Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2009] CSOH 159
A166/07	OPINION OF LORD UIST in the cause UPTON PARK HOMES LIMITED Pursuers against MACDONALDS, Solicitors Defenders ­­­­­­­­­­­­­­­­­________________

Pursuers: Miss Joughin; Burness LLP

Defenders: Lake QC; Brodies LLP

27 November 2009

Introduction

[1] This is an action of damages against a firm of solicitors and its partners for breach of contract consisting of professional negligence. The negligence averred relates to the negotiation of missives by the defenders on behalf of the pursuers. The defenders' first plea-in-law is a plea to the relevancy and specification of the pursuers' averments. The pursuers' third plea-in-law is a plea to the relevancy of the defences to the merits of the action. Both pleas were debated before me on the procedure roll.

The pleadings

[2] The factual background is set out in condescendence 2 as follows:

"During 2002 Mrs Melanie Collins ... entered into preliminary negotiations with Wishaw and District Housing Association ... (W & D) regarding the sale of an area of land off Woodside Crescent, Crindledyke, Newmains ("the subjects"). At that time the subjects were owned in two parts, one by Mrs Collins and the other by Oscarpark Developments Limited ... ("Oscarpark"). Mrs Collins then was and now is the principal director and shareholder of both the pursuers and Oscarpark. The subjects were under the effective control of Mrs Collins. To make the subjects more marketable for sale as a development site Mrs Collins installed infrastructure and services. Planning permission was obtained. In order to obtain roads construction consent Oscarpark obtained a road bond in compliance with the Security for Private Road Works (Scotland) Regulations 1985. It was envisaged, following sale of the subjects, W & D would place the contract for construction of the development with Mrs Collins or a company under her control. As the preliminary negotiations progressed W & D indicated that they wished the subjects to be under the sole ownership of the entity with which they would place the construction contract. It was agreed among the pursuers, Mrs Collins and Oscarpark that the subjects would be sold by Mrs Collins and Oscarpark to the pursuers. Mrs Collins transferred the part of the subjects owned by her to the pursuers by disposition of 30 January 2003 in which the consideration was stated to be £118,667. Oscarpark transferred their parts of the subjects to the pursuers by disposition dated 30 January 2003 in which the consideration was stated to be £237,333. ... Said sums were paid by the pursuers to Mrs Collins and Oscarpark respectively on about 21 February 2003."

[3] In condescendence 3 it is averred:

"During 2002 missives for the sale of the subjects were negotiated by the defenders on behalf of the pursuers with W & D by means of a travelling draft offer being adjusted by the defenders and solicitors for W & D respectively. The defenders' Robert Bree acted as solicitor for the pursuers in connection with the proposed sale. The defenders had acted for Mrs Collins, Oscarpark and the pursuers in the aforementioned preliminary negotiations and dealings involving the subjects. Mr Bree of the defenders knew of the terms of the planning permission for the subjects. He was aware of the terms of the design and build contract. He was aware that ultimately the subjects were to be sold to a housing association for residential properties to be built thereon. He was aware that the subjects contained services and that infrastructure installations had been provided thereon. On or around 6 March 2003 Brechin Tindall Oatts ("BTO") submitted an offer on behalf of their client W & D to the defenders dated 6 March 2003 for the purchase of the subjects at a price of £370,000 together with a payment of £300,000 in respect of services installed on the subjects. The offer of 6 March 2003 is referred to for its terms and is produced herewith. Said offer was the final version of said travelling draft. It was in the terms that had been adjusted between the pursuers and W & D and in respect of which it had been indicated between them agreement had finally been reached. The offer of 6 March 2003 contained the following provision:

"Clause 4. There are no overriding interest or interests (sic) within the meaning of section 28(1) of the Land Registration (Scotland) Act 1979 affecting the subjects save, if appropriate, insofar as disclosed in the Land Certificates exhibited in respect of the subjects."

