Scottish Court of Session Decisions

In July 1996 the Bank of Scotland, the defenders in this action of reduction, raised proceedings in the Court of Session against the present pursuers - a partnership called Fraser Trading Company and its two partners, Mr and Mrs Millward - seeking repayment of money lent on overdraft by the bank to the partnership. The summons in that action of payment called on 8 August 1996. No appearance was entered by the partnership or the partners and no defences were lodged. On 27 August 1996 the Court granted decree in absence against the present pursuers for payment by them of £435,315 along with certain interest and expenses. In the present action the pursuers seek reduction of that decree pronounced against them in absence on 27 August 1996. The decree was extracted on 9 September 1996.

Before turning to the pleadings in the present action which were discussed on the procedure roll it is convenient to record that in security of the loan the bank held two standard securities over two separate parcels of ground owned by Mr and Mrs Millward at Larkhall Burn, Jedburgh. The bank took steps to enforce that security and brought two actions of declarator of their entitlement to sell the security subjects and of removing against Mr and Mrs Millward in the Sheriff Court in Jedburgh. On 1 May 1997 the Sheriff, persuaded that there was no defence to the actions, granted summary decrees in each. Mr and Mrs Millward appealed to the Court of Session against the granting of those summary decrees. It appears that the notice upon which one of the actions was based was technically flawed and the appeal in respect of that action was allowed of consent. No such deficiency was present in the other action which had been appealed and while the appeal was pending before the Inner House Mr and Mrs Millward (the defenders and appellants) tendered a minute of amendment ["the Appeal Minute of Amendment"] which sought to amend the defence to the Sheriff Court action by advancing a counterclaim against the bank on the basis of which it was said that they might exercise a right of retention as respects the sums payable to the bank. Counsel for the bank (the pursuers and respondents) opposed the allowance of the Appeal Minute of Amendment on the basis that the averments in the proposed counterclaim were manifestly irrelevant. The Inner House accepted that submission and refused the proposed amendment on the basis that it was plainly irrelevant. The Opinion of the Court was delivered on 29 April 1998. It will be necessary at a later point to notice some of the proposed averments in the Appeal Minute of Amendment.

Reverting to the terms of the present action of reduction, it is averred by the pursuers that the reason for which they did not defend the action of payment was that, having received service of the summons on 9 July 1996, they were "under the misapprehension that they would be given intimation of the time within which they would be required to lodge defences". It is also averred by the pursuers in Article 2 of the Condescendence that "the charge in the said summons that passed the signet was directed against Western Scottish Buses Limited". It is evident from a perusal of the principal summons in the action of payment that that averment is inaccurate and it was explained by counsel for the defenders that in the intimation copy summons served on the second defender in the payment action (Mr Millward) the words "Western Scottish Buses Limited" appeared by mistake in the charge of that intimation copy.

Article 3 of Condescendence is in the following terms:

It is not suggested by the pursuers that the sum for which decree was granted in the action of payment had not been advanced by the bank to the partnership.

Part of the background to the granting of the overdraft is set out in Article 4 of Condescendence. In summary, it is averred that in 1988 the partnership decided to develop a leisure property complex at Larkhall Burn near Jedburgh. They approached the bank for finance. The pursuers provided the bank with a cashflow forecast for completion of the first six units which indicated that the sums borrowed would be repaid from the proceeds of sale of the units and which also gave an indication of various timescales relating to the completion of the development and the expected repayments.

On 16 January 1992 the bank agreed to provide certain overdraft facilities. The terms are contained in a letter of 16 January 1992 (number 12/1 of process). Under the heading "Amount" it is provided as follows:

The provision respecting repayment is in these terms:

Article 6 of Condescendence contains the following averments:

Averments in virtually identical terms were included in the Appeal Minute of Amendment. It appears from the defenders' answer to Article 6 that on several occasions after January 1992 the overdraft limit was increased, the last occasion averred being on 6 December 1994 when the limit was increased to £344,000. The pleadings for the pursuers in the present action contained no denial of those averments by the defenders. I did not understand their accuracy to be disputed by the present pursuers.

Article 7 of the Condescendence contains certain averments relating to the code of banking practice and the present defenders' state of knowledge respecting certain matters. Virtually identical averments are contained in the Appeal Minute of Amendment.

In Article 8 of Condescendence one finds the averred bases of the claim of damages which the present pursuers seek to assert against the defenders. The first basis is averred thus:

It may be observed that in the Appeal Minute of Amendment except for the omission of the words "express or alternatively" precisely the same averments are made.

