Scottish Court of Session Decisions

Lonergan v. W & P Food Service Limited & Anor [2002] ScotCS 118 (25th April, 2002)

OUTER HOUSE, COURT OF SESSION
CA59/01	OPINION OF LORD CLARKE in the cause EDWARD AIDEN LONERGAN Pursuer; against W & P FOOD SERVICE LIMITED First Defenders; and ALLDAYS PLC Second Defenders:   ________________

 

 

Pursuer: Thomson, Q.C., Hardman; Fyfe Ireland, W.S.

Defenders: Hodge, Q.C., Fairley; Maclay Murray & Spens

25 April 2002

Introduction

1. In this action the pursuer seeks a declarator in the following terms:

"(a) That the first defender has warranted to the pursuer that it has incurred expenditure on the construction of a building at Tannochside, by Uddingston whilst carrying on a trade which consists, in whole or in part, in the construction of buildings and structures with a view to their sale all in terms of Section 10(A)(9) of the Capital Allowances Act 1990:

(b) that in the event that an Appeal against the Decision of the Inland Revenue dated 4 June 1999 in respect of the pursuer's claim to capital allowances for the year 1994/95 fails the defenders are jointly and severally obliged to indemnify and keep indemnified the pursuer against payment by him of the amount of additional income tax which would have been payable by him by reason of the expenditure amounting to £2,978,939 or any part of it (including all Value Added Tax charged) incurred by him relative to the building at Tannochside, by Uddingston not qualifying for capital allowances under the Capital Allowances Act 1990 by reason in whole or in part of a breach of the warranty set out above by the first defender."

As an alternative to this declarator the pursuer seeks rectification of three documents namely, 1. A letter of offer from Fyfe Ireland W.S. to Thorntons dated 5 April 1995 with acceptance endorsed thereon, 2. Proposed Agreement and Indemnity agreement among W & P Food Services Limited and Watson & Philip plc and Edward Aiden Lonergan annexed to that letter of offer and 3. an Agreement and Indemnity amongst W & P Food Service Limited and Watson & Philip plc and Edward Aiden Lonergan dated 11 May and 1 June 1995.

2. The action relates to a transaction whereby the pursuer agreed to purchase from the first defenders, and lease back to the second defenders, an area of land at Uddingston, together with a warehouse depot erected upon the subjects. This transaction was entered into by missives dated 3 March and 5 April 1995. Those missives contained a warranty that the seller, that is the first defenders, had incurred capital expenditure on the construction of the warehouse, whilst the first defenders were carrying on a trade which consisted inter alia of the construction of buildings and structures, with a view to their sale, within the meaning of Section 10(A)(9) of the Capital Allowances Act 1990. The pursuer wanted to be in a position to have the benefit of the capital allowances which arose from such capital expenditure. It is averred by the pursuer that, in terms of said Section 10(A)(9), the relevant date for the pursuer being able to claim these capital allowances would be the date when the purchase price in respect of the purchase of the said subjects, became payable, as was well known to all parties. In terms of the missives that date was 5 April 1995. By further exchange of correspondence between the parties' agents dated 5 April 1995, the parties agreed to enter into what was described as a proposed agreement and indemnity. This provided, inter alia, as follows:

"WHEREAS the Company has warranted to EAL that it has incurred expenditure on the construction of a building at Tannochside, by Uddingston whilst carrying on a trade which consists, in whole or in part, in the construction of buildings or structures with a view to their sale all in terms of Section 10(A)(9) of the Capital Allowances Act 1990 ("the Warranty") AND WHEREAS the Company and WP have agreed to indemnify EAL against the Loss (as after defined) arising as a result of a breach of the Warranty;

THEREFORE the parties have agreed and do hereby agree as follows:-

'1. "the Loss" shall mean the sum equal to the amount of additional income tax which would have been payable by EAL in respect of the fiscal year ending 5 April 1995 by reason of the expenditure amounting to £2,978,939 or any part of it (excluding all Value Added Tax charged) incurred by EAL relative to the said building at Tannochside, by Uddingston not qualifying for capital allowances under the Capital Allowances Act 1990 by reason in whole or in part of a breach of the Warranty by the Company, assuming always that EAL had sufficient income in the fiscal year ending 5 April 1995 to utilise fully capital allowances based on expenditure qualifying for capital allowances under the Capital Allowances Act 1990 of £2,978,939 whether or not that is the case in fact.

