For our review, we have considered ten notable Scottish cases decided this year in the commercial and public law fields, which include the action brought by the administrators of Rangers FC, a landmark decision striking down an Act of the Scottish parliament, and different approaches to contractual interpretation.
INSOLVENCY AND CONTRACT
Joint Administrators of Rangers Football Club, Plc, Noters
This was the most widely reported case before the Court of Session this year. The decision has significance beyond the sports pages, as it provides an important analysis of trust law, private international law and the rights of creditors.
The case was brought by the administrators of Rangers and concerned the sale of season tickets for future years to Ticketus. They sought directions from the Court on two questions.
First, was it possible for the administrators to terminate the contract with Ticketus? Lord Hodge held that it was not possible to give directions without more information. Nevertheless, he gave guidance indicating that where an administrator decided that it was in the interests of the creditors as a whole to decline to perform a contractual obligation, the court would not normally force the company to perform the contract.
Secondly, what was the nature of the rights acquired under the contract? This question determined how Ticketus would rank as a creditor. It was held that a contract for future sales could only create a contractual, unsecured right.
PUBLIC LAW
Salvesen v Riddell
In this landmark case it was held, for the first time, that an Act of the Scottish parliament was ultra vires and accordingly ‘not law’.
The appellant owned a farm leased to a limited partnership, of which the respondents were the general partners. The respondents avoided dissolution of the partnership, and accordingly preserved their tenancy, by serving notice in terms of s72 of the Agricultural Holdings (Scotland) Act 2003. The Land Court refused the appellant a remedy.
The appellant appealed to the Inner House, arguing that this violated his rights under the European Convention on Human Rights (ECHR). The Court held that the Land Court’s interpretation of the facts was wrong and that he was entitled to a proof. Consequently, there was no need to address the Convention questions, but the Court decided that they should still be considered.
Article 1 of Protocol 1 of the ECHR was engaged because the appellant’s right to terminate a lease and recover possession was restricted. Ultimately, the Court found that the Act was neither proportionate nor appropriate in achieving its aim as it went further than classic anti-avoidance measures, and it could not be interpreted in a way to make it Convention compliant.
Imperial Tobacco, Petitioner
This was the first of two decisions this year concerning the validity of the Tobacco and Primary Medical Services (Scotland) Act 2010, which restricts the display of tobacco products and bans their sale through vending machines. The petitioner challenged the Act on the ground that it related to matters on which the Scottish parliament is not permitted to legislate.
The Inner House found that the legislation was valid. The Court emphasised that it was the ‘true nature and character’ of a provision that was important and held that, although the legislation touched on reserved matters, this was not its primary purpose. The Court, however, rejected the view that the Scottish parliament’s actions should be given any special treatment and emphasised that these are still subject to the law.
At the time of writing, the petitioner’s appeal to the Supreme Court had been heard and a decision was awaited.
Sinclair Collis Ltd v The Lord Advocate
The reclaimers, who owned, operated and imported tobacco vending machines from the EU, also challenged the 2010 Act, arguing that it was outside the legislative competence of the Scottish parliament on two grounds.
First, as the legislation made these machines illegal in Scotland, their importing business would be jeopardised. Accordingly, it interfered with trade in contravention of Article 34 of the EU Treaty. The Inner House held that the Act’s objectives were to reduce smoking and improve public health. As a prohibition on vending machines shut off a source of supply, this was a proportionate way of attaining this objective and, accordingly, justified.
Secondly, they argued that it was incompatible with Article 1 of Protocol 1 of the ECHR. The Court found that it was proportionate and struck a balance between the public interest and the reclaimers’ economic interest.
CONTRACTUAL INTERPRETATION
Aberdeen City Council (Respondents) v Stewart Milne Group Ltd (Appellants)
This case concerned the interpretation of a clause in missives for the sale of development land. The consideration paid to the respondents was subject to a possible uplift in the events described in the missives. The uplift provisions were triggered when the appellants transferred their title to another company in their group. The sale price was well below market value and they argued that no uplift was payable. The respondents contended that the uplift should be calculated with reference to the open market value, which was considerably higher.
The Supreme Court held that, although open market valuations were expressly referred to only in the event of a lease or buyout, it must have been the parties’ unspoken intention that, in the event of a sale not at arm’s length on the open market, this type of valuation should be used. The Court decided this as a matter of contractual interpretation, but indicated that had it been necessary to imply this term into the missives to give the contract business efficacy, it could have done so, as there was no commercially sensible argument for why the approach should be different in the event of a sale.
