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Crouch Mining Ltd v. Scottish Coal Company Ltd [2003] ScotCS 217 (01 August 2003)

OUTER HOUSE, COURT OF SESSION

CA137/02

OPINION OF LORD CLARKE

in the cause

CROUCH MINING LIMITED

Pursuers;

against

THE SCOTTISH COAL COMPANY LIMITED

Defenders:

________________

Pursuers: Howie, Q.C.; MacRoberts

Defenders: Woolman, Q.C.; Harper MacLeod

1 August 2003

Introduction

[1] In this commercial action the pursuers seek payment from the defenders of £206,789.22 with interest thereon from 31 March 2002 until payment. The pursuers contend that that sum is due to them by the defenders in terms of a contract between the parties and associated companies. The contract is dated 8 November 2001 and is No. 6/1 of process.

[2] The background to the conclusion of the contract was a series of disputes between the pursuers and the British Coal Corporation, which arose out of contracts previously entered into between the pursuers and the British Coal Corporation in 1988 and 1994, and as subsequently varied, and which related to the winning of coal by the pursuers from the Dalquhandy open cast coal site at Coalburn in Lanarkshire. The contract between the parties was designed to bring about a final settlement of those disputes. It was, furthermore, designed to provide for the terms and conditions which would govern the cessation of work on the site by the pursuers and their departure from the site. The provisions of the agreement with which the present dispute between the parties is involved, relate, in particular, to what was to happen to excavating, earth moving and haulage plant and equipment which the pursuers had employed for the purpose of winning the coal from the site. The intention of the parties was that this plant and equipment should be employed by the defenders themselves after the pursuers ceased working and had left the site. Some of the plant and equipment in question was subject to subsisting finance agreements whereby they were hired by the pursuers from third parties, in terms of which the pursuers were required to make rental payments therefor, either in arrears or in advance.

The relevant contractual provisions and the parties' averments relating thereto

[3] The contract between the parties provided for the defenders taking over the plant and equipment in question on what is described in the agreement as the "Effective Date". Clause 1.1 of the agreement says that "the Effective Date" is 8 November 2001. In this respect it is averred by the pursuers in Article 2 of Condescendence as follows:

"To cater for the foregoing facts, the said contract contained provision in Clause 10 thereof for those items of plant and equipment specified in Part 3 of the schedule to said contract to be transferred to the defender on the 'Effective Date' and in Clause 12 thereof, for the assignation or novation to the defender of the finance agreements affecting items of plant or equipment being transferred. By Clause 12.1 of the said contract, the pursuer and the defender were taken bound to use reasonable endeavours to procure the assignation or novation to the defender with effect from the 'Effective Date' of the 'Finance Agreements', being those copies of which were appended to said contract as Part 5 of the Schedule thereto."

The averments just quoted are all admitted by the defenders. Clause 6 of the contract deals with payments to be made by the defenders to the pursuers under the contract. These payments are divided into four tranches. The sum of £1,971,201.79 together with £344,960.13 value added tax was payable in terms of the agreement on the Effective Date by the defenders to the pursuers. In addition payments of £3,028,798.21 and £1,785,000.00 were payable on the Effective Date by the defenders to the pursuers. Lastly, by virtue of clause 6.4 it was provided:

"On the earlier of the Finance Agreement Date and the Payment Date but in any event not earlier than the Interim Date the Employer shall pay to the Contractor the sum of £800,000."

In terms of the parties' agreement the "Finance Agreement Date" is defined as meaning the date on which the contractor's interest in all of the finance agreements shall have been assigned, novated or otherwise transferred to the employer. In terms of the parties' agreement the "Contractor" is defined as being the pursuers and the "Employer" is defined as being the defenders. The "Payment Date" is defined as 31 March 2002. The "Interim Date" is defined as 31 December 2001. It is in relation to the payment of the sum of £800,000 that the present dispute arises.

