|
OUTER HOUSE, COURT OF SESSION
[2007] CSOH 123
|
|
CA25/06
|
OPINION OF LORD REED
in the cause
MACDONALD ESTATES
PLC
Pursuers;
against
REGENESIS (2005)
DUNFERMLINE LTD
Defenders:
ญญญญญญญญญญญญญญญญญ________________
|
Pursuers: Sandison;
Brodies LLP
Defenders: Connal, Q.C., Solicitor Advocate; McGrigors
11 July 2007
Introduction
[1] This is the latest in a
series of cases before the Commercial Court in recent times concerned with the
question where the costs incurred with a view to undertaking the development of
land (including, in particular, the costs involved in applying for planning
permission) should lie in the event that the development does not proceed. In the present case, the pursuers maintain
that they are entitled, under their contract with the defenders, to be
reimbursed for professional fees and other outlays which they incurred,
amounting altogether to more than ฃ500,000.
The defenders on the other hand maintain that that is not the effect of
the parties' contract. Alternatively, in
the event that that is the effect of the contract, the defenders maintain, by
way of a counterclaim to the principal action, that the contract fails to
reflect the agreement between the parties and should therefore be rectified.
[2] The
case has come before the court for proof before answer on the question of
liability, under the principal action, and on the question of rectification,
under the counterclaim. The quantification
of the pursuers' claim has been left over to be dealt with, if necessary, at a
later stage.
The witnesses
[3] Before turning to the
facts, it may be useful to note at the outset my assessment of the
witnesses. Evidence was given on behalf
of the pursuers by their chief executive, Mr Dan MacDonald, their managing
director, Mr Kevin Robertson, and their finance director, Mr Gordon
Lawson; by Ms Brenda Scott and
Mr Nick Scott, both partners in Brodies, who are the pursuers'
solicitors; and by Mr Ken Ross, the
chairman of the Elphinstone Group, who gave evidence of commercial practice in
the property development industry.
Mr MacDonald and Mr Robertson were involved only in the
initial stages of the dealings with which the proof was concerned. Mr MacDonald did not appear to have a
clear recollection of the events, which occurred several years ago, and
Mr Robertson's recollection also appeared to be unreliable in the light of
the contemporaneous documents.
Mr Lawson appeared to me to be an unconvincing witness: he had a tendency to avoid giving direct
answers to questions, and his evidence was at times inconsistent. The evidence of Ms Scott, Mr Scott
and Mr Ross was relatively straightforward.
[4] Evidence
was given on behalf of the defenders by Mr Peter Lawson (unrelated to
Gordon Lawson), a partner in Burness, who were at the material time the
defenders' solicitors; by his assistant,
Mr Nick Williamson; by Mr Alfred Stewart,
the principal of the defenders; by
Ms Michelle MacDonald, n้e Forrest, who was at the material time
Mr Stewart's employee, but who is now married to the pursuers'
Mr MacDonald; and by
Mr William McVicar and Mr Roano Pierotti, chartered surveyors who
gave evidence relating to practice in the property development industry. Mr Lawson and Mr Williamson were
impressive witnesses. Subject to some
minor points on which their recollection may have been at fault, I accept their
evidence in its entirety.
Mr Stewart was an elderly man whose recollection of events was
often vague or at odds with the contemporaneous records, and I did not consider
him an entirely reliable witness.
Ms MacDonald was a reluctant witness, who gave the impression of
wishing to distance herself from the events in question. Her evidence was difficult to reconcile with
the contemporaneous documents and with the evidence of other witnesses, and I
do not regard it as reliable. The evidence
of Mr McVicar and Mr Pierotti was relatively straightforward.
The factual background
[5] In 1999 Mr Stewart was
on the verge of retiring, after a long career as the managing director of a
housebuilding company, Alfred Stewart Properties Ltd ("ASP"), which carried on
business in the Dunfermline area. He decided to acquire a large area of land in
the centre of Dunfermline, which had been unoccupied for
a number of years. Some of the buildings
were in a dilapidated condition.
Mr Stewart had it in mind also to secure control of some adjoining
areas of land so as to form, with the land which he had already acquired, a
site which would be capable of comprehensive re-development, in partnership
with a developer, so as to provide Dunfermline with a
major new shopping centre.
Mr Stewart envisaged that this would be the final project of his
career. ASP by this stage had only one
employee besides himself:
Ms Forrest, a former personal assistant who ran the office, and had
the job title of project co-ordinator.
Mr Stewart also formed another company, Regenesis (Dunfermline)
Ltd ("RDL"), as a vehicle for the project.
[6] Mr Stewart
instructed architects and other professional advisers, and plans for the
proposed development were prepared. A
number of developers were approached, but they showed little interest in the
project. During 2002, the architects
approached the pursuers, who are a property development company specialising in
the development of shopping centres and other large retail developments. They have a small number of staff, and
instruct external consultants, such as architects, traffic engineers and
retailing consultants, as necessary.
[7] The
pursuers' chief executive, Mr MacDonald, and their managing director,
Mr Robertson, met Mr Stewart and Ms Forrest on a number of occasions during
May and June 2002, to discuss the site and its possible development. Mr MacDonald concluded that the site
offered an attractive opportunity for his company. He and Mr Robertson agreed to outline to
Mr Stewart the type of joint venture which they would regard as
feasible.
[8] Following
these meetings, on 25 June 2002
Mr Robertson sent RDL a joint venture proposal [No. 31/3 of process]. The proposal was not intended to have
contractual effect, and stated:
"Please note that the terms of
this heads of terms document are an outline of our proposal and any contract
will only be entered into by means of an exchange of Missives between
Solicitors".
The proposal was that the pursuers
would enter into a 50:50 joint venture with RDL to undertake the development of
the site. The joint venture would be
subject to three pre-conditions:
"a. Satisfactory planning permission being
received for the proposed development.
b. Legal agreements being entered into
with such third party landowners as is required to enable the development to
proceed.
c. Pre-let agreements being entered into
with anchor stores within the development."
In relation to costs,
paragraph 2 of the proposal stated:
"The project costs and profits
would be shared on an equal basis between R(D)L and ME [the pursuers] subject
to 3b below."
Paragraph 3 stated:
"a. The R(D)L existing property holdings
will be acquired by the JV [joint venture] at an agreed value.
b. ME will fund the costs of the planning
and all professional fees and other associated costs in progressing the project
from a date to be agreed up until detailed planning permission is obtained.
c. After detailed planning permission is
obtained, ME will obtain the required funding for the development on a basis to
be agreed with R(D)L."
[9] In
relation to paragraph 3b, Mr MacDonald and Mr Robertson said in
evidence that by "funding" the costs they had meant merely paying for the costs
in the first instance: they had envisaged
that, if the project proceeded, the costs would ultimately be borne by the
joint venture; and they had not
considered what would happen in relation to the costs if the joint venture did
not proceed. Mr Stewart and Peter
Lawson, on the other hand, said in evidence that they understood the pursuers'
proposal as meaning that the pursuers would bear the costs involved in
progressing the project from a date to be agreed until planning permission was
obtained, and that the other costs of the project would be shared equally. I accept their evidence that that was how
they understood the proposal.
[10] At a further meeting with Mr Robertson on 28 June,
Mr Stewart and Ms Forrest indicated that they would instruct Burness,
solicitors, to take the matter forward.
Mr Robertson then passed the matter on to Gordon Lawson to deal
with legal matters.
[11] On 11 July Peter Lawson, the partner in Burness who acted
for Mr Stewart and the companies associated with him, wrote to Mr Scott,
the "relationship partner" in Brodies who acted for the pursuers, enclosing
draft heads of terms [No. 31/4 of process] for the proposed joint
venture. The draft heads of terms
envisaged a joint venture agreement ("JVA") between the pursuers and RDL, under
which they would subscribe for equal numbers of shares in a joint venture
company ("JVC"), which would acquire the properties owned by RDL or its parent
company and undertake the development.
The completion of the JVA would be subject to the satisfaction of three
conditions precedent, covering the obtaining of planning permission, site
assembly and pre-letting. The draft
heads of terms also stated, at paragraph 12:
"ME will fund the costs of the
planning and professional fees and other associated costs incurred in
furthering the Development from [1 June 2002] until detailed planning
permission, such as to allow the Development to proceed, is obtained [the Costs].
For the avoidance of doubt, the Costs shall include, but shall not be
restricted to, the costs and expenses listed in Annex 1. All costs, expenses or charges in connection
with the Development which are incurred after the grant of detailed planning
permission shall be borne by the JVC".
That clause was intended to provide
a framework for agreeing the nature of the costs to be borne by the pursuers,
the date from which they would bear the costs, and their amount. The draft heads of terms were not intended to
be legally binding, but to form a basis, as the document stated, for the
parties to "endeavour in good faith to agree the detailed terms of the joint
venture, on the basis of the principles set out in these Heads of Terms". Peter Lawson and Mr Williamson stated in
evidence that the negotiation of the detailed terms of a joint venture would
not normally be a particularly adversarial process, since the parties were
choosing to form what was in effect a partnership. If one party's view were to change to such an
extent as to affect the "deal" agreed at the outset, they would expect that
party to say so and to propose an amendment of the "deal". Gordon Lawson, on the other hand, said in
evidence that he would not necessarily spell out to the other party a departure
from agreed heads of terms.
[12] Mr Scott saw little purpose in revising Burness's draft
heads of terms, since they were not intended to be legally binding. He preferred to proceed directly to the
negotiation of a contract. He told his
partner Ms Scott, who specialised in company law, that they were not
looking at the heads of terms produced by Burness.
[13] On 22 July Mr Scott met Gordon Lawson and
Mr Robertson to discuss the matter.
Later that day, Mr Scott e-mailed Peter Lawson [No. 31/5 of
process]:
"I met my clients this morning,
and received from them an indicative heads of terms which they provided to your
clients in June [i.e. the proposal sent on 25 June].
Broadly the two accord [i.e. the
proposal sent on 25 June, and the heads of terms prepared by Burness] and
I think the simplest thing is for you to let me have a draft contract for
consideration..."
Mr Scott then mentioned a
number of specific points, some of which were concerned with the implications
of taxation for the structuring of the joint venture. He continued:
"3. It is agreed that my clients will pick up the professional
and other costs incurred in pursuing planning, optioning the various land
interests, pre-letting the scheme and the like.
If the deal aborts, that will be
their risk. If, however, it becomes
unconditional those costs should be JV costs.
I'm not sure that was what your draft suggested but it is what my
clients expect to happen.
The principal caveat to this is
that my clients will need to review the schedule of costs you have provided,
and the existing professional team appointments/fee arrangements. They are also to come back to me on the
actual date from which they will 'take over' the fees. But I trust that needn't hold up progressing
the legals" (emphasis added).
That e-mail was copied to Gordon
Lawson and to Brenda Scott.
[14] In his evidence, Mr Scott said that he did not remember
the meeting which had preceded the sending of the e-mail. Mr Robertson, in his evidence, said that
he did not remember costs being discussed at the meeting, but he assumed that
the matter dealt with in paragraph 3 of the e-mail must have been
discussed. Gordon Lawson also said in
evidence that he did not remember the matter being discussed at the
meeting. It appears to me to be probable
that the matter was discussed. In
particular, Mr Scott's statement in
the first sub-paragraph that the arrangement described there "is what my
clients expect to happen", and his statement in the second sub-paragraph that
"they are also to come back to me on the ... date", suggest that the matter had
been discussed.
[15] As I have mentioned, the e-mail was copied to Gordon
Lawson. He said in evidence that he
remembered receiving it, and reading paragraph 3. Although he did not remember the discussion
at the meeting, he was of the opinion that Mr Scott had misunderstood the
pursuers' position. He did not however
take any action, after receiving the e-mail, to draw the error to
Mr Scott's attention.
Mr Lawson said that he had not done so, because the transaction was
still in the course of negotiation. I found
that evidence unconvincing. The fact
that the negotiations had not yet been completed was no reason not to correct
an error of understanding on the part of Mr Scott, if there had been such
a misunderstanding. It appears to me to
be more likely that Mr Scott had acted in accordance with the instructions
which he had received.
[16] On 25 July Peter Lawson e-mailed Mr Scott
[No. 31/6 of process], agreeing to produce a draft joint venture
agreement. In relation to
paragraph 3 of Mr Scott's e-mail of 22 July, Mr Lawson
responded:
"We agree that your clients will
pick up costs etc, and we look forward to your client's comments on the
schedule of costs. As stated in our
draft Heads, our clients are assuming that the actual date from which your
clients will take over the fees is 1 June
2002."
[17] In his evidence, Mr Scott said that he would not have
regarded himself as free, following that exchange of e-mails, to put forward a
different proposal regarding costs, in the absence of a change of circumstances: that was a matter which was settled for the
course of the negotiations, subject to the issues which had been raised regarding
the schedule and the date. He added,
however, that if there were changes which caused a party to re-appraise aspects
of the deal, that was part of the negotiation.
Nothing was final until a contract was signed. Peter Lawson similarly said in evidence that,
following the exchange of e-mails, he considered that there was a common
understanding that the pursuers would meet the costs, and "keep" them if the
joint venture did not proceed, and that all that remained was to agree the
details as to the categories of costs involved and the date from which the
pursuers would be responsible for them.
At the same time, he did not regard any matters dealt with in the
e-mails as being incapable of being revisited.
Gordon Lawson, in his evidence, said that he remembered receiving and
reading Peter Lawson's e-mail. He maintained
that he had understood the words "pick up costs" as meaning that the pursuers
would fund the costs initially and be reimbursed, not as meaning that they
would bear the costs if the joint venture did not proceed. He did not regard the pursuers as having
adopted any definite position as to what they were going to do about
costs. In cross-examination, however,
Mr Lawson accepted that Peter Lawson had stated his agreement with what
Mr Scott had said, and that what Mr Scott had said in the earlier
e-mail meant that the pursuers would bear the costs if the joint venture did
not proceed, and not merely fund them in the first instance. Mr Lawson accepted that he had known
what had been said and agreed, and that he had taken no steps to do anything
about it. He maintained that that was not
because Mr Scott had acted in accordance with the pursuers' instructions,
but because the parties were still some way off agreeing a legal document. I found that evidence unconvincing.
[18] On 6 August Peter Lawson's assistant, Mr Williamson,
e-mailed Mr Scott a draft JVA between the pursuers and ASP. Before considering the draft, it should be
noted how, on the evidence, solicitors currently go about drawing up contracts
relating to commercial property transactions.
Mr Scott explained that the negotiation of contracts of this kind
does not normally involve meetings or discussions between the parties, or even
between their lawyers. Such negotiations
proceed electronically. One solicitor
will take as a starting point a draft contract stored electronically as a
template. He will make suitable
adaptations to it, then e-mail the draft to the solicitor acting for the other
party. That solicitor will then return
by e-mail a revised version of the document, possibly after taking instructions
from his client. This process continues
until both solicitors are content with the draft. It will then be signed by their clients, to
conclude the contract. This explanation
is consistent with the evidence of Peter Lawson and Mr Williamson. The process which Mr Scott described
largely reflects what happened in the present case, subject to the
qualification that one meeting took place between the parties, as explained
below.
[19] Clause 2.1 of the draft JVA [No. 31/7 of process] provided
for the fulfilment of three conditions:
satisfactory detailed planning permission being received for the
development of a shopping centre on the site;
satisfactory agreements or consents from third party owners of land
forming part of the site; and pre-let
agreements being entered into with anchor stores. Clause 2.2 provided that the pursuers
would have primary responsibility for procuring that those conditions precedent
were fulfilled, but that each party would use all reasonable endeavours. If the conditions were not fulfilled by a
given deadline, the agreement would automatically terminate. Clause 3.1 provided for the
incorporation of the JVC.
Clause 3.2 provided that, in the event that the conditions
precedent were fulfilled, the pursuers and ASP would each subscribe for shares
in the JVC, and
"(g) the following [agreed form] ancillary
agreements shall be entered into, namely:
[(i) the Asset Transfer Agreement between ASP
and the JVC relating to the transfer of the Properties for a consideration of
ฃ[valuation to be discussed], to be
satisfied in cash;]
[(ii) the Banking Arrangements];
[(iii) other agreements?];
[(iv) the [Management] Services Agreement
between and the JVC relating
to the provision of services to the JVC as therein provided;]"
The square brackets signified that
the matter in question was not determined.
[20] In relation to clause 3.2(g)(iv), it appears from the
evidence of the solicitors that it would be common in a situation of this kind
for there to be a management services agreement (MSA) relative to the
development. It is to be noted that, in
terms of the original draft of the JVA, the MSA was to be entered into only in
the event that the conditions precedent were fulfilled. Mr Williamson, who prepared the draft
JVA, explained that clause 2.2 imposed an obligation on the pursuers to
make progress only up to the point when the conditions precedent were fulfilled. After that point, since the JVC would not
have employees, it would be reliant on the pursuers to take the development
forward. There therefore had to be some
obligation on the pursuers to make progress with the development after the
conditions precedent had been fulfilled.
Such an obligation could be imposed either in the JVA itself or in a
separate MSA.
[21] Mr Scott, on the other hand, regarded the suggestion of a
MSA as a potential means by which one party to the joint venture could take out
a larger share of the profit than the other party, since it would enable the
former party to receive a "top slice" from the JVC by way of a fee, before the
net profit of the JVC (after payment of the fee) was divided between its
shareholders. The parties themselves, as
explained below, appear to have regarded the legal paperwork as all comprising
a single joint venture agreement.
[22] In relation to costs, clause 12.2 of the draft JVA provided:
"ME shall be responsible for all
planning and professional fees and other associated costs incurred in
furthering the Development from [1 June 2002] until detailed planning
permission is achieved in terms of clause 2.1(a) (the Costs). For the avoidance of
doubt, the Costs shall include, but shall not be restricted to, the costs and
expenses listed in Schedule [5]. If each
of the Conditions Precedent described in clause 2 is fulfilled or waived
and Completion is effected in terms of clause 3 then the JVC shall become
responsible for such costs and shall reimburse ME accordingly [when funds
become available so to do]."
Peter Lawson explained in evidence
that this provision was intended to implement the earlier understanding,
reflected in the exchange of e-mails between himself and Mr Scott. It is apparent that clause 12.2 was
modelled on paragraph 12 of Burness's draft heads of terms.
[23] Although the draft JVA did not envisage that the JVC would be party
to the contract, it provided in clause 11 that ASP and the pursuers would
each use their votes in the JVC to ensure that the JVA was performed. Finally, the draft JVA contained an "entire
agreement" clause.
[24] In his e-mail of 22 July, Mr Scott had said that the
pursuers were keen to get a schedule of the property interests owned by third
parties. On 16 August Burness
provided the information requested. Site
assembly was not straightforward: for
example, one of the sites to be acquired was a church, whose congregation would
have to be found another place of worship.
This was one of a number of factors which, over a period of time, caused
the pursuers to re-appraise the degree of risk involved in the project, and (as
Mr Robertson put it) affected their attitude to costs, making them
determined to try to recover their costs.
They did not however make their concern known to ASP or Burness.
[25] On 26 August Mr Scott e-mailed Burness a revised
draft of the JVA, and suggested a meeting, attended by the clients, to agree
matters and conclude the agreement. That
meeting was subsequently arranged to take place on 4 September.
[26] In the revised draft JVA [No. 31/11 of process], Brodies
proposed that the JVC should be formed immediately, and have the land
transferred to its ownership at the outset.
It was suggested that this would result in a saving of stamp duty. Clause 2.1, as revised, was in broadly
similar terms to the original draft.
Clause 2.2 specified the deadline for the fulfilment of the conditions
precedent as three years from the date of the JVA, and was otherwise in similar
terms to the original draft. Clauses 3.1 and 3.2 were in broadly
similar terms to the original draft.
Clause 3.2(g) provided, as before, for ancillary agreements to be
entered into in the event that the conditions precedent were fulfilled,
including:
"[(iv) the [Management] Services Agreement between
ME and the JVC relating to the provision of services to the JVC as therein
provided;] ME willing to provide admin services
etc in Services agreement - can you please suggest a draft of what is required
and fee proposal]".
The words from "ME willing" to the
end of the clause had been added by Mr Scott. Although he maintained in evidence that these
revisals had been made by his colleague Ms Scott, her evidence to the
contrary is more consistent with the other evidence in the case, to the effect
that issues relating to the MSA were dealt with by Mr Scott, and appears
to me to be more likely to be correct.
