Continental Illinois National Bank & Trust Company of Chicago v Papanicolaou

Continental Illinois National Bank & Trust Company of Chicago v John Paul Papanicolaou; Same v Nicholas Frederick Papanicolaou (The "Fedora" "Tatiana" and "Eretrea II")
Court of appeal (Civil Division)
[1986] 2 Lloyd's Rep 441
HEARING-DATES: 9, 10 June, 1 July 1986
1 July 1986
CATCHWORDS:
Banking -- Guarantee -- Stay of execution -- Default on loan agreement -- Bank claimed under personal guarantees -- Whether bank acted negligently in performing duty as mortgagees -- Whether bank entitled to summary judgment -- Whether defendants entitled to stay of execution.

HEADNOTE:
The bank held as security for three loans (the Trevone, Sulcis and Palmerston agreements) personal guarantees of the defendants as well as inter alia mortgages of vessels owned by the borrowers. In the case of the Trevone agreement there was a first preferred Greek mortgage of the vessel Tatiana, in the case of the Sulcis agreement a first preferred Panamanian mortgage of the vessel Fedora and in the case of the Palmerston agreement a first preferred Panamanian mortgage of the luxury yacht Eretrea II. There were second preferred Greek mortgages of Tatiana and Fedora.

The bank sued the defendants as personal guarantors of the indebtedness of the principal debtors under the loan agreements.

It was not disputed that the amounts claimed were properly due from the defendants under their guarantees but the defendants contended that they had valid cross-claims for damages in respect of the Trevone, Palmerston and Sulcis agreements on the ground that the bank had negligently or unreasonably failed to carry out its duties as mortgagees of Tatiana, Eretrea II and Fedora and had failed to realise a proper value from these vessels either on sale or pending sale and in addition in the case of the Palmerston agreement had acted recklessly.

-- Held, by EVANS, J that the cross-claims asserted by the defendants were arguable and that the defendants could proceed with them by way of counterclaim; by reason of the provisions of the loan agreements and the guarantees the claims were not available by way of set off or as a ground for giving unconditional leave to defend; the bank were entitled to summary judgment but the defendants would be granted stays of execution.

The defendants appealed contending that the learned Judge had erred and that they should be given unconditional leave to defend. The plaintiff bank cross appealed contending that the stays of execution should be removed.

-- Held, by CA (PARKER and NOURSE, LJJ and SIR ROGER ORMROD) that (1) there was no good reason for treating the clauses in the agreement in the same way as exclusion clauses; the latter purported to exclude liability altogether; these clauses did not touch liability; the guarantors could still prosecute their claims to judgment and the clauses merely prevented them from holding up payments admittedly due under the guarantees while disputed cross-claims were litigated; the commercial purpose of the transaction was that, upon default by the borrower the bank should be paid quickly and the natural meaning of the clauses was that all set offs and counterclaims were excluded; the learned Judge was right to reach the conclusion that the bank were entitled to summary judgment (see p 444, col 1);

(2) the purpose of the guarantee was to ensure immediate payment if the principal debtor did not pay; the Court ought not to interfere since the parties had specifically provided both in the loan agreements and the guarantees that payment should be made free of any set off or counterclaim; it would defeat the whole purpose of the transaction, would be out of touch with business realities and would keep the bank waiting for a payment which both the borrowers and the guarantors intended it should have while protracted proceedings in the alleged counterclaims were litigated; although the Court had a discretion to grant a stay such discretion should rarely if ever be exercised; there was no ground for granting a stay and the bank's appeal would be allowed (see p 445, col 2; p 446, col 1).