2. The Company and WP hereby undertake jointly and severally to indemnify and keep indemnified EAL against the Loss."

3. It is averred by the pursuer that, moreover, the parties had agreed that the missives and the indemnity contract should be concluded and exchanged during the fiscal year 1994/95, with the price payable on 5 April 1995 but that, because of delay, the transaction was not concluded until the early hours of 6 April 1995. As a consequence, the pursuer did not become bound to pay the purchase price until after the end of the 1994/95 fiscal year.
4. The pursuer goes on to aver that, thereafter, the parties negotiated as to whether the transaction should proceed or not and, if so, on what terms. It is averred that the defenders agreed with the pursuer, in the course of a meeting on 13 April 1995, that the defenders would provide to the pursuer a further warranty relating to the timing of the transaction to ensure that the pursuer would be able to utilise the capital allowances and, in the event of that not being achieved by the pursuer, that the defenders would agree to indemnify the pursuer by payment of £200,000. It was, furthermore, agreed that the missives of sale and the proposed Agreement and Indemnity contract should be treated as exchanged between the parties on 13 April 1995. In the event the terms of the Proposed Agreement and Indemnity were incorporated verbatim into an Agreement and Indemnity document which was executed by the parties on 11 May and 1 June 1995, and the transaction in terms of the missives of sale proceeded. It is averred that the parties agreed that the missives, and the indemnity contract, should be treated as exchanged between the parties on 13 April 1995. In the event, however, it is averred by the pursuer, that the contractual documents were not amended to reflect the common intention of the parties to take into account the defenders' failure to conclude the bargain within the tax year 1994/95. In that situation, therefore, the pursuer asks the Court to enforce the contract, as if parties had expressly provided that the relevant capital allowances were those in respect of the tax year 1995/96 or, alternatively, for rectification of the documents to bring about that result.
5. The defenders deny that there was any agreement that the missives or the Agreement and Indemnity should differ from what was set out in the proposed Agreement and Indemnity (attached to 6/2 of process) and that the existing documents clearly reflect the true intention of the parties. They deny any liability to indemnify in respect of any failure by the pursuer to obtain capital allowances in respect of fiscal year 1995/96. The pursuer's claim in respect of capital allowances is still being pursued against the Inland Revenue.

The Issue

6. The case came before me for debate on the defenders' first plea-in-law, in respect of relevancy and specification, on a preliminary point, namely that any warranty granted by the defenders had lapsed by passage of time and that, accordingly, the pursuer's case was irrelevant and should be dismissed. The defenders' argument in this respect, turned, on the provisions of Clause 15.1 of the pursuer's offer to purchase the subjects dated 3 March 1995, which formed part of the missives, which are number 6/1 of process. That letter of offer covers a large number of matters relating to the actual sale and purchase of the heritable subjects. Clause 13 of the letter, however, is in the following terms:

"Capital Allowances

13.1 In as much as the Purchaser intends to claim capital allowances under the Capital Allowances Act 1990 in respect of the qualifying expenditure on the construction of the buildings comprised in the Subjects, the Seller warrants to the Purchaser as follows:-

13.1.1 that at all times since acquiring the Subjects until the Completion Date the Seller was and continues to be heritable proprietor of the Subjects and did whilst being such heritable proprietor incur (within the meaning of the Capital Allowances Act 1990 Section 10) capital expenditure on the construction of the buildings comprised in the Subjects;

13.1.2 that there has been no other transaction by way of sale or lease in relation to the Subjects or any part of it;

13.1.3 that no part of the Subjects has been used within the meaning of the Capital Allowances Act 1990 Section 10(4) and that no part of the Subjects will be so used prior to the Completion Date; and

13.1.4 that the Seller has not and will not make any application for capital allowances in respect of the Subjects or any part of it.