[4] The pursuers aver, and the defenders admit, that the defenders have withheld payment of £206,789.22 of that sum. They do so purportedly in the exercise of rights contained in clause 19.8 of the contract which is in the following terms:

"With respect to the payment due in terms of Clause 6.4 but not in respect of any other payment to be made under this Agreement the Employer shall be entitled to exercise set-off, abatement, compensation and/or retention in connection with any matters arising under or from the terms of this Agreement or any failure, act, omission or misrepresentation of or on the part of the Contractor hereunder or any breach of the terms of this Agreement by the Contractor."

Clause 12.3 of the parties' agreement provides as follows:

"The amounts paid by each of the Employer and the Contractor in respect of sums due to be paid under and in terms of the Finance Agreements shall be apportioned on a time basis so that such part of the relevant payments attributable to the period ending on the Effective Date shall be borne by the Contractor and such part of the relevant payments attributable to the period commencing on the date immediately following the Effective Date shall be borne by the Employer and each shall account to the other, within 14 days of being requested to do so in writing, for any such payment so made in respect of the Finance Agreements for a period which is not so attributable to each of them."

It is ultimately about what that clause provides for that the parties are in dispute in these proceedings.

The Dispute

[5] The pursuers maintain that clause 12.3 provides solely for an apportionment of those payments due under the relevant finance agreements which "straddle" the Effective Date. In others words, on its true construction, the clause provides for an apportionment according to the user of the equipment during periods straddling the date of the transfer of equipment being financed. The provisions of the clause arise in a context where assignation or novation of the leases in question are anticipated. Until the assignation or novation takes place the legal liability under the agreements will remain with the pursuers. The clause is designed to apportion the monthly or other termly payments due under the hire agreements in respect of which the defenders have taken over the physical equipment on the Effective Date but before the relevant agreements have been assigned or novated.

[6] In the case of each of the agreements in respect of which the clause has a role to play, (of which there were four), there was liability to pay what was described in the discussion before me as a "balloon" payment. That is a payment, which frequently appears in finance leasing agreements of the sort in question, which is made at the end of the duration of the agreement by the hirer and which is substantially very much more than the monthly or other termly payments made under the agreement. It is a matter of agreement, in this case, that all four of the relevant agreements were, in due course, novated in favour not of the defenders themselves, but of a subsidiary company of the defenders. To enable novation to take place the balloon payment had to be made to the finance companies who had been the lessors in terms of agreements. The pursuers contend that clause 12.3 was not intended to operate in relation to such payments made some time after the Effective Date in the foregoing circumstances. The defenders, on the other hand, maintain that the clause was intended to cover the balloon payments and does so and that the sum which they have retained from the sum of £800,000 represents an apportionment of the balloon payments by applying the terms of that clause.

[7] The case came before me for debate on both parties' pleas to the relevancy. It is clear that the agreement was structured with the purpose and expectation of the pursuers being freed from the relevant finance agreements and those agreements being either assigned or novated in favour of the defenders. It is right, in that connection, that I set out in full the way in which these matters are expressly dealt with in the agreement in Clause 12. I have already set out the provisions of Clause 12.3. The remaining relevant provisions of Clause 12 are as follows:

"12.1 The Parties shall use reasonable endeavours to assign or procure the assignation or novation to the Employer with effect from the Effective Date of the Finance Agreements.

12.2 The Employer shall accept an assignation or novation of and shall observe and perform or procure to be observed and performed with effect from the Effective Date all the obligations of the Contractor under the Finance Agreements.

12.4 The Employer shall indemnify and keep indemnified the Contractor on demand for and against all claims, actions, proceedings, costs, expenses, losses, damages and liabilities incurred by the Contractor in respect of the non performance or defective or negligent performance by the Employer of the Finance Agreements after the Effective Date."

Copies of the four leases are produced as part of the schedule to the agreement and are to be found at pages 81-88 thereof. The first lease is between the pursuers and Barclays Mercantile. It provides that it shall commence on 17/12/98 and shall run for sixty months. The rental payments are said to be fifty nine monthly rentals of £20,242.58, payable in advance followed by one monthly payment of £250,000. The last mentioned payment is the balloon payment in terms of this agreement. This agreement provides that the hirer may renew the lease of the equipment on the expiry of the agreed terms on a year to year basis with the maximum overall period of leasing being twenty five years, by paying annually in advance rents of £11,525.

