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Cite as: [2005] ScotCS CSIH_53, 2005 SCLR 943, [2005] CSIH 53

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Caterleisure Ltd v. Glasgow Prestwick International Airport Ltd [2005] ScotCS CSIH_53 (01 July 2005)

EXTRA DIVISION, INNER HOUSE, COURT OF SESSION

Lord Hamilton

Lord Kingarth

Lord Emslie

[2005CSIH53]

A833/04

OPINION OF THE COURT

delivered by LORD EMSLIE

in the cause

CATERLEISURE LIMITED

Pursuers and Respondents;

against

GLASGOW PRESTWICK INTERNATIONAL AIRPORT LTD

Defenders and Reclaimers:

_______

For pursuers and respondents: E.W. Robertson; Henderson Boyd Jackson, W.S.

For defenders and reclaimers: Delibegovic-Broome; McClure Naismith

1 July 2005

Introduction
[1] This is a commercial action in which the pursuers claim damages for the premature termination of certain contractual arrangements under which they were to provide retail and catering services for the defenders at Prestwick Airport. Although these arrangements were agreed to be unitary in nature, they were substantially developed in the form of two separate written drafts which are hereinafter referred to as the "Licence Agreement" and the "Management Agreement". In broad terms the Licence Agreement provided for the pursuers to have the occupation and use of certain defined areas within the Airport premises, whereas the Management Agreement bore to regulate the provision of retail services by the pursuers from a substantial shop to which the Licence Agreement did not apply. By early January 2001, according to the pursuers, the terms of these drafts had been negotiated to a point at which the parties' principals orally agreed that a deal had been struck, and that the pursuers should commence operations at the Airport with effect from 8 January 2001. In anticipation of that stage being reached, the pursuers undertook several days of preparatory activity which, as narrated in Article 6 of their Condescendence, included inter alia the setting up of bank accounts and the placing of supply and employment contracts. In due course, the pursuers' operations commenced on 8 January 2001 as arranged. On the very same day, however, the defenders' managing director, Mr Wilson, telephoned to say that, since the contract did not have the approval of the defenders' new shareholder, it was now at an end and the pursuers must cease operations and remove from the Airport forthwith.

[2] In these proceedings the parties are in dispute as to whether the foregoing negotiated arrangements as claimed by the pursuers were contractually valid and enforceable. The pursuers' position is that the arrangements on which they acted, including the Licence Agreement and Management Agreement, were valid and binding as they stood, and that the formalities required for certain types of contract under the Requirements of Writing (Scotland) Act 1995 did not apply. In particular, while the Licence Agreement was doubtless a contract for the creation of an "interest in land" as defined in that Act, it had been granted for a period of less than one year and was therefore exempt from any formal requirement to be in subscribed written form. Alternatively, the pursuers' actings on the faith of the negotiated arrangements were effective to elide the formal requirements of the statute. Accordingly the defenders, having acted in breach of contract, should be found liable in damages. For their part, the defenders maintain on a variety of grounds (some of which are not material for present purposes) that by 8 January 2001 no legally binding contract had in fact been concluded between the parties. In particular, with regard to the 1995 Act, (i) the nature and duration of the Licence Agreement were such that nothing less than a subscribed written contract would have met the requirements of section 1(2); and (ii) by reference to section 1(4), the pursuers had not relevantly averred any basis on which they might be entitled to relief from the foregoing statutory formalities. In these circumstances, since the parties had never contemplated entering into the Management Agreement on its own, the pursuers were now left with no legitimate foundation for their claim of damages.

[3] So far as material for present purposes, section 1 of the Requirements of Writing (Scotland) Act 1995 provides as follows:

"(1) Subject to subsection (2) below and any other enactment, writing shall not be required for the constitution of a contract, unilateral obligation or trust.

(2) Subject to subsection (3) below, a written document complying with section 2 of this Act shall be required for -

(a) the constitution of -

(i) a contract ... for the creation, transfer, variation or extinction of an interest in land;

...

