Scottish Court of Session Decisions

[1] In this commercial action, the Lord Ordinary, by interlocutor of 11 March 1998, allowed the parties a Proof before Answer of their respective averments, and appointed the action to be put out By Order on 30 March 1998. In this reclaiming motion, the second defenders and reclaimers, Svenska Handelsbanken, submit that their first plea-in-law, a plea to the relevancy of the pursuers' averments, should be sustained, and the action dismissed. The pursuers, The Norwich Union Life Insurance Society, submit that the reclaiming motion should be refused; but in addition, they have a cross-appeal, in terms of which they contend that the second defenders have no title or interest to resist the conclusion for rectification. (They do not contend that there is a lack of title or interest to resist the other conclusions). The second defenders ask that the cross-appeal be refused. The first defenders, Tanap Investments VK Limited (in liquidation), do not appear.

[2] The pursuers have two substantive conclusions. By the first, they seek rectification of certain Minutes of Agreement between themselves and the first defenders, in the manner specified in a Scheme of Rectification annexed to the summons. In terms of their second conclusion, they seek declarator that the preference in ranking of a standard security granted by the first defenders in favour of the pursuers, over another standard security granted by the first defenders in favour of the second defenders, extends to all sums due by the first defenders to the pursuers under one of the Minutes of Agreement referred to in the first conclusion.

[3] The basis for the application for rectification is to be found in the Law Reform (Miscellaneous Provisions)(Scotland) Act 1985, section 8. Supplementary provisions are to be found in section 9. It is convenient, before turning to the pleadings and submissions in the present case, to set out those provisions of these two sections which are most in point. In particular,

[4] In 1988, Tanap owned a property known as Douglas House, in Waterloo Street, Glasgow. By a letter of 12 July 1988, Norwich offered to lend Tanap £3.3m, and by a docquet of 15 July Tanap accepted. That agreement envisaged that the loan would be released in two instalments. A variation was agreed, and confirmed by a further letter from Norwich of 17 August. This provided that the loan would be released in three instalments of £900,000, £1.29m. and £1.11m. Tanap confirmed their acceptance of the variation by a docquet of 19 August.

[5] These relatively informal communings form the context and background of certain more formal documents - a standard security granted by Tanap in favour of Norwich, and three Minutes of Agreement. Tanap executed the standard security on 16 August 1988. They executed the first of the three agreements on the same day, and Norwich executed it on 9 September 1988. These documents were prepared by a single firm of solicitors acting on behalf of both parties. The standard security was granted over Douglas House, and provided that it was in security of all sums of money due and that might become due to Norwich by Tanap "in terms of Minute of Agreement granted by us in favour of the Society dated of even date with our execution hereof and subsequent date and any variation, extension, renewal, replacement or alteration thereof." It thus provided security for sums of money that were or might become due not only in terms of the first agreement itself, but also in terms of any document which fell within the described category of variation, extension etc.

[6] Whatever either party may have intended prior to or at the time of the execution of the first agreement or the standard security, and whatever either of them thought had been achieved in advance of, or was being achieved by, execution of the second or third agreement, it has already been held judicially that these two subsequent Minutes of Agreement are not such variations etc. of the first Minute of Agreement. Any sums becoming due in terms of the second and third agreements are thus, as matters stand, not secured by the standard security. It is these two agreements which Norwich seek to have "rectified" in terms of their first conclusion. And, putting the matter shortly, the alterations to these agreements, contained in the Scheme of Rectification, are designed to turn these two agreements into variations and extensions of the first agreement, so that advances made in terms of the later two agreements are secured by the standard security. Even if that were achieved, a question of ranking would remain, between the security thus created in respect of the loan made under the third agreement, and the security granted by Tanap in favour of the second defenders. That issue would depend upon questions of fact, and may be left aside for the moment. The issues which arise at this stage are the reclaimers' contention that the application should be dismissed, on the ground that there is no basis in the pleadings for allowing rectification, and the respondents' contention that the reclaimers have no title or interest to resist rectification.