[8] The remaining three agreements were between the pursuers and Caterpillar Financial Services (UK) Limited. These leases were for a period of two years and were entered into in January 2000. They provide for twenty three monthly payments of rent followed by a final balloon payment. Part 5 of the schedule to the parties' agreement, at page 41, sets out the outstanding balances in respect of these agreements as being as follows:

"Barclays Mercantile - 24 monthly payments £20,242.58 payable 18^th of month followed by balloon £250,000.

Caterpillar Finance -

1 Three monthly payments £2,894 payable 15^th of month followed by balloon £10,000.

2 Three monthly payments £3,481 payable 15^th of month followed by balloon £10,000

3 Three monthly payments £3,424 payable 15^th of month followed by balloon £10,000."

[9] In averment, the pursuers state, in Article 4 of Condescendence, as follows:

"The defender was entitled to make claim to payment (or set-off) under the said Clause 12.3 only in respect of those of the Finance Agreements wherein payments were made in arrears, and then only to the extent that the payment (if any) made to the financier for the period straddling 8 November 2001 represented money due for the portion of that period ending at midnight on 7/8 November 2001. In the case of each of those agreements the payments of rental were paid on a monthly basis. Having regard to the days of the month on which the monthly periods of payment in question began, the maximum sum which the defender would have been entitled to set-off under Clause 12.3 is £6,915.92."

As previously noted the defender's position in answer is that the apportionment exercise should be carried out in addition in respect of the balloon payments.

Defenders' submissions

[10] In presenting his submissions, and inviting me to dismiss the action, senior counsel for the defenders went through the relevant provisions of the parties' agreement and referred also to the lease agreements. He referred me to the definition of "apportion" in the Shorter Oxford English Dictionary which is "to assign (to) as a proper portion" and the definition of "attribute" which is "to ascribe to as belonging or proper". His submission, ultimately, came to be simply that, in construing Clause 12.3 as applying to the balloon payments, one was providing for a more equitable agreement or a more equitable result as between the parties. I would observe that, as baldly stated, as it was, that approach seems to me to involve some novelty in this branch of the law. The approach is somewhat more elaborately enunciated in the defenders' second note of argument in the following terms:

"The proposed construction yields a commercially sensible result. Incorporating the balloon payments into the calculation reflects the whole cost and benefit of the finance agreements to the respective parties. It results in an appropriate share being allocated to each party, having regard to the whole term of the agreements. Excluding the 'balloon' payments leads to a disproportionate result: too large a benefit is conferred upon the pursuers; too high a burden is imposed upon the defenders."

Senior counsel for the defenders drew my attention to the provisions of Clause 9.9 of the contract. The wording of that Clause is as follows:

"9.9 The Contractor shall use all reasonable endeavours to assign to the Employer all insurances (including but not limited to private health cover and life assurance) held by the Contractor in relation to any Transferring Employee. All premiums paid in respect of the Transferring Employees shall be apportioned between the Contractor and the Employer as at the transfer date and as from the transfer date the Contractor shall hold the relevant policies of insurance and proceeds relating thereto on trust for the Employer. Beneficial ownership of the insurances hereby agreed to be assigned shall not pass to the Employer until the Transfer Date."

