Scottish Court of Session Decisions

The pursuers were formerly proprietors of heritable property at the Bridge of Orchy Hotel, by Glencoe, Argyll. That property comprised (1) the hotel itself ("the hotel subjects") and (2) two areas of ground lying on the opposite side of the A82 road ("the development subjects"). On 19 March 1987 the pursuers, in consideration of certain advances made or to be made to them, granted in favour of the defenders a standard security over the whole property ("the security subjects"). The standard conditions specified in Schedule 3 to the Conveyancing and Feudal Reform (Scotland) Act 1970 ("the Act") were applied subject to certain variations which are for present purposes not material. The standard security was recorded in the General Register of Sasines on 9 April 1987.

In about 1991 the pursuers ran into financial and other difficulties. They endeavoured to sell the security subjects but did not succeed in doing so. In 1992, the pursuers having fallen into arrears with payments due to the defenders, the latter served various notices of default and calling-up notices on them. Legal proceedings for payment were instituted and decree passed. In March 1993 the defenders obtained decree of possession of the security subjects and thereafter took possession of them. In about April 1993 the defenders instructed estate agents to sell the security subjects. Certain steps were taken to market them. Instructions were subsequently given for their exposure to sale by public roup. An auction was held in December 1993 but no offers to purchase were then received. The defenders thereafter made an application under section 28 of the Act to the sheriff for a decree of foreclosure. That application was opposed and, for reasons which it is unnecessary to discuss, ultimately dismissed. In February 1996 the security subjects, under exclusion of a small area of ground which had meantime been sold by private bargain to a local authority, were again exposed to sale by public roup. They were sold at auction for £240,000 (the reserve price) to a company connected with the defenders.

In this action the pursuers sue the defenders for damages for alleged breach of the statutory duty imposed by section 25 of the Act on a creditor exercising his right to sell security subjects. Reliance is also placed on the common law. The pursuers aver an elaborate history of events from about 1989 until the ultimate sale in February 1996. In the course of that pleading they criticise the manner in which the subjects were marketed and brought to sale and the conduct of both auctions. Criticisms are directed at the defenders personally and at their agents, both the estate agents and the auctioneers, for whose acts and omissions the pursuers contend that the defenders are responsible. The case came before me at debate in respect of certain challenges by the defenders to the relevancy and specification of the pursuers' pleadings.

The procedural situation is unusual in that at the outset of the debate Mr Sellar for the defenders made clear that, the subjects having been sold by them to a company with which they were closely related, the defenders accepted that an onus of proof had been transferred to them. In particular it was conceded that in these circumstances it was for the defenders to establish that section 25 of the Act had been complied with. That concession proceeded on the basis that the circumstances of the present case were analogous to those discussed in Davidson v Scott 1915 S.C. 924 and in Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349. No express reference was made to the onus in respect of the case pled at common law but, having regard to the cases referred to, it seems plain that the same consideration would apply. Accordingly, it was accepted by Mr Sellar that a proof would require to be heard. Nonetheless, insofar as the pursuers sought to advance a positive case of breach of duty, as distinct from simply giving notice of such case as they would advance in response to the defenders' case, the pursuers' pleadings, he submitted, required to meet the standard of relevancy and specification appropriate to such a positive case. Insofar as particular averments or groups of averment failed to meet that standard, they fell to be excluded from probation. Reference was made to Gibson v B.I.C.C. & Co 1973 S.C. (H.L.) 15.