(b) the creation, transfer, variation or extinction of any interest in land otherwise than by the operation of a court decree, enactment or rule of law;

...

(3) Where a contract, ... mentioned in subsection (2)(a) above is not constituted in a written document complying with section 2 of this Act, but one of the parties to the contract... ('the first person') has acted or refrained from acting in reliance on the contract... with the knowledge and acquiescence of the other party to the contract, ... ('the second person') -

(a) the second person shall not be entitled to withdraw from the contract...; and

(b) the contract... shall not be regarded as invalid, on the ground that it is not so constituted, if the condition set out in subsection (4) below is satisfied.

(4) The condition referred to in subsection (3) above is that the position of the first person -

(a) as a result of acting or refraining from acting as mentioned in that subsection has been affected to a material extent; and

(b) as a result of such a withdrawal as is mentioned in that subsection would be adversely affected to a material extent.

.....

(7) In this section 'interest in land' means any estate, interest or right in or over land, including any right to occupy or to use land or to restrict the occupation or use of land, but does not include -

(a) a tenancy;

(b) a right to occupy or use land; or

if the tenancy or right is not granted for more than one year..."

Section 2(1) further provides:

"No document required by section 1(2) of this Act shall be valid in respect of the formalities of execution unless it is subscribed by the granter of it ... ".

[4] Against that background two main disputed questions were canvassed at the debate which took place before the Lord Ordinary in March and April 2004. First, on a proper construction of the Licence Agreement, was it granted for more than one year so as to require subscribed writing for its validity in terms of sections 1(2) and 2(1) of the 1995 Act? And second, did the pursuers' averred actings on the faith of the negotiated drafts, and the consequences of the defenders' premature withdrawal, nonetheless effectively override any such requirement for subscribed writing, and render the informal arrangements valid and enforceable by virtue of section 1(4) of the Act? By interlocutor dated 25 November 2004 the Lord Ordinary determined the first of these questions in the pursuers' favour, repelling the defenders' fourth plea-in-law and excluding certain related averments from probation. Apparently in consequence of that decision, he also excluded from probation the defenders' averments concerning the relationship between the Licence Agreement and the Management Agreement, although we note that the defenders' relative fifth plea was left standing and that, at paragraphs [31] and [49] of his opinion, the Lord Ordinary found it unnecessary to discuss the arguments presented to him in that context. As regards the second question, the Lord Ordinary took the view that it raised a matter of degree which could not properly be determined without inquiry. He therefore allowed a proof before answer on the parties' whole remaining averments. The defenders duly marked a reclaiming motion against that interlocutor, and a hearing on the Summar Roll has now taken place before us.

Submissions on the construction of the Licence Agreement
[5] Counsel for the defenders contended that the Lord Ordinary had fallen into error in this regard. In her submission the Licence Agreement, properly construed, was plainly granted for a specified period of 12 years notwithstanding the provision of certain options under which it might have been brought to an end at an earlier date. Where the Lord Ordinary had gone wrong was in treating the defenders' option to terminate the Licence Agreement on giving 6 months notice under Clause 5.4 as if that defined the term of the grant. The proper view was that the length of a mere notice period could not have that effect. The test was the period of the grant, and not the actual endurance of the contract, whether longer or shorter, and in that context it was immaterial whether any option to terminate arose on some specified date or event, or merely at the whim of the entitled party. In this particular agreement, the 12-year term was a matter of express definition at the outset, and clear references to that defined term thereafter appeared in many of the operative clauses. As might be expected, the Management Agreement was also expressly entered into for a 12-year term.

