Raiffeisen Zentralbank Osterreich AG v Crossseas Shipping Ltd

JurisdictionEngland & Wales
JudgeHenry,Thorpe,Potter L JJ
Judgment Date21 December 1999
CourtCourt of Appeal (Civil Division)
Date21 December 1999

Court of Appeal (Civil Division).

Henry, Thorpe and Potter L JJ.

Raiffeisen Zentralbank Osterreich AG
and
Crossseas Shipping Ltd & Ors.

Richard Salter QC and Geraldine Andrews (instructed by Lawrence Jones) for the appellant.

Steven Hofmeyr and Peter Eggers (instructed by Stephenson Harwood) for the respondents.

The following cases were referred to in the judgment of Potter LJ:

Aldous v CornwellELR (1868) LR 3 QB 573.

Armor Coatings (Marketing) Pty Ltd v General Credits (Finance) Pty Ltd [1976] 17 SASR 259.

Caldwell v Parker (1869) Ir Rep 3 Eq 519.

Canadian Imperial Bank of Commerce v Skender [1986] 1 WWR 284.

Crediton (Bishop of) v Bishop of ExeterELR [1905] 2 Ch 455.

Davidson v CooperENRENR (1844) 13 M & W 343; 153 ER 142.

Farrow Mortgage Services Pty Ltd v Slade & Nelson (1996) 38 NSWLR 636.

Gardner v WalshENRENR (1855) 5 El & Bl 83; 119 ER 412.

Halgate & Osborn's Contract, Re [1902] 1 Ch 451.

Koch v DicksELR [1933] 1 KB 307.

Lombard Finance Ltd v Brookplain Trading LtdWLR [1991] 1 WLR 271.

Master v MillerENRENR (1791) 4 TR 320; 100 ER 1042.

Pigot's CaseENRENR (1614) 11 Co Rep 26b; 77 ER 1177.

Suffell v Bank of EnglandELR (1882) 9 QBD 555.

Walsh v Westpac Banking Corp (1991) 104 ACTR 30.

Banking — Guarantee — Whether alteration of guarantee by insertion of name and address of agent for service rendered guarantee unenforceable — Test for avoidance for material alteration.

This was a defendant's appeal from the judgment of Cresswell J ([1999] CLC 973) that a bank guarantee was not rendered unenforceable by an alteration to insert the name and address of an agent for service.

The plaintiff bank claimed against the defendant, “S”, under a guarantee. S claimed that the guarantee had been altered in that cl. 37 providing for a service agent in England had originally been left blank and that without S's knowledge or consent the name and address of a company connected with S had been inserted into cl. 37 by or on behalf of the bank as purported agent for service in England. S alleged that that was a material alteration which avoided the guarantee relying on Pigot's Case (1614) 11 Co Rep 26b. On a trial of preliminary issues Cresswell J held that the service agent clause was procedural in nature and the contract of guarantee and indemnity would not operate differently whether cl. 37 was filled in or not. The legal incidence and business effect of the guarantee was not altered and the alteration was accordingly not in the context material and the guarantee remained enforceable. S appealed.

Held, dismissing the appeal:

1. Any material alteration not approved by all parties to the original document after execution rendered an instrument void. Such an instrument was no longer the instrument of the maker. Also the rule tended to prevent fraud. (Pigot's Case (1614) 11 Co Rep 26b, Master v MillerENR(1791) 4 TR 320 considered.)

2. The test of materiality applied by the English court had been whether the alteration complained of affected the contractual obligations of the parties in some particular or the business utility of the instrument. There was no support in the authorities for the judge's distinction between procedural and other obligations. ( Suffell v Bank of EnglandELR (1882) 9 QBD 555, Koch v DicksELR[1933] 1 KB 307considered.)

3. Alterations which added nothing to what the law would otherwise provide and those which merely corrected a misdescription had been held to be immaterial in the English cases. (Aldous v CornwellELR(1868) LR 3 QB 573, Lombard Finance Ltd v Brookplain Trading LtdWLR[1991] 1 WLR 271 considered.)

4. Considering the Commonwealth authorities the rule relating to material alteration of guarantees should be updated to provide that the person who sought to avoid the guarantee had to show prejudice or potential prejudice from the alteration. The judge's decision could be upheld on the basis that his conclusion that cl. 37 was only procedural was in effect a decision that S would suffer no prejudice from the alteration. ( Armor Coatings (Marketing) Pty Ltd v General Credits (Finance) Pty Ltd [1976] 17 SASR 259 and Farrow Mortgage Services Pty Ltd v Slade & Nelson(1996) 38 NSWLR 636considered.)

5. S was not prejudiced by the alteration because under the terms of the guarantee the issue rather than service of proceedings constituted a demand under the guarantee and because the terms of the guarantee required any communication to be sent to S out of the jurisdiction as well to the service agent. Thus the only potential prejudice to S would be if he was seeking to evade service which was not a good reason to apply the rule.

