The respondent, Stainforth, obtained a loan from the appellant company, Lexi, to purchase a property. Stainforth had difficulty in re-financing the loan and asked Lexi if it knew of anyone who might be interested in buying the property. Lexi knew of a property investor who expressed an interest in buying the property. Lexi and Stainforth therefore entered into an “exclusive sale agreement” drafted by Lexi. The property investor did not proceed with the purchase. Lexi therefore tried to cancel that agreement, demanded repayment from Stainforth and appointed a receiver of the property.

Stainforth claimed that he had been discharged or released from any liability under the exclusive sale agreement. The judge agreed with Stainforth and held that the agreement had the effect of discharging Stainforth’s liability in return for his “relinquishing all rights” to the property.

Lexi appealed against that decision and argued that the judge’s construction of the agreement was wrong. Lexi claimed the main purpose of the agreement was simply to confer authority on Lexi to sell the property and the discharge of Stainforth’s liability was dependent on the sale taking place.

What was the true effect of the exclusive sale agreement?

Reference

Their Lordships held that the effect of the wording “relinquishing all rights” under the agreement was that Stainforth was required to transfer to Lexi all his beneficial interest in the property and that, at least by implication, his liability was discharged at the same time. Their Lordships also applied the contra proferentem rule of construction that if the terms of the agreement were inadequate and ambiguous then they should be construed against the party who had prepared the agreement.

Full case details*
Lexi Holdings plc vs Garth Scott Stainforth
Court of Appeal (Civil Division), Sir Andrew Morritt C, Carnwath LJ, and Moses LJ, [2006] EWCA Civ 988

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Postscript

This case is a useful illustration of how the Courts apply the so called contra proferentem rule. Generally speaking, this rule means that where there is doubt as to the meaning of a contract, this may be resolved against the party who drafted the contract.

This rule is used by the court as a matter of last resort such that if all other points are equally balanced, it would operate against the party who put forward the document. In this case, Lexi was in the position of having drafted the agreement without specific legal advice such that the court considered there was no unfairness in holding that, having presented the agreement in that form, they should bear the risk of any resulting ambiguity.

The case underlines the importance, especially if you are the party putting forward a contract, of ensuring that the wording of your contract is clear and unambiguous.