G & C Kreglinger v New Patagonia Meat & Cold Storage Co Ltd [1913] UKHL 1; [1914] AC 25
Court: House of Lords | Judgment: 20 November 1913
A five-year option to buy sheepskins survived repayment of the loan with which it had been negotiated. The House of Lords treated the option as an independent commercial bargain, not an invalid restriction on the borrower’s right to redeem its security. A collateral benefit was not automatically invalid simply because it continued after repayment.
The loan and the sheepskin option
New Patagonia preserved and canned meat and consequently had sheepskins available for sale. It wanted to borrow £10,000. G & C Kreglinger, merchants and woolbrokers, were willing to lend because they wanted an option to buy those skins.
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The agreement of 24 August 1910 provided for a £10,000 loan at six per cent interest. Subject to compliance with conditions, the lenders could not demand repayment before 30 September 1915. The company could repay earlier. The debt was secured by a floating charge over the company’s undertaking and its present and future property.
Clause 8 separately addressed the skins. For five years, until 24 August 1915, the company could not sell them elsewhere if Kreglinger was willing to match the best price offered by another purchaser on the specified London delivery terms. The agreement also provided for a one per cent commission on sales to others.
The company repaid the loan early and argued that this ended the option. Kreglinger sought an injunction to enforce the agreed five-year arrangement.
Why redemption was disputed
A mortgage provides security for an obligation. The right to redeem protects the borrower against terms improperly preventing the property from being released when the secured obligation is satisfied. A restriction of that kind is commonly described as a clog on the equity of redemption.
The company argued that the option continued to restrict its business after repayment and was therefore invalid, or at least could not survive redemption. Kreglinger maintained that obtaining the option was the commercial reason for making the loan. The option was a separate bargain, even though the same document recorded both arrangements.
Swinfen Eady J refused an interlocutory injunction because he considered earlier House of Lords decisions conclusive against the lenders. The Court of Appeal disposed of the case without argument so that the point could reach the House of Lords promptly.
One document, two distinct bargains
Viscount Haldane LC emphasised substance rather than the document’s form. The fact that the loan and option were agreed simultaneously and written into one instrument did not necessarily make them an indivisible mortgage transaction. The question was whether the option genuinely cut down redemption or was a separate collateral undertaking.
Here, the option was a separable commercial bargain made as a condition of obtaining the loan. The parties intended it to last five years regardless of earlier repayment. A trading company could ordinarily enter a continuing contract for the sale of its products, and the security arrangements did not prevent that sort of business dealing.
The floating nature of the charge mattered because the company remained able to deal with assets in the ordinary course of business while the security remained floating. Repayment released the security; it did not necessarily undo every commercial obligation the company had undertaken alongside it.
Haldane did not say that floating charges were exempt from the protection against clogs. A genuine fetter on redemption could be invalidated in that context too. The option survived because of its character as an independent bargain, not merely because the security happened to be a floating charge.
Lord Parker’s limits on collateral advantages
Lord Parker distinguished the protection of redemption from the older rule against lenders obtaining advantages beyond interest. He connected that older restriction with the former usury laws. Their repeal did not remove equity’s protection against oppressive bargains, but it undermined an automatic prohibition on collateral benefits.
He stated that a lender could stipulate for a collateral advantage unless it was:
- unfair and unconscionable;
- a penalty clogging the equity of redemption; or
- inconsistent with or repugnant to the contractual and equitable right to redeem.
The option fell into none of these categories. The company wanted the loan, while Kreglinger wanted the purchase option. Neither party intended repayment to cancel the option. The agreement was a fair commercial exchange, and both the option and associated commission remained enforceable.
How the earlier cases were distinguished
In Noakes & Co v Rice, the obligation to buy a lender’s beer after redeeming a mortgaged public house was treated as a restriction on recovering that specific property free from the mortgage terms. In Bradley v Carritt, the majority had treated a continuing brokerage obligation associated with mortgaged shares as impeding redemption.
The House did not treat those decisions as establishing that every collateral benefit must end on repayment. Their application depended on the nature of the transaction. Broad statements made in earlier judgments did not replace examination of the actual bargain before the court.
Lord Mersey likewise considered the five-year commitment clear. Applying the redemption doctrine to cancel it would defeat the parties’ intended exchange. The other members of the House agreed that the lenders should succeed.
Outcome
The appeal was allowed. Kreglinger was declared entitled to the injunction sought and to costs in the House of Lords and Court of Appeal, with liberty to apply to the Chancery Division to dispose of the action. The sheepskin option continued until its agreed expiry in August 1915.