CASES-REF-TO:

Aries Tanker Corporation v Total Transport Ltd, (HL) [1977] 1 Lloyd's Rep 334; [1977] 1 WLR 185;
Brede, The (CA) [1973] 2 Lloyd's Rep 333; [1974] QB 233;
Cebora SNC v SLP Industrial Products Ltd, (CA) [1976] 1 Lloyd's Rep 271;
Intraco Ltd v Notis Shipping Corporation, (CA) [1981] 2 Lloyd's Rep 256;
Montecchi v Shimco (UK) Ltd, (CA) [1980] 1 Lloyd's Rep 50; [1979] 1 WLR 1180;
Montebianco Industrie Tessili SpA v Carlyle Mills (London) Ltd, (CA) [1981] 1 Lloyd's Rep 509;
Nova (Jersey) Knit Ltd v Kammgarn Spinnerei GmbH, (HL) [1977] 1 Lloyd's Rep 463; [1977] 1 WLR 713;
Power Curber International Ltd v National Bank of Kuwait SAK, (CA) [1981] 2 Lloyd's Rep 394; [1981] 1 WLR 1233;
RH & D International Ltd v IAS Animal Air Services Ltd, [1984] 1 WLR 573;
Wolmershausen v Gullick, [1893] 2 Ch 514.

INTRODUCTION:
This was an appeal by the defendants, John Paul Papanicolaou and Nicholas Frederick Papanicolaou and a cross appeal by the plaintiff Continental Illinois National Bank & Trust Company of Chicago from the decision of Mr Justice Evans in which he held that the defendants were not entitled to unconditional leave to defend and that the judgments given in favour of the bank would be stayed.

The further facts are stated in the judgment of the Court which was delivered by Lord Justice Parker.

COUNSEL:
Mr Nicholas A Phillips, QC and Mr Bernard Eder for the bank; Mr David Hunt for the defendants.

JUDGMENT-READ:
Judgment was reserved. Tuesday, July 1, 1986

PANEL: Lord Justice Parker, Lord Justice Nourse and Sir Roger Ormrod

JUDGMENTBY-1: PARKER LJ

JUDGMENT-1:
PARKER LJ: This is the judgment of the Court. By orders dated Oct 3, 1985, Mr Justice Evans gave summary judgment in favour of the plaintiff bank in three actions in which the bank sued one or other of the two brothers, Nicholas Frederick Papanicolaou and John Paul Papanicolaou, as personal guarantors of the indebtedness of the principal debtors under three loan agreements to which we shall refer respectively as the Trevone agreement, the Sulcis agreement and the Palmerston agreement.

The bank held, as security for the three loans, not only the personal guarantees of the two brothers, but also inter alia certain mortgages of vessels owned by the borrowers. These were, in the case of the Trevone agreement a first preferred Greek mortgage of the vessel Tatiana, in the case of the Sulcis agreement a first preferred Panamanian mortgage of the vessel Fedora, and, in the case of the Palmerston agreement a first preferred Panamanian mortgage of the luxury yacht Eretrea II and second preferred Greek mortgages of Tatiana and Fedora.

It is not disputed that the amounts for which the Judge gave summary judgment in the three actions were properly due from the defendants under their guarantees, but it was contended by the defendants before the learned Judge that they had valid cross-claims from damages in respect of the Trevone and Sulcis agreements on the ground that the bank had negligently or unreasonably failed to carry out its duties as mortgagee of Tatiana and Fedora and had failed to realize a proper value from these vessels either on sale or pending sale. In the case of the Palmerston agreement Eretrea II had not yet been sold so the case was presented somewhat differently and it was contended that the defendants ought in equity to be given credit for the likely proceeds of sale of Eretrea II, ie, what she would be likely to realize pending and on sale had not the bank, as the defendants alleged, acted with a cavalier disregard of the mortgagors' interests. This contention was based on certain passages in the judgment of Mr Justice Wright in Wolmershausen v Gullick, [1893] 2 Ch 514. Since the judgment of Mr Justice Evans Eretrea II has in fact been sold for 30 million French francs or some US $3 million which the defendants assert is grossly under value. Before this Court, therefore, the contention based on the judgment of Mr Justice Wright does not arise. The result of the sale is that the position in regard to the Palmerston agreement is now the same as under the Trevone and Sulcis agreements with this difference only that, whereas in those two cases the defendants say merely that the bank acted negligently or unreasonably with regard to the mortgagor's interests, in the case of the Palmerston agreement there is added the contention that the bank acted recklessly.

The Judge held, and we shall assume, that the cross-claims asserted by the defendants were arguable and that the defendants could therefore proceed with them by way of counterclaim, but he further held that, by reason of the provisions of the loan agreements and the guarantees, the claims were not available by way of set off or as a ground for giving unconditional leave to defend. The defendants on this appeal contend that in so holding the learned Judge erred and they seek orders that in all three actions they should be given unconditional leave to leave.

