Investors Compensation Scheme Ltd v West Bromwich Building Society (Investors Compensation Scheme Ltd v Hopkins & Sons)

Contractual interpretation is objective. The court asks what the document would convey to a reasonable person possessing the background knowledge reasonably available to the parties. That background may show that the parties used mistaken words or syntax. Prior negotiations and declarations of subjective intention remain excluded, except in rectification proceedings.

Natural and ordinary meaning is a strong presumption, rather than an absolute rule. It may yield where the contextual meaning is clear and a literal reading conflicts with business common sense. A chose in action comprises the underlying right to debt or damages, together with the available remedies. A personal right to rescission attached to ownership may remain with the assignor without invalidating an assignment of the separate right to damages.

Investors Compensation Scheme Ltd v West Bromwich Building Society (Investors Compensation Scheme Ltd v Hopkins & Sons) concerned compensation paid to investors who had suffered losses through Home Income Plans. The claim form assigned rights against financial advisers and third parties to the compensation scheme, while section 3(b) reserved specified claims against the relevant building society.

Investors pursued the building society for rescission, damages and other relief. The scheme brought separate proceedings as assignee against the building society and solicitors. Evans-Lombe J held that section 3(b) reserved only part of the investors’ rights, but that the attempted division of remedies made the assignment ineffective. The Court of Appeal construed the reservation more broadly, while agreeing that the scheme lacked title to sue.

The central questions were how section 3(b) should be interpreted and whether the investors’ rights to damages and compensation had been validly assigned while their personal right to seek rescission remained with them.

1. Disposition. The appeal was allowed by a majority of four to one. Lord Hoffmann delivered the leading speech. Lord Goff of Chieveley, Lord Hope of Craighead and Lord Clyde agreed with his reasoning and proposed answers. The House held that all claims for damages and compensation had been validly assigned to the scheme. The investors could not maintain those claims, but retained the right to seek rescission of their mortgages on such terms as the court considered just.

2. Contractual interpretation. Per Lord Hoffmann, interpretation determines what the document would convey to a reasonable person possessing all background knowledge reasonably available to the parties when they contracted. The admissible background may include anything affecting how the language would reasonably be understood. Previous negotiations and declarations of subjective intention are excluded, save in proceedings for rectification.

   The meaning of a document is distinct from the dictionary or grammatical meaning of its words. Context may show that the parties used mistaken words or syntax. Natural and ordinary meaning remains an important presumption because courts do not readily infer linguistic mistakes, particularly in formal documents. The presumption yields where the background establishes that the language went wrong and the literal construction conflicts with business common sense.

3. Construction of the claim form. Applying those principles, Lord Hoffmann concluded that section 3(b) reserved only the investor’s personal claim to an abatement of the mortgage debt consequent upon rescission. It did not reserve claims for damages or compensation. The explanatory note, the commercial structure of the arrangement and the arbitrary consequences of the wider construction showed that the drafting contained a mistake of meaning or syntax.

4. Assignment. Per Lord Hoffmann, a chose in action is the underlying proprietary right to recover debt or damages. Remedies are not separate property capable of assignment independently of that right. Section 136 of the Law of Property Act 1925 permits assignment of a debt or other legal thing in action.

   A claim to rescission of a mortgage is personal to the owner of the mortgaged property and is not itself a chose in action assignable separately from that property. Reserving rescission therefore did not divide the chose in action assigned to the scheme. The possibility that rescission might alter the quantum of damages, require joinder or create overlapping factual issues could be addressed through case management and did not invalidate the assignment.

5. Dissent. Lord Lloyd of Berwick considered the investors’ construction to be the only permissible meaning of section 3(b). In his view, purposive interpretation could not rearrange the words into a meaning unavailable from the language, and the commercial consequences were insufficiently absurd to displace the plain meaning. He would have dismissed the main appeal, although he agreed that the claims against the solicitors were validly assigned.

• House of Lords: In Investors Compensation Scheme Ltd v West Bromwich Building Society (Investors Compensation Scheme Ltd v Hopkins & Sons) [1997] UKHL 28, the House allowed the appeal by a majority of four to one. It held that the claims for damages and compensation were validly assigned, while the investors retained their right to seek rescission.
• Court of Appeal: The court held that section 3(b) reserved all claims against the building society to the investors. It agreed that a purported assignment of only part of the available remedies was ineffective and that the assignment of claims against the solicitors was invalid.
• High Court: Evans-Lombe J construed section 3(b) as reserving only an abatement consequent upon rescission. He nevertheless held that the attempted assignment was invalid because it divided remedies relating to the same cause of action. He also held the assignment of claims against the solicitors ineffective.