Scottish Court of Session Decisions

By contracts dated 15 January and 8 April 1998 the pursuers, Kinloch Damph Limited, supplied to the first defenders, Nordvik Salmon Farms Limited, two quantities of salmon smolts. Under the first contract the first defenders agreed to purchase and were supplied with one million smolts, at a price of £1.10 per smolt. The total contract price was thus £1,100,000. Under the second contract, the quantity of smolts which the first defenders agreed to purchase and the pursuers supplied was 250,000, the price per smolt was 80p, and the total contract price was thus £200,000. The contracts made provision for the dates on which payment was to be made by the first defenders. The payment terms were subsequently re-negotiated. Some payments to account were made. The sum which remained due by the first defenders to the pursuers when this action was raised was £712,142.41.

After the smolts were supplied by the pursuers to the first defenders they were placed in sea water in cages, and were fed and husbanded by the first defenders. They have developed from smolts into salmon, and are now thirty times their original size.

In this action the pursuers conclude (1) for declarator that "the one million two hundred and fifty thousand salmon smolts (sic) currently in the control of the defenders" which were supplied under the two contracts are the property of the pursuers; (2) for an order for delivery of them by the defenders to the pursuers; (3) for interdict against the defenders disposing of them, and interdict ad interim; and (4) for payment of the outstanding balance of the price, £712,142.41, with interest from the date of citation.

On 16 March 1999 the second defenders were appointed joint receivers of the first defenders.

It is not disputed by the defenders that the sum of £712,142.41 is due by the first defenders to the pursuers. The contracts, however, each contained a retention of title clause (Clause 11). The principal issue which arises for determination in this action is whether the salmon as they now exist in the possession of the defenders are, by virtue of that clause, the property of the pursuers, or are instead the property of the defenders. When that issue was first focused it was of importance because, in light of the receivership of the first defenders, the proprietary remedy which the pursuers seek to invoke in the first and second conclusions is, if it is available to them, more valuable than the undisputed monetary claim for the unpaid balance of the price expressed in the fourth conclusion. Further events have, however, occurred which have a practical bearing on the remedies available to the pursuers. In April 1999 a notice was served under regulation 4 of the Diseases of Fish (Control) Regulations 1994 on the ground that the first defenders' fish farm was suspected of being infected with infectious salmon anaemia (ISA). That brought into operation the control measures set out in Schedule 4 to the Regulations, which include a prohibition on removal of fish from the farm. On 25 May there followed a notice under regulation 5 on the basis that it had been confirmed that fish on the farm were infected fish. That imposed on the first defenders certain requirements which included:

The second defenders were not in a position to comply with that notice. In those circumstances regulation 12 authorises an inspector to take steps to ensure compliance with the notice. I was informed that the practical result was that some of the fish may be sold by the Ministry, and may yield a surplus over the costs which the Minister is entitled to recoup under regulation 12. For that reason the issue of ownership remains a live one but, in view of the Ministry's intervention, it would not be appropriate for me to grant the declarator or order for delivery sought in the first two conclusions. I was therefore invited to express my conclusion on the issue of ownership, and to put the case out By Order for further consideration of the practical consequences.

The "stock and goods" to which the contracts of sale related were identified in Clause 3 of the contracts as specified quantities of "salmon smolts" of stated average weight "suitable for the production of quality salmon on-grown in the sea". Clause 11 of each of the contracts was headed "OWNERSHIP" and made provision in the following terms:

Clause 12 was headed "INSOLVENCY" and provided:

Clause 13 was headed "PROPERTY RIGHTS" and provided:

For the defenders two lines of argument were advanced. In outline they were (1) that the retention of title clauses in the contracts, properly construed, constituted an ineffective attempt to constitute in the pursuers' favour a security over goods which remained in the possession of the first defenders and which were not those which were the subject of the contract; and (2) that by virtue of the feeding and husbandry which the first defenders had provided, the smolts which the pursuers had supplied had ceased to exist as such, and the salmon which were now in the defenders' possession had come into existence, and that by specificatio ownership of the nova species, the salmon, was vested in the first defenders.

The changes which smolts undergo in developing into salmon are the subject of a report by Professor Randolph Richards, the Director of the Institute of Aquaculture at the University of Stirling. In that report (No. 7/1 of process) the following points are made:

I did not understand the defenders to dispute the content of Professor Richards' report. They accept that in the biological sense smolts and adult salmon are of the same species, salmo salar. Their contention, rather, is that the physiological changes which smolts undergo in becoming mature salmon are sufficient to support the conclusion that the adult salmon are a nova species in the legal sense.