The learned Judge, notwithstanding that he held that the defendants' cross-claims were no answer to the bank's application for summary judgment, held that the defendants were nevertheless entitled to stays of execution in respect of the whole or part of the judgments given. The plaintiffs seek a removal of such stays of execution.

The foregoing is a very much simplified account of the facts and the contentions made, but is in our view all that is necessary for the present purpose which is to give reasons why, at the conclusion of the argument with regard to the effect of the contractual provisions and the propriety of granting any stay of execution, the Court concluded that the defendants' appeal failed, that the plaintiffs' appeal succeeded and that the orders made by the learned Judge should therefore be varied by the deletion therefrom of any stay of execution.

The contractual provisions upon which the matter turns are as follows:

The Trevone agreement

Notwithstanding anything to the contrary contained in this Agreement all payments by the borrower hereunder shall be made without set-off or counterclaim in dollars to CINB's account at . . .

The Sulcis agreement

Notwithstanding anything to the contrary contained in this Agreement and/or any of the Security Documents all payments by the Borrower under this Agreement and the Security Documents shall be made without set-off or counterclaim and without deductions or withholdings whatsoever in dollars to CINB's account at . . .

The Palmerston agreement

Notwithstanding anything to the contrary contained in this Agreement and any of the Security Documents all payments by the Borrowers under this Agreement and/or any of the Security Documents shall be made without set-off or counterclaim in dollars to . . .

The personal guarantees in respect of the Trevone and Sulcis agreements

6(d) All amounts payable by the Guarantor hereunder (whether on account of principal or interest or otherwise) shall be paid in full free of set-off or counterclaim and without any withholding or deductions whatsoever on account of any present or future taxes or charges or otherwise save and except for taxes on the overall gross receipts or net income of CINB.

The personal guarantees in respect of the Palmerston agreement

1.01(v) This guarantee shall be in addition to and not in any way prejudiced or affected by and shall not be in substitution for any other security now or at any time hereafter in force in respect of the moneys hereby guaranteed and may be enforced without first having recourse to any such other security.

2.01 All payments by the Guarantor under this Guarantee shall be made without set-off or counterclaim and without deductions or withholdings whatsoever in the currency and manner in which and to the account to which payments are to be made by the Borrowers under the Agreement.

On the face of them these clauses are clear enough but it is submitted that they do not apply to exclude a set off of counterclaim based on negligence. This argument is advanced on the basis that the clauses should be treated in the same way as exclusion clauses and thus that they do not apply to claims by way of set off or counterclaim which are based on negligence since -- (a) such claims are not specifically excluded; (b) in the absence of the word "whatsoever" the general words are insufficient to include claims in negligence; (c) to exclude from their operation claims based on negligence would not rob the clauses of all effect.

There are two initial difficulties in the way of this submission. The first is that there is no good reason for treating such clauses in the same way as exclusion clauses. The latter purport to exclude liability altogether. These clauses do not touch liability. The guarantors can still prosecute their claims to judgment. They are, if the clauses are effective, merely prevented from holding up payments admittedly due under the guarantees whilst disputed cross-claims are litigated. This being so the principle which lies behind the narrow construction given to exclusion clauses, that specific words or the use of all embracing words such as "whatsoever" are necessary to enable a party to exclude liability for his own negligence has no application.

The second is that although the Judge said that he recognized that, if the clauses did not operate to bar claims in negligence, certain limited kinds of potential dispute might remain which would be subject to their operation, he did not identify any such limited kinds of potential dispute and that, when Mr Hunt was asked to do so, he found it impossible, notwithstanding that, since the judgment, there had been ample time to try to find and answer to this obvious difficulty in this way.

There must also be added (1) that the commercial purpose of the transaction is that, upon default by the borrower the bank should be paid quickly, and (2) that the natural meaning of the words is that all set offs and counterclaims are excluded. The natural meaning of the words is not that all set offs and counterclaims "other than set offs and counterclaims for negligence or breach of the bank's duties as mortgagee" are excluded.

