Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2009] CSOH 133
CA126/09	OPINION OF LORD HODGE in the cause BEAGHMOR PROPERTY LIMITED Pursuers; against STATION PROPERTIES LIMITED Defenders: ­­­­­­­­­­­­­­­­­________________

Act: Davie; Davidson Chalmers LLP

Alt: Barne; Biggart Baillie LLP

30 September 2009

[1] This is an application by the defenders under section 15K(2) of the Debtors (Scotland) Act 1987 as amended ("the 1987 Act") to recall an inhibition on the dependence and also the warrant for diligence on the dependence granted by an interlocutor dated 5 August 2009.

[2] The pursuers, Beaghmor Property Limited ("Beaghmor"), have sought for some time to acquire for development a site at 6 Cockburn Street, 8 Advocates Close, 18-21 Market Street and the Tower Building, Advocates Close, Edinburgh ("the site"). Beaghmor entered into a lock-out agreement with Station Properties Limited ("Station"), which own the site. In that agreement Station undertook that between 30 June and 31 July 2009 it would negotiate exclusively with Beaghmor for the sale of the site. Beaghmor have commenced this action for damages for breach of the lock-out agreement and have registered an inhibition on Station which is limited to the site.

[3] Beaghmor claim damages of £4,500,000, which they aver are the profits which they projected from their proposals to develop and sell on the developed site and their advanced negotiations with an end user.

[4] Station admit breach of certain of their obligations under the lock-out agreement but seek recall of the inhibition on the dependence and the warrant for diligence. They submit that Beaghmor cannot satisfy the court on each of the grounds listed in section 15K(9) of the 1987 Act, namely (a) that they have a prima facie case to support their claim in damages, (b) that there is a real and substantial risk that enforcement of any decree against Station would be defeated or prejudiced by insolvency and (c) that it is reasonable in the circumstances that the warrant and inhibition should continue to have effect.

The factual background

[5] Beaghmor have negotiated to purchase the site on two occasions before this summer. On the second occasion, in February 2009, Beaghmor submitted a formal offer to purchase the site for £7.5 million. On each occasion the negotiations broke down when another party offered to purchase the site. But each time the sale to that other party did not proceed. Unsurprisingly, when two directors of the parties agreed in June 2009 to resume negotiation of a sale at the price of £7.5 million, Beaghmor wanted the security of a lock-out agreement to prevent a repetition of what had occurred before.

[6] The material provisions of the lock-out agreement dated 29 and 30 June 2009 were as follows:

"3. Lock-out Obligations

3.1 Subject to the other terms and conditions of this deed during the Lock-out Period the Seller or any agent acting on their behalf .... shall not:-

3.1.1 actively market the Property for sale;

3.1.2 seek any offers for or seek any interest in the sale of the Property to or from any third party;

3.1.3 supply any information about or copy deeds or documents or other material relating to the Property or any occupiers of the same to any third party;

3.1.4 proceed with or accept any offer made by any third party in respect of the sale of the Property or the granting of an option or any other rights over same, or any other dealing in respect thereof;

3.2 During the Lock-out Period the Seller shall act in good faith and shall:-

3.2.1 notify all agents previously instructed in relation to the Property and any third parties who were aware that the Seller was willing to consider offers for the Property that it is under offer and instruct the agents not to reveal to any party details of the Transaction;

3.2.2 notify the Purchaser of any bona fide unsolicited offer made in respect of the Property by any third party;

3.2.3 use all reasonable endeavours following on the last date of execution of this Lock-Out Agreement to enter into the Transaction with the Purchaser and, to that end, procure that the Seller's Solicitors shall seek to negotiate the terms of a draft Agreement with the Purchaser's Solicitors;

3.2.4 implement the Transaction as soon as reasonably practicable;

3.3 The Purchaser and the Seller shall act in good faith with a view to agreeing the principal terms of a contract for the Transaction and entering into Missives to implement the Transaction and, to that end, they shall procure that the Purchaser's Solicitors and the Seller's Solicitors shall seek to negotiate the terms of the Missives to give effect thereto as soon as reasonably practicable;"

[7] Station in their defences admitted that they had broken clause 3.1 and clause 3.2.2 of the lock-out agreement. They entered into binding missives with AMCO Developments Limited ("AMCO") on 5 August 2009 under which AMCO agreed to purchase the site, excluding 8 Advocates Close. The agreement comprised a detailed offer on behalf of AMCO dated 5 August 2009 to purchase that property for £8.5 million subject to certain suspensive conditions and an unqualified acceptance of that offer on the same date. The documents appended to the offer revealed that there had been an earlier offer dated 9 July 2009, which had been prepared after AMCO had obtained detailed information about the site.