In opening the submissions in support of the defenders' first line of argument, Mrs Swanson referred to Armour v Edelstahlwerke AG 1990 S.L.T. 891, in which the House of Lords rejected the view that a retention of title clause constituted an invalid attempt to create a security over moveables without transfer of possession and was on that account ineffective. She referred first to the following passage in the speech of Lord Jauncey of Tullichettle (at 895K-896G):

Mrs Swanson also cited the following passage from the speech of Lord Keith of Kinkel (at 895C-E):

The "general rule" to which Lord Keith referred is to be found formulated in a passage quoted earlier in his speech (at 894E) from Gloag and Irvine on The Law of Rights in Security, page 188:

and at page 189:

Against that background of authority Mrs Swanson submitted that, since the contracts in the present case clearly contemplated that the salmon would be grown to maturity in the possession of the first defenders and would thus increase substantially in size and in value, and would come to be different from the goods which the pursuers had supplied, Clause 11 strayed beyond the proper scope of a retention of title clause, and became instead an attempt to create a security over something other than the subjects of sale, but failed to do so because the salmon remained in the possession of the first defenders. Not only was there express recognition in the contracts of the fact that the smolts would be fed and husbanded by the first defenders and grow into mature salmon, but also it could be seen from the terms of the first paragraph of Clause 13 that the salmon would come to be the property of the first defenders. Not only the purported re-transfer of ownership to the pursuers in the events contemplated in that paragraph of Clause 13, but also the retention of title in clause 11, was invalid in its attempt to give the pursuers rights of ownership in or security over goods other than those supplied under the contracts.

The defenders' second line of argument was that, by the efforts and material provided by the first defenders in the form of feed for and husbandry of the smolts, there had been created a nova species, namely the mature salmon, which was irreducible to its constituent parts. By the doctrine of specificatio that nova species belonged to the first defenders. Mrs Swanson referred first to the Institutes of Justinian, II. i. 25:

Stair, in Institutions II, 1, 41, simply recorded the competing views and pointed out that positive law might, without injustice, follow any of these ways, provided reparation is made to the party who loses his interest. More positively, Erskine, Institute II, i, 16, adopted the middle opinion. Bell, having in Commentaries II, 295 castigated the middle opinion as " a rule as distant perhaps from plain sense, or any useful purpose, as the opinions which it professed to reconcile", came round in Principles § 1298 to the view that:

In support of the proposition that the view expressed in Bell's Principles has been adopted as the law of Scotland Mrs Swanson cited a number of cases (International Banking Corporation v Ferguson, Shaw & Sons 1910 SC 182, William McLaren, Son & Co Ltd v Mann, Byars & Co Ltd (1935) 51 Sh.Ct.Rep. 57, Armour v Thyssen Edelstahlwerke AG 1986 S.L.T. 452 at 458E-F (O.H.) and 1989 S.L.T. 182 at 188K and 190I (I.H.), North West Securities Limited v Barrhead Coachworks Limited 1976 SC 68, at 72). Wylie and Lochhead v Mitchell (1870) 8 M. 552 was not a case of specificatio (see per Lord President Inglis at 556). The adoption of the doctrine of specificatio in Scots law was correctly reflected in McDonald v Provan (of Scotland Street) Limited 1960 S.L.T. 231, although Lord President Clyde went too far in representing the doctrine as a wholly equitable one (cf. per Lord McDonald in North West Securities at 73).

In the present case, the goods that had been sold, the smolts, had ceased to exist as such. As a result of the first defenders' actings in feeding and husbanding the fish, something new - the salmon - had come into existence. Since the process could not be reversed, the new thing belonged to the first defenders. Mrs Swanson submitted further that the operation of the doctrine of specificatio could not be excluded by contract, and relied in support of that proposition on Zahnrad Fabrik Passau GmbH v Terex Ltd 1986 SLT 84, per Lord Davidson at 88K-L. The contractual provisions regulating the relationship between the pursuers and the first defenders as a matter of contract could not alter the fact that by virtue of the doctrine of specificatio property in the new things, the mature salmon, was vested in the first defenders.

