SHERIFFDOM OF GRAMPIAN, HIGHLAND and ISLANDS AT ABERDEEN

 

CA9/12

 

 

JUDGMENT

 

by

 

SHERIFF PRINCIPAL DEREK C W PYLE

 

in causa

 

 

MARK BRIAN SCOTT, residing at 8 Distillery Cottages, Aultmore, Keith

Appellant

 

against

 

KAYE MAREE McKANDIE, residing at 19 Nelson Brae, Fife Keith, Keith

Respondent

 

 

 

Background

[1] This is a commercial action in which the appellant seeks to enforce a Minute of Agreement between the parties. Before the sheriff the parties argued the following issue:

"Is it a correct interpretation of the Minute of Agreement between the parties that payment of the sum of £7,800 by the Defender to the Pursuer would be deemed to satisfy the debt and that the Pursuer has no right under the Minute of Agreement to demand payment of any other sum?"

The sheriff answered the question in the affirmative. The appellant has appealed that decision.

 

[2] Parties were agreed that in order to answer the question it was unnecessary for there to be a proof about the surrounding circumstances at or about the date the parties entered into the agreement. Moreover, they were agreed that the following circumstances arose, namely

(1) That the parties were co-habitees;

(2) That the respondent is and was involved in the running of a hair salon out of the premises at 31 Regent Street, Keith, which were initially leased from the owners;

(3) That the respondent decided to purchase the premises;

(4) That the purchase price was agreed at £26,000, of which £7,800 was to be paid as a deposit and which was provided by the appellant by way of an unsecured loan to the respondent;

(5) That the terms and conditions of the loan are as set out in the Minute of Agreement.

The appellant's position is that on a proper construction of the agreement he is entitled to more than simply repayment of the loan; the respondent maintains the opposite.

 

Minute of Agreement

[3] The relevant parts of the agreement are in the following terms:

"WHEREAS the First Party [the respondent] has borrowed the sum of... £7.800... (hereinafter referred to as "the sum") from the Second Party [the appellant] and WHEREAS the Parties wish to regulate the terms and conditions for repayment of the sum; THEREFORE the parties have agreed and do hereby agree as follows:-

(First) The Second Party will not be entitled to any interest on the sum.

(Second) In the event of the First and Second Parties separating the Second Party will have the right at any time after the date of separation to demand repayment of the sum. This will be satisfied by the First Party paying to the Second Party one-half of the net value of the property 31 Regent Street, Keith standing in name of the First Part [sic] (hereinafter referred to as "the property") and any business carried on from the property by the First Party (hereinafter referred to as "the business"). The net value shall be the value of the property and the business as ascertained by an Independent Valuer mutually chosen by the Parties (hereinafter referred to as "the gross value") less any loans secured over the property and any loans or overdraft in name of the business. Such payment will be made no later than three months after the date of ascertainment. In the event of payment not having been made within that 3 month period the First Party will pay interest thereon at the rate of two per centum per annum above the Royal Bank of Scotland plc base rate from time to time on any outstanding part until payment.

(Third) As an alternative to payment being made in accordance with the terms in Clause Second the First Party will have the option of advertising the property and the business, if still carried on for sale on the open market at the gross value in which event the Second Party will be entitled to a one-half share of the free proceeds of sale of the property and the business (if any) after deduction of all outstanding loans secured over the property and any loans and overdrafts in name of the business and legal fees and expenses in connection with the sale. The Parties will be bound to accept any Offer received in excess of the gross value provided it does not contain any unusual or unusually burdensome conditions."

 

 

The approach of the sheriff

[4] In her commendably concise note, the sheriff describes the agreement as "poorly prepared, confusing and ambiguous" and which "does not properly reflect the averred intention of either party". She goes on to record:

"It is not for the court to interpret what the parties intended to say but what the parties have said in [the agreement]. It is not the function of the court to rescue the parties or their advisers from a bad bargain. There must be construction not a reconstruction of the contract."

 

[5] In her opinion the first part of the agreement sets out clearly that it is a document of loan in which there is provision for repayment of a simple interest free loan, but that it is contradicted by the second sentence in clause (Second) and what follows thereon. She concludes that the latter part of the agreement is unclear and inoperable. As the former part is the only clear part of the agreement, it is that which should be regarded as containing the true agreement between the parties.