[27] The revisals imply that the pursuers were willing, for a fee, to
provide "administrative services" under the MSA. This was the first time it had been suggested
that the pursuers would be paid a fee, and the first time it had been suggested
that they would perform "administrative services". Given the pursuers' responsibility under
clause 2.2 of the draft JVA for procuring that the conditions precedent
were fulfilled (which included the obtaining of planning permission), the
provision in clause 12.2 (discussed below) that the pursuers were to be
responsible for the costs incurred up until the obtaining of planning
permission, and the provision that the MSA was to be entered into after the
conditions precedent had been fulfilled, the "administrative services" which could
fall within the scope of the MSA, as envisaged at this stage, would have to be
different from, and subsequent to, the work carried out by the pursuers in
order to obtain planning permission and to procure the fulfilment of the other
conditions precedent. Gordon Lawson's
evidence, that the services which were envisaged at this stage as being
provided under the MSA were the obtaining of planning consent and pre-lettings,
and were therefore not aptly described as "administrative", is inconsistent not
only with the use of that description in Brodies' revisals to the draft JVA
(which Mr Lawson saw at the time) but also with the structure of the draft
JVA as it then stood.
[28] In relation to costs, the revised draft of clause 12.2
provided:
"ME shall be responsible for all
planning and professional fees and other associated costs incurred in
furthering the Development from [date to be confirmed but to reflect the date
on which ME began instructing the relevant professionals - and historic costs
limited to architect and traffic engineers only] until detailed planning
permission is achieved in terms of clause 2.1(a) (the Costs). For the avoidance of
doubt, the Costs shall include, but shall not be restricted to, the costs and
expenses listed in Schedule [5] [PROVIDED NOT A MONETARY AMOUNT AS NOT POSSIBLE
TO SET COST RESTRICTIONS AT THIS STAGE ALTHOUGH A MECHANISM FOR CONTROL CAN BE
DISCUSSED]. If each of the Conditions
Precedent described in clause 2 is fulfilled or waived and Completion is
effected in terms of clause 3 then the JVC shall become responsible for
such costs together with any applicable VAT and shall reimburse ME accordingly
at Completion."
In relation to Brodies' revisals,
Gordon Lawson accepted in evidence that the only matters raised at that time
concerned the date from which the pursuers would accept responsibility for
costs, and the form in which the costs were to be listed in the schedule: the same two issues as had remained to be
settled following the exchange of e-mails in July.
[29] As in the original draft, clause 11 provided that ASP and
the pursuers would use their votes in the JVC to ensure that the JVA was
performed. Finally, the revised draft
contained an "entire agreement" clause in the same terms as the original draft.
[30] On receiving the revised draft JVA, Peter Lawson noted the
revisals to clause 3.2(g)(iv). They
were consistent with what he had in mind:
the services provided under an MSA would typically involve liaising with
professional advisers and tenants and reporting to the JVC on the progress of
the project, and were therefore aptly described as administrative. There was however at that stage no very clear
idea of what services the pursuers would provide under the MSA: in general terms, they would deliver the
development. The revisals to
clause 12.2 were equally as expected:
he understood that there was no issue as to where the risk would lie in
relation to the costs referred to in the clause, in the event that the
conditions precedent were not fulfilled.
Since the pursuers were to be responsible for costs up to that stage,
any fees payable under the MSA would arise only subsequently: the pursuers were not being paid a fee for
the work involved in securing the fulfilment of the conditions precedent.
[31] Reporting to ASP on the revisals, Mr Williamson said, in
connection with the revisals to clause 3.2(g)(iv), that a manager would
typically be paid a fee equal to a percentage of the passing rent of the
shopping centre. In his evidence,
Mr Williamson (who had, at the time in question, only two years'
experience as a solicitor) candidly acknowledged that that had not been a
sensible thing to say: a fee of that
kind was appropriate for the managing agents of a shopping centre, and it was
not envisaged that the pursuers would perform a role of that kind. I accept that evidence. Like Peter Lawson, Mr Williamson
understood the revised draft of clause 12.2 as implying, as previously
understood, that the costs referred to would not be reimbursed to the pursuers
if the conditions precedent were not fulfilled.
[32] After taking instructions from Ms Forrest,
Mr Williamson e-mailed Mr Scott on 29 August [No. 31/12 of
process] with comments on the revised draft JVA. He indicated that Burness agreed with the
view that it would be tax efficient to transfer the property to the JVC sooner
rather than later. In relation to
clause 3.2(g)(iv), he wrote:
"In relation to the provision of
management services, there has not previously been any discussion regarding any
fee being payable to Macdonald Estates.
Our clients do not envisage any such fee being payable."
That reflected Ms Forrest's
instructions that fees did not form part of the deal, and that the pursuers
would be getting sufficient return from their 50 per cent share in the
JVC. In relation to clause 12.2,
Mr Williamson wrote that the clause would be discussed at the meeting on
4 September. Burness understood
that the pursuers had previously agreed that the date from which the pursuers
would be responsible for costs would be 1 June
2002. ASP agreed that the
only costs incurred by them which the pursuers should take over would be those
relating to the architects and the traffic engineers.
[33] The agenda for the meeting on 4 September [No. 31/13
of process] included the following:
"4. Method of dealing with third parties
(including Fife Council);
representation/attendance at meetings.
...
6. Terms of management services agreement
between JVCo and ME.
...
9. Liability for costs: date from which liable; what type;
when reimbursed?
10. Thomsons' World of Furniture. Third party sites."
The agenda reflected the fact that
the terms of the MSA (item 6) were not regarded as being related to the
issue of liability for costs (item 9).
[34] In relation to item 4, it appears that Mr Stewart did
not have a good working relationship with the Council's planning
officials. They were concerned about the
delay in developing the site, and were contemplating the possible use of powers
of compulsory purchase. The Council also
had concerns about the safety of some of the buildings on the site, and was
contemplating the possible use of powers to order demolition. In order to deal with the Council, it was
important that an experienced retail developer should be seen to be involved in
the project. It was agreed at the
meeting that the pursuers' Mr MacDonald would take forward the discussions
with the Council, after agreeing with ASP's Ms Forrest what position he
was to adopt. It was agreed that the
list of services to be provided by the pursuers under the MSA should be
prepared and provided to the Council, to demonstrate that ASP had a development
partner on board. In that regard, a document
was produced by Mr Scott at the meeting, described as a schedule of
services, duties and obligations. It was
put forward as a draft list of services which would be attached to the MSA, but
which could also be shown to the Council (rather than the JVA, which was going
to take some time to be agreed, and would in part be commercially confidential). It was envisaged that a finalised schedule
would be provided to the Council in time for a Council meeting to be held on
11 September.
[35] In relation to item 6, there appears to have been only a
brief discussion at the meeting. None of
the witnesses could remember the discussion, apart from Gordon Lawson, who maintained
that his notes of the meeting (which were not produced) showed that the
discussion had revolved around the fee the pursuers would receive for providing
the services.
[36] In relation to item 9, 1 June 2002 was agreed as the relevant date. It was agreed that Gordon Lawson would
produce a schedule of the costs which the pursuers were to be reimbursed in
terms of clause 12.2 of the JVA (i.e. a draft of Schedule 5 to the
JVA). Costs were not otherwise discussed
in any detail. There was no suggestion
that the pursuers should be reimbursed their costs even if the conditions
precedent were not fulfilled.
[37] In relation to item 10, a large site owned by Thomsons,
close to the site which was proposed to be developed by the JVC, had come on to
the market. The pursuers considered that
it would be useful to have control of it, possibly for development as a
multi-storey car park associated with the proposed shopping centre. There was also discussion of the appropriate
size of the shopping centre scheme, given the number of third party sites which
had to be assembled.
[38] The draft schedule of services [No. 31/15 of process] which
Mr Scott produced at the meeting had been prepared by Gordon Lawson, by revising
a document which the pursuers had used in connection with another development. It set out the services to be provided by "the
Consultant". They related, first, to the
appointment by "the Employer" of professional advisers:
"1. PROFESSIONAL ADVISER'S APPOINTMENTS
1.1 Advise the Employer on the need for and
make recommendations for the appointment of other Professional Advisers by the
Employer.
1.2 Assist the Employer and the Project
Manager in relation to Professional Advisers Appointments (including duty of
care warranties).
1.3 In conjunction with the Project Manager
monitor the performance of the Professional Advisers and the Main Contractor in
the performance of their duties and the discharge of their responsibilities".
It will be noted from paragraphs
1.2 and 1.3 that the draft envisaged that, in addition to the consultant, there
would also be a project manager. The
subsequent provisions of the schedule generally required the consultant to
co-ordinate and monitor the work of the other professional advisers and to
report to the employer. Such services
related, first, to the design brief:
"2. BRIEF, DESIGN AND QUALITY CONTROL
2.1 Co-ordinate with the Professional
Advisers the preparation of the design brief.
Amplify the design brief as necessary during design development. Incorporate any changes and obtain the
Employer's authorisation.
2.2 Monitor the progress of design work."
Mr Ross, giving evidence on
the basis of his experience of property development, observed that the
preparation of a design brief might involve professional advisers from a
variety of disciplines: typically,
architects, structural engineers and quantity surveyors, but also possibly
traffic consultants, retail consultants and other professionals. The draft schedule also provided for similar
services relating to project meetings and reporting procedures, to the
programming of the project, to the preparation of budgets, to financial
management and to cash flow. In
connection with planning, the draft schedule provided:
"8. LOCAL AUTHORITY AND PLANNING APPROVALS
8.1 In conjunction with Planning Consultant
(if any) co-ordinate and support negotiations with planning authorities.
8.2 Check with the Planning Consultant (if
any) the form and content of planning applications. Progress the planning process and arrange
that a check of all approval/refusal documents is carried out by the project
team. Check that Professional Advisers
implement and deal with any conditions attached to a planning consent."
Mr Ross
observed that the planning process would be likely to involve the entire design
team, and that changes to the design of the development might be required as a
result of discussions with the planning authority.
[39] Some of the services to be provided under paragraph 8 would
plainly antedate the grant of planning permission. They were therefore not appropriate for
inclusion in the MSA if, as had been envisaged (and as appeared from the
current draft of the JVA), the MSA was to be entered into after the conditions
precedent (including the obtaining of planning permission) had been
fulfilled.
[40] The draft schedule further provided for services to be provided
by the consultant in connection with the tendering process for the building
contract and the preparation of contract documents, the management of the
contract, the maintenance of the building pending occupation, tenancies and
fitting out, and letting. In relation to
tenancies and fitting out, in particular, the draft schedule provided:
"12.1 In conjunction with the Professional
Advisers procure the preparation of drawings, specifications or other
documentation required for marketing or contracts.
12.2 In conjunction with the Professional
Advisers provide any tenant with information to enable him to prepare fitting out
proposals and arrange for any Employer's approvals to be obtained."
Mr Ross commented that
architects and services engineers would be likely to be involved in the matters
described in those provisions.
[41] On 6 September Mr Williamson e-mailed a revised
(third) draft of the JVA to Ms Scott.
On the same date, the defenders were incorporated, under the name
Lothian Fifty (912) Ltd. They were
formed by Burness, and controlled by them, as an off-the-shelf company
available for the use of their clients. Peter
Lawson explained that Burness prepared "shelf" companies in batches, so as to
have a stock available. He would not
have identified any particular company as the JVC. A company would be taken off the shelf on the
day it was required.
[42] On 9 September Mr Williamson faxed a revised draft of
the schedule[No. 31/18 of process] to Mr Scott. The revisals were relatively minor: they altered the references to a project
manager, to make it clear that that role would be undertaken by the pursuers,
and added provisions relating to site assembly:
"9.1 Obtain information on ownership and any
lessees of the Site, existing buildings, boundaries and any known easements,
underground services, rights of way, right of support and other relevant
matters.
9.2 Assist the Employer and its solicitors in
negotiating the acquisition of any parts of the Site not under the Employer's
control and ancillary property rights.
9.3 Negotiate for the acquisition of any
additional land required to execute the Development and for the grant or
release of any relevant servitudes, rights or restrictions."
Certain, at least, of these
provisions would again be relevant only if some of the services were to be
performed prior to the satisfaction of the conditions precedent (since site assembly
was one of those conditions). In
relation to paragraph 9.1, Mr Ross commented that the pursuers would
need external assistance in order to obtain the necessary information.
[43] On 11 September Mr Williamson and Mr Scott
finalised the terms of the schedule, and of the accompanying letter to be
produced to the Council. The schedule
and the letter were then transmitted to the Council. The letter [No. 31/20 of process] described
the schedule as "the list of services which it has been agreed in principle
will be provided by Macdonald Estates PLC to the joint venture in connection
with the redevelopment of Dunfermline town centre." The schedule was generally in similar terms
to the previous draft.
[44] On 12 September Ms Scott e-mailed
Gordon Lawson and Mr Scott [No. 31/25 of process], confirming that
for tax reasons it would be desirable that the ASP properties should be
transferred to the JVC at the outset, and that the JVC should remain part of
the ASP group of companies until planning permission was obtained, with no more
than 25 per cent of the shares in the JVC being taken by the pursuers at the
outset: in the event, it was later
agreed that the JVC should be wholly owned by ASP until the conditions precedent
were fulfilled, at which point the pursuers would take a 50 per cent
shareholding (as had been envisaged from the outset). She added:
"6. Will need to think of what happens if we
do not complete. If you transfer shares
back at par (ฃ25) you don't get any reimbursement for costs and you get no
benefit of any economic growth in the new property. Something to consider further".
Ms Scott said in evidence that the second sentence reflected the
terms of the draft JVA, under which the pursuers would not be reimbursed their
costs unless the conditions precedent were fulfilled. She had highlighted the risk in order for Mr Scott
and Gordon Lawson to deal with it.
[45] In his evidence, Mr Scott
said that it was around this time that the pursuers became concerned about what
they were going to get out of this deal.
They had by then failed to secure the Thomsons' site. It had been secured instead by Tesco,
prejudicing the prospects of the pursuers' attracting a retail superstore
operator to the proposed development.
The pursuers were also becoming nervous about the prospects of
assembling the site. It was suggested in
evidence by Mr Scott and the witnesses from the pursuers that there had
been a change in that regard, in that Mr Stewart had insisted on taking
over responsibility for site assembly;
but I found that evidence unconvincing in the light of the contrary
evidence of other witnesses, including Mr Stewart himself, and the
suggestion is not supported by the contemporary documents. What undoubtedly changed, however, was the
pursuers' assessment of the prospects of the site being assembled. There were also doubts about the degree of
support which could be expected from the Council. The pursuers became concerned that the
project might never come to fruition.
[46] In these circumstances, Mr Scott's
instructions from Gordon Lawson were to "cover the downside" and deal with the
situation where the pursuers could not get the scheme to be a viable
project. Specifically, he was to cover
the downside in relation to the costs of obtaining planning permission. In responding to these instructions, there
was little that Mr Scott could do about the JVA: it had to be conditional on site
assembly. Mr Scott concluded that
the way to deal with the costs was therefore through the MSA. For that purpose, the MSA would have to be in
force before the JVA became unconditional.
He said in evidence that, in drafting the MSA, he was trying to shift
the costs on to ASP (or, strictly speaking, its wholly-owned subsidiary, the
JVC). Gordon Lawson confirmed in
evidence that he had instructed Mr Scott to look for a way of recovering the
pursuers' costs. He knew that, in terms
of the draft JVA, the pursuers were not to be reimbursed their costs in the
event that the project did not proceed (indeed, they would effectively recover
only half of their costs even if the project did proceed, since the JVC
reimbursing their costs would in that event be 50 per cent owned by the
pursuers themselves). He acknowledged
that nothing was done to bring the pursuers' change of position to the attention
of ASP or their advisers.
[47] On 5 November Peter Lawson
e-mailed Mr Scott and Ms Scott a further revised draft of the JVA
[No. 31/27 of process]. In relation
to costs, Mr Lawson asked Brodies to confirm the precise costs which were
to be included in Schedule 5, i.e. the costs which, in terms of
clause 12.2, were to be the responsibility of the pursuers, subject to
reimbursement by the JVC in the event that the conditions precedent were
fulfilled. After taking instructions
from Gordon Lawson, Ms Scott responded on 7 November [No. 31/28
of process] that the pursuers could not confirm precise costs, but could
provide a note of the relevant categories, on the basis that Schedule 5
would cover costs falling within those categories provided they were properly
incurred in connection with the development.
A schedule in that form was later provided by Mr Scott.
[48] In relation to this matter, Gordon Lawson
accepted in evidence that there was still no indication given to Burness or ASP
that the pursuers had changed their position in relation to the costs. He had told Mr Scott that the pursuers
were looking to recover their costs in the event of the joint venture's not
proceeding, and Mr Scott had said that he had something in the MSA to
cover that. Mr Lawson accepted
that, at the same time, Brodies were continuing, on his instructions, to
negotiate the detail of the provisions in the JVA governing costs, under which
the pursuers did not, in that event, recover their costs. Mr Lawson's explanation of his behaviour
was that the JVA and the MSA were two separate agreements. Peter Lawson, on the other hand, said in
evidence that he was under the impression that matters were going well. There was no indication of any hitches, and
no discussion of any material changes:
only matters of detail were being discussed.
[49] On 13 November Mr Scott
e-mailed Peter Lawson [No. 31/29 of process]:
"Attached
boilerplate - let me know if you have any comments. Its sent subject to any my guys have. Cant immediately recall what %age the fee was
- will need to check. Also I believe you
have the final form of services - can you add to Schedule 1. Ta."
The boilerplate was the draft of the MSA, into which the schedule of
services agreed in September was to be incorporated. Mr Scott had prepared the draft by
altering a document obtained from a colleague who dealt with construction law.
[50] The draft MSA was in the
form of a letter addressed by the JVC (given the name, in the letter, of
Macdonald Estates (Dunfermline) Ltd, or ME(D)L) to the
pursuers:
"to confirm
the terms of your appointment to provide certain services in connection with
the proposed redevelopment of Dunfermline Town Centre on the following terms
and conditions."
The draft MSA then provided inter
alia as follows:
"2. Services
2.1 You shall provide to ME(D)L the services
listed in Part 1 of the Schedule. You
shall also perform such other reasonable services in relation to the Project as
ME(D)L may from time to time instruct...
2.2 The services listed in Part 1 of the
Schedule, and all Additional Services instructed under this Appointment, are
referred to as 'the Services'.
....
3. Duty of Care
You warrant and undertake to ME(D)L
that in the performance of the Services:-
3.1 You have exercised and will continue to
exercise all such professional skill, care and diligence as may reasonably be
expected from suitably and properly qualified project manager in providing
services similar to the Services for exercises of a similar size, scope, nature
and complexity as the Project
....
4. Fee
4.1 In consideration of the performance by
you of the Services, ME(D)L shall pay to you a fee equal to [ ]% of the total cost of carrying out and
completing the Project ...
4.2 The Fee shall be paid quarterly in arrears
in equal payments throughout the projected period of the Project ...
....
4.5 In supplement of the foregoing ME(D)L
shall free and relieve you on demand of all outlays reasonably required to be
made by it as an incident of the performance of its obligations hereunder and
the provision of the Services.
....
6. Provisions about this Appointment
6.1 Notwithstanding the date of this letter,
it shall be deemed to have taken effect when you commenced the performance of any
services within the scope of the definition of 'the Services'.
6.2 This Appointment supersedes any previous
arrangements between the parties in respect of the Services (whether oral or
written) and represents the entire agreement between the parties in relation to
the Services."
The expression "project" was
defined by clause 1 as meaning "the development of a new mixed use town
centre scheme in Dunfermline on the Site".
[51] In this draft, clause 4.5 was intended by Mr Scott to
enable the pursuers to recover the costs incurred by them in attempting to
secure planning permission, site assembly and pre-letting, in the event that
the project did not proceed, on the basis that such costs were "outlays" falling
within that provision. Mr Scott's
thinking was that the schedule of services, to be appended to the boilerplate,
obliged the pursuers to provide services for which they had no professional
competence (for example, in connection with obtaining planning consent, it was
necessary to obtain architectural drawings, surveys, traffic impact assessments
and retail impact assessments, amongst other matters; and in connection with site assembly, it was
necessary to obtain legal advice regarding ownership, leases, servitudes and
boundaries, amongst other matters).
Since they would have to engage suitably qualified experts in order to
provide the services contracted for, the costs which the pursuers had already
incurred in instructing such experts (in particular, solicitors, architects,
traffic engineers, planning consultants and chartered surveyors) would be
recoverable under the boilerplate as outlays required to be made by the
pursuers in order to perform the services listed in the schedule. Clause 4.5 was thus intended by him to
cover not only incidental costs, but the fees of approximately ฃ500,000 which
the pursuers had already incurred or anticipated incurring. Clause 6.1, giving the MSA retroactive
effect, was drafted with the same objective in mind. Clause 6.2 was intended to ensure that
clause 4.5 would not be affected by the treatment of costs in the
JVA. In relation to clause 4.2, Mr Scott
said in evidence that the pursuers' fee was to be paid while the project was
ongoing as a construction project.
Mr Scott drew clause 4.5 to the attention of Gordon Lawson, as
meeting his concerns. Mr Lawson was
content that it met the pursuers' requirements.