[8] At the hearing on the motion for recall Mr Barne on Station's behalf submitted that AMCO's offer had been unsolicited. He accepted that Station had broken their contract by not revealing the offer contrary to their obligation in clause 3.2.2. In the course of the discussion he also submitted that Station's admission of the breach of clause 3.1 should be confined to clause 3.1.4, namely the proceeding with AMCO's offer during the lock-out period. Miss Davie for Beaghmor did not accept that AMCO's offer was unsolicited. There was therefore a dispute about an important factual circumstance which could not be resolved at the hearing.

The parties' submissions

[9] Mr Barne submitted that Beaghmor did not have a prima facie case for claiming substantial sums in damages such as to justify diligence on the dependence for two reasons. First, he submitted that the appropriate measure of damages for breaking a lock-out agreement is the wasted transaction costs of the party who was not in breach. Secondly, he argued that Beaghmor had not averred a relevant case of the loss of an opportunity which would sound in damages, because there was no averment that they would have been prepared to match the offer of £8.5 million if Station had, as it was bound, disclosed AMCO's offer. Station denied Beaghmor's averment that the parties had reached agreement on the substance of the missives. In support of his assertion that the appropriate measure of damages was the wasted transaction costs he referred to Walford v Miles [1992] 2 AC 128, Lord Ackner at p.139, Pitt v P.H.H. Asset Management Ltd [1994] 1 WLR 327, Sir Thomas Bingham MR at p.334, Moroney v Isofam Investments SA [1997] EGCS 178 and Tye v House and Jennings (1998) 76 P & CR 188, Evans Lombe J at p.190. Scots law did not exclude such a claim: Fielding v Newell 1987 SLT 530 and Dawson International plc v Coats Paton plc 1993 SLT 80. He also submitted by reference to Transfield Shipping Inc v Mercator Shipping Inc [2009] 1 AC 61 that liability in damages for the loss of Beaghmor's hoped-for contract was not the sort of risk which Station assumed when they entered into the lock-out agreement. On the correct approach to the recall of diligence on the dependence he referred to the Inner House decision in Gillespie v Toondale Ltd 2006 SC 304 and Lord Pentland's opinion in MRK 1 Ltd v Sakur and Bachir [2008] CSOH 176.

[10] Mr Barne's other submissions were (i) that there was no substantial risk of Station's insolvency having regard to a statement of assets and liabilities dated 26 August 2009 and (ii) it was not reasonable to maintain the inhibition. In relation to the former, he submitted that on a proper valuation Beaghmor's claim was probably in the region of £25,000 which Station had sufficient resources to meet. In relation to the latter submission he advanced six arguments. First, the inhibition could have a disastrous effect on Station, which was a property company, and in particular could undermine the valuable deal with AMCO which Station's bankers, Clydesdale Bank plc, wished to see proceed. Secondly, a lock-out agreement did not justify the remedy of an inhibition which operated as an interdict. Thirdly, if the deal with AMCO were to fall, third parties, including AMCO, would be adversely affected. An inhibition confined to the other property which Station owned would be more appropriate. Fourthly, Beaghmor's claim was unrealistic as they were seeking the full profit which they hoped to make on their deal and that profit depended upon contingencies which might or might not come about. Fifthly, Beaghmor would not obtain any profit until 2011 at the earliest yet they were claiming the full value now. Finally, it appeared that Beaghmor were a dormant company which would not be able to pay damages if in the end they were held liable for wrongful diligence.