By letter dated 13 March 2003 the defenders accepted BTO's offer of 6 March 2003 (together "the missives"). Specifically, clause 4 was accepted. Prior to accepting the offer of 6 March 2003 and throughout the adjustment of the said travelling draft the defenders did not seek specific instructions on the terms of the said clause 4. Said clause had originally, as proposed by W & D, provided simply that there were no overriding interests. Mr Bree of the defenders had sought to delete this clause in its entirety. It was then reinstated by W & D subject to the exception as to what might be disclosed in the Land Certificate in this respect. Mr Bree of the defenders agreed to this clause being in the final draft and then accepted it by said letter dated 13 March 2003. In doing so he took no instructions from Mrs Collins of the pursuers, nor did he explain the import of said clause to her. He did not seek to exclude the existing services and infrastructure installations from clause 4. He did not seek to qualify the clause by reference to matters within the pursuers' knowledge. Mr Bree would have or should have been aware that there could have been overriding interests over the subjects within the meaning of the said section 28(1) of which the pursuers or Mrs Collins were unaware and which were not disclosed in the Land Certificate."

[4] The duties incumbent on the defenders are averred in condescendence 5 as follows:

"The defenders' acceptance of the pursuers' instructions constituted a contract between them. It was an implied term of that contract that in acting for the pursuers in the land transaction the defenders would use the knowledge, skill and care of a reasonably competent solicitor. In the exercise of such knowledge, skill and care it was the defenders' duty in adjusting the missives, having sought to have clause 4 deleted and the defenders (sic) having reinstated it, to have sought to restrict the scope of clause 4 in respect of the existence of overriding interests to matters within the pursuers' actual knowledge. In the event that such a restriction was rejected by the purchasers' agents, it was their duty to advise the pursuers accordingly, to advise them of the risk which the existence of an overriding interest of which they were not aware might present and to take explicit instructions as to whether they wished to accept the risk involved. It was the defenders' duty not to accept a clause in terms of clause 4 without having obtained informed instructions thereon. The defenders knew or ought to have known that there could be overriding interests over the subjects of which the pursuers or Mrs Collins were unaware. They knew that if there transpired to be such interests the pursuers would be placed in breach of clause 4 of the missives, as unqualified. No reasonably competent solicitor exercising ordinary knowledge, skill and care would have failed to have sought to revise clause 4 so as to restrict it to the knowledge of the pursuers or Mrs Collins. No reasonably competent solicitor exercising such knowledge, skill and care, in the event of the purchasers refusing to accept such a restriction and insisting on the inclusion of clause 4 being part of their contract, would have failed to have advised the pursuers and Mrs Collins of the risk involved in the acceptance of said clause unrevised and, before accepting it, to have sought informed instructions. In failing to seek to restrict said clause and further in failing to explain the risk of accepting it to the pursuers prior to accepting it and thus in failing to obtain informed instructions from them in respect thereof, the defenders were in breach of said implied term of said contract. Said breach caused the pursuers to sustain loss and damage as hereinafter condescended upon. But for the defenders' breach of contract the pursuers would not have sustained the loss and damage.

[5] The consequences of the alleged negligence of the defenders are set out in condescendence 3 at pages 9C - 11A as follows:

"Had Mr Bree explained the implications of clause 4 to Mrs Collins and that it involved the pursuers warranting that there were inter alia no phone or electricity lines, water, sewerage or gas pipes or rights such as servitude rights of access or rights held by the Coal Authority over the subjects she would not have been prepared to give such a warranty. She would have realised that she could not know with any certainty that there were no such rights. Had Mr Bree explained that it would be possible to propose a qualification to the said clause 4 restricting the warranty as to their being no overriding interests in said land to her knowledge Mrs Collins would have agreed to his proposing such a qualification. It is likely that W & D would have accepted such a qualification had it been proposed. Esto W & D had not been prepared to accept such a qualification and the pursuers had been faced with the options to accept the clause unrevised or lose the sale, Mrs Collins would have sought advice from her civil and structural engineers, Scott Bennett Associates Limited. She would have informed them that she had been asked to warrant that there were no such services running beneath the subjects and requested that they investigate and report on that. They would have looked at the existing site investigation reports. They would have carried out trial bores and other site investigations. They would have written to all statutory bodies including British Gas, Scottish Power and Scottish Water asking that they check records as to the existence of any pipes or services affecting the land in question. Scottish Water would as a result have reported the existence of the said sewerage apparatus to the pursuers. Had they thus discovered Scottish Water's sewerage apparatus then that would have been disclosed to W& D by the pursuers. The pursuers would have obtained an amendment to their planning permission for the development that they were planning to build for W & D. They could, for example, have investigated whether it might have been possible to build over the apparatus and if so applied for permission to do that or failing that have sought to revise the planning permission to build around it. This could have been done prior to conclusion of the missives and the result accommodated within the terms of the contract. Had W & D not agreed to proceed with a contract on this basis then the contract would not have been concluded. When the existence of the sewerage apparatus was intimated the missives had already been concluded and the transaction settled. When it was discovered the pursuers had already warranted, by virtue of the acceptance of clause 4, that no such overriding interest existed. They were thus placed in breach of that contract. Had clause 4 been qualified to restrict it to the knowledge of the pursuers or Mrs Collins the pursuers would not have been placed in breach of contract by the discovery of said overriding interest. By the time it was discovered the contract had been concluded and the pursuers were not in a position to adjust the terms of the contract so as to take into account the existence of the sewerage apparatus or to restrict clause 4 to the pursuers' or Mrs Collins' knowledge. W & D were by that time in occupation of the subjects. This restricted the possibilities open to the pursuers to deal with the existence of the sewerage apparatus. They were simply placed in breach of contract and made vulnerable to a claim for damages by W & D. Esto W & D had declined to accept a qualification to clause 4 and had also declined to agree to the development being reconfigured once the overriding interest had been discovered in the circumstances hereinbefore averred and the contract had not then been concluded, the pursuers would not then have entered into a contract of which they were in breach and would not have been vulnerable to said claim."

