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UPS Supply Chain Solutions v. Glasgow Airport Ltd [2004] ScotCS 223 (01 October 2004)

OUTER HOUSE, COURT OF SESSION

CA154/03

OPINION OF LORD CLARKE

in the cause

UPS SUPPLY CHAIN SOLUTIONS

Pursuer;

against

GLASGOW AIRPORT LTD

Defender:

________________

Pursuer: Keen, Q.C., Buchanan; Semple Fraser

Defender: Murphy, Q.C., Gardiner; Bishops

1 October 2004

Introduction
[1] In this commercial action the pursuer sues the defender for £744,490.62 with interest. It does so on the basis of alleged breaches of contract by the defender. The dispute arises out of contractual arrangements entered into between the parties in 1998 and 1999. At that time the pursuer was known as Fritz Companies Inc.

[2] The first of the contractual arrangements involved was an agreement, described as an agreement for lease relating to Block 2, Unit A, Air Cargo Centre, Douglas Terrace, Glasgow Airport. A draft of that agreement is appended to missives between the parties, 6/2 of process. The defender admits that the parties entered into that agreement on the terms contained in the draft ,appended to 6/2 of process.

[3] At Article 4 of condescendence, the pursuer avers as follows:

"In 1998 the pursuer and the defender entered into an "Agreement for Lease." In the agreement for lease, the pursuer was defined as "the Tenant" and the defender was defined as the "Landlord". In terms of clause 2 thereof, the defender was obliged to proceed with the construction of the Landlord's works being defined within the agreement for lease as "the works to be carried out by or on behalf of the Landlord in the construction of the Premises ... as more particularly shown on and described in the Plans and Specifications". The Premises referred to included the building known as Block 2, Air Cargo Centre, Douglas Terrace, Glasgow Airport, Paisley. At page 2A/14 thereof, the Plans and Specifications provided that "the floor system adopted must reflect the nature of the initial user (cargo freight handling and storage) ...". In terms of clause 2 of the Agreement for Lease, the defender undertook to the pursuer "to procure that the Landlord's Works will be carried out in a good and workmanlike manner in accordance with good building practice using good quality materials of their several kinds ...". At clause 1.05 of the Employer's Requirements it is stated that the flatness of the roof slab is to be category 2 of Concrete Society Technical Report 34."

[4] It is on clause 2 of the agreement for lease, that the pursuer sues in the present action, averring various problems with the floor at the said premises, which they say arise from breach of the defender's obligations undertaken in terms of clause 2 of the agreement for lease.

[5] The second relevant contractual arrangement between the parties is a lease of the premises, a copy of which is 6/10 of process. The pursuer is the tenant under that lease and the defender is the landlord. That lease was granted in implement of an obligation on the defender contained in clause 11 of the agreement for lease, whereby the defender undertook to grant, or procure the granting of, a lease of the premises for a period of 20 years no later than "the Handover date". The "Handover date" was defined in the agreement for lease to mean "the later of (a) the date on which the Certificate of Practical Completion is issued or deemed to be issued pursuant to clause 4 and (b) the date of receipt by the Tenant of a Local Authority Completion Temporary Occupation Certificate ...". In terms of clause 14 of the agreement for lease, it was provided that that agreement should remain in full force as to any of the stipulations and obligations thereof "which shall not have been performed and remain to be performed notwithstanding the grant of the lease and the tenant and/or the landlord shall on request confirm the same in such manner as the landlord and/or the tenant may request from time to time." Moreover, in terms of clause 1.3 of the agreement for lease, it was provided that "in the event of any discrepancy or inconsistency between the terms of this Agreement and the terms of the Lease, the terms of this Agreement shall prevail."

[6] Clause 1.4 of the lease provided that the date of entry was "18 January 1999". Clause 5.3 of the lease is in the following terms:

"The tenant further undertakes to the landlord To accept the Premises at the commencement of this Lease as in all respects in good and substantial and tenantable repair and condition and in all respects fit for the purpose for which the Premises are let and at all times to keep the Premises in good and substantial and tenantable repair and condition and if necessary for such purposes, renew, reinstate and rebuild the same irrespective of the cause of damage necessitating any repair, renewal, reinstatement or rebuilding (subject always to the provisions of clauses 6.2 and 8) and to replace from time to time the Landlord's fixtures, fittings and appurtenances in the Premises which are beyond economic repair at any time during or at the expiration of the Period irrespective of the cause necessitating such replacement".

Clause 9.9 of the lease provides:

"This Lease embodies the entire understanding of the parties relating to the Premises or to any of the matters dealt with by any of the provisions of this Lease."

