Investors Compensation Scheme Ltd v West Bromwich Building Society (No 1)
Armitage v West Bromwich Building Society
House of Lords
Citations:  1 WLR 896;  1 All ER 98;  1 BCLC 531;  CLC 1243;  PNLR 541;  CLY 2537.
Investors entered into home income plans. As part of these plans, the claimants took out mortgages on their homes to secure advances. They then invested these advances into equity-linked bonds. They suffered heavy losses after a fall in the equities market.
The investors were advised by independent financial advisors, but these had since become insolvent. For this reason, they instead sued the Investors Compensation Scheme. This body, established by s.54 of the Financial Services Act 1986 (superseded by the Financial Services and Markets Act 2000), provided compensation to those with unsatisfied claims against authorised persons in the investment industry.
The scheme’s claim form required the investors to assign all rights against third parties to the ICS. There was an exception to this under s.3(b) of the form. This stated that the assignment excluded the benefits of any claim the investor might have against the building society which granted the mortgage, where the claim was for the abatement of sums payable under the mortgage.
After paying out to the investors, the ICS sued the building societies and solicitors firms for breach of statutory duty. The building societies contested the claim. They argued thats.3(b) meant that there had not been an effective assignment of the investors’ claims against them.
At first instance, the judge held that s.3(b) only reserved to the investors the right to an adjustment of their mortgage debts in the event of rescission. However, he held that the assignment was nevertheless void. This was because it involved the assignment of part of a remedy attached to the assigned chose in action. The Court of Appeal disagreed with the judge’s construction of the clause.
- How should s.3(b) be interpreted?
- Was the assignment valid?
The House of Lords held in favour of the ICS. The trial judge was correct to interpret s.3(b) as merely reserving to the investor any claim to abatement of the mortgage debt consequent on rescission.
However, he was wrong to conclude that the assignment was invalid. Only the owner of the mortgaged property could claim rescission or abatement. It was not a separately assignable chose in action nor a remedy attached to the assigned chose in action (which consisted of claims for damages against third-parties).
As such, s.3(b) did not cut down on the scope of the chose in action assigned to the ICS. It was merely intended to make clear that the investor would not be accountable to the ICS for any abatement of their debt. Accordingly, the assignment validly transferred to the ICS the whole of the investors’ claims against the building societies.
This Case is Authority For…
Lord Hoffman in this case outlined the key principles involved in interpreting contract terms. The goal of a court in construing a contract is to find the meaning which a reasonable person would understand the document to have. The following principles apply to this process:
- The reasonable person does not take into account the parties’ subjective intentions or evidence of pre-contractual negotiations. These are only relevant in a claim for rectification.
- The reasonable person will construe the language of the document against the overall context and factual matrix.
- The factual matrix includes ‘absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.’
- Usually, a good guide to the contract’s meaning is the ordinary and natural meaning of the words.
- However, if ‘one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had.’ The reasonable person will take into account the possibility of ambiguity or errors of words or syntax, particularly where the competing meanings seem unnatural.
- Additionally, the ordinary and natural meaning of words is less helpful where the words have not been ‘used in a natural and ordinary way.’
A chose in action is a form of property. It refers to ‘all personal rights of property which can only be claimed or enforced by action and not by taking physical possession’. The existence of a remedy is necessary for the existence of a chose, but the remedy is not a form of property itself. A remedy cannot, therefore, be assigned separately from the chose.
In the present case, the possibility of an abatement did not form part of the chose in action assigned to the ICS. It was a remedy which attached to the property in the house, not to the investor’s rights to sue the building societies for damages. This is why assigning the ICS the right to sue the building societies for damages but not the right of abatement did not cut down on the scope of the assigned chose in action.
Lord Lloyd of Berwick dissented. He thought that on the true construction of the contract, the investors had retained their claims against the building societies, and not assigned them to ICS.