Lombard North Central Plc v Nugent & Ors

A lease-purchase agreement is construed objectively, by reference to its language and the relevant background, while excluding subjective intentions and prior negotiations. Where the agreement requires the owner to try to sell goods after termination and credits the net proceeds to the hirer, the court may imply a term requiring reasonable care to obtain their true market value. If the owner leases the goods pending sale, a corresponding duty may arise to obtain a true market rent and take reasonable steps to collect it. The claim under a guarantee remains a claim in debt, but the guarantor may rely on any contractual set-off or counterclaim available to the principal debtor. The mitigation rules for damages and equitable mortgagee duties did not govern the case.

The claimant financed machinery acquired by Waterfront Corporation Ltd under a lease-purchase agreement. The defendants, who were directors of Waterfront, gave joint and several guarantees. The agreement terminated automatically when administrators were appointed to Waterfront, leaving a balance due.

The claimant later received rent for use of the machinery and sold it. The defendants disputed the description and value of the financed goods, contended that the claimant should have sold or rented them earlier and at higher values, and sought to reduce their guarantee liability by set-off or counterclaim. The central issues were the proper construction of the agreement, the claimant’s obligations following termination, and the amount properly recoverable under the guarantees.

1. Construction. The Lease Purchase Agreement referred only to the Prisma 250 ml Filling Machine, identified by its serial number, and not to the entire production line. The ordinary meaning of the contractual wording was consistent with the contemporaneous documents. Subjective intentions and prior negotiations were inadmissible aids to construction. The principles in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] 1 AC 1101, and Rainy Sky SA v Kookmin Bank [2011] UKSC 50; [2011] 1 WLR 2900 were applied.
2. Implied obligations. The disposal clause imposed an obligation to try to sell the goods. It was therefore implicit that sale proceeds would be credited to the hirer and that the claimant would take reasonable care to obtain the true market value. If the claimant chose to lease the machine pending sale, it likewise had to take reasonable care to obtain the true market rent and to ensure that rent was paid. The approach to implication in A-G of Belize v Belize Telecom [2009] 1 WLR 1988 was applied.
3. Defence under the guarantees. The guarantee claim was a claim in debt, but the guarantors could rely on any set-off or counterclaim available to Waterfront. The case was not governed by mitigation of damages, because the agreement ended on insolvency rather than breach. Equitable mortgagee obligations were unnecessary because the claimant owned the machine rather than holding it as security.
4. The claimant acted reasonably in dealing with the title dispute and did not breach its implied obligations by accepting rent of £1,000 per month. However, it failed to take adequate steps to collect all rent due. A set-off of £15,275 was allowed.
5. Judgment was entered for the claimant in the sum of £39,071.58.