Robin Macpherson (left) and Joseph Farmer (right) of Brodies LLP highlight the ten most significant Scottish cases of the past year in the commercial and public law spheres and analyse their potential impact
For our review we have identified ten notable Scottish cases decided in 2011 in the commercial and public law fields. There have been significant decisions on challenges to Acts of the Scottish Parliament, interest on damages and contractual interpretation – not to mention an interesting interim interdict.
AXA General Insurance Ltd & ors v The Lord Advocate & ors
Perhaps the most significant judgment in a Scottish appeal to the Supreme Court this year was AXA. The appellants were insurance companies who challenged the lawfulness of the Damages (Asbestos-related Conditions) (Scotland) Act 1999, an Act of the Scottish Parliament. The 1999 Act provides that asymptomatic pleural plaques constitute (and have always constituted) actionable harm for the purposes of an action of damages for personal injury. The purpose of the 1999 Act was to reverse the decision of the House of Lords in Rothwell v Chemical & Insulating Co Ltd .
The appellants had been unsuccessful at first instance and on appeal in Scotland, and were ultimately also unsuccessful in the Supreme Court. The main judgments are given by Lord Hope and Lord Reed (with whom Lords Kerr, Clarke and Dyson agree). Lords Brown and Mance give their own separate concurring opinions.
The issues for the Supreme Court were:
- whether, in terms of the Scotland Act 1998, the 1999 Act was outside the legislative competence of the Scottish Parliament because it was incompatible with the appellants’ Convention rights (under Article 1 Protocol 1); and
- whether the 1999 Act was invalid because irrational at common law.
On both issues, the Supreme Court found that the appellants’ challenge failed.
A third issue was specific to judicial review proceedings in Scotland. A number of individuals who had been diagnosed with pleural plaques wanted to be involved in the case. At first instance, the court allowed them to enter the process. On appeal in Scotland, it was held that they would not be directly affected if the appellants’ challenge succeeded. However, the Supreme Court held that they would indeed be directly affected and that they were entitled to enter the process. Lords Hope and Reed considered the question of ‘standing’ in judicial review more generally and their views are likely to result in a liberalised approach to standing in Scotland.
Christine O’Neill, head of public law and regulatory at Brodies LLP (who acted for the appellants in AXA), provides more detailed analysis of the case in her article in this issue.
Sinclair Collis Ltd, Petitioners
Another unsuccessful challenge to an Act of the Scottish Parliament, this time to s9 of the Tobacco and Primary Health Services (Scotland) Act 2010, was brought by Sinclair Collis, described in the court’s opinion as the largest operator of tobacco vending machines in the UK.
Section 9 of the 2010 Act made it an offence to manage or control premises that have tobacco vending machines available for use. Sinclair Collis argued that the provision was outside the legislative competence of the Scottish Parliament in two ways. First, it was incompatible with Article 34 of the Treaty for the Functioning of the European Union, essentially because it restricted the importation of vending machines into the UK. Secondly, it infringed Sinclair Collis’ right (under Article 1 Protocol 1 of the Convention) to peaceful enjoyment of its assets (the tobacco vending machines) and ultimately its business and goodwill.
Both arguments were unsuccessful. On the Community law challenge and the Convention rights challenge, Lord Doherty decided, for similar reasons, that s9 was justified and proportionate.
Sinclair Collis’ appeal against Lord Doherty’s decision was heard in early summer and the decision of the Inner House is awaited.
Lloyds TSB Foundation for Scotland v Lloyds Banking Group plc
How should you interpret a defined term in a contract when, years after the contract is signed, a change in accounting practice changes the defined term?
This was the question that Lord Glennie (the principal commercial judge in Scotland) had to consider in a dispute arising from Lloyds’ acquisition of HBOS in 2009 and the treatment in its accounts of the negative goodwill (of £11.17bn) in relation to the acquisition.
The Foundation was at odds with Lloyds over the interpretation of a provision in a deed that obliged Lloyds to pay the Foundation and provided a calculation for the amount to be paid (which was expressed essentially as a percentage of pre-tax profit). The issue was whether negative goodwill was included in pre-tax profit.
