House of Lords
Session 1997-98
Publications on the Internet

Judgments - Investors Compensation Scheme v. West Bromwich Building Society


  Lord Goff of Chieveley   Lord Lloyd of Berwick   Lord Hoffmann
Lord Hope of Craighead   Lord Clyde





ON 19 JUNE 1997


My Lords,

      I have had the opportunity of reading in draft the speech of my noble and learned friend, Lord Hoffmann. I agree with the conclusion which he has reached as to the construction to be placed upon section 3(b) of the Investors Compensation Scheme Claim Form and, for the reasons given by him, I would answer the questions directed by Evans-Lombe J. to be tried as preliminary issues in the manner proposed by my noble and learned friend. I would therefore allow the appeal.


My Lords,


      This is the second occasion on which the House has had to consider the scheme for compensating investors set up under section 54 of the Financial Services Act 1986. On the first occasion I described the Rules made by the Securities and Investment Board under section 54(6) of the Act as being needlessly confusing and obscure. On this occasion it is not the Rules that are primarily in issue, but a single clause in the Claim Form which investors are required to sign when making a claim for compensation; and the problem arises not from any obscurity of the language (the meaning is, I think, tolerably clear) but from slovenly drafting.

      The general background to the Home Income Plans, and the reasons why so many investors have come to grief, have already been described in the judgments in the earlier appeal, and need not be repeated here. The particular background to the present appeals are proceedings brought by two groups of investors against West Bromwich Building Society ("W.B.B.S.") for damages for negligence at common law and under section 2(1) of the Misrepresentation Act 1967. They also claim rescission of their mortgages on the ground of misrepresentation and undue influence, equitable compensation, damages in lieu of rescission under section 2(2) of the Act of 1967, and a variety of other remedies. Some of these remedies overlap.

      The Investors Compensation Scheme Ltd. ("I.C.S.") have also commenced proceedings against W.B.B.S. in which they claim as assignees of the Investors' rights against W.B.B.S. They assert that all the investors' claims against W.B.B.S. have been validly assigned to I.C.S., with the exception of the investors' claim for rescission. It follows that there are competing claims against W.B.B.S. for the same damages, by the investors on the one hand and I.C.S. on the other. The resolution of the issue which thus arises indirectly between I.C.S. and the investors depends on the true construction of the Claim Form, and in particular on the scope of the provisions relating to the assignment of the investors' rights against third parties.

      As between I.C.S. and W.B.B.S. there is a further issue. For W.B.B.S. allege in the alternative that if the question of construction is resolved in favour of I.C.S., and the investors have purported to assign their claims for damages against W.B.B.S., then the assignment is void or unenforceable on grounds of public policy.

      In addition to their claim against W.B.B.S., I.C.S. have brought proceedings against numerous firms of solicitors, in which they claim damages for negligence in advising their clients in relation to the Home Income Plans. These proceedings are also brought as assignees under the Claim Form. But there are two important differences. In the first place, there is no issue as to the meaning or scope of the assignment in the case of claims against the solicitors. Secondly (and no doubt for the same reason) none of the investors have brought their own proceedings against the solicitors. So there is no underlying conflict between I.C.S. and the investors in relation to the I.C.S. claim against the solicitors. The solicitors' defence is the same as the alternative argument advanced by W.B.B.S., namely, that the assignment is void or unenforceable on grounds of public policy.

      Before turning to the question of construction, it is convenient to set out the main provisions of the Claim Form. The form is addressed to the individual investor. In section 2 it sets out the amount of the compensation to which the recipient is entitled under the scheme. Section 3(a) sets out the claimants' declaration. It provides (in a typical case) as follows:

     "I/we hereby claim compensation for losses amounting to £20,345 as a result of the default of Fisher Prew-Smith.
    "I/we believe . . . that I/we have a claim against the firm in respect of negligent acts and/or advice given by Fisher Prew-Smith on or after 28 August 1988.
    . . .

    "I/we confirm that I/we have received no compensation of any kind in respect of amounts owed to me/us at the date of default by Fisher Prew-Smith or any other person. . . .
    ". . . I/we also confirm that I/we do not expect to receive any such compensation in the future . . .
    "I/we understand that subject to section 3(b) below
      1.      I/we are not obliged to make a claim under this scheme.
      2.      Investors' Compensation Scheme Ltd. . . . will take over my/our rights and claims against Fisher Prew-Smith and other third parties on the payment of any compensation as described in the Transfer of Rights at section 4 of this form. . . ."

The claimants' declaration is then signed by the investor.

