Case No: A3/2000/0397
Neutral Citation Number: [2001] EWCA Civ 1276
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION (EVANS-LOMBE J)
Royal Courts of Justice
Strand, London, WC2A 2LL

Tuesday 31st July 2001

B e f o r e :

LORD JUSTICE HENRY
LORD JUSTICE ROBERT WALKER
and
SIR ANTHONY EVANS
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	ISLAMIC PRESS AGENCY INC	Appellant	
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	AL-WAZIR	Respondent	

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(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040,  Fax No:  020 7831 8838
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Mr Roger Kaye QC and Mr John McCaughran (instructed by Herbert Smith for the appellant)
Mr Nigel Davis QC and Mr Paul Teverson (instructed by Rooks Rider for the respondent)

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Judgment
Lord Justice Robert Walker: 
1.	This appeal raises an unusual question as to whether equitable interest must be paid in order to redeem a charge, even though the charge does not expressly provide for interest.  It is an appeal from an order of Evans-Lombe J made on 14 February 2000 in proceedings between Abdullah Abbas Al-Wazir (“Abdullah”) as claimant and Islamic Press Agency Inc (“Inc”) as defendant.  Abdullah’s claim was for a declaration as to the existence of an equitable charge on an office building at East Burnham, Buckinghamshire, and for enforcement of the charge by an order for sale and other ancillary relief.
2.	The judge’s order was made after two hearings.  The first was concerned with some disputed issues of fact and also with issues about the sufficiency of a memorandum under s.40 of the Law of Property Act 1925 and the equitable doctrine of part performance (the events in question occurred before the enactment of the Law of Property (Miscellaneous Provisions) Act 1989).  This hearing resulted in a fairly lengthy reserved judgment handed down on 28 October 1999.  That judgment made findings of fact and reached conclusions of law, as to the existence of an enforceable equitable charge, which are not challenged on this appeal.  It is therefore possible to summarise the facts relatively shortly.
3.	There was then an unfortunate delay before the judge heard further argument on the issue of interest.  That hearing took place on 14 February 2000 and the judge gave a further extempore judgment on that issue (and also on issues as to costs).  The judge decided that interest should be paid at the judgment rate from the contractual date for repayment (1 September 1985).  It is that decision that is challenged on appeal by Inc.
4.	Inc is a Panamanian company which was incorporated on 29 March 1982 for the purpose of acquiring and holding office premises known as Crown House, East Burnham, Buckinghamshire.  An offshore company was used for tax reasons.  Inc bought the premises for £630,000, and the purchase was completed on 30 April 1982.  It bought the premises for occupation by an English company, Islamic Press Agency Ltd (“IPAL”) which had been incorporated on 21 February 1980.  IPAL’s main activity was publishing magazines and books concerned with Islam and the Islamic world.  It seems to have been regarded as an arm (although it was not a subsidiary) of a publishing business in Jeddah called the Islamic Press Agency.  
5.	Abdullah had four uncles, the Al-Wazir brothers, who shared many business interests.  The other individual who played a central part in the sequence of events is Mohammed Salahuddin Hussein Omar (“Salahuddin”).  Salahuddin was until 1989 a long-standing friend and business associate of the Al-Wazir brothers.  He was a director of both IPAL and Inc and he held one-third of the shares in each company.  Abdullah’s uncle Mohammed was also a director and one-third shareholder of each company.  The remaining third was held by a Liechtenstein corporation called Han Mai on behalf of various other investors including King Faisal of Saudi Arabia.  Inc had a third director until 1992 but he played little part in the relevant events.  
6.	Until the acquisition of Crown House IPAL had only a nominal issued capital.  But on 31 March 1982 its authorised capital was increased to £3m and on the following day 1,499,998 shares were issued at par, for cash.  The judge did not make any findings about the issued share capital of Inc or of how its purchase of Crown House was financed.  The arrangements may have been informal.  Abdullah (who was never a director or shareholder of either company) said in his witness statement that he thought IPAL and Inc “were one venture or two sister companies owned by the same shareholders”.  He first became concerned in the matter because the Al-Wazir brothers had put him in charge of running another publishing venture in Jeddah, Saudi Publishing and Distribution House.  