The principal criticisms made by Mr Sellar of the pursuers' pleadings may be summarised as follows. (1) The defenders as heritable creditors were entitled to sell the security subjects at a time of their own choosing (Dick v Clydesdale Bank plc 1991 S.L.T. 678, especially per Lord President Hope at pps. 681-2). That proposition was also consistent with the right of a mortgagee under English law (Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] 1 Ch. 949, especially per Salmon L.J. at pps. 965-6 and pp.968-9, cited with approval in Tse Kwong Lam v Wong Chit Sen, per Lord Templeman at p.1356). Reference was also made to A.I.B. Finance Ltd v Debtors [1997] 4 All. E.R. 677, per Carnwath J. at p.686 (reported on appeal at [1998] 2 All ER 929). This was subject only to the qualification that heritable creditors must do so in good faith. The observations of Lord Jauncey in Armstrong, Petitioner 1988 S.L.T. 255 at p.258 were to be read in their context and with proper regard to the words used (Halifax Building Society v Gupta 1994 S.L.T. 339 at pps.345-6). In these circumstances the pursuers' reliance on a valuation which, in respect of the exposure to sale in each of 1993 and 1996 proceeded upon open market values (which assumed a willing seller) and ignored forced sale values, was misconceived. The relative averments should be excluded from probation. (2) The pursuers' averments relative to the estate agents and to the auctioneers engaged by the defenders were irrelevant. A heritable creditor was, in the absence of exceptional circumstances, to be taken as having fulfilled his duties in that respect if he took and acted upon appropriate professional advice (Dick v Clydesdale Bank plc, per Lord President Hope at p.681). That was all in practical terms he could do. The analogy drawn in Dick with the position of a trustee was apt. A heritable creditor, no more than a trustee, was not vicariously liable for failures by reputedly competent professional advisers engaged by him. The decision to the contrary by the High Court of Australia in Commercial and General Acceptance Ltd v Nixon [1983] 152 C.L.R. 491 should not be followed. In any event, the pursuers' averments did not set out a relevant case of negligence either in respect of the estate agents or of the auctioneers. As regards the former, there were no relevant averments as to what a reasonably careful and skilful selling agent would have done or as to at what price it was contended the hotel subjects or the development subjects would have been sold by such an agent. The present pursuers' position was as theoretical as that of the pursuer in Dick v Clydesdale Bank plc. The actings of the estate agents had to be seen in the context of the defenders having decided in 1993 that the subjects should be sold and having instructed the agents to sell. Even if, as the pursuers averred, the disposal of a trading hotel by public auction was extremely unusual, it was necessary to bear in mind that the pursuers admitted that their own efforts (prior to the defenders taking possession) to sell the subjects by private bargain had been unsuccessful. It was unclear whether the pursuers' criticisms of the arrangements made prior to the first of the auctions were directed against both sets of agents or against only one of them. The criticisms of the actual conduct of the auctioneers at the second auction were likewise not supported by relevant averments. (3) The pursuers' case, insofar as resting on a criticism of the defenders' decision to proceed by public roup rather than by private bargain, was irrelevant. Under section 25 of the Act a heritable creditor had an unqualified right (subject only to the exercise of good faith) to choose which mode of sale to adopt. This was consistent both with his similar right to choose when to sell and

Mr Sellar also criticised as lacking in necessary specification two particular passages in the pursuers' pleadings and as fundamentally irrelevant an averment in the pursuers' condescendence of damage which posited an obligation to realise another security (a policy of assurance) held by them. I shall deal with these last matters first.

The first of these criticisms related to an averment by the pursuers that between February and March 1993 estate agents then acting for the pursuers had attracted "a number of interested parties" in circumstances where the asking price was at a particular level. It was argued that the lack of identification of these parties failed to give the defenders fair notice to enable them to investigate the matter. I reject this criticism. This issue was considered in the course of preliminary hearings in this action. It was then stated on behalf of the pursuers that the estate agents in question had provided the information reflected on averment but could not, due to the absence of records, now identify the parties in question. That remained the pursuers' position at debate, subject to the qualification that a particular individual (a Mr Mann) already referred to in the pleadings in this general connection, was one of the parties who had shown such an interest. On the basis of that explanation the pursuers have, in my view, given as fair notice as can reasonably be required of them. If the defenders wish to investigate the matter further, it will be open to them to seek appropriate precognition facilities and, if necessary, a commission to recover any relevant documents which do exist or to confirm that none do. The second criticism related to the pursuers' averment of an inference which the pursuers seek to draw from certain specified connections and relationships that the purchasers at the second auction must have come to know (in advance) of the reserve price. Mr Sellar submitted that it was not clear whether the pursuers were (1) seeking to attribute to the purchasers knowledge had by an officer of the defenders or had by their solicitors or (2) asserting that someone from the defenders or from their solicitors must actually have informed the purchasers of that reserve price. Mr Stewart, who appeared for the pursuers, stated that the pursuers were unable to improve on their existing averments on this matter. The position, in my view, is not wholly satisfactory but on balance I am satisfied that the defenders are not unfairly prejudiced by the somewhat ambiguous terms of the averment under attack. The critical information in this respect is with the defenders or with those with whom they are associated. The pursuers cannot reasonably be expected to confine to a particular mechanism the inference which they seek to draw from the connections and relationships referred to.

