Summary

Effect of s. 2 of the Law of Property (Miscellaneous Provisions) Act 1989.

Facts

These two applications for summary judgment by the plaintiff were in two actions against different defendants but raised the same issues. The plaintiff, who had been a close friend of both sets of defendants, acted as solicitor for all the defendants in unprofitable litigation. The defendants were under financial strain, owing another company £100,000 and the plaintiff £46,000 in costs. The plaintiff sought security from the defendants in the form of documents purporting to give a charge over their houses, which they executed. The documents contained two clauses: (i) cl.1 contained language apt to create an equitable charge over Tony Guinness' house and on Michael Guinness' half beneficial interest in his house (jointly owned with his wife); (ii) cl.2 of the documents contained a contractual obligation on the part of the Guinness brothers to execute legal mortgages as required. After the conclusion of the action against Mr Madhvani, the plaintiff had his fees taxed and obtained judgment against the defendants for payment of fees as taxed, in excess of £70,000. Michael and Tony Guinness entered into individual voluntary arrangements which stated that they intended to challenge the documents. No challenge was made before the defendants in their affidavits in answer to these applications for summary judgment contended that the charges were void for non-compliance with s.2 of the Law of Property (Miscellaneous Provisions) Act 1989 and that they were voidable for undue influence. The issues were: (1) whether there was a grant by the defendants to the plaintiff of an equitable charge; (2) whether the grant (if made) was open to challenge by the defendants on grounds of undue influence; and (3) whether the charge (if both granted and valid) secured all sums due for services provided by the plaintiff to the defendants.

Held

(1) Cl.2 of the documents fell foul of s.2 of the 1989 Act because the plaintiff was not a signatory and cl.2 could therefore have no legal effect. However, s.2 of the 1989 Act imposed requirements for the validity of contractual obligations of the character there specified but did not go further and strike down the document as a whole. S.2 struck down cl.2 but left cl.1 fully effective. This was not a case where the invalidating effect of s.2 on the contractual obligations in a document had such a fundamental effect on the contract or transaction as a whole that the other provisions in the document could not sensibly or fairly be allowed to stand alone. Cl.1 should take effect because if the entirety of the agreement for security could not be given effect, it must be more in accord with the parties' intentions, fairness and good sense that half be given effect to rather than none at all. (2) S.2 of the 1989 Act afforded no impediment to the valid grant by the Guinness brothers of the interests described above. (3) The defence of undue influence lacked any substance or merit. (4) Cl.1 was clumsily drafted but it was clear from the documents read as a whole that the charges were intended to secure the fees currently due for services rendered, plus all fees that became due for services rendered in the future and were drafted in such a way that interest was payable on the existing indebtedness and not on the future indebtedness.

The plaintiff was entitled to valid equitable charges as claimed and as described in (4) above. All outstanding applications to be adjourned to the district judge.