Scottish Court of Session Decisions

LORD DAVIDSON'S OPINION.—The pursuers are a corporation incorporated in the Federal Republic of Germany. They sue the present action against Terex Limited, a company incorporated under the Companies Acts and having a place of business at Newhouse Industrial Estate, Motherwell (the company). The company went into receivership in November 1983. The defenders are the company and its joint receivers.

In their conclusions the pursuers seek two declarators to the effect that certain goods described in appendices to the summons and held by the joint receivers of the company are the property of the pursuers. At procedure roll it was agreed that proof before answer should be allowed in relation to the goods referred to in the second declarator, which is set out as conclusion 4. The submissions of counsel were concentrated upon the declarator sought in the first conclusion, namely that the goods set out in Appendix 1 which are held by the joint receivers are the property of the pursuers. By the second conclusion the pursuers seek delivery of the goods set out in Appendix 1, and there is a third conclusion for interdict against the defenders disposing of these goods.

The goods detailed in Appendix 1 are various vehicle axles and transmissions and a single filter. It is common ground between the parties that by a series of contracts entered into between the pursuers and the company between June 1982 and September 1983 the company agreed to purchase from the pursuers the goods set out in Appendix 1. The total price payable was DM 579,891. The goods described were all duly delivered to the company.

The pursuers aver that the various contracts for the supply to the company of the goods described in Appendix 1 were subject to the pursuers' general terms and conditions of supply of vehicle gear units and steering gears. The pursuers claim that these conditions were incorporated into each of the contracts by being referred to in, and printed on the reverse side of, the pursuers' acceptance of order, or were enclosed with the acceptance of order which was sent to the company prior to the execution of each order. The pursuers also aver that by telex dated 7th April 1983 the company specifically requested the pursuers to advise them of their "terms of delivery". According to the pursuers they sent their general terms and conditions to the company by letter dated 16th May 1983. Further, the pursuers aver that condition 11 of the terms and conditions provided, inter alia, that contracts were subject to German law. The defenders deny these averments of the pursuers about the alleged incorporation of the general terms and conditions of supply into each of the sale contracts.

The pursuers quote condition 5 of their general terms and conditions as follows: [His Lordship quoted the terms of condition 5 and continued.] The pursuers explain that paragraph 947 (1) of the German Civil Law provides that "where moveable objects are joined together in such a way that they form integral parts of a further individual object, then the various owners become joint owners of this object. Their interest is calculated according to the relative values which the objects had at the time of being linked together."

The pursuers aver that none of the goods supplied by them and described in Appendix 1 have been paid for. They continue as follows: [His Lordship quoted the pursuers' averments in Article 5 of Condescendence and continued].

In reply the defenders contend that, assuming Condition 5 has been validly incorporated into the sale contracts, it is invalid in Scots law. They also make the following averments in Answer 5 about the goods which the pursuers supplied: [His Lordship quoted Answer 5 and continued].

At procedure roll counsel for the defenders submitted that there should be a proof before answer in relation to the first declarator. If the pursuers were found entitled under the contract to retain title in the goods until payment had been made in full, it would be necessary for the court to determine whether or not at some stage prior to the receivership the property in all, or some of, the goods had passed to the company by accession. Hence at proof the Court would be concerned primarily with the defenders' averments in Answer 5 quoted above. These averments were the basis of the defenders' third plea-in-law which was in these terms:

"The goods specified in Appendix 1 being the property of the first defenders, the defenders should be assoilzied from the first three conclusions of the Summons."

The prime object of the defenders at procedure roll was to have the pursuers' averments about German law excluded from probation. These averments were irrelevant, and it was desirable that they should be excluded at procedure roll so that parties could be saved the trouble and expense of embarking upon a more detailed enquiry into the German law referred to on record.