[6] The averments of loss in condescendence 6 are as follows:

"As a consequence of the defenders' said breach of contract the pursuers have suffered loss and damage. Upon discovery that the pursuers were in breach of clause 4 W & D declined to make payment of the said sum of about £360,000 which was still due. The pursuers' then solicitors, Messrs Burness, corresponded with W& D's solicitors in this regard. They attempted to negotiate the smallest possible retention of said sum until matters could finally be resolved. On about 14 May 2004 W & D's solicitors indicated that settlement might be obtained by inter alia the pursuers agreeing to dispone to W & D an adjacent area which would be sufficient to construct four houses equivalent to the ones which they had indicated were to be lost as a result of said overriding interest. They also indicated they would require payment of £12,000 in respect of additional legal costs incurred in relation to a separate matter arising out of the missives. After protracted negotiations an agreement along these lines was reached in about the middle of July 2004. As part of that agreement it was agreed that £12,000 would be paid by the pursuers in respect of W & D's additional costs and that said sum would be deducted from the sum otherwise due before payment. It was further agreed that £75,000 of the sums otherwise due would be retained until the conveyance of the additional land was completed. Accordingly the sum of £260,781.42 was paid in about mid July 2004 by W & D to the pursuers. During 2004 and 2005 the pursuers negotiated a resolution of W & D's claims for breach of clause 4. The terms of the resolution reached and agreed were the best terms which the pursuers could obtain in the circumstances. As part of that resolution it was agreed that the pursuers would arrange for W & D to receive a separate area of land by way of compensation. The pursuers procured that land at Bonds Drive, Newmains, Wishaw ... ("the Bonds drive land") was disponed by Mrs Collins to W & D. The land was 0.08 of a hectare lying to the south of Bonds Drive, Newmains. As a result of the said transfer of the said piece of land on about 26 July 2005 W & D's agents paid the pursuers £72, 565.75, being the retained £75,000 less costs of £2, 534.25 incurred by them in relation to the pursuers' breach of clause 4 which it had been agreed would be met by the pursuers. The pursuers incurred additional legal expense with Burness in the sum of £11,750 (inclusive of VAT) in connection with the negotiations to reach a resolution of W & D's claim in respect of their breach of said clause 4. In connection with the transfer of the Bonds Drive land the pursuers incurred additional fees to Scott Bennett Engineers in the sum of £5,875. As a result of the existence of said overriding interest the pursuers were in breach of their contract with W & D. W & D had a claim for damages against them as a result. The pursuers have suffered the loss of having to settle that claim. The line of the sewerage pipe and the low build zone around the sewerage pipe would have had the effect of W & D losing four type C houses and one type A cottage flat. The average monthly rent for a type C W & D house is £239.29 and of a type A property £212.01. The existence of the overriding interest causing the loss of these units would have led to an annual rental loss for W & D of about £14,030.04. The effect of the existence of the overriding interest on the value of the subjects can be assessed by projecting forward the net annual loss for 60 years, being the model understood by the pursuers to be used by housing associations. The value of the land to W & D would thus have been reduced by at least £291,000. W & D would therefore have had a valid claim against the pursuers in respect of their said breach of contract of at least £291,000. W & D would therefore have had a valid claim against the pursuers in respect of their said breach of contract for payment of at least £291,000. However, W & D made it clear at that time that in order to resolve the position they sought the conveyance of an additional plot of land rather than the payment of any particular sum. They were aware that Mrs Collins owned other adjacent land. In order to reach a settlement she agreed to convey 0.08 of a hectare lying to the south of bonds Drive as hereinbefore condescended upon. The pursuers are under an obligation to pay her for the value of the said ground conveyed including the loss of build profit. Said ground was suitable for development. Its value was partly determined by the profit which could have been made from its development. Said land was serviced. Each plot was worth about £50,000 with a 'rates' value of £126,750 per plot net of 2.25% selling expenses and a total build cost of £216,000. Development would therefore have given rise to a profit of about £291,000 (4 x £126,750 less £216,000). The value of said land was accordingly about £291,000. As a director of the pursuers Mrs Collins has lent £200,000 to the pursuers in respect of the value of the four serviced plots transferred and £91,000 in respect of build profit loss in relation to said transfer. The pursuers are under an obligation to repay said loans. They incurred that obligation in order to resolve W & D's said claim for breach of contract. The sum sued for of £311,159.25 is based on the sum of £291,000 which the pursuers are due to pay to Mrs Collins in respect of the value of the land conveyed in settlement together with W & D's costs of £2,534.25 that the pursuers had to pay together with the pursuers' own costs of £17,625 incurred in relation to the settlement reached. Had said settlement not been reached, W & D would have raised an action against the pursuers for damages. Their claim would have been based on the effect of the said overriding interest on their plans to develop the subjects purchased from the pursuers. ... the loss of said properties would have produced a loss far greater than the £311,159.25 here sued for. The sum sued for here is based on the lesser figure based on the value of the land conveyed to W & D to achieve settlement together with the costs of doing so. The sum sued for is therefore reasonable."

