Bank of Scotland v Henry Butcher & Co & Ors

A partnership is bound by a partner’s act done for the purpose of partnership business. Where the partnership has entered into a contract in the course of its business and that contract makes a guarantee an integral part of the transaction, the guarantee is itself partnership business, even if its full terms were not known to every partner. Older authorities on a partner’s authority to give guarantees require caution where professional business has changed. A material alteration avoids an instrument only where it changes its nature or is potentially prejudicial to the obligor’s legal rights or obligations. An alteration narrowing a guarantee is not prejudicial to the guarantors.

The Bank of Scotland sued Henry Butcher & Co and four named partners to enforce a guarantee securing the overdraft of a customer. The guarantee followed a consultancy agreement under which the firm agreed to provide services to the customer and to guarantee the overdraft.

The Deputy High Court judge rejected the defendants’ arguments that the firm was not bound, that the signing partners were not personally bound, and that a subsequent alteration invalidated the guarantee. The defendants appealed on those three issues. The central questions were whether the guarantee was partnership business, whether clause 17 bound the individual signatories despite any failure by other intended parties to execute it, and whether the alteration was materially prejudicial.

1. Appeal dismissed. Munby J gave the principal judgment. Chadwick LJ gave a separate analysis of section 5 of the Partnership Act 1890, and Aldous LJ agreed with both judgments.
2. A partnership is bound under the first limb of section 5 where a partner acts for the purpose of partnership business. The consultancy agreement was validly entered into by the firm and required the guarantee as an integral part of the transaction. The guarantee was therefore partnership business, even though giving a guarantee might otherwise have been outside the firm’s usual business and its full terms might not have been known to every partner. The relevant question was whether the partnership had adopted the provision of consultancy services as part of its business, not whether it had ratified every detail of the guarantee.
3. Chadwick LJ explained that section 5 contains two limbs. The first concerns acts done for the purpose of partnership business. The second concerns ostensible authority for acts done in the usual way in business of the kind carried on by the firm, subject to the statutory knowledge proviso. The second limb did not need to be decided because the first limb applied.
4. The older authorities on a partner’s authority to give guarantees required caution. Sandilands v Marsh remained good law and was consistent with section 5.
5. The four individual signatories were independently bound by clause 17 of the guarantee, which expressly provided for liability even if another intended party did not execute or was not bound. No condition precedent, escrow delivery, common mistake or rectification case had been established. A signed deed sent to the other party without an expressed reservation could not be treated as delivered in escrow on the basis of an uncommunicated intention.
6. The alteration did not avoid the guarantee. Under the rule in Pigot’s Case, as explained in Raiffeisen Zentralbank Osterreich AG v Crossseas Shipping Ltd, materiality includes an alteration affecting the nature and character of the instrument or one potentially prejudicial to the obligor’s rights or obligations. Actual prejudice need not be shown. The alteration narrowed the guarantee to one account and was beneficial to the guarantors.
7. The appellants were ordered to pay the respondent’s costs of the appeal, subject to detailed assessment on the standard basis if not agreed. The court also censured the failure to comply with relevant practice directions on appeal bundles and citation of authorities.

• Court of Appeal (Civil Division) — The appeal was dismissed and the Deputy High Court judge’s conclusions on the challenged issues were upheld.
• High Court, Chancery Division — Mr Michel Kallipetis QC, sitting as a Deputy Judge, gave judgment for the bank. The decision is reported at [2001] 2 All ER (Comm) 691.