The main attack developed by counsel for the defenders centred upon the relevancy of the pursuers' averments about paragraph 947 (1) of the German Civil Law. These averments, it was submitted, were irrelevant because the goods described in Appendix 1 were situated in Scotland. On the assumption that German law was the proper law of the contract, that law governed the interpretation of personal contractual rights, but it was not concerned with proprietary rights. The dispute in the present case was about title to the goods. It was well settled that the lex situs was the law which governed the determination of such a dispute. In the present case the lex situs was the law of Scotland. The defenders had averred facts which, if proved, justified their plea that the goods had become their property through industrial accession in accordance with rules stated in various Scottish authorities. Reference was made to Stair's InstitutesII.1.39–41; Erskine's Institute III.15–17; Bell's Principles paras. 1296–1298. Furthermore, in the present case real rights and the interests of third parties were involved. Accordingly the defenders were entitled to rely upon the decisions in Todd v. Armour (1882) 9 R. 901; Inglis v. Robertson and Baxter (1898) 25 R (HL) 70; Carse v. Coppen 1951 SC 233; Winkworth v. Christie Manson & Woods Ltd. [1980] 1 Ch. 496. The passage in the German Civil Code quoted by the pursuers appeared to provide that if the goods had been incorporated into other machinery title remained with the pursuers until such time as the goods became integral parts of the whole machinery; that stage was not reached unless and until the goods could not be removed from the whole machine without being destroyed; in that event title did not pass to the customer, but had to be shared between him and the pursuers. Two points arose out of that contention.

(1) The law of Scotland relating to industrial accession was clear-cut and settled. That law was inconsistent with the provisions of paragraph 947 (1) of the German Code which the pursuers sought to introduce. In Hamlyn and Co. v. Talisker Distillery (1894) 21 R. (H.L.) 21 Lord Chancellor Herschell said this at p. 23:

"I should be prepared to admit that an agreement which was opposed to a fundamental principle of the law of Scotland founded on considerations of public policy could not be relied upon and insisted upon in the Courts of Scotland.…"

The German law relied upon by the pursuers did infringe a fundamental principle of Scots law. In any event the dictum quoted could not be of any assistance to the pursuers because the present case, unlike that of Hamlyn and Co., was concerned with proprietary rights.

(2) It was not clear why the pursuers had introduced paragraph 947 (1) of the German Code. The terms of the first conclusion disclosed that the pursuers asserted an exclusive title to the goods. They had no alternative case to the effect that they were joint owners of the goods with the company. In that connection there were no averments as to the shares, either in bulk or money value, which the pursuers claimed. In addition, neither party averred that the goods, or any of them, could not be removed from the equipment into which they had been installed without destruction.

In reply counsel for the pursuers submitted that the pursuers were entitled to decree de plano in terms of their first declaratory conclusion. The conditions of the contract included an express stipulation regarding passing of property in the goods. Although the company was in receivership, that development had no bearing whatever on the passing of property. The company and the pursuers had entered into an agreement, part of which regulated the passing of property. By the law of Scotland the passing of property was to be determined in accordance with the intention of the parties. Prima faciesection 17 of the Sale of Goods Act 1979 enabled the parties to agree that the passing of property should be regulated by the contract. If parties sought to introduce a reference to foreign law in order to regulate the passing of property, the provision would receive efect unless it was, in the words of Lord Chancellor Herschell, "opposed to a fundamental principle of the law of Scotland". Paragraph 947 (1) was not fundamentally opposed to any principle of the law of Scotland. The law of Scotland relating to industrial accession had been little refined or developed since the institutional writers, who in turn relied upon Roman law. Reference was made to Justinian, Institutes II.1.25–28; Wylie and Lochhead v. Mitchell (1870) 8 M. 552. The opinion of Lord President Inglis in Wylie and Lochhead supported the view that equitable considerations carried weight in this branch of the law. That case was authority for the general principle of equity that when the materials, skill and labour of two or more persons are voluntarily and inseparably combined in the production of an indivisible corporeal subject, the same belongs to the contributors jointly, the interest of each being in proportion to the value of his contribution. Although in certain respects the facts of the present case were different, the principle stated in Wylie and Lochhead could properly be applied. In Wylie and Lochhead and in examples given in Justinian Institutes II. 1.27 it was possible to discern an agreement of parties for a joint venture. As suppliers the pursuers had no interest in the eventual use which customers made of their products. But paragraph 947 (1), providing for a joint ownership in the event of integration, was consistent with the ratio of Wylie and Lochhead in that by agreement the parties had allowed for the contingency of the goods undergoing accession prior to payment of the price, and had stipulated what was to be the legal consequence in that event. Such provision was consistent with the relatively scanty Scots law on the subject. In any event it could not properly be described as being fundamentally opposed to any principle of the law of Scotland.