Mr Cowie and Mr McNeill for the pursuers responded to the first branch of the defenders' argument by analysing the terms of the retention of title clause in the contracts. It was plain, they said, from Clause 11, that the intention of the parties to the contracts was that the fish supplied by the pursuers to the first defenders would remain the property of the pursuers until the price was paid in full, and that that would be so notwithstanding the growth of the fish in the meantime. The contract, however, recognised that a pure retention of title clause could operate unfairly when the goods gained in value with the passage of time. As Lord Keith pointed out in Armour v Thyssen at 895D, any growth in value belongs to the unpaid seller who has retained title to the goods. The contracts therefore addressed that unfairness by the provision in the second paragraph of Clause 13, which restricted the pursuers' right of repossession to an amount equal in value to the outstanding debt. Although the matter was not expressly developed, the effect of that provision would be that, once the pursuers had exercised their right to repossess to the extent permitted by Clause 13, the full price would fall to be treated as paid, and title to the remaining stock would transfer to the first defenders. There was nothing in that arrangement which went beyond the proper scope of a retention of title clause, or amounted to an invalid attempt to create a security. It was accepted that the first paragraph of Clause 13 did not make sense against the background of Clause 11. If Clause 11 took effect, the fish would remain the property of the pursuers until payment was made in full. There were therefore no circumstances in which the event contemplated in the first paragraph of Clause 13 - namely the re-transfer of property in fish which had not been paid for from the first defenders to the pursuers - could take place. The first paragraph of Clause 13 was thus of no effect. It could not by implication destroy the clear meaning of Clause 11. Clause 11 was thus a perfectly valid and effective retention of title clause. If, on the other hand, contrary to the pursuers' contention, the doctrine of specificatio overrode Clause 11, it was accepted that the first paragraph of Clause 13 would have been ineffective to transfer property back to the pursuers in the event which it contemplated.

The pursuers did not dispute that the doctrine of specificatio was part of the law of Scotland. Their response to the defenders' reliance on that doctrine came in two parts. In the first place, they denied that there had been in the circumstances the creation of a nova species. Secondly, they disputed the proposition that the doctrine of specificatio could not be displaced by contract.

On the first of these points, the pursuers' contention was that the goods which they had sold and over which they had retained title were still in existence in the possession of the defenders. Nothing new had been created. The fish which had been sold had grown to maturity, but were still the same entities as they had always been. The pursuers had sold to the first defenders 1.25 million fish of the species salmo salar. Those fish still existed in the possession of the defenders. They were older, more mature, larger and more valuable, but they were the same creatures as had originally been supplied. Specificatio, it was submitted, involved the destruction of the original materials and the creation of a new thing. It was concerned with a process of manufacture or creation, not the growth of a living creature. The growth and physiological change which the smolts had undergone in developing into mature salmon was a natural process which they could have undergone in the wild without human intervention. The approach both in the Roman law and in the institutional writers was to illustrate the rule rather than formulate a test for its application, and it was instructive that none of the examples referred to living creatures. Given the greater significance which animals had in everyday life at the time of those writings, the absence of any attempt to illustrate specificatio by reference to the growth of living creatures was a strong pointer to the inapplicability of the doctrine to such a case. The court should be slow to extend the doctrine to animate creatures. It was also instructive that the emphasis placed on value and market considerations by Lord Mayfield in Armour v Thyssen 1986 S.L.T. at 458H did not find favour in the Inner House (1989 S.L.T. at 188K and 190J).

On the second point, Mr McNeill submitted that in any event there was neither authority for nor principle in favour of the proposition that parties could not by contract regulate ownership of something which was to be created by one of them. The doctrine of specificatio was designed to resolve the question of ownership of the new thing where there was no arrangement between the provider of the materials and the provider of labour. If in the contract there was evidence that the parties had addressed the question of who should own the new thing created by the labour of one out of materials belonging to the other, there was no need to resort to the doctrine to find the owner of the new thing. Here the contract quite clearly contemplated that the pursuers would continue to own the fish until the price was paid, however much the fish might grow in the meantime.

It is, in my opinion, convenient to begin by considering what the parties to the contract agreed with regard to the passing of title to the fish supplied by the pursuers to the first defenders. It is, in my view, clear that it was agreed that title would not pass until the price was paid. Clause 11(a) is expressly to that effect. It is equally clear, and scarcely surprising, that the parties were alive to the fact that the fish would grow during the period while they were in the possession of the first defenders, but remained the property of the pursuers. Clause 11(d) places on the first defenders an obligation during that period to rear the fish "in accordance with good husbandry as applicable to the farming of salmon (sic) in Scotland". The last paragraph of Clause 11 expressly records the first defenders' acceptance that no amount of growth will prevent the operation of the condition or permit the buyer to claim that title has passed by such fact alone. Thus far, the terms on which the parties were agreed are clear. The first part of Clause 13 confuses the position. It provides that when fish which have not been paid for reach the weight of 1 kg they shall become the property of the seller. But if full effect is given to Clause 11, no fish which has not been paid for can have left the ownership of the seller. There can therefore be no question of such a fish, on reaching the weight of 1 kg becoming the property of the pursuers; such a fish has never ceased to be the property of the pursuers. The defenders sought to argue that it was implicit in that provision that the parties recognised that the doctrine of specificatio would take effect to confer on the first defenders ownership of the grown salmon, even if they had not been paid for (although they recognised that such a provision, as a purported retrocession of ownership without transfer of possession, would be ineffective). That argument cannot, in my view, be accepted. Standing the express terms of the last paragraph of Clause 11, there is in my view no room for an inference that the parties contemplated that specificatio would operate. The first paragraph of Clause 13 must in my view be regarded as a drafting blunder, making a provision (and an invalid provision at that) for an eventuality the occurrence of which had already been excluded. The remaining part of Clause 13 is, in my view, somewhat elliptical. It provides that the pursuers' rights to "repossession or recovery" shall be limited to "an amount equivalent to" the outstanding debt. That, it seems to me, operates as a restriction on the extent to which the pursuers may vindicate their retained right of property in the fish. The restriction mitigates the potential unfairness of the rule mentioned by Lord Keith in Armour v Thyssen that any increase in value belongs to the unpaid seller who has retained title to the goods. By restricting the pursuers' right to repossess the goods to an amount equivalent in value to the outstanding debt, Clause 13 ensures that the retention of title cannot be operated oppressively. What Clause 13 does not expressly address is the consequence, so far as title to the un-repossessed portion of the stock is concerned, of repossession up to the limit which it sets. In my opinion, however, Mr McNeill was correct in his submission that if the pursuers exercised their right of repossession up to the permitted limit and thus satisfied the outstanding debt, the price would then be paid, and the un-repossessed stock would pass into the ownership of the first defenders under Clause 11.

