Two Outer House cases in which Cheshire Mortgage and Blemain Finance (connected companies) were the victims of a mortgage fraud and sought to sue the solicitors instructed by the fraudsters  (the banks had instructed separate solicitors) for breach of warranty of authority.

In each case the fraudsters had pretended to be persons owning property which they were seeking to use as security for a loan (of £355,000 in one case and £203,000 in the other).  They had been able to produce evidence of their identity in the form of utility bills and driving licences to their solicitors and to the banks.  In both cases the fraudsters had approached the bank (directly in one case and via a broker in the other) before instructing their solicitors.

The banks argued that, in each case, the solicitors warranted that they had the authority of the individuals who owned the properties over which standard securities were purportedly granted. The solicitors recognised the doctrine of a solicitor giving an implied warranty of authority. However, they contended that it does not go as far as giving a warranty of the identity of the person for whom they act, nor does it include any warranty as to whether he is or is not the owner or occupier of any particular property. In effect the solicitors said that they warranted only that they had authority from persons who were already known to the banks and with whom the banks were already dealing.

Lord Glennie found in favour of the solicitors. The circumstances in which the solicitors came to transaction were of particular importance. By the time the solicitors became involved, the banks knew who they were (or who they thought they were) dealing with. They had already made the decision to lend to those individuals. The solicitors had been instructed (by the fraudsters) for the limited purpose of drawing up the loan and security documentation and liaising with the banks’ solicitors. In the words of Lord Glennie:

“The position can be viewed, perhaps more graphically, in this way. Imagine the negotiations between lender and borrower happening in a large room. Agreement in principle is reached between lender and borrower. The loan and security documentation requires input from solicitors. The lenders instruct Mellicks, who enter the room. The borrowers decide to instruct solicitors of their own to safeguard their interests. They appoint Longmuir & Co, or Balfour & Manson. They too enter the room. The solicitors begin the process of drawing up the documentation. They eventually complete it, signatures are obtained from their respective clients, the signed documentation is handed over to the lenders or to Mellicks, and the loan is advanced to the borrowers. In those circumstances, if one imagines that the lenders or Mellicks on their behalf were to ask Longmuir & Co, or Balfour & Manson, “who are you acting for?”, the terse reply would be something like: “what do you mean, we’re acting for the individuals on the other side of the room with whom you have already been in discussions and to whom you have provisionally agreed to lend money”. It is to my mind absurd to suggest that in those circumstances one could imply a promise from the solicitors that they were acting on behalf of the Cheethams of 34 Danube Street or the Morgans of 3 Menteith View, still less a promise that these individuals, calling themselves Cheetham and Morgan, did indeed own those properties”.

In one of the cases there was also discussion as to whether the solicitors were liable to the bank in terms of the letter of obligation they had granted. The bank argued that they suffered loss as a result of the solicitors’ failure to procure the title deeds recording the security in terms of the solicitors undertaking. However, Lord Glennie again agreed with the solicitors’ arguments on this point:

1. the letter of obligation was collateral to the principal transaction between the bank and the borrowers and could not be enforced if that principal transaction was void; and
2. in any event, the bank could show no damages flowing from the failure by the solicitor to produce a title encumbered with the Standard Security, since the Standard Security referred to in the letter of obligation was itself void.

Outer House case considering the interpretation of missives between two builders for the sale of land at Broomhouse in Glasgow.

The land was to be sold by Bellway to Persimmon for £4.16m. Bellway were to undertake works before the sale and the date of entry was tied to Bellway’s completion of the sellers works (which involved the upgrading of a road and construction of a roundabout).

Condition 10 of the missives made provision for completion of the works and included a longstop date of 15 December 2007. Condition 12 of the missives also related to the long stop date and provided:

“In the event that the Seller has failed to Complete all of the Seller’s Works or the Seller has not fully implemented the Seller’s Obligations by the Long Stop Date as such date may be extended in terms of Condition 10(a) hereof then the Seller will be obliged to offer to sell to the Purchaser another residential development site within Central Scotland of comparable size and value to the Subjects. Upon settlement of the transaction contemplated by the missives in respect of the said other residential development site the missives to follow hereon (of which this offer forms part) shall be terminated”.

 Bellway failed to complete the works by the longstop date and wrote to Persimmon offering to sell a site in Airdrie to them instead. Persimmon sought damages for breach of contract.