13.2 The Seller will co-operate fully with the Purchaser in the making of the Purchaser's claim for capital allowances and shall without limitation provide the Purchaser with evidence of all expenditure actually incurred by the Seller in relation to the matters giving rise to such claim."

7. Clause 15.1 upon which the defenders relied in the debate, before me, is in the following terms:

"Continuation of Missives

15.1 The Missives shall remain in full force and effect until fully implemented notwithstanding payment of the price and delivery of the Disposition but that for a period of two years only except in so far as they are founded on in any Court proceedings which have commenced within the said period and holograph letters to this effect will be exchanged between us and the Seller's Solicitors immediately after delivery of the Disposition."

The obligation, in relation to the indemnity to be provided by the defenders for any breach of that warranty, is not to be found in the missives, but is to be found in the document described as Agreement and Indemnity which was executed by the parties on 11 May and 1 June 1995 (6/3 of process). That agreement incorporates the terms taken from the proposed Agreement and Indemnity, which I have referred to above. The rest of it is taken up with a requirement that the pursuer should make a claim to the Inland Revenue in respect of the capital allowances and deals with questions of appeals being taken against any refusal by the Inland Revenue of the claim.

The Defender's submissions

8. Mr Hodge Q.C., senior counsel for the defenders, submitted that the effect of Clause 15.1 of the offer of 3 March 1995 was that the warranty contained in Clause 13 of the offer had been extinguished by lapse of time, since the present proceedings, seeking to enforce it, had been brought after the expiry of the two years period referred to in Clause 15.1. If the warranty had expired, by passage of time, any indemnity relating to it had also expired.
9. As to the effect of so-called "non-supersession" clauses in missives on the obligations contained in the missives, on the expiry of the period of time fixed in such a clause, Mr Hodge referred me to the case of Mark Hamilton and another v Dennis G. Rodd (1998) S.C.L.R. 418. The relevant clause in that case, in missives for the purchase of a domestic flatted property, provided that the "missives shall remain in full force and effect but that for a period of two years from the date of entry only". The missives contained the provision that the sellers would be responsible for the cost of all work on the subjects, including any mutual or common parts thereof, which had been instructed prior to the date of entry. A sum of money (part of the purchase price) had been placed on deposit receipt in joint names of the parties, and their solicitors, in respect of "ongoing repairs notice work". The purchaser sought to recover this at a time which was after the expiry of two years from the date of entry. The Lord Ordinary held that, since the missives were no longer enforceable, the seller could no longer be held responsible for the cost of the repair works. Since the sum had been put on deposit solely in order to cover any claim against the seller arising out of his responsibility for repair costs, in terms of missives, the reason for the money being placed on deposit receipt had ceased, along with the seller's responsibility for the repairs in terms of the missives - see Lord Abernethy at page 424. Senior counsel, for the defenders, also referred me to Smith v Lindsay & Kirk 2000 S.C. 200. That case was also concerned with missives for the sale of domestic subjects. The relevant clause appeared in the disposition of the subjects and provided that, notwithstanding the delivery of the disposition, the missives should form a continuing and enforceable contract "but the said missives shall cease to be enforceable after a period of two years from the date of entry hereunder except insofar as they are founded upon in any Court proceedings which have commenced within the said period". The argument for the purchasers, in that case, had, in effect, been that, notwithstanding the lapse of the two year period provided for, they could sue for damages for breach of obligations contained in the missives though they could not sue for specific implement of those obligations. The purchaser's claim was rejected. Lord President Rodger, in his opinion, at page 204 stated "the clause prescribes that the missives are to be legally enforceable despite the disposition, but that they are to be so only for a period of two years after the date of entry. Once the two year period has elapsed, the missives and all the particular obligations which they contained ceased to be legally enforceable. Since they are no longer legally enforceable, no action of any kind can be founded upon them." In this respect his Lordship referred, with approval, to the approach of Lord Abernethy in the case of Hamilton v Rodwell. Senior counsel for the defenders invited me to follow these authorities, in relation to the present case, and submitted, in particular, that nothing turned on the fact that in the Smith case the word "enforceable" occurred in the clause in question, whereas in the present case the equivalent words were "in full force and effect". The last authority, to which I was referred by senior counsel for the defenders, was the decision of Lord Macfadyen in the case of Albatown Limited v Prudential Group Limited (unreported 24 August 2001). This case related to a contract for the purchase of commercial subjects. The sellers had granted their predecessors in title, the defenders in the action, a standard security over the subjects, in security of their whole obligations under missives of purchase by them of the subjects, from the defenders, and, in particular, the payment of the purchase price. The pursuers, the new proprietors of the subjects, sought, a declarator that the standard security had been discharged, since the obligations secured by it had expired by virtue of the provisions of the missives between the defenders and the granter of the standard security and, in particular, the effect of the "non-supersession clause" in those missives. The clause in question was in the following terms:

"The missives to follow hereon will form a continuing enforceable contract notwithstanding the delivery of the disposition except insofar as fully implemented thereby, but the said missives shall cease to be enforceable after a period of two years from the date of entry unless they are founded on in any Court proceedings which are being commenced within the said period."

Lord Macfadyen came to the conclusion that the purchasers' obligations, in particular the obligation to pay the purchase price, in terms of the said missives, had expired by virtue of that non-supersession clause and that, accordingly, there were no longer any obligations secured by the standard security. In so doing, he rejected an argument that the obligation to pay the purchase price had survived because of the granting of the standard security in relation thereto.

10. The foregoing authorities, Mr Hodge submitted, were all to the same effect, namely that a "non-supersession" clause of the type found in the missives of the present case had the effect of extinguishing the obligations contained in the missives, on the expiry of the prescribed period of time. That being so, the warranty, in the present case, contained, as it was, in the missives had been extinguished by the passage of time. The pursuer was, therefore, not entitled to the declarators he sought and no question of rectification arose, since what was being sought to be rectified was something that no longer had any practical effect. In these circumstances the pursuer's action was irrelevant and the action should be dismissed by the Court sustaining the defenders' first plea-in-law.

The Pursuer's submissions
[11] In reply senior counsel for the pursuer, Mr Thomson Q.C., commenced by saying that his primary position was that it was not necessary for the pursuer to rely on the missives (6/1 of process) to claim that there had been a warranty granted by the defenders which was still enforceable. The warranty's continued existence was to be found in the Agreement and Indemnity document (6/3 of process). His secondary position was that, in any event, even if the pursuer was forced to rely on the missives to pursue his claim against the defenders, the warranty contained therein had not been extinguished by operation of Clause 15.1. He reminded me that, side by side, with the conclusion of the missives for the purchase of the heritable subjects, the parties' agents had entered into missives (6/2 of process) where they agreed to execute the indemnity agreement in the terms in which it was ultimately executed. Both sets of missives were concluded on 5 April 1995 and were held as undelivered until 13 April 1995. This demonstrated that parties regarded the warranty and indemnity obligations as standing separate from the obligations relating to the actual sale and purchase of the subjects. The warranty and indemnity were truly collateral matters which were not intended to be covered by the time limit imposed by Clause 15.1 of the missives. Senior counsel invited me to look at the contractual arrangements of the parties, as a whole, and to apply a commercially acceptable construction to them. In making that submission he referred me, firstly, to what was said my Lord Hoffman in Investors Compensation Scheme v West Bromwich Building Society (1998) 1 WLR 896 at pages 912 to 913. He also referred me to Bank of Scotland v Dunedin Property Investment Company Limited 1998 SC 657 where, at page 661, Lord President Rodger said:

"I am content to follow Lord Steyn's general guidance that in interpreting a commercial document of this kind the Court should apply the 'commercially sensible construction' of the condition in question: Mannai Investment Co Limited v Eagle Star Life Assurance Co Limited at page 771A."