The second alleged breach of contract is pled in the following way:

Precisely the same averment was contained the Appeal Minute of Amendment which also contained averments relating to a further alleged breach of an implied term of the contract not replicated in the present action of reduction.

The third basis upon which the present pursuers seek damages is put thus:

An equivalent contention was advanced in the Appeal Minute of Amendment in the following, slightly different, terms:

In addition to the contention that they have a claim of damages against the bank giving rise to a right of retention which they could plead by way of defence to the action of payment the pursuers in the present action appear to advance a separate point in Article 11 of the Condescendence, which is in the following terms:

The pursuers' fourth plea-in-law appears to be linked to the averments in Article 11. It is in these terms:

The defenders in the present action plead that the action is irrelevant and Mr Drummond Young, who appeared for the defenders, invited me to uphold that plea and dismiss the action.

In advancing his submission that the action was irrelevant counsel adverted first to the nature of what should be averred in an action seeking reduction of a decree granted in absence. He referred to Robertson's Executor v Robertson 1995 S.L.T. 429, especially at 433F; Mackenzie v Smith (1861) 23D 1201 and Scott v Handyside's Trustees (1868) 6M 753. Counsel submitted that while, where the decree sought to be reduced had been granted in absence, all pertinent circumstances might be considered, the Court should be satisfied (a) that the party seeking reduction of the decree in absence had averred a relevant defence to the claim advanced in the original action and (b) that there was some explanation or excuse for his omission to defend the original action.

Taking the latter aspect first, counsel pointed out that there was no explanation averred of the reason wherefor the pursuers believed they would receive notification of a date for lodging defences. The summons was in the official form and a misreading of it would not suffice. So far as the Western Bus error was concerned, counsel pointed out that the error was in the charge. It was not in the instance. There could be no dubiety as to who were the defenders in the action of payment. Counsel referred to Spalding v Valentine & Co (1883) 10R. 1092; Brown v Rodger (1884) 12R. 340 and Overseas League v Taylor 1951 S.C. 105. However in the present case there was no error at all in the instance of the action of payment, wherein the defenders were properly described and designed. It was an obvious clerical error which could not be described as material.

Turning to the issue whether the present pursuers had averred a relevant defence to the action of payment counsel pointed out that the pecuniary claim advanced by them was a claim for damages. The reference in Article 3 to set off (or compensation), was either irrelevant or mistaken. What the pursuers were truly seeking to do was to exercise a right of retention (c.f. Gloag on Contract 645-6 and 622). However, the averments in support of the claim for damages in respect of which retention was sought to be exercised were manifestly irrelevant. The same issue had been considered in the Inner House in the appeal from the Sheriff Court. The damages claim averred in the present action of reduction was essentially the same as that put forward by way of counterclaim in the Appeal Minute of Amendment. That amendment had been refused by the Inner House on the ground that the averments relating to the claim for damages were manifestly irrelevant. Counsel referred in detail to the appropriate passages in the Opinion of the Court of 29 April 1998. The only respect in which what was averred in the present action went beyond the averments contained in the Appeal Minute of Amendment was that the first contractual term averred in the present action (Closed Record 17C-D) was averred not simply to be an implied term but "an express or alternatively implied term". However, the pleadings said nothing of where, when or by whom the express term was agreed and accordingly the reference to an express term did not assist the pursuers at all. Accordingly, the irrelevance of the pursuers' claim for damages was effectively determined by the decision of the Court of 29 April 1998.

Finally, in respect of Article 11, counsel submitted that the existence of a security was wholly irrelevant to the question whether a creditor was entitled to decree for payment of the amount secured.

In his response Mr Millward, whose submissions were formally adopted by his wife, sought to describe the background to the case. He said that he had been in the leisure property business for twenty five years and having come to the Borders identified a development opportunity at Larkhall. He had obtained planning consent and then sought financial backing. In addition to the bank, Scottish Borders Enterprise was involved in providing top-up finance for what was to be a phased project. The letter of 16 January 1992 contained the contract which he reached with the bank. Mr Millward considered that in terms of that contract the bank was under an obligation to fund the whole project.

So far as the decision of the Inner House in the appeal from the Sheriff Court was concerned, Mr Millward submitted that it was dealing only with the issue of whether amendment should be allowed. The decision was therefore not applicable to this action. In any event the pursuers were proceeding with a counterclaim in Jedburgh Sheriff Court which was at the adjustment stage and in which they were claiming damages of £1.5 million. Mr Millward submitted that even if, in light of the Inner House's decision, no relevant defence to the action of payment had been averred, important issues concerning small businesses and banks were raised and he suggested that the Court might have a general discretion to allow the action of reduction to proceed even if there were no good defence to the action of payment.

