Scottish Court of Session Decisions

At advising, on 7th July 1993:

LORD JUSTICE-CLERK (Ross)—In this action the pursuers seek payment from the defenders of the sum of £69,920 which they allege is due to them in terms of a contract between the parties consisting of missives for the sale by the pursuers to the defenders of a heritable property known as 28–32 Union Street, Glasgow.

The pursuers aver that the defenders failed to pay the purchase price of the subjects on the date of entry, which was 30th March 1990, and that they were accordingly in breach of condition 2 of that part of the missives consisting of a letter dated 25th January 1990 from the pursuers' solicitors to the defenders' solicitors.

Condition 2 is in the following terms: [his Lordship quoted same and continued:]

The pursuers aver that after the completion date (30th March 1990) the pursuers made repeated requests for the defenders to settle the transaction, but that they failed to make payment. By letter dated 29th June 1990, the pursuers' solicitors formally notified the defenders' solicitors that as at 29th June 1990 the pursuers had resiled from the missives. The pursuers further aver that interest in terms of condition 2 from the date of entry to 29th June 1990, charged at four per cent per annum above the pursuers' then base lending rate of 15 per cent, amounted to £69,920 which is the sum sued for.

While the action was still on the adjustment roll in Glasgow Sheriff Court, the defenders were allowed to introduce Messrs Montagu Evans, chartered surveyors, Glasgow, as a third party. After sundry further procedure the sheriff sustained the first plea-in-law for the defenders and found that the pursuers' averments were irrelevant. He accordingly dismissed the action, and on the defenders' motion dismissed the cause against the third party. Against that interlocutor of the sheriff the pursuers have now appealed to this court.

In the note annexed to his interlocutor, the sheriff pointed out that the pursuers' claim for interest was wholly founded upon the terms of condition 2 of the qualified acceptance of 25th January 1990 which was part of the missives. The pursuers, however, had resiled from the missives as at 29th June 1990. They were accordingly seeking to make a claim for interest ex contractu out of the provisions of a contract, which they had previously brought to an end by resiling therefrom. The sheriff observed that if the pursuers were entitled to resile, it might well be that they would have other remedies against the defenders for breach of contract, but he held that the pursuers could not now sue on the basis of condition 2 of the qualified acceptance in the missives, as if the missives had not now been brought to an end.

On behalf of the appellants counsel subjected condition 2 to a close analysis. He identified four features in condition 2: (a) payment of the purchase price in full on the completion date was of the essence of the contract; (b) in the event of the purchase price not being paid in full on completion date, interest was to accrue; (c) in the event of non-payment of the purchase price within 14 days of the date of entry, the sellers were to be entitled to resile from the missives on giving prior notice in writing. This was without prejudice to any right or claim competent to the sellers arising from the breach of contract; and (d) there was a proviso to the effect that the rights to interest and to resile from the missives should not be enforceable by the sellers in the event of the delay in settlement being due solely to the act or default of the sellers.

He submitted that the sheriff was in error in holding that the pursuers could not enforce their contractual right to interest after resiling from the contract. He submitted that the effect of the sheriffs judgment was that if the pursuers brought the contract to an end, they were not then entitled to sue in respect of rights which had already accrued under the contract. That, he submitted, was an erroneous view.

Counsel on both sides of the bar were agreed that the reference in condition 2 to a right to resile was inappropriate. Counsel were agreed that there is sometimes confusion in the use of the words "resile", "rescind" and "repudiate". Condition 2 provides for certain contingencies which may arise after the contract has been completed. If one of the parties is to have the right to bring the contractual relationship to an end after a contract has been formed, then, in my opinion he is not exercising a right to resile. The more correct view appears to be that what condition 2 was providing for was that in the event of the purchase price not being paid timeously the purchaser was in material breach of contract and was thus repudiating the contract. This would then give the seller the right to rescind the contract. Accordingly condition 2 must, in my opinion, be read as entitling the sellers to rescind the contract rather than as entitling them to resile from the missives (Zemhunt (Holdings) Ltd. v. Control Securities plc 1992 SC 58). If the right were truly a right to resile then neither party would be entitled to claim damages from the other.

