Scottish Court of Session Decisions

[1] This is the second action arising out of arrangements for the disposal by Mr Sutherland, the present pursuer, to Mr and Mrs Barry, the present defenders of the Waterfront Bar, Wick.

[2] The circumstances of the arrangements for that disposal are more fully narrated in the Opinion delivered in the first action, namely that by Mr and Mrs Barry against Mr Sutherland. In that action Mr and Mrs Barry seek damages for losses suffered by them by reason of allegedly fraudulent representations made by Mr Sutherland which they say induced them to enter into, inter alia, missives for the acquisition of the premises and business of the Waterfront Bar.

[3] Those missives provided that for a period of approximately one year leading up to the October 2000 meeting of the Caithness Licensing Board, Mr and Mrs Barry would be tenants of the premises. A lease in terms of the missives was duly executed and Mr and Mrs Barry entered into possession of the Waterfront Bar. Having discovered the alleged fraud Mr and Mrs Barry exercised a provision in the missives whereby they might give notice bringing the lease to an end without proceeding to implement the sale element of the transaction.

[4] The present action is concerned with claims arising out of Mr and Mrs Barry's occupancy of the premises. The first conclusion of the summons is for payment of the rent payable in terms of the lease during the last three months of the defenders' occupancy. The second conclusion relates to the rates and insurance payable by the tenant during that period. The third conclusion relates to a claim for delapidations. That claim however, need not be further noticed at this stage in the proceedings, parties being agreed that determination of that issue cannot be dealt with at debate but must await inquiry.

[5] The amount and the prima facie liability of the defenders for payment of the outstanding rent, rates and insurance for the last three months of the tenancy is not in dispute. The defenders contend however that they are entitled to withhold payment of those agreed sums by way of retention against firstly their claim for damages respecting the losses sustained by them by virtue of the fraud perpetrated upon them, and, secondly, respecting their own claim for payment of the agreed amount of the value of the wet and dry stock valued at their outgo, the latter of these two claims forming the subject-matter of a counterclaim at their instance in this action. In his answer to that counterclaim, the pursuer, Mr Sutherland, pleads retention respecting the claim in the summons in this action. There is no dispute respecting the amount of the valuation of the stock or the ultimate liability of Mr Sutherland to make payment for it.

[6] At debate Mr Clive, who appeared for the present pursuer, submitted that the defence put forward by Mr and Mrs Barry to the pursuer's claim for the outstanding amounts of rent, rates and insurance sought in the first and second conclusions of the summons was irrelevant. The defence so advanced was one of retention. However, the concept of retention was concerned only with the mutuality of obligations under a contract; the obligation whose performance was being withheld required to be a counterpart of the obligation whose performance was sought - see Bank of East Asia Ltd v Scottish Enterprise 1997 S.L.T.1213. Accordingly, since a claim for damages for loss suffered by reason of fraud was not a claim for breach of contract but a claim in delict, the present defenders were not entitled to withhold payment of their contractual liabilities under the lease pending the determination of their claim for damages for the losses allegedly suffered by reason of the fraudulent representation. Further, it was submitted that since Mr Sutherland's liability to pay for the stock only arose at outgo it was not a counterpart of the obligation of Mr and Mrs Barry to pay rent during the currency of the lease.

[7] For his part Mr Hammond who appeared for the present defenders (Mr and Mrs Barry) referred to McBryde on Contract, para.10-21 and submitted that in terms of what was said in that paragraph there was authority for the proposition that while not seeking reduction of a contract allegedly induced by fraud, it was permissible (for the party induced by such representations to conclude the contract) nevertheless to retain payment of sums due under the contract in retention of a claim for reparation for injury suffered by having entered into that contract. Given that one was in the realm of fraud, it would be artificial, said Mr Hammond, to take a strict view of the scope of the concept of retention of performance of a contractual obligation. Payment of the outstanding balance of rent, rates and insurance should accordingly be delayed until the claim by Mr and Mrs Barry for damages for fraud had been judicially ascertained.

[8] In approaching this aspect of the controversy between the parties, it is convenient, in light of Mr Hammond's submission, to set out the relevant portion of paragraph 10-21 of Professor McBryde's work:-

It is I think apparent that the passage, which is set in the context of a discussion of the procedural advantages of claiming damages as opposed to reduction, is dealing essentially with two distinct matters, namely, (a) the competency as a matter of principle of setting off (i.e. retaining) payment of the contractual obligation against the delictual claim for damages for fraud, and (b) the procedural or technical requirement for answering a claim for the contractual obligation by means of a counterclaim for the delictual, illiquid claim in terms of the Sheriff Court Rules as then existing. This paragraph, as Mr Hammond properly suggested, has also to be read with what Professor McBryde writes in paragraph 22-52:-

[9] In my opinion the first matter, namely the scope of the principle of retention, is settled by Smart v Wilkinson 1928 S.C.383. The circumstances of that case were that the pursuer therein had sold his medical practice to the defender and sued for the outstanding balance of the price. The defending medical practitioner contended that he had been induced to purchase the medical practice by reason of fraudulent representations on the part of the pursuing medical practitioner. It was held in the Inner House that the claim for damages arising out of the alleged fraud being illiquid and delictual could not constitute a relevant defence to a claim for payment of the balance of the sale price. The Lord Justice Clerk (Alness) expressed himself thus (386):-

Having then reviewed certain contentions relating to the minute of agreement, the Lord Justice Clerk continued as follows:-

[10] The other judges expressed broadly similar views and in my view Smart v Wilkinson governs the issue in the present case. I would add that the soundness of that decision appears to be accepted by Professor Walker in his work on Civil Remedies, 63 and Professor Wilson, The Scottish Law of Debt, in the final alinéa of paragraph 13.9.

[11] I therefore consider that Mr Clive is correct in his submission that the existence of Mr and Mrs Barry's action for damages for fraud is not a relevant defence to Mr Sutherland's claim for payment of the outstanding amounts of rent, rate and insurance due by Mr and Mrs Barry under the lease.

[12] For his part Mr Clive also accepted in the course of his submissions that the plea of retention contained in the answers for Mr Sutherland to the counterclaim by Mr and Mrs Barry for the value of the stock at outgo was misconceived and that there was no relevant defence to that claim.

[13] In these circumstances it therefore appears to me that since the claims, on the one hand, for the outstanding balance of the rent, rates and insurance due under the lease and, on the other hand, for payment of the value of the stock at outgo are admitted in respect of amount and prima facie liability the stage has been reached at which those debts fall to be compensated the one with the other. In arithmetical terms that exercise of compensation of debts results in a balance being now payable to Mr Sutherland. Since however I understand various sums to have been put on deposit receipt in joint names, I shall put the case out By Order for discussion of the means of giving effect to the findings which I have just made and also for discussion of future procedure for addressing the remaining issues in this action.