7.	The business carried on by IPAL was never commercially successful.  It appears that between 1982 and 1984 the shareholders paid to the company (in unequal proportions) substantial sums in addition to what had been due in respect of the shares issued at par on 1 April 1982.  But these payments came to an end in December 1984 and the company was in severe financial difficulties.
8.	On 2 January 1985 Abdullah signed a cheque on his own account, payable to Salahuddin, for 120,000 Saudi Riyals.  The cheque was handed to Salahuddin’s brother Mustafa who signed a receipt acknowledging it as a loan to Salahuddin.  Then in May 1985 Abdullah arranged a further payment to IPAL of £200,000 (921,800 Riyals at the rate of exchange then current).  The mechanics by which this payment was made were fairly complicated but are no longer relevant.  On 16 May 1985 a memorandum typed on IPAL’s headed writing paper was signed by Salahuddin and (later) Mohammed.
9.	The memoradum was in the following terms:
“The undersigned directors of Islamic Press Agency Ltd do hereby certify that the Agency’s premises known as Crown House and situated at Crown Lane East Burnham near Slough Bucks SL2 3SG (England) has been mortgaged to Mr Abdullah Abbas AlWazir PO Box 2254, Jeddah Saudi Arabia, for a sum of Saudi Riyals, 1,041,800/00 (Saudi Riyals: 1,041800 only).
The above mortgage amount will be paid back to Mr Abdullah Abbas AlWazir on 1st September 1985, either by sale of the said premises or otherwise.”
10.	The judge reviewed at some length the conflicting evidence about the purposes of the payments and the circumstances in which the memorandum came into existence.  The conclusions which he reached (which are not challenged on appeal) are that the payments were loans out of Abdullah’s own money, and that they were loans to IPAL, not payments by way of subscription for shares.
11.	As regards the circumstances and purpose of the loans the judge’s findings were as follows:
“ … I find that by the 16th May 1985 Abdullah had agreed with Salahuddin that he would advance a further £200,000 to IPAL upon terms that that sum and his first advance of 120,000 Riyals would be repaid by IPAL on the 1st September 1985 in the meantime to be secured by a charge over Crown House.  In entering into the agreement, in which he was later joined by Mohammed, Salahuddin was acting as a director both of IPAL and Inc, as was Mohammed.  It does not seem to me that the fact that the memorandum does not expressly refer to Inc is inconsistent with this conclusion.  In addition to Abdullah’s evidence of Salahuddin’s representations as to his authority to charge Crown House there was plainly an agreement to charge it and Inc was a necessary party to effect that.
It is not in issue that to grant a mortgage of its property in support of another company was within the express powers of Inc under its articles of association.  To enter into such a contract before being authorised by resolution of the board and of the members would, accordingly, not be a nullity since such a contract would be capable of subsequent ratification.  The contract in question was one for the granting of a mortgage over land in England.  It follows that English law governs the validity and enforceability of such a transaction …”
12.	The judge held that the memorandum did not satisfy s.40 of the Law of Property Act 1925, because it did not identify Inc.  But he held that there had been a sufficient act of part performance, citing Steadman v Steadman [1976] AC 536.  No issue arises on the appeal as to that.
13.	It is the judge’s second judgment, given on 14 February 2000, on which the appeal focuses.  The judge began by reading into his judgment passages from the judgments in Cityland and Property (Holdings) v Dabrah [1968] Ch 166, 182 and Ezekial v Orakpo [1997] 1 WLR 340, 346.  In the former case Goff J said, 
“True it is, as a general rule, that a mortgage debt carries interest in the absence of an express provision, but that is because as stated in the Irish case of Carey v Doyne (1856) 5 Ir.Ch.Rep 104, and approved in Re Kerr’s Policy (1869) LR 8 Eq 331, it would be inequitable to allow redemption without payment of interest; or, as it was put in Mendl v Smith (1943) 112 LJ Ch 279, interest is allowed unless there is any contractual right or equity to exclude it.”
