Scottish Court of Session Decisions

On 28th June 1910 Hegarty & Kelly, live stock agents, Glasgow, and the individual partners thereof, pursuers, brought an action against the Cosmopolitan Insurance Corporation, Limited, defenders, for £6000 (afterwards restricted to £4500) as damages for alleged breach of contract—the breach alleged being that they (the defenders) had since 9th October 1909 refused to insure any of the pursuers' live stock although bound to do so by the agreement, dated in March 1909, and to endure for three years from 1st March 1909, the material clauses of which are quoted supra in rubric.

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The pursuers pleaded, inter alia— “(1) The defenders being in breach of their contract with pursuers as condescended on, are liable to the pursuers for the loss and damage thereby sustained and to be sustained by them. (3) The defenders having repudiated said contract of insurance, are barred from now founding upon its terms.”

The defenders, inter alia, pleaded—“(1)The action is incompetent in respect it is not laid upon an award of an arbitrator finding that the position taken up by the defenders in their letter of 9th October 1909 was not justified by the facts. (2)The action is excluded by the arbitration clause in the contract founded on, and should accordingly be dismissed. (6)The pursuers being in breach of the contract founded on are barred from maintaining the present action.”

The pursuers averred—“ (Cond. 3)Certain disputes or differences having arisen between pursuers and defenders as to the construction of the said contract and parties' rights thereunder, the defenders on 9th October 1909 wrote to the pursuers as follows— ‘Glasgow, 9th October 1909. Dear Sirs,—We have your memo, of 8th inst., together with cheque value £153,15s., but regret we must return the latter, and same is enclosed herewith. We are compelled to decline further business in view of your total disregard of our letters of 1st, 6th, 13th, and 23rd September last, all of which we confirm.—J. M. Buchanan, General Manager.’ Thereafter the pursuers and the defenders, by minute of reference dated 10th and 16th November 1909, agreed to refer to Mr William Gillies, writer, Glasgow, as arbitrator mutually chosen, all the disputes or differences that had then arisen between them, and nominated and appointed him arbitrator accordingly. The defenders on said date refused, and since said date have continued to refuse, to implement said contract, and at said date they were in breach of contract in respect that they then refused to accept further premiums or to pay any losses arising out of said contract. Since said date, and until the raising of the present action, the defenders have never withdrawn from the position that they repudiated the contract, and that the same was at an end.… (Ans. 3)… Admitted that the defenders have refused since 9th October 1909 to accept further premiums from the pursuers in terms of said agreement, or to pay any losses arising out of the said contract of insurance, and explained that the defenders were forced to take up this position in consequence of the breach of contract of the pursuers. Explained further that on 13th October 1909 the defenders, in terms of the contract, expressed their willingness to arbitrate upon the questions which had arisen, including the questions raised by the defenders' said letter of 9th October and the pursuers' reply dated 11th October 1909.… (Cond. 4) A claim and answers were duly lodged in said process of arbitration, and after sundry procedure and after hearing a full proof and the arguments of parties, the said arbitrator on 26th April 1910 issued proposed findings, and on 9th June 1910 pronounced and issued his formal award by decree-arbitral of that date, whereby he found, inter alia, that the pursuers had not in any of the ways claimed by the defenders in their condescendence and claim in the reference committed a breach of the said agreement, and further that the defenders were not warranted in refusing to implement their part of the said agreement from and after 9th October 1909, and were therefore in breach of said agreement.… (Ans. 4)… Explained that in the course of the said arbitration proceedings the defenders, who were anxious to have all disputes decided in terms of the contract, on 17th March 1910 tendered to the arbitrator a minute of amendment specifying certain facts involving breaches by the pursuers of the sixth article of said agreement, but the pursuers, although well aware that the questions raised must go to arbitration, objected to the said amendment being dealt with by Mr Gillies or the question raised therein being determined by him, and they succeeded in inducing the arbitrator to disallow the said amendment, to refuse to inquire into the facts therein set forth, and to decline to decide the question whether the defenders' letter of 9th October 1909 was justified by the facts. The said decree-arbitral does not deal with or decide the questions raised by the said amendment or any question as to breach of contract on the part of the defenders on or after 9th October 1909. The defenders were all along willing that the said disputes between them and the pursuers arising out of said contract should be decided by arbitration, but the pursuers declined to allow the arbitrator to consider the same. The said disputes are disputes which the pursuers are bound by the terms of the said contract to refer to arbitration, and to obtain the award of an arbitrator on, as a condition-precedent to maintaining an action of damages against the defenders for breach of the said contract.… (Cond. 5).… On 20th June 1910 the defenders raised an action for reduction of the said award. The Lord Ordinary, by interlocutor dated 30th November 1910, dismissed said action, and on 9th December 1911 their Lordships of the First Division refused the reclaiming note against the Lord Ordinary's judgment and adhered thereto. The defenders have finally repudiated said contract, and the present action of damages in respect of their breach has accordingly been rendered necessary. The defenders having repudiated said contract and refused to recognise in any way said arbiter's award, and having declined all further business with the pursuers .the pursuers have been compelled to treat and have treated said contract as being now at an end, and have made other arrangements for protecting themselves against risks arising in connection with their sales of insured cattle.… (Ans. 5) … Explained that it was the duty of the

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pursuers under the contract to proceed to arbitrate upon the questions raised by the defenders' said letter of 9th October 1909 and the questions raised under the said minute of agreement, but in further breach of their contract they declined to do so.… ”

On 5th July 1912 the Lord Ordinary ( Skerrington) repelled the defenders' first plea-in-law and allowed a proof before answer.

