The Co-Operative Bank Plc v Hayes Freehold Ltd & Ors

An unconditional and irrevocable contractual release cannot ordinarily be qualified by implying a condition precedent which contradicts its express wording. The court must construe the express terms before considering implication, and implication requires necessity for commercial coherence or obviousness. Where a party instructs solicitors to ensure that a transaction is effective, the risk of negligent legal advice may remain with that party. A unilateral mistake in a voluntary disposition must be distinct, causative, sufficiently grave, and such that retention would be unconscionable. The availability of a professional negligence remedy may affect that assessment. Unjust enrichment cannot provide a general escape from the consequences of an express bargain.

Deutsche Bank was tenant under a headlease of a data centre and had granted an underlease to Sentrum Hayes. Holdings guaranteed Sentrum Hayes’ obligations. The parties executed a deed purporting to surrender both leases and release Holdings from its guarantee.

The headlease was charged to The Co-operative Bank, whose consent was required for an effective surrender. That consent was not obtained. Deutsche Bank nevertheless executed the deed after relying on negligent advice from its solicitors that the surrender would be effective.

Deutsche Bank claimed against Holdings and Sentrum Hayes for an implied condition precedent, fraudulent misrepresentation, unilateral mistake, common mistake and unjust enrichment. The central issue was whether the ineffective surrender of the headlease prevented the contractual release of the guarantee.

1. Construction and implied condition. Clause 6 of the deed unambiguously released Holdings from the guarantee unconditionally and irrevocably, taking effect upon execution. An implied condition that the headlease surrender be effective would contradict and rewrite that express term. The implication was neither necessary for commercial coherence nor so obvious that it went without saying. The parties knew that Deutsche Bank was a sophisticated institution represented by solicitors, and the risk that the surrender might be ineffective was allocated to Deutsche Bank. The court followed the principles in Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2016] AC 742 and applied Irish Bank Resolution Corporation v Camden Market Holdings [2017] EWCA Civ 7.
2. The surrender of the underlease was effective notwithstanding the ineffective surrender of the headlease. The two surrenders were not legally interdependent.
3. Misrepresentation. Neither the draft deed nor the accompanying communications represented that the Co-operative Bank’s consent had been obtained or that Hayes Freehold had power to accept the surrender. Deutsche Bank relied on its own solicitors’ advice, not on any representation by Holdings or Sentrum Hayes. The claim therefore failed under the principles stated in Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland Plc [2011] 1 Lloyd’s Rep 123.
4. Mistake. The deed was not a voluntary disposition because Deutsche Bank received consideration through the effective surrender of the underlease and release of its landlord obligations. Alternatively, the requirements in Pitt v Holt [2013] 2 AC 108 and Kennedy v Kennedy [2014] EWHC 4129 were not satisfied. Deutsche Bank had run the relevant risk, its mistake was not causative of execution, and the availability of a remedy against its solicitors mitigated the consequences. The deed was not void for common mistake because the parties lacked a common positive belief and performance was not impossible. The court applied Great Peace Shipping Ltd v Tsavarilis Salvage (International) Ltd (The Great Peace) [2003] QB 679.
5. Unjust enrichment and disposition. Holdings’ release was the result of an express bargain and was not unjust. Unjust enrichment could not relieve Deutsche Bank from the consequences of that bargain. The claims, including the claim against Sentrum Hayes, were dismissed.