Changing landscape: Scottish litigation in 2010

Lisa Kelly highlights 11 of Scotland’s most important commercial cases from the past year. The decisions cover various types of litigation, from retention, construction and contract interpretation to representation in court, positive interim orders and notices – all set to shape Scotland’s future legal landscape

As 2011 is now in full swing, this article pulls together 11 of Scotland’s most influential litigation cases in 2010.

From the Supreme Court to the Court of Session, the decisions range from contractual interpretation and delay in construction projects to the meaning of ‘reasonable endeavours’.

Tullis Russell Papermakers Ltd v Inveresk Ltd [2010]

Retention

Inveresk entered into an asset purchase agreement and a services agreement with Tullis. Tullis sued for £5.358m in damages, which it claimed were due because Inveresk had failed to comply with the service agreement terms. Inveresk sued in a separate action for just below £1m, which it said Tullis was still due to pay under the asset purchase agreement.

Tullis said that it did not have to pay Inveresk for two reasons:

because Inveresk still had to go through certain procedures in terms of the asset purchase agreement to ascertain any sums due by Tullis; and
because, in any event, Tullis was entitled to retain any sums due as it was due the as yet unascertained damages from Inveresk.

Inveresk was successful at both first instance and on appeal to the Inner House, both decisions concluding that Tullis was not entitled to retain payment of the sum due to Inveresk.

The Supreme Court overturned the decision finding that Inveresk had not actually fulfilled certain procedural steps of the asset purchase agreement before they could get decree. Tullis was therefore remitted back to the Lord Ordinary.

Despite remitting the matter back to the Lord Ordinary, the Supreme Court considered the question of retention by Tullis. Some key points are:

Where there is a risk of the other debt becoming liquid before your client’s competing claim does, it allows the court to postpone the granting of decree until both debts are liquid.
Normally a competing illiquid claim is not enough to prevent the payment of a sum that is definitely due, except where it arises from a mutual contract.
The two debts must be ‘counterparts’ of each other – each conditional on the performance of the other in some way.
The debts do not need to be contained in a single contract as long as they are part of the same transaction.
Lord Rodger emphasises that the court retains an overriding equitable power to allow retention even where the strict requirements are not satisfied – but it will need to be carefully pled and needs a specific plea in law.

Farstad Supply AS v Enviroco Ltd [2010]

Construction

Farstad , which was largely concerned with s3(2) of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1940 (the 1940 Act), was discussed in detail by Rosie O’Donnell in IHL 183 (p57, September 2010).

Section 3(2) seeks to deal with the situation where a party is liable to a pursuer but another party could have been sued by the pursuer (which would have allowed apportionment under s3(1)).

Enviroco was sued for negligence by Farstad. Enviroco sought a contribution from Asco UK Ltd to take account of Asco’s breach of duty to Farstad. Farstad argued successfully in the Supreme Court that Enviroco was not entitled to sue Asco for a contribution because Farstad and Asco had a contract that contained a clause excluding liability on Asco’s part for negligence.

There are two key aspects to Farstad :

the question of the interpretation of the 1940 Act; and
the interpretation of the contract entered into between the pursuers and the third party.

The Supreme Court decided that s3(1) and s3(2) are inextricably linked. A defender can only seek recovery (from another party who has not been sued by the pursuer) under s3(2) if the pursuer could themselves have obtained a joint and several decree in terms of s3(1) against the defender and the unsued party.

The Supreme Court’s favoured interpretation of the phrase ‘defend, indemnify and hold harmless’ was as a complete exclusion of liability rather than a simple indemnity, which is what the contract between Farstad and Asco intended.

Multi-Link Leisure Developments Ltd v Lanarkshire Council (Scotland) [2010]

Contract interpretation

This appeal concerns the proper construction of a lease term that gives the appellant tenant the option to purchase the leased property from the respondent landlord. The question was whether, given the particular drafting, the respondent was entitled to take into account ‘hope value’ attributable to the potential for residential development when it determined the option price.

The Supreme Court unanimously dismissed the appeal. It held that the respondent was entitled, when determining the option price, to take full account of the land’s development potential. Had reasonable commercial parties directed their minds to the benefits to the appellant if the option was exercised, they would have agreed that the option price was to be the full market value of the land, taking account of any development potential, which the parties must have taken to have agreed.

