Essentially Different Ltd v Bank of Scotland Plc

A party seeking rectification must prove a continuing common intention, an outward expression of accord, continuation of that intention when the document was executed, and a mistake causing the document not to reflect it. The ordinary civil standard applies, but convincing proof is ordinarily required because rectification contradicts the written instrument. The alleged term must be sufficiently ascertainable to be workable. A lender cannot withhold contractual loan funding on the basis of an unproved condition precedent or misstatement. For causation, the claimant need only establish that the breach prevented it from pursuing the relevant commercial opportunity; success or resulting profit may remain matters for a later assessment.

The claimant, a start-up technology company, obtained a loan from the defendant under the DTI’s Small Firms’ Loan Guarantee Scheme. The facility was to be advanced in two tranches. The defendant paid the first tranche but refused to advance the second, relying on an alleged condition precedent requiring evidence of contracts sufficient to service the full debt, or alternatively contracts of a specified value. It also alleged material misstatements and misrepresentations in the claimant’s application materials.

The claimant denied that any such condition had been agreed and claimed damages for breach of contract. The issues were whether the facility letter should be rectified, whether the alleged misstatements entitled the defendant to withhold funding or recover the first tranche, and whether the refusal caused recoverable loss by preventing development and exploitation of the claimant’s software project.

1. Rectification. The court applied the principles stated by Peter Gibson LJ in Swainland Builders Ltd v Freehold Properties Ltd [2002] EWCA Civ 560. The defendant had to establish a continuing common intention, an outward expression of accord, continuation of that intention when the facility letter was executed, and a mistake causing the document to fail to record that intention. The balance of probabilities applied, but convincing proof was required in view of the cogent evidence supplied by the written facility letter.
2. Neither the alleged £120,000 condition nor the alternative condition requiring sufficient contracts to service the full debt was proved. The contemporaneous documents did not establish agreement. The evidence of the relevant bank employee was largely reconstructed and the alleged figure emerged only shortly before trial. The alternative condition was capable of being made workable by implication and was not void for uncertainty, but the court was not satisfied that it had been agreed or remained the parties’ common intention. The claim for rectification therefore failed.
3. Misstatements. The claimant’s documents did not establish breaches of the representations and warranties in clauses 6.01(e) and 10.01(b) of the facility letter. The statements relied upon were assessed in their commercial context. They did not represent that development was complete, and the claimant was actively marketing its product, had a realistic first-mover opportunity, and was progressing towards significant contracts. The defendant was not entitled to withhold the second tranche on this ground.
4. Causation. The claimant established that the refusal of the second tranche prevented it from continuing development, demonstrations and sales activity. The court was not required at this stage to decide whether the project would ultimately have generated profit. The claimant’s claim was therefore not shown to be incapable of yielding recoverable loss, although the defendant remained entitled to repayment of the first tranche with appropriate interest, subject to set-off against any damages.