There were two questions for the court:

(1)   Whether the requirement for Bellway to offer an alternative site to Persimmon was the only remedy available to Persimmon in the event Bellway failed to meet the longstop date or whether Persimmon were also entitled damages for breach of contact.

(2)   Whether condition 12 had in fact been breached by Bellway.

The remedies available to Persimmon

Persimmon argued that when Bellway failed to fulfil the obligation contained in condition 10 by the long stop date they were in breach of contract and the existence of Condition 12 was irrelevant to that.

However, Lord Glennie took the view that Bellway were not in breach of contract at this stage. Although the right to damages for breach of contract is an important right which can only be taken away by clear provision to the contrary, Bellway were not arguing that the provisions of condition 12 were an alternative to damages for non-performance of the contract. Instead, they were arguing that breach of Bellway’s obligation under Condition 10 gave rise to a further obligation under Condition 12 to offer an alternative site. If the alternative site were not offered then, at that stage, a breach of contract would occur giving rise to damages.

If the contract were construed in the manner suggested by Persimmon condition 12 would amount to an option exercisable by them. If that was what was intended it was difficult to understand why it was not expressed as such. That damages would not be available unless there was a failure to provide an alternative site, was further supported by the commercial background to the contract. What Persimmon wanted was an alternative site for development to enable them to deploy their resources efficiently. That could best be satisfied by the provision of an equivalent site if the Broomhouse site was unavailable. Thus the obligation to provide an alternative site was an essential feature of the structure of the contract and it was only if that obligation were breached that the right to rescind and claim damages arose.

Breach of Condition 12

The next question was whether the offer of the site at Airdrie was sufficient to satisfy the requirements of Condition 12. Lord Glennie found that it was not. Whilst, the Airdrie site was (taking a broad view) of comparable size (the difference in gross areas was 6.07% and the difference in net developable areas was 13.4%), it was not of comparable value. After considerable discussion as to the method of valuation to be applied, Lord Glennie found that the value of the Broomhouse site was 17% higher than that of Airdrie and, as such, the sites were not of comparable value within the meaning of Condition 12.

The full judgement is available from Scottish Courts here.

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

Outer House case relating to an agreement for lease of subjects at the Maxim office park in North Lanarkshire.  Tritax were owners of the development and Regus were to take a lease of part of the development. Monies were to be made available to Regus in respect of its fit out costs as an incentive.  Regus did not meet qualifying criteria for type of tenant to whom parts of the development could be let imposed by the sale agreement and so HUB (a company created to run the restaurant and other facilities at the development) was interposed to sub-let to Regus.

In terms of the agreement for lease, HUB was to deliver a letter to Regus from the Bank of Scotland relating to sums which the Bank held on deposit in respect of the fit out costs. This letter formed the crux of the case and was in the following terms:

“We understand that Heads of Terms have been agreed between TAL CPT and Regus (Maxim) Limited for the lease of the first floor of Building 1 at Maxim.

It may assist the proposed tenant to have confirmation from us that, on behalf of the landlord (Tritax Eurocentral EZ Unit Trust) and TAL CPT, we hold the sum of £913,172 to meet the landlord’s commitment to fit-out costs. These funds will be released in accordance with the drawdown procedure agreed between the parties, whereby the proposed tenant’s contractors will issue monthly certificates.

This is subject always to agreement of wider commercial terms with the incoming tenant.”

Regus carried out the fitting out works and issued invoices to HUB who confirmed that the costs were properly incurred and that the contribution should be paid to Regus. However, the bank refused to release the costs as there had been a default in the facility agreement and they were exercising a right of retention over the sums referred to in the letter.

Regus put forward the following arguments:

1.  The letter was an undertaking in terms of which the bank were obliged to make payment.
2. There was a separate underlying agreement between the bank and Tritax/HUB in respect of which Regus were, by means of a jus quaesitum tertio, entitled to payment from the bank.
3. That the bank was personally barred from relying on the terms of its agreements with Tritax/the developers to resist payment to Regus.
4. That the letter contained negligent misrepresentations acted on by Regus to its detriment and the bank was obliged to make reparation to the Regus for breach of a duty of care.

Lord Menzies rejected Regus’s arguments and dismissed the action. He found that he was unable to construe the letter as amounting to a unilateral undertaking by the bank of a legally enforceable obligation to pay the sum to Regus.

The letter was no more than a letter of comfort, and as such, could carry a moral responsibility but not a legal obligation. The court could not enforce a moral responsibility where there was no legal obligation.