[11] Miss Davie submitted that Beaghmor's substantial claim for damages was justified as at a meeting on 7 July 2009, involving the senior personnel in each of the parties, their legal advisers and also three representatives of Clydesdale Bank plc, agreement had been reached on the principal terms of the sale of the site. Thereafter, all that remained was for the parties' solicitors to formalise the contractual documentation. This submission was supported by the actings of Station's solicitors who on 8 July 2009 sent Beaghmor's solicitors a copy of Beaghmor's earlier offer of 10 February 2009 with revisals to reflect the matters which the parties had discussed and agreed on the previous day. The solicitors acknowledged that they did not have their clients' authority to set out the terms but they also sent a copy of the document to Station. Miss Davie accepted that a bare agreement to negotiate in good faith was not binding; her point was that the parties had got beyond that stage and had agreed all of the essential terms of the contract for the sale of the site. Thereafter the second part of clause 3.3 applied: Station should have instructed their solicitors to complete the missives. Instead they deliberately delayed instructing their solicitors before seeking to pull out of the lock-out agreement in mid-July.

[12] She did not accept that AMCO's offer was unsolicited and inferred from the existence of the detailed offer on 9 July 2009, Station's behaviour thereafter and their general admission of a breach of clause 3.1 that Station had encouraged AMCO to bid in breach of the lock-out agreement. She submitted that if AMCO had not been allowed on the scene it was more likely than not that the deal between Beaghmor and Station would have been formalised. She referred to Petromec Inc. v Petroleo Brasiliero SA [2006] 1 Lloyd's Rep 121, BBC Worldwide Ltd v Bee Load Ltd [2007] EWHC 134 (Comm), Dandara Holdings Ltd v Co-operative Retail Services Ltd [2004] EWHC 1476 (Ch) and Allied Maples Group Ltd v Simmons & Simmons [1995] 1 WLR 1602.

[13] In relation to the quantification of loss, she reminded the court that the basic rule for contractual damages in Scots law was that they were to place the wronged party as nearly as possible in the same position as he would have been in if the contract had been performed: McBryde, "The Law of Contract in Scotland" (3^rd ed.) at paras 22-91 and 22-96. The award of wasted transaction costs appeared to be an exception to that rule but it was not an exclusive measure of the damages due for breach of a lock-out agreement.

[14] On the risk of the decree being defeated by Station's insolvency, Miss Davie referred to Station's unpaid debts and the presentation of a winding up petition earlier in 2009. She quoted from an email from Station's solicitors in May 2009 in which they informed the company's architects, who were pursuing a substantial debt, that a director of Station had stated that the best course for Station might be "a bank-led administration". Station owed the bank over £7.6 million. A desk-top valuation of the site by DTZ dated 6 September 2009 stated that its current open market value was £3.5 million. Station were, she submitted, practically and absolutely insolvent.

[15] Finally, the maintenance of the inhibition was not unreasonable. It was restricted to the site and the pursuers had no desire to fetter Station's business unnecessarily. While the missives with AMCO were caught by the inhibition and thus third parties were affected by it, the defenders knew of their breach of the lock-out agreement when they entered into those missives. Beaghmor were no longer a dormant company but were trading. In any event it was unlikely that a claim for wrongful diligence would arise under the statutory regime for the recall of inhibitions.

Discussion

[16] It is for the creditor, Beaghmor, to satisfy the court that it should not recall the warrant and the inhibition: section 15K(10) of the 1987 Act. I am so satisfied at this stage of the proceedings. But I would be prepared to reconsider matters in the light of further disclosure about what occurred at the meeting on 7 July 2009 and also the circumstances in which AMCO came to make their offer on about 9 July 2009. I explain my reasoning below.

(i) The prima facie case

[17] In order to meet the statutory requirement of a prima facie case, the pursuer must demonstrate that he has a good arguable case. That is a substantial hurdle, which is more than a colourable case. The Inner House in Gillespie v Toondale Ltd have applied to the statutory regime this test of which Lord Drummond Young spoke in Barry D Trentham Ltd v Lawfield Investments Ltd 2002 SC 401 at para 19 in the context of the pre-existing common law.

[18] That Beaghmor have a good arguable case of breach of contract is not in issue. Station admit breach of the lock-out agreement and liability in damages therefor. The questions therefore are (i) of what breaches have Beaghmor made out an arguable case and (ii) what damages might flow from those breaches?

