Investec Bank (UK) Ltd v Zulman & Anor

A guarantee is construed according to its ordinary and natural meaning. Where the guarantee limits liability by reference to the debtor’s underlying indebtedness, a secured deposit does not necessarily reduce the contractual threshold unless the wording so provides. Contractual negotiations are generally inadmissible as background for construction and cannot be used indirectly to rectify the agreement. Rectification requires convincing proof of a continuing common intention, or of a unilateral mistake known to the other party, together with an outward expression of accord and a clear proposed correction. An estoppel cannot be established where the alleged shared assumption is not proved and the parties’ conduct instead shows that execution of a formal amendment was contemplated.

Investec Bank claimed £577,752.70 under guarantees given by Arnold and David Zulman in support of lending to Ashbury Confectionery Ltd. The guarantees limited liability to indebtedness exceeding £2 million, subject to a maximum principal liability of £500,000. In 2007, a £1 million cash deposit was applied against Ashbury’s borrowing, reducing the outstanding balance below £2 million. A variation letter stated that the guarantee amendment rendered the existing limitation clause void, but the revised guarantee was never executed.

The principal questions were whether the original clause remained effective, whether the guarantees could be varied orally or by the variation letter, whether the defendants were estopped from relying on the clause, and whether the guarantee should be rectified.

1. Construction. Clause 3.1 operated according to its ordinary and natural meaning. The £2 million threshold referred to the underlying loan figure, which had been treated as fixed and secured in part by the cash deposit. Applying the deposit did not reduce that contractual threshold. The clause therefore prevented recovery while Ashbury’s indebtedness was below £2 million.
2. Negotiations and construction. The negotiations showed that the guarantee had been carefully negotiated, but they could not be used to alter the meaning of the executed wording. Following ICS v West Bromwich [1998] 1 WLR 896, as confirmed in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, the negotiations fell within the exclusion of background material for contractual construction.
3. Variation and estoppel. No binding oral agreement was proved. The negotiations were subject to contract, and the variation letter itself contemplated formal acceptance. Execution by David Zulman on behalf of Ashbury varied the facility arrangements only. It did not vary the personal guarantee, which required execution by both guarantors following legal explanation. The alleged shared assumption for estoppel was not established; the bank’s preparation of a revised guarantee showed that execution of an amendment was expected.
4. Rectification. The bank failed to provide convincing proof of a common intention that the guarantee should remain enforceable despite the balance falling below £2 million, or that the loan should be treated as a net advance of £1 million. The carefully negotiated drafting history, and the bank’s later insistence on an executed amendment, were inconsistent with the alleged mistake.
5. Disposition. Judgment was entered for the defendants.