[6] In support of her argument on this point, counsel for the defenders referred us to the cases of Earl of Roseberry v Brown 7 March 1811, F.C. and Laing v Stephenson (1848) 11 D. 142, in which the existence of break clauses did not lead the court to question the defined term of the relative leases. More importantly, in Cummins Engine Co Ltd v Inland Revenue 1981 S.C. 365, the First Division required to consider the period for which a tenancy had been granted for the purposes of an assessment of liability under the Stamp Act 1891. The issue for decision was whether the lease was "for a definite term exceeding 35 and not 100 years" within the meaning of the First Schedule to that Act. The defenders there contended that, on a proper construction, the term of the lease was 99 years and remained unaffected by the existence of break options which might or might not be exercised. The pursuers, on the other hand, contended that the grant was for only 20 years, since that marked the first date at which the tenants could enforce an express option to terminate. Lord President Emslie, delivering the Opinion of the Court in the defenders' favour, said at p.369:

"From the lease the term is to be ascertained. Now the term specified is 99 years and this is the term to be taken for stamp duty purposes notwithstanding that contingencies are provided for which may lead to its termination before the expiry of 99 years. The lease may be terminated prematurely by the landlords who have the option to irritate the lease if the tenants should be in material breach of contract. It may also be terminated prematurely if the tenants choose to exercise their option to bring it to an end at any of the prescribed terms, all of which are within the period of the lease which confers the option. Under the lease the landlords (leaving possible irritancy out of account) are bound for 99 years. If neither party takes any action to bring the lease to an end before the expiry of 99 years the lease will endure for 99 years. The only proper conclusion to be drawn from this lease is that it must be regarded as a lease for 99 years which may, if the tenants take the appropriate action at a defined break, be terminated prematurely."

Subsequently in Wishaw and District Housing Association Ltd v Neary 2004 S.C. 463, an Extra Division reached the same conclusion where the issue was whether a Scottish assured tenancy was "... for less than 6 months" for the purposes of section 32(1) of the Housing (Scotland) Act 1988. On the question of construction the court followed the guidance given by Lord President Emslie in the Cummins case and went on to say:

"That decision is also illuminating in its recognition that the existence of a break clause (at least in favour of the tenant) does not have the result that the duration or term of the lease is restricted to the period ending with the date (or earliest date) at which, if the clause is operated, the relationship of landlord and tenant is brought to an end."

[7] In these circumstances, counsel for the defenders maintained that the Lord Ordinary had been wrong to repel her clients' fourth plea-in-law, and to exclude the related averments from probation. It was, however, a matter of regret that none of the foregoing authorities had been cited to the Lord Ordinary in the course of the debate.

[8] In reply, counsel for the pursuers invited us to hold that the Lord Ordinary had correctly construed the Licence Agreement, and that his decision on that issue should not be disturbed. Clause 5.4 was unusual, in the sense that it gave the defenders an unfettered option to terminate the Licence Agreement at any time on giving 6 months notice, and in a real sense 6 months constituted the limit of the guaranteed period of the grant. The intended significance of that clause was shown by the use therein of the words "... will cease and determine". Admittedly there were references elsewhere to a 12-year term, especially in clause 2, but that clause should be seen as a mere "aspiration" in the event that the 6-month termination did not occur. Although described in clause 4.2 as an "option to terminate", clause 5.4 was different in kind from the other options (for example those in clauses 5.1, 5.7 and 5.9) which were only exercisable in defined circumstances. The cases of Earl of Roseberry and Laing were of no material assistance in this context since the duration of the relative leases was not there in issue. Moreover, Cummins and Wishaw were cases which dealt with the construction of formal leases for the purposes of different statutes, and in Wishaw the court had expressly reserved its position as to the possible effect (under the statute in question) of an unfettered option exercisable by the landlord as opposed to the tenant. For the foregoing reasons, the Lord Ordinary's decision on this point should be affirmed.