14.	In the latter case (which was concerned with the Charging Orders Act 1979) Millett LJ (with whom Neill and Phillips LJJ agreed) said in relation to an equitable charge on land to secure a stated principal sum:
“Such a charge would carry interest even though there were no words allowing interest in the charge itself.  That was decided at first instance in In re Drax; Savile v Drax [1903] 1 Ch 781, which was followed by Simonds J in Stoker v Elwell [1942] Ch 243 in somewhat startling circumstances, where the charging order had been made as long ago as 1899.”
In fact (as appears below) the decision of Joyce J in Re Drax was affirmed by this court on appeal.  
15.	Those are the leading modern statements of a principle which goes back at least to Farquhar v Morris (1797) 7 Term Rep. 124.  The judge stated that the principle did at first sight apply and he considered four arguments put forward by Mr Roger Kaye QC (appearing below, as in this court, with Mr John McCaughran for Inc).  He rejected them all.  It is unnecessary to examine them in detail since Mr Kaye has to some extent regrouped and redeployed his submissions in this court.  The outcome below was a declaration that Crown House stands charged by way of equitable mortgage or charge with payment to Abdullah of £173,633 with interest from 1 September 1985 until payment at the judgment rate from time to time prevailing (15 per cent per annum until 1 April 1993, and thereafter 8 per cent).  The order also gave directions for the sale of Crown House, with an order for possession to be given to the purchaser on completion.
16.	In his submissions in this court Mr Kaye has accepted the general principle applicable to equitable charges, as stated in the authorities already mentioned (to which he has added Lippard v Ricketts (1872) LR 14 Eq 291).  He has also mentioned another general principle which is not in dispute, that an unsecured loan does not carry interest (before judgment) unless that has been provided for expressly or by necessary implication (see generally President of India v La Pintada Compania [1985] AC 104; equitable interest is discussed briefly in the speech of Lord Brandon at p.116).
17.	Building on this important distinction, Mr Kaye drew attention to the judge’s findings, set out above, that the aggregate of the two debts would be repaid by IPAL, and would in the meantime be secured on Crown House (the property of Inc).  Therefore, he argued, Inc was in the position of a surety (though simply as a provider of security, not as a covenantor).  He said that the judge was wrong to reject this argument, as he did in the following passage of his judgment:
“It seems to me that it is really not to the point that this was an agreement with a party whom he described as a surety (of course Inc was not in any true sense a surety, what it did was to commit its property to support IPAL in order to obtain a loan).  Thirdly, it is true certainly that the direct agreement to make the advance upon which the interest is payable was not made with Inc directly, although it follows from my judgment that there was a contract by which Inc agreed to charge its property.  Nonetheless, it seems to me that there is no reason why the general principle that where a sum of money stands secured under a mortgage interest is payable on the principal sum until redemption or sale should not apply in circumstances where the mortgagor is not the recipient of the amount advanced for which the security is given.”
18.	I would agree that the most usual meaning of ‘surety’ (as applied to a person) or ‘guarantor’ is someone  who undertakes personal liability for another person’s obligation.  However the expression ‘surety’ can be used, without solecism, to describe a person who provides some of his property as security for another person’s obligation: see the decision of this court in Re Conley [1938] 2 AER 127, a case on the meaning of ‘sureties or guarantors’ in s.44 of the Bankruptcy Act 1914.  The point of substance is not what labels are used, but whether there is any special feature in the triangular relationship between Abdullah, IPAL and Inc which makes it inappropriate to apply the normal rule as to equitable interest.