 

Submissions of the parties

[6] Counsel for the appellant helpfully analysed the well known dicta on the proper approach under Scots Law to the construction of commercial contracts since the English case of Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL). As counsel for the respondent did not criticise that analysis I find it unnecessary to repeat it in detail here. On the proper construction of the agreement counsel submitted that as the appellant is giving up his common law right to interest on the loan the agreement is intended to provide for the appellant to receive a financial return in place of his common law right, although it would be possible that he receive less than the principal sum depending upon the value fixed (Clause (Second)) or the sale price achieved (Clause (Third)). The word "this" in the second sentence of Clause (Second) is a reference to the demand for repayment, not the repayment itself. The next words, "will be satisfied" are peremptory, not discretionary. If the parties did not intend to extend to the appellant the prospect of a return on his investment, there would be no reason to enter into the agreement in the first place. The effect of the sheriff's decision is that a very substantial part of the agreement is ignored, a step which should be taken only where an ambiguity cannot be resolved otherwise. (Multi-Link Leisure Developments Ltd v North Lanarkshire Council 2011 SC (UKSC) 53, Lord Hope at para [11]) Taking into account the ordinary meaning of the words of the agreement and the agreed surrounding circumstances, the appellant's construction should be preferred.

 

[7] Counsel for the respondent submitted that the problem with the appellant's construction was that it did violence to the earlier part of the agreement to which the sheriff referred. A more commercially sensible construction of the latter part was that it allowed for the possibility of the respondent receiving up to £7,800 of "net value". Such an approach does not do violence to any part of the agreement. Nothing turns on what is the proper reference in the word "this" as submitted by the appellant, because nothing in practice would change; the demand is for repayment.

 

Discussion

[8] After the issue of the opinions of the House of Lords in the Investors Compensation case (and the dicta of Lord Hoffman in particular) any commercial litigator of the time will readily recall that the reaction was that it had set out a radically different approach to the construction of commercial contracts and in Scotland a decision of the Inner House was awaited with considerable anticipation. That came in Bank of Scotland v Dunedin Property Investment Co Ltd 1998 SC 657 and many commentators concluded that Scots Law was not following the same route as in England. Much time has been spent since then in deciding to what extent the Scottish approach to construction has changed or indeed whether it has changed at all. In some respects the various dicta often looked more like an exercise in semantics, rather than any material change in the law. Whether that is correct or not, I respectfully agree with the approach taken by the Extra Division in Connell v Hart [2008] CSIH 67 in which they adopted the principles (which they describe as clear and succinct) set out by Lord Macfadyen in Glasgow City Council v Caststop 2003 SLT 526:

"On the one hand, the approach adopted by the Lord President in Bank of Scotland v Dunedin Property Investment Co Ltd involved first inquiring as to the ordinary meaning of the words used, then, having reached a conclusion on that matter, considering the surrounding circumstances in which the contract was entered into to see whether they affected the result of the original inquiry. On the other hand, the approach advocated by Lord Hoffman in Investors Compensation Scheme Ltd runs those two stages together, by regarding the task of construction as the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge reasonably available to the parties in the situation in which they were at the time of the contract. Whichever of these approaches is adopted... the result should be the same. The language of the contract is of paramount importance. As Lord Mustill said in Charter Reinsurance Co Ltd v Fagan [[1997] AC 313 at 384B, in a passage quoted with approval by the Lord President in Bank of Scotland v Dunedin Property Investment Co Ltd at 661G "the inquiry will start, and usually finish, by asking what is the ordinary meaning of the words used."

 

 

[9] There can be little doubt that the sheriff's conclusion on the talents of the professional drafter of the agreement are correct; indeed its terms are unsatisfactory in more respects than the issue before the court. I give just one of many examples: commercial contracts commonly provide for references to an independent valuer and any competent solicitor should be aware of the need to provide for contingencies such as a failure by the parties to agree on the choice of the independent valuer, in which event the task is given to the Dean of the Faculty of Advocates or other independent party. The agreement is silent on the matter. It is in my view easy therefore to conclude, as the sheriff did, that the agreement has been poorly drafted. In that circumstance, it is necessary to consider the approach the law provides for the construction of ineptly drafted contracts. That is described by Lord Hope of Craighead in the passage in Multi-Link Leisure, to which counsel for the appellant referred, namely:

"The court's task is to ascertain the intention of the parties by examining the words they used and giving them their ordinary meaning in their contractual context. It must start with what it is given by the parties themselves when it is conducting this exercise. Effect is to be given to every word, so far as possible, in the order in which they appear in the clause in question. Words should not be added which are not there, and words which are there should not be changed, taken out or moved from the place in the clause where they have been put by the parties. It may be necessary to do some of these things at a later stage to make sense of the language. But this should not be done until it has become clear that the language the parties actually used creates an ambiguity which cannot be solved otherwise."

 

 

In a later passage (para [19]), Lord Hope says:

"... the solution must be found by recognising the poor quality of the drafting and trying to give a sensible meaning to the clause as a whole which takes into account the factual background known to the parties at the time when the lease was entered into."