In support of his attack on the relevancy of the pursuers' averments relative to the failure to realise the policy of assurance, Mr Sellar referred to China and South Sea Bank v Tan Soon Gin [1990] 1 AC 536, especially per Lord Templeman at p.545. Mr Stewart submitted that the creditor was bound to attribute the value of the collateral security to the debt. He did not suggest that the propositions stated by Lord Templeman were inapplicable to Scots law. It is plain in my view that the defenders were entitled to realise or to retain the policy of assurance as they saw fit. They were under no duty to the pursuers to realise it at any particular time. As the averments in question are directed to the calculation of the principal sum on which interest would run (the pursuers' proposition being that the defenders ought at some time in the past to have realised the policy and applied its proceeds to reduce that sum) they are irrelevant and fall to be excluded from probation.

I turn now to the principal criticisms made by Mr Sellar. It is a speciality of this case that, having regard to the relationship between the pursuers and the purchaser of the security subjects, the onus of proof is, as the defenders acknowledge, at least in large measure shifted to them. They must prove that they duly fulfilled their obligations under section 25 of the Act and, insofar as they may separately exist, their analogous duties at common law. Mr Sellar, as I understood him, was prepared to accept that a less strict test of relevancy would fall to be applied to the pursuers' averments if they were understood simply as giving notice of what might be urged in response to the defenders' case than if they were intended to support positive breaches of duty. Mr Stewart was not prepared to accept that the pursuers' averments should be viewed solely as such a response. In my view, a proof being required in any event, it would be inappropriate, subject to any question of fair notice, to exclude from probation averments which could be relevant in answer to the defenders' case, even if the same averments might be insufficient to support a positive case by the pursuers. Gibson v B.I.C.C. & Co, on which Mr Sellar relied, was a case decided after proof before answer. Lord Kilbrandon at p.36 observed that, if a pursuer wished to lead evidence about a certain safety measure which he contended had been neglected, he must "specify that neglect as part of his grounds of fault", albeit the onus was on the defender to prove that he had made the working place as safe as was reasonably practicable. That observation, in my view, simply reflects, in the circumstances of that case, the general proposition that if, where the onus of proof rests on one party, the other party wishes to adduce from his own or his opponent's witnesses evidence of some particular failure, he must give fair notice of his intention to do so. It does not justify, in a case such as the present, a more rigorous scrutiny of the pursuers' averments in relation to any positive case than would be appropriate in relation to a response to the defenders' case. In the end the court will require to decide on the basis of the whole evidence before it whether the defenders did or did not comply with the duties incumbent on them. Insofar as a question may then arise as to the discharge of any onus of proof, that question will be addressed against the evidence in fact adduced. Provided fair notice has been given of matters to be proved, it does not matter, in my view, whether it is done as part of a positive allegation of fault or as a rebuttal of an allegation of due performance.

Section 25 of the Act provides:

As regards Mr Sellar's principal criticism (1), the report relied on by the pursuers expresses a view as to the open market value of the development subjects as at March 1993 and as at January 1996. (These dates do not correlate exactly with the dates of the auctions but no point was taken in that respect). The valuer proceeds upon the hypothesis that both parties to the relative hypothetical transactions would have acted knowledgeably, prudently and without compulsion. His valuation is not, as he states, on a "forced sale" basis, which he explains as meaning one whereby an unreasonable time limit or restriction is applied to the sale. The pursuers' criticism of the actings of the defenders or their agents is that they failed to take all reasonable steps to ensure that the price at which the security subjects (including the development subjects) were sold was the best that could be reasonably obtained. The criticisms include failure to market the development subjects separately from the hotel subjects, failure to advertise them appropriately, failure to follow up the interests of potential purchasers and failure to make arrangements relative to the auctions such as would maximise the prospects of securing bids or higher bids from willing purchasers. At the time of each auction the defenders were, at least in one sense, willing sellers. On each occasion they voluntarily caused the subjects to be exposed for sale. There is no suggestion that the defenders were subject to any external constraints in relation to the time selected by them or in relation to the circumstances of either auction. In Dick v Clydesdale Bank plc Lord President Hope observed -