19.	Mr Kaye has argued that there is a special feature of that sort.  There is no evidence, he said, that IPAL ever agreed that the loans should bear interest, and no such provision is to be implied into a contract of loan.  Consistently with that, Abdullah did not prove for interest when IPAL went into compulsory liquidation in 1991.  So IPAL would not, Mr Kaye said, have had to tender more than the principal sum of 1,041,800 Riyals stated in the memorandum.  In that event Inc could have insisted on redemption of the security without paying interest, because it could not be inequitable to allow redemption without interest, if that was precisely the effect of the transaction which the parties had chosen to enter into.  Otherwise Inc, which is in the position of a surety, would be liable for a greater amount than the principal debtor, and that would itself be inequitable. 
20.	In his oral submissions in this court Mr Kaye returned to a point which he had raised before the judge, but did not include in his skeleton argument: that the individuals concerned in this case are all Moslems resident in Saudi Arabia, and that interest on money is repugnant to Islamic law.  The judge did not attach weight to that point, saying
“that this is an English mortgage contract governed by English law in respect of English property belonging to a company incorporated in England.”
Here he was overlooking that although IPAL was incorporated in England, Inc was incorporated in Panama.  But the substance of his reasoning remains.  In any event Islamic law should have been pleaded, if it was to be relied on as ousting the general rule.
21.	Mr Kaye’s fall-back position was that interest should be payable only from the date of service of the writ, 18 October 1996, on the ground that Abdullah had delayed in pressing his claim after the contractual date for repayment (1 September 1985).  
22.	Mr Nigel Davis QC (appearing in this court with Mr Paul Teverson for Abdullah) has argued that Mr Kaye’s main argument is flawed at its inception, because it wrongly treats Abdullah’s loan to IPAL as if it were a separate transaction from that under which Inc gave security in the form of the equitable charge over Crown House.  That gives no weight, Mr Davis said, to the judge’s finding that this was a tripartite contract in which Salahuddin and (later) Mohammed were acting as directors both of IPAL and of Inc (if indeed they distinguished at all clearly between those companies; some of the evidence suggested that they were viewed together as a sort of agency).  Therefore, Mr Davis said, IPAL was liable to pay interest, although it was not claimed in the proof.  He relied on the judgment of the Master of the Rolls of Ireland in Carey v Doyne at p.117:
“ … in the case of a deposit of deeds to secure a debt, although that debt does not in its nature bear interest, the debt bears interest by reason of the deposit, as the mortgagor could not, in my opinion, redeem without paying interest.”
23.	In Carey v Doyne there had initially been an unsecured loan of £830 followed (after an interval of uncertain duration) by the borrower’s deposit of his title deeds.  The argument for the petitioner (the creditor) was (at p.109)
“ … that, although the claim of the petitioner, in relation to the £830, was only an ordinary simple contract debt, not bearing interest, it became a demand bearing interest, by reason of the deposit and the accompanying letter.”  (emphasis supplied).
The accompanying letter did not make any reference to the payment of interest.  It was the provision of security which altered the position.  Although this passage is only a summary of counsel’s argument, it is clear from the judgment of the Master of the Rolls of Ireland that he accepted it as correct.
24.	Mr Davis also relied on the restatement of the principle by this court in Re Drax [1903] 1 Ch 781 by Sir Richard Henn Collins MR (at p.793), Romer LJ (at p.794) and Cozens-Hardy LJ (at p.796).  Romer LJ expressed the principle in these terms:
“Now I take it to be settled at the present day that, if you find in any settlement or contract a provision that a sum of money is to be charged on land and the money is to be paid at a fixed time, the sum itself being fixed, then as between the owner of the land and the person entitled, although nothing is said in the settlement or contract as to interest, in the eye of a Court of Equity, from the date fixed for payment of the money, that money bears interest.  There might be, no doubt, circumstances so strong as to negative the presumption that interest was payable – there are none such here.”
Mr Davis pointed particularly to the words ‘as between the owner of the land and the person entitled’ as apt to cover the present situation.
25.	As to Mr Kaye’s fall-back position, Mr Davis submitted that there was no reason for not following the general rule stated by Romer LJ in Re Drax, especially as the judge had been exercising his discretion in selecting that period.  He also relied on Abdullah’s evidence (recorded in the main judgment without disapprobation) that 
“from time to time he pressed for payment but was persuaded to hold his hand by representations that a delay in selling Crown House would produce a more substantial sum for IPAL with which to pay its creditors because the property market in London was rising.”