[7] It will be convenient to refer to the three Minutes of Agreement as A1, A2 and A3. On behalf of the reclaimers, it was submitted that rectification of A2 and A3 in the manner proposed would only be legitimate if the pursuers averred a prior agreement that A2 and A3 were to be variations or extensions of A1. In terms of section 8 of the 1985 Act, one was concerned with "a document intended to express or to give effect to an agreement". It would not be enough, for example, to show that the two parties had the same intention: there had to be an agreement. Reference was made to Shaw v. William Grant (Minerals) Limited 1989 S.L.T. 121, and George Thompson Services Limited v. Moore 1993 S.L.T. 634, and also to Bank of Scotland v. Brunswick Developments (1987) Limited 1999 S.C. (H.L.) 53, Lord Clyde at page 59B-C. One had to know the original agreed intention, and that could only be discovered from what had been expressed in the original agreement. It was accepted that it might be appropriate to look at the surrounding facts and circumstances, or factual matrix, in which that agreement had been reached. But it was important to bear in mind that any reference to such facts and circumstances or matrix was for the purpose of interpreting the intention expressed in the actual agreement. Reference was made to Rehman v. Ahmad 1993 S.L.T. 741, and to Huewind Limited v. Clydesdale Bank plc 1995 S.L.T. 392 and 1996 S.L.T. 369. If the original agreement, properly construed, did not cover some particular matter, so that it was unagreed, there would be no "common intention" of the parties to the essential agreement in that respect, and correspondingly there could be no failure to express such an intention accurately, and there would be no scope for rectification in order to give effect to that intention.

[8] In submitting that the pursuers' averments were irrelevant, counsel for the second defenders and reclaimers took as his starting point the scheme of rectification. The pursuers' position was evident from the scheme: they were saying that, but for a failure to express the parties' common intention accurately, A2 and A3 would have been variations or extensions of A1. A2 and A3 were documents intended to express or give effect to an agreement, and the pursuer was claiming that they failed to express accurately the common intention of the parties to the agreement, in as much as these documents failed to make them variations or extensions of A1. But their pleadings revealed no prior agreement expressing any such common intention.

[9] The pursuers found upon the original agreement in July 1988, and its variation in August, with a total loan of £3.3m., to be released in three instalments. The letter of 12 July 1988, after specifying the amount of the loan as £3.3m., provides for security by way of a first mortgage of Douglas House. While the pursuers aver that A1 "narrated that the first instalment of £900,000" had been made, A1 does not in fact treat that sum as an "instalment" of the £3.3m. mentioned in the earlier correspondence. Similarly, the pursuers aver that the "second instalment" of £1.29m. was paid on or about 13 October 1988, but A2, dealing with the agreement to lend £1.29m., does not treat it as an instalment of any larger loan. And while there is a definition of "the standard security" as being the standard security granted by Tanap in favour of Norwich "over the security subjects" dated 16 August and registered on 23 September 1988, the security subjects being identified as Douglas House, the only substantive provision in this respect is a bald statement that the debtor has granted the standard security. Similarly, the pursuers aver that the third "instalment" of £1.11m. was paid in April 1991, but A3 does not in fact treat it as an instalment of a larger loan, and like A2, although in rather different terms, assumes rather than provides that the standard security will be security for this particular loan.

[10] The pursuers aver that A2 and A3 failed to express accurately the common intention of the pursuers and first defenders. They make the following averments:

Reference is then made to the averments concerning the original correspondence. Condescendence 6 continues as follows:

[11] Counsel for the second defenders and reclaimers submitted that the parties' common intention at the time when A2 and A3 were executed was not in point. What mattered was the common intention of the parties at the date of (and expressed in) the original agreement; and at least initially, the passages quoted from Condescendence 6 suggested that the pursuers were taking that original agreement to be contained in the letters of July and August 1988. While the standard security provided for extension or variation, the averment that it "envisaged" that A1 would be extended or varied by subsequent agreements when further "instalments" were drawn down had no foundation in the standard security's terms. The pleadings did not reveal the date at which it was allegedly "envisaged" that the whole loan would be advanced under a series of agreements. And while it was true that A2 and A3 referred back to the standard security, they did not refer back to A1. Equally, A1 expressed no intention that there would be extension or variation, in the form of A2 and A3 or otherwise. The correspondence of July and August thus contained no suggestion that there would be three separate agreements, far less that the second and third would be variations or extensions of the first. And if (although the pleadings did not show this) the pursuers were relying upon A1 (rather than or together with the earlier communings) as the prior agreement in which a common intention could be found, it was to be noted that A1 contained no indication that further agreements were envisaged, far less that they would be variations or extensions of A1 itself. The course that had in fact been adopted, in so far as there might be any departure from what was contained in the July and August communings, might in any event represent some intentionally new approach, rather than a badly expressed effort at repeating or expressing the original intention of a single loan, with a single security, being released at a series of different dates. One could not infer from the inefficacy of A2 and A3 in relation to security that there had been an agreed common intention at the relevant earlier dates to effect A2 and A3 as extensions or variations of A1. One could see that A2 and A3 had been bungled. But section 8 of the 1985 Act was not intended to transform bungled documents into documents which achieved some particular end, in circumstances where there had not been a prior agreement, expressing a common intention, which the document failed to express accurately.