Luminar Lava Ignite Ltd v Mama Group Plc & Anor [2010]

Contractual interpretation

Luminar operates the ‘Lava Ignite’ nightclub in Edinburgh. Mama had contracted to purchase other premises in Edinburgh from a company associated with Luminar and intended that Mean Fiddler (a company associated with Mama) would operate the premises as a live music venue.

The two premises are close to each other and the contract for sale included a clause to restrict Mama using the premises to compete with Lava Ignite. After the parties had completed the sale, Mean Fiddler operated the Lothian Road premises under the name ‘The Picture House’, primarily as a live music venue. However, it also advertised its intention to operate the premises as a nightclub/discotheque, at which people would dance to recorded music on Friday and Saturday evenings. Luminar considered that this infringed the contractual restriction.

The Lord Ordinary had ruled that evidence of prior negotiations was inadmissible and, having regard only to the agreement’s wording, agreed with Mama’s submission that the restriction only prevented Mama from putting on discotheques operating in a similar style and seeking to appeal to similar potential customers.

On appeal, the Inner House held that the exclusion of evidence of prior negotiations is not absolute. The court’s task in construing the contract was to ascertain what a reasonable person, having all the background knowledge available, would have understood them to be using the contract wording to mean. As a result the court could look to the surrounding circumstances when construing the words of the contract, in some cases possibly including things said and done during negotiation. However, facts known only to one party are not admissible as part of the surrounding circumstances.

The Inner House found that Luminar was not aware that Mama always provided club nights for dancing at their live music venues. As such, this was not shared knowledge that could be part of the surrounding circumstances.

The appeal was allowed (the Lord President dissenting) and interdict granted.

HM Secretary of State for Business Enterprise & Regulatory Reform, Re An Order To Wind Up UK Bankruptcy Ltd [2010]

Representation in court

Who can represent a company in legal proceedings before the Scottish courts? This question arose in UK Bankruptcy , where the Secretary of State for Business, Innovation and Skills had petitioned the Court of Session for the winding-up of UK Bankruptcy. A company director opposed the petition and sought to represent the company, claiming any refusal of the right to do so would breach the company’s right to a fair trial under Article 6 of the European Convention on Human Rights (ECHR). In the Outer House, Lord Hodge was unpersuaded, but reported UK Bankruptcy to the Inner House for its consideration. Given the implications for both public policy and the administration of justice, the Advocate General and Lord Advocate were both represented. In addition, the Inner House appointed senior and junior counsel as amicus curiae .

The Inner House found that the director possessed no right of audience under existing Scots law. Reliance was placed on the somewhat dated College of Justice Act 1532 (only a member of the Faculty of Advocates or a party litigant can plead before the Court of Session) and on Equity and Law Life Ass Soc v Tritonia Ltd [1943]. In the lead opinion, the Clerk LJ was clear that the party litigant exception did not extend to artificial persons such as companies. He was similarly convinced that it would be imprudent to import the English system of ‘MacKenzie friends’ – lay advisers who help someone without legal representation – due to the Scottish courts’ weaker case management powers (MacKenzie friends have since been authorised in the Scottish courts).

The court acknowledged doubt surrounding the rule’s consistency with Article 6 of the ECHR but refused to consider it in the absence of evidence that the company had authorised the director to represent it.

For more details see Lucy McCann’s article, IHL 186 (p58, December 2010/January 2011).

Whyte & Mackay Ltd v Capstone International [2010]

Positive interim orders

Relating to s47 of the Court of Session Act 1988, an order was granted at first instance requiring the pursuers to continue to supply whisky to the defenders in terms of a distributorship agreement pending resolution of the contractual dispute. In allowing the pursuers’ appeal the Inner House held that:

when deciding whether or not to exercise its discretion to grant or refuse an interim order the court should take the course that has the lower risk of injustice;
the Lord Ordinary had erred in granting an interim order in the terms sought because the order innovated on the parties’ contract terms;
in any event, even if the order had not innovated on the contract, Lord Menzies had erred in the exercise of his discretion by failing to attach sufficient weight to the defenders’ alleged illegal activity, and by concluding that refusing an order would mean the pursuers’ product would not be sold or distributed in the US until conclusion of the action;
it would be unjust and cause inconvenience to the pursuers if they were obliged to continue to accept orders pending determination of the litigation; and
an interim interdict preventing the pursuers appointing new distributors in the US was allowed to remain in place, leaving it open to a later court date to grant a final decree ad factum praestandum having heard evidence at proof.