Lloyds TSB Foundation for Scotland v Lloyds Banking Group Plc
The reclaimers and the respondents were parties to a Deed of Covenant, the terms of which obliged the respondents to pay the reclaimers, a charitable foundation, a precise percentage of their group profit. Some years after the deed was agreed, a European regulation was passed which made it compulsory for the respondents to recognise negative goodwill in its accounts. When the respondents acquired HBOS, the resulting amount of negative goodwill significantly increased its profit figure. The reclaimers argued that negative goodwill should be included in the calculation of the amount due to them.
The Inner House found in favour of the reclaimers. The Court considered what a reasonable person would have understood the parties to have meant when they entered into the agreement, which they considered to have clear and unambiguous wording. Although he would not have known that negative goodwill would become part of the accounts, he would know that accounting rules could change. The fact that the amount of negative goodwill was dramatically high one year did not mean that the rule itself was dramatic. Further, the parties had agreed a precise figure for the percentage of the profits, and so he would expect to find that figure in the accounts without any adjustment being required.
We understand that the respondents are appealing this decision to the Supreme Court.
SALE OF GOODS
MacDonald v Pollock
The Inner House considered whether a sale is in the course of business if it is ancillary to its business.
The appellant purchased a cruise vessel from the cruise provider respondents. He had instructed a partial survey and carried out a short sea trial beforehand. After the purchase, the appellant discovered that the vessel was damaged. He sought full refund of the purchase price, arguing that the implied condition of satisfactory quality under the Sale of Goods Act 1979 had been breached. The respondents claimed that this was not implied as the sale was not in the course of their business.
The Court found in favour of the appellant. The intention of the legislation was to extend the protection afforded to purchasers and a wide interpretation was appropriate. Although the commercial seller may not have particular knowledge of the article incidentally sold, he could protect himself by expressly excluding the implied warranty.
The respondents also sought to rely on another provision of the Act, which obviates a seller’s liability where the goods have been examined. They argued that a proper examination would have revealed the defect. The Court held that it was necessary to show that the defect could have been disclosed by the actual examination carried out, and that the buyer could still rely on the implied condition for the unexamined parts of the vessel.
ALL REASONABLE ENDEAVOURS
EDI Central Ltd v National Car Parks Ltd
This case concerned the meaning of the term ‘all reasonable endeavours’. The parties contracted to develop a car park. The pursuers and respondents, who were the developers, abandoned the project on the basis that the local authority was unlikely to approve it. The defenders and reclaimers, who originally leased the site, refused to buy back their interests in the lease, arguing that the other party was in material breach of contract, as they had failed to use all reasonable endeavours to obtain planning permission as would be expected of a normal prudent commercial developer.
The Inner House refused to grant the reclaiming motion. The pursuers’ obligation required to be balanced with countervailing commercial considerations. It was necessary to consider whether reasonable steps had been taken, and that although the obligation was more onerous than one to use ‘reasonable endeavours’, the pursuers were not obliged to disregard their own commercial interests if it was clear that further efforts would be futile.
East Dunbartonshire Council v Bett Homes Ltd
This dispute arose from an agreement for the sale of two sites. Payment was to be
made in three separate phases. The pursuer and defender each had the right to rescind if timeous entry to the sites was not given on the phase one entry date, but no such clause existed in relation to phases two and three.
The question was whether, in specifying a date by which ‘vacant possession’ of the phase three subjects was to be given, the parties intended that time should be of the essence. If so, a failure to do so would constitute a material breach that would entitle the defender to rescind.
The Inner House considered that, while there may be a commercial element to the agreement, its essential character was a contract for the sale and purchase of heritage. There was no authority that it should be implied into a vacant possession clause that time is of the essence. On this basis, and as there were not equivalent provisions for phases two and three, it was held that unless there is express contractual provision to the contrary, time is not of the essence in a contract for the sale of heritage.
SOLICITORS’ WARRANTY OF AUTHORITY
Cheshire Mortgage Corp Ltd v Grandison and Blemain Finance Ltd v Balfour & Manson LLP
These conjoined cases concerned the law of agency.
The appellants were secured lenders who were victims of mortgage fraud.
The respondents were solicitors who had acted for the fraudster borrowers. In each case, a pair of individuals applied to the lenders for a loan, pretending to be husband and wife and the owners of certain heritable property. Their solicitors put standard securities in place over these properties. By the time it was discovered that the individuals were fraudsters, they had disappeared with the loan funds.
The lenders sued the solicitors, arguing that they had breached their warranty of authority as agents, because they had warranted the identities of their clients as being the owners of the properties.
The Inner House held that all the solicitors had warranted was that they had clients and authority to act. It would be unreasonable and inappropriate to extend this to an implied warranty as to particular attributes of those clients, such as their identity. Agents were subject to the rule of implied warranty of authority because they knew best whether they had the authority they professed to have. However, the lenders were seeking protection from commercial risks, and there were no reasons in principle or practice to extend the scope and nature of the rule and transfer this risk to the solicitors.