Counsel for the appellants submitted that on a proper construction of condition 2 interest would accrue at the prevailing rate from the completion date until full payment. He further maintained that if full payment was never made and the contract was rescinded by the seller, interest would then be due in terms of the clause from the completion date until the date of rescission. That was what the pursuers were claiming in this action. He further submitted that in the third sentence of condition 2, where the right to resile was said to be without prejudice to any right or any claim competent to the sellers arising from breach of contract, "any right or any claim" covered the claim for interest based upon the provisions of the preceding sentence in condition 2. He contended that once the contract was rescinded by the pursuers as the innocent parties, both parties were discharged from executory obligations under the contract, but that any accrued rights remained enforceable. What the pursuers were seeking to enforce in the present action was their right to interest which had accrued between the completion date and the date of rescision of the contract. Although the pursuers' claim was not a claim for damages for breach of contract, counsel maintained that it was akin to such a claim.

Counsel for the appellants put forward certain propositions of law, as did counsel for the defenders. There was no real dispute between them regarding the law which fell to be applied, and at the end of the day, I understood counsel on both sides of the bar to accept that what was at issue was the proper construction to be placed upon condition 2. Counsel canvassed the law as it has been laid down in recent years in a number of English cases. It appears to me that the following can properly be gleaned from these cases:

1. (1) Where, as here, a contract has been rescinded by the innocent party as a result of material breach of contract by the party in default amounting to repudiation, both parties are absolved from future performance of their primary obligations under the contract (Photo Production Ltd. v. Securicor Transport Ltd. [1980] AC 827).

2. (2) However, it is incorrect to say that in these circumstances the contract has come to an end. The innocent party may still bring an action for damages against the party in default for breach of contract (Photo Production Ltd. v. Securicor Transport Ltd. ).

3. (3) Furthermore, even after such rescission, either party may still enforce against the other any clauses in the contract which were plainly intended by the parties to survive rescission. These are sometimes referred to as ancillary clauses. Examples are arbitration clauses, clauses prorogating jurisdiction, or clauses specifying the proper law of the contract (Lep Air Services v. Rolloswin Investments Ltd. [1973] A.C. 331).

4. (4) Apart from such ancillary clauses, there may be clauses in the contract affecting damages due for breach of contract, and the language of the contract may show that parties must have intended these clauses to be enforceable after rescission. Examples are exclusion clauses, clauses limiting liability and clauses providing for liquidate damages (Photo Production Ltd. v. Securicor Transport Ltd. ).

5. (5) Although rescission absolves both parties from future performance of their primary obligations under the contract, they are not absolved from primary obligations already due at the time of rescission. Thus claims for debts or arrears of money unconditionally due under the contract may still be enforced. Examples are arrears of rent due under a lease, or instalments of price due prior to rescission (Hyundai Heavy Industries Co. Ltd. v. Papadopoulos [1980] 1 W.L.R. 1129). These are sometimes referred to as accrued rights.

6. (6) Sales of land or goods where there has been rescission following a total failure of consideration are an exception to the last mentioned rule (Hyundai Heavy Industries v. Papadopoulos ). Under our law, a seller who rescinds such a contract of sale, cannot retain advances or instalments of the price that he has received, but is required to repay these to the purchaser unless the payment falls to be regarded as a deposit (Zemhunt (Holdings) Ltd. v. Control Securities plc ).

7. (7) In all cases, the question of whether a particular clause in a contract can be enforced after rescission depends upon ascertaining the intention of the parties from a consideration of the terms of the contract in the light of the foregoing principles of law.

Counsel for the defenders differed from counsel for the appellants as to the proper construction to be placed upon condition 2. He submitted that the law of Scotland was the same as the law of England so far as this branch of the law was concerned, and he referred to Gloag on Contract (2nd edn.), pp. 621–622 and McBryde on Contract, para. 14–13. In short his submission was that although debts and real rights in property would survive rescission of the contract, after rescission the pursuers were not able to enforce any right to interest. He contended that by rescinding, the pursuers were in effect saying that they were no longer prepared to sell the subjects to the defenders, and that they were not willing to accept the purchase price plus interest even if that was tendered in full. He therefore submitted that the pursuers could not claim a contractual right to interest when they for their part were not willing to furnish the counterpart. He contended that the pursuers could not insist on payment of the price or interest unless they offered possession and gave a good title to the subjects (Graham & Co. Ltd. v. United Turkey Red Co. Ltd. 1922 SC 533). He also submitted that just as a seller who rescinds a contract of sale cannot retain instalments of the price which he has received, so also a seller after rescission could not insist on payment of interest on the price which has never been paid. He submitted that the second sentence in condition 2 was dealing with the situation where there was completion of the contract by payment, whereas the third sentence of condition 2 was dealing with the situation where there was no completion of the contract by payment. The rights to interest and to resile which are referred to in the proviso are the separate and distinct rights which are expressed in the two previous sentences.