He explained in evidence that, since the schedule required the pursuers
to provide services (such as legal services) which were beyond their competence,
it followed that they were entitled to engage professionals to provide the
services in question (e.g. engaging Brodies to provide the legal services), and
to recover the cost of doing so as an outlay.
They were also in his opinion entitled, in addition, to recover the fee
agreed in the MSA as their remuneration for providing the services in
question: in his view, the fee was a
priority profit return.
[52] In his evidence, Mr Scott said that, in describing this
draft as a boilerplate, he was saying that he did not regard there as being a
need for much negotiation of this: it
covered standard matters. The evidence
of the other legal witnesses was to similar effect. Ms Scott, for example, said that to
describe something as boilerplate meant that it was a standard wording and
non-controversial. At the same time,
Mr Scott said quite candidly that what he was attempting to achieve, when
he drafted the document, was to shift costs amounting to ฃ500,000 to ASP (or their
subsidiary-to-be). When it was suggested
to Mr Scott that he had never indicated to Burness that there had been a
change in his client's position in relation to costs, he responded:
"It's not our job to tell Burness
the consequences of the documents that we're presenting ... We assume that they will pick it up if
they're concerned about it by reading the document and then negotiating".
At another point in his evidence,
Mr Scott said:
"It's not my job to advertise to
[Peter] Lawson if he's labouring under a misapprehension. I mean that's why you hire a big law firm in Edinburgh
to negotiate documents for you. I leave
it to them to advise their clients. I
can't comment on what they thought".
When it was put to Mr Scott
that there was nothing in any of the documents to suggest that anything was
happening to "shift costs" he responded:
"It's not my responsibility, and
it's not my duty to my client, to point out to the other party or his lawyers
the consequences for them of their acceptance of the document".
[53] Peter Lawson did not notice anything out of the ordinary about
the boilerplate. Clause 3.1
accorded with his understanding that the pursuers would act as a project
manager, liaising with professional advisers, negotiating with prospective
tenants, dealing with the Council and reporting to the employer. The outlays which he envisaged as being
incurred by a project manager would be in respect of such matters as travel and
hotels. He did not understand
clause 4.5 as being concerned with the costs dealt with in the JVA: the issues arising in relation to those costs
had already been discussed in detail in the context of the JVA, and the JVA
made it clear how those costs were to be allocated.
[54] Peter Lawson's evidence about the role of a project manager was
consistent with that of most of the other witnesses. Mr Ross, for example, said that a
project manager would co-ordinate a design team appointed by the employer: he would not appoint them or be responsible
for their costs. A project manager would
not appoint the people listed in Schedule 5A to the JVA (as the schedule
listing the costs which were to be borne by the pursuers and reimbursed in the
event of completion - described as Schedule 5 in the draft JVA - came to
be designated), i.e. the architect, the structural engineer, the planning
consultant, the services engineer, the traffic consultant, the quantity
surveyor, the environmental consultant, the topographical surveyor and the
lawyers. It would at least be unusual
for such appointments to be made by the project manager. I accept that evidence. Although the expression "project manager"
does not have a fixed meaning, and the precise responsibilities of a project
manager will depend on the particular contract, it appears from the evidence
that the role of a project manager is normally to co-ordinate the work of
others involved in a project, those others being in a contractual relationship
(or in a chain of such relationships) with the employer rather than with the
project manager himself. The services to
be provided under the schedule were however more extensive than those typically
undertaken by a project manager, notably in that they included matters arising
prior to the construction phase of the project.
[55] On 19 November Mr Williamson e-mailed to Ms Scott a further
revised draft of the JVA [No. 31/34 of process]. One of the proposed amendments was to the
clause concerning costs (previously clause 12, now re-numbered as clause 13),
so as to provide for the conditional reimbursement of costs incurred by ASP as
described in Schedule 5B, as well as for the conditional reimbursement of
costs incurred by the pursuers as described in Schedule 5A. In relation to the pursuers' draft of
Schedule 5A, Mr Williamson asked for clarification of what was
covered by a ฃ50,000 provision for legal fees.
Mr Williamson also noted that it had been agreed between the
pursuers and ASP that, since the pursuers were to receive a fee for services
provided under the MSA, ASP should also receive a fee in respect of the
services provided by Ms Forrest.
[56] On 25 November Peter Lawson e-mailed to Mr Scott [No. 31/33
of process] that, subject to agreement on the fee, the draft MSA was fine. The fee was agreed the following day (at 5 per
cent of the cost of the project).
[57] On 26 November Mr Scott replied to Mr Williamson's
e-mail of 19 November [No. 31/34 of process]. His reply was copied to Gordon Lawson,
who followed the exchanges. In response
to the proposal that ASP should be reimbursed costs, Mr Scott wrote:
"We need to know what you are
talking about here - if its internal costs I think that may be a problem as ME
aren't charging any either - they get the service fee from when it goes
unconditional but nothing before".
One implication of the latter
statement was that the fee under the MSA (i.e. the "service fee") would be
payable only in the event that the project proceeded (and, therefore, only in
the event that the conditions precedent listed in the JVA were fulfilled): as Mr Scott said in evidence, the fee was
payable during the construction phase of the project, and the project would
have to be unconditional for it to be under construction. The statement that the pursuers would get
"nothing" until the project "goes unconditional" was consistent with Peter
Lawson's understanding that the pursuers' costs would be reimbursed only if the
conditions precedent were fulfilled. In
relation to the provision for legal fees in Schedule 5A to the JVA, Mr Scott
wrote:
"Its to cover the costs of
getting planning alone - in terms of any offsite works, negotiation of the
planning consent and statutory agreements".
The implication was that the costs
incurred by the pursuers in respect of legal services related to the obtaining
of planning permission were covered by clause 13 of the JVA. In relation to this matter, Gordon Lawson accepted
in his evidence that no indication had been given to Burness that Schedule 5A
was effectively irrelevant (since, on Brodies' approach, the costs in question would
be recoverable under the MSA, regardless of whether the conditions precedent
were fulfilled), and that that had been on his instructions.
[58] On 28 November Mr Scott e-mailed Mr Williamson
[No. 31/36 of process], requesting that a conference call be held the
following morning to discuss the remaining issues. He accepted the proposal that the JVA should
provide for the conditional reimbursement of ASP's costs. In relation to the proposal that there should
also be a fee payable to ASP under an agreement analogous to the MSA, he wrote:
"ME do not agree a fee for
Michelle's time; they aren't getting a
time charge fee and the fee they are getting is for basically doing what a
professionally employed project manager would do anyway - the fee would be paid
to whoever did that role. But ME's own
inhouse time in getting planning etc isn't being charged so in turn AS [Mr
Stewart] should [not] be charging a fee for Michelle's time."
The apparent implication of the
latter statement, in particular, was that the pursuers were not charging a fee
for obtaining planning permission, and, therefore, that obtaining planning
permission fell outwith the scope of the services for which a fee was payable
under the MSA. In relation to those
services, Gordon Lawson (to whom the e-mail was copied) said in evidence that
Mr Scott had used the description "project manager" with his knowledge. Mr Lawson said that he had not agreed
with that description, but had not corrected it. Mr Williamson and Peter Lawson, on the
other hand, said that that description fitted their understanding of the
MSA: that the pursuers would be liaising
with and supervising the professional advisers and drawing the project to a
successful conclusion.
[59] On 29 November Mr Williamson replied to
Mr Scott's e-mail, and provided a schedule of ASP's costs. On the same date, Peter Lawson also e-mailed
Mr Scott revised drafts of the JVA and the MSA, reflecting the matters
that had been discussed. In relation to
the agreement under which a fee was to be paid to ASP, Mr Lawson noted
that "as with the ME management fee, this will only be paid by the JVCo on
completion".
[60] On 2 December the JVA, the MSA and the ASP services agreement
were executed by Mr Stewart and Mr MacDonald. The terms of the JVA and the MSA, as
executed, are discussed below. In his
evidence, Mr MacDonald said that his view of the paperwork was that it all
formed part of one joint venture agreement.
He would read the MSA as being part of the JVA. Mr Stewart's evidence, although somewhat
confused, was essentially to the same effect.
He said that he did not know that there was going to be a MSA before the
date of signing, and believed the JVA was the only agreement. He was under the impression, he said, that
the purpose of the MSA was to have an agreement which could be shown to the
Council, the terms of the JVA being commercially confidential. He had envisaged that instructions would
continue to be given to the various professionals by the pursuers, rather than
by the defenders. On the same date, the
existing share capital of the defenders (a single subscriber share, held by a
Burness nominee) was transferred to ASP, who also subscribed for a further
49 shares, in accordance with the JVA.
[61] Gordon Lawson accepted in evidence that, in terms of the JVA,
the pursuers were agreeing to fund the costs until a point was reached when the
deal either completed or collapsed. When
it was put to him that, in that case, the pursuers could not have been
expecting to be reimbursed the same costs under the MSA in the period before
that point was reached, he responded that they had provision to do so (in the
MSA), but in the spirit of the joint venture they were not looking to draw the
costs down, but were hoping that the joint venture would proceed and that they
would recover their joint venture costs in due course. I note that the pursuers would effectively
recover only half of their costs under the JVA if the project proceeded (since
they would in that event own 50 per cent of the JVC), whereas they would
recover the whole of their costs under the MSA, if their interpretation of it
were correct. Their entitlement to
recover their costs under the MSA (on their interpretation of it) would also be
immediate and unconditional, rather than being contingent on the fulfilment of
the conditions precedent. When it was
put to Mr Lawson that the pursuers had agreed to fund the costs, he
replied "In terms of the joint venture agreement we had, yes". He maintained that the pursuers were
nonetheless entitled to be repaid the same costs under clause 4.5 of the
MSA. Asked whether it was his
understanding that the JVA and the MSA provided for different ways in which the
same costs were to be dealt with, he confirmed that it was.
[62] On 5 December Mr Williamson summarised the main points arising
from the agreements in a note intended for ASP and the defenders [No. 31/49
of process]. He noted that the JVA was
conditional on the satisfaction of the conditions precedent prior to the
deadline, and that in that event the JVC was to reimburse the pursuers'
costs. He also noted:
"The fee payable to ME (by JVCo)
in terms of the ME Management Services Agreement is 5% of total project costs,
but this only becomes payable if the JV Agreement becomes unconditional and the
parties proceed to Completion (i.e. if the JV Agreement does not become
unconditional then ME will receive no fee, nor be reimbursed for the costs
which it has incurred)".
Peter Lawson said in evidence that
that was his understanding of the position throughout the discussions, and that
it was on that basis that he had taken instructions. Mr Stewart confirmed that that had also
been his understanding when he signed the agreements.
[63] Reference was also made during the evidence to a letter dated 17 November 2004 [No. 31/50
of process] sent to Mr Pierotti by the pursuers' Mr Robertson, and
copied to Mr Scott. The letter was
written in response to a suggestion made by Mr Pierotti, who was then
acting on behalf of ASP, that ASP should be reimbursed costs of ฃ60,000 which
had been incurred in connection with the demolition of a building on the
site. Mr Robertson wrote:
"Alf [i.e Mr Stewart] has taken
responsibility for all property acquisitions in the proposal, which are
reimbursed when the JV Company is triggered.
This is mirrored by our
responsibility to fund the costs of obtaining planning permission which are now
substantial".
It was suggested to Mr MacDonald
and Mr Robertson that the implication of the letter was that the pursuers
were not entitled to be reimbursed their costs until the conditions precedent
were fulfilled. Mr MacDonald said
that he could only suggest that the letter had been written
absent-mindedly. Mr Robertson himself
maintained that he had meant that the pursuers had to "fund" the costs, in the
sense of meeting them in the first instance, until the conditions precedent
were fulfilled, and that that was consistent with the pursuers' recovering the
costs under the MSA whether the project proceeded or not.
[64] On 5 September
2005 the pursuers submitted invoices to the defenders in respect of
costs which they claimed to have incurred.
The amounts invoiced totalled ฃ507,307.67 and are the sums sued for in
the present proceedings. By then it was
apparent to the pursuers that the conditions precedent were not going to be
fulfilled and that the development was not going to proceed. On 15 September
2005 the present proceedings were commenced. On 5 December
2005 the time limit for the fulfilment of the conditions precedent,
as agreed in the JVA, expired. The
conditions precedent had not been fulfilled.
[65] During the present proof, a number of witnesses were asked
whether, as the pursuers maintain in their pleadings, it would have made no
commercial sense for a developer such as the pursuers to incur substantial
costs, conferring potential benefits on a landowner such as the defenders or ASP,
in the hope that the JVA would reach completion; or whether, as the defenders maintain in
their pleadings, it would have made no commercial sense for the landowner to
agree to pay costs incurred by the developer, over which the landowner had no
control, regardless of success in obtaining the necessary consents and
agreements. All the witnesses agreed
(although, in some cases, with a degree of reluctance) that there was no
standard practice in this regard, and that the arrangements entered into varied
from case to case, reflecting the particular circumstances and the negotiating
strength of the parties involved. I
accept that that is the position.
[66] Finally, in relation to the factual background, it will be
apparent that much of the foregoing narrative has been concerned with the
actual intentions of the parties, their negotiations, and the drafts of the
contracts in question. Evidence about
these matters was led, by agreement, under reservation of its competency and
relevancy. I consider below the extent
to which, and the purposes for which, it is admissible and relevant.
The JVA
[67] It is necessary to set out
at some length the relevant provisions of the JVA and the MSA. The JVA [No. 31/1 of process] is headed:
"Agreement between Alfred Stewart
Properties Limited and Macdonald Estates plc.
Joint Venture Agreement relating
to the operation of Lothian Fifty (912) Limited as a jointly-owned company".
It begins by narrating that the
agreement is made between ASP and the pursuers, and continues:
"WHEREAS
(A) ASP has established a new company (JVC)
which will acquire certain rights and assets, and otherwise be established and
carry on business, in the manner set out in this Agreement.
(B) ASP and ME have agreed that upon
satisfaction of the conditions precedent set out in this Agreement, ME shall
subscribe for shares in JVC and that their relations as shareholders in JVC
shall be governed by the terms of this Agreement.
IT IS AGREED
as follows".
[68] Clause 2 of the JVA provides for the fulfilment of the three
conditions precedent, in broadly similar terms to the earlier drafts:
"2.1 Completion under clause 3 shall be conditional upon each of the
following conditions having first been satisfied or waived:
(a) satisfactory detailed planning permission
(and to the extent necessary, demolition consents, road construction consents,
stopping up orders, listed building consents and Section 75 agreements) being
received for the Development;
(b) satisfactory unconditional binding
agreements or consents from the owners of the Third Party Sites and any other
parties having rights over or the benefit of restrictions or other interests
required to be acquired or released to enable the Development to proceed; and
(c) unconditional binding pre-let agreements
being entered into with at least (i) one anchor food superstore and (ii) two
anchor department stores within the Development.
2.2 ME shall have primary responsibility for
procuring that the Conditions Precedent set out in Clauses 2.1(a), (b) and (c)
.... are fulfilled as soon as possible, but notwithstanding such obligations each
party shall use all reasonable endeavours to procure that the Conditions
Precedent are fulfilled as soon as possible.
If the Conditions Precedent shall not have been fulfilled (or waived) by
the date three (3) years from the last date of subscription hereof .... then the
parties shall procure that:
(i) this Agreement (other than the
provisions of Clause 11 (Confidentiality))
shall, unless otherwise agreed, thereupon automatically cease and terminate;
...
(iii) the ME Management Services Agreement is
terminated with immediate effect".
[69] The expression "JVC" is defined in Schedule 1 as meaning
Lothian Fifty (912) Ltd, i.e. the defenders.
The expression "ME Management Services Agreement" is defined as meaning
"the management services agreement in the agreed form between ME and JVC to be
entered into of even date or near even date herewith". The expression "in the agreed form" is in
turn defined as meaning agreed by the pursuers and ASP.
[70] Clause 3.1 narrates that the JVC has been incorporated and has
an authorised share capital of ฃ100 divided into 50 A shares and 50
B shares. It goes on to provide:
"on the date of this Agreement
the following events shall take place:
(h) ASP shall subscribe unconditionally for
49 A shares in cash at par and shall accept the transfer of the 1 nil-paid
subscriber share (the subscriber share having been designated an A share);
......
(j) Alfred Stewart and Michelle Forrest
shall be appointed as the first A Directors pursuant to Clause 5.1, (for
the avoidance of doubt to the exclusion of any prior directors);
(k) the following agreed form ancillary
agreements shall be entered into, namely:
(i) the Asset Transfer Agreement between
ASP and the JVC relating to the transfer of the Properties for a consideration
of ฃ4,000,000, such sum to be treated as an advance to JVC by way of a
A Shareholder Loan;
(ii) the ME Management Services Agreement
between ME and JVC relating to the provision of services to the JVC as therein
provided".
I note that,
although ASP was not to be party to the MSA itself, the JVA (entered into
between the pursuers and ASP) provided for the MSA (described as an "ancillary"
agreement) to be entered into, in an agreed form.
[71] Clause 3.3 makes provision for the
eventuality that the conditions precedent were to be fulfilled within the
deadline:
"Completion
shall take place within ten (10) days after the Conditions Precedent are
fulfilled or waived) when the following events shall take place, namely:
(a) ME shall subscribe unconditionally for
50 B shares in cash at par;
.....
(c) Dan Macdonald and Gordon Lawson shall be
appointed as the first B Directors pursuant to Clause 5.1, Dan Macdonald to be
the Chairman of the Board from the date of his appointment; and
....
(f) ME will procure that JVC is placed in
sufficient funds to repay the A Shareholder Loan to the extent of ฃ2 million
whether by a loan from ME or by some other means of financing;
(g) the parties shall procure that the JVC
shall reimburse ME for the ME costs incurred in terms of Clause 13.2;
...
(i) the following ancillary agreements shall
be entered into, namely:
(i) novations and/or assignations
(containing suitable indemnities in favour of ME or the other contracting
purchaser/developer) of (i) all missives and agreements for lease and (ii)
professional appointments concluded by ME in pursuance of satisfaction of the
conditions mentioned in Clause 2.1."
I note that under clause 3.3(g),
ASP and the pursuers agreed to procure that the JVC would reimburse the
pursuers for the costs which they incurred in terms of clause 13.2, in the
event that the conditions precedent were fulfilled. I also note that clause 3.3(i) envisaged
that the pursuers would conclude professional appointments for the purpose of
fulfilling the conditions precedent, and that those appointments would be taken
over by the JVC (by way of novation or assignation) in the event that the
conditions precedent were fulfilled.
[72] Under clause 12, it is agreed that ASP and
the pursuers will each use their votes in the JVC and all other means at their
disposal to ensure that the JVA is duly performed.
[73] In relation to costs, clause 13.2 provides:
"13.2 ME shall be responsible for all planning and
professional fees and other associated costs incurred in furthering the
Development from 1 June 2002 until detailed planning permission is
achieved in terms of clause 2.1(a), to the extent that those matters were
instructed by any of (i) the JVC with the knowledge and consent of ME, (ii) ME
or (iii) ASP with the knowledge and consent of ME (the ME costs). For the
avoidance of doubt, the ME costs shall include, but shall not be restricted to,
the costs and expenses listed in Schedule 5A.
If each of the Conditions Precedent described in clause 2 is fulfilled
or waived and Completion is effected in terms of clause 3 then the JVC shall
become responsible for such costs and shall reimburse ME in accordance with
clause 3.3(g) except that project management costs incurred by ME may be
invoiced by ME after Completion and will be repaid within 30 days of invoice
date".
Schedule 5A lists categories
of costs, with estimated amounts totalling ฃ420,000 (exclusive of VAT). The categories are: architect, structural engineer, planning
fees, planning consultant, services engineer, traffic consultant, quantity
surveyor, environmental consultant, topographical surveys and legal costs. It is a matter of admission, in the present
proceedings, that all the costs which the pursuers are seeking to recover fall
within the scope of clause 13.2 and Schedule 5A.
[74] Finally, in relation to the JVA, clause 15 sets out an "entire
agreement" provision:
"This Agreement and any other
Agreements entered into on Completion pursuant to clause 3 set out the entire
agreement and understanding between the parties with respect to the subject
matter of it. It is agreed that:
(a) neither party has entered into this
Agreement in reliance upon any representation, warranty or undertaking of the
other party which is not expressly set out in this Agreement;
(b) a party shall have no claim or remedy in
respect of misrepresentation (whether negligent or otherwise) or untrue
statement made by the other party;
(c) this clause shall not exclude any
liability for fraudulent mirepresentation."
The MSA
[75] The MSA [No. 31/2 of
process] is in the same terms (apart from the date, and the name of the JVC) as
Mr Scott's original "boilerplate" draft.
It is in the form of a letter addressed by the defenders ("JV Co") to
the pursuers. It provides inter alia:
"2. Services
2.1 You shall provide to JVCo the services
listed in Part 1 of the Schedule. You
shall also perform such other reasonable services in relation to the Project as
JVCo may from time to time instruct, subject to the parties first agreeing an
additional fee therefor under clause 4.