The source of that proposition is not given by the Lord President, thought it may owe something to English authority. Some of the older Scottish authorities (for example, Kerr v McArthur's Trs. (1848) 11 D. 301, especially per Lord Mackenzie at p.302 and Stewart v Brown (1882) 10 R. 192, especially per Lord President Inglis at p.203), to which no reference was made in Dick, tend to suggest that a heritable creditor was, at least under the pre-1970 law, not wholly unfettered in relation to his choice of time to sell. Be that as it may, the defenders in fact chose to expose the security subjects for sale in December 1993 and again in February 1996. If it appears that all reasonable steps were not in fact taken at those times to ensure that the price at which the relevant subjects were sold was the best that could reasonably be obtained, the issue will then be at what price they would probably have been sold if the omitted steps had been taken. The open market value at the relevant times is, in my view, at least a starting point for determination of that issue. I cannot hold that it is irrelevant. It is not in the circumstances figured a purely theoretical hope value, the basis on which the pursuers' action in Dick was dismissed as irrelevant.

In response to Mr Sellar's principal contention (2), Mr Stewart submitted that the duty imposed on a heritable creditor by section 25 could not be avoided by delegation to an employee or agent. He relied on Commercial and General Acceptance Ltd v Nixon to which the Inner House had not been referred in Dick. He also referred to Cuckmere Brick Co Ltd v Mutual Finance Ltd especially per Cross L.J. at p.973 for the distinction drawn in English law between a mortgagee and a trustee. There was, he submitted, nothing in Dick v Clydesdale Bank plc to prevent this court being persuaded to follow Commercial and General Acceptance Ltd v Nixon.

In Dick the Lord President said at p.681:

That last observation was obiter there being no criticism in that case of the creditor's choice of professional advisers. It is also distinguishable in that it was concerned with a situation in which the creditor's own acts, not those of any professional adviser, were in issue. It is further qualified by the reference to "in the ordinary case".

In Commercial and General Acceptance v Nixon the High Court of Australia had to construe section 85(1) of the Property Law Act 1974 - 1976 (Q.) which provided:

The appellant, which was a mortgagee in possession, had exercised its power of sale and employed a firm of real estate agents to conduct the sale by auction. The advertisement of the sale, which had been left to the agents to arrange, was deficient in a number of respects leading to the property being sold at an undervalue.

Gibbs C.J. observed at p.495:

The Chief Justice also accepted as sound the view of Cross L.J. in Cuckmere Brick Co v Mutual Finance Limited at p.973 that the position of a mortgagee was quite different from that of a trustee.

Mason J., concurring, observed at p.503:

He also declined to equiparate the position of a mortgagee with that of a trustee. He further observed at p.505:

The other judges (who included Brennan J.) also concurred. Brennan J. said at pps.524-5:

So far as drawn to my attention, the effect of a failure of an agent of a heritable creditor to perform tasks entrusted to him relative to a sale has never been the subject of express decision in Scotland, whether by reference to section 25 or otherwise. An analogy between the position of a heritable creditor and a trustee has sometimes, it is true, been drawn. Professor Halliday in The Conveyancing and Feudal Reform (Scotland) Act 1970 (2^nd Edition) at para.5-11, under reference to the older authorities, comments in relation to section 35(1) of the Act (which makes in respect of a bond and disposition in security analogous provisions to those in section 25 relative to a standard security) - "It may be regarded as broadly stating the existing principle that a heritable creditor in exercising his power of sale is in the position of a quasi-trustee for the debtor". Lord President Hope refers to this comment in Dick v Clydesdale Bank plc. Some of the older authorities lend support to the analogy. In Beveridge v Wilson (1829) 7 S. 279 the consulted judges at p.281 observed:

(See also Rimmer and Another v Thomas Usher & Son Ltd, per Lord Thomson at p.8). However, none of these observations was made in the context of a discussion as to whether failures by an agent charged by a heritable creditor with the carrying through of a sale were to be imputed to his principal. The notion of a "quasi-trustee" (which is to be distinguished from a trustee proper) may have its place to reflect the obligations owed by the creditor to his debtor. But the analogy should not, in my view, be taken too far. The reasoning of the Australian judges, albeit directed to a statute in slightly different terms, is very persuasive. I prefer the approach indicated there (that the duty remains throughout on the creditor to secure the statutory result) to that indicated in the pursuers' pleadings (that the defenders are vicariously liable for the failures of their agents). The appropriate analysis at common law may be otherwise. Although something may turn on the particular circumstances as disclosed in the evidence, it would be inappropriate in my judgment to exclude averments in this case from probation on the ground that the obligations of a heritable creditor in relation to the marketing and sale of the subjects are even in ordinary circumstances wholly discharged by his appointing reputedly competent professional advisers to carry through such tasks.

Mr Sellar also criticised the specification of the averments directed against failures by the estate agents and by the auctioneers. In my view these averments are sufficiently specific to warrant inquiry into them. This is not an action of professional negligence directed against either of the agents. While the practice of estate agents and of auctioneers may be relevant to the issue whether the creditor's statutory obligation has been fulfilled, the ultimate question is whether all reasonable steps were taken to ensure that the price at which the security subjects were sold was the best that could be reasonably obtained. The pursuers have averred a series of detailed criticisms of what was done and what was not done in bringing the subjects to sale. These, in my view, give sufficient notice of the pursuers' complaints in that respect and are relevant for inquiry. It is true that the pursuers' averments relative to the causation of the quantum of the loss they claim are somewhat broadly expressed. But that is perhaps inevitable given the range of criticisms some although not all of which may in the end be made out. In this respect also the defenders have in my view been given sufficient notice of the case made against them. There is an adequate basis on averment for the proposition that an enhanced price or prices were in fact reasonably capable of being obtained in the market at the times of exposure to sale.

In response to Mr Sellar's principal contention (3) Mr Stewart relied on Rimmer and Another v Thomas Usher & Son Ltd. In that case the creditors held the security subjects on an ex facie absolute disposition subject to a back letter which entitled them to sell the subjects "either by public roup or private bargain with or without advertisement or other intimation and that at such price in such lot or lots and on such terms and conditions as they may think proper". The creditors had sold the subject by private bargain without advertisement to a third party, with whom they had made an advantageous continuing business arrangement, at a price which, it was averred, they knew was far less than what could have been obtained in the open market. Lord Thomson identified the broad question of law as being "whether an agreement in the terms above quoted between the debtor and the ex facie absolute disponee relieves the latter when exercising his power of sale of his common law obligation to act fairly and with due regard to the debtor's interests." He in effect answered that question in the negative.

The present question turns not upon the effect of any private agreement but on the construction of section 25 of the Act. There is some force in the distinction which Mr Sellar draws between the choice (indicated by the word "may") conferred on the creditor in the first part of the section and the duty imposed on him in the second. However, Mr Sellar acknowledged that that choice was not wholly unfettered. It is subject to the exercise of good faith. Mr Sellar also, as I understood him, acknowledged that it was subject to the power to choose the method of sale being exercised for the purpose for which it was granted. The purpose for which that power was granted is not difficult to identify. It was to allow of maximisation of the sale price, it being recognised that the older procedure which required sale by public roup was not in modern circumstances best designed to achieve that objective. In these circumstances the pursuers' offer to prove that the disposal of a trading hotel by public auction in 1993 and in 1996 was "extremely unusual" is not, in my view, so plainly irrelevant that it would be appropriate to deny to them the opportunity of proving it. Even where no question of bad faith arises in relation to the choice made (and none is suggested here), there may be circumstances in which a particular choice of mode of sale is so bizarre as to be outwith the power of selection conferred on the creditor.

In the whole circumstances I shall exclude from probation the pursuers' averments in Article 9 of the summons from "The defenders had an assignation..." to "...reducing the said debt". Quoad ultra I shall allow to parties a proof before answer. The case will be put out By Order for discussion of further procedure in that respect.