[12] In reply counsel for the pursuers and respondents pointed out the extent to which A1, A2 and A3 together covered the same ground and achieved the same purposes as were to be seen in the original facility letters. Much of the detail was identical, and in so far as one found provisions in the three agreements which were not to be found in the facility letters, these, like the greater degree of formality, were precisely the type of provisions which facility letters envisaged could and would be dealt with in subsequent more formal contracts. Overall, it was clear that one had the section 8 situation of documents which were intended to express or to give effect to an earlier agreement, which was to be found in the facility letters. That being so it was important to note that there was originally an expressed common intention that there should be security for the whole £3.3m. which was to be lent, and that this would be achieved by a single mortgage over Douglas House. Working forward from that original intention of a single standard security, the execution of A1 involved no departure from, or failure to express, that common intention. But it narrowed down the possibilities, since the execution of A1 and the standard security meant that the original and abiding intention of one security to cover all instalments could only be put into effect by ensuring that subsequent agreements, regulating subsequent instalments, would have to fall into the defined category identified in the standard security, of variations, extension etc. The documents A2 and A3, which were not expressed as variations or extensions of A1, thus failed to express accurately the common intention that the subsequent instalments be secured by a single standard security along with the original instalment, which they could have done by being expressed as variations or extensions of A1. It was clear from the terms of A2 and A3, with the references to the original standard security and the absence of any new security, that they were intended, albeit ineffectually, to give effect to this original and abiding intention. Their failure to do so was precisely the type of failure for which section 8 of the 1985 Act provided a remedy by rectification. While Condescendence 6 might have been expressed more clearly, it was plain enough that it was setting out these propositions. The original common intention in the facility letters would naturally not contain all the details of any precise mechanism of security. It would not really matter whether the security might be achieved by one document or three. But it would be inconsistent with the intention expressed in the facility letters to have adopted three separate standard securities: the expressed intention was to have one, and that was what A2 and A3 failed to express or achieve. The conversion of A2 and A3 into variations or extensions of A1 was not just a device to achieve the security which the pursuers obviously wanted. It was truly rectification - replacing a defective provision by provisions which achieved the original intention of a single standard security for all instalments, in the only way, and the very way, which the execution of A1 and the standard security allowed for. The problem and the solution fitted the statutory provisions, and were consistent with what was said in the cases cited by the second defenders and reclaimers, and with such cases as Bank of Scotland v. Graham's Trustee 1992 S.C. 79 and Belhaven Brewery Company Limited v. Swift 1996 S.L.T. (Sh. Ct.) 127, the sheriff principal at page 130K-L.

[13] We are not persuaded that the pleadings of the pursuers and respondents are so defective as to justify dismissal at this stage. Where an initial agreement takes the familiar form of a facility letter or relatively informal communings between parties, the common intention of the parties at that date may, and indeed usually will, be quite broadly expressed, part of the intention (express or implied) being that the document or documents which are in due course to give effect to the agreement will, possibly from a range of available mechanisms, provide for a particular mechanism as a means of giving effect to the original agreement and the common intention of the parties to it at its date. An additional degree of complexity will be introduced where, as here, after execution of a formal agreement and a standard security, there is a reduction in the number of possible ways of expressing or giving effect to the original agreement, and so expressing accurately the common intention of the parties at its date. If a subsequent document fails to adopt what is by then perhaps the only means of achieving the original common intention, rectification may be justified to the effect of re-expressing the document in terms of such particular means, even although the original common intention was a broader one, which at earlier stages might have been achieved by a number of means. While it was suggested that in this case nothing would be achieved by proof, and that everything turned on the documents, we are not persuaded that that is necessarily so. While one is concerned with a common intention expressed in an agreement, it appears to us that the surrounding facts and circumstances might well throw light upon that common intention, particularly having regard to the close relationship in time between the facility letter, variation and docquets on the one hand, and A1 and the standard security on the other. It may also be of some importance in this case that a single firm of solicitors acted for both parties in the preparation of the formal documents. Their role, including their part in the selection of mechanisms (with or without reference to their two clients) might cast light on whether or not the actual documentation accurately reflected an intention which was both common to the clients and abiding throughout the stages of the transactions. We are satisfied that Proof before Answer is appropriate, leaving it to the Lord Ordinary to regulate the scope of the proof.