On the question of the pursuers' omission to defend the action for payment Mr Millward stated that prior to raising the action the bank had served calling up notices under the standard securities and he was in discussion with the bank about those at the time when the summons was served. When the summons was served he believed that he would be notified in due course of the date of calling and hence the date upon which defences required to be lodged. He did not seek any legal advice at the time because he was in negotiation with the bank and assumed that if the negotiations failed he would be told of the date of calling.

Although in deciding whether a decree granted in absence may be reduced a Court is entitled to look at the whole circumstances of the case (Robertson's Executor v Robertson 1995 S.L.T. 429, 433) I consider that a crucially material circumstance is whether the party seeking reduction of the decree pronounced against him has a prima facie case which could relevantly be stated by way of defence to the action in which the decree was pronounced. Indeed it is difficult to envisage any ground for reducing a decree if there is no defence to the action. The defence to the original action must be stated in the pleadings in the action of reduction - Scott v Handyside's Trustee (1868) 6M 753 especially p. Lord Deas at 7553/4). I shall accordingly consider first whether the averments made by the pursuers respecting their claim that they are entitled to damages for either or both of breach of contract or misrepresentation disclose any prima facie basis of defence, by way of retention, to the action for payment.

As counsel for the defenders pointed out, essentially the same question arose for consideration before the Inner House in the Sheriff Court appeal in which, faced with the Appeal Minute of Amendment proposing to advance a defence to the Sheriff Court action, the Court declined to allow the amendment on the basis that the proposed counterclaim was manifestly irrelevant. The claim which the Appeal Minute of Amendment proposed to introduce as a counterclaim in the Sheriff Court action is essentially no different from that which the pursuers put forward in the current action as a defence to the bank's claim for payment of the overdraft. The wording of the averments in the Appeal Minute of Amendment closely aligns with the very wording used in the pleadings in the present case. Mr Millward did not suggest that the defence to the bank's claim for repayment of the overdraft which is put forward in this action for reduction was any different in its nature or in its supporting averments from the proposed defence put forward in the Appeal Minute of Amendment and refused by the Inner House on the ground that the claim advanced was manifestly irrelevant. With the sole exception of the fact that in the present action for reduction one finds as respects the first alleged contractual term said to have been breached a bald averment that it was an express term, the defence to the payment action propounded in this action of reduction is indistinguishable from the defence sought to be put forward as respects the Sheriff Court action and held by the Inner House to be a manifestly irrelevant claim.

In my opinion the addition of the words "express" in regard to the first alleged contractual term makes no difference to the position. As counsel for the defender submitted, the averment is wholly lacking in any specification of where this "express" term is to be found. As I understood him, Mr Millward pointed to the letter of 16 January 1992 referred to and incorporated in the pleadings as being the contract between the partnership and the bank. However I can find nothing in the letter which could ever be said to be an express stipulation of the contract in the terms averred.

Accordingly I am satisfied that there is no basis upon which the claim for damages asserted in the pleadings by the present pursuers against the bank in this action for reduction can be seen as a prima facie relevant claim which would provide any defence, by way of retention, to the bank's recovering the money advanced on overdraft and repayable on demand.

What is said in Article 11 of Condescendence is, in my view, utterly irrelevant as a defence to the action for payment. The fact that the creditor in a pecuniary obligation holds security for that obligation plainly provides no defence to an action for payment of that obligation.

Since the pleadings in the present action do not disclose any prima facie defence to the action of payment I consider that the present action for reduction of the decree in absence is irrelevant. I would add that in listening to what Mr Millward had to say about the case I was unable to detect the existence of any defence other than the manifestly irrelevant ones put forward in this action (and the Appeal Minute of Amendment).

Had I been persuaded that there was a prima facie sound defence to the bank's action of payment of the overdraft I would have been inclined, in light of what was said by Mr Millward at the debate, to allow inquiry into the basis and reason for his not entering appearance when the action called. Mr Millward very fairly stated that the "Western Bus" misnomer in the charge of one of the three service copy summonses received by him and his wife was recognised at the time as an error and he expressly said that they did not put that forward as any excuse for not defending the action. I would merely indicate that had it been necessary for me to decide the issue I would have accepted Mr Drummond Young's submission that the misnomer, being in the charge of the summons and not in the instance was plainly a clerical error of no particular materiality.

In these circumstances I shall uphold the defenders' first plea-in-law and dismiss the action.