The full judgement is available from Scottish Courts here

(See appeal to Inner House here)

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

Sheriff court case concerning an action for damages for failure to pay the purchase price timeously in terms of missives for the purchase/sale of a house in Saltcoats.

The missives provided for a date of entry of 4^th July 2008. However, settlement did not take place and the purchase price was not paid until the 28^th November 2010. No formal amendment was made to the missives. However, there was correspondence between the parties in which the sellers indicated that they were reserving the right to recover losses in terms of the original missives. There were also various references to the date of entry and date of settlement in the correspondence between the parties which led to debate in court as to whether the missives had been varied.

As is normal, the missives contained a supersession clause providing that they ceased to have effect after two years from the date of entry.  The sellers served an action for claims on 24 of November 2010. I.e. less than 2 years after entry was taken but more than 2 years after the date of entry provided in the missives.

The sellers claimed that the date of entry in the missives had been changed in the correspondence whereas the purchasers argued it had not.

Sheriff Livingstone found that the exchange of correspondence did not change the date of entry which in his view had a technical as well as a practical meaning.

 “In other words…the date that a party actually pays over the price i.e. the settlement date or the date that a party actually moves in both of which might lay claim to being the date of entry will not affect the date of entry in the missives in the absence of parties agreeing same. It might be more apt to describe the date of entry as being the agreed date for the seller to deliver a disposition in return for the buyer paying over the purchase price no matter when these things actually happen. There is no doubt in this case that the date of entry was 4^th July 2008 and it seems to me that this was a contractually agreed date of entry and could only be changed by agreement and further such an agreement would have to adhere to certain formalities. It is clear to me from the correspondence that although the Defenders solicitors asked the Pursuers to agree to a new date of entry the Pursuer never agreed to that. What the Pursuer did do was agree to settle on 28^th November 2008. That does not constitute an agreement to change the date of entry. The Pursuer did sign a disposition which refers to “WITH ENTRY and vacant possession as at 28^th November 2008 notwithstanding the date or dates hereof” but it seems to me that again that does not change the date of entry but effectively uses entry in a different sense referring to the date from which the [purchasers] became the heritable proprietor.”

 As a result the date of entry was 4 July 2008 meaning the proceedings should have been raised by 3^rd July 2010 and sellers were time barred from raising the action.

 A full report of the judgement is available from Scottish Courts here

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

Inner House case considering whether a contractual clause constituted a penalty and was therefore unenforceable.

The clause in question was contained in an agreement between Stewart Milne Group, Bett Limited and Stewart and Robert Hill which related to the development of two sites in Wishaw.  Basically, the agreement provided that Stewart Milne and Bett would install sewerage and surface water drainage systems at the site they were developing which the Hills would be able to connect their site to the systems at no cost. If the drainage systems were not completed by the 28 March 2008 the Hills were entitled to receive payment from Bett and Stewart Milne of a penalty of £5,000 per calendar month until the systems were completed.

The works were not completed by 28 March 2008 and payments were made to the Hills until December 2008 but then stopped leading to the court action being raised by the Hills.

The temporary sheriff principal held that the clause imposed a liability to make payment on the occurrence of what was a breach of contract.  Whilst it was for the party seeking to show that the clause is a penalty to raise the issue, it was then for the party relying on the clause to demonstrate that it was a genuine pre-estimate of losses and damage caused by the breach.  In this case Stewart Milne and Bett had raised the issue and the Hills had put themselves in a position to show that the provision was a genuine pre-estimate of their loss. However, as the Hills had not shown that, but for the failure to complete the system by 28 March, they would have been able to complete their site, sell it and realise the return, they could not succeed.

However an Extra Division of the Inner House agreed with the submissions made on behalf of the Hills to the effect that it was for Stewart Milne and Bett as the parties claiming that the provision was an unenforceable penalty clause to show that this was the case and they had failed to do so.

In coming to his decision, the key question the sheriff principal had failed to consider was whether Stewart Milne and Bett had provided any argument in support of their contention that the provision was an unenforceable penalty. It appeared from the sheriff principal’s decision that he considered that it was not only for the Hills to show that the provision was a genuine pre-estimate of damages but also that the supposed breach of contract had given risen to a loss of the sort that the pre-estimate had been directed at quantifying.  There was no such requirement. The whole purpose of a provision such as the one used in this case is to avoid the need for proof; not only proof as to quantification of the loss but also proof that the loss had occurred.