Clause 9.10 of the lease is in the following terms:

"The Tenant acknowledges that this Lease has not been entered into in reliance wholly or partly on any statement or representation made by or on behalf of the Landlord save insofar as any statement or representation is expressly set out in this Lease."

[7] In June 1999, the contractors and professionals who were engaged by the defender in respect of the construction of the said premises, provided certain collateral warranties in favour of the pursuer. Copies of these warranties are lodged as 7/2 to 7/5 of process, inclusive. Reference to these collateral warranties was made by the defender, in a minute of amendment lodged on 24 June 2004, No. 16 of process.

Procedural History to date
[8] On 15 April 2004, the court, at a procedural hearing, allowed the parties, of consent, a debate on the pursuer's preliminary pleas in law and the defender's first plea in law. As can be seen from the parties' respective notes of argument, Nos. 11 and 13 of process, which were lodged in advance of that procedural hearing, the issue which parties wished to debate was the relevancy of their respective pleadings in relation to the question as to whether the provisions of the lease had, in effect, superseded the provisions of the agreement for lease. The debate was set down for 17 and 18 June 2004. At that hearing Mr Buchanan, junior counsel for the pursuers appeared and Mr Murphy, Q.C. senior counsel together with Mr Gardiner, Advocate, appeared for the defender. It became clear at the very outset of Mr Murphy's submission that he wished to argue that the pursuer's case should be dismissed, not on the argument that the granting of the lease had had the effect that the provisions of the agreement for lease were superseded, but on an approach which involved construing the contractual arrangements between the parties, as a whole, and, in particular, having regard to the collateral warranties which were lodged by the defender, shortly before the commencement of the debate, but which were not, at that time, referred to in the defender's pleadings. No notice of this new approach had apparently been given to the other side, far less the court. Junior counsel for the pursuer expressed his concern about this departure from what had been the agreed basis upon which the debate would proceed at the time of the procedural hearing, and indicated that he would have wished the opportunity to discuss this new proposed line of argument with senior counsel who had been instructed on behalf of the pursuer. As senior counsel for the defender made it clear that he was no longer intending to seek dismissal of the pursuers on the basis of what might be called, in shorthand, "the supercession" argument, I considered that it was appropriate to discharge the diet of debate to allow the new line of argument to be properly intimated to the pursuers and the court. A new diet of debate was fixed for 6 July 2004. The defender, in the meantime, lodged the minute of amendment, No. 16 of process, referred to above. The pursuer lodged answers thereto, No. 18 of process. Both parties lodged revised notes of argument, Nos. 17 and 19 of process respectively. At the commencement of the debate, on 6 July 2004, I allowed the pleadings to be amended in terms of the minute and answers and, of consent, I reserved the question of expenses arising therefrom.

The Defender's submissions
[9] At the commencement of his submissions, senior counsel for the defenders invited the court to sustain the defender's first plea in law and to dismiss the action as being irrelevant. If the court was not with him in relation thereto, senior counsel submitted that the cause should be put out by order for discussion regarding further procedure. Senior counsel for the defender went on to submit that the question for the court was how the contractual arrangements between the parties, in particular the agreement for lease, the lease itself and the collateral warranties fell to be construed and to what effect. It was submitted that, when the lease was granted, the pursuer accepted the premises as being "in an agreed condition" and acquired the same rights and remedies which the defender had against the contractor and the professionals, by virtue of the collateral warranties which had been granted in favour of the pursuers by those parties. Where, as in the present case, the pursuer claimed that faulty workmanship, poor quality materials and negligent building practices had resulted in the pursuer having to incur expense in the repair and renewal of the premises, then that expense was only recoverable from the defender by the operation of clause 7 of the agreement for lease. Clause 7 of the agreement for lease is in the following terms:

"Defects Liability

Without prejudice to any of the rights of the Tenant against the Landlord:-

7.1 The Landlord will attend to or remedy all items within any snagging list (meaning minor faults or omissions appropriate for inclusion in the snagging list) as soon as reasonably practicable after the Date of Practical Completion.

7.2 The Landlord will make or procure that there are made good any defects in the Landlord's Works arising out of defective workmanship or materials or other faults attributable to a failure by the Building Contractor to comply with the terms of the Building Contract upon being notified thereof in writing by the Tenant within 12 months of Practical Completion with all reasonable speed and immediately in the case of emergency provided that the Tenant agrees for the purposes of this clause 7.2 only to be bound by the decision of the Architects as to whether or not there has been a failure by the Building Contractor to comply with the terms of the Building Contract .