2.2 The services listed in Part 1 of the
Schedule, and all Additional Services instructed under this Appointment, are
referred to as 'the Services'.
2.3 You shall perform the Services in
accordance with:
2.3.1 the terms and conditions set out in this Appointment
2.3.2 JVCo reasonable instructions, and
2.3.3 any agreed programme.
3. Duty of Care
You warrant and undertake to JVCo
that in the performance of the Services:-
3.1 you have exercised and will continue to
exercise all such professional skill, care and diligence as may reasonably be
expected from suitably and properly qualified project manager in providing
services similar to the Services for exercises of a similar size, scope, nature
and complexity as the Project.
3.2 you are and will remain competent to
perform the obligations imposed on you by this Appointment; and
3.3 you shall act in a competent and
efficient manner and in the best interests of JVCo so as to give to JVCo the
benefit of your experience and expertise in relation to the Project.
4. Fee
4.1 In consideration of the performance by
you of the Services, JVCo shall pay to you a fee equal to 5% of the total cost
of carrying out and completing the Project (subject to clauses 4.3 and 4.4).
4.2 The Fee shall be paid quarterly in
arrears in equal payments throughout the projected period of the Project. Where the costs of carrying out and
completing the Project change, an appropriate adjustment shall be made to
future payments of the Fee so as to ensure that in total all payments received
by you for the Services (subject to Clause 4.3 and 4.4) shall be 5% of the
total cost of carrying out and completing the Project.
4.3 If JVCo ask you to perform any Additional
Services, the parties shall require to agree a fair and reasonable adjustment
to the Fee prior to the date of commencement of such Additional Services.
4.4 Where you require to carry out Additional
Services in the event of emergency, you will not require to agree the
additional fee with JVCo before carrying out such Additional Services, and an
additional fee shall be calculated on a fair and reasonable basis.
4.5 In supplement of the foregoing JVCo shall
free and relieve you on demand of all outlays reasonably required to be made by
it as an incident of the performance of its obligations hereunder and the
provision of the Services.
4.6 Payment of any part of the Fee or of the
outlays due hereunder shall be required to be made by JVCo on the date occurring
7 days after the date of receipt by JVCo of a demand from you, accompanied by
the appropriate VAT invoice ...
5. Assignation
5.1 You shall not assign or transfer your
rights or obligations in terms of or arising out of this Appointment without
JVCo's prior written consent.
5.2 You shall not sub-contract the
performance of the Services or any part thereof without JVCo's prior written
consent.
...
6. Provisions about this Appointment
6.1 Notwithstanding the date of this letter,
it shall be deemed to have taken effect when you commenced the performance of
any services within the scope of the definition of 'the Services'.
6.2 This Appointment supersedes any previous
arrangements between the parties in respect of the Services (whether oral or
written) and represents the entire agreement between the parties in relation to
the Services".
The expression
"Project" is defined by clause 1.3 as meaning "the development of a new mixed
use town centre scheme in Dunfermline on the Site".
[76] Part 1 of the Schedule is based on the
schedule which was produced by Mr Scott at the meeting on 4 September, and
reflects the revisals which were subsequently agreed. It lists the following services:
"1. PROFESSIONAL ADVISER'S APPOINTMENTS
1.1 Advise the Employer on the need for and
make recommendations for the appointment of other Professional Advisers by the
Employer.
1.2 Assist the Employer in relation to
Professional Advisers Appointments (including duty of care warranties).
1.3 Monitor the performance of the Professional
Advisers and the Main Contractor in the performance of their duties and the
discharge of their responsibilities.
2. BRIEF, DESIGN AND QUALITY CONTROL
2.1 Co-ordinate with the Professional
Advisers and oversee the preparation of the design brief. Amplify the design brief as necessary during
design development. Incorporate any
changes and obtain the Employer's authorisation.
2.2 Monitor the progress of design work.
3. REPORTING AND MEETINGS
3.1 Establish meetings structure. Lay down procedure for converting, chairing,
attendance, function, frequency and responsibility for recording of meetings
and circulation of information and ensure that this procedure is followed on
behalf of the Employer. Monitor communications
and distribution of information.
3.2 Agree with Professional Advisers their
reporting and recording procedures and generally establish appropriate channels
of communication between the Professional Advisers, the Contractor and the
Employer.
3.3 Attend and represent the Employer at all
principal project meetings.
3.4 Provide regular monthly reports to the
Employer indicating the current situation on progress of the Project.
4. PROGRAMMING
4.1 In conjunction with Professional Advisers
(but assuming primary responsibility for achieving successful resolution of
this matter), prepare and maintain a master programme from concept to
completion to record principal activities and identify critical dates, verify
and incorporate Professional Advisers' programmes for production of detailed design
information. Monitor progress.
4.2 Check that applications for statutory
consents, government grants, etc, are submitted in accordance with the master
programme. Make recommendations on any
necessary or appropriate action to be taken in this respect.
4.3 Advise the Employer of changes to
programme and recommend appropriate action.
4.4 Check in conjunction with the design
Professional Advisers, the Main Contractor's programme; seek clarification of the Main Contractor's
programme proposals if necessary, and incorporate these into master programme.
5. COST CONTROL
5.1 Monitor the Professional Advisers in the
preparation of budget costs, and present feasibility studies to the Employer
for approval.
5.2 In conjunction with the Professional
Advisers (but assuming primary responsibility for achieving successful
resolution of this matter), prepare and maintain a master cost plan. Advise the Employer of any alterations
required and obtain authorisation for changes.
5.3 Report any actual or potential delays and
cost increases and advise as to measures to avoid or reduce them.
6 CONSTRUCTION ECONOMICS AND FINANCIAL
MANAGEMENT
6.1 Check that the Professional Advisers are
providing adequate and timely information for the preparation of tender
documentation.
6.2 Obtain the Employer's authorisation for
costs of variations when limit of authority is exceeded and check that costs
are being documented.
6.3 Report to the Employer at regular
intervals in relation to the forecast of final costs (including costs of
variations and the cost implications of extensions of time) and forecast
completion dates.
6.4 Check, in conjunction with Professional
Advisers (but assuming primary responsibility for achieving successful
resolution of this matter), fees for statutory approvals and arrange payments.
6.5 Check and recommend applications for
payment made by those of the Professional Advisers who are employed by the
Employer.
6.6 Check and recommend other relevant
invoices to the Employer.
6.7 Check that those of the Professional
Advisers who are employed by the Employer prepare final account and agree
settlement.
7. CASH FLOW
7.1 In conjunction with Professional Advisers
(but assuming primary responsibility for achieving successful resolution of
this matter) arrange for the preparation and maintenance of cash flow
forecasts.
8. LOCAL AUTHORITY AND PLANNING APPROVALS
8.1 In conjunction with Planning Consultant
(if any) (but assuming primary responsibility for achieving successful
resolution of this matter) co-ordinate and support negotiations with planning
authorities.
8.2 Check with the Planning Consultant (if
any) the form and content of planning applications. Progress the planning process and arrange
that a check of all approval/refusal documents is carried out by the project
team. Check that Professional Advisers
implement and deal with any conditions attached to a planning consent.
8.3 Check with the Professional Advisers
which other statutory approvals are required and that applications for approval
are submitted. Check that Professional
Advisers apply for amendments to statutory approvals granted when required.
8.4 In conjunction with the Professional
Advisers (but assuming primary responsibility for achieving successful
resolution of this matter) check that (a) all necessary approvals are received
and correctly documented and that adequate records are kept of all tests,
inspections etc. which are carried out to satisfy the requirements of the
various authorities and (b) the Professional Advisers obtain clearance from
health and safety and fire officers.
8.5 Discuss the Development as appropriate
with outside groups who may influence the design and construction, including
adjoining owners, environmental groups, archaeological departments and
statutory undertakers.
9. SITE ASSEMBLY
9.1 Obtain information on ownership and any
lessees of the Site, existing buildings, boundaries and any known easements,
underground services, rights of way, right of support and other relevant
matters.
9.2 Assist the Employer and its solicitors in
negotiating the acquisition of any parts of the Site not under the Employer's
control and ancillary property rights.
9.3 Negotiate for the acquisition of any
additional land required to execute the Development and for the grant or release
of any relevant servitudes, rights or restrictions.
10. CONTRACT PROCEDURES
10.1 In conjunction with the Professional
Advisers (but assuming primary responsibility for achieving successful
resolution of this matter) advise on and obtain the Employer's approval of a
list of tenderers for the Building Contract.
10.2 In conjunction with the Professional
Advisers (but assuming primary responsibility for achieving successful
resolution of this matter) invite tenders.
10.3 In conjunction with the Professional
Advisers (but assuming primary responsibility for achieving successful
resolution of this matter) appraise the tenders with the Professional Advisers
and report to the Employer.
10.4 Monitor Professional Advisers in the
preparation of contract documents.
Arrange signatures of parties to the contract. Prepare letter of intent for signature if
this is required or necessary (subject to approval of its terms by solicitors).
11. CONTRACT MANAGEMENT
11.1 Save where Professional Advisers'
appointment has been novated to the Main Contractor to co-ordinate the
Professional Advisers to ensure that information is provided to the Main
Contractor in an appropriate timescale.
11.2 Save where Professional Advisers
appointment has been novated to the Main Contractor to check that Professional
Advisers are providing adequate supervision in accordance with their terms of
appointment and undertaking regular site inspections.
11.3 Save where Professional Advisers'
appointment has been novated to the Main Contractor to check that the
Professional Advisers fulfil their contractor obligations in relation to
practical completion and defects liability generally.
11.4 Check that making good of defective works
is carried out during the defects liability period.
12. BUILDING MANAGEMENT, COMMISSIONING AND
MAINTENANCE
12.1 Advise the Employer and deal with practical
management, maintenance programmes, provision of maintenance staff and state of
services pending occupation.
12.2 In conjunction with the Professional
Advisers (but assuming primary responsibility for achieving successful
resolution of this matter), arrange for the Main Contractor's and Professional
Adviser's maintenance and cleaning information, maintenance manuals, test
certificates, guarantees, operating instructions, 'as built' drawings and 'as
installed' progress diagrams to be forwarded to the Employer.
13 TENANCIES AND FITTING OUT
13.1 In conjunction with the Professional
Advisers (but assuming primary responsibility for achieving successful
resolution of this matter) procure the preparation of drawings, specifications
or other documentation required for marketing or contracts.
13.2 In conjunction with the Professional
Advisers (but assuming primary responsibility for achieving successful
resolution of this matter), provide any tenant with information to enable him
to prepare fitting out proposals and arrange for any Employer's approvals to be
obtained.
14 TENANT AND FINANCIERS
14.1 In conjunction with the Professional
Advisers (but assuming primary responsibility for achieving successful
resolution of this matter), arrange for and implement a system for approval by
the Employer, Tenant, Financiers for any variation or changes to the Contract
Works whether required by the Employer or the Tenant.
14.2 In conjunction with the Professional
Advisers (but assuming primary responsibility for achieving successful
resolution of this matter), supervise and co-ordinate the measurement of the
lettable areas of units prior to practical completion statement being issued to
the Main Contractor.
15 LETTING STRATEGY
15.1 On behalf of the Employer, instruct letting
agents approved by the Employer (from time to time) to promote the Project and
market vacant parts of the Site (as developed) on the best terms reasonably
achievable, negotiate leases, investigate and assess the creditworthiness,
profile and desirability as tenants of all prospective Tenants and take such
reasonable steps as shall assist the Employer, as soon as reasonably
practicable to enter into agreement for leases and leases with Tenants
recommended for such lettings by the agents (such lettings to be consistent
with a good tenant mix taking account of the character of the Site (as
developed).
15.2 On behalf of the Employer, instruct
solicitors and agents approved by the Employer to effect lettings of vacant
parts of the Site (as developed) on terms approved by the Employer.
For the avoidance of doubt, the
Consultant, in questions with the Employer shall have no liability to such
letting agents and solicitors instructed by the Consultant on behalf of the
Employer pursuant to this Paragraph 15 and the Employer shall, upon demand,
free, relieve and fully indemnify the Consultant in respect of all costs, fees
and others incurred by the Consultant to such letting agents and solicitors
pursuant to such instructions except where the consultant has exceeded its
authority or has acted recklessly, fraudulently or in a grossly negligent
manner".
The submissions on behalf of the pursuers
(a) The principal action
[77] Counsel for the pursuers submitted that a reasonable person in
the position of the parties to the MSA would appreciate that the performance of
the services set out in the Schedule to the MSA (specifically, those described
in paragraphs 2.1, 8.1-8.3, 9.1 and 13.1) would require the pursuers to
engage external professional assistance, thereby incurring considerable
costs. Those costs were recoverable
under clause 4.5 as "outlays reasonably required to be made by [the
pursuers] as an incident of the performance of [their] obligations [under the
MSA] and the provision of the Services".
[78] Virtually none of the evidence led was admissible for the
purpose of construing the MSA, for the reasons explained by Lord Wilberforce in
Prenn v Simmonds [1971] 1 W.L.R. 1381 at pages 1384-1385. The question was not what one or other of the
parties meant or understood by the words used, but the meaning which the
document would convey to a reasonable person having all the background
knowledge which would reasonably have been available to the parties in the
situation in which they were at the time of the contract: Investors
Compensation Scheme Ltd v West
Bromwich Building Society [1998] 1 WLR 896 at page 912 per Lord Hoffmann; Bank of
Credit and Commerce International SA v Ali
[2002] 1 AC 251 at paragraph 39 per
Lord Hoffmann; Mannai Investment Co Ltd v Eagle
Star Life Assurance Co Ltd [1997] AC 749 at pages 767-768 per Lord Steyn. The
starting point was that words were to be given their ordinary and natural
meaning: Charter Reinsurance Co Ltd v Fagan
[1997] AC 313 at page 384 per Lord
Mustill; Bank of Scotland v Dunedin Property Investment Co Ltd 1998
S.C. 657 at page 661 per Lord President Rodger.
[79] In response to the defenders' contention that the MSA was
subsidiary to the JVA and should be construed so as to accord with it (and,
therefore, on the basis that the sums in question were not payable to the
pursuers unless and until completion occurred in terms of the JVA), counsel
submitted that the MSA was the whole agreement between the pursuers and the
defenders in relation to the services in question. That was made clear by the "entire agreement"
clause. The fact that the pursuers and
ASP were also entering into the JVA was a relevant part of the factual matrix
known to the parties to the MSA. But the
MSA and the JVA were not two contracts executed by the same parties: they were between different parties and
governed different matters. The purpose
of the JVA was to determine the events in which the pursuers and ASP would
become joint shareholders in the defenders, and to regulate their relationship
as such shareholders thereafter. That
was apparent from the recitals, which were a proper aid to construction: Crouch
v Crouch [1912] 1 KB 378. The purpose of the MSA, on the other hand,
was to govern the terms and conditions upon which the pursuers would render
services to the defenders both before and after "completion" (if it occurred)
in terms of the JVA. There was no
hierarchy between the documents.
[80] There was in any event no inconsistency between the JVA and the
construction of the MSA advanced by the pursuers. The two were, if possible, to be read
together, and effect was to be given to them as a whole: Pagnan
SpA v Tradax Ocean Transportation SA
[1987] 2 Lloyd's Rep. 342 at pages 350-351 per
Bingham L.J. Clauses 3.3(g)
and 13.2 of the JVA dealt with what was to happen if completion took place and
the defenders accordingly became a joint venture vehicle between the pursuers
and ASP. The JVA did not deal with what
was to happen in relation to costs incurred by the pursuers if completion did
not occur. The MSA made provision for
the liability of the defenders to reimburse certain costs incurred by the pursuers,
both before completion and, if completion had taken place, thereafter. The defenders' approach to the construction
of the JVA was based on what they subjectively understood the bargain to be, on
the basis of remarks made in the early stages of the negotiations.
[81] In the course of discussion, counsel accepted that it would be
impossible in practice to charge a fee under the MSA unless the project
proceeded. Counsel also accepted that
the MSA had been terminated with effect from 5 December 2005, but maintained that any right to
payment which had accrued prior to that date remained enforceable.
[82] In response to the defenders' contention that the pursuers'
construction of the MSA made no commercial sense, in that the landowner would
be liable for costs over which he had no control, regardless of whether
planning permission was obtained, counsel submitted that that contention was
not supported by the evidence. The
pursuers' witnesses were adamant that there was nothing uncommercial about such
an arrangement. All the solicitors who
gave evidence agreed that there was no standard practice in the relevant
regard: that could not be the case if
the arrangement contended for was truly uncommercial. If, in the circumstances, the defenders had
made a bad bargain, the court could not rescue them from it: City
Wall Properties (Scotland) Ltd v Pearl Assurance plc
2004 S.C. 214 at paragraph 23 per
Lord Clarke. Reference was also made to Glasgow City Council v Caststop Ltd 2002 S.L.T. 47 at paragraph
34 per Lord Macfadyen.
[83] If it were suggested that the subsequent actings of the
pursuers, and in particular their invoicing of the defenders for costs prior to
the expiry of the deadline for "completion" in terms of the JVA, were
inconsistent with their construction of the MSA, such actings were irrelevant: James
Miller & Partners Ltd v Whitworth
Street Estates (Manchester) Ltd [1970] A.C. 583 at page 603 per Lord Reid.
[84] If it were suggested that the scope of the services to be
rendered under the MSA was limited by the use of the phrase "suitably and
properly qualified project manager" to describe the scope of the pursuers' duty
of care, none of the witnesses claimed that the phrase "project manager" was a
term of art. The MSA made it clear that
the appointment was to perform certain services in connection with the proposed
development.
(b) The counterclaim
[85] The defenders' claim for rectification, under
section 8(1)(a) of the Law Reform (Miscellaneous Provisions) (Scotland)
Act 1985, was of an extreme nature. It
sought to insert a new clause 6.1.1 into the MSA in the following terms:
"Notwithstanding the terms of
this Agreement, payments by the defenders to the pursuers shall be conditional
upon and the timing thereof shall be governed by the terms of the Joint Venture
Agreement between the defenders and Alfred Stewart Properties Limited relating
to the operation of the defenders dated of even date herewith and in particular
by Clauses 3.3(g) and 13.2 thereof".
It also sought a consequential
amendment of clause 6.2 (the "entire agreement" clause), by inserting at
the beginning the words "Save as specified in Clause 6.1.1 hereof".
[86] A heavy burden rested upon the defenders to demonstrate that
the terms of a written contract settled by exchanges between the parties'
respective solicitors, and formally executed, so radically failed to express
the true agreement of the parties: Huewind Ltd v Clydesdale Bank plc 1996 S.L.T. 369 at page 375. As to the requirements of section 8(1)(a),
reference was made to Shaw v William Grant (Minerals) Ltd 1989 S.L.T.
121 and Renyana-Stahl Anstalt v McGregor 2001 S.L.T. 1247 at paragraphs
35-36 per Lord Macfadyen. The evidence showed how the MSA was put
together. Reference to a MSA first
appeared in Burness's initial draft of the JVA, taken from their in-house
style. Upon the first revisal of that
draft by the pursuers' solicitors, the entity which would provide the services
was identified as the pursuers. Subsequently
a list of services which would be provided by the pursuers to the JVC was
provisionally settled between the pursuers and ASP, largely for the purpose of
demonstrating to the Council the role of the pursuers in the project. Although the initial list of services
produced by the pursuers was amended somewhat before being provisionally
agreed, no attempt was made at that stage to agree the terms and conditions
upon which those services would be provided by the pursuers to the JVC. In mid-November 2002, a draft of the terms
and conditions upon which the services would be provided was produced by the
pursuers' solicitors. That draft was not
intended to reflect any previous agreement between the pursuers and the
defenders as to the terms on which the services would be provided, because
there was no such earlier agreement.
There had been no previous discussion about what would or would not
appear in the proposed MSA. Either party
to that proposed agreement was free to propose or reject the inclusion of any
term. The draft was the subject of some
minor revisal by the defenders' solicitors, agreed to by the pursuers, but no
alteration was made to any clause of import for present purposes, and no
attempt was made to alter the "entire agreement" clause. No attempt was made to add any stipulation
that the terms of the MSA would fall to be regarded as subordinate to the terms
of the JVA.
[87] The terms of the draft MSA between the pursuers and the
defenders which had been agreed by circulation between those parties'
respective agents were the terms set out in the version of the MSA executed by
both parties on 2 December 2002.
[88] Against that background, there was no basis upon which it could
be suggested that the terms of the MSA did not represent the terms of the
agreement between the parties on the subject to which it related. It might be the case that the terms to which
the defenders agreed had a different import from that which they imagined those
terms to have when they signed the MSA.