Opinion.—The pursuers are a firm of live-stock agents, and the defenders are an insurance company. On 2nd and 3rd March 1909 the parties entered into a somewhat obscure written agreement which was to remain in force for three years, and which was intended to indemnify the pursuers against loss arising from the live stock which they sold for killing purposes being condemned as unfit for human food. I do not need to explain how it came about that the pursuers as auctioneers were interested in the fate of the animals which they sold.…

In the present action the pursuers claim £6000 (restricted to £4500) in name of damages through the defenders having since 9th October 1909 refused to do any business with the pursuers or to insure any of their live stock. The defence is primarily founded upon the 7th clause in the insurance agreement—‘… [ quotes, v.sup. in rubric] …’ The defenders' first plea-in-law is—‘The action is incompetent in respect it is not laid upon an award of an arbitrator finding that the position taken up by the defenders in their letter of 9th October 1909 was not justified by the facts.’

“The dispute, which in the defenders' view ought to be decided by arbitration, arises out of clause 6 ( a) of the insurance agreement, which, as the defenders construe it, bound the pursuers to pay premiums upon all the live stock which they sold, and did not entitle them to insure the bad and doubtful animals, while refusing to pay premiums upon the good ones. The defenders' sixth plea-in-law is that ‘the pursuers being in breach of the contract founded on are barred from maintaining the present action.’ The defenders' advisers seem to have had so much confidence in their first plea that they did not think it necessary to make their averments in support of this sixth plea with proper specification or in such a form as to elicit a reply from the pursuers. Accordingly the defenders will require to amend their pleadings if, contrary to their contention, the present action is held to be competent.

“I am unable to hold that in the circumstances disclosed and admitted in the pleadings the present action is incompetent. However wide a construction one may put upon the arbitration clause, the fact remains that at the date when the present action was instituted (28th June 1910) the pursuers held (as they still hold) a decree-arbitral, dated 9th June 1910, by which the arbiter (Mr Gillies) found ‘that the said Hegarty & Kelly did not in any of the ways claimed by the said the Cosmopolitan Insurance Corporation, Limited, in the said condescendence and claim commit a breach of the said agreement, but that the said agreement still subsists, and that the said the Cosmopolitan Insurance Corporation, Limited, and the said Hegarty & Kelly, are bound to perform their respective parts of the said agreement for its full course of three years from 1st March 1909 as therein provided; … and further, I find that the said Cosmopolitan Insurance Corporation, Limited, were not warranted in refusing to implement their part of the said agreement from and after 9th October 1909, and are therefore in breach of said agreement.’ It is true that the arbiter did not adjudicate upon the particular dispute which I have already explained, because he considered (and as the Court afterwards decided) rightly considered that he had no jurisdiction to do so. The question whether the present pursuers had contravened article 6 (a) of the insurance agreement was raised by the present defenders for the first time on 16th March 1910, the day before the proof in the arbitration, whereas Mr Gillies (and subsequently the Court) held that by the terms of the minute of reference of 10th and 16th November 1909, his jurisdiction was limited to the decision of the disputes which were in existence at the last-mentioned date. The defenders protested against the arbiter's decision upon this point, and after the issue of his award they unsuccessfully attempted to reduce it upon the ground that he had refused to decide a question which was within the submission. The summons of reduction was signeted on 20th June 1910, and was finally dismissed by the Inner House on 9th December 1911. Pending this action the present action of damages was sisted but the sist was recalled on 15th December 1911. From the foregoing statement it is, I think, apparent that when the present action was instituted the defenders had never made any competent demand upon the pursuers to submit to arbitration the new dispute as to the pursuers' alleged violation of article 6 (a) of the insurance agreement. I do not require to consider how the rights of parties would have stood if, immediately on the issue of the decree-arbitral, the defenders had intimated that they acquiesced in it, and if they had then called upon the pursuers to join with them in a new reference to an arbiter. Instead of taking this course the defenders persisted in their erroneous contention that the new dispute had already been submitted to Mr Gillies. In these very special circumstances I am of opinion that the pursuers were entitled to sue upon the award in their favour and that they were entitled to treat the defenders as persons who refused to go to arbitration before a new arbiter.