[14] We turn to the cross-appeal. Section 9(2) of the 1985 Act identifies the category of person to whom the section applies, although subsection (3) excludes from that category certain persons who would otherwise fall within it. Put broadly, the section applies to a person where there has been reliance on the terms of the document in question with the result that that person's position has been materially affected. If there is such a person, section 9(1) provides substantial protection for him: rectification will only be ordered if his interests would not be adversely affected to a material extent or if he has consented. The second defenders and reclaimers previously attempted, in their pleadings and in particular their original fourth plea-in-law, to resist rectification on the basis that they were persons to whom section 9 applied. That is no longer their position, and their fourth plea-in-law does not now rely on section 9. It is now simply to the effect that the defenders being adversely affected by the proposed rectification, decree of rectification should be refused. Put shortly, they assert a general title and interest to resist rectification, whereas the pursuers and respondents contend that only a person to whom section 9 applies has title and interest to oppose rectification.

[15] Ignoring section 9 for the moment, it is to be noted that section 8 requires the applicant to satisfy the court of various matters if the court's discretion to order rectification is to be exercised. The need to satisfy the court would thus exist, regardless of whether there was any opposition from any other party. Apart from section 9, it is not suggested that the 1985 Act deals in any way with the question of who would have title or interest to resist rectification; and provided the court is satisfied on the specified matters, section 8 itself gives no indication as to what might justify refusal. But the fact that rectification would alter the terms of an existing document, and in particular the fact that section 8(4) provides for the document rectified to have effect as if it had always been so rectified, shows that it might, in some circumstances, have some adverse effect upon the interests of third parties. A rectification which has the consequence of creating a security which would not otherwise have existed is an obvious example of such a possible adverse effect upon the interests of others. In the absence of any statutory provision altering the position at common law, averment of such an adverse effect would, according to the contentions of the second defenders, constitute a sufficient averment of interest and consequential title for their being allowed to enter the process as defenders. And having done so, one would expect them to be entitled to urge refusal not only on the basis of adverse effect, but upon the basis that the court should not be satisfied on the specified matters. Put shortly, their contention is that the existence of section 9 does not alter that position, although section 9 confers certain more specific rights on specific persons in specific circumstances. That being so, they would be entitled not merely to argue that their fourth plea-in-law should be sustained, and rectification refused because of its adverse effect on them, but also to be party to the primary issue as to whether the court should be satisfied on the required matters under section 8, joining issue as to whether those facts were established.

[16] The cross-appeal by the pursuers and respondents is to the effect that this amended fourth plea-in-law is ill-founded: it is not enough for a defender to say that he would be adversely affected - he must bring himself within the category of persons to whom section 9 applies, and if he cannot do so (as the second defenders now accept they can not) then he lacks title and interest to defend. The cross-appeal should therefore be allowed, and the second defenders' fourth plea should be repelled.

[17] In support of the cross-appeal, the fundamental submission on behalf of the pursuers and respondents was that sections 8 and 9 together brought into force a new code, governing the matter of rectification. Within that code, section 9 dealt with the question of who should be protected, and in what circumstances, when an applicant was otherwise in a position to satisfy the court that rectification could properly be granted. Before considering the arguments in favour of this fundamental view of the relationship between sections 8 and 9, we should note that counsel for the pursuers and respondents apparently accepted that if section 9 did not exist, the effect of section 8 would be that which we have already described, with any party who wished to resist rectification being entitled to do so if they could show title and interest according to the ordinary rules which apply at common law. The submission that in relation to rectification of documents a person detrimentally affected would not be protected by the law from this harm to his interests depended entirely upon the fact that section 8(1) was expressly subject to section 9, and that apart from the protective measures found in section 9, the court's discretion in terms of section 8(1), to order the document to be rectified, existed without any restraint referable to adverse effects upon the interests of others, or prejudice to those interests. Persons who were or might be thus adversely affected had in effect been excluded by statute from a right to resist the granting of a court decree, which they would otherwise have had. The argument was not one about what ought or ought not to be the position. It was an argument as to the meaning and effect of these specific statutory provisions. At least in its primary form, the submission was to the effect that if a party was not a person to whom section 9 applied they would not merely be excluded from the protection afforded by that section, but would also lose any right to put the applicants to proof of the required matters upon which the court has to be satisfied in terms of section 8, even if they had an interest which, at common law, would have entitled them to join issue upon that matter.

