Pathway Finance: construction or rectification?

Briefing

Due to an error in wording having been made across 87 finance documents, the claimant in a recent case successfully requested a declaration from the court to construe the meaning of those documents to disregard the error, by applying the reasonable person test.

It was found that the mistake clearly didn't reflect the intention of the parties, and the risk to third parties was held to be minimal based on the facts.

Facts

Pathway Finance SARL v London Hanger Lane Centre [2020] EWHC 1191 (Ch) involved the claimant, Pathway Finance SARL (Pathway), and 87 defendant companies within the IWG Group. Pathway granted the Group companies £3 million borrowing facilities under an initial facility agreement dated 16 September 2011 (the Facility Agreement).

On the same date, the borrowers entered into a security agreement under which they each gave a floating charge to Pathway (the Security Agreement). The Facility Agreement was later amended on 17 November 2016 to substantially increase the loan amounts being made available to £180 million.

The Security Agreement was not amended; it was dated 16 September 2011. Accession deeds were also executed by each of the Group companies, to gain access to the loan. However, a security audit in October 2019 identified a wording error, in that 87 Accession Deeds entered into around March 2017 incorrectly referred to the Security Agreement as being dated 17 November 2016.

The case was brought to the Court and not merely settled by way of agreement due to the position of the directors of the defendant companies, who were mindful of their duty to act in the best interests of their individual company, especially given the large sums of money at stake. Another factor was that the Accession Deeds were public documents, as they had already been registered at Companies House. All parties involved needed the certainty of a court ruling.

Construction versus rectification

The Court could not order both construction and rectification. The Judge outlined relevant case law, which suggested that the question as to which remedy should be used is generally decided pragmatically. He noted that it was more usual to consider construction first and then rectification, if necessary.

Pathway elected for the use of construction as the preferred form of remedy, and Salzedo J also favoured the use of construction due to the status of non-parties.

Extrinsic evidence

The extrinsic evidence in this case was threefold:

the existence of a Security Agreement dated 16 September 2011
the non-existence of a Security Agreement dated 17 November 2016, and
the fact that the Facility Agreement had been amended on 17 November 2016, which explained the drafting error.

It was clear that the parties were aware of the existence of such extrinsic evidence when entering into the Accession Deeds.

In Chartbrook v Persimmon Homes [2009] 1 AC 1101, Hoffmann LJ made the point that the Court would always take the background and context of the case into consideration when interpreting contracts.

There also needed to be clarity:

that an error had been made, and
regarding "what a reasonable person would have understood the parties to have meant."

The fact that there was no Security Agreement dated 17 November 2016 pointed to the first requirement. Both parties knew of the existence and terms of the 2011 Security Agreement which gave clarity in relation to what was intended, fulfilling the second requirement.

In Cherry Tree Investments Ltd v Landmain [2013] Ch 305, Lewinson LJ stated the principle that "whatever the charge means, it has always meant what it means". Therefore, it could not mean one thing to the parties to the agreement and another thing to third parties who might be affected by it.

Does the public nature of the Accession Deeds alter the weight and availability of extrinsic evidence?

It was beneficial to consider ss859A - 859Q Companies Act 2006 and to whom the charge was addressed. Notwithstanding s859P, which instils a requirement to make the registered charge available for inspection, the charge itself was not held to be addressed to the public at large.

Although it was capable of being inspected and relied on by third parties, the purpose for which such charges were made public was "relatively narrow". Those third parties seeking to extend credit and/or take security from the chargor would ask to inspect such a charge.

Upon inspection and enquiry, it would become clear to any third party that no security agreement dated 17 November 2016 existed. They would come to the conclusion that the document referred to was indeed the Security Agreement dated 16 September 2011. As a result, third parties would not be disadvantaged. They would be in the same position as the parties with extrinsic knowledge.

Salzedo J therefore concluded that it was "right to give full weight" to extrinsic material in construing the meaning of the Accession Deeds. He also said by way of obiter that if he had not granted the requested declaration as to construction, he would have granted relief by way of rectification.

Judgment

Construction by way of a declaration was approved. This had the effect of construing the date cited for the Security Agreement as 16 September 2011, rather than 17 November 2016.

However, Salzedo J commented that while these proceedings were uncontested, if a third party subsequently succeeded in challenging the use of construction then any subsequent claim – and the appropriateness of equitable relief by way of rectification – would need to be reviewed afresh.