Legal Briefing

Commercial litigation in Scotland: fast and flexible

The In-House Lawyer Logo

Scotland | 01 October 2010

Most commercial organisations try to avoid court actions if at all possible. The fear of becoming embroiled in a long-running and potentially intractable dispute understandably puts many businesses off enforcement of their contractual rights through standard legal channels. Alternative means of dispute resolution have sprung up to fill the gap. Mediation, arbitration and adjudication have all proved successful to greater or lesser degrees in achieving resolution of disputes away from the pressures of the courtroom.

Commercial Court

As a result, it can sometimes come as a surprise to clients that courts are prepared to be very sympathetic to the needs of commercial parties that choose to litigate in Scotland. The rise of the Commercial Court in the Court of Session has sparked a renaissance in commercial litigation, with judges adopting a flexible approach to decision making that is far removed from the traditional image of the Scottish courts. The pace of litigation has long been a bugbear for clients used to operating on rather speedier timescales. Even here, however, the courts are changing. Experience has proved that, whether at first instance or on appeal, the Court of Session is, in appropriate circumstances, prepared to reflect the commercial needs of clients and deal with urgent matters expeditiously. By way of example, a petition for judicial review presented by Brodies on behalf of clients recently took just ten weeks from first presentation to the issuing of an appeal decision by the Inner House.

section 47, Court of Session Act 1988

In addition to the procedural and cultural changes embraced by the commercial judges, litigators in the Court of Session have another, highly significant, weapon in the armoury – s47 of the Court of Session Act 1988 (the 1988 Act).

The 1988 Act deals with matters relating to the ‘constitution, administration and procedure’ of the Court of Session. Tucked away towards the end is s47, which makes specific provision in relation to interim interdict and ‘other interim orders’. Orders for interim interdict are, of course, commonly used to prevent another party from carrying out some threatened action in breach of its contractual, statutory or common law duty. However, interdict (whether granted permanently or on an interim basis) cannot be used to force a party to take positive action. That is where s47(2) comes in:

‘In any cause in dependence before the court, the court may, on the motion of any party to the cause, make such order regarding the interim possession of any property to which the cause relates, or regarding the subject matter of the cause, as the court may think fit.’

right to seek specific implement

The right of a party to insist on performance of a contract in Scotland has long been recognised. Decisions in cases such as Highland & Universal Properties Ltd v Safeway Properties Ltd [2000] have highlighted the difference between English and Scottish law on the question of specific implement while Church Commissioners for England v Abbey National [1994] resulted in interim orders for specific implement being sought more regularly. In particular, the enforcement of ‘keep-open’ clauses in leases became a common target.

Discretion

Section 47(2) undoubtedly gives the court a very wide discretion both on the type of order that can be made and the form that the order can take. The authoritative consideration of the way in which the court can exercise its discretion is to be found in Scottish Power Generation Ltd v British Energy Generation (UK) Ltd & anor [2002], where, in the end, the Inner House refused to grant an interim order. Scottish Power involved a dispute surrounding overpayments made under an electricity supply contract. The pursuers sued for return of the payments they had made and sought an interim order under s47(2) to regulate what should happen to disputed payments (past and future) pending the conclusion of the dispute. They were successful at first instance but the Inner House overturned the decision on appeal and set out the key principles to which the court must have regard when deciding whether or not to grant an interim order under s47(2).

‘First, the Lord Ordinary has to identify the issues in the action, including the legal basis of the claims with which he is dealing. Secondly, he has to consider whether the party seeking the order has demonstrated a prima facie case that an obligation exists, and that there is a continuing or threatened breach of that obligation which the order will address. Thirdly, he has to avoid significantly innovating on the parties’ contractual rights and obligations. Fourthly, he has to consider whether the balance of convenience is such as to justify the making of the interim order, bearing in mind the nature and degree of the harm likely to be suffered on either side by the grant or refusal of the interim order, and the relative strength of the cases put forward by each party.’

The Inner House did not consider that the interim order sought was appropriate in that case. Interestingly, however, no issue was taken with the competency of the type of order made by the Lord Ordinary and accordingly it may well have been permitted in different factual circumstances. The order was certainly a complex one involving very substantial sums and with a requirement on parties to set up a designated bank account into which the disputed element of the payments (both past and future) would be paid. It therefore serves as a useful illustration of the kind of result that might be achieved by use of the statutory provision.