A full discussion of Whyte & Mackay can be found in IHL 184 (p47, October 2010).

City Inn Ltd v Shepherd Construction Ltd [2010]

Construction: delay

It is not uncommon for a construction project to be held back beyond the original completion date and it can also be difficult to establish the cause of the delay.

In City Inn the judge at first instance preferred the evidence of the contractor’s site and regional managers, together with an expert, to the employers who relied solely on the evidence of their programming expert. The judge also considered that in the context of the contract it was possible to apportion delay between different causative factors.

The employer appealed to the Inner House on 16 grounds that can be grouped together under two headings:

waiver delay; and
concurrent delay.

The court considered the waiver points together and unanimously held that the employer had waived its right to insist on a procedural hurdle, over which the contractor had stumbled in an attempt to throw the case out.

The court held that it was possible to give guidance on the proper approach to be taken to the application of clause 25.3 of the contract:

A claimant has to first show that the relevant event (a contractually defined term) is a cause of delay and that the completion of works is likely to be, or has in fact been, delayed.
Whether a relevant event has had such an effect is to be resolved ‘by the application of principles of common sense’, not philosophical questions.
The decision maker (the architect) can decide the cause of any delay on the basis of any factual evidence acceptable to them. Critical path analysis may be of assistance but is not conclusive.
If a dominant cause can be identified as a cause of a particular delay, non-material causes will be left out of the account.
Where there are concurrent delays, one being a relevant event and one being the responsibility of the contractor, a claim for extension of time will not necessarily fail as the decision maker will approach the issue fairly and reasonably ‘to apportion the delay in the completion of the works… between the relevant event and the other event’.

Aberdeen City Council v Stewart Milne Group Ltd [2010]

Construction: interpretation

Aberdeen concerns the interpretation of missives and, in particular, a clause providing for a potential uplift in price in the event that the land was sold on by the defenders. The Inner House seems to have had little difficulty in upholding the Lord Ordinary’s original judgement, stating:

‘In recent years the importance of construing contractual provisions in context, and in such a way as to give effect to the parties’ commercial objectives, has been emphasised in a large number of cases; the principal authorities are well known and scarcely require discussion.’

‘It is noteworthy, however, that at least in Scotland this approach is not new. It appears clearly from cases such as Mackenzie v Liddell [1883], Bank of Scotland v Stewart [1891] and Jacobs v Scott & Co [1899].’

‘Following this approach, we are of opinion that clause 9 and the associated definitions in the Schedule should be construed in such a way as to give effect to the parties’ clear commercial purpose in agreeing to that clause… We think that that definition must be so construed, for the compelling commercial reasons discussed previously. Some slight violence to the wording of the parties’ contract is involved, but the damage seems slight by comparison with the damage to the parties’ objectives that would result from a contrary view.’

Mactaggart & Mickel Ltd v Hunter & Anor [2010] and Edi Central Ltd v National Car Parks (NCP) Ltd [2010]

Reasonable endeavours

A developer was required to use ‘reasonable endeavours’ to obtain planning permission for a 17-unit housing development in the Balerno Conservation Area on the outskirts of Edinburgh. Having twice been denied planning permission the developer believed it had endeavoured reasonably enough and served an unsatisfactory planning notice on the site owners seeking return of their £1.5m deposit. The original owners contended that the developer had not satisfied the ‘reasonable endeavours’ requirement, listing several additional actions that it could have taken. However, Lord Hodge held that while there may have been several reasonable courses open, ‘reasonable endeavours’ required only that one such course was followed – by contrast with ‘best endeavours’, which necessitates following all such options. His Lordship was also clear that while the developers could have undertaken additional measures they would not have affected the outcome.

EDI v NCP also concerned the hierarchy of ‘reasonable endeavours’ with the more onerous ‘all reasonable endeavours’. However, Lord Glennie held that neither requirement extended to an obligation for a party to act against its own commercial interests. The term ‘all reasonable endeavours’ would also necessitate that the other party be consulted and kept informed of difficulties. Finally, while the initial onus would rest with the other side to show the endeavours were insufficient, it would then switch, with the obligated party required to demonstrate that any additional steps would have been either excessively burdensome or futile.