That was however irrelevant to found a claim for rectification, which was
properly predicated upon a discrepancy between an executed document and a
pre-existing agreement, and not upon a discrepancy between an executed document
and what one party imagined that document to mean: George
Thompson Services Limited v Moore
1993 S.L.T. 634 at page 636 per Lord
Weir.
[89] The defenders' contention appeared to be that the terms of the
MSA were in conflict with what the pursuers and ASP had at an early stage in
their discussions contemplated would or might be said in relation to certain
costs of the proposed project in the JVA.
That was wholly irrelevant. Quite
apart from the facts that the JVA and the MSA were not contracts between the
same parties, and that the defenders were not even in existence until September
2002, the final terms of the MSA and of the JVA were ultimately settled
relatively contemporaneously. Reference
was made to Rehman v Ahmad 1993 S.L.T. 741 at pages 751-752 per Lord Penrose, and to Co-operative Wholesale Society Ltd v Ravenseft Properties Ltd 2003 SCLR 509
at paragraphs 28 and 31 per Lord
Eassie. In any event, even if there had been
an informal agreement between the same parties as the ultimate contract,
following which the intention of one of the parties changed, and the words of
the final contract reflected that change, it would be impossible to hold that
the contract as finally concluded was intended to express the common intention
of the parties to the informal agreement at the time when that agreement was
entered into: there would have ceased to
be any common intention which the contract expressed. Reference was made to Angus v Bryden 1992
S.L.T. 884 at page 888 per Lord
Cameron of Lochbroom.
[90] Furthermore, even if there had been a prior agreement, the
"entire agreement" clause expressly stipulated that the terms of the MSA as
executed "supersede" any previous agreement between the parties, and represent
the entire agreement between the parties in relation to its
subject-matter. Although there was
English authority that such a clause might not be a bar to rectification under
English law (J J Huber (Investments) Ltd
v Private DIY Co Ltd (1995) 70
P.& C.R. D33), the English law of rectification did not require the
demonstration of an antecedent contract (Joscelyne
v Nissen [1970] 2 Q.B. 86). That approach could not be reconciled with the
Scots law of rectification. Reference
was also made to the explanation of the purpose of an entire agreement clause
in Inntrepreneur Pub Co (GL) v East Crown Ltd [2000] 2 Lloyd's Rep. 611
at page 614 per Lightman J.
[91] In reality, it was submitted, the defenders were resorting to
the tactic described by Lord Nicholls of Birkenhead in his 2005 Lecture to the
Chancery Bar Association, published under the title "My Kingdom for a
Horse: The Meaning of Words" at (2005)
121 L.Q.R. 577, at page 578:
"In my days at the Bar the
practice was that when the parties' pre-contract negotiations furnished some
insight into their actual intentions, one or other of the parties would include
a rectification claim in the proceedings.
By this means, whatever the outcome of the rectification claim, the
evidence of the parties' actual intentions would be before the court. The hope was that, either consciously or
subconsciously, the judge's thinking on the interpretation issue would be
influenced by this evidence. No one was deceived
by this transparent ploy. I understand
this still goes on. There is nothing
improper about this, so long as the rectification claim has a seriously
arguable factual basis and is brought in good faith".
The submissions on behalf of the defenders
(a) The principal action
[92] On behalf of the defenders
it was submitted that, on a proper construction of the MSA, outlays were
payable only as a supplement to the fees.
Clause 4.5 appeared in a clause dealing with fees, and followed
immediately upon detailed provisions governing fees which might arise in
particular circumstances. The phrase "supplemental
to the foregoing" was read naturally as meaning "supplemental to the foregoing
provisions about fees".
[93] When was the fee payable?
The fee was designed to be calculated once the costs, or estimated
costs, of the project were known. It was
difficult to see how the fee could be calculated before it was known whether
the project was to proceed at all.
Accordingly, on a proper construction of the MSA, the fee did not become
payable until the project became unconditional.
The logical consequence was that if the outlays were supplemental to the
fee, the intention of the parties was that the outlays would also be payable
once the contract became unconditional.
As it was a matter of agreement that that did not take place, nothing
was payable.
[94] For the pursuers to succeed, it would be necessary to establish
that the sums recoverable under clause 4.5 as "incidents" of performance under
the MSA included, on a natural construction of the contract, what were
described in evidence as "big ticket" items, i.e. the costs of instructing
professionals such as architects, lawyers and so forth. These were the same costs as were set out in
Schedule 5A to the JVA. If on a proper
construction of the MSA it did not encompass such costs, the claim for recovery
failed.
[95] There was no express inclusion, within the Schedule of
services, of the instruction and payment of other professionals. The Schedule created an entirely different
impression - namely that the person carrying out such services would be engaged
in advising "the employer" on the appointment of other professionals and would
then be engaged in liaison with and supervision of those other professionals. Insofar as fees were mentioned, the role of
the pursuers was restricted to checking invoices and passing them on (e.g. at
paragraph 6.5 of the Schedule). That was
the consistent approach throughout the Schedule, other than in paragraph 15,
where careful provision was made for the instruction of particular
professionals and for the manner in which liability for those instructions was
to be managed as between the person carrying out services under the MSA and the
client.
[96] It was nothing to the point that some of the services might
require the involvement of other professionals, since, under the Schedule,
other professionals would have been appointed to the team following advice from
the "manager". Accordingly, there was
nothing in the Schedule which supported the proposition that the intention of
clause 4.5 was to carry with it "big ticket" items.
[97] Clause 4.5 should be understood as covering incidental outlays
incurred by the manager while carrying out his duties. The concept of fees and outlays was well known. It was not suggested that anything of the
nature of such modest outlays was the intended aim of recovery in this case.
[98] When setting a standard by which a duty of care should be
imposed, the parties had referred to the role of a project manager (clause
3.1). It seemed to be suggested by the
pursuers that this was a largely meaningless phrase or that it did not accord
with what was truly envisaged. The
defenders maintained that it accorded precisely with what was envisaged. No doubt the services to be provided by a
project manager would depend on the project, but to say that someone was
responsible for making progress was a reasonable description of a project
manager. The use of the term "project
manager" supported the defenders' submission.
A project manager was there to manage as one of a team, not to take
direct responsibility for payment. There
was a consensus among the witnesses that the one thing a project manager would
never do would be to instruct and pay other members of the professional team.
[99] The modern approach to the interpretation of documents was set
out in Investors Compensation Scheme Ltd
v West Bromwich Building Society at
pages 912-913 per
Lord Hoffmann. As his Lordship
observed at page 913, the background to a document might enable the reasonable
man not merely to choose between the possible meanings of words which were
ambiguous, but to conclude that the parties must have used the wrong words or
syntax. In establishing the relevant
circumstances, reference could be made to the parties' discussions: Bovis Construction
(Scotland) Ltd v Whatlings
Construction Ltd 1994 S.C. 351 at page 357 per Lord President Hope, Bank
of Scotland v Dunedin Property
Investment Co Ltd, Proforce Recruit
Ltd v The Rugby Group Ltd [2006]
EWCA Civ.69. Reference was also
made to Charter Reinsurance Co Ltd v Fagan, to the lecture by Lord Nicholls
already cited, and to Berg, "Thrashing Through the Undergrowth" (2006) 122
L.Q.R. 354.
[100] In the present case, the correct approach was to regard the MSA
and the JVA as parts of one overall joint venture agreement. In the context of a set of documentation
signed at the same time by effectively the same parties, it was unrealistic to
construe the MSA in isolation. Part of
the factual matrix was the terms of the JVA.
The JVA described the MSA as "ancillary" (clause 3.1(b)). It would be natural to construe an ancillary
agreement along with and in the context of the principal agreement.
[101] There was no dispute that the JVA made the recovery of costs by
the pursuers conditional on the deal completing. The parties had gone into detail on the
nature of those costs, and when they were to be recovered: Schedule 5A and clauses 3 and 13. The parties were agreed that the mechanism
through which the costs would become payable was the JVC (the defenders), and
provision was then made as to how and when that would be achieved. The mechanism of the parties "procuring"
payment was employed simply because the JVC was not itself a party to the JVA.
[102] The JVA made specific provision as to what was to happen if the
contract did not complete. Although
there was no provision which expressly stated what was to happen to costs in
the event of non-completion, the treatment of costs in that event was an inevitable
consequence of the conditional nature of the payment provisions. In addition, the JVA specifically provided
that the parties would procure that on non-completion the JVA would
automatically terminate and that the parties would forthwith terminate the MSA
(clause 2.2). The joint venturers had
therefore agreed that if the conditions precedent were not satisfied, both the
JVA and the "ancillary" MSA would come to an end. When that was considered together with the
conditional nature of the payment of costs under the JVA and the payment
mechanism, it was plain that the intention of the parties was that the costs
would be payable only in the event of completion. To interpret a provision for incidental
outlays as entitling the pursuers to recover major sums prior to completion
would set at naught much that was carefully included in the JVA. The court should prefer a construction which
made sense of the provisions as a whole, rather than one which led to conflict,
or one which made the provisions on costs in the JVA largely redundant.
[103] The defenders' construction was consistent with the exchanges
between Mr Robertson and Mr Pierotti in November 2004. Subsequent conduct could shed light on what
the parties to a contract intended:
Scottish Law Commission, Report on
Interpretation in Private Law (Scot. Law Com. No. 160, 1997), paras. 2.24 et seq;
Cameron (Scotland) Ltd v Melville Dundas Ltd 2001 S.C.L.R. 691. In addition, the pursuers' pleadings
repeatedly accepted that the JVA regulated the position on costs "until the
events described in clause 13.2 occurred, or, if they did not, for so long as
the JVA itself continued in existence".
On that basis, the MSA could not entitle the pursuers to payment of
costs while the JVA remained in force.
If, as was agreed, the MSA was terminated at the same time as the JVA,
there could be no right, accrued or otherwise, to payment of costs under the
MSA.
[104] The defenders also maintained that it would have made no
commercial sense for ASP or the defenders to agree that they would pay costs of
the type in question regardless of whether or not the contract became
unconditional. The pursuers would be in
control of the costs. It was known that
the costs were likely to be very substantial.
It would make no commercial sense for another party to entrust complete
control of such substantial costs to the pursuers and to agree, in advance, to
meet those costs even if the pursuers failed to get the planning consent, which
was a central pillar of the conditions precedent. It was the developer, rather than the
landowners, who was best placed to assess risk, particularly in relation to
obtaining planning consent, and to bear the risk that consent would not be
obtained. It appeared to be suggested
that had the landowners not entered into a joint venture or similar
arrangement, they would have had to do everything themselves - but then they
would have had control of the process, and of the costs being incurred. On the pursuers' interpretation, the
landowners wrote what was close to being a blank cheque.
[105] In discussion, it was accepted that, if the pursuers had a right
to payment under the MSA prior to the termination of that agreement on 5
December 2005, that right would remain enforceable after that date.
(b) The counterclaim
[106] Rectification was a flexible
and wide-ranging remedy, restricted only by the words of the statute. It was not confined to errors of expression,
but could correct more substantial defects:
Bank of Scotland v Graham's Trustee 1993 S.L.T. 252 at page 255
per Lord President Hope. Common intention was to be determined
objectively: Rehman v Ahmad at page
752 per Lord Penrose. Agreement could be reached over a period of
time, for example through a process of exchange of documents: Rehman
v Ahmad at page 751. The fact that a document had been read and
approved prior to execution did not make rectification impossible: Renyana-Stahl
Anstalt v MacGregor at page 1258 per Lord Macfadyen. The fact that terms were re-negotiable did
not prevent the parties from being ad
idem unless and until their agreement on those terms was departed
from: Huber (Investments) Ltd v Private
DIY Co Ltd. An "agreement", within
the meaning of section 8, need not be legally binding: Shaw v
William Grant (Minerals) Ltd; Joscelyne
v Nissen at page 98.
[107] In the present case, agreement on the question of costs, and on
the question at whose risk the costs would be, was reached in July 2002 by way
of the e-mail exchange between Mr Scott and Peter Lawson. At no time thereafter was any indication
given by or on behalf of the pursuers that they had changed or intended to
change their position so as to depart from that agreement. In addition, the parties continued to
negotiate on the way in which costs were to be described in the JVA so as to
give effect to that agreement. The
details supporting the agreement in principle continued to be discussed and
negotiated up until the date of signing of the JVA. That was consistent with such an agreement remaining
in place and, on the face of it, was inconsistent with the proposition that
there had been any change. The pursuers'
contention would have to be that at one and the same time parties were
thrashing out the details of their prior agreement on costs for the purpose of
inserting them in the principal agreement, while at the same time they were
entering into a very different agreement as a subordinate (or ancillary)
agreement. That was a scarcely tenable
proposition.
[108] It was clear that the parties viewed negotiations as being a
single process leading to the conclusion of "joint venture arrangements". Accordingly, the presence of a third
participant (the JVC, now the defenders) did not detract from the
argument. For practical purposes, the
JVC remained a creature of ASP throughout.
It was a matter of agreement in the pleadings that Burness represented
both ASP and the JVC throughout. A
common intention could be attributed to ASP and the JVC.
[109] If such a dramatic turnaround over such a large sum of money was
to be envisaged, it was surprising that plain and straightforward words to that
effect were nowhere to be found. One
might also note the evidence that, in the negotiation of the terms of a joint
venture, one would normally expect to see any significant change identified and
brought forward for discussion. There
was no sign of that having been done. The
MSA was presented as being boilerplate:
in other words, a standardised or usual form of words. Gordon Lawson clearly had a particular view
of how matters could properly be conducted in order to achieve a business
objective. He accepted that the JVA was
structured in such a way that recovery of costs was conditional on completion,
that it recorded that the JVA and MSA should fall in the event of
non-completion, and that the details of those costs continued to be discussed
and negotiated almost up to signing. His
view was that the pursuers were entitled to continue to negotiate with their
joint venture partners on that basis, safe in the knowledge that, in the MSA,
there was a provision which not only entitled them to recover their costs if
completion did not take place, but indeed entitled them to recover their costs
at any time after the MSA was signed. He
accepted that he was content for the pursuers knowingly to sign two
contradictory documents at the same time in relation to one project. It was ultimately not in dispute that the JVA
was structured to make recovery of costs conditional on completion and to make
both principal and ancillary agreements fall on non-completion whereas,
according to the pursuers, under the MSA an entitlement to payment of those
self-same costs arose immediately, and was unconditional.
[110] Even leaving aside the moral dimension to behaviour of that kind,
a party who decided not to raise a point overtly ran the risk that, on an
objective consideration of the evidence, no material would be found to support
the suggestion that any change was ever made.
The courts had shown themselves willing to approach commercial disputes
in a manner which would, in some cases, prevent a party playing a "dirty trick"
on the other. The court should be
reluctant to adopt an approach which would allow such a result. Reference
was made to Alpha Trading Ltd v Dunnshaw-Patten Ltd [1981] Q.B. 290 at
page 306 per Templeman L.J., Thomson v Thomas Muir (Waste Management) Ltd 1995 S.L.T. 403, Anderson v Commercial Union Assurance Co plc 1998 S.C. 197 and Glasgow City Council v Caststop Ltd 2002 S.L.T. 47.
[111] The entire agreement clause was not a bar to rectification. The question was whether the document
correctly reflected the parties' agreement.
If, on the evidence, it did not, an entire agreement clause did not oust
the court's jurisdiction to order the rectification of the document. The case of Inntrepreneur Pub Co (GL) v East
Crown Ltd was not concerned with rectification; neither were Exxonmobil Sales and Supply Corp v Texaco Ltd [2003] 2 Lloyd's Rep 686, SERE Holdings Ltd v Volkswagen
Group UK Ltd [2004] EWHC 1551 (Ch) or Ravennari
SpA v New Century Shipbuilding Co Ltd
[2006] EWHC 733 (Comm). The defenders'
argument was supported by J J Huber
(Investments) Ltd v Private DIY Co
Ltd.
Discussion
(a) The principal action
(i) The terms of the MSA
[112] Without overlooking the importance of context to the
interpretation of a contract, it is often useful to begin by considering the
words which the parties have used to express their agreement (cf. Bank of Scotland v Dunedin Property Investment Co Ltd at page 661 per Lord President Rodger, following Charter Reinsurance Co Ltd v Fagan
at page 384 per
Lord Mustill). In the present case
it appears to me to be useful to begin by considering the terms of the MSA.
[113] Under clause 2.1 the pursuers are to provide to the
defenders the services listed in Part 1 of the Schedule. In return, the defenders are required under
clause 4.1 to pay the pursuers a fee "in consideration of the performance
by you of the Services". The presence of
the words "by you" suggests that the Services are to be provided by the
pursuers themselves: otherwise those
words need not be present. Under clause
3.2, the pursuers warrant and undertake that they are and will remain competent
to perform the obligations imposed on them by the contract: they therefore warrant, in particular, that
they are competent to perform the Services themselves, without requiring the
assistance of third parties. Clauses 5.1
and 5.2 in addition prohibit the pursues from assigning or transferring their
rights or obligations under the contract, or sub-contracting the performance of
the Services, without the defenders' prior written consent; and there is no suggestion that such consent
was given in the present case. Clause
6.1 gives retrospective effect to the provisions of the MSA, so that they apply
from the date when the pursuers began to perform any services falling within
the scope of the Schedule.
[114] Considering clause 4.5 in that context, it provides:
"In supplement of the foregoing
JVCo shall free and relieve you on demand of all outlays reasonably required to
be made by it as an incident of the performance of its obligations hereunder
and the provision of the Services".
The words "it" and "its" must be a
mistake: the defenders could not
sensibly be undertaking to relieve the pursuers of outlays which the defenders
had themselves made. Those words must be
understood as meaning "you" and "your".
So understood, clause 4.5 entitles the pursuers to be relieved of the
outlays reasonably required to be made by them as an incident of the
performance of their obligations under the contract. Those outlays cannot in my opinion include
the cost of their paying third parties to perform the Services in whole or in
part, since, for the reasons already explained, the contract envisages that the
Services will be performed by the pursuers alone. Nor could such costs be described in that
context, in my opinion, as "an incident of the performance of [the pursuers']
obligations hereunder and the provision of the Services". The contrary interpretation would have the
unreasonable consequence, if the project proceeded, that the defenders would be
obliged to pay the pursuers the entire fee due for the performance of the
Services, and in addition would be obliged to meet the very substantial costs
which the pursuers had incurred in employing third parties to assist them,
because of their own inability to perform the Services without assistance.
[115] Nothing in the remaining provisions of the MSA supports any
different interpretation. On the
contrary, the provisions of the Schedule, in particular, are consistent with
that interpretation. Paragraph 1.1
envisages that other professional advisers will also be appointed by the
defenders; and it is apparent from other
provisions (e.g. paragraphs 2.1, 4.1, 5.2, 7.1, 8.1-8.4, 10.1-10.3, 12.2,
13.1-13.2 and 14.1-14.2) that the pursuers may work in conjunction with such
other professional advisers. It is not
however envisaged that the pursuers will themselves engage or pay such
advisers, or that such advisers will be engaged in "the performance of [the
pursuers'] obligations hereunder and the provision of the Services", in terms
of clause 4.5.
[116] Paragraph 6.5 requires the pursuers to "check and recommend
applications for payment made by those of the Professional Advisers who are employed
by the Employer", and paragraph 6.7 requires the pursuers to "check that those
of the Professional Advisers who are employed by the Employer prepare final
account and agree settlement": there is
no suggestion that the pursuers will themselves pay the professional
advisers. Paragraph 6.6 requires
the pursuers to "check and recommend other relevant invoices to the
Employer": again, it is not suggested
that the pursuers are themselves to pay the invoices. The only exception to this general pattern,
in relation to the instruction of other professional advisers, appears in
paragraphs 15.1 and 15.2.
Paragraph 15.1 requires the pursuers on behalf of the defenders to
instruct letting agents approved by the defenders "to promote the Project and market
vacant parts of the Site (as developed)", and paragraph 15.2 requires the
pursuers on behalf of the defenders to instruct solicitors and agents approved
by the defenders "to effect lettings of vacant parts of the Site (as
developed)". There is no suggestion that
either provision is applicable on the facts of the present case; but what is significant, for present
purposes, is the specific provision in paragraph 15.2 that the defenders
"shall, upon demand, free, relieve and fully indemnify the [pursuers] in respect
of all costs, fees and others incurred by the [pursuers] to such letting agents
and solicitors pursuant to such instructions".
That provision would be unnecessary if clause 4.5 had the meaning for
which the pursuers contend. It is
necessary, in the only section of the Schedule which provides for the pursuers
to instruct third parties, because the general position under the contract is
that the pursuers are not authorised to instruct other professionals (let
alone, to instruct other professionals to perform the Services), and cannot
therefore recover the cost of instructing such professionals under clause 4.5
as incidental outlays.