Counsel for the pursuers also argued that decree de planoshould be granted in terms of the first conclusion because the defenders' averments in answer 5 were irrelevant. In particular these averments were not relevant to support a case of accession by the law of Scotland. From the defenders' point of view the most favourable formulation of the test was that given by Lord President Inglis in Wylie and Lochhead, supra, at p. 557:

"that they could not be separated without such injury as greatly to impair, if not destroy, their value as materials for the construction of a hearse, while such separation would not only extinguish for ever the value of the labour and skill contributed by both parties, but would also put an end to the hearse as a subject of property…".

Reference was also made to the opening words of Stair Inst. II.1.39. If the defenders' averments were subjected to the Lord President's test, they were not entitled to proof on the question of accession because they did not aver facts from which it could be inferred that separation of the axles and transmissions from the earthmoving equipment would cause destruction or material detriment to them. Reference was made to McDonald v. Provan 1960 S.L.T. 231.

I consider that the rival arguments of the parties require to be tested by reference to their respective pleadings. It is admitted that the pursuers supplied the company with the goods detailed in Appendix 1. The total price was DM 579,891. Although the defenders do not admit their failure to pay the purchase price, I conclude from their other averments that payment has not been made. The pursuers also aver that the supply of the goods described was subject to their general terms and conditions, including condition 5, which were incorporated in each contract. The defenders deny that assertion, and call upon the pursuers to aver in what way these general terms and conditions were incorporated. Although the pursuers appear to have answered that call, the defenders' denial still stands. Since proof that the general terms and conditions were incorporated into the contract is essential to the pursuers' success, I do not consider that the pursuers can obtain the declarator which they seek de plano. But if after proof the pursuers establish that condition 5 was incorporated in each contract, what will be the legal position of the parties? In my opinion it will be uncomplicated. The opening sentence of condition 5 provides that "the goods shall remain our property until payment has been made in full". Counsel for the defenders did not challenge that part of the condition on the ground that it was unclear, or that it could not receive efect by the law of Scotland. It was not argued that the condition was open to the type of objection which is exemplified by Emerald Stainless Steel Ltd. v. Southside Distribution Ltd. 1982 SC 61; Deutz Engines Ltd. v. Terex Ltd. 1984 S.L.T. 273; and Hammer and Sohne v. H.W.T. Realisations Ltd. 1985 S.L.T. (Sh. Ct.) 21. In this action the pursuers claim that they retain property in the goods until they have been paid for in full. The goods have been delivered to the company but have not been paid for. If the pursuers are right in averring that condition 5 was incorporated into each contract, then in my opinion the onus rests upon the defenders to justify, if they can, retention of the goods under their control. The sole defence stated is that property in the goods specified has passed to the company by accession. It is therefore necessary to examine the averments in answer 5 to determine whether the defenders are entitled to proof on that issue. In my opinion the defenders' averments on this matter are irrelevant. To that extent the pursuers' seventh plea-in-law, a general plea to relevancy of the defences, is well-founded and should be sustained.