IPAL should not, he said, obtain all the advantages of acts of forbearance which it requested.  
26.	The choice between the competing arguments is in the end quite a short point.  My conclusion is that the submissions of Mr Davis on behalf of Abdullah should be preferred both on the main point and on the fall-back position.  
27.	I first address the main point.  Suppose that a borrower has an unsecured interest-free loan under a simple contract of loan (by ‘interest-free’ I mean that the terms of the loan say nothing either way about interest, so that under the general rule no interest is payable).  Suppose further that a third party (such as a relative of the borrower) later seeks to assist him by entering into a separate transaction by which property of the third party is made subject to an equitable charge to secure the indebtedness (with no personal covenant by the third party, and nothing said either way about interest).  It would be an odd result if the provision of security (which might even be unknown to the debtor) operated to increase the debtor’s liability, and it would also be odd if the security secured more than the borrower’s indebtedness.  The separateness of the two transactions might be sufficient to oust the general rule.  But it is not necessary to express a view on that because the transaction embodied in the memorandum of 16 May 1985 was in my judgment essentially different.
28.	It was a tripartite contract which restated the position and redefined the relationship between Abdullah and the two companies.  The two companies acted in unison by their common directors.  IPAL was plainly a party to the contract and there is no challenge to the judge’s finding that Inc must also have been intended to be a party, as Inc owned Crown House and was able to give a charge by way of security.  The redemption of that security out of the proceeds of the property, after an early sale, was the commercial aim.  As from the signing of the memorandum, IPAL’s indebtedness became a secured indebtedness, under a single transaction to which IPAL was a party, and the general rule about unsecured borrowing was no longer in point.  
29.	I also prefer Mr Davis’ submissions as to the date from which interest should run.  That was the order which the judge made, and it has not been shown that he erred in the exercise of his discretion.  In the end neither point permits of much more elaboration.  I would dismiss this appeal.
Sir Anthony Evans:
30.	In this case we are forced to grapple with the consequences of the distinction between the Chancery court and the common law courts which lasted until 1873, and between the rules of law and of equity which they administered.  The rules of equity and of the common law were then amalgamated, but even now, after nearly 130 years, it is all too often necessary to have regard to these historical differences.
31.	The problem arises here in the context of a straightforward dispute.  A lender took a charge on property as security for repayment of the loan.  Is he entitled to recover interest as well as the principal sum from the person by whom the charge was given, if nothing was said or agreed about interest when the loan was made and the security was taken?
32.	The common law rule was and is that a debt does not carry interest unless the parties agreed, expressly or impliedly, that it should.  This was held by the House of Lords in London, Chatham and Dover Railway Co v South Eastern Railway Co [1893] AC 429 and again in La Pintada [1985] AC 104.  The law does not award damages for breach of an obligation to pay money.  Interest may be awarded in certain limited circumstances at law, or under a statutory power, or in conjunction with remedies that were formerly available only in the Chancery Courts.
33.	These rules of equity were mentioned by Lord Brandon in the leading speech in La Pintada (see page 116).  One is that the chargee or mortgagee of property, given as security for repayment of a debt, may be awarded interest for late payment, either as ancillary relief, if he brings proceedings to enforce the security, or as an item in the settlement of accounts if the property is sold.  But the award is not made unless it is equitable to do so in the circumstances of the case.  An express exclusion by the surety of any liability for interest would be likely to preclude an order, if one was sought.
34.	The authorities are clear as to the existence of this practice in the Chancery Courts.  They include Carey v Doyne (1855) 20 Beav 49, a judgment of the Master of the Rolls in Ireland, much cited in the later authorities; Re Kerr’s Policy (1869) LR 8 Eq 331; Re Drax [1903] 1 Ch 781; and Ezekiel v Orakpo [1997] 1 WLR 340.  Whilst the right to award interest when it was equitable to do so was an established feature of the jurisdiction of the equity courts, it was also recognised that there might be cases where “the contrary was implied” (Lippard v Ricketts (1872) LR 14 Eq 291 at 294) or where the circumstances might militate against it (Re Drax at 794).