 

 

 

[10] Approaching the task in hand in the light of these authorities, it seems to me that, with due respect, the sheriff's approach is, at least in part, misconceived. As I have already noted, she states that it is not for the court to interpret what the parties intended to say but what the parties have said in the agreement. That is of course in part true, but it ignores the fact that all of the rules of construction are intended to assist the court in ascertaining the true intention of the parties. The danger in the sheriff's approach is that its logical conclusion is that the court should always ignore the surrounding circumstances of the contract and simply consider the words in the contract. That is plainly not the law. She goes on to add that the court's function is not to rescue the parties or their advisers from a bad bargain. As a general principle of the law of contract (expressed commonly in the principle of freedom of contract) that is doubtless true, but it is not in my view relevant to the rules of construction. In effect, the sheriff is saying that the court should not rescue parties from bad drafting, rather than bad bargains. Again, that is plainly not the law.

 

[11] More critically in the context of this particular agreement, the consequence of the sheriff's decision is that a very substantial part of the contract must be treated as pro non scripto. It is of course always possible to have that as a necessary consequence of the correct application of the rules of construction. But it seems to me that to reach that result should arise only in extremis, where there is no alternative at all, namely, as Lord Hope describes, when an ambiguity has been created which cannot be resolved otherwise.

 

 

 

 

Decision

[12] In my opinion, if one looks at the agreement as a whole the proper construction is that the parties truly intended that on separation the appellant would be entitled to trigger the full provisions of Clause (Second) or, as an alternative but at the option of the respondent, of Clause (Third). The problem is caused by the words "[t]his will be satisfied by" in the second sentence of Clause (Second). If, instead, the first sentence had merely been continued by replacing those words with the words, "which will be satisfied by" the meaning becomes clear: namely that satisfaction of repayment of the sum will be by the mechanism set out in the remainder of the clause. As counsel for the appellant pointed out, the use of the word "will" means that the remaining provisions are peremptory.

 

[13] I should add, for the avoidance of doubt, that I am not suggesting that an amendment of the agreement in the manner I have described is necessary; merely that the change in wording satisfactorily explains the true meaning of the words used and offers a convenient way to explain why the ambiguity is more apparent than real.

 

[14] Accordingly, I will allow the appeal and will answer the question raised in the issue in the negative. To that extent, therefore, I will, as invited by counsel for the appellant, sustain the appellants' preliminary plea-in-law. Counsel also moved me to delete certain averments in the defences. Counsel for the respondent did not dispute the accuracy of that proposed deletion. On reflection, I have decided to delete more than counsel had moved, but that is merely to allow the remaining pleadings to make grammatical sense (although it is likely that further fine tuning will be necessary in the defences). I do so without allowing parties to address me further because of a desire to avoid unnecessary expense and also in the knowledge that in a commercial action the terms of the written pleadings are of secondary importance. It is, in any event, always open to parties further to adjust the pleadings without any complicated or time wasting procedure.

 

[15] Parties were agreed that expenses should follow success and that I find the appeal as suitable for the employment of junior counsel.

 

Postscript

[16] The late Lord Cameron once famously said that the task of a judge was easier the higher the court he or she was in. During the course of his submissions counsel for the respondent made reference to the fact that the sheriff had not had the benefit of citation of authority during the debate before her. Certainly the detailed notes of argument lodged by the parties make reference to none.

 

[17] The introduction of commercial courts in the sheriffdom of Grampian, Highland and Islands was a welcome innovation. But their value does not just depend upon the expertise and specialism of the commercial sheriffs; it also relies upon those appearing in them ensuring that they present their arguments with proper reference to authority. There is no doubt that my task was made considerably easier by counsel for both parties being able to cite the relevant case law. The sheriff did not have that advantage. It is hoped that in future those solicitors who appear before a commercial sheriff are properly prepared not just in their arguments but also in their knowledge of the law.

 

 

 

 

Aberdeen, 14th November 2012

The sheriff principal, having resumed consideration of the cause, Allows the appeal; Recalls the interlocutor of the sheriff of 10 August 2012; Answers Issue 1 of the appellant's note of issues (number 11 of process) in the negative; Sustains the appellant's third plea-in-law and excludes from probation the averments in article 3 of the defences as follows: "Accordingly, payment of £7,800 by the defender to the pursuer must be deemed to satisfy the debt. The pursuer has no right under the Minute of Agreement to demand payment of any other sum. In particular, the pursuer has no right to be paid any sum in excess of £7,800. The defender has offered to satisfy the payment of £7,800 out of the proceeds of sale of the former family home. The pursuer has rejected the defender's offer. The remainder of Clause Second of the Minute of Agreement sets out an alternate means by which the debt might be satisfied, namely by payment by the defender to the pursuer of one-half of the net value of the property and any business carried on from the property. Satisfaction of the debt by the operation of this alternative method of calculation is conditional upon the further agreement of the parties in appointing an independent valuer."; Finds the respondent liable in the expenses of the appeal; Allows an account thereof to be lodged and remits same to the auditor of court to tax and report; Finds the appeal as suitable for the employment of junior counsel.

 

Sheriff Principal Pyle