Senior counsel submitted that the wording of that provision was simpler, in its terms, than Clause 12.3. This suggested that the ambit of Clause 12.3 was intended to be wider than simply to provide for an apportionment of payments straddling the Effective Date. The provisions of Clause 15.1, it was submitted, also assisted in showing that the overall purpose of the contract, including Clause 12.3, was to produce an equitable bargain as between the parties. Clause 15.1 is in the following terms:

"Under exception of any charges, periodical outgoings and/or liabilities relating to or concerning the Transferring Employees or under the Finance Agreements all periodical charges and periodical outgoings of the Contractor or related to its assets including, but not limited to rents, rates, non-customer rebates, insurance, gas, electricity, telephone and water charges and all liabilities shall be apportioned on a time basis so that such part of the relevant charges attributable to the period ending on the Effective Date shall be borne by the Contractor and such part of the relative charges attributable to the period commencing on the day immediately following the Effective Date shall be borne by the Employer provided that any such charges and periodical outgoings which are chargeable by reference to the extent of the user of any property or rights shall be apportioned to the extent known between the Contractor and the Employer according to the extent of such user."

Having in mind that equitable approach to matters, the "relevant payment" referred to in Clause 12.3 could be read to include the portion of the balloon payment which could be traced back to the period of the pursuers' use and enjoyment of the plant and equipment in question. The apportionment exercise, in other words, should be carried back at the end of the finance agreements and the balloon payments apportioned as between the pursuers and the defenders with regard to the periods of user by them.

Pursuers' submissions

[11] In reply senior counsel for the pursuers submitted that the construction of Clause 12.3, had to be done by reference to the basic idea of the clause and its context. The context was that Clause 10.1 provides as follows:

"The Employer shall on the Effective Date purchase the Transferring Plant and Equipment from the Contractor and the Employer shall acquire all risk in the Transferring Plant and Equipment on the Effective Date."

The purposes of the relevant provision was for the pursuers, as it were, to be able to draw a red line under matters as at the Effective Date but it was, nevertheless, recognised that in respect of the finance agreements, assignation or novation of these might take some to effect. Clause 12.3 was designed simply to deal with apportionment of payments made under the agreements which related to the period straddling the Effective Date. The expectation, however, was that the agreements would all be either assigned or novated and there was no anticipated reason why the finance houses should prove difficult about this. Clause 12.3 was simply a tidying up of loose ends until the mechanics of assignation or novation took place. If difficulty or delay was encountered in relation to effecting assignation or novation of the relevant agreements, other provisions of the contract provided for such situations. Clause 12.4, for example, provided protection for the pursuers where they remained liable under the contracts but the defenders had taken over the possession and enjoyment of the equipment. On the other hand Clause 12.5 imposed obligations on the pursuers pending the assignation or novation of the agreements. Clause 12.6 provided for warranties by the pursuers and indemnity by them to the defenders regarding its obligations under the relevant agreements which have arisen prior to the transfer of the plant and equipment to the defenders. These provisions clearly demonstrated, it was submitted, that the role of Clause 12.3 was a limited one and did not have the effect contended for on behalf of the defenders. The phrase "attributable to the period", where it appears in Clause 12.3, was simply meant to refer to periodic payments due under the relevant agreements which related to the month during which the Effective Date occurred. The defenders' approach in construing the provisions to embrace the balloon payments, which were not payable until the end of the relevant agreements, did not, as had been submitted on the defenders' behalf, prevent a "windfall" that would otherwise arise, from falling on the pursuers. On the contrary, there was a real danger of a windfall accruing to the defenders if their approach to the construction of the clause was employed. The Barclays agreement, as it appears at pages 81-82 of the agreement, provides that the lessee might sell the equipment in question and if it did so, might then obtain refund of the rental payments which had been made under the agreement. The relevant provisions, in the Barclays agreement, are to be found in what are described as the schedule provisions. The provisions are, inter alia, to the following effect:

"C.1 You may only sell the equipment if we have authorised you to do so ...

3 If we agree to a sale during the term, you must pay us the amount we quote to you as payable (including any VAT) to terminate the hiring.

4 We will allow you a refund of rent equal to the percentage of the net sale proceeds shown overleaf as long as it does not exceed the total rentals you have paid and you have sent us a copy of your sales invoice."

On the body of the Barclays agreement itself it is provided as follows:

"If you are entitled to sell (see clause C overleaf) and do sell the equipment your refund of rent will be 97.50% of the net sale proceeds."