Submissions on the pursuers' actings and their consequences
[9] For the defenders, counsel argued that the pursuers' averments demonstrably failed to meet the requirements of section 1(4)(b) of the 1995 Act, and that the Lord Ordinary should not have allowed a proof before answer in that regard. By analogy with the provisions of the Law Reform (Miscellaneous Provisions)(Scotland) Act 1985 concerning the rectification of documents, no relief was available under the 1995 Act to a party who alleged only that he would lose an intended benefit under the contract in question. If that were sufficient, then the requirement for writing would be elided in virtually all cases. What was necessary, in counsel's submission, was averments as to how the pursuers had been adversely affected to a material extent by the loss of the contract. For example, the loss of a house-purchase transaction might leave a party homeless, or the loss of a commercial contract might deprive a party of significant consequential advantages. There was, however, no relevant averment of that sort here, the pursuers' Article 8 being essentially limited to the loss of anticipated contractual profit.

[10] As against that, however, counsel conceded that the pursuers had been affected to a material extent for the purposes of section 1(4)(a) of the Act, and that any averment of materially adverse consequences might be sufficient for the purposes of section 1(4)(b). A question of degree thus potentially arose, although in counsel's submission that would not automatically justify the allowance of proof. Over and above that, counsel acknowledged that she had not sought to challenge the relevancy of the pursuers' claim of damages in which significant consequential losses were alleged.

[11] For his part, counsel for the pursuers maintained that the statutory test was simply worded and that, at the stage of relevancy, it could not be said that it had not been met. It was sufficient for the pursuers to aver that they had been adversely affected to a material extent by the defenders' premature withdrawal from the parties' contract. The issue was one of degree which could not properly be resolved without proof, and in all the circumstances the Lord Ordinary had been well entitled to take the course he did. The pursuers' pleadings should, moreover, be considered as a whole, with account being taken of both Articles 6 and 8 in this connection.

[12] In all the circumstances, the pursuers' position was that the Lord Ordinary's decision should not be disturbed, that the reclaiming motion should be refused in its entirety, and that the case should be remitted back to the Lord Ordinary for further procedure.

Discussion
[13] On the matter of construction of the Licence Agreement we conclude, ultimately without much hesitation, that the intended term of the grant was 12 years notwithstanding the existence of certain stipulated options which might or might not be exercised at an earlier date. In particular, it is significant that the parties began by defining the "Term" of the Licence Agreement in clause 1.1 as meaning "... the period commencing on and including the Commencement Date [8 January 2001] and expiring on 7 January 2013". Clause 2.1 then provided as follows:

"2.1 The Licensor hereby grants to the Licensee a Licence from the Date of Entry [also 8 January 2001] for the Term to use the Licensed Area... for the purposes of the Business."

What is important here, in our view, is the juxtaposition of the verb "grants" with an express reference to the "Term". Thereafter, under clause 3, the licensee's obligations were specified as subsisting "... throughout the Term"; clauses 3.1.4, 3.5, 3.6 and 3.7 all imposed obligations on the licensee by reference to the "Term"; and clause 4.1 further referred to the "Term" as defining the measure of the licensee's rights.

[14] Against that background we are unable to accept that, on a proper construction of the Licence Agreement, the term of the grant was anything other than the 12-year period expressly defined, or that that term was affected to any degree by the existence of the various options for which provision was made in clause 5.4 and elsewhere. In our opinion the principle to be applied in such cases is correctly set out in the opinion of Lord President Emslie in the Cummins case, and also in the later decision of the Extra Division in Wishaw, and we reject the pursuers' contention that in this respect a contract of licence should be treated any differently from a lease.