“The defenders' second plea-in-law raises somewhat awkwardly the question whether, assuming the action to be competent, I ought not to sist process until the dispute as to the pursuers' alleged breach of contract has been decided by arbitration. The pursuers' counsel argued that although a question had arisen as to the construction of article 6 (a), that question did not

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fall to be decided by arbitration, because admittedly the arbitration clause does not empower the arbiter to assess damages, and because the arbiter is entitled to construe the contract only so far as is necessary in order to explicate his own jurisdiction. The Court took this view in the case of Mackay v. Leven Police Commissioners, 20 R. 1093, but the arbitration clause there was not identical with that now under construction. He also argued that the clause was executorial only and could have no further effect seeing that the contract time expired on 1st March 1912. I am not prepared to sustain either of these contentions. If both parties had treated the contract as binding and subsisting for the whole period of three years, and if their only dispute had been whether the defenders were justified in having refused during these years to insure a particular kind of stock, e.g., sheep, as not being ‘live stock’ within the meaning of the agreement, I should have thought that the question whether the defenders were liable in damages ought to be decided by arbitration in spite of the fact that the arbiter could not assess the damages, and in spite of the fact that the contract period had now expired. The peculiarity in the present case is that the defenders' position ever since October 1909 has been a complete refusal to insure any of the pursuers' live stock. That looks very like a repudiation of the contract on the part of the defenders, but I do not propose to pronounce any decision to that effect, because the position taken up by the pursuers and also the arbitration proceedings may have to be considered in their bearing on the question of repudiation. The safer course is to allow the pursuers a proof of their averments including those in support of their third plea-in-law—‘The defenders having repudiated said contract of insurance, are barred from now founding upon its terms.’ That was the course adopted by the House of Lords in the case of Johannesburg v. Stewart, 1909 S.C. (H.L.) 53. If it be the fact that either justifiably or unjustifiably the defenders have refused to fulfil their part of the contract, prima facie I should think that they cannot demand specific performance of the arbitration clause. If they were right in the dispute and acted justifiably, then the defenders will be assoilzied in of damages, and can in their turn sue the pursuers for damages. On the other hand, if the defenders were in the wrong in refusing performance, the damages due to the pursuers will be assessed in the present action.

“I repel the defenders' first plea-in-law, and I allow the record to be amended as proposed by the defenders in their minute and by the pursuers in their answers thereto. I close the record of new, and before answer I allow the parties a proof in common form. I do not repel the defenders' second plea-in-law as it is possible that the agreement for arbitration may still be held binding upon the parties, though not as a condition-precedent to the present action.”

The defenders reclaimed, and argued— The determination of the arbiter was a condition-precedent of liability. The action should therefore be sisted to await his decision— Caledonian Insurance Company v. Gilmour, December 16, 1892, 20 R. (H.L.) 13, per Lord Watson at p. 18, foot, 30 S.L.R. 172; Hamlyn & Company v. Talisker Distillery, May 10, 1894, 21 R. (H.L.) 21, 31 S.L.R. 642; Anstruther v. Burns, 1893, 1 S.L.T. 421; Scott v. Avery, 1855, 5 Clark's H.L. Cas. 811 per Crnaworth, L.C., at p. 847-8. Where one party committed a material breach of a contract the other party could either rescind the contract or hold to it and claim damages irrespective of whether there was or was not an arbitration clause, though in the latter case the determination of the arbiter might, as here, be a condition-precedent of liability—Pollock on Contracts (8th ed.) 616, et seq.; Turnbull v. M'Lean & Company, March 5, 1874, 1 R. 730, at p. 738, 11 S.L.R. 319; Mersey Steel and Iron Company v. Naylor, Benzon, & Company (1884) L.R., 9 A.C. 434, per Selborne, L.C., at p. 439. The pursuers had clearly adopted the latter course. They were therefore barred from maintaining that the contract had been rescinded. A party to a contract could not by himself rescind it— Johnstone v. Milling, (1886) L.R., 16 Q.B.D. 460, per Lord Esher, M.R., at p. 467. The case of the Municipal Council of Johannesburg v. D. Stewart & Company, Limited, 1909 S.C. (H.L.) 53, 47 S.L.R. 20, on which the pursuers relied, was distinguishable, for the circumstances there showed that both parties had treated the contract as totally rescinded. That was not so here, for neither party regarded the letter of 9th October as putting an end to the contract. The defenders were therefore clearly entitled to plead the arbitration clause.

Argued for respondents—Where, as here, the defenders had repudiated the contract, they could not appeal to the arbitration clause, for the contract with all its clauses was gone— Municipal Council of Johannesburg (cit.). That was especially so where, as here, the pursuers had acted in the belief, induced by the defenders, that the contract was at an end—Leake on Contracts (6th ed.) 639; Shiells v. Scottish Assurance Corporation, Ltd., July 17, 1889, 16 R. 1014, 26 S.L.R. 702; Ripley v. M'Clure (1849), 4 W.,H., & G. 345 (18 L.J. Exch. 419). As to the mutual rights of parties to a contract of lease, reference was made to Munro v. M'Geoghs, November 15, 1888, 16 R. 93, 26 S.L.R. 60; and to M'Donald v. Kyd, June 14, 1901, 3 F. 923, 38 S.L.R. 697.