Legal Briefing

Kilted contractual remedies: compelling performance

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Scotland | 01 February 2013

It is generally understood that one 
of the key differences between Scottish and English remedies for breach of contract is the Scottish courts’ focus on implement (or performance) rather than damages as the primary remedy for breach. It is true that, in most cases, we do tend to end up arguing about damages, but this change in focus can give rise to some interesting differences north and south of the border, particularly in the context of interim remedies.

This has been considered in a number of recent Scottish cases and highlights important issues for those seeking to draw up and utilise effective contracts in the IT and outsourcing sector, where continuity of service is a primary concern.

If your contract is subject to Scots law, 
then understanding these cases will certainly provide some additional tactical weaponry for negotiations when things go wrong, regardless of which side of the customer/supplier fence you are on. The availability of these interim remedies may also cause organisations that, as a matter of policy, usually contract under English law, to consider whether Scots law gives them more effective tools in the event of a dispute.

CONTRACTUAL REMEDIES AND INTERIM ORDERS: THE SCOTTISH DIMENSION

In order to understand the significance of interim remedies in the Scottish context, an important difference between contract law in Scotland and in England must first be understood.

It is well-established in Scots law that the remedy of specific implement (in England, specific performance) is available to a party seeking to enforce its rights under a contract (see White and Carter (Councils) Ltd v McGregor [1962] and Highland and Universal Properties v Safeway Properties [2000]). This is in contrast to the position in England, where such a remedy is not available as of right. In Scotland, a party who is owed a contractual obligation, therefore, may seek to enforce this obligation, rather than simply claiming damages.

When are remedies available?

White and Carter (Councils) and Highland and Universal Properties were both final judgments. However, the Court of Session is empowered, in terms of s47(2) of the Court of Session Act 1988, to make such interim orders ‘as the court may think fit’ at any point during the course of an action.

The most commonly sought interim remedy in Scotland is interdict (in England, an injunction). However, the scope of s47(2) includes interim orders which will oblige a party to fulfil an obligation, not simply to prevent that party from breaching it. This can be of particular importance to parties while a dispute is ongoing, as it can be used to ensure that obligations continue to be fulfilled pending final determination of 
the dispute.

The factors to be taken into account when considering an application for an interim order of this nature were authoritatively considered in Scottish Power Generation v British Energy Generation (UK) [2002]. In Scottish Power, the Inner House (appeal court) of the Court of Session held that the grant of an order was subject to four considerations:

  • First, the court must be able to identify the issues underlying the dispute, and the legal basis for any order sought.
  • Secondly, the party seeking the order must be able to demonstrate a prima facie case that the obligation which the order is sought to implement exists.
  • Thirdly, any order must avoid ‘significantly innovating’ on the 
existing terms of the agreement between the parties.
  • Fourthly, the balance of convenience must favour the granting of the interim order. In particular, the court should consider whether any harm would be suffered by either party as the result of grant or refusal, together with the relative strength of each party’s arguments.

In addition to the Scottish Power factors, a further significant requirement was introduced by the Inner House in the later case of William Collins v CGU Insurance [2006]. William Collins was a dispute between the tenants of an office and a party to whom they were sub-letting a part of the office space. The pursuers (in England, the plaintiffs) wished to carry out repairs on the space which was sublet, and raised an action, seeking access to carry them out. At first instance, the pursuers obtained an interim order under s47(2) giving access for the works. On appeal, however, the Inner House held that the order should not have been granted: the purpose of an interim order was to provide a temporary settlement between the parties, rather than to effectively determine the case. In this case, the effect of the interim order would have been to allow the building works to be completed – the sole issue in dispute.

As a result of these decisions, interim orders will be particularly useful in relation to disputes where the original agreement envisaged some type of ongoing relationship between the parties concerned, such as contracts for supply, or for the continued provision of services.

By using a greater range of orders than simply interdict, parties can act to protect their commercial interests as the action progresses, ensuring that business disruption will be kept to a minimum.

Whyte & Mackay v Capstone International

One recent Scottish case in particular gives an example of the ways in which these remedies might be used to good effect.

Whyte & Mackay v Capstone International [2011] concerned an agreement to distribute John Barr Scotch Whiskies, a Whyte & Mackay brand, in the United States. Whyte & Mackay alleged that Capstone had been distributing the whisky without the licences required by the American authorities and purported to terminate the agreement for material breach of contract. It subsequently brought an action seeking declarator that the agreement between the parties had been validly terminated. A counterclaim was lodged by Capstone, seeking damages for breach. In addition, however, Capstone sought an interim order in terms of s47(2), requiring the pursuer to continue its supply of John Barr Scotch Whiskies, so that Capstone’s business, of which the distribution of John Barr formed a major part, could continue while the action was live.

At first instance, the order sought by Capstone was granted by the Lord Ordinary, following the approach set down in Scottish Power. It was held that Capstone had demonstrated a prima faciecase. Significantly, the Lord Ordinary considered that Capstone would suffer ‘significant adverse financial consequences’ were Whyte & Mackay to cease the supply of a whisky which formed a significant part of Capstone’s business. By contrast, Whyte & Mackay, a larger organisation, would not suffer an ‘adverse impact’ financially, as the whiskies would continue to be distributed by the supplier which it had used for the past 20 years.

This decision was appealed by Whyte & Mackay to the Inner House of the Court of Session. The Inner House considered the terms of the whole contract between the parties – in particular, a clause that had not been considered by the Lord Ordinary in 
the Outer House. This clause suggested that there was no obligation on Whyte & Mackay to accept orders placed by Capstone. In this context, it was held by the Inner House that the Lord Ordinary’s grant of an interim order was a ‘significant innovation’ in terms of the third limb of the Scottish Power test.