      Section 3(b) on which the present appeal turns, sets out a counter-declaration by I.C.S. It provides:

     "I.C.S. agrees that the following claims shall not be treated as a 'Third Party Claim' [as defined in section 4 of this form] for the purposes of this agreement and that the benefits of such claims shall enure to you absolutely:
    "Any claim (whether sounding in rescission for undue influence or otherwise) that you have or may have against the West Bromwich Building Society in which you claim an abatement of sums which you would otherwise have to repay to that Society in respect of sums borrowed by you from that Society in connection with the transaction and dealings giving rise to the claim (including interest on any such sums)."

      Section 4 is headed "Investor's Agreement and Acknowledgment (Rights Against Participant Firm)." It provides as follows:

     "1.      I/we agree that my/our rights against the Participant Firm in respect of the Claim shall pass to Investors Compensation Scheme Ltd. ('I.C.S.') on payment of compensation pursuant to the Financial Services (Compensation of Investors) Rules 1990 ('the Rules'). . . .
    "3.      I/we acknowledge that under the Rules on payment of the amount of £20,345.15 I/we will not longer have the right to make a claim against the Participant Firm in respect of the Claim and that any such right will be vested in I.C.S. pursuant to the Rules, and I/we further acknowledge that any sums which would otherwise be payable to me/us in respect of the Claim by the Participant Firm, or by any trustee appointed under the Financial Services Act 1986, shall be paid instead to I.C.S. . . .

    "5.      I/we agree that in the event of my/our receiving any moneys or assets in respect of the Claim from the Participant Firm or from any trustee appointed under the Financial Services Act 1986 I/we will forthwith pay or transfer them to I.C.S.
    "6.      I/we hereby assign absolutely to I.C.S. each and every Third Party Claim and the benefit thereof.
    "12.      In this document, 'Third Party Claim' means any right, claim or cause of action which the claimant has or may have against any person other than the Participant Firm or against any fund or property in the hands of any person other than the Participant Firm and arising out of the circumstances giving rise to the Claim or otherwise relating to the Claim whether such claims shall arise in debt, breach of contract, tort, breach of trust or in any other manner whatsoever (and including all sums to which I/we may become entitled under sections 6 and 61 of the Financial Services Act 1986)."

      Section 4 is then signed by the investor. There follows an Explanatory Note. Paragraphs 1, 2 and 3 are all concerned with the assignment of claims against the Participant Firm, in this case Fisher Prew-Smith. Paragraph 4 is concerned with the assignment of third party claims. It provides:

     "4.      You also agree that I.C.S. should be able to use any rights which you now have against anyone else in relation to the claim. Examples might be directors of the firm or other persons also responsible for causing the loss for which you are being compensated. You give up all those rights and transfer them to I.C.S. (paragraph 6)."

      So much for the general shape of the Claim Form. I now return to section 3(b). It provides for an exception in respect of third party claims assigned under paragraph 6 of section 4. Mr. Vos on behalf of I.C.S. submits that the exception is confined to claims against W.B.B.S. for rescission. Mr. Oliver on behalf of W.B.B.S. and Mr. Strauss on behalf of the investors submit that the exception covers all claims against W.B.B.S. whether for rescission or not, in which the investor claims a reduction in the amount due under the mortgage loan.

      This is not the first time the court has had to consider the meaning of section 3(b). The same question arose in proceedings brought by I.C.S. against Cheltenham and Gloucester P.l.c., formerly known as Cheltenham and Gloucester Building Society. In that case Evans-Lombe J., who has had overall charge of the litigation, ordered, and subsequently tried, a preliminary issue as to the construction of section 3(b). He held that the more natural meaning of the words was that for which the investors contend; in other words that the exception covers all possible claims against Cheltenham and Gloucester, and is not limited to claims for rescission. However, he went on to reject what he regarded as the more natural meaning of the words on the ground that it produced a "ridiculous" result, contrary to the "demonstrable purpose of the parties in entering into the Claim Forms." He thus upheld I.C.S.'s construction even though it meant, in his view, doing violence to the language of the Claim Form.

      When the present proceedings were before Evans-Lombe J., he repeated his view that the investors' construction was the more natural meaning of the words, but held once again that such meaning was displaced by a consideration of the surrounding circumstances, and in particular by the need for an "efficient system" to enable I.C.S. to recover its outlay. However, the learned judge went on to hold that the purported assignment in favour of I.C.S. was invalid, on the grounds that the assignment of some but not all the remedies available against W.B.B.S. in respect of a single cause of action is ineffective in law. Since the assignment was invalid, it followed that the investors were free to pursue their claims for damages against W.B.B.S.

      I.C.S. appealed to the Court of Appeal. The Court of Appeal agreed with Evans-Lombe J. that the investors' construction accords with the natural meaning of the words. But unlike the judge they did not regard the result as commercially ridiculous. Leggatt L.J. who gave the leading judgment said: "There is simply no warrant for limiting the rights retained to claims for or consequent upon rescission." I find myself in complete agreement with the Court of Appeal.