I have come to the conclusion that the views of counsel for the defenders are to be preferred. Looking at the terms of condition 2, I agree with him that the second sentence is dealing with the situation where full payment of the price is eventually made. In that event if the purchase price has not been paid in full on the completion date interest will run on it or the outstanding part of it from the completion date until the date of full payment. The next sentence (which includes the right to resile) is dealing with the situation where the price is never paid. Where there has been failure to pay the purchase price within 14 days of the date of entry, and the seller exercises his right to resile (or more correctly rescind), the seller will then be able to enforce a claim for damages for breach of contract. That, however, is a different right from the right to interest which is referred to in the previous sentence and which only arises where the full price is ultimately paid but there has been delay in making full payment on the due date. Accordingly the second sentence is dealing with the situation where the contract is being performed, whereas the third sentence is dealing with the situation where a contract is not being performed.

The interest which is provided for is interest on the purchase price or any part thereof outstanding, and in my opinion, interest cannot be payable under this clause when the purchase price itself is not being paid. In the sentence dealing with interest it is stated that interest is to run "until full payment is made". That is the only terminus ad quern which is mentioned in the clause. What the pursuers appear to me to be endeavouring to do is to read that sentence as if it provided that interest was to be paid "until full payment is made or the contract is rescinded". I do not consider that it is legitimate to read into the clause words which are not there.

As the Lord Justice-Clerk observed in Graham & Co. v. United Turkey Red Co. it is a general principle of the law of contract that where one party seeks performance of stipulations in his favour, he must show that he has given or tendered performance on his part of the contract. It thus appears to me to be contrary to principle for the pursuers now to be seeking payment of interest on the price when by rescinding the contract they for their part are declaring themselves to be unwilling to perform their part of the contract. By rescinding the contract the pursuers are intimating that they for their part are no longer prepared to accept payment of the purchase price and interest due under the contract even if the defenders were now to offer to make payment of these in full. That being so, I do not see how the pursuers can now enforce a claim for interest under the contract. Counsel for the appellants founded on the presence of the word "accrue" in the second sentence of condition 2, and he submitted that even after rescision the pursuers were entitled to enforce rights which had accrued. In my opinion, however, he is reading too much into the word "accrue". All that the word "accrue" means in this context is that interest will run at the rate of four per cent above base rate until full payment is made.

I am left with the clear impression that this court was given a much fuller citation of authority and more detailed submissions than were addressed to the sheriff. I am satisfied, however, that the sheriff arrived at the correct conclusion in this case. I would accordingly move your Lordships to refuse this appeal and to affirm the interlocutor of the sheriff.

LORD MURRAY —I agree that this appeal fails and that the sheriffs interlocutor dismissing the action should be affirmed.

The issue in this appeal turns entirely upon the proper construction of a condition in missives agreed between the parties. Counsel for the pursuers submitted that there were four significant features in this provision: (1) timeous payment in full on completion date was made of the essence of the contract; (2) in event of nonpayment, interest was to accrue at the stated rate until full payment was made; (3) further, in event of non-payment within 14 days, the pursuers had a right to rescind the contract, after notice in writing, without prejudice to their remedies for breach of contract; and (4) the pursuers' foregoing right to interest and to rescind the contract would not be enforceable only where delay was solely attributable to the pursuers. The defenders had failed to pay within some months of the completion date, due notice of rescission had been given and the pursuers were accordingly entitled to hold the defenders to have repudiated the missives. Interest therefore ran at the rate provided from the completion date until the date when the pursuers had accepted the defenders' repudiation of the contract.

In support of that reasoning counsel for the pursuers referred us to the following cases: Photo Production Ltd. v. Securicor Transport Ltd. [1980] AC 827; Hyundai Heavy Industries Co. Ltd. v. Papadopoulos [1980] 1 W.L.R. 1129; Damon Campania Naviera S.A. v. Hapag-Lloyd International S.A. [1985] 1 W.L.R. 435 and to Gloag on Contract (2nd edn.), pp. 59, 621 and 622. The foregoing cases all appear to me to be distinguishable from the present case on their facts, though no doubt they illustrate the extent to which specific elements of rescinded contracts may survive demise of the contract.