At the time the deed was signed in 1997, the accounting practice was such that negative goodwill would not have been included in pre-tax profit. However, a change in accounting practice several years after signing basically meant that negative goodwill would be included.
The correct starting point in this case, according to Lord Glennie, was the language used, and he found that its ordinary and natural meaning was clear and straightforward. However, that was not the end of the matter. He considered the circumstances in which the deed was made, and concluded that the change in accounting practice was not and could not have been anticipated at that time.
Lord Glennie thought the court should establish what the ‘purposes and values’ expressed or implicit in the deed were, understood in the context of the time at which it was made, and then attempt to reach an interpretation that applies the wording of the deed to the changed circumstances in the manner most consistent with those purposes and values.
Applying this approach, which he stated was justified by a line of authority, Lord Glennie disregarded certain words in the relevant definition in the deed. He emphasised that he was not rewriting the contract but acknowledged that in some cases, ‘some slight violence’ to the wording may be necessary where, because of changed circumstances, the drafting gives a result that neither party could have intended.
ARRESTMENT AND INSOLVENCY
Martin Bain v The Rangers Football Club plc
Martin Bain, the former chief executive of Rangers FC, raised an action against the football club for breach of contract, alleging that Rangers repudiated his contract of employment. Rangers had counterclaimed, alleging breaches of fiduciary duty. The action arose in the context of the sale by Sir David Murray and companies in his control of an 85% shareholding in Rangers.
Mr Bain was seeking warrant for arrestment on the dependence of the action in order to secure the assets of Rangers which would be used to satisfy any decree he obtained. Lord Hodge decided that Mr Bain had a prima facie case on the merits of his action (at least to the extent of his ‘fallback position’) and that it was reasonable in all the circumstances to grant warrant for arrestment. The main discussion was in relation to whether there was a real and substantial risk that Rangers’ insolvency (or near insolvency) would prejudice the enforcement of any decree obtained by Mr Bain if warrant for arrestment was not granted.
Lord Hodge was not persuaded that Rangers was practically or absolutely insolvent. However, he found that the structure of the takeover deal (by which an 85.3% shareholding in Rangers had been purchased) was significant and considered that the deal showed an appreciation of a risk of insolvency resulting from a tax claim (Rangers had a potential tax liability of £49m, which was the subject of an appeal from a determination by HM Revenue & Customs).
Lord Hodge considered that although the outcome of the tax appeal was not known, HMRC’s claim could not be equated with a future trading debt which had not been incurred and which would involve speculation as to the future. He also considered that the court had to look to the future to when the action will be decided and he was not persuaded that the outcome of the HMRC claim was too remote in time for the court to form a view as to the existence of a risk.
Lord Hodge was satisfied that there was a real and substantial risk of insolvency if Rangers were to lose the tax appeal but he emphasised that he was concerned with the statutory test which addresses the degree of possibility and was not speaking of the actuality or even probability of insolvency. He decided to grant warrant for arrestment on the dependence but limited it to a sum of £480,000, acknowledging the existence and likely development of Rangers’ counterclaim against Mr Bain.
Schuh Ltd v Shhh… Ltd
Schuh sought to interdict Shhh… from infringing its registered trade mark ‘Schuh’ and from passing off its trade as being connected to Schuh by using names such as ‘Shhh’ and ‘shhh-oohs’.
On the trade mark infringements and passing off, Lord Glennie thought that Schuh had not established a prima facie case essentially because it had not shown that the names were similar or were likely to be confused. Lord Glennie adopts the snappy formulation contained in an affidavit lodged on behalf of the defender: ‘SHHH… is a secret. SCHUH is a shoe.’
In relation to the prima facie case test, Lord Glennie confirmed that a prima facie case means (and always has meant) a good arguable case – in other words, that the case has reasonable prospects of success at proof. Gillespie v Toondale Ltd (2006) brought the test for the grant of diligence on the dependence into line with that for interim interdict but it should not be regarded as putting a gloss on the prima facie case test. The good arguable case is that which Lord Glennie also understood to be applied in English courts in relation to interlocutory injunctions.