The learned Judge was in our view right to reach the conclusion that the bank were entitled to summary judgment.

Stay of execution

In Nova (Jersey) Knit Ltd v Kammgarn Spinnerei GmbH, [1977] 1 Lloyd's Rep 463; [1977] 1 WLR 713, the plaintiffs sued on dishonoured bills of exchange. The defendants applied for a stay of proceedings on the ground that they had cross-claims which were the subject of arbitration proceedings in Germany. The stay of proceedings was refused by the House of Lords and no question arose whether, if the plaintiffs had obtained judgment on the bills, a stay of execution would have been right and proper. However, having drawn attention to this Viscount Dilhorne at pp 469 and 722 said:

. . . Bearing in mind the intrinsic nature of a bill of exchange, "an unconditional order" which the appellants were entitled to regard as a deferred instalment of cash, and the fact that cross-claims, unless based on fraud, invalidity or failure of consideration are not allowed, it appears to me that seldom, if ever, can it be right while denying the right to bring a cross-claim, to allow a cross-claim to operate as a bar to execution and to prevent the holder of a bill of exchange receiving the deferred instalment of cash which the parties agreed he should get.

In Montecchi v Shimco (UK) Ltd, [1980] 1 Lloyd's Rep 50; [1979] 1 WLR 1180, also a case concerning bills of exchange, Lord Justice Bridge said at pp 51 and 1183:

It is elementary that as between the immediate parties to a bill of exchange, which is treated in international commerce as the equivalent of cash, the fact that the defendant may have a counterclaim for unliquidated damages arising out of the same transaction forms no sort of defence to an action on a bill of exchange and no ground on which he should be granted a stay of execution of the judgment in the action for the proceeds of the bill of exchange.

Again in Cebora SNC v SLP Industrial Products Ltd, [1976] 1 Lloyd's Rep 271, Lord Justice Buckley said:

. . . the mere existence of a counterclaim which is likely to succeed cannot in my judgment, of itself be a sufficient ground for saying that the Court must exercise its discretion in favour of a stay in a case of this kind.

and in the same case Sir Eric Sachs said:

Pleas to leave in Court large sums to deteriorate in value while official referee scale proceedings are fought out may well to [the business] community seem rather divorced from business realities.

The foregoing quotations were cited with approval in this Court in Montebianco Industrie Tessili SpA v Carlyle Mills (London) Ltd, [1981] 1 Lloyd's Rep 509.

The same approach was adopted by this Court in relation to claims under a letter of credit in Power Curber International Ltd v National Bank of Kuwait SAK, [1981] 2 Lloyd's Rep 394; [1981] 1 WLR 1233 and has long applied in relation to claims for ocean freight: see Aries Tanker Corporation v Total Transport Ltd, [1977] 1 Lloyd's Rep 334; [1977] 1 WLR 185. This last case is of particular importance in the present case for the House of Lords was invited to alter a long established rule which had been approved by this Court as recently as 1973: see The Brede, [1973] 2 Lloyd's Rep 333; [1974] QB 233. In relation to this Lord Wilberforce said at pp 338 and 190-191:

But beyond all this there is a decisive reason here why this House should not alter the rule approved in The Brede by reversing it. That is that the parties in this case have, I think beyond doubt, contracted upon the basis and against the background that the established rule is against deduction. Such a case as this, in fact, marks out very decisively the possible limits of judicial intervention: for it would be undesirable in this, or in any other case where the same question arose, for the Courts to declare that a rule, clearly shown to exist, and shown to be the basis of the contract before the Court, ought to be replaced by a different rule which would have to operate on the contract in question. However convinced the courts might be of the latter's merits, to substitute it could be no part of a judicial process. This is all the less so since the parties themselves, if they dislike the rule, can perfectly well provide oherwise in their contract.

If parties contract on the basis of the existence of a rule it is in our view the same as if they impliedly incorporate the rule in the contract. If this be so, it must at least prima facie follow, in cases where no established rule exists but they expressly provide by contract for the same result, that such contract will provide the same result.

The rule in relation to ocean freight has been applied in relation to transport under the Convention scheduled to the Carriage of Goods by Road Act 1965: see RH & D International Ltd v IAS Animal Air Services Ltd, [1984] 1 WLR 573 and cases there cited.