In reply counsel for the defenders referred in addition to the following cases: Zemhunt (Holdings) Ltd. v. Control Securities plc 1992 SC 58; Bosco Design Sennces Ltd. v. Plastic Sealant Services Ltd. 1979 S.C. 189; Graham & Co. Ltd. v. United Turkey Red Co. Ltd. 1922 SC 533 and Lloyds Bank v. Bauld 1976 S.L.T. (Notes) 53. He also referred to further passages in Gloag on Contract at pp. 59, 621 and 622; and to McBryde on Contract, para. 14–13, at p. 300. Counsel for the defenders placed the emphasis of his argument on general principle. The basic rule, he submitted, was that a party who rescinds is disabled from ending the contract and seeking to implement it at the same time. He could not claim both damages and implement. But this was subject to certain well-established exceptions. First, there may be clauses designed to survive rescission dealing for instance with arbitration, prorogation of the jurisdiction or providing for the proper law applicable. Secondly, where a clear intention was expressed, particular provisions might remain enforceable such as exclusion clauses, or clauses limiting damages or providing for liquidate and ascertained damages. Thirdly, rescission did not necessarily preclude claims for debts or arrears which were unconditionally due, for example, arrears of rent, outstanding hire-purchase payments or payment for services already provided. Furthermore, on the principle of restitution, a seller who rescinded a sale agreement could not even hold on to advances of the purchase price which he had already received. Nothing could be discerned in the wording of the condition to be construed to bring it under an exception.

In the end counsel for both sides were agreed about the general principles applicable to the issue in this case. It clearly turns upon the actual wording of this clause. In my view three considerations are decisive against the interpretation for which the pursuers contended. First, the phrase "interest will accrue" means no more in my view than "interest will run", which carries no implication that accrued rights to interest are continuously created. Secondly, as there can be no payment of the price because the contract is rescinded, there is no provision for an alternative terminus to payment date for liability to pay interest. It cannot be that the pursuers are given an option to exact interest for an indefinite period. Thirdly, it appears paradoxical to require interest to run on a purchase price which ex hypothesi will never be paid. I conclude that the construction for which the pursuers contend is unsound so that the appeal must fail.

LORD KINCRAIG —The issue between the parties to this appeal is whether the provision in condition 2 of the missives of sale survives the rescission of the contract between them by the appellants, and is enforceable against the respondents. The parties do not dispute the law to be applied to the determination of this issue and they are agreed that its resolution depends upon the construction to be placed on the said condition. It is convenient to quote it here: [his Lordship quoted the terms of condition 2, omitting the proviso, and continued:]

The relevant facts are that the purchase price was not paid on the completion date, that entry was not taken by the defenders and that the appellants rescinded the contract presumably on the basis that the price not having been paid and such payment being of the essence of the contract, they were entitled to treat the bargain as having been repudiated and to rescind. I say "presumably" because the appellants did not intimate rescission in terms, but purported to act in accordance with the provision in the condition entitling them to resile if the price was not paid within 14 days of the date of entry. Entry was never taken by the defenders so that this provision never came into operation. It was accepted by the appellants, however, that they had effectively rescinded the contract before the price was offered to be paid, thus putting it beyond the power of the purchasers to perform their obligation under the contract to pay the purchase price and any interest thereon.

In my opinion the condition contemplated only a completion of the contract and did not become enforceable in the event of the contract not having been implemented for whatever reason. It operated merely as a penalty for delay in completion by the purchasers. This is I think manifest by the provision that interest is to run from the completion date until actual entry is given, i.e. until the purchase price is paid. The appellants, in my opinion, were not by the provision, given power arbitrarily to decide, as they have purported to do, up to what date the interest was to run by rescinding the contract on the grounds of non-performance of what was made an essential condition of the contract namely payment on the completion date. It follows, in my opinion, that implement of the contract of sale having been rendered impossible by the act of rescission, the obligation to pay interest on the purchase price does not survive the termination of the contract, and is not enforceable. For these reasons I would also dismiss the appeal.