Batt Cables Plc v Spencer Business Parks Ltd [2010]

Notices

Batt Cables concerned whether a break notice seeking to terminate a commercial lease had been validly served. The tenant enjoyed a right to terminate the contract subject to providing the landlord with notice of such an intention. For this notice to be validly served the tenant had to strictly comply with the agreed conditions. The dispute arose as the tenant served the notice not on the landlord itself but on an associate company of the landlord. This was perhaps understandable as both the landlord and the associate company were registered at the same address, and when welcoming the tenants to the property the landlord had contrived to do so on the headed paper of the associate company! Indeed, Lord Hodge concluded that the landlord displayed ‘a general laxity as to corporate identity’. Nonetheless, His Lordship held that he was bound by the previous Inner House decision in Ben Cleuch Estates Ltd v Scottish Enterprise [2008], where, for a notice to be validly served, the tenant had to strictly comply with the agreed conditions relating to its exercise. Consequently, the notice had not been properly served on the real landlords.

His Lordship then turned to the question of whether the associated company had acted as the landlord’s agent and thus validly accepted service. The associate company could only be inferred to be the landlord’s agent if there was real evidence of agency. This was established on the basis that the associate company had express authority to act as the landlord’s agent. Consequently, the fact the notice had been wrongly addressed to the associate company did not invalidate its power to receive the notice.

Royal Bank of Scotland (RBS) plc v Wilson & Anor (Scotland) [2010]

Recovery of secured property

The Supreme Court’s judgement in Wilson signalled the end of a 12-year litigation that had commenced in the Sheriff Court. RBS had issued a letter to the defenders demanding repayment of all sums secured by standard securities granted in RBS’s favour. When the debtors failed to pay, RBS raised proceedings under s24 of the Conveyancing and Feudal Reform (Scotland) Act 1970 (the 1970 Act) seeking warrant to enter into possession and sell the security subjects, and to eject the debtors from the residential properties subject to the standard security.

Wilson concentrated on whether a ‘formal requisition’ for payment of the principal sum secured by a standard security had been made by RBS – a necessary pre-condition for warrant for ejection to be granted by the court in terms of s5 of the Heritable Securities (Scotland) Act 1894. The sheriff agreed with the debtors that neither the demand letter nor a certificate of indebtedness in terms of Schedule 7 to the the 1970 Act constituted such a ’formal requisition’, so ejection could not competently be granted. The Inner House disagreed with the sheriff, holding that a formal requisition only required the certificate of indebtedness under Schedule 7.

The Supreme Court Justices also examined Part II of the 1970 Act to determine the correct procedure for a creditor seeking repayment of the debt secured by a Standard Security – particularly the terms of ss19 and 21, which provide for calling-up notices and default notices respectively. The Supreme Court concluded that where a creditor wishes to secure repayment of any debt secured by a standard security, the 1970 Act makes it mandatory to first serve a calling-up notice in terms of s19. It is only when that notice period expires that the debtor will be in default (in terms of standard condition 9(1)(a)) allowing the creditor to exercise its remedies. In addition, the Supreme Court clarified that the procedure of demanding repayment by a simple demand letter would not, on failure to repay by the debtor, give rise to a default in terms of standard condition 9(1)(b). The 9(1)(b) default related to obligations in the standard security other than repayment of the debt, so it is not competent to issue a default notice under s21 or raise proceedings under s24 where a debtor has failed to repay following such a letter. This makes it clear that for a long time creditors have been purporting to exercise powers without formal authority.

For a full discussion of this important case, please see Jonny Nisbet’s article on p58.

By Lisa Kelly, senior solicitor, Brodies LLP. E-mail: lisa.kelly@brodies.com.

Aberdeen City Council v Stewart Milne Group Ltd [2010] ScotCS CSIH 81

Bank of Scotland v Stewart [1891] 18 R 957

Batt Cables plc v Spencer Business Parks Ltd [2010] ScotCS CSOH 81

Ben Cleuch Estates Ltd v Scottish Enterprise [2008] ScotCS CSIH 1

City Inn Ltd v Shepherd Construction Ltd [2010] ScotCS CSIH 68

EDI Central Ltd v National Car Parks Ltd [2010] ScotCS CSOH 141

Equity and Law Life Ass Soc v Tritonia Ltd [1943] SC (HL) 88

Farstad Supply AS v Enviroco Ltd [2010] UKSC 18

Jacobs v Scott & Co [1899] 2 F (HL) 70

HM Secretary of State for Business Enterprise & Regulatory Reform, Re An Order To Wind Up UK Bankruptcy Ltd [2010] ScotCS CSIH 80