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Cite as: [2003] ScotCS 274

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Cheval Property Finance Plc v. Hill [2003] ScotCS 274 (04 November 2003)

OUTER HOUSE, COURT OF SESSION

A39/98

OPINION OF LORD JOHNSTON

in the cause

CHEVAL PROPERTY FINANCE plc

Pursuers;

against

BERNARD HILL

Defender:

________________

Pursuers: Murphy, Q.C., Robertson; Haig-Scott & Co., W.S.

Defender: Smith, Q.C.; Simpson & Marwick, W.S.

4 November 2003

[1] In this action the pursuers, who are a finance company, seek to enforce letters of obligation granted by the defender, in his capacity as a solicitor acting for a client, in relation to certain loan transactions entered into between the pursuers and the defender's client. Essentially the client was seeking to re-finance certain properties that he owned which involved exhibiting clear searches free of any loans in respect of the various properties.

[2] There were produced before me two facility letters dated respectfully 1 November 1996 (6/5 of process) and 29 April 1997 (6/1 of process).

[3] The averments disclose that a loan of in fact £495,500 was made in the Spring of 1997 subsequent in date to the issue of the second facility letter. The averments also disclose that there were discussions between the parties about a further advance of a sum slightly in excess of £1 million, but this was not in fact effected. However, at the time of the loan that was made, the relevant letter of obligation, which are the basis for the action, was issued by the defender. As an example 6/21 is in the following terms:

"With reference to the settlement of the above transaction today we hereby (1) undertake to exhibit to you within six months of this date Land Certificate issued by the Keeper of the Registers of Scotland in favour of our clients showing the interest of our clients as Registered Proprietors of the whole of the above subjects registered under Title Number REN 84744 which Land Certificate will be unaffected by any deed, decree or diligence (other than such as may be created by or against your clients) which may be recorded in the Personal Registers or to which effect may be given in the Land Register in the period from 15^th May 1997 to 14 days hereafter inclusive (or to the earlier date of registration of your clients' interest in the above subjects) which would cause the Keeper to make an entry on, or qualify his indemnity in, the Title Sheet relating to our clients' interest in the above subjects and further will disclose the Standard Security in your clients' favour and (2) confirm that to the best of our knowledge and belief, that as at this date the answers in Questions 1 to 8 in the draft Form 2 adjusted with you (in so far as these answers relate to our clients' interest in the above subjects) are still correct. Further we undertake to deliver relative Discharges together with Forms 2 and 4 and cheque for Registration Dues within 14 days."

[4] Although counsel for the defender opened the debate, his single aim was the deletion of certain averments en route to a proof before answer on the whole case. On the other hand, counsel for the pursuers sought effectively deletion of the defence save on quantum, and declarator in terms of conclusion 1 and for thereafter a proof restricted only to the issue of quantum.

[5] Since the pursuers' position is more radical before me than that of the defender, I propose to deal with it first.

[6] The contention advanced on behalf of the pursuers in substance was that, against the background of a contract between A and B that contract cannot usually qualify or bear upon a separate obligation granted by a third-party to A. This proposition, in simple terms meant, it was submitted, that a letter of obligation issued by the solicitor was a unilateral voluntary obligation, free-standing and binding upon him without any conditions attached.

[7] Counsel went on to submit that if that argument was wrong then in this case there had to be a proof that the total of £1.6 million, that is to say both the sum actually advanced and the balances which were discussed, were specifically related to an agreement with regard to the issuing of the letters of obligation so as to make one conditionial upon the other. He submitted that this was not properly averred upon the averments and, in any event, was contradicted by some of the defender's averments. In this respect, he pointed specifically to averments which would suggest that by not advancing the whole of the discussed sums, the pursuers were in breach of contract and by reference to the law of unity of contract, could not insist in performance of the defender of his obligations under the letters of obligation (para.25C-D).

[8] The further submission by counsel for the pursuers was that if there were sufficient averments of an agreement, such as was contended for by the defender, there were no averments that any condition that attached to that agreement was purified. In essence, he maintained that it was not possible to reconcile the two letters of facility which, in any event, were not in identical terms, not least with relation to the terms of repayment.

[9] Counsel also had some subsidiary submissions about lack of knowledge on the part of the pursuers in respect of the loans' background and that furthermore, much of the defender's pleading related to transactions with another third-party which was irrelevant to the matter between the parties, in any event post-dating the facility letters.

[10] I was referred to McDonald on Conveyancing, paras.33.45, .46 and .52 with regard to the general status of the letters of obligation, and was also referred to Mason v A & R Robertson & Black 1993 S.L.T. 773. This was against the background that the letters of obligation were sufficiently executed in terms of the recent statutory provisions with regard to the requirements of the Writing (Scotland) Act 1995 and section 1 of the Contract (Scotland) Act 1997. In any event, no challenge was made in that respect by the defenders, who did not, accordingly, attack the alleged validity or otherwise of the letters of obligation.

[11] Counsel's response to this was essentially to the effect that his client's position was that the actual advance made was merely a part of the original transaction, that is to say relating to the letter 6/1. Accordingly, the balance of £1.1 million was required to be paid and the failure on the part of the pursuers to honour that part of the arrangements put them in breach of contract, denying them the right to insist on the letters of obligation. The latter, properly understood, were conditionally related to the existence of the loan agreements, and in this respect he placed much emphasis on the opening words of the letter of obligation which I have quoted, namely, "With reference to the settlement of the above transaction today". Counsel referred to George Campbell v Hugh McLean & Co 1871 1 R. 700, in order to enforce the notion of the unity of contract, albeit with separate obligations.

[12] Counsel for the defender's quite separate point related to the averments in response to his own averments, involving a company which was named as Algraguest. This company, it was said, was behind the transaction that never materialised with regard to the £1.1 million and reference was made to a Minute of Agreement in that respect, which is produced herewith (6/25 of process). Counsel's position in this respect was while his averments were relevant in this context, the response by the pursuers, starting at p.17C of the Record and continuing to the end of that condescendence was not. In simple terms, his submission was that the averments were incomprehensible and therefore lacking in specification and should not be remitted to probation. This would merely restrict the proof, which should otherwise take place, he submitted, in relation to the whole remaining issues.

[13] By way of postscript, counsel did point to the fact that there was a reference to a property known as Broadfield House and also lands around it. While in the first facility letter those were listed as separate items, in the second, it was only entered as Broadfield House. This, he said, supported his position that the two letters were inextricably linked.

[14] Counsel for the defender's final position was that the proof should encompass explanations by the defender as to how the whole arrangements had been entered into with regard to both facility letters, and it was therefore going too far too fast for me to sustain the pursuers' position at this stage.

[15] In seeking to address this matter, I should say at once that I find it quite impossible to rationalise the two letters of facility as amounting to one transaction. The very fact that the repayment terms are different, one being after a certain term, and the other being on demand seems to me at once to admit to two separate transactions with separate results. Furthermore, there was a time limit of 21 days imposed in the first letter which, plainly, had passed months before any attempt was made to resuscitate the offer of £1.1 million. On any view, therefore, if the first facility letter is of any relevance, it must be on the basis that it was renewed or extended and there are no averments to that effect beyond some vague references to activities by a middle man called Baker. On a view of the averments which I feel I am able to take without proof, the proper view must be that the first loan facility letter lapsed, as indeed seems to be understood on the basis that initially the credit committee of the pursuers was not prepared to sanction the loan and it was never revived formally.