The Inner House therefore allowed the appeal against the sheriff principal’s decision.

The full judgement is available from Scottish Courts here.

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

Elekta Limited v The Common Services Agency, 21 June 2011
Outer House case concerning the procurement of radio therapy equipment (with an estimated value of around £21m) for cancer centres in Scotland.

Elekta, which produced radio therapy equipment, complained that the Common Services Agency (also known as NHS National Services Scotland), which was responsible for procuring the equipment, had effectively excluded them from bidding by specifying criteria which could only be met by one tenderer.  Four out of the five cancer centres in Scotland had a system manufactured by Varian and the Agency specified that the equipment would have to integrate with the Varian system. However, Elekta argued that Varian system was not compatible with those of other suppliers meaning that everyone other than Varian was excluded from bidding.

The effect of Elekta raising the proceedings (in terms of the Public Contract (Scotland) Regulations 2006) was to prevent the Common Services Agency from entering the contract with Varian and the Agency applied for an interim order bringing that prohibition to an end.

After considering the authorities, Lord Glennie laid down a number of points:

• the contracting authority must be entitled to decide upon the functional requirements it wishes to satisfy;

• the fact that the criteria included in the tender notice can only be met by one tenderer, or a limited range of tenderers, does not of itself contravene the principle of equality;

• the inclusion of these criteria can only be considered discriminatory if they cannot be justified objectively having regard to the characteristics of the contract and the needs of the contracting authority.

Lord Glennie noted that Elektra had not argued that the criteria were not objectively justified and pointed out that there a number of possible justifications for the decision such as the cost, disruption and potential teething problems involved in replacing one system with another.

Elekta also referred to the fact that the Agency had followed an open procedure (under regulation 15 of the procurement regulations) rather than the negotiated procedure (under regulation 14) arguing that, if it chose to follow the open procedure, it had a duty to frame the criteria in such a way that allowed a range of tenderers to bid. However, Lord Glennie said that, whilst it may have been that the Agency could have used the negotiated procedure, it did not follow that, by going down the route of the open procedure, it had to remove criteria which it regarded as essential to define its requirements (i.e. that the system could integrate with the Varian system).

In addition, Elekta complained that the criteria requiring integration with the Varian system had also been applied to the one cancer centre which did not already have Varian equipment. However, Lord Glennie also found that there was no merit in this point. The contracting authority was entitled to decide what its procurement requirements were and how to frame them.  It could properly decide (on the basis of objectively justifiable criteria) that there should be a sole tenderer to provide equipment across the five centres.

Lord Glennie was not asked to dismiss Elekta’s action but found its case to be a very weak one which had no reasonable prospect of success. As such, an interim order was granted removing the prohibition on the Agency contacting with Varian.

The European Parliament has voted by a large majority in favour of  an optional European contract law (see our earlier post here).

The European Commission’s press release welcoming the vote is available here.

Two related cases in which guarantors under personal guarantees sought to avoid liability under the guarantees and also to avoid sequestration as a result of the guarantees being called up. The Royal Bank of Scotland was the creditor in both cases.

The guarantors applied for an interim interdict to prevent the Bank obtaining sequestration. The Royal Bank had loaned sums to two companies of which the guarantors were directors.  The guarantors claimed that a Bank employee had made representations to them to the effect that the bank could not exercise the guarantees until it had first pursued all steps against the companies.

Lord Brodie refused to grant the interim interdict finding that the guarantors had failed to make a prima face case. And even that decision was wrong and they had managed to make a prima face case, the guarantors delay in bringing the case had been too long.

The error the bank’s employee was said to have induced was one as to the meaning of a formal legal document. The guarantors knew that they were entering binding legal documents and they were only in error as to the circumstances in which the guarantee would be enforceable. Any award of reduction would have been dependant on restitutio being possible (i.e. the Bank being paid). The issue was not solely between the companies and the bank as the loans had been advanced on the strength of the guarantees.

Full reports of the decisions are available from Scottish Courts here and here.

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

An Expert Group established by the European Commission and consisting of legal practitioners, academics and former judges from across the European Union has produced a feasibility study on European contract law. The publication is a move towards achieving an optional European contract law instrument to be used by European Community legislators to improve the consistency and quality of contract legislation across the Community.

Comments are invited by 1 July 2011.

The Commission’s press release is available here

The study is available here

A useful commentary by Professor Clive (one of the UK representatives in the expert group) is available here