to be subrogated to the rights of the secretary of state, in relation to the secured funding provided by the first defendant.

The claimant submitted that: first, the payment by UBS to the secretary of state had not discharged the debt due under the counter-indemnity from LDV Ltd to the secretary of state. Secondly, he contended that he was entitled to subrogation to extinguished rights, on the basis that the arrangements with UBS had been a mechanism to ensure that the claimant paid the secretary of state, because the debt due from LDV Ltd had not been discharged by the payment by UBS.

Thirdly, he submitted that he was entitled to subrogation to subsisting rights, because the agreement or understanding between the parties had been that he would be entitled to stand in the position of the secretary of state to share in the first defendant's recoveries from an administration of LDV Ltd if UBS paid as required.

Against that background, the issue arose, inter alia, of what the words 'represent and cover' had meant in the context in which they were used in the letter of credit and in the demand that the secretary of state had made upon UBS (the demand). The claimant contended that UBS's payment could not have discharged LDV Ltd's liability without express authority from LDV Ltd, and that it was very difficult to discharge another person's debt. The first defendant contended that the entire structure had been established so that, when UBS paid under the letter of credit, LDV Ltd's liability under the counter-indemnity was to be 'represented' and 'covered' by the payment.

It fell to be determined whether the wording of the letter stated that the secretary of state had to certify that the amount demanded was only 'sufficient to discharge' the unpaid sums due from LDV Ltd to the secretary of state, or that he had 'discharged' those sums. The claim would be dismissed.

In considering the meaning of 'represent and cover' as used in the letter, it was necessary to give the words their dictionary meaning. The intention of the parties would be important: in the instant case, the intentions of the secretary of state as the party to whom the debt under the counter indemnity was due, and LDV Ltd as the obligor under the counter-indemnity. Although the intentions of the parties had to be primarily divined from the documents they had entered into, it was permissible to look at other evidence to consider what the parties' understandings had been (see [120] of the judgment).

In the instant case, UBS would undoubtedly be bound by the letter of credit. All the parties had ultimately seen the wording of the letter, commented on it and agreed to it. In the circumstances, the usual usage of the word 'cover' would be 'discharge' rather than 'be sufficient to discharge'. In the first paragraph of the letter, the word 'covering' meant 'protecting'.

In the second paragraph of the letter, and in the demand, it meant either 'be sufficient to discharge' or 'discharges or pays'. Consequently, the secretary of state was required, in order to make his claim against UBS, to certify that the amount demanded represented and covered (meaning discharged) the debt due from LDV Ltd to the secretary of state. In such circumstances, the secretary of state could not properly approbate and reprobate.

He had secured the payment from UBS on the basis of a representation that would discharge the LDV Ltd debt. He had to be taken as to have intended that it would be so. LDV Ltd had itself given the secretary of state the authority to demand the money due from it from any other person. The fact that the certification might turn out to have been ill thought out and to have had unforseen consequences was beside the point.

On the evidence, it was clear that the parties to the counter-indemnity had to be taken to have intended what the secretary of state had said had been happening when it had asked UBS for the money (see [116], [120], [128] of the judgment). When UBS had paid the secretary of state, the debt due from LDV Ltd to the secretary of state under the counter indemnity had been discharged (see [129] of the judgment).

Brown, Shipley & Co Ltd v Amalgamated Investment (Europe) BV [1979] 1 Lloyd's Rep 488 not followed; Morris v Ford Motor Co Ltd [1973] 2 All ER 1084 considered; Esso Petroleum Co Ltd v Hall Russell & Co Ltd and Shetland Islands Council, The Esso Bernicia [1989] 1 All ER 37 considered; Boscawen v Bajwa, Abbey National plc v Boscawen [1995] 4 All ER 769 considered; Banque Financiere de la Cite v Parc (Battersea) Ltd [1998] 1 All ER 737 considered; Crantrave Ltd v Lloyds Bank plc [2000] 4 All ER 473 considered; Oxfordshire County Council v Oxford City Council [2006] 4 All ER 817 considered; Haugesund Kommune v Depfa ACS Bank (Wikborg Rein & Co, Pt 20 defendant) [2011] All ER (D) 226 (Jan) considered.

Romie Tager QC and Hugh Jackson (instructed by Winckworth Sherwood LLP) for the claimant. Patrick Goodall (instructed by Addleshaw Goddard LLP) for the first defendant. Sarah Harman (instructed by the Treasury Solicitor) for the secretary of state.