35.	A feature of these authorities is that the equity courts stopped short of holding that the debtor, by whom the property was charged, was personally liable to pay interest on the debt, unless of course he had expressly or impliedly agreed to do so.  So the situation was reached where the creditor was not entitled to demand interest, or to recover interest if he took action on the debt, but he might nevertheless receive interest if he took proceedings in the Chancery Court with regard to the property against which it was secured.
36.	This apparently anomalous situation, in my judgment, was the direct result of the limits which the Courts of Equity placed on their own jurisdiction.  They could supplement but not contradict the law.  They could award interest when they considered it equitable to do so, but only in proceedings which were properly brought before them within their own jurisdiction.  They could not and did not challenge the common law rule that the debtor was not liable for interest, unless he had agreed to pay.  They went as far as they could, but no further.
37.	The result is that equitable interest may be claimed when the proceedings are before the Court in the exercise of its former equity jurisdiction, even though no contractual right exists at common law.
38.	Mr Kaye QC submits that none of these authorities was concerned with the case of a third party surety, that is to say, where a third party has provided security for a debt which is not his own.  In such a case, he submits, the third party receives no benefit from the loan.  He is involved as a property surety only, and as a matter of principle his, or rather his property’s, liability should not exceed that of the principal debtor, being secondary to it.  If the loan contract was silent as regards interest, then the debtor is not liable beyond the principal sum, and it is wrong or at least inequitable to order the surety to pay more.
39.	These are powerful arguments, but I agree that they must be rejected in favour of the Judge’s view that an award of equitable interest may be made, even where the debt does not carry interest at common law.  This is essentially for one reason.  The authorities are entirely clear as to the existence of the jurisdiction.  They show that the obligation to pay interest is imposed on the security, not on the surety personally, when it is equitable to do so.  Moreover, the fact that the debtor is under no personal or legal obligation to pay interest, because the loan contract is silent, does not prevent the order from being made.  This suggests to me that the fact that the third party surety is under no personal or legal obligation to pay interest does not prevent the jurisdiction arising against the property which he made security for the debt.
40.	I would take issue with Mr Kaye’s analysis of the situation in one respect.  It is correct that the third party does not receive the benefit of the loan, as the principal debtor does.  But in a commercial transaction, the third party must have some good reason for making his property security for another’s debt.  He must have considered that it was to his advantage that the loan should be made to the debtor.
41.	This is one aspect of the tripartite relationship in this case.  The relationship may, perhaps should, be expressed in terms of the bilateral contracts (“synallagmatic”) between each party and each of the others.  If the security is liable for interest as well as the principal sum, the question could arise whether the third party surety is able to recover a full indemnity from the debtor, notwithstanding that the latter was not under any personal liability for interest by virtue of the common law rule.  This would depend on the terms of the contract between surety and debtor, express and implied.  No such claim was made here.
42.	Notwithstanding the close analysis of the legal and equitable rules which has been necessary, I conclude by observing that the result in practical terms is simply that the third party surety, if he wishes to exclude his property’s liability for interest on the debt, should make this clear when the security is given.  If he does not do this, the equitable rule is not displaced.
43.	I agree with Robert Walker LJ that both grounds of appeal must be dismissed.
Lord Justice Henry:
44.	For the reasons set out in the Judgments of Lord Justice Robert Walker and Sir Anthony Evans I also agree that both grounds of appeal should be dismissed.

Order:	 Appeal dismissed with costs, to be subject to a detailed assessment; interim payment of £30,000 in respect of costs to be paid within 21 days; payment out of sum of £296,503.82 plus interest earned by that amount to the claimant's solicitors; permission to appeal to the House of Lords refused; counsel to lodge an agreed minute of order.
(Order does not form part of approved Judgment)