7.3 The Tenant will permit the Landlord to have access to the Premises at reasonable times to prepare a schedule of defects itemising defects, shrinkages, and other faults due to materials or workmanship not in accordance with the Building Contract before Practical Completion and will deliver the schedule of defects to the Building Contractor within the applicable time limit for doing so under the Building Contract.

7.4 The Architects shall give to the Tenant's Surveyor not less than five Working Days prior written notice of the date upon which the Architects intend to inspect the Landlord's Works with a view to issuing the Notice of Completion of Making Good Defects pursuant to the Building Contract and the Tenants Surveyor shall be entitled to inspect the Landlord's Works and make representations as to why in his view the Notice of Completion of Making Good Defects as aforesaid should not be issued and the Landlord shall ensure that the Architects shall take into account such representations in deciding whether or not to issue the Notice of Completion of Making Good Defects aforesaid.

7.5 The Tenant will permit the Landlord and those authorised by the Landlord to have access to the Premises at reasonable time on written notice (save in the case of emergency) for the purposes of making good any such defects if the work concerned cannot be carried out reasonably conveniently other than from within the Premises.

7.6 The person so entering shall cause the minimum amount of interference and disruption to the Tenant's, trade or business as reasonably possible and make good any damage to the Tenants Works so called.

7.7 The repairing obligations of a Tenant under the Lease are to be waived to the extent that works are to be carried out by the Developer under this clause 7."

The pursuer, in the present case, it was submitted, had not operated the provisions of clause 7. They, therefore, could not rely on it. In that situation the pursuer must seek to recover any loss and expense, as claimed by them in the present action, against the contractors/professional team under the collateral warranties granted in their favour. This approach to matters, senior counsel for the defender submitted, made commercial sense, particularly having regard to what senior counsel described as the pursuer's "unequivocal obligation to repair" in terms of clause 5.3 of the lease. The pursuer's approach to matters required reading that obligation as being subject to a qualification where no such qualification was expressed in the wording of clause 5.3 itself or, alternatively, treating the provisions of clause 2.2.3 of the agreement to lease, as being akin to an indemnity, which negatived and contradicted the pursuer's repairing obligation. I should, at this stage, set out those provisions of clause 2 to which reference was made in the debate. They are as follows:

"2. The Landlord's Works.

2.1 As soon as practicable after execution of this Agreement the Landlord shall proceed with the construction of the Landlord's Works and shall use all reasonable endeavours to procure that the Date of Practical Completion occurs prior to the Construction Target Date.

2.2 Without prejudice to the generality of the foregoing the Landlord further undertakes to the Tenant as follows:

2.2.1 to obtain the Necessary Consents and as soon as the same are obtained to supply copies thereof to the Tenant;

2.2.2 to procure that the Landlord's Works shall be completed in conformity with the Necessary Consents;

2.2.3 to procure that the Landlord's Works will be carried out in a good and workmanlike manner in accordance with good building practice using good quality materials of their several kinds; if any of the materials referred to in the Plans and Specification shall not be procurable within a reasonable time or at a reasonable time or at a reasonable cost the Landlord shall be at liberty to substitute therefore such comparable materials of similar or superior quality with the prior consent of the Tenant, which consent shall not be unreasonably be withheld or delayed;

2.2.4 that it shall not instruct the use of Deleterious Materials in the Landlord's Work ..."

As has been seen it is upon clause 2.2.3 that the pursuers sue in the present action.

[10] It was submitted on behalf of the defender that, in the present case, the pursuer was bound, by its acceptance of an urban lease, and the acceptance of the premises as "in all respects in good tenantable repair and condition and in all respects fit for the purpose for which the Premises are let ..." to carry out any extraordinary repairs that were required. The complaints which the pursuer averred, regarding the condition of the floor, it was submitted, all related to matters covered by the repairing obligation in the lease and it followed that the responsibility for putting these matters remained with the pursuer, even if the defects in question had been inherent from the outset. For any redress in relation thereto the pursuer had to look to the collateral warranties. While it was accepted, on behalf of the defender, that it was perfectly possible to have a contract for the sale of heritage including a new building, which contained a "collateral obligation" which allowed the purchaser to claim damages against the seller for defects in the building, in the present case, it was submitted, the effect of the repairing obligation in the lease was to obliterate any such collateral obligation in the agreement for lease. In developing this submission, senior counsel for the defender, referred to various definitions contained in clause 1 of the agreement for lease and to the full term of clause 2 of the agreement for lease. He referred to clause 4 which deals with the issue of the Certificate of Practical Completion. Clause 5.1 it was pointed out, provides that the Landlord should insure the Landlord's works and the building and all other fixtures etc. until date of practical completion. The provisions of clause 7 were also revisited. That clause, it was said, was intended to operate, after the lease was granted, and provided the only qualification to the repairing obligation obtained in the lease. Putting matters another way, if the provisions of clause 7 were not operated, then the Tenant's repairing obligation was not affected. Clause 8 is the provision whereby the Landlord undertook to obtain in the Tenant's favour collateral warranties from the contractors and the professional team. Clause 11 provides for the granting of a lease for a period of 20 years. Senior counsel for the defender referred to clause 14 of the agreement for lease which I have set out above. I was referred to clause 7, in the various collateral warranties, provided for the pursuer. It allows assignation of the collateral warranty without the consent of the party granting the warranty, but only on one occasion.