In the present case, I accept that it is legitimate, in construing the provisions of the sale and purchase missives, to apply such a test and that since the warranty and indemnity provisions were part of the overall transaction it is also legitimate, in carrying out the task of construction, to have regard to the terms of the other missives (6/2 of process) relating to the matter namely the Agreement and Indemnity document (no. 6/3 of process).

11. But Mr Thomson had, in any event, a further and more fundamental point to make in relation to Clause 15.1 in the missives of sale. He pointed out that the Clause does not provide any starting date from which the period of two years is to run. That is unlike the position in the authorities relied upon by the defenders where, in each case, the relevant clause provided that the period of time should run from "the date of entry" to the subjects. Mr Thomson submitted that, since there was no starting date expressly provided for in the Clause, in the present case, there were a number of possibilities which could be imagined. He mentioned three of these. Firstly, the starting date might be the date of the missives themselves. Secondly, it might be the date of the execution of the disposition relating to the subjects. Thirdly, it might be the date of delivery of that disposition. He was not saying that these were the only possibilities. It was simply impossible for the Court to say what date the parties had intended, if any. Accordingly, the clause was inoperative because of uncertainty and the defenders' argument, founded as it was on this provision being effective, failed.
12. In any event, Mr Thomson argued, the warranty continued to be alive and well, having regard to the terms of 6/3 of process, the Agreement and Indemnity document. This, senior counsel submitted, was not simply an agreement to indemnify. The operative part of the agreement was to be found in Clause 2 which stated that "the Company and WP hereby undertake jointly and severally to indemnify and keep indemnified EAL against the Loss". The "loss" is defined in Clause 1 as set out above. Senior counsel then referred to the provisions of the preamble to the agreement. Mr Thomson made the point that any oral warranty granted by the defenders could have been adequately evidenced by this document. But, in any event, the deed, which was executed after the missives, itself was habile to establish the continuing existence of the warranty, untrammelled by any time limit as set out in Clause 15.1 of the missives. It was significant that this agreement makes no reference to the missives, 6/1 of process, and in particular to Clause 13 thereof. The wording of the warranty contained in Clause 13, and the wording in the recital to the Agreement and Indemnity, was different in that in the recital the words "in whole or in part" appeared but did not do so in Clause 13. Mr Thomson, however, accepted that this was a difference more of expression than substance. Mr Thomson's main point was that, if there had been no warranty expressed in the missives, 6/1 of process, the pursuer could have sued on the Agreement and Indemnity as containing a warranty. He, furthermore, drew my attention to the elaborate provisions set out in Clauses 4-9 inclusive of 6/3 of process, which provide for the submission of a claim in respect of the capital allowances by the pursuer to the Inland Revenue and the possible taking of appeals thereafter. The timetable for all of this was not solely in the control of the parties to the agreement and, clearly, could endure for a number of years. It was simply inconceivable that the parties would have agreed a two year cut off period for the warranty, in these circumstances, since these procedures had to be gone through before the loss in respect of which the warranty and indemnity provisions applied could be known. Having regard to those provisions, the proper construction to be placed upon the parties' contractual arrangements was that the warranty was embraced in 6/3 of process and was not curtailed by the terms of Clause 15.1 of 6/1 of process. Senior counsel for the pursuer asked me, for all these reasons, to refuse the defenders' motion to dismiss the action.