[7] It is helpful, in order to complete the picture, to note at this stage certain averments which the defenders make in response in answer 6:

"Explained and averred that the sum sued for is excessive. The presence of an overriding interest within the meaning of section 28(1) of the Land Registration (Scotland) Act 1979 affecting the subjects had the effect that the pursuers were in breach of the warranty given in clause 4. Any inability to develop the land on the part of W & D flows from the existence of the overriding interest and not the breach of warranty. The liability of the pursuers in respect of the breach of contract was limited to the effect on the value of the land of the facts not being as warranted by them."

Relevancy of the pursuers' pleadings

Submission for the defenders

[8] It was submitted for the defenders that condescendence 3 averred that Mrs Collins would not have been prepared to give the warranty which was in fact given if she had been advised what it involved. That was only half of the picture: the other half was what W & D would have done. There were two possible scenarios: (1) W & D would have accepted a qualification to the clause; or (2) if W & D had not accepted a qualification to the clause the contract would not have been concluded. These two factual scenarios having been identified, it was necessary to identify the loss to the pursuers on each scenario. Vigilance had to be exercised when identifying the loss on the one hand from the measure of the loss on the other hand. Failure to distinguish between these two was at the heart of the difficulty in the pursuers' averments. One was looking for physical or economic harm brought about by the alleged conduct of the defenders. In McLaren Murdoch & Hamilton Ltd v The Abercromby Motor Group Ltd 2003 SCLR 323 Lord Drummond Young stated at p. 339F, para [34]:

"..... In identifying the loss it is of critical importance to bear in mind that the loss resulting from a breach of contract is not the same thing as the quantification of that loss. Nor is it the same as the remedial measures necessary to put right the loss. The loss is rather the actual physical or economic damage sustained in consequence of the breach of contract."

Similarly, in Euro Pools plc v Clydeside Steel Fabrications Ltd 2003 SLT 411 the same judge said at p 415D, para [11], in holding that a proposition for the defenders was incorrect:

".... It confuses two matters that are conceptually quite distinct, the loss sustained in consequence of a breach of contract and the quantification of that loss. The loss is the physical or economic damage sustained in consequence of the breach of contract. That loss must be quantified, in the sense that a monetary equivalent must be ascertained, but that exercise is not the same as the quantification of the loss."

Accordingly, before one turned to consider the quantification of the loss in the present case, it was first necessary to identify what the loss was on each of the two factual scenarios averred by the pursuers.