[11] Certain of the provisions of the lease were then referred to by senior counsel for the defender, who pointed out that the building had been erected by the date of entry provided, including the fitting out works. Clause 8 of the lease provided that the landlord should insure and keep insured the premises for the full cost of reinstatement subject to the tenant paying the premiums. That provision, taken with what was described as the very full and onerous repairing obligation, imposed upon the Tenant, produced the result that the Tenant had no complaint against the Landlord for any defects in the premises, whether latent or patent. At one point in his submissions, senior counsel for the defender, formulated the defender's position in the following way. The repairing obligation contained in clause 5.3 of the lease, amounted to a representation by the pursuer, the Tenant, that it waived the obligation on the Landlord contained in clause 2.2.3 of the agreement for lease. Subsequently, however, senior counsel for the defender advised the court that, although he had used the word "waive" in the submission referred to, he was not relying, in advancing the defender's position, on the law relating to waiver or more generally the law of personal bar. His argument was one based simply on the proper construction to be placed on the wording used by the parties in the various contractual arrangements between them, having regard to the ordinary meaning of the words used. In that respect I was referred to the unreported decision in the case of City Wall Property (Scotland) Ltd v Pearl Assurance Plc, 25 July 2003. I was also referred to the unreported decision on the case of Thorn EMI v Taylor Woodrow Industrial Estates Ltd 29 October 1982 and Turners Trustees v Steel (1990) 2 F 363 in relation to questions of tenants' obligations to repair defects. In the last mentioned case it was held that where a tenant accepted, in terms of the lease, that the leased premises were "in proper tenantable condition and repair" and agreed to leave the premises "in good tenantable condition and repair at the expiry of this tack", the tenant was bound to execute all ordinary repairs that were necessary during the tenancy to keep the premises in tenantable condition. Both Lord Adam and Lord McLaren, at page 367, accepted that the relevant provisions, appearing, as they did, in an urban lease, did not absolve the landlord from carrying out extraordinary repairs. In House of Fraser Plc v Prudential Assurance Co Ltd 1993 S.L.T. 519, however, the Lord Ordinary, Lord Cullen, held that the wording contained in a particular urban lease had the effect of imposing the obligation on the tenant in respect of both ordinary and extraordinary repairs. Senior counsel for the defender submitted that, as a matter of construction, in the present case, the repairing obligation imposed in the lease on the pursuers, as tenants, resulted in the provisions of clause 2.2.3 in the agreement for lease having no subsisting affect. The pursuer's approach to the construction of the contractual arrangements would, on the other hand, have the effect of contradicting the Tenant's contention of fact, contained in clause 5.3 of the lease. It involved, in effect, imposing a qualification on the provisions of clause 5.3 which was not to be found in the clause itself. The pursuer's approach, moreover, begged the question as to why clause 7 found its way into the agreement for lease. What was the purpose of this clause, senior counsel asked, if clause 2.2.3 meant that the landlord would be liable, in any event, under that clause's provisions in relation to defects. The correct view of matters was that the effect of clause 2.2.3 was negatived, as between the Landlord and the Tenant, by the execution of the lease, and by the putting in place of the collateral warranties, and their coming into effect. As the pursuer's case was not pled on the basis of clause 7, the action, for the foregoing reasons, was irrelevant and should be dismissed.

The Pursuer's reply
[12] In reply senior counsel for the pursuer invited the court to sustain the pursuer's first plea in law which is in the following terms:

"The defender's averments in answer, anent the Agreement for Lease having been superseded by the Lease, being irrelevant et separatim lacking in specification, the defences in so far as directed thereanent ought to be excluded from probation".

He initially also submitted that the defender's first plea in law as to relevancy should be repelled ,but subsequently accepted that it should, perhaps, be reserved, meantime, as there may still be further points of relevancy that the defender may wish to take in due course.