Lord Glennie also had something interesting to say on balance of convenience. Normally interim interdict applications are heard ex parte, provided no caveat is lodged by the defender. However, Lord Glennie allowed Shhh… an opportunity to be heard, even though a caveat had not been lodged. He justified it on the basis that the court should be slow to grant interdict without hearing the defender, except where the pursuer can show that the defender might act in a way that was prejudicial to the pursuer before the hearing. This approach, he said, was justified by reference to the balance of convenience, which in an ex parte hearing is not just about whether the interim interdict should be granted, but also about whether it should be granted ex parte.
interest ON DAMAGES
Farstad Supply AS v Enviroco Ltd
‘Creative’ sometimes has negative connotations when applied to first instance decisions. Lord Hodge’s important decision in Farstad, however, is creative in the best sense and has the potential to open up debate about the correct rate of interest applying to awards of damages.
Farstad and Enviroco had settled an action for an agreed sum but in their joint minute had left it up to the court to decide the appropriate rate of interest to be applied to the sum. In Scotland, ‘judicial’ interest from the date of decree is currently set at 8% (and has applied to decrees pronounced after 1 April 1993 and has not been reduced despite the recent reductions in interest rates generally). Interest can also be awarded from the date on which the right of action arose and the practice of the Court of Session has been to award pre-decree interest at the judicial or post-decree rate of 8% (even though the relevant statutory provision gives the court a discretion on the pre-decree rate). The concern was that applying 8% pre-decree was over-compensatory. Given the potential sums involved, Enviroco had flagged the challenge to this rate in its defences.
Ultimately, Lord Hodge held that it would take a higher court (or legislative intervention) to award pre-decree interest on some ‘novel basis’ (such as 1% above base rate). However, he chose to exercise his discretion in relation to pre-decree interest and took account, among other things, of the ‘clear mismatch between the judicial rate and market rates in recent years’. He chose to award interest at 4%. In relation to post-decree interest, Lord Hodge stated that while interest in principle should be compensatory, he saw no objection to a rate that was mildly penal as a means of encouraging payment by defenders.
Hill & anor v Stewart Milne Group & anor
The pursuers and the defenders were developing nearby sites in Morningside, Wishaw. A minute of agreement allowed the pursuers to connect to the sewage and surface/storm water drainage systems installed by the defenders. The key provision was that the defenders undertook to use all reasonable endeavours to complete the systems by the longstop date of 28 March 2008, or a penalty of £5,000 per month until completion would be payable to the pursuers.
The question, in basic terms, was whether this was an unenforceable penalty clause. The pursuers won at debate at first instance but lost when the matter was appealed to the sheriff principal. On appeal to the Court of Session, they argued that the relevant obligation was not to complete the systems, but simply to use all reasonable endeavours to complete them. Failure to complete by itself was not necessarily a breach of contract. The court saw force in this argument but considered it a ‘nice question’ on which it did not have to decide. On the issue of the nature of the clause, the court held that it was for the defenders, as the parties claiming that the provision was an unenforceable penalty clause, to have pleadings in support of that claim.
The court also held that the question of whether a provision is an unenforceable penalty clause should be decided by looking at the position as at the date the contract was made, rather than when it was breached. Later events may throw light on whether or not there had been a genuine pre-estimate of damages. The pursuers did not have to establish that the provision was a genuine pre-estimate of damages and that the supposed breach of contract had given rise to a loss of the sort that the pre-estimate had been directed at quantifying. The whole purpose of a provision like the one in the minute of the agreement was to avoid the need for proof on how the loss should be quantified and whether the loss had in fact occurred.
SOLICITORS’ warranty of authority
Cheshire Mortgage Corporation Ltd v Grandison; Blemain Finance Ltd v Balfour + Manson LLP
In Cheshire and Blemain, the pursuers were lenders who were the subject of mortgage fraud. The fraudsters would pretend to be Mr and Mrs X of a particular address owning heritable property, give a pretended standard security over the property to secure the loan, obtain the loan and disappear. The solicitors instructed by the fraudsters were also deceived in relation to the fraudsters’ identities.