[9] On the first scenario clause 4 would have been qualified. On the second scenario there would have been no missives. The actual situation was that there were missives and a claim against the pursuers for breach of contract. The question which arose is: what is the value of that claim? The hypothetical alternative to the actual situation was that there would have been no contract and no claim, the pursuers would have retained ownership of the land in question and they would not have been entitled to payment of £670,000 in terms of the missives. The averments dealing with the first scenario did not come anywhere near what required to be averred for quantification of the pursuers' loss. What was the measure of damages for the breach of warranty claim against the pursuers? South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191 was a decision of the House of Lords dealing with the negligent overvaluation of a property by surveyors. The plaintiffs lent money on security of the property on the basis of that valuation. There was subsequently a general fall in the value of the property market and default by the borrowers in repayment of the loans. When the plaintiffs obtained possession of the property they had to sell it at a price below valuation. The question arose whether their loss attributable to the fall in the value of the property market was recoverable from the surveyors. Lord Hoffmann stated at p. 219D-F:

"The measure of damages in an action for breach of a duty to take care to provide accurate information must also be distinguished from the measure of damages for breach of a warranty that the information is accurate. In the case of breach of a duty of care the measure of damages is the loss attributable to the inaccuracy of the information which the plaintiff has suffered by reason of having entered into the transaction on the assumption that the information was correct. One therefore compares the loss he has actually suffered with what his position would have been if he had not entered into the transaction and asks what element of this loss is attributable to the inaccuracy of the information. In the case of a warranty one compares the plaintiff's position as a result of entering into the transaction with what it would have been if the information had been accurate. Both measures are concerned with the consequences of the inaccuracy of the information but the tort measure is the extent to which the plaintiff is worse off because the information was wrong whereas the warranty measure is the extent to which he would have been better off if the information had been right."

[10] In Irving v Burns 1915 SC 260 a tradesman entered into a contract with the secretary of a company which purported to bind the company. The contract was for the execution of certain work and after the work had been executed the tradesman, having ascertained that the contract did not in fact bind the company, brought an action against the secretary for damages for breach of his warranty of authority to make the contract. In the action he averred that the company had no assets. It was held by the Second Division that, as it appeared from this averment that the pursuer would have been in no better position had the contract bound the company, he had suffered no loss from, and therefore could not recover damages for, the defender's breach of warranty. Lord Salvesen stated at p. 269:

"If, therefore, the company was bound by the contract made on their behalf by the defender or on his instructions, no claim can arise on the breach of warranty. Even if it were otherwise I cannot see what claim the pursuer would have against the defender. The import of the numerous cases cited to us on this subject is that the agent who acts without authority on behalf of his principal does not become liable on the contract which he professes to make, but only warrants his authority. Now, it is part of the pursuer's case that if he had had a good contract with the company he could have recovered nothing, as the company has no assets. In the case of Firbank 18 QBD 54 at p. 62, in dealing with the liability of directors who issued debenture stock on the implied representation that they had authority to do so whereas they had none, Lindley LJ said, 'if genuine debenture stock of the company had been worthless, the measure of damages would have been nil.' The defender, no doubt, warranted his authority to act on behalf of the company. If he had in fact had authority the company would have been bound; but as it has no assets the damage arsing from a breach of warranty is nil. On both grounds, therefore, I hold that the pursuer has no relevant averments to support his second plea."

[11] In Cullinane v British "Rema" Manufacturing Company Ltd [1954] 1 QB 292 the plaintiff purchased a clay pulverising plant from the defendants, who warranted that it would be able to process his clay at the rate of six tons per hour. The plant was made according to specification and was duly delivered, but it failed to pulverize the clay at the warranted rate. The plaintiff claimed damages for the capital expended in in installing the plant, with interest, making allowance for the unpaid balance of the purchase price and the residual value of the plant and ancillary equipment. He also claimed for the loss of profit, deducting from his estimated gross receipts at the warranted output, running costs, interest on capital, depreciation and maintenance. The loss of profits was claimed from the date of installation until the date of trial, approximately three years. The estimated useful life of the machine was, however, ten years. The official referee awarded £7,370 damages for capital thrown away, plus interest and £8,913 loss of profit. It was held by the Court of Appeal (Evershed MR and Jenkins LJ, Morris LJ dissenting) that the damages awarded were excessive and should be reduced. The measure of damages was the cost of putting the plaintiff in the same position (so far as money could do that) as he would have been in if the warranty had been fulfilled. He could claim either capital loss due to the breach of warranty or, as the plant was to the knowledge of the defendants required to perform the particular function to which the warranty related, he could claim the business loss which must reasonably be supposed to have been in the contemplation of both parties at the time they made the contract as being the probable result of the breach. These two claims were alternative. The plaintiff had chosen to limit his claim to loss of profit for three years, but that did not entitle him to claim for the capital loss in addition, as he, admittedly, could not have claimed both if he had not placed any limitation on the profit. He had made allowance for depreciation, but in so far as his claim was based on loss of profit, depreciation was irrelevant. The capital loss had to be deducted from the total awarded, and the loss of profit had to be calculated up to the date of judgment in the action, that being the period claimed, without any deduction for interest. Evershed MR stated at p. 303:

"As a matter of principle, .., it seems to me that a person who has obtained a machine, such as the plaintiff obtained, being a machine which was mechanically in exact accordance with the order given but which was unable to perform a particular function which it was warranted to perform, may adopt one of two courses. He may say, when he discovers its incapacity, that it was not what he wanted, that it is quite useless to him, and he may claim to recover the capital cost he has incurred, deducting anything he can obtain by disposing of the material that he got. A claim of that kind puts the plaintiff in the same position as though he had never made the contract at all. In other words, he is back where he started; and, if it were shown that the profit-earning capacity was in fact very small, the plaintiff would probably elect so to base his claim. But, alternatively, where the warranty in question relates to performance, he may, in my judgment, make his claim on the basis of the profit which he has lost because the machine as delivered fell short in its performance of that which it was warranted to do. If he chooses to base his claim on that footing, it seems to me that depreciation has nothing whatever to do with it."

What the pursuers in the present case were attempting to do was to apply the loss of profit approach despite the absence of any warranty as to output.

[12] So far as the pursuers' averments of loss on the first scenario were concerned, two issues arose: (1) Were there relevant averments of a breach of warranty claim that have been made by W & D against the pursuers? (2) To the extent that any claim by W & D was identified, in view of the pursuers' averments about what they and other people did, had they averred that they (as opposed to a third party) suffered loss?

[13] The averments of loss were contained in condescendence 6. Who actually suffered the loss here? The substitute piece of land was conveyed by Mrs Collins. To what extent did the pursuers suffer loss if they procured someone else to act? Was it the pursuers or Mrs Collins who suffered loss, and, if so, what was the loss? It was not the value of the land to W & D that was in issue, but its value generally and how that was affected by the overriding interest. Moreover, the averments assumed that it would have been open to W & D to claim loss of long-term revenue on the development, although the warranty was not that a certain number of houses could be built, still less what would be the annual rent that W & D could achieve: the warranty, in terms of clause 4, was solely that there was no overriding interest within the meaning of section 28(1) of the Land Registration (Scotland) Act 1979 affecting the subjects, save, if appropriate, insofar as disclosed in the land certificates exhibited in respect of the subjects. In their averments about the loss of having to settle the claim the pursuers set out what the claim would have been if the warranty had been in quite different terms. As Evershed MR pointed out in Cullinane at pps 299-300, it was "extremely important to have clearly in mind the nature of the contract and particularly of the warranty".

[14] Recent authority from the House of Lords, although not dealing with breach of warranty, was entirely consistent with the approach in Cullinane. In Transfield Shipping Inc v Mercator Shipping Inc [2009] 1 AC 61Lord Hoffmann stated at p. 68A-D, paras 12 and 13, as follows:

"12 It seems to me logical to found liability for damages upon the intention of the parties (objectively ascertained) because all contractual liability is voluntarily undertaken. It must be in principle wrong to hold someone liable for risks which someone entering into such a contract in their particular market would not reasonably be considered to have undertaken.

13 The view which the parties take of the responsibilities and risks they are undertaking will determine the other terms of the contract and in particular the price paid. Anyone asked to assume a large and unpredictable risk will require some premium in exchange. A rule of law which imposes liability upon a party for a risk which he reasonably thought he was excluded gives the other party something for nothing. And as Willes J said in British Columbia and Vancouver's Island Spar, Lumber and Saw-Mill co Ltd v Nettleship (1868) LR 3 CP 499, 508: 'I am disposed to take the narrow view that one of two contracting parties ought not to be allowed to obtain an advantage which he has not paid for.'"