[18] In support of the cross-appeal, counsel for the pursuers and respondents submitted that if one read the two sections together as a code, it was clear that section 9 showed the situations in which rectification should not be granted, even if the applicant could satisfy the court on the required matters under section 8. It was thus exhaustive of the issues that could be raised in counter-argument, and of the parties entitled to raise such issues. It was true that in terms of section 8, the applicant had to satisfy the court on certain matters. But those were questions for the court, and not for third parties. The protection of third parties was dealt with by section 9; and the proposition that it defined the full scope of third party rights of intervention was supported by the terms of the Scottish Law Commission Report on Rectification of Contractual and other Documents (Scot. Law Com. No. 79), in particular at Part VI, Protection of Third Party Interests, which showed that such protection, and any right of intervention, was intentionally limited to persons of the type identified in section 9. Moreover, the second defenders' pleadings revealed no relevant case of title and interest. Not merely were their averments insufficient to bring them within section 9. Their averments, which were somewhat confused as a result of partial deletion, still contained averments designed to support the argument that they fell within section 9. But they were simply irrelevant, since the defenders were not within that section.

[19] In reply, and in asking that the cross-appeal be refused, counsel for the second defenders and reclaimers submitted that their pleadings demonstrated clear title and interest. The language of sections 8 and 9 did not come close to depriving a person with a clear patrimonial interest in the outcome of the proceedings of his interest as a defender. One was not concerned with complex issues of reliance, such as were involved in bringing oneself within section 9. The mere fact that one would be detrimentally affected by rectification was sufficient to give interest and title (a) to put the applicants to proof on the matters upon which they had to satisfy the court in terms of section 8, and to join issue in relation to those matters; and (b) to put evidence before the court of the potential detrimental effect, not only because that detrimental effect might lead the court to refuse to exercise its discretion under section 8, but as the basis of the defenders' title both in that respect and on the prior issue of whether the court should be satisfied upon the specified matters. The detriment might be sufficient for this latter purpose, even if it was not so great as to be a positive ground for refusal of rectification, as a matter of discretion. The question was not whether such a defender could identify a basis for refusal. In the first instance all he had to do was show a sufficient interest, so that he would have title to participate as a defender in the primary exercise, when the applicant tried to satisfy the court under section 8.

[20] While analogies were drawn with a number of other situations in which a party may be entitled to participate upon issues in which he is not primarily concerned, if he has an interest in the outcome of an action, and while a number of background matters were mentioned by each party, we do not find it necessary to refer to these in more detail. Proof is inevitable upon the matters specified in section 8(1)(a), being matters which are a pre-requisite to the exercise of the statutory discretion. If the pursuers were unsuccessful in that respect, other matters which might justify refusal would be academic. But if these matters can be established, it does not appear to us that possible adverse effect on the defenders can be seen as an academic matter: it is something which might lead the court to wish to refuse rectification in terms of its discretion under section 8. Unless the defenders are debarred by section 9 from drawing possible adverse effect upon them to the court's attention, and putting that matter in issue, it appears clear to us that they have the appropriate interest and title to take part in proof upon that matter, and that their interest would also be such that they would have title to take part as defenders in any proof upon the prior matter relating to section 8(1)(a). There was some suggestion that proof upon that matter might take place with no defender participating, with a subsequent proof in which the second defenders could participate upon the question of whether the detriment to them provided a possible reason for refusal. That appears to us to be procedurally unacceptable; but in any event, while it may well be a matter of degree, potential detriment could in our opinion provide a natural basis of interest and title for a party who wished to take issue with the pursuers as to whether the court should be satisfied on the specified matters. While statutory protections of the broad type contained in section 9 might in some circumstances be intended by Parliament to be exhaustive, with an express or implied removal of a third party's normal right to defend his patrimonial interests where those would be directly affected by a decree of the court, we are satisfied that removal of rights in this way would require either express provision or very clear implication. There is no express provision. And the type of provisions made in section 9 do not appear to us to be so closely related to either of the two issues in respect of which the defenders assert an interest as to justify any such implication. The eventual position will no doubt depend on what emerges at proof, and we are satisfied that a proof before answer upon the whole matter is the appropriate procedure in this case.

[21] In the whole circumstances we refuse the reclaiming motion and refuse the cross-appeal, allowing a proof before answer with all pleas standing. We remit the matter to the Lord Ordinary to put the case out By Order on such date as he may provide, for further procedure.