There are three classes of goods detailed in Appendix 1—the axles, the transmissions, and the filter. The filter can be disposed of summarily because there are no averments as to how property in it passed to the defenders. It is said of the axles that they have all been incorporated into finished or partly finished earth-moving equipment; that they have all been attached to the main frame; and that they have been painted and filled with oil. In my opinion the averments relating to the axles are irrelevant. The defenders do not specify the mode of attachment to the main frame. It is not averred that the axles cannot be removed, or if they can, what damage or detriment would result. Furthermore, if, as the defenders aver, the axles have been painted and filled with oil, that suggests a possible enhancement rather than an impairment of their usefulness as vehicle components. The transmissions too are said to have been attached to the vehicles and painted. Before that was done a pipe was removed from the front of each transmission and disposed of, a new pipe was fitted in place of the back-plate, and plastic hose and wires were attached. That description does not indicate that the transmissions cannot be removed from the vehicles without suffering damage. In addition it would appear that the work described was carried out in order to make the transmissions more rather than less suited for their purpose. In this connection I think that the appropriate test is not what is the diminution in the market value of the item once it has been separated from the vehicle, but rather what is the diminution, if any, in its efficiency as an axle or transmission. In any event, whichever test is appropriate, I do not think that the defenders satisfy either.

If I am right in holding that the averments in answer 5 are irrelevant, then it follows that there is no substantive defence to the first conclusion of the summons. I shall therefore allow a proof before answer in relation to the first three conclusions of the summons, restricted to the averments in condescendence 3 and answer 3.

The interesting and difficult question of law which occupied most of the time at procedure roll does not arise unless I am wrong in holding that the averments in answer 5 are irrelevant. If, contrary to my opinion, the defenders have relevantly averred a transfer of property by accession according to the law of Scotland, it seems to me that at best the pursuers' averments of German law can have only limited application. According to the pursuers' interpretation of paragraph 947 (1) of the German Civil Code, they retain exclusive title in the goods at least until such time as they cannot be removed from the vehicles into which they have been installed without the goods being destroyed. By introducing paragraph 947 (1) the pursuers appear to envisage a situation where a Scottish buyer of their goods might succeed in proving accession on the strength of the Lord President's test in Wylie and Lochhead, but be defeated by the pursuers' contractual condition which imposes a stiffer test for accession, namely destruction in the event of separation. For reasons already given my reading of the defenders' pleadings gives me no ground for supposing that such a state of affairs would come about in the present case. But if, contrary to my view, such scenario is possible, then I would prefer the pursuers' arguments.

If, as section 17 of the Sale of Goods Acts 1979 provides, the parties to a contract are entitled to agree when property is to pass, then I think it is wrong to regard the lex situs as being an inflexible corpus of law. Agreeing with counsel for the pursuers on this point, in a contract regulating the rights and obligations hinc inde of two contracting parties, prima facie I see no reason why they should not incorporate into the contract one or more provisions of a foreign legal system. If the contracting parties choose to do that, then the condition relied upon may be open to challenge on, among others, the ground that it is opposed to a fundamental principle of the law of Scotland. Counsel for the pursuer conceded that if the defenders succeeded in such a challenge, then paragraph 947 (1) could not prevail over the law of Scotland; but they maintained that if there was a difference between paragraph 947 (1) and the law of Scotland relating to accession, that difference was merely one of degree and could not be regarded as fundamental. I agree with counsel for the pursuers on this point. Furthermore the main proposition contended for by the pursuers appears to me to be in accordance with general statements of law contained in Dicey and Morris The Conflict of Laws (10th ed.), pp. 558–560; Cheshire and North Private International Law (10th ed.), pp. 530–531. I refer also to The Parchim [1918] AC 157, per Lord Parker of Waddington at p. 161.

In the result I allow parties a proof before answer in relation to the fourth, fifth and sixth conclusions. I sustain the pursuers' seventh plea-in-law to the extent of excluding from probation the averments in answer 5. Quoad ultra I allow a proof before answer in relation to the first, second and third conclusions, but restricted to the averments in condescendence 3 and answer 3.