What? The High Court has held that, although a definition was not used in a contract, it should be given a meaning consistent with the purpose of the contract.

So What? This case highlights the danger of including an unused definition in an agreement: the effect may be difficult to predict and may work against you.

In Rayford Homes Limited v Bank of Scotland plc and another [2011], the judge followed the approach set out in the Court of Appeal case Chartbrook Ltd v Persimmon Homes Ltd [2009] where he said that the correct process is to decide what a reasonable person would have understood the parties to have meant.

Case Facts

Rayford borrowed money from two lenders: T (its trustee shareholder) and B (Bank of Scotland).  Rayford granted security to both lenders.  All parties entered into an intercreditor agreement in B’s standard form intended to regulate the rights of the creditors among themselves.  A schedule to the agreement included a definition of the “B priority”, which was to be a sum in pounds sterling, although this amount was left blank when the agreement was signed.  The term “B priority” was not used in the agreement.

B then agreed to make further advances to Rayford and asked T (the other lender) to sign a document which acknowledged that the “B priority” figure was increased to the maximum amount that B had now agreed to advance.  T complied, although because the definition was still not used in the agreement, this did not seem to have any effect.  Rayford became unable to repay its debts and administrative receivers were appointed.

B, having previously asked for the “B priority” figure to be increased, now tried to argue that the definition was irrelevant, so that B could rely on the other provisions of the agreement and other security documents.  T tried to establish that the definition did have a meaning, as this might give T a way of preventing B from claiming all the funds collected by the administrative receiver.

The court said that the “B priority” must have meant something and that, because it was contained in a B standard form document intended to protect B, it must be given a definition that benefited B, rather than T.  The judge decided that B’s priority was limited, but not to the figure submitted by T.  On its proper construction, the effect of the agreement was that any charges in favour of B should rank in priority to T’s security.

This case highlights the danger of including an unused definition in an agreement: the effect may be difficult to predict and may work against you.