Barclays Mercantile Business Finance Ltd v Marsh

A contractual instrument must be construed according to its substance. Where its terms impose primary liability and expressly preserve the creditor’s freedom to vary or release securities, the obligor cannot rely on ordinary suretyship rules to obtain a discharge. A failure to enforce a security, without a deliberate release or negligent omission causing its loss, does not discharge a surety. The Unfair Contract Terms Act 1977 does not convert such provisions into an obligation to enforce third-party rights where the contract requires no corresponding performance. The exceptional doctrine of unconscionable bargains has no ordinary role in a commercial guarantee or indemnity entered into by a businessman.

Barclays Mercantile claimed £106,393.21 from Mr Marsh under a deed described as a guarantee and indemnity securing Soundalive Tours Ltd’s obligations under a leasing agreement. The underlying equipment had been subleased to English Heritage, and Barclays Mercantile had taken an assignment and charge over the subleasing agreement.

Mr Marsh sought to amend his defence, alleging that Barclays Mercantile had failed to enforce or had released the underlying securities, thereby increasing his liability or depriving him of subrogation rights. He also relied on sections 2(2) and 3(2) of the Unfair Contract Terms Act 1977 and on unconscionable bargain. The High Court judge allowed the amendment, and Barclays Mercantile appealed.

1. Appeal allowed. The amendment should not have been permitted. The order of Judge Perrett was set aside and judgment was entered for Barclays Mercantile, with contractual-rate interest and costs on the indemnity basis.
2. The deed was, in substance, a contract of indemnity rather than an ordinary guarantee. Its provisions made Mr Marsh a primary obligor. Clauses 2.2 and 4 were clear, and liability was not dependent upon Barclays Mercantile first enforcing the leasing or subleasing arrangements.
3. Alternatively, even if Mr Marsh were treated as a surety, the proposed pleading disclosed no sufficient basis for discharge. A surety is not discharged merely because a creditor does not enforce a security. Discharge requires a deliberate act of release or a negligent omission causing the security to be lost or diminished. The pleading alleged only failure to enforce, and there was no evidence that English Heritage had been released by Barclays Mercantile.
4. Section 2(2) of the Unfair Contract Terms Act 1977 was irrelevant because clauses 4 and 5 did not exclude or restrict liability for negligence. Section 3(2)(a) could not apply without an identified breach of contract. Section 3(2)(b) concerned contractual performance substantially different from that reasonably expected, or no performance; the deed imposed no contractual obligation on Barclays Mercantile to enforce the subleasing agreement. Clauses 4 and 5 were inconsistent with the suggested implied term requiring reasonable care, and that term was unnecessary for business efficacy.
5. The alleged unconscionable bargain did not engage the exceptional doctrine. The clauses were ordinary commercial provisions, and Mr Marsh was a businessman who had entered the transaction with the opportunity to refuse them or obtain a counter-indemnity.
6. Brooke LJ agreed that the Court of Appeal should exceptionally determine the pure point of law at the case-management stage because, if Barclays Mercantile succeeded, there was no defence requiring a trial.

• High Court, Queen’s Bench Division, Mercantile Court: His Honour Judge Perrett QC allowed Mr Marsh’s application to amend his defence on 10 December 2001.
• Court of Appeal (Civil Division): The appeal was allowed. The amendment order was set aside and judgment was entered for Barclays Mercantile.