The principles enunciated by the Inner House have been relied on in several more recent cases and have certainly not prevented the court granting interim orders in appropriate cases.

Consignation

In Onyvax Ltd v Endpoint Research (UK) Ltd [2007], the defenders were asserting a common law lien over documentation relating to the development of a new cancer vaccine on account of the non-payment of invoices. The court ordered the release of the documents justifying the order on the grounds that it would remove any possible risk to patient safety and ‘leave the parties free to resolve their remaining differences along ordinary commercial lines’. The court recognised that by making such an order the defenders would lose a potentially valid right of lien and so the s47(2) order was made conditional on the pursuers consigning into court the sums due under the outstanding invoices.

Consignation of sums also featured in JH Cunningham & Son (Haulage) Ltd v Smith & ors [2010] where the parties’ sale and purchase agreement made provision for the withholding of payment in the event of a claim being made against the defenders. The court held that granting an order under s47(2) requiring those sums to be consigned by the pursuers simply reflected the terms of the contractual agreement and, applying the test in Scottish Power, could not be said to innovate on the contract in any way.

Interim order for specific implement

The way in which the court can be asked to use its powers under the 1988 Act, and the flexibility of this kind of order, can be seen even more clearly in Whyte & MacKay Ltd v Capstone International Inc [2010]. The action, which is ongoing, concerns a distribution agreement for the pursuers’ whisky in the US. Whyte & MacKay seek a declarator that the agreement was validly terminated in correspondence, together with payment of sums that they assert are due by the defenders for whisky already supplied to them. In response, the defenders counterclaim for a permanent order ordaining the pursuers to continue to accept orders from them for the purchase of whisky in terms of the agreement pending the currency of the litigation and until valid termination of the agreement.

The defenders sought an interim order on the same basis. In a judgement issued in July this year Lord Menzies made an interim order in the terms sought but attached conditions to ensure that the granting of the order complied with the principles set down in Scottish Power. He had no difficulty in accepting that the issue raised in the counterclaim was whether the pursuers were still under an obligation to perform their contractual obligations and he was also satisfied that the defenders had made out a prima facie case. The question of the balance of convenience raised more interesting questions. One of the arguments advanced on behalf of the pursuers was that courts will not generally compel performance if obligations are intended to continue over a lengthy period nor will they compel performance of contracts that involve the provision of services and co-operation between parties. Lord Menzies rejected those arguments. He highlighted the fact that, in terms of the agreement, the defenders’ status was one of independent contractor. He considered that a contract of that type could be distinguished from certain categories of contract (such as engagement to marry), where courts have historically been reluctant to enforce performance.

Lord Menzies emphasised the distinction between the Scottish and English approaches to specific implement. Provided the Scottish Power principles were adhered to, he saw no reason why an order for specific implement of a contract could not be granted on an interim basis. In any event, whether or not it would be appropriate to grant an order for specific implement in perpetuity at the conclusion of an action, different considerations come into play when considering the merits of grantingan interim order.

Innovating on the contract

Lord Menzies had more difficulty when considering the question of whether the order would innovate on the parties’ contract. Part of the pursuers’ case was that they were still owed £240,000 for whisky already supplied to the defenders. An order would remove one of the pursuers’ contractual remedies for non-payment, namely to decline to supply further whisky until payment was received. The removal of the remedy would accordingly innovate on the contract in breach of the principles laid down by the Inner House. The solution favoured by Lord Menzies was to grant an interim order but make operation of the order conditional on payment of the sums due. The effect was to maintain the status quo while the principal dispute proceeds through the courts.

advantages of litigation

The ability to obtain a positive court order under s47(2) to govern parties’ ongoing relationship during the conduct of litigation is a clear advantage that other forms of dispute resolution simply cannot offer. When combined with a reinvigorated Commercial Court and experienced Commercial Court practitioners, the result can be a speed and clarity of decision-making, far removed from the stereotypical views promoted by critics of Scotland’s courts.

Postscript

Capstone has now been appealed to the Inner House and an early hearing date allocated, so further guidance as to the type of interim order that the courts are entitled to pronounce and the conditions that may be attached to such orders may be available shortly.

By ,and , Brodies LLP.

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