Further, it was held that the Lord Ordinary had underplayed the significance of Capstone’s alleged breach of US law. The effect of the order sought would be to force Whyte & Mackay to trade with a company alleged to have breached US licensing regulations. This could have an adverse reputational impact for Whyte & Mackay, and affect its relationship with the American authorities. In addition, the Inner House held that Whyte & Mackay’s commercial considerations had to be balanced against the financial interests of Capstone, rather than simply considering the potential loss that Capstone might suffer if the order was not granted. The Inner House therefore held that the order granted by the Lord Ordinary should 
not stand.

What is the significance of Whyte & Mackay for those practising in the area of commercial contracts? We would suggest that four wider points can be taken:

  • The Inner House in Whyte & Mackay disagreed with the Lord Ordinary’s application of the legal test to the facts before him. It did not, however, disagree with the availability of the remedy that the Lord Ordinary granted. If a party can satisfy a court that it is appropriate, an interim order for specific implement is clearly possible.
  • The contrasting approaches taken by the Lord Ordinary and the Inner House show how fact-sensitive the grant of such a remedy is. The decision of the Inner House places considerable emphasis on the contractual background to the dispute and, therefore, the importance of ensuring that the written contract correctly reflects the agreed terms of the relationship. If contractual obligations are not clearly expressed then the court cannot order compliance. In contrast, if a contractual obligation is clearly and unambiguously stated, then the court will have less hesitation in granting an interim order.
  • The factual setting of a claim is also important. The Inner House placed considerable emphasis on the allegedly illegal nature of the whisky supply by Capstone. Parties must consider carefully what the effect of the grant or refusal of an order would be in 
this regard.
  • Ultimately, decisions will be made on the ‘balance of convenience’. This has two distinct elements. Firstly, a failure to implement a term of a contract may well cause a loss for the party who was entitled to demand performance. This was the point upon which the Lord Ordinary’s decision in the Outer House turned. However, the opinion of the Inner House makes it clear that this is not enough: a party that is forced to perform may also suffer loss, perhaps in ways which are harder to quantify (for example reputational damage). The balance of convenience, therefore, is a wide test, and must be carefully considered.

CHOICE OF REMEDY – AND CHOICE OF LAW

These recent decisions on Scottish contracts have significance for all those involved in the supply and purchase of goods or services. In particular, those who work in the technology sector may wish to consider how such issues can impact on the drafting and enforcement of outsourcing contracts, and contracts for the supply of Information and Communication Technology (ICT) goods and services.

There are two issues to consider. Firstly, the choice of governing law, and secondly the choice of remedy that can be sought.

Choice of law

As discussed above, the interim remedies sought in Scottish Power and Whyte & Mackay are available under Scots law, but are unlikely to be granted under English law. Contracting parties, therefore, may wish to consider carefully whether the broader range of interim (and final) remedies in Scots law could be of benefit, and therefore whether it is preferable to contract under Scots law rather than English law.

Choice of remedy

It is clear that different interim orders will be available in different – although not all – circumstances.

How might this be of use to in-house lawyers involved in IT or outsourcing contracts? We would suggest two areas in particular where those drafting and governed by contracts of supply may wish to consider the issues that they raise:

  • Contracts for the supply of goods (or software) – the principles developed in Whyte & Mackay in relation to whisky are just as relevant to issues such as the supply of computer software or hardware. As with Whyte & Mackay, a supplier can be obliged to continue to supply an item to a customer (whether the end user or, for example, a hardware/software reseller) while a dispute is ongoing, provided that the balance of convenience favours the granting of that order. This has particular implications in the technology field, where continuity of business and supply is often at a premium for the customer.
  • Contracts for the supply of services – the law regarding interim orders in relation to contracts for services is less well developed. However, there is no reason to suppose that the courts would not be prepared also to extend interim remedies in this area, provided that the Scottish Power criteria were satisfied. In Highland & Universal Properties, the Lord President (the senior judge in the Inner House) observed that the purpose of granting specific implement was to provide an ‘obligation… to carry on a business’. Much of the Scottish case law on final decrees has focused on the obligation contained in ‘keep open’ clauses for shopping centres. There seems no reason, therefore, why the scope of interim remedies should be restricted to the supply of services. A party which relies on critical services to be supplied by another party – for example the provision of outsourced services, maintenance or technical support – may wish to utilise the remedies (and interim remedies) available in the Scottish courts.

Finally, no matter what the subject matter of the contract, as Whyte & Mackay shows, accurate and precise drafting is crucial. If a party wishes to ensure continuity of supply, then the contract should clearly provide for it. If this is done correctly, effective remedies are available to ensure that a party can rely on supply under a contract.

CAVEATS?

In Scotland, it is possible to obtain an interim order from the court without the other party having a chance to oppose the application. Once granted, it is often much harder to persuade a court to overturn an order than it would have been had that opposition been made prior to the order being granted. The granting of an interim order may also impact upon the relative bargaining position of the parties when attempting to resolve a dispute.

A caveat is a written intimation that can be lodged by an organisation’s Scottish solicitors with the courts in Scotland. Having a caveat means that no hearing may take place at which an interim interdict or other interim order may be granted without the solicitor who lodged the caveat being given advance notice of the court hearing and the opportunity to oppose the grant of such an order.

Caveats are applicant blind (that is, you do not need to name the party that may seek to obtain an order against you), and renewed on an annual basis.

Given the potential commercial consequences of an interim order being granted by the court, any business that is contracting under Scots law, or is otherwise potentially subject to the jurisdiction of the Scottish courts, should have caveats in place to ensure that it is given an opportunity to oppose any attempt to obtain an interim order against it.