The question of construction

      A useful starting point for ascertaining the meaning of section 3(b) of the Claim Form is to put oneself in the position of the ordinary investor to whom the Claim Form is addressed. This was the approach adopted by the House in Porter v. National Union of Journalists [1980] I.R.L.R. 404. The question in that case concerned the proper construction of the rules of the N.U.J. Lord Diplock said, at p. 407:

     "I turn to the interpretation of the relevant rules, bearing in mind that their purpose is to inform the members of the N.U.J. of what rights they acquire and obligations they assume vis-à-vis the union and their fellow members, by becoming and remaining members of it. The readership to which the rules are addressed consists of ordinary working journalists, not judges or lawyers versed in the semantic technicalities of statutory draftsmanship."

      The purpose of the Claim Form was to inform the investor in relatively non-technical language what his rights and liabilities were to be on receipt of compensation under the scheme. No doubt the investor would start by reading the Explanatory Note, as he is invited to do before signing section 4. He would notice that the first three paragraphs of the explanatory note are all dealing with his right to claim against the defaulting firm, Fisher Prew-Smith. This would not surprise him. For it was the firm of Fisher Prew-Smith which led him into his disastrous investment. He would well understand that I.C.S. might wish to recover some or all of its outlay from that firm: see paragraph 2 of the explanatory note. He might then turn to section 4 itself. He would at once notice that the heading of section 4 refers specifically to "Rights against Participant Firm". Next he would find that the first five paragraphs of section 4 are all dealing with the claim against Fisher Prew-Smith. He would infer that the claim against Fisher Prew-Smith was of primary importance to I.C.S.; otherwise it would hardly have been given such prominence.

      Next he would read paragraph 4 of the Explanatory Note. He would note that he was to give up his rights against "anyone else" in relation to the claim (i.e. the claim against Fisher Prew-Smith). The examples given are any rights he might have against a director of Fisher Prew-Smith "or any persons also responsible" for causing his loss. He might or might not at that stage envisage a claim against W.B.B.S.; probably not. Certainly the reference to "other persons" in the context of the directors of Fisher Prew-Smith does not serve to highlight a possible claim against W.B.B.S. If he were in doubt, he would turn to paragraph 6 of section 4, note the definition of Third Party Claim in paragraph 12, and so come to section 3(b).

      On a quick reading of section 3(b) our hypothetical reasonable investor would notice that it excludes from the definition of Third Party Claim any claim which he might have against W.B.B.S. for an "abatement" of sums due under his mortgage. The benefit of any such claim was to enure to him absolutely. In other words it was not to pass to I.C.S. under any circumstances. He would probably not pause over the words in brackets, recognising that words in brackets do not ordinarily govern the meaning of the rest of the sentence, especially if the parenthesis starts with the word "whether" and ends with the words "or otherwise." He might well, in passing, understand the words in brackets as being the equivalent of "whether or not sounding in rescission for undue influence." He would then come to "abatement." This would strike him as an unusual word in the context. So he would turn to his lawyer (who is assumed to be at his elbow) and ask him whether abatement has some special meaning in law. His lawyer would reply that abatement has a technical meaning in the law of nuisance, and in connection with contracts for the sale of goods and the provision of services. But otherwise it simply means reduction. It has no technical meaning in relation to rescission. Counsel were unable to point to a single case in which the word had been used in that connection. So the investor would understand that if he still owed money on his mortgage, as would almost always be the case, he would retain the right to sue W.B.B.S. in order to reduce his outstanding debt. Again, this would not surprise him. For in most cases he would not have recovered full compensation from I.C.S., and in some cases nothing like full compensation. Certainly he would wish to have all defences available should W.B.B.S. start proceedings against him for recovery of the loan.

      So the position would be that he, the investor, would retain his right to sue W.B.B.S. for a reduction of the mortgage debt, but I.C.S. would obtain the right to sue Fisher Prew-Smith and "Third Parties" other than W.B.B.S., on the understanding that I.C.S. would re-assign those rights on request, should they not be needed: see paragraph 5 of the Explanatory Note. This would strike the investor as fair and reasonable. At this stage our hypothetical investor would feel that he understood his rights and obligations well enough and would sign section 4.

      Is there, then, any reason why the courts should not give section 3(b), and the Claim Form as a whole, the same meaning as the investor? (I shall refer to this as "the plain meaning.") The objections fall into two groups. The first group of objections relate to the language of section 3(b); the second group of objections relate to the legal and commercial consequences of adopting the plain meaning. I suspect that none of these objections would occur to anyone other than a lawyer.