Senior counsel for the pursuers submitted that the defenders, therefore, had the potential of recovering all the rental payments made by the pursuers. The other three relevant agreements had similar provisions regarding sale of the equipment and repayment of the rentals. Moreover, the four agreements provided for renewal of the leases on the expiry of their term on a year to year basis at a much reduced rental. These potential benefits to the defenders argued against the imbalance or unfairness which the defenders contended arose from the pursuers' approach to the construction of Clause 12.3.

[12] As regards the defenders' reliance on the wording of Clause 9.9 of the contract in support of their approach to matters, senior counsel for the pursuers submitted that this was a simpler clause than Clause 12.3 because it had a simpler task to perform. It was dealing with a situation where, ex hypothesi, there was no question of payments having been made by the defenders, as opposed to the pursuers. The wording of Clause 12.3 was worded in the way it was because it was dealing with a situation where termly payments straddling the Effective Date might be paid by either party. In addition reference to Clause 15 did not assist the defenders. The provisions of Clause 12 were designed to deal with the apportionment of and allocation of rights and liabilities under the finance agreements and did so in a detailed way. Clause 15 was expressly said not to be dealing with those matters.

[13] For the foregoing reasons, I was invited by senior counsel for the pursuers to repel the defences as being irrelevant. He, ultimately, did not invite me, in that event, to pronounce decree de plano as he informed me that there was a small dispute between the parties as to the sum due by the defenders to the pursuers if the pursuers' arguments were upheld. Senior counsel, therefore, invited me to have the case put out By Order in the event that I held that the defences were irrelevant.

Decision

[14] I am satisfied that the pursuers' approach to the construction and effect of Clause 12.3 is to be preferred. It is quite apparent, in my judgment, that the structure of Clause 12, as a whole, was based on the expectation that the relevant finance agreements would be assigned or novated. It, nevertheless, was the parties' agreement that the defenders should have the effective enjoyment and use of the machinery and plant immediately after the Effective Date. The agreement provides, however, for the way in which matters are to be regulated in the event of assignation or novation of the agreements not taking place for some time after the Effective Date (or, indeed, on one view of matters, not at all). If the agreements were assigned to the defenders then, on ordinary principles, the defenders would be liable for the obligations and burdens remaining to be performed in terms of those agreements. Those would include the balloon payments. Had it been the parties' intention that some qualification of that position should obtain, it seems to me that they would and should have expressly provided for that. Instead the defenders have to rely on what they describe as a broad construction of the provisions of Clause 12.3 to bring about that qualification. I am not satisfied that the wording has or should be read as having that effect. It seems to me that, having had regard to the provisions of Clause 12, as a whole, the provisions of Clause 12.3 were designed to deal with a very specific situation, namely the apportionment of payments made under the relevant agreements in respect of the periods specified in those agreements which actually straddle the Effective Date. The balloon payments were not payable until the final month of the agreements which was some time after the Effective Date, and I do not consider that the plain meaning of the provisions of Clause 12.3 embraces those payments. To construe the clause as excluding the apportionment exercise in respect of the balloon payments, in my judgment, makes perfectly good commercial sense in the context of the clause and the agreement as a whole.

[15] I have noted that the defenders' approach to construing the provisions of Clause 12.3 depends on a large extent on a fairness argument, that is that their approach produces a "fairer" result as between the parties. For the reasons, however, advanced by senior counsel for the pursuers in relation to the potential of the defenders obtaining repayment of rental payments made by the pursuers when exercising a right of sale of the equipment in question, I am not persuaded that it is, in any event, obvious that there is a disequilibrium in the agreement if the pursuers' approach to the construction of Clause 12.3 is applied. Moreover, the consideration provisions of the agreement, and the background to and reasons for them, are not so transparent as to demonstrate that any imbalance does occur if the defenders have to pay the full amount of the balloon payments.

[16] I accordingly consider the defences to be irrelevant and, as moved by counsel, shall put the case out By Order for discussion as to the appropriate decree to be pronounced.