Thursday, 15 December 2011

What to do with a redundant definition in your document?

Although it's a case involving banking documents, Rayford Homes Ltd v Bank of Scotland Plc and Anor [2011] EWHC 1948 (Ch) (23 July 2011) raises points of more general application. It concerned a strange situation: there was an unused definition (of the expression "BoS Priority") in a document that had been based on the bank's standard form, and it should have had a number inserted to give it any meaning anyway. What was the court to make of it?

The correct thing to do is to adopt the "Chartbrook approach", after Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101: "there is not, so to speak, a limit to the amount of red ink or verbal rearrangement or correction which the court is allowed. All that is required is that it should be clear that something has gone wrong with the language and that it should be clear what a reasonable person would have understood the parties to have meant" (per Lord Hoffmann). The purpose of the definition, even without a connection to an operative provision in the agreement, was clear enough, and the later insertion (by the bank) of a figure in the space provided. It looked as if it limited the bank's priority to the amount stated, although the bank argued that it didn't because the definition wasn't actually used in a provision of the loan agreement. Not a very attractive argument when it was the bank that had, first of all, deleted the provision which the definition should have been connected to, and second, inserted a figure that placed a limit on its own priority. And adopting a Chartbrook approach the court took the view that the bank was indeed bound by what it had written into the definition. The fact that all that was needed to give the definition effect was to add a few words to an operative provision was not determinative, but it seems to me that it indicates that little ink would be needed to make the agreement work as it looked as if it should work.

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