[19] Beaghmor conceded that an agreement to negotiate in good faith was not an enforceable contract: Walford v Miles, Lord Ackner at pp.138-139. They also accepted that the essence of a lock-out agreement was that it was a negative undertaking and not an agreement to sell: Pitt v P.H.H. Asset Management Ltd, Sir Thomas Bingham MR at p.334. As Lord Ackner stated in Walford v Miles at p.139G, "what A has achieved is an exclusive opportunity, for a fixed period, to try to come to terms with B."

[20] Where A's only obligation in a lock-out agreement is that of giving B an exclusive opportunity to reach a deal with him, breach by A of that obligation may not give rise to a substantial claim in damages. If A had performed his contractual duty and given B the exclusivity to which he was entitled, no deal might have resulted. Such an exclusivity agreement is designed to protect purchasers from incurring substantial expense in negotiating complex deals which is wasted if the seller chooses to sell to someone else. Thus in England it has been held that B can recover his wasted transaction expenses if A deals with another during the period of exclusivity: Tye v House and Jennings. While that may not put the party observing the contract in the position he would have been in if it had been performed, it can be seen as compensating for the denial of the protection for which he had contracted.

[21] There is, however, no rule that the only measure of damages for the breach of a lock-out agreement is the wasted costs incurred in the aborted transaction. The court must look at the particular contract and the breaches which are alleged. In this case Beaghmor do not assert that they would have been prepared to match AMCO's offer. Thus they do not found on any breach of clause 3.2.2 of the lock-out agreement. They found on the admitted breach of clause 3.1. They assert that Station, having agreed all the essential terms of the contract with them on 7 July, received AMCO's offer, which they had solicited in breach of clause 3.1, and then deliberately and in bad faith failed to perform their obligation under clause 3.3 to procure that their solicitors put the deal agreed at the meeting on 7 July into a formal contract. But for the solicited offer from AMCO, Beaghmor's deal with Station would have been formalised.

[22] At this stage in the action, when parties and the court have not yet seen all of the relevant documentation, I have to judge whether Beaghmor have a prima facie case on the pleadings, the documents in process and counsel's submissions. While I consider that it is likely that the opening words of clause 3.3 are too uncertain to be enforced, it does not follow that none of that clause may be enforced. Where the parties intended the lock-out agreement to be a legally binding contract, the court should strive to give effect to their agreement: Petromec Inc, Longmore LJ at paras 115-121; BBC Worldwide Ltd, Toulson LJ at paras 48-51. I have also discussed this issue in more detail in a recent opinion: R & D Construction Ltd v Hallam Land Management Ltd [2009] CSOH 128 (at paras 33-55) and adopt the same approach in this case. I accept that if, as Miss Davie submitted, the parties had reached agreement on the essential terms of their deal, the unenforceability of an obligation to try to do so would not prevent the court giving effect to the second half of the clause. I consider that Beaghmor have averred sufficient to have a good arguable case that Station broke their obligation to procure the finalisation of the deal and that they solicited the offer from AMCO.

[23] I do not accept the submission based on the decision of the House of Lords in Transfield Shipping Inc. that it is evident that the parties to the lock-out agreement could not have intended to expose Station to such a large claim in damages. If, as I have opined, the second part of clause 3.3 may be enforceable once the essentials of the contract had been agreed, it must have been in the contemplation of the parties that a deliberate failure to procure that the sellers' solicitors negotiate the missives with the purchasers' solicitors could cause Beaghmor to lose the benefit of the purchase.

[24] Accordingly, it appears on the information provided to the court that Beaghmor have pleaded a claim in damages for the loss of a real or substantial chance to conclude the purchase and the opportunity to develop the site. Such a claim has the potential to be of much greater value than merely the wasted transaction costs. It may be that evidence will show that at the meeting on 7 July 2009 the parties did not agree the essential terms of the sale; it may turn out that the AMCO offer was unsolicited and, if so, it may be argued that its receipt allowed Station not to proceed with any deal reached on 7 July 2009. If an unsolicited offer suspended any obligation on Station under clause 3.3 to finalise a deal, a breach of other provisions of the contract may not have deprived Beaghmor of its chance to conclude the agreement. There may be no causal link as in Dandara Holdings Ltd. For now, however, I approach the other statutory questions on the basis that Beaghmor have a good arguable claim of substantial value against Station.