[15] In theory, perhaps, it is conceivable that the unfettered entitlement of the grantor to terminate a given lease or licence at a certain stage might be accorded primary significance, as regards duration of the contract, by comparison with weaker indications elsewhere in the deed. But that is plainly not the position here, where the overriding emphasis throughout the Licence Agreement is on the defined 12-year term which would subsist so long as no step was taken by either party to exercise a relevant option to bring it to an end at an earlier date. We also recognise that, for other purposes, the potential for early termination of a lease or licence may be a relevant consideration. It may, for example, have a material bearing on the measure of damages claimable in respect of a breach of contract, and indeed appears to have played a part in determining the level of the pursuers' claim in the present case. However, as regards identification of the term of the grant, the position is in our view entirely different. Giving proper effect to the statutory language, we do not consider that the right which the pursuers claim to occupy and use land under the Licence Agreement is excluded from the requirements of sections 1 and 2 of the 1995 Act as being a right " ... not granted for more than a year". We therefore hold the defenders' reclaiming motion to be well-founded on this point.

[16] Turning now to the relevancy of the pursuers' averments for the purposes of section 1(4)(b) of the 1995 Act, we can deal with this matter quite shortly. As counsel for the defenders effectively conceded, the issue is one of degree to be determined in the particular circumstances of an individual case. The statutory test is simple, referring only to the materiality of adverse effects, and in our opinion it cannot be said that the Lord Ordinary wrongly exercised his discretion in allowing a proof before answer on this and other matters. The defenders accept that, on averment, the pursuers were affected to a material extent for the purposes of section 1(4)(a); no challenge is offered to the relevancy of the pursuers' claim of damages; and although the case might have been better pled we think that it would be going too far to hold that the pursuers' averments in Article 6 must be left out of account in determining the issue which arises under section 1(4)(b). At a proof, as it seems to us, the pursuers' averments, taken as a whole, may support the leading of evidence capable of bringing them within the protection afforded by section 1(4). Accordingly, while we see some force in the defenders' contention that mere loss of anticipated benefit under a contract will not necessarily be sufficient for this purpose in all cases, we are satisfied that the Lord Ordinary was entitled to take the course which has been challenged before us.

Disposal
[17] For the reasons given in paragraphs [13] to [15] above, we shall recall those parts of the Lord Ordinary's interlocutor in which he repelled the defenders' fourth plea-in-law and excluded their related averments from probation. In addition, while acknowledging that the matter was not specifically argued before us, we think that it would also be right to recall that part of the interlocutor in which the Lord Ordinary sustained the pursuers' fifth plea and excluded from probation the defenders' averments as to the relationship between the Licence Agreement and the Management Agreement. As narrated in paragraph [4] above, this part of the interlocutor seems to have depended on the Lord Ordinary's treatment of the defenders' fourth plea-in-law with which we are unable to agree, and in addition the terms of paragraphs [31] and [49] of the Lord Ordinary's opinion would appear to leave this aspect of the case in a somewhat uncertain state. Moreover, as it seems to us, the relationship between the Licence Agreement and the Management Agreement may ultimately prove to be of some significance, not only on account of the issue focused in the defenders' fifth plea-in-law, but also because we have some doubt as to why only the Licence Agreement was said to be affected by the Requirements of Writing (Scotland) Act 1995. It is at least arguable, in our view, that the Management Agreement provided for the occupation and use of the shop premises by the pursuers, and restricted the defenders' rights in that connection.

[18] Having come this far, and having concluded that none of the parties' preliminary pleas can properly be sustained at this stage, it seems to us that the best course would be to recall the whole of the Lord Ordinary's interlocutor so that future procedure, and in particular the form and scope of the proof which will now be required, can be put out By Order for discussion in the context of a commercial action. It was, for example, suggested before us that a preliminary proof before answer might be appropriate on the issue of materiality arising under section 1(4)(b) of the 1995 Act. There was also some argument as to whether the pursuers could legitimately pursue a claim in respect of the Management Agreement alone if they were ultimately unsuccessful on the enforceability of the Licence Agreement. In our view it would be appropriate for these issues, among others, to be considered at first instance by the commercial judge.

[19] In granting the reclaiming motion we shall therefore recall the Lord Ordinary's interlocutor of 25 November 2004 in its entirety, and remit the case to him to proceed as accords in light of our decision.