[117] That being the meaning of the MSA, if its provisions are
considered in isolation, the pursuers rely on certain aspects of the factual
background to support their claim. In
particular, they rely on evidence that, notwithstanding clause 3.2, the
pursuers were known by the defenders not to be competent to perform certain of
the obligations imposed on them; that,
notwithstanding clauses 5.1 and 5.2, it was understood that the pursuers would
sub-contract the performance of part of the Services without obtaining the
defenders' prior written consent; that,
notwithstanding clause 6.1, it was understood that many of the Services
had already been performed by other professionals instructed by the pursuers,
without the defenders' prior consent; that, notwithstanding paragraph 1.1 of the
Schedule, it was understood that the necessary professional advisers would be
instructed (and that many had already been instructed) by the pursuers; and that, notwithstanding paragraphs 6.5,
6.6 and 6.7, it was understood that the pursuers would themselves pay the
professional advisers and meet other relevant invoices, and that they had already
done so in respect of substantial sums.
It is against that background that the pursuers advance the somewhat audacious
proposition that a reasonable person would interpret clause 4.5 as entitling
them to recover, as outlays, the fees which they had paid to professionals whom
they had instructed to perform part of the Services on their behalf, or to
assist them in performing the Services, in addition to their being entitled
under clause 4.1 to receive the fee payable as remuneration for the performance
of the Services.
[118] In reality, therefore, the pursuers' claim under clause 4.5 does
not depend merely upon the interpretation of the MSA against its factual
background. It proceeds on the basis
that the terms of the MSA do not reflect the agreement between the
parties. It requires the court to accept
that there was in reality a different agreement between the parties, under
which the pursuers were to be remunerated for services which lay beyond their
own competence, and which had been, or were to be, performed wholly or in part
by third parties instructed and paid by the pursuers. The court cannot however proceed on the basis
that an agreement was entered into on materially different terms from those of
the MSA simply as a matter of interpretation of the MSA. It may be that the pursuers might have sought
the rectification of the MSA if, as they maintain, its terms do not reflect the
common intention of the parties; or it
may be that other remedies might have been available if there was in reality no
consensus between the parties. These are
matters which need not be considered at present. The present action is concerned with the
interpretation of the MSA as it stands;
and the pursuers' case requires the court to go beyond the limits of
interpretation, since the terms of the MSA cannot be interpreted as conveying
the meaning for which the pursuers contend. The disparity between the terms of the MSA and
the agreement which the pursuers seek to establish is not simply a matter of
syntax or choice of words, of the kind exemplified by Mannai Investment and discussed by Lord Hoffmann in the Investors Compensation Scheme case at
page 913, where the intended meaning would be clear, notwithstanding its
infelicitous expression, to a reasonable person aware of the background
circumstances. As Lord Mustill observed
in Charter Reinsurance Co Ltd v Fagan
at page 388,
"There comes a point at which the
court should remind itself that the task is to discover what the parties meant
from what they have said, and that to force upon the words a meaning which they
cannot fairly bear is to substitute for the bargain actually made one which the
court believes could better have been made.
This is an illegitimate role for the court".
On that short basis, the pursuers'
claim for reimbursement of professional fees falls to be dismissed.
[119] There is however one element in the pursuers' claim which
requires separate consideration, namely their claim for reimbursement of
planning application fees totalling ฃ11,090.
Although it was not suggested in argument that those fees might require
to be considered separately from the professional fees to which the remainder
of the claim relates, that appears to me to be the position, for two
reasons. First, paragraph 6.4 of
the Schedule to the MSA requires the pursuers to "check ....fees for statutory
approvals and arrange payments". (emphasis
added). No reference was made to this
provision in the parties' submissions.
At first sight, the phrase "fees for statutory approvals" might include
planning application fees.
Paragraph 6 is however headed "Construction Economics and Financial
Management", and it deals with the preparation of tender documentation
(paragraph 6.1), variations (paragraph 6.2) and final costs (paragraph
6.3). In that context, paragraph 6.4
would appear to be concerned with statutory approvals during the construction
phase of the project, rather than with the initial obtaining of planning
permission. That impression is
strengthened when one sees that planning approvals are dealt with separately in
paragraph 8. In the circumstances,
and bearing in mind that no reliance was placed by counsel for the pursuers on
paragraph 6.4, I need not consider it further.
[120] Secondly, however, the argument which I have accepted, that clause 4.5
cannot be interpreted (whatever the factual background might be) as entitling
the pursuers to be reimbursed professional fees paid to third parties for
performing the Services, does not apply to the planning application fees. The only question is whether those fees are
"outlays reasonably required to be made by [the pursuers] as an incident of the
performance of [their] obligations hereunder and the provision of the
Services". Paragraph 8 of the Schedule requires
the pursuers to provide services in relation to planning. In particular, in relation to applications
for planning permission, paragraph 8.2 requires the pursuers to
"Check....the form and content of
planning applications. Progress the
planning process and arrange that a check of all approval/refusal documents is
carried out by the project team. Check
that Professional Advisers implement and deal with any conditions attached to a
planning consent".
That paragraph does not expressly
impose any duty upon the pursuers in relation to the submission of planning
applications (whereas paragraph 8.3, in relation to other statutory approvals,
requires them to check that applications for approval are submitted). Nor does it state that they are required to
pay planning application fees: an obligation
which, if it were to be imposed, one would expect to see stated expressly. Nevertheless, the words "progress the
planning process" are arguably wide enough to be capable of being interpreted
as meaning that the pursuers were to submit the planning application and to pay
the appropriate fee, if that was a reasonable interpretation to place on those
words in the light of the surrounding circumstances. In respect of that limited aspect of the
pursuers' claim, therefore, it appears to me that the factual background might
in principle be capable of supporting the pursuers' interpretation, and
accordingly requires to be considered.
[121] Finally, in relation to the terms of the MSA, in the preceding
discussion I have not questioned the premise of the pursuers' argument, namely
that the performance of the services set out in the Schedule (specifically,
those described in paragraphs 2.1, 8.1-8.3, 9.1 and 13.1) would require
them to engage external professional assistance. That proposition was based particularly on
the evidence of Mr Ross, which I have summarised, and on the evidence of other
witnesses to the effect that the instruction of architects, traffic engineers
and other professional advisers was understood to be the responsibility of the
pursuers. That evidence does not however
appear to me to support the proposition advanced in argument. Paragraph 2.1, for example, does not
require the pursuers to prepare the design brief single-handed, but to
"co-ordinate with the Professional Advisers and oversee the preparation of the
design brief". The evidence does not
suggest that the performance of a service described in those terms lay beyond
the competence of the pursuers: on the
contrary, that was the type of service which Peter Lawson envisaged the pursuers
as performing.
[122] Similarly, paragraphs 8.1 to 8.3 do not require the pursuers
to undertake obtaining planning permission without the involvement of other
members of the design team.
Paragraph 8.1 requires them to "co-ordinate and support negotiations
with planning authorities"; and paragraph 8.2
requires them to "check ... the form and content of planning applications", to
"progress the planning process and arrange that a check of all approval/refusal
documents is carried out by the project team", and to "check that Professional
Advisers implement and deal with any conditions attached to a planning
consent". Paragraph 8.3 similarly
requires the pursuers to check other matters with the Professional Advisers. Although it is apparent that other professional
advisers would be involved in the process of obtaining planning permission,
they would not be performing the services required of the pursuers under these
provisions: the pursuers were being paid
a fee for acting as project managers, not for acting as architects or
engineers.
[123] The same point arises in relation to paragraph 13.1: it does not require the pursuers to prepare
fitting-out drawings or specifications, but rather "in conjunction with the
Professional Advisers ... [to] procure the preparation of drawings,
specifications or other documentation".
As previously explained, the appointment of those professional advisers
was not the responsibility of the pursuers under the MSA: under paragraph 1.1, their
responsibility was to advise the defenders in relation to such appointments.
[124] In the context of the MSA, it appears to me that
paragraph 9.1 similarly has a more limited scope than was assumed in the
pursuers' submissions. Considered in
isolation, an obligation to
"Obtain information on ownership
and any lessees of the Site, existing buildings, boundaries and any known
easements, underground services, rights of way, rights of support and other
relevant matters"
might be thought to require legal
expertise, as Mr Ross suggested.
Paragraph 9.2 however requires the pursuers to "assist the Employer
and its solicitors in negotiating the acquisition of any parts of the Site not
under the Employer's control and ancillary property rights"; so it is apparent that the defenders will be
instructing solicitors, who will deal with the acquisition of any necessary
real rights. Paragraph 15.2
similarly envisages that solicitors will be instructed to deal with
lettings. More fundamentally, it has to
be borne in mind that the pursuers were known to the other party to the MSA to
be property developers, not lawyers, and that the professional skill required
of them under clause 3.1 was "such ... as may reasonably be expected from
[a] suitably and properly qualified project manager". In that context, paragraph 9.1 cannot in
my opinion sensibly be construed as requiring the pursuers to research
conveyancing deeds and the law governing heritable property. In requiring the pursuers to "obtain
information" about the ownership of the Site, leases and related matters it
must be intended to refer to the type of information which a project manager
such as the pursuers could reasonably be expected to obtain through their own
enquiries.
[125] For these reasons also, therefore, it appears to me that the
pursuers' claim under clause 4.5 is based on a mis-reading of the MSA,
which places a meaning upon the agreement that its terms cannot fairly bear.
(ii) The "entire agreement" clause
[126] Before considering the
factual background, it is necessary first to consider the effect of
clause 6.2 of the MSA:
"This Appointment supersedes any
previous arrangements between the parties in respect of the Services (whether
oral or written) and represents the entire agreement between the parties in
relation to the Services."
[127] Provisions of this kind, commonly referred to as "entire
agreement" clauses, have not been the subject of judicial discussion in
Scotland, so far as appears from the authorities cited to me. They have however been discussed in recent
years in a number of cases in England. They are also the subject of
section 1(3) of the Contract (Scotland)
Act 1997, and were considered by the Scottish Law Commission in the Report
which preceded that Act (Report on Three
Bad Rules in Contract Law, Scot. Law Com. No.152, 1996).
[128] In their Report, the Commission stated (at paragraph 2.29):
"'Entire contract' clauses do not
in our view raise questions of evidence so much as questions of substance. The 'entire contract' clause is either an
accurate reflection of the agreement between the parties or it is not. If it is, then the terms of the document
necessarily supersede any prior terms and, as a matter of substance, the only
terms of the contract as at the time of execution are the terms set out in the
written document. Evidence of a prior
term would simply be evidence of a superseded term and, as such, would be
irrelevant. If, on the other hand, the
'entire contract' clause is not an accurate reflection of the agreement between
the parties then the remedy is rectification.
Of course, an 'entire contract' clause may also be challengeable under
the common law on fraud or under the Unfair Contract Terms Act 1977 or the
Unfair Terms in Consumer Contracts Regulations 1994. However, if unrectifiable and
unchallengeable, it ought simply to take effect according to its terms. Nonetheless, although we do not consider that
any special provision on 'entire contract' clauses is necessary, the very fact
that this issue was raised by some consultees suggests that there could be
value in including a provision, for the avoidance of doubt, preserving the
effect of such clauses."
That approach is reflected in
section 1(3) of the 1997 Act, which provides that where one of the terms
in a document is to the effect that the document does comprise all the express
terms of the contract, that term shall be conclusive of the matter.
[129] Entire agreement clauses may have a bearing on a number of
significant contractual issues. Such a
clause may, for example, be intended to exclude any argument that there is some
collateral contract or term, or some implied term arising from custom or usage,
which does not appear in the contract;
or it may be intended to exclude any argument that evidence extrinsic to
the contract should be considered in its construction; or it may be intended to have other effects
(e.g. to exclude claims for misrepresentation, or to exclude any common law
duty of care). The effect of any
particular clause will depend upon its terms.
[130] An entire agreement clause in similar terms to that in the MSA
was considered by Lightman J in Inntrepreneur
Pub Co (GL) v East Crown Ltd. After reviewing the earlier authorities, his
Lordship observed (at page 614):
"[S]uch a clause constitutes a
binding agreement between the parties that the full contractual terms are to be
found in the document containing the clause and not elsewhere, and that
accordingly any promises or assurances made in the course of the negotiations
(which in the absence of such a clause might have effect as a collateral warranty)
shall have no contractual force, save insofar as they are reflected and given
effect in that document ... [I]t constitutes an agreement that the full
contractual terms to which the parties agree to bind themselves are to be found
in the agreement and nowhere else and that what might otherwise constitute a
side agreement or collateral warranty shall be void of legal effect. That can be the only purpose of the
provision."
That approach was followed by Park
J in Inntrepreneur Pub Co (CPC) v Sweeney [2002] 2 E.G.L.R. at
pages 139-140. At the same time,
such a clause would not in my opinion exclude terms which required to be
implied in order to make the express terms work (cf. Exxonmobil Sales and Supply Corp v Texaco Ltd). Questions might
also arise, which I need not consider, as to the effect of such a clause on
terms implied by statute.
[131] In the present case, the terms of the entire agreement clause
appear to me to preclude any argument that the terms of the parties' agreement
are partly to be found outside the MSA.
In that regard, I respectfully agree with the judgments cited in the
preceding paragraph. On the other hand,
the terms of the clause do not appear to me to be apt to bar consideration of
the surrounding circumstances for the purpose of interpreting the agreement
contained in the MSA. I note that that
conclusion is consistent with the decision of the Court of Appeal in Proforce Recruit Ltd v The Rugby Group Ltd (a decision which
however only determined arguability), and with the earlier judgment of the New
Zealand Court of Appeal in Air New
Zealand Ltd v Nippon Credit Bank Ltd
[1997] 1 N.Z.L.R. 218 at page 224.
(iii) The MSA in context
[132] I therefore consider next the interpretation of the MSA in the
context of the surrounding circumstances.
In doing so, I shall consider all aspects of the pursuers' claim, in
case my conclusion that clause 4.5 of the MSA cannot be interpreted as
entitling the pursuers to the reimbursement of professional fees paid to third
parties for their assistance in performing the Services is mistaken.
[133] The question arises, which surrounding circumstances are
relevant? In that regard, counsel for
the pursuers relied on the opinion of Lord Wilberforce in Prenn v Simmonds. In his opinion,
with which the other members of the Appellate Committee expressed their
agreement, Lord Wilberforce said at page 1384, under reference to the
judgment of Lord Blackburn in River
Wear Commissioners v Adamson
(1877) 2 App.Cas. 743 at page 763:
"We must, as he said, inquire beyond
the language and see what the circumstances were with reference to which the
words were used, and the object, appearing from those circumstances, which the
person using them had in view".
Lord Wilberforce however rejected a
contention that prior negotiations could be considered as an aid to the
construction of a written document, concluding (at page 1385):
"In my opinion, then, evidence of
negotiations, or of the parties' intentions, and a fortiori of [one party's]
intentions, ought not to be received, and evidence should be restricted to
evidence of the factual background known to the parties at or before the date
of the contract, including evidence of the 'genesis' and objectively the 'aim'
of the transaction".
In relation to the "aim" of the
transaction, Lord Wilberforce had earlier acknowledged (ibid):
"It may be said that previous
documents may be looked at to explain the aims of the parties. In a limited sense this is true: the commercial, or business object, of the
transaction, objectively ascertained, may be a surrounding fact".
When Lord Wilberforce's
judgment is read as a whole, it appears that, in stating that "evidence of
negotiations ... ought not to be received", his Lordship may not have intended to
exclude evidence concerning things said or written in the course of the
parties' negotiations which were relevant to establishing "the factual
background known to the parties at or before the date of the contract,
including evidence of the 'genesis' and objectively the 'aim' of the transaction". I note that that was also the conclusion
reached by Lord President Hope in Bovis
Construction (Scotland) Ltd v Whatlings
Construction Ltd at page 357.
[134] Lord Wilberforce returned to this subject in Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 W.L.R. 989 at
pages 995-996:
"No contracts are made in a
vacuum: there is always a setting in
which they have to be placed. The nature
of what is legitimate to have regard to is usually described as 'the surrounding
circumstances' but this phrase is imprecise:
it can be illustrated but hardly defined. In a commercial contract it is certainly
right that the court should know the commercial purpose of the contract and
this in turn presupposes knowledge of the genesis of the transaction, the
background, the context, the market in which the parties are operating ....
When one speaks of the intention
of the parties to the contract, one is speaking objectively - the parties
cannot themselves give direct evidence of what their intention was - and what
must be ascertained is what is to be taken as the intention which reasonable
people would have had if placed in the situation of the parties. Similarly when one is speaking of aim, or
object, or commercial purpose, one is speaking objectively of what reasonable
persons would have in mind in the situation of the parties".
After referring to the speeches in Charrington & Co Ltd v Wooder [1914] AC 71, his Lordship
continued, at page 997:
"I think that all of their
Lordships are saying, in different words, the same thing - what the court must
do must be to place itself in thought in the same factual matrix as that in
which the parties were. All of these
opinions seem to me implicitly to recognise that, in the search for the relevant
background, there may be facts which form part of the circumstances in which
the parties contract in which one, or both, may take no particular interest,
their minds being addressed to or concentrated on other facts so that if asked
they would assert that they did not have these facts in the forefront of their
mind, but that will not prevent those facts from forming part of an objective
setting in which the contract is to be construed".
[135] Lord Hoffmann summarised the principles emerging from these
speeches of Lord Wilberforce in the Investors
Compensation Scheme case at pages 912-913:
"(1) Interpretation is the ascertainment of the meaning which the
document would convey to a reasonable person having all the background
knowledge which would reasonably have been available to the parties in the
situation in which they were at the time of the contract.
(2) The background was famously referred to by Lord Wilberforce
as the 'matrix of fact', but this phrase is, if anything, an understated
description of what the background may include.
Subject to the requirement that it should have been reasonably available
to the parties and to the exception to be mentioned next, it includes
absolutely anything which would have affected the way in which the language of
the document would have been understood by a reasonable man.
(3) The law excludes from the admissible background the previous
negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for
rectification. The law makes this
distinction for reasons of practical policy and, in this respect only, legal
interpretation differs from the way we would interpret utterances in ordinary
life. The boundaries of this exception
are in some respects unclear. But this
is not the occasion on which to explore them."
[136] In relation to the boundaries of the exception, it is also
necessary to note the opinion of Lord President Rodger in Bank of Scotland v Dunedin
Property Investment Co Ltd, where, after referring to prior authorities
including Prenn v Simmonds, Bovis Construction (Scotland) Ltd v Whatlings Construction Ltd and the Investors Compensation Scheme case, his Lordship observed (at
page 665):
"As these authorities
demonstrate, the rule which excludes evidence of prior communings as an aid to
interpretation of a concluded contract is well-established and salutary. The rationale of the rule shows, however,
that it has no application when the evidence of the parties' discussions is
being considered, not in order to provide a gloss on the terms of the contract,
but rather to establish the parties' knowledge of the circumstances with
reference to which they used the words in the contract."
I respectfully agree with that
observation.
[137] I note that the question whether the rule excluding evidence of
previous negotiations and of subjective intent should be relaxed has become the
subject of debate in recent years, not only in the jurisdictions of the United
Kingdom but also in other common law
jurisdictions. That debate is reflected
in some of the authorities (e.g. Bank of
Credit and Commerce International SA v Ali
at paragraph 31 per Lord
Nicholls of Birkenhead), as well as in the lectures and
articles which were cited. It is
unnecessary for me to enter into that debate, since my conclusion would be the
same whether or not the existing rule were to be relaxed. In the circumstances, I can confine myself to
the approach laid down in the authorities to which I have referred.
[138] One important surrounding circumstance, in relation to the
construction of the MSA, is that it formed only one part of a larger
transaction: the "entire agreement"
clause does not require one to close one's eyes to that fact, since one can
take account of that fact as an aid to interpretation without seeking to
establish some wider or collateral contract between the parties to the
MSA. To construe the MSA as if it were a
separate and independent transaction, standing alone, would be unreal. The transaction was of a composite
nature: a number of inter-related steps,
including the execution of a series of contracts, were to be taken on the same
date in order to establish a joint venture for the development of the site in
question, each step being taken on the basis that the others would also be
taken. Those steps included, in particular:
(i) the execution of the JVA
by Mr MacDonald and Mr Stewart on behalf of the pursuers and ASP
respectively;
(ii) the establishment of the
defenders as a wholly-owned subsidiary of ASP in accordance with
clause 3.1(h) and (j) of the JVA;
(iii) the entering into of the
Asset Transfer Agreement between ASP and the defenders, whereby properties
valued at ฃ4m were to be transferred from ASP to the defenders, in accordance
with clause 3.1(k)(i) of the JVA;
and
(iv) the execution of the MSA,
in terms agreed by the pursuers and MSA, by Mr MacDonald and
Mr Stewart on behalf of the pursuers and the defenders respectively, in
accordance with clause 3.1(k)(ii) of the JVA.