(ii) A real and substantial risk that a decree could not be enforced

[25] This statutory test requires the court not only to look at a defender's present financial position but also to predict, so far as one can, future events at the time when the pursuers might obtain a decree for payment of damages: Barry D Trentham Ltd, Lord Drummond Young at para 8 and MRK 1 Ltd, Lord Pentland at paras 25 -26.

[26] Station's statutory accounts for the year ending 30 April 2008 are of limited relevance as property values have generally declined since then as a result of the major financial crisis which arose later that year. Station appear to have had some financial difficulties earlier this year: see paragraph [14] above. But they have submitted a statement of affairs dated 26 August 2009. This purports to show that they have net assets of £3.8 million. Their assets include a hotel at 9-13 Market Street, Edinburgh, which Station have let out on a long lease, and retail premises at 48 George IV Bridge, Edinburgh, which have been independently valued at £2.7 million and £250,000 respectively. Other heritable properties are valued at an aggregate of £535,000. But the calculation of net assets depends fundamentally upon the valuation of the site at £8.5 million on the strength of AMCO's conditional offer, whose suspensive conditions may or may not be purified. I do not feel able to rely on that valuation before AMCO's offer becomes unconditional. Beaghmor have lodged an independent valuation of the site which values it with the current planning permission for development at £3.5 million, but their own actions suggest that there is the potential to obtain considerably greater value from the site. It appears that Station have a commercial future if they continue to be supported by their bankers, Clydesdale Bank plc. As Station's trade creditors are stated at only £350,000, there is a prospect of the company's financial position improving markedly if the sale to AMCO proceeds. But if it were not to proceed, there may be, as Station's solicitors have earlier stated, a prospect of the company being put into administration.

(iii) The reasonableness of the warrant and the inhibition remaining in effect

[27] In some cases the prospect of insolvency may be such that it militates against the grant of warrant for diligence on the dependence because it is clear that the diligence cannot protect the enforcement of a decree in future. This may arise particularly in relation to the diligence of inhibition which is merely a prohibitory diligence and does not attach the land. At common law it ranked after debts which have already been secured and gave no preference in relation to prior unsecured debts. On insolvency it secured more than a pari passu ranking at the expense only of posterior creditors: see Bell's Canons of Ranking in "Commentaries" (McLaren's ed.) Vol II, p.413 and Baird and Brown v Stirrat's Trustee (1872) 10 M 414. An inhibition registered after 22 April 2009, when section 154 of the Bankruptcy and Diligence Etc (Scotland) Act 2007 came into force, does not confer any preference in ranking. Thus in many cases the imminent prospect of the debtor's insolvency may make it unreasonable to grant warrant for such diligence or maintain it in effect. In this case, however, there is a prospect of an advantageous sale of the site at a sum which significantly exceeds Station's current liabilities. There appears therefore to be something to secure.

[28] There is, nonetheless, a danger of killing the goose that might lay the golden egg. The missives with AMCO are caught by the inhibition. An inhibition is available to secure a claim and not to undermine a rival's bid. Were the AMCO deal to fall, Station would lose out and would have fewer funds to meet Beaghmor's claim. Clydesdale Bank plc have a standard security or standard securities over the site as well as a floating charge over Station's property and undertaking. Station owes them about £7.6 million but the net free proceeds of the site are likely to be considerably greater than Station's debt if the AMCO deal proceeds. It appears that there should be an opportunity for Station and their bankers to provide alternative security for Beaghmor's claim from the free proceeds of the sale of the site after deduction of the sums due to the bank. That might be supplemented by an inhibition or security over another heritable property. Until such an arrangement is made, or it is demonstrated that Beaghmor's claim based on breaches of clauses 3.1 and 3.3 of the lock-out agreement is not a good arguable case, I consider that it is reasonable that the inhibition in relation to the site and the warrant continue to have effect.

Conclusion

[29] As Beaghmor have discharged the onus of satisfying the court as to the matters in section 15K(9) of the 1987 Act, I refuse Station's application for recall in hoc statu.