Finally it is necessary to refer to Intraco Ltd v Notis Shipping Corporation, [1981] 2 Lloyd's Rep 256. In that case the purchase price on the sale of the vessel Bhoja Trader was to be paid as to part ($400,000) within 90 days of delivery. This payment was the subject of a bank guarantee which provided for payment by the bank on demand coupled with a statement that the amount had not been paid by the buyers. Shortly after delivery the vessel was arrested and the buyer had to pay $200,000 to obtain her release. The buyer claimed that the arrest and consequent losses were due to the sellers' breach of contract. They sought an injunction preventing the sellers from demanding payment under the guarantee. They obtained a holding injunction ex parte, but this was discharged on the subsequent inter partes hearing before Mr Justice Staughton. They then appealed to this Court. Giving the judgment of the Court Lord Justice Donaldson said at p 257, col 2:

In refusing to interfere with the sellers' right to call upon the bank to make payment under its guarantee, the learned Judge acted in conformity with the well-established principle that the Court will not grant such an injunction unless fraud is involved (see Richardson (Howe) Scale Co Ltd v Polimex-Cekop and Another [1978] 1 Lloyd's Rep 161). We agree with him. Irrevocable letters of credit and bank guarantees given in circumstances such that they are the equivalent of an irrevocable letter of credit have been said to be the life blood of commerce. Thrombosis will occur if, unless fraud is involved, the Courts intervene and thereby disturb the mercantile practice of treating rights thereunder as being the equivalent of cash in hand.

We can see no relevant distinction between the guarantee in that case and the guarantees presently under consideration. The purpose of both was to ensure immediate payment if the principal debtor did not pay. Indeed the present cases make it the more necessary that the Court should not interfere, for here the parties have specifically provided both in the loan agreement and the guarantees that payment should be made free of any set off or counterclaim. It would defeat the whole commercial purpose of the transaction, would be out of touch with business realities and would keep the bank waiting for a payment, which both the borrowers and the guarantors intended that it should have, whilst protracted proceedings on the alleged counterclaims were litigated. We do not doubt that the Court has a discretion to grant a stay but it should in our view be "rarely if ever" exercised, as Lord Dilhorne said in relation to claims on bills of exchange. Guarantees such as these are the equivalent of letters of credit and only in exceptional circumstances should the Court exercise its power to stay execution. The fact that a counterclaim which was likely to succeed existed would not by itself be enough, as Lord Justice Buckley pointed out. It might be that the existence of such a counterclaim coupled with cogent evidence that the bank would, if paid, be unable to meet a judgment on the counterclaim would suffice, but nothing of that nature arises here. This is a simple case where no ground for granting a stay can be shown.

The learned Judge, in granting a stay, said:

I do not accept this submission to its full extent. The power to order a stay of execution is discretionary, and in my view, the contractual terms are one, but only one, of the relevant factors. Another factor which is relevant here is that the defendants have at least some equitable right to bring into account the existence of the additional security provided by ERETREA II, whatever her worth may be. Such a right or equity is recognised by Woolmershausen v Gullick [1893] 2 Ch 514 and is not excluded, in my judgment, by Clause 1.01 (iv) of the Palmerston guarantee (p 288). The potential inequity of permitting the plaintiffs to execute a judgment for sums totalling $17 million and at the same time to keep an asset which may be worth $10 million or more in their own hands for the purposes of sale is recognised by the plaintiffs themselves, for they have indicated that they would be prepared to undertake not to institute bankruptcy proceedings pending the sale.

It is clear from that that the learned Judge placed great reliance on the alleged equitable right. Indeed, no other ground for granting a stay was mentioned. However, that right, if it existed, has disappeared with the sale of Eretrea II, and it must be very doubtful whether the Judge would not view the matter in the same light.

At all events, the particular grounds having disappeared, this Court is free to exercise its own discretion.

DISPOSITION:
Defendants' appeals dismissed. Plaintiffs' cross-appeal allowed. Plaintiffs to have costs of appeal and cross-appeal here and below. Defendants refused leave to appeal and stay of execution.

SOLICITORS:
Watson Farley & Williams; Dipp Lupton