[139] Since that composite transaction forms the factual context in
which the MSA was entered into, the other elements of that transaction,
including the JVA, can be referred to as an aid to the construction of the
MSA. In particular, the MSA should if
possible be construed so that it and the JVA fit together to form consistent
elements in the overall transaction, rather than conflicting with each other.
[140] Considering the terms of the JVA, I accept that the recitals are
relevant, since any contract must be construed as a whole. At the same time, it is necessary to bear in
mind that recitals are usually in more general terms than the operative parts
of the contract. In the present case,
the recitals indicate that ASP has established the JVC, that the JVC is to
acquire rights and assets, and to be established and to carry on business, in
the manner set out in the JVA, that upon satisfaction of the conditions
precedent the pursuers are to subscribe for shares in the JVC, and that the
relations of the pursuers and ASP as shareholders in the JVC are to be governed
by the JVA. In general terms, that is a
reasonable summary of the aims of the JVA, although it is apparent from the
remainder of the JVA that those recitals are not an exhaustive account of its
terms. Even the recitals however
indicate that the purpose of the JVA was not confined to the two matters
specified by counsel for the pursuers in his submissions, namely to determine
the events in which the pursuers and ASP would become joint shareholders in the
JVC, and to regulate their relationship as joint shareholders thereafter.
[141] Turning to the operative provisions of the JVA, it is common
ground that the costs with which the present case is concerned fall within the
scope of clause 13.2. That clause
is a detailed provision, in terms of which the pursuers are to be
"responsible for all planning and
professional fees and other associated costs incurred in furthering the
Development from 1 June 2002 until detailed planning permission is
achieved ... to the extent that those matters were instructed by any of (i) the
JVC with the knowledge and consent of ME, (ii) ME or (iii) ASP with the
knowledge and consent of ME".
The costs in question are
specified, for the avoidance of doubt, as including those listed in
Schedule 5A: namely, architect,
structural engineer, planning fees, planning consultant, services engineer,
traffic consultant, quantity surveyor, environmental consultant, topographical
surveys and legal costs. They therefore
cover all the costs which the pursuers seek to recover in the present
proceedings. Clause 13.2 continues:
"If each of the Conditions
precedent described in clause 2 is fulfilled or waived and Completion is
effected in terms of clause 3 then the JVC shall become responsible for
such costs and shall reimburse ME in accordance with clause 3.3(g) ...".
Although those words do not state
in terms what is to happen if the conditions precedent are not fulfilled, the
plain implication is that the obligation of the JVC to reimburse the pursuers
is contingent on the fulfilment or waiver of the conditions precedent. That is equally the implication of
clause 3.3(g), which includes, in a list of events that are to take place
within ten days after the fulfilment or waiver of the conditions precedent,
that "the parties shall procure that the JVC shall reimburse ME for the ME
costs incurred in terms of clause 13.2".
[142] That being the meaning of the detailed provision of
clause 13.2 of the JVA, it would be unreasonable to construe the general
language of clause 4.5 of the MSA ("JVCo shall free and relieve you on
demand of all outlays reasonably required to be made by [the pursuers] as an
incident of the performance of [their] obligations hereunder and the provision
of the Services") as requiring the defenders to reimburse the identical costs
regardless of the fulfilment or waiver of the conditions precedent. It would make no sense for the JVA to provide
for reimbursement by the defenders only in the event that the conditions were
fulfilled or waived within a three year deadline, if the MSA entitled the
pursuers unconditionally to immediate reimbursement. It would equally make little commercial sense
for the JVA to provide for reimbursement by the defenders at a time when fifty
per cent of their share capital was held by the pursuers, if the MSA entitled
the pursuers to payment by the defenders at a time when they were a wholly-owned
subsidiary of ASP. These conclusions are
fortified by a number of other considerations.
[143] First, it is apparent from the terms of the JVA that its terms
and those of the MSA must have been intended to be consistent with one another,
rather than contradictory.
Clause 2.2(iii) of the JVA refers to the MSA; Schedule 1 defines the expression "ME
Management Services Agreement" as meaning "the management services agreement in
the agreed form between ME and JVC to be entered into of even date or near even
date herewith", and defines the expression "in the agreed form" as referring to
"a document agreed by the parties", i.e. by the pursuers and ASP; and clause 3.3(g) describes the MSA as
being ancillary to the JVA.
[144] Secondly, the JVA expressly envisages that the pursuers will
instruct professional advisers for the purpose of securing the fulfilment of
the conditions precedent (i.e. planning permission, site assembly and
pre-letting): that is apparent from
clause 3.3(i) as well as clause 13.2.
The necessity for the pursuers to instruct such advisers arises from
their obligation, under clause 2.2, to procure that the conditions
precedent are fulfilled, and from their inability to do so without assistance (a
factual circumstance of which both parties to the JVA were aware). As I have discussed, the JVA also makes
express provision for the circumstances in which the costs incurred by the
pursuers in respect of those instructions will be reimbursed by the
defenders. The MSA, on the other hand,
does not envisage that the pursuers will instruct professional advisers to
assist them in the performance of the specified services; nor, when the services are carefully
examined, is it apparent that they would require such assistance; and the pursuers had in any event warranted
their own competence to perform those specific services. In those circumstances, the instruction of
professional advisers by the pursuers for the purpose of securing planning
permission, site assembly and pre-letting, and responsibility for the fees
incurred in that regard, can be understood as being matters falling within the
scope of the JVA rather than of the MSA.
[145] It is also necessary to note the final part of clause 13.2, which
follows the words previously quoted:
"... except that project management
costs incurred by ME may be invoiced by ME after Completion and will be repaid
within 30 days of invoice date."
Nothing was made of those words in
parties' submissions; and the relationship
between those words and the earlier part of the clause is not clear. It is however apparent that "project
management costs" are intended to fall within the scope of clause 13.2,
and that they are to be invoiced by the pursuers after the conditions precedent
have been fulfilled or waived. The
expression "project management costs" is not defined. In the context of clause 13.2, the
expression must be intended to cover costs incurred by the pursuers prior to
the grant of detailed planning permission.
In that context, the words "project management" could be understood as
referring to the management of the project during the period when the pursuers
are responsible (under clause 2.2) for securing planning permission, site
assembly and pre-letting. On that
construction, it might be argued that there is an overlap with the MSA, which
also uses the concept of a project manager to describe the pursuers' duties (in
clause 3.1). So understood,
however, the final words of clause 13.2 of the JVA are a further
indication that it is only after the fulfilment or waiver of the conditions
precedent that invoices are to be submitted and paid.
[146] Accordingly, even if it were not clear from the terms of the MSA
alone, as I consider it to be (except possibly in relation to the planning
fees), that the pursuers are not entitled to recover the costs in question as
"outlays" under clause 4.5, regardless of whether planning permission was
obtained, it appears to me in any event that that is clearly the correct interpretation
when regard is had to the surrounding factual circumstances, including in
particular the terms of the JVA.
[147] Finally, although I do not require to rely on this principle, I
note that the construction of contracts according to what a reasonable person
would have understood is not value-free:
since the reasonable person is honest, the law is able to give effect to
what have been described as the reasonable expectations of honest people (Lord
Steyn, "Contract Law: Fulfilling the
Reasonable Expectations of Honest Men" (1997) 113 L.Q.R. 433; Lord Nicholls of Birkenhead, "My Kingdom for
a Horse: the Meaning of Words" (2005)
121 L.Q.R. 577, 580). In different
language, the reasonable person will tend to expect a result which is just
rather than unjust (Australian
Broadcasting Commission v Australian
Performing Right Association Ltd (1973) 129 C.L.R. 99 at pages 109-110
per Gibbs J), fair rather than unfair
(Laura Investment Co Ltd v Havering London Borough Council [1993] 1
E.G.L.R. 124 per Hoffmann J). In the present case, an honest person in the
position of the pursuers, having agreed to clause 13.2 of the JVA, would
not in my opinion have expected to be able to recover the same costs, without
being subject to the same conditions, under clause 4.5 of the MSA.
(b) The counterclaim
[148] If my conclusion in respect
of the principal action is correct, then it is unnecessary for the defenders to
seek the rectification of the MSA, and the counterclaim should therefore be
refused. I require nevertheless to
consider the counterclaim, on the hypothesis that my conclusion as to the
interpretation of the MSA is mistaken.
[149] Rectification is sought by the defenders under section 8(1)(a) of
the Law Reform (Miscellaneous Provisions) (Scotland)
Act 1985, which provides:
"8-(1) Subject to section 9 of this Act, where the court is satisfied, on
an application made to it, that -
(a) a document intended to express or to give effect to an
agreement fails to express accurately the common intention of the parties to
the agreement at the date when it was made;
or
(b) a document intended to create, transfer, vary or renounce a
right, not being a document falling within paragraph (a) above, fails to
express accurately the intention of the grantor of the document at the date
when it was executed,
it may order the document to be
rectified in any manner that it may specify in order to give effect to that
intention.
(2) For the purposes of subsection (1) above, the court shall be
entitled to have regard to all relevant evidence, whether written or oral".
[150] It appears, from the terms of the additional clause which the
defenders seek to have inserted into the MSA, that the claim to rectification
proceeds on the basis that there was a common intention, held by the parties to
an agreement which the MSA was intended to express or give effect to, that
payments by the defenders to the pursuers under the MSA were to be conditional
upon, and their timing governed by, the terms of the JVA, and in particular
clauses 3.3(g) and 13.2.
[151] Such a claim raises a number of questions in relation to the
application of section 8(1)(a). Issues arise, in the first place, from the use
of the defenders as a corporate vehicle to give effect to arrangements which
had in reality been made by the pursuers and ASP. For example, can the requirements of
section 8(1)(a) be met if the "agreement" relied on was made prior to the
incorporation of the company which executes the document intended to give it
effect, or prior to the acquisition of the company for use as a vehicle? Other issues arise from the nature of the
exchanges between the pursuers and ASP, and their respective agents, which
could be described in broad terms as a continuing negotiation. Does an "agreement" have to be a legally
binding contract? Does there have to be
an objectively manifested agreement?
Further issues arise from the conduct of the pursuers and their
agents: their failure to disclose their
change of position, their decision not to draw the attention of Burness to the
intended effect of clause 4.5 of the MSA, and the description of the MSA
as "boilerplate". If, for example, one
party to an agreement knows that the document does not give effect to it, and
is content that it should not do so, can it be said that the document is
"intended" to give effect to the agreement?
Is intention ascertained according to what is in the parties' minds, or
on the basis of their words and conduct?
Is the situation one in which the mistake is merely one of expression of
an agreement, or is it a situation where the agreement itself has been entered
into under a mistake? What, finally, is
the effect of the "entire agreement" clause in the MSA in relation to
rectification?
[152] In considering these questions, which involve fundamental aspects
of the law relating to rectification, it is useful to begin with the background
to the introduction of the remedy of rectification, in order to understand what
it was intended to achieve.
Section 8(1)(a), in particular, has its origins in the Scottish Law
Commission's Report on Rectification of
Contractual and Other Documents (Scot. Law Com. No.79, 1983), which was
itself preceded by the Commission's Consultative Memorandum No.43 (1979): Defective
Expression and its Correction. That
Memorandum began by referring to what the Commission described (at
paragraph 2) as
"the problem that arises when
parties have reached agreement but their agreement is later recorded
inaccurately in the document purporting to be the embodiment of the contract."
The problem arose because of Scots
law's failure to provide a suitable remedy.
Although patent defects in expression could be "cured" by construing the
document so as to accord with the parties' intentions, latent defects were more
difficult to address, particularly because the law of evidence was reluctant to
admit extrinsic evidence once a contract had been reduced to writing (the
"parole evidence" rule). In order to
avoid the application of the parole evidence rule, mistakes in expression
tended to be treated as if they were errors in
substantialibus, i.e. the type of error which would invalidate a contract
and warrant its reduction. With rare
exceptions (notably Krupp v Menzies 1907 SC 903) the court had
declined to grant a remedy where reduction was not available.
[153] The law had been clarified by the House of Lords in Anderson v Lambie
1954 SC (HL) 43. In that case, as
the result of a mistake, a disposition of property conveyed the entirety of an
estate which consisted mainly of a farm, but also included other property. The preceding missives of sale were capable
of more than one meaning as to the extent of the subjects to be conveyed. The evidence established that the missives
had themselves been preceded by an oral agreement for the sale of the farm
alone. Lord Reid observed that the
problem arising from this type of mistake in expression could not be resolved
by construing the document as it stood, unlike a mistake in expression which
was obvious on the face of the document.
Equally, this was not a case where an agreement was vitiated by
error: "in the present case the error
only arose after the parties had reached agreement". There must nevertheless be a remedy: Lord Reid cited Lord President Dunedin's
remark, in Krupp v Menzies (at page 908) that "it would be
truly a disgrace to any system of jurisprudence if there was no way available
of rectifying what would otherwise be a gross injustice". Reversing the judgment of the First Division,
the House of Lords held that reduction was an available remedy. In that regard, Lord Reid's first proposition
(at page 57) was that:
"In my judgment, if two parties
both intend their contract to deal with one thing and by mistake the contract
or conveyance is so written out that it deals with another, then as a general
rule the written document cannot stand if either party attacks it."
Lord Keith of Avonholm considered
(at page 68) that reduction was available in the event of a conveyance or
contract "being expressed as regards essentials in different terms from what
the parties really intended and had agreed between them".
[154] In relation to reduction, Lord Reid observed (at page 62):
"But, when it is sought to reduce
a deed, it is necessary to go behind the deed and discover the real facts. The fact that the parties agreed to the
missives is important evidence but it is not the only competent evidence. The question is not what the missives
mean: if that were the question, the
ordinary rule would apply that the meaning of a document must be found from its
terms. The question is whether the real
facts are such that the disposition must be reduced, and the existence of the
missives does not alter the nature of the inquiry."
In discovering "the real facts",
and "what the parties really intended", their Lordships' conclusions were not
based on uncommunicated states of mind:
Lord Reid concluded (at page 57) that each party had had the same
intention and that "each had made that intention clear to the other"; and Lord Keith of Avonholm described the
issue as being "what the parties really intended and had agreed between them" (emphasis added).
[155] In Anderson v Lambie, their Lordships made it clear
that it was incompetent under Scots law for a defectively expressed document to
be corrected by the court so as to give effect to the true agreement between
the parties. Lord Reid, for example,
stated (at page 61):
"I think that it is equally clear
that a Scots court has no power to rectify a disposition or other deed in the
sense of altering its terms so as to make them conform to some earlier contract
or to the real intention of the parties."
[156] The practical disadvantages consequent on the need for reduction,
and the absence of any jurisdiction to rectify defectively expressed documents,
were commented on by Lord Maxwell in the later case of Hudson v Hudson's Trustees
1978 S.L.T. 88. The following year the
Scottish Law Commission issued their Memorandum. Following consultation, they issued their
Report. It appears from the Memorandum,
in particular, that the Commission's proposals emerged from a detailed
consideration of rectification in English law, where the remedy had long
existed. The Commission's proposals
generally followed the approach adopted in the English authorities which they
discussed (with one exception, in relation to the need for an agreement to have
some outward or objective expression, where the Commission appear to me to have
misunderstood the English authorities: I
refer to the analysis of those authorities by Hoffmann LJ in Britoil plc v Hunt Overseas Oil Inc [1994] C.L.C. 561 at pages 577-579, and
to Smith, "Rectification of Contracts for Common Mistake, Joscelyne v Nissen and
Subjective States of Mind" (2007) 123 L.Q.R. 116).
[157] In their Report, the Commission stated, in relation to
contractual documents:
"3.3 In the memorandum we discussed criteria which potentially might
have to be satisfied by a party seeking the rectification of a written
contract. Our provisional view was that
rectification of a document giving effect to an agreement should not be
confined to cases where the original agreement had in itself been an
enforceable contract. Some contracts
will only be legally constituted when in formal writing, and it was our provisional
view that this requirement would prove unduly restrictive. Most of those who commented on the memorandum
shared this opinion.
3.4 We do not think that any particular restrictions should be
imposed on an applicant for rectification other than that to be successful he
should be able to satisfy the court that the terms of a written contract fail
to express accurately the common intention which the contracting parties had
agreed it should express...
3.5 Our provisional proposals in the memorandum were in wide terms
and were designed to permit, rather than restrict, the use of all relevant
evidence in the proof of defective expression.
We agree, however, with those commenting on the memorandum that there
are some important criteria which should be satisfied if rectification is to be
granted. The first is that the parties
should have reached agreement. The
second is that the document which was intended to give effect to that agreement
defectively expresses the parties' common intention at the time when they
reached agreement. These apparently
simple requirements may often prove difficult to satisfy and we consider that
they should operate as adequate safeguards against unjustified claims. Accordingly we recommend that:
The court should be able to order the rectification of a document intended
to give effect to a prior agreement when it is satisfied that the document does
not express accurately the common intention of the parties to that agreement at
the time when it was made.
(Recommendation 2)"
In relation to evidence, the
Commission stated (at paragraph 4.2):
"Latent defects by definition can
only be rectified if it is possible for the court to go behind the terms of the
writing in question and investigate all relevant evidence, whether written or
oral, which can establish what the true agreement was and what the correct
expression of it should be. Extrinsic
evidence of that nature is currently admitted in cases of reduction ... for the
simple reason that the remedy would not be a practical proposition were such
evidence not admissible. For similar
reasons of practicability we consider that a new power to rectify a writing
would be of limited value unless specific provision were also made enabling the
court to hear all relevant evidence as to how the defect in question came to
exist."
The Commission appended to their
Report a draft Bill, the relevant provisions of which were subsequently enacted,
with only formal changes, as section 8(1) and (2) of the 1985 Act.
[158] In the light of that background, three general observations might
be made. First, although
section 8(1)(a) is a short provision, it requires a considerable amount of
unpacking, and is apt to raise a variety of difficult questions. Secondly, the provision creates a significant
new remedy, which has to be integrated into the remainder of the law of
contract. That integration is
facilitated by the use of terms, such as "agreement" and "intention", which are
central to the law of contract. Those
terms are open-textured and capable of development, enabling rectification to
develop as a remedy as the law of contract evolves over time. Thirdly, I would respectfully adopt, in
relation to section 8(1)(a), an observation made by Lord President Hope in
respect of section 8(1)(b), in Bank
of Scotland v Graham's Trustee
(at page 255):
"We think that it would be unwise
to attempt to define all the circumstances to which the power of rectification
under section 8(1)(b) can apply."
Bearing that observation in mind,
and bearing in mind also that my remarks on this branch of the case are obiter dicta (given my conclusion in
relation to the principal action), it would be not only unnecessary but also
unwise to express a concluded opinion on all the issues raised by the
counterclaim. I require, nonetheless, to
consider the parties' submissions.
[159] First, I am not persuaded by the contention that an "agreement",
within the meaning of section 8(1)(a), must be an enforceable
contract. I respectfully agree in that
regard with the Opinion of Lord McCluskey in Shaw v William Grant
(Minerals) Ltd. The contrary
proposition would deprive the remedy of rectification of some of its intended
effect, not least in relation to agreements requiring writing, and it would
involve reading into section 8 words which do not appear there. I would observe that it is necessary, when
considering other aspects of rectification, to bear in mind one of the
implications of this conclusion: that
rectification can be ordered so as to give effect to an agreement by which
neither party was bound.
[160] Secondly, I am not persuaded by the contention that there can be
no "agreement", for the purposes of rectification, unless that agreement has
been concluded prior to the execution of the document which is sought to be
rectified. I respectfully agree, in that
regard, with the Opinion of Lord Penrose in Rehman
v Ahmad at page 751:
"An error of expression of common
intention may enter the proceedings at a time prior to the resolution of the
last essential of a completed contract, and remain uncorrected when that final
stage is achieved. If the authorities
are any guide, one might think typically of an error of description of
heritable property in missives overlooked while parties' solicitors negotiated
the minutiae of a modern contract for sale of the subjects. The agreement would be made, in many cases,
by the delivery of a final letter which might do no more than accept the last
counter stipulation and 'hold the bargain as completed'. The last letter would both complete the
agreement and the exchange of documents intended to express it. I can see no reason to deny a remedy in such
a case, if otherwise appropriate, simply because the two events occurred
simultaneously."
I note that this reasoning is the
same as that adopted in the English authorities (such as Joscelyne v Nissen) to
which the Scottish Law Commission had referred.
[161] The contention that "the common intention of the parties" must be
determined objectively, and that the evidence of the parties or their agents as
to what they actually had in their minds should therefore be disregarded,
raises a more difficult issue. On the
one hand, I was referred to the dictum of Lord McCluskey in Shaw v William Grant (Minerals) Ltd (at page 121) that the court has
to be satisfied "that the intentions were actual (not deemed) intentions": an approach which might be argued to derive
support from dicta in Anderson v Lambie. On the other hand, I
was referred to the Opinion of Lord Penrose in Rehman v Ahmad at page
752:
"Common intention, in the context
of making an agreement, has to be determined objectively: Thomson
v James (1855) 18 D. 1 and Muirhead & Turnbull v Dickson (1905) 7 F 686. In the former case, the 'actual' intention of
Mr James to enter into any contract at all had been departed from, but
there was held to be a completed bargain, on an application of the postal
rule. In the latter, one finds the
statement of Lord President Dunedin:
'But commercial contracts cannot be arranged by what people think in
their inmost minds. Commercial contracts
are made according to what people say.'