So far, I have been concerned simply to understand the language and apparent intention of the parties' contracts. I turn next to the defenders' contention that in the events which have happened the doctrine of specificatio operates to vest ownership of the mature salmon in the first defenders. I do not find it necessary to decide whether the defenders are right in their contention that the operation of specificatio cannot be excluded by contract (although I do not consider that what Lord Davidson said in Zahnrad Fabrik Passau GmbH v Terex Limited supports that proposition), or whether the pursuers are right, conversely, in their contention that specificatio only operates in default of the question of ownership of the new thing having been addressed by the parties. It is sufficient for the decision of this case that I am not satisfied that in the event there has been created a nova species in respect of which the doctrine of specificatio can operate. There was, in the end, no dispute between the parties that the doctrine of specificatio, as formulated in the media sententia referred to in the Institutes of Justinian, forms part of the law of Scotland. What was disputed was the applicability of that doctrine to the natural growth (albeit aided by nourishment and husbandry provided by man) of a living creature. There is, no doubt, a sense in which the smolts can be said no longer to exist. Certainly the process of their development into mature salmon is irreversible. But in my opinion the proper scope of the doctrine is in relation to inanimate objects or substances created by human effort out of materials which are used up and cease to exist in the process of creation. There is nothing in the authorities to suggest that the doctrine is applicable to the process of growth of living creatures. I find it instructive that the defenders were unable to refer me to any authority on such application. The examples in the writings on the subject contain no references to specificatio of growing animals. I consider that there is force in the submission that, having regard to the much greater importance of animals in daily life in former times (whether the times of the Roman writers or those of the Scottish institutional writers), the absence of such reference is a strong indication that the doctrine had no such application. There seems to me to be nothing peculiar to the development of salmon to make the doctrine more applicable to them than to other species. I am in the circumstances satisfied that it would be an unwarranted extension of the doctrine of specificatio to hold that a fish farmer who feeds and husbands large numbers of salmo salar while they develop from smolts into mature salmon creates a nova species ownership of which vests in him. On the contrary, I am satisfied that the mature salmon in the first defenders' cages are, as objects of ownership, the same things as the smolts which the pursuers supplied.

In these circumstances, there is in my view no good reason for denying effect to the pursuers' retention of title clause. If the salmon had indeed been a new thing separate and distinct from the smolt, it would have been necessary then to resolve the relationship between the doctrine of specificatio and the express terms of the parties' contracts. If that issue had been decided in the defenders favour, i.e had I held that specificatio took effect irrespective of the intentions of the parties to the sale as expressed in their contracts, there would have been force in the submission that the retention of title clause went beyond the proper scope of such a clause and should be regarded as an illegitimate attempt to transfer ownership of the new thing to the pursuers without delivery. In the event, however, that does not arise. The mere fact that the salmon are larger and more valuable than the smolts from which they have grown has, in my view, no adverse effect on the validity of the retention of title clause. Nor does the fact that, while retaining title, the pursuers have agreed to the restriction which Clause 13 places on the extent to which they may vindicate their ownership by recovery of possession. In my opinion, the retention of title clause is valid and effective and yields the result that the salmon presently (if the Ministry has not yet intervened) in the possession of the defenders remain the property of the pursuers.

As I have already indicated, I shall, having reached that conclusion on the disputed issue, put the case out By Order for discussion of future procedure in light of the Minister's intervention under the Regulations.