The Defender's reply

13. In reply Mr Hodge for the defenders did, I think, see the difficulty that the absence of a starting date in Clause 15.1 posed. He invited me however, to imply into the clause, as a starting date, the date of delivery of the disposition or the date of entry (which he said would normally be the same). He submitted that I might do that by reference to "the background of case law" and the understanding of the parties. He conceded that if the Court found itself unable to follow this course, then Clause 15.1 would have to be regarded as void because of uncertainty. He accepted also that there was an absolute need for certainty on the matter. As to the rest of what counsel for the pursuer had submitted, Mr Hodge's position was that the reference to the warranty in the Agreement and Indemnity document, was simply narrative and that, prima facie one would not expect such words to give rise to obligations. The words fell to be treated only as evidence of a previous warranty. He pointed out that the words "in whole or in part" had appeared in the draft agreement, appended to the missives 6/2 of process, so that there had been no subsequent revisiting of the terms of the warranty. He renewed his motion for dismissal of the action.

Decision

14. Having considered the submissions made on both sides, I am of the opinion that the defenders' motion to dismiss the action, falls to be refused. In the first place, I have reached the conclusion that the pursuer was well-founded in submitting that Clause 15.1 is unenforceable because of uncertainty, standing that it does not contain a starting point from which the two year period is to run. As I have already noted, senior counsel for the defenders fairly accepted that certainty was essential in such matters and that, unless the Court could imply a starting point into the clause, it would fall to be regarded as unenforceable. I cannot accede to Mr Hodge's submission that I should simply imply, as a starting date, the date of delivery of the disposition or the date of entry, having regard to what he described as the "background of case law" and the intention of the parties. Mr Hodge, beyond referring to this background of case law and the parties' supposed knowledge of it, referred me to nothing more from which the intention of the parties in relation to the date in question could be implied. This is simply an inadequate basis for implying any term into a contract, far less a term of such importance. In referring to the background of case law to which I could refer, I assumed Mr Hodge was referring to the authorities he placed before me and relied upon in his submissions, where the clauses in question had all provided that the date of entry was to be the commencement of the specified period. But that was simply a matter of fact in each case and, in my judgment, I clearly cannot, without further ado, extrapolate from that, that it was the intention of the parties to the present contract that the same starting point should be held to be taken as read in their missives. Accordingly, I am of the opinion that Clause 15.1 is void for uncertainty and that since the defenders' position before me was periled on the efficacy of Clause 15.1 it follows that their motion to dismiss the action falls to be refused.
15. Lest I be wrong about that matter, however, I should deal with the pursuer's alternative position. I am satisfied that, for the reasons advanced, on the pursuer's behalf, that, even if Clause 15.1 can be read to have some effect, it does not mean that the pursuer is barred from pursuing a claim based on an existing warranty against the defenders. It appears to me that, having regard to the contractual documents as a whole, and placing a "commercially sensible construction" upon them, the parties' intention was that the warranty would continue to be enforceable, without any two year cut off period applying to it. I am satisfied that the warranty was seen by the parties as standing alone from the other provisions in the missives, 6/1 of process, relating to the sale and purchase of the heritable subjects, and that its separate and independent existence was recognised and contained in the Agreement and Indemnity document (6/3 of process), which made no reference to Clause 13 of 6/1 of process and whose provisions, 4-9 inclusive would make no real practical sense if there was a two year cut off. Mr Hodge for the defenders, in making the submissions he did, conceded that his position, on the matter, had no equity in it and was a harsh one. What is more he made no attempt to suggest any commercially sensible purpose for the parties agreeing to such a cut off period in relation to the warranty, standing the other contractual arrangements, looked at as whole. In accepting the submissions made on behalf of the pursuer as sound, I arrive at a conclusion which, in my judgment, has the advantage of being not without equity, is not harsh, but, most importantly, places a commercially sensible construction on the parties' agreement. For these reasons, accordingly, even without reaching the view I have with regard to the unenforceability of Clause 15.1, I would have refused the defenders' motion.
16. In the circumstances, I will put the case out By Order for discussion as to the appropriate interlocutor to be pronounced, and as to further procedure in the action.