The description of intention as 'actual' leaves open, perhaps, the
question whether one is concerned with a party's intention as a matter of
subjective perception, or as a matter of expression, objectively
determined. In my opinion the common
intention of parties referred to in the provision is the common intention
ascertained objectively in accordance with the normal canons of construction of
agreements, and in particular the rules applicable in ascertaining whether
consensus in idem has been achieved, and to what effect."
[162] It is also relevant to note in this connection the Opinion of
Lord Weir in George Thompson Services Ltd
v Moore, where rectification was
sought on the basis of a common intention, without any suggestion that that
intention had found expression in an agreement.
Lord Weir dismissed the petition, stating (at pages 636-637):
"In my opinion it is implicit in
the terms of [s.8(1)(a)] that one has to discover the existence of an earlier agreement from which a common intention can
be discerned. The word 'intention'
has a positive character. It is
suggestive of something more than a wish or a belief, an indication or even a
general understanding. It has a purpose
to it and in this context, in my view, it must be related to an agreement"
(emphasis added).
[163] I note that the same approach was followed in the English
authorities cited by the Scottish Law Commission (and in more recent
authorities), for the same reasons as were explained by Lord Penrose in Rehman v Ahmad. In Britoil plc v Hunt Overseas Oil Inc, for example, Hobhouse LJ referred (at
page 574) to
"the necessity that a claimant
for rectification show something with the objective status of a prior
agreement. There must be some 'outward
expression of accord' or evidence of a continuing common intention 'objectively
manifested'. Without this, the claimant
for rectification will not be able to begin to satisfy the relevant criteria. In the words of Simonds J, it is this which
gives the court 'jurisdiction'."
In the same case, Hoffmann LJ (in a
dissenting judgment) explained (at pages 578-579) some of the implications
of adopting an objective approach to the ascertainment of the common intention:
"In my view it does not matter
what [the plaintiff] thought that the heads of agreement [a prior informal
agreement] and the definitive agreement [the document sought to be rectified]
meant. What matters is what the parties
agreed. The purpose of rectification of
a contract (as opposed to rectification of a unilateral instrument like a will
or voluntary settlement) is not to make the instrument accord with what the
parties subjectively intended but with what they actually agreed. Agreement in English law does not require a
meeting of minds, a consensus ad idem.
It is an objective fact, requiring only the appearance of such a
consensus. If therefore the parties both
intended a written instrument to embody their agreement and it does not do so,
the necessary common mistake exists. It
does not require that the written instrument should actually mean something
different from what each of the parties thought it meant.
There is ample authority for the
reverse proposition, namely that rectification will not be granted merely
because the effect of the instrument is different from that which both parties
subjectively intended. ... [T]here must be
material upon which it can be said that the instrument does not reflect what
the parties agreed, not merely what they or one of them thought it meant.
In my judgment the converse is
also true. A subjective mistake as to
what the contract means is unnecessary as well as insufficient. As Mustill J said in The Olympic Pride [1980] 2 L1 Rep 67, at
pp.72-73:
'It is the words and acts of the
parties demonstrating their intention, not the inward thoughts of the parties,
which matter.'"
[164] This is the approach which appears to have been adopted by Lord
Cameron of Lochbroom in Angus v Bryden.
In that case, an informal agreement for the sale of river fishings was
followed by an exchange of missives, in the course of which the pursuers (the
sellers) made an offer which the defenders (the purchasers) interpreted as
including sea fishings as well as the river fishings. The defenders were assumed, for the purposes
of the hearing on relevancy, to have realised that this was a drafting error by
the sellers' agents, but to have decided to say nothing so as to take advantage
of the mistake. They accepted the
offer. A disposition was then granted,
which conveyed both the river fishings and the sea fishings. Lord Cameron of Lochbroom held that,
correctly interpreted, the missives were for the sale only of the river
fishings. It followed that the
disposition had failed to express accurately the common intention (objectively
ascertained) of the parties to the missives.
In those circumstances, his Lordship appears to have considered (at
page 888) that it would be competent in principle to rectify the
disposition so as to give effect to the missives, although he could not do so
"as matters presently stand on the pleadings".
[165] For the reasons explained below, I do not require to express a
concluded view in relation to this matter;
but my provisional view is that the approach adopted by Lord Penrose and
Lord Cameron of Lochbroom is to be preferred to that stated in the Shaw case.
[166] The contention that rectification cannot be granted where the
subjective intention of one party has changed since the parties' antecedent
agreement, but that change of intention has not been disclosed to the other
party, appears to me to raise difficult questions. It may be argued, as it was in the present
case, that in such circumstances the document is not "intended" to give effect
to the common intention of the parties to the agreement.
[167] Where the agreement is an enforceable contract, under which the
parties are entitled to a document which gives it effect, it might be thought
to be sensible for the court to have the power to rectify the document,
whatever the subjective intentions of one of the parties might have been, since
the alternative remedy - reduction, possibly coupled with an order for specific
performance - would, even if available, be at best a circuitous method of
achieving the same result. In that
regard, I note the observations of Hobhouse LJ in the Britoil case at page 572:
"Where the prior agreement is a
legally binding contract then the grant of the remedy of rectification is, as
was pointed out by Lord Cozens-Hardy in Lovell
& Christmas v Wall (1911) 104
LT 85 at p.88, analogous to the remedy of specific performance. The parties were entitled to have an
agreement conforming to their earlier contract.
If the later document fails to fulfil this entitlement, the parties are
entitled to have it rectified so that it will do so. Such a conclusion will only be defeated if
the parties have intended to vary their earlier agreement. In such a situation the court will have to
construe the earlier agreement as a contract and as a matter of law. Having decided as a matter of law what its effect
is, the court will give effect to the legal rights of the parties."
There are a number of possible
bases on which that approach might be supported in Scots law. Even if a subjective approach were adopted to
the ascertainment of what was "intended", the view might well be taken that,
standing the parties' legal obligations under the agreement, they cannot be
heard to say that they had no intention of fulfilling them. If an objective approach were adopted, then an
undisclosed change of inward intention would in principle be of no relevance.
[168] Where the agreement is not an enforceable contract, the position
may be less straightforward. A situation
of that kind was considered, obiter,
by Lord Cameron of Lochbroom in Angus v
Bryden. The facts of the case have already been
narrated. His Lordship considered what
the situation would have been if, contrary to his opinion, the missives had
included the sea fishings. In that situation,
the disposition would have given effect to the missives, but the missives would
not have accurately given effect to the prior informal agreement, as a result
of a mistake by one party, of which the other party had decided to take
advantage by remaining silent. His
Lordship considered that rectification was incompetent in that situation,
stating (at page 888):
"If, notwithstanding the earlier
informal agreement, a party changes ground in the course of negotiations for
purchase of property (as any party is entitled to do where there has been an
informal agreement for the sale of heritable subjects which has not been
homologated or otherwise subject to rei interventus), it is impossible for the
court to hold that the missives as finally concluded were intended to express
the common intention of the parties to the informal agreement at the time when
that agreement was entered into. In my
opinion, s.8(1)(a) gives no countenance to the proposition, which was urged
upon me by counsel for the pursuer, that the court can in such circumstances intervene
to rectify the missives. To do so would
be to ignore the fact that at the conclusion of the missives there had ceased
to be any common intention which the missives expressed. Indeed to do otherwise would be, as counsel
for the defenders pointed out, to make enforceable an informal agreement
relating to heritage which had neither been homologated by the parties nor was
subject to rei interventus. In the event
that the pursuer established this alternative case, in my opinion, the result
must be that the court would require to reduce both the disposition and the
missives. Otherwise the court would be
seeking to write into the contract terms which the defenders at the end of the
day had not intended to accept."
His Lordship's conclusion that
reduction was competent was based on the view that the missives and disposition
were vitiated by an error on the part of the pursuer which, although unilateral
and uninduced, was to be treated as an error in substantialibus, the defenders having taken advantage of the
error in bad faith.
[169] There are some aspects of this reasoning which, with respect, I
do not find entirely persuasive. If the
common intention of the parties to an agreement is to be ascertained
objectively (as previously discussed), then an undisclosed intention to depart
from the agreement does not entail that "there had ceased to be any common
intention". Equally, if a document can
be rectified to give effect to an informal agreement (as previously discussed),
then it appears to me to follow that rectification may "make enforceable an
informal agreement relating to heritage".
The background of section 8 in Anderson v Lambie suggests, as previously discussed, that that was one of the
situations which section 8 was intended to cover. Nevertheless, I acknowledge that it may be
arguable, at least in certain circumstances, that in the absence of a legally
binding agreement the court should not "write into the contract terms which the
defenders at the end of the day had not intended to accept". On the other hand, there may also be circumstances
where to allow a defender successfully to oppose rectification by reason of an
undisclosed intention to depart from an earlier informal agreement would result
in injustice. Reduction may not always
be a competent remedy where there has been a unilateral error of the kind in
question, since its availability depends on the error being sufficiently
serious to be regarded as going to the root of the contract. Even where available, reduction may not be an
adequate remedy: as explained
previously, that was one of the reasons for the introduction into Scots law,
from English law and its cognate systems, of the remedy of rectification. It would be productive of injustice, in my
opinion, if the court had no jurisdiction to rectify a contract which one party
had entered into on the basis of a manifest prior agreement, which to all
appearances continued but had been incorrectly expressed in the final document,
merely because of an uncommunicated subjective change of mind on the part of
the other party.
[170] I note that English law has developed an approach to
rectification in cases of unilateral mistake which adopts the same starting
point as in Angus v Bryden - that the court should not
ordinarily "write into the contract terms which the defenders at the end of the
day had not intended to accept" - but nevertheless permits rectification where
it is unconscionable for the defendant to resist it. The law was summarised by Stuart
Smith LJ in Commission for the New
Towns v Cooper (Great Britain) Ltd [1995] Ch. 259 at
page 277:
"The commonest circumstance in
which rectification is granted is where the written contract does not
accurately record the parties' joint agreement.
In other words, there is a mistake common to both parties. In the case of unilateral mistake, that is to
say where only one party is mistaken as to the meaning of the contract,
rectification is not ordinarily appropriate.
This follows from the ordinary rule that it is the objective intention
of the parties which determines the construction of the contract and not the
subjective intention of one of them.
Also, it would generally be inequitable to compel the other party to
execute a contract, which he had no intention of making, simply to accord with
the mistaken interpretation of the other party:
see Olympia Sauna Shipping Co.
S.A. v Shinwa Kaiun Kaisha Ltd
[1985] 2 Lloyd's Rep. 364, 371, per Bingham
J. But the court will intervene if there
are 'additional circumstances that render unconscionable reliance on the
document by the party who has intended that it should have effect according to
its terms:' Spry, Equitable Remedies, 4th ed. (1990), p.599."
[171] A similar approach appears to be followed in other common law
jurisdictions. In Canada,
for example, the law was summarised by Binnie J in Performance Industries Ltd v Sylvan
Lake Golf & Tennis Club Ltd [2002] I S.C.R. 678 at paragraph 31:
"Rectification is an equitable
remedy whose purpose is to prevent a written document from being used as an
engine of fraud or misconduct 'equivalent to fraud'. The traditional rule was to permit
rectification only for mutual mistake, but rectification is now available for
unilateral mistake (as here), provided certain demanding preconditions are met. Insofar as they are relevant to this appeal,
these preconditions can be summarized as follows. Rectification is predicated on the existence
of a prior oral contract whose terms are definite and ascertainable. The plaintiff must establish that the terms
agreed to orally were not written down properly. The error may be fraudulent, or it may be
innocent. What is essential is that at
the time of execution of the written document the defendant knew or ought to
have known of the error and the plaintiff did not. Moreover, the attempt of the defendant to rely
on the erroneous written document must amount to 'fraud or the equivalent of
fraud'."
[172] It appears from Angus v
Bryden, and the authorities discussed
there, that Scots law has in the past been able to address the problems caused
by unilateral errors relating to the expression of prior agreements, within the
limits of the remedies then available.
Given the purpose behind the introduction of the remedy of rectification
- essentially, to provide a more convenient and effective remedy than reduction
in cases of defective expression - it is not to be expected that that remedy will
be narrower in scope. It is apparent
from the experience of other jurisdictions, with a broadly similar approach to
the treatment of mistakes in the law of contract but with a longer experience
of rectification as a possible remedy, that it has been found necessary to make
rectification available in certain cases of unilateral mistake in order to
avoid injustice. The facts of the
present case, and of Angus v Bryden, suggest that similar cases can
also arise here.
[173] In Scots law, rectification is not rooted in the conceptual
framework of equity (in any technical sense), but depends on the fulfilment of
statutory requirements. Those
requirements draw no explicit distinction between defects in expression which
are due to a common mistake and those which are due to a unilateral mistake,
but simply require that the document is "intended" to express or to give effect
to an agreement but fails to express accurately the "common intention" of the
parties to the agreement at the date when it was made. It is also to be noted that the remedy of
rectification is discretionary.
[174] In this situation, one possible approach might be to construe
"intended" as referring to the parties' actual, subjective, intentions. If that approach were adopted, it may be that
recourse could be had to the concept of personal bar if that was necessary in
order to avoid injustice. The
circumstances in which such a bar would arise would require to be considered in
particular cases: in that context again,
it might be of assistance to consider the experience of other jurisdictions
which have previously addressed these issues.
Since the present case was not analysed in argument in terms of personal
bar, it is unnecessary for me to express any view as to what the necessary
requirements might be.
[175] Another possible approach would be to construe "intended" as
referring to an intention which is to be ascertained objectively. That approach would be consistent with the
adoption of an objective approach to the assessment of the "common intention"
of the parties to the agreement: the
adoption of an objective approach at one stage and a subjective approach at
another would be liable to give rise to difficulties, since they might point in
different directions and, when they did, primacy would have to be given to one
or the other. An objective approach
would also be consistent with Scots law's general unwillingness to have regard,
in the law of contract, to inward intentions uncommunicated to the other
party: an unwillingness for which there
are strong practical reasons. If that
approach were adopted, any argument that it was unjust to rectify a particular
contract because the defender had not (subjectively) intended to give effect to
the prior agreement might (if relevant) be directed to the court's exercise of
its discretion.
[176] These appear to me to be questions of importance, which deserve
fuller consideration than they received in argument in the present case. Although I am inclined to favour the adoption
of an objective approach, I do not require to reach a concluded view for
present purposes. In the circumstances,
it is appropriate for me to reserve my opinion.
[177] The argument in the present case also proceeded on the assumption
that, where the document sought to be rectified is a contract, the parties
entering into that contract must either be the same as "the parties to the
agreement", or at least that it must be possible to attribute the intentions of
the parties to the agreement to the parties to the contract. That appears to me to be correct. As explained earlier, section 8(1)(a) is
intended to address the situation where an agreement is reduced to writing (or
put into effect by a written document) but the document does not accurately
express the parties' agreement, by enabling the court to rectify the document
so as to express the parties' agreement.
That being the case, it appears to me that the parties must either
remain the same at the time when the document is executed as when the agreement
was made, or they must be indistinguishable for the purposes of the law of
contract (e.g. by reason of a relationship of agency). In relation to the present case, this issue
was not analysed in argument beyond counsel for the defenders' describing
Brodies and Burness as having conducted negotiations as the agents of the
pursuers, and of ASP and the defenders, respectively. As explained below, there appear to me to be
difficulties with that approach on the facts of the present case.
[178] Finally, I do not find persuasive the contention that the
presence of an entire agreement clause, in the terms of the clause contained in
the MSA, precludes the court from rectifying a document. The power to rectify under
section 8(1)(a) exists, by force of statute, where "a document ... fails to
express accurately the common intention of the parties to the agreement". If a document fails to do so, that fact is
not altered by the presence of the entire agreement clause: a defectively expressed document cannot, as it
were, haul itself up by its own bootstraps.
I would in any event interpret the clause as being intended to preclude
the establishment of a collateral contract or term, rather than to preclude the
rectification of any defects in expression which might be present in the
document itself.
[179] The present case, so far as concerned with rectification, can in
my opinion be decided on a relatively narrow basis, without requiring to
determine all the issues canvassed in the foregoing discussion. The defenders' case, as pleaded, is that "the
intentions of parties as to costs and their agreement on that subject were
reflected in the Letter of Intent [i.e. the pursuers' letter to Regenesis (Dunfermline)
Ltd dated 25 June 2002],
the exchanges between the parties in the course of preparation of the suite of
documents and the said JVA". The
pleadings also state that "the provisions as to payment of costs specified in
the [JVA] represent ... the intentions and agreement of ASP and the defenders on
the one hand and the pursuers on the other".
The vagueness of these averments is evident: there is no reference to any specific
agreement between the pursuers and the defenders, other than the MSA
itself; nor is it explained on what
basis ASP and the defenders might be treated as if they were effectively
indistinguishable.
[180] The submissions of the defenders focused on the exchange of
e-mails between Mr Scott and Peter Lawson on 22 and 25 July 2002 as
establishing an agreement in relation to costs, and on the absence of any
subsequent indication on behalf of the pursuers of an intention to depart from
that agreement. I am prepared to accept
that that exchange of e-mails established an informal agreement between the
agents acting for the pursuers and ASP, but the character of that agreement has
to be borne in mind: exchanges at that
stage did not bind either side to enter into any contract, nor did they commit
them to the terms of any contract which might subsequently be entered
into. Although they are not without
significance, they were a stage in the negotiations between those parties. The idea of an MSA emerged during the
subsequent discussions between Burness and Brodies, as has been explained, and
the terms of the MSA were settled by exchanges between them. Brodies' draft of the terms and conditions,
first produced on 13 November
2002, had been accepted by Burness by 26 November with only
minor revisals, none of which related to clause 4.5. The MSA, as executed, accurately reflected
the terms which had been so agreed; and
it was in the terms which the JVA envisaged when it referred to "the management
services agreement in the agreed form".
[181] Whether or not the connection between the exchange of e-mails in
July 2002 and the executed MSA is sufficiently direct to support the
proposition that the MSA was intended, but failed, to give effect to the
agreement contained in that exchange, it is in any event clear that the
defenders were not involved in the exchange of e-mails either directly or
through agents acting on their behalf:
they were not even incorporated until 6 September 2002. Although an agent's intention may be
attributed to a disclosed principal for the purposes of section 8(1)(a)
(cf. Bank of Scotland v Brunswick Developments (1987) Ltd 1997
S.C. 226 at page 232 per Lord
President Rodger), a company cannot be a principal, and cannot be deemed to
have possessed an intention, prior to its incorporation. Even at the stage when the terms of the MSA
were negotiated, Burness were not acting on behalf of the defenders: it was only on the date of execution of the
MSA that the defenders were acquired by ASP and became involved in the
transaction which had been arranged between ASP and the pursuers. Until then, they merely belonged to Burness's
stock of "shelf" companies. In those
circumstances, it is not possible, in my opinion, to treat the defenders as
having been party to any agreement entered into by ASP or by Burness prior to
the date of execution of the MSA, or as having had any intention in common with
the pursuers, derived from such an agreement, prior to that date. The argument for the defenders did not
attempt to establish that any agreement had been constituted between the
pursuers and the defenders on the date of execution of the MSA (other than the
MSA itself). Nor was it argued that the
defenders had entered into the MSA as the agent of ASP. If, as was assumed in argument,
section 8(1)(a) requires that the contract sought to be rectified must be
between the same parties as the agreement to which it was intended to give
effect, or that at least the intentions of the parties to the agreement can be attributed to the parties to the
contract under the law of agency, it follows that that requirement is not
met.
[182] In these circumstances, I conclude that, whatever other remedies
might be available (if, for example, the defenders might be regarded as having
entered into the MSA under a mistake as to its effect), the defenders have not
demonstrated that the court has any jurisdiction to order the rectification of
the MSA. Given that conclusion, the
other criticisms which were made of the application for rectification, on
behalf of the pursuers - in particular, that rectification could not be ordered
where the prior agreement was not legally binding, or where there was an
undisclosed intention to depart from it, or where the document contained an
entire agreement clause - do not require to be determined, although I have
indicated my view of certain of those contentions.
Conclusion
[183] In the circumstances, I shall grant decree of absolvitor in the
principal action and refuse the application made in the counterclaim. Refusal of the application appears to me to
be more appropriate than the decree of absolvitor sought by the pursuers, since
the court is refusing an application made by the defenders to provide them with
a remedy, rather than adjudicating between the parties on a question of
disputed right.