With no prospect of recovery from the fraudsters or under the pretended standard securities, the lenders raised proceedings against the fraudsters’ solicitors for breach of warranty of authority. They argued that by warranting that they acted for ‘Mr and Mrs X of a particular property’, the solicitors were warranting the identity of the person instructing them. However, Lord Glennie was not persuaded. The solicitors had come to the transactions at a relatively late stage when the lenders knew who they were (or thought they were) dealing with. So the only authority they professed to have was that they were instructed by the borrowers who were already known to the lenders to assist in drawing up the loan and security documentation.
Frank Houlgate Investment Company Ltd v Biggart Baillie LLP
Houlgate is another case in which the lender unsuccessfully argued breach of warranty of authority against solicitors acting for a fraudster. This time, the fraudster had pretended to own property over which a standard security was granted in favour of the lender. By the time the case came before Lord Glennie at a debate on the relevancy of the lenders’ case, the lenders were arguing that the solicitors were negligent, had knowingly participated in the fraud and had breached their warranty of authority.
On the negligence argument, Lord Glennie held that the lenders had a relevant case in relation to the solicitors’ failure to inform the lenders of the fraud after becoming aware of it themselves. The case on knowing participation was allowed. However, the case on breach of warranty of authority was knocked out for the same sort of reasons for which the claims in Cheshire and Blemain failed and because, essentially, the solicitors were not warranting the capacity of the fraudster as owner of the property.
Brightcrew Ltd v The City of Glasgow Licensing Board
It is difficult to ignore the humour – intentional or otherwise – present in Brightcrew, which involves the licensing of a lap-dancing club. For licensing practitioners though, there is useful guidance on the function of a licensing authority, as well as some commentary on the Licensing (Scotland) Act 2005.
Brightcrew had applied to ‘convert’ its licence for the lap-dancing club into a premises licence under the 2005 Act, but the Licensing Board rejected the application. Only one of two grounds of rejection was relevant by the time the case reached the Inner House (that the granting of the application was inconsistent with the licensing objectives of protecting and improving public health and preventing crime and disorder). The basis for this ground was that there had been breaches of the Licensing Board’s Code of Practice.
The breaches are detailed in full at paragraph 9 of the opinion and are concerned with both the on- and off-stage operations of the club. One breach lays bare what may be described as an artistic difference – or more appropriately a difference in performance practice – between two temporary dancers from Edinburgh and the (Glasgow) Code of Practice. It appears that the approach of the Edinburgh dancers left much to be desired (at least in terms of the Code), but little, if anything, to the imagination.
The court considered that the essential function of a Licensing Board was to license the sale of alcohol and that its power to impose conditions was limited. The licensing objectives were not free-standing and the fact that they were desirable did not mean that a Licensing Board could insist on matters that were not linked to the sale of alcohol. In considering that aspects of its Code of Practice had been breached, none of which related to the sale of alcohol, and on the basis of those breaches concluding that the alcohol licence should be refused, the Licensing Board had not properly addressed the statutory test.
By Robin Macpherson, partner, and Joseph Farmer, solicitor, dispute resolution and litigation team, Brodies LLP.
AXA General Insurance Ltd & ors v The Lord Advocate & ors  UKSC 46
Brightcrew Ltd v The City of Glasgow Licensing Board  CSIH 46
Cheshire Mortgage Corporation Ltd v Grandison; Blemain Finance Ltd v Balfour + Manson LLP  CSOH 157
Farstad Supply AS v Enviroco Ltd  CSOH 153
Frank Houlgate Investment Company Ltd v Biggart Baillie LLP  CSOH 160
Gillespie v Toondale Ltd (2006) SC 304
Hill & anor v Stewart Milne Group & anor  CSIH 50
Lloyds TSB Foundation for Scotland v Lloyds Banking Group plc  CSOH 105
Martin Bain v The Rangers Football Club plc  CSOH 158
Rothwell v Chemical & Insulating Co Ltd  UKHL 39
Schuh Ltd v Shhh… Ltd  CSOH 123
Sinclair Collis Ltd, Petitioners  CSOH 80