[13] Senior counsel for the pursuer drew my attention to the fact that as well as the agreement for lease, the lease itself, and the collateral warranties, there was another agreement between the parties which is included in draft in the bundle which is 6/2 of process. It is described as "minute of agreement constituting licence for works". This, it was said, entitled the tenant to carry out certain works on the premises. It bears to take effect after the lease was granted. Clause (Third) of this agreement provided "Except insofar as amended by these presents, the whole terms of the Agreement for Lease and the Lease shall remain in full force and effect". (I should say that although this agreement is only produced in draft form, it was not contended on behalf of the defender that I was not entitled to look at this for the purpose of the debate, nor was it suggested that it had not in fact been executed). Senior counsel for the pursuer then reminded the court of the terms of clause 1.3 of the agreement of lease regarding the resolution of any discrepancy or inconsistency between the terms of that agreement and the terms of the lease. Clause 7 of the agreement for lease, it was pointed out, was prefaced with the words "without prejudice to any of the rights of the Tenant against the Landlord". Clause 7 therefore, it was submitted, was not intended to qualify, far less obliterate the provisions of clause 2 of the agreement for lease. It was, it was submitted, simply mechanical in character to provide a simple shortcut to remedy defects arising during the 12 month making good defects liability period. Clause 8 in the agreement for lease, in providing for the production of collateral warranties, did not provide that these should be in substitution for the Landlord's obligation, particularly those contained in clause 2. These warranties were additional to, and not in substitution for, the Tenant's existing rights and remedies, against the Landlord. Clause 10 of the agreement for lease demonstrated that the granting of the lease did not result in the Landlord's obligation in respect of the quality of the premises coming to an end. It provided as follows:

"Without prejudice to any other terms of this Agreement and notwithstanding Handover and the entering into of the Lease the Landlord shall at its own expense observe and comply with all monitoring and ground remediation measures required by the local Planning Authority, environmental agency or other competent authority arising out of matters contained or referred to in the Environmental Investigation Report prepared by Kerr Mellor Associates in February 1998 or as otherwise recommended by the Department or Environmental Services which includes (but is not limited to) those required by Condition 8 of the Planning Permission and the Landlord shall indemnify and keep the Tenant indemnified against all costs, claims, liability and demands arising by any breach or non-compliance of the Landlord in respect of the same."

Moreover, and most importantly, clause 14 put beyond argument, the submission, made on behalf of the defender, as to the effect that the granting of the lease had on the terms of the agreement for lease. While the defender placed great emphasis on the collateral warranties in favour of the pursuer, in support of its approach, these, did not, however, provide the tenant with exactly the same rights, either indirectly, or directly, against the contractor and professional team as arose from clause 2 of the agreement for lease. Reference for example was made to clause 1(a), of 7/4 of process. These collateral warranties provided the tenant with some safeguard in the event of insolvency or dissolution of the landlord. In arrangements like the present, the parties to the agreement for lease might well have been different from the parties to the lease which was, in the event, executed. In that situation the argument as to the construction to be put upon the various contractual arrangements would have been untenable. There was no reason, in principle, why it should be given any more validity, simply because the parties to both the agreement for lease and the lease itself happened, in the event, to be the same. The court should not accept the defender's submission, which was to the effect that clause 5.3 in the lease completely negatived the provisions of a clause in another agreement, the agreement for lease. Any room for the argument that the provisions of clause 5.3 removed the effects of clause 2 of the agreement for lease was completely undermined by the provisions of clause 1.3 of the agreement for lease. While it was accepted by the pursuer that there may be an issue as to whether the problems, which the pursuer avers have arisen in relation to the floor of the premises, amounted to a breach of the landlord's obligations under clause 2.2.3, that was a different question from the question as to whether any obligation in terms of clause 2.2.3 subsisted.

[15] In the whole circumstances I, therefore, reject the defender's argument in relation to the pursuer's pleadings, as advanced at the debate before me. There may well remain arguments to be made as to whether or not the matters complained of by the pursuer, as presently averred, by reason of the provisions of clause 2 of the agreement for lease, provide a remedy. Senior counsel for the defenders did, indeed, indicate that if the action was not to be dismissed, at this stage, the defenders would seek to challenge the pursuer's pleadings as to relevancy and specification, on the basis that what was complained of did not fall within the terms of clause 2 of the agreement for lease. Such matters are, however, for another day. The present decision is restricted to the relevancy of the pursuer's averments seeking to rely on clause 2 at all, standing the other contractual provisions obtaining between the parties.

[16] I shall have the case put out By Order for discussion regarding further procedure in light of the decision I have arrived at in relation to the arguments advanced at the debate.