JUDGMENT

Potter LJ: Introduction

1. This is an appeal by the fourth defendant (“Mr Shah”) from a decision of Cresswell J dated 19 March 1999 reported at [1999] CLC 973 in respect of which the judge himself gave leave to appeal. The decision followed the trial of a number of preliminary issues, previously ordered by Rix J on 4 December 1998 to be tried before all other questions or issues in the action.

2. The plaintiff bank, Raiffeisen Zentralbank Osterreich AG (“the bank”) claimed against Mr Shah, who is a resident of Kenya, the sum of US$5m and interest pursuant to a guarantee dated 29 July 1997 (“the guarantee”). One of the matters raised by Mr Shah in his defence was a plea that the guarantee had been avoided by a material alteration made to it after execution, namely the insertion by or on behalf of the bank in cl. 37 of the guarantee (which had been left blank at the time of his signature), of the name, address, telex and fax numbers of the first defendant, Crossseas Shipping Ltd (“Crossseas”), as purported service agent for Mr Shah. It was alleged, and admitted by the bank for the purposes of the preliminary issues, that the insertion was made without Mr Shah's knowledge or consent, there having been no discussion between the bank and Mr Shah in relation to this clause or the appointment of an agent for service at any material time. The bank asserted in its reply various factual matters intended to show that Mr Shah would or should have consented to the alteration made had he been asked and that, in any event, the alteration did not in fact operate to his prejudice. In particular it was alleged that Mr Shah was a joint venturer with Crossseas and had provided all the capital for the joint venture vessels' facilities; further, Crossseas had been the nominated agent for service of any notice/demand under previous facilities and vessel mortgages granted by the bank in respect of the joint venture.

The issues

3. On 4 December 1998 Rix J ordered that the following issues of fact and law be tried as preliminary issues:

  1. (1) Whether cl. 37 of the guarantee was filled in by Mr Andrew Church of the plaintiffs before Mr Shah signed the guarantee and returned it to the plaintiff or after.

  2. (2) If cl. 37 was filled in after Mr Shah had signed the guarantee, whether, in determining whether that alteration to the guarantee was material, so as to render the guarantee unenforceable against Mr Shah, the court will be entitled to take into account any factual matters pertaining to the relationship between Mr Shah and the service agent named in cl. 37 which may hereafter be pleaded by the plaintiff by way of amendment to its points of reply.

  3. (3) Whether (leaving out of account any such factual matters as aforesaid) the alteration to the guarantee by the insertion of the name and address of the service agent in cl. 37 was material so as to render the guarantee unenforceable against Mr Shah?

The issue in (1) fell by the wayside when, shortly before the hearing below, the bank admitted that the alteration had been made by the bank after signature of the guarantee and without the authority of Mr Shah.

The judge's decision

4. The judge dealt first with issue (3). Having reviewed the leading authorities at some length, in a passage headed “Analysis and Conclusions” he decided as follows ([1999] CLC 973 at p. 984).

5. He began by quoting the well-known rule in Pigot's Case (1614) 11 Co Rep 26b to the effect that any material alteration made to a deed or other instrument after the execution of that instrument or deed renders it void, if made without the approval of all the parties thereto. He also cited Aldous v CornwellELR(1868) LR 3 QB 573, Bishop of Crediton v Bishop of ExeterELR[1905] 2 Ch 455 and Lombard Finance Ltd v Brookplain Trading LtdWLR[1991] 1 WLR 271 at p. 274 per Dillon LJ. He then referred to the rationale underlying the rule as stated by Jessel MR in Suffell v Bank of EnglandELR(1882) 9 QBD 555 at p. 561, quoting with approval from the judgment of Grose J in Master v MillerENR(1791) 4 TR 320; 100 ER 1042:

“a man shall not take the chance of committing a fraud, and when that fraud is detected recover on the instrument as it was originally made. In such a case the law intervenes, and says that the deed thus altered no longer continues the same deed, and that no person can maintain an action on it…and the principle of those cases is that any alteration in a material part of any instrument or agreement avoids it, because it thereby ceases to be the same instrument. And this principle is founded on great good sense because it tends to prevent the party in whose favour it is made from attempting to make any alteration in it.”

Turning to the question of materiality, he referred also to the passage at p. 563 where Jessel MR stated:

“before one can consider the question as to whether the alteration is an alteration affecting the contract one must know exactly what the instrument is, what the alteration is, and what the general effect is…”

6. The judge then pointed out and emphasised the fact that the instant contract was a contract of guarantee, the central obligations of which were contained in cl. 2 (the guarantee clause) and cl. 3 (the indemnity clause). The remainder, save for cl. 37, went to the nature, extent and validity of...

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