One had to look at the terms of the contract to determine the extent of the liability. Applying that to the present case, one had to ask - what was the warranty? The warranty here was only as to an overriding interest, but the pursuers were seeking to treat it as a warranty of future rental flows and impose responsibility on the warranty giver if those rental flows were not met. What the pursuers were seeking to do was to introduce a large and unpredictable loss. What Lord Hoffmann said in paras 14 to 16 in Transfield (a case about breach of a charterparty) applied with even more force in relation to a warranty:

"14 In their submissions to the House the owners said that the 'starting point' was that damages were designed to put the innocent party, so far as it is possible, in the position as if the contract had been performed: see Robinson v Harman (1848) 1 Exch 850, 855. However, in Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd (sub nom South Australia Asset Management Corpn v York Montague Ltd) [1997] AC 191, 211, I said (with the concurrence of other members of the House):

'I think this was the wrong place to begin. Before one can consider the principle on which one should calculate the damages to which a plaintiff is entitled to compensation for loss, it is necessary to decide for what kind of loss he is entitled to compensation. A correct description of the loss for which the valuer is liable must precede any consideration of the measure of damages.'

15               In other words, one must first decide whether the loss for which compensation is sought is of a 'kind' or 'type' for which the contract-breaker ought fairly to be taken to have accepted responsibility. In the South Australia case the question was whether a valuer, who had (in breach of an implied term to exercise reasonable care and skill) negligently advised his client bank that property which it proposed to take as security for a loan was worth a good deal more than its market value, should be liable not only for losses attributable to the deficient security but also for further losses attributable to the fall in the property market. The House decided that he should not be liable for this kind of loss:

'In the case of an implied contractual duty the nature and extent of the liability is defined by the term which the law implies. As in the case of any implied term, the process is one of construction of the agreement as a whole in its commercial setting. The contractual duty to provide a valuation and the known purpose of that valuation compel the conclusion that the contract includes a duty of care. The scope of the duty, in the sense of the consequences for which the valuer is responsible, is that which the law regards as best giving effect to the express obligations assumed by the valuer: neither cutting them down so that the lender obtains less than he was reasonably entitled to expect, nor extending them so as to impose on the valuer a liability greater than he could reasonably have thought he was undertaking.' (p. 212).

What is true of an implied contractual duty (to take reasonable care in the valuation) is equally true of an express contractual duty (to redeliver the ship on the appointed day). In both cases the consequences for which the contracting party will be liable were those which 'the law regards as best giving effect to the express obligations assumed' and '[not] extending them so as to impose on [the contracting party] a liability greater than he could reasonably have thought he was undertaking'."

[15] The law should allow recovery of damages only to give effect to the express obligations undertaken by the parties. In this case there was no warranty as to the number of houses that could be built or the rental stream produced and the pursuers' averments were therefore irrelevant. At p 75, para 21 in Transfield Lord Hoffmann stated that

"the question whether a given type of loss is one for which a party assumed contractual responsibility involves the interpretation of the contract as a whole against its commercial background, and this, like all questions of interpretation, is a question of law."

In view of the express terms of the warranty as to the non-existence of overriding interests, was there room for imputing a presumed intention to the seller to assume responsibility for the number of houses to be built or the future rental flows? The answer to that question had to be in the negative. The seller was being paid for the land, not for assuming a risk for the future business of the purchaser. The seller knew that the land was being developed for housing but not what the future rental stream would be. Assumption of responsibility was the basis of the decision of Lord Hope of Craighead in Transfield at pps 72-3, paras 30 and 31. One had to determine whether there had been an assumption of responsibility for the head of loss claimed. At p 74, para 34 Lord Hope dealt with the question of unpredictability of loss. What he said there could be applied to the present case: it was known that houses would be built, but not how many and what rental would be obtained from them.

[16] Lord Rodger of Earlsferry took a different approach in his speech, but said nothing adverse to the pursuers' contention. Lord Walker of Gestingthorpe pointed out at p 88, para 84, the need to determine "the common intention of reasonable parties to a charterparty of this sort".

[17] Clause 4 of the contract in the present case was sufficiently clear as to its scope and nothing was to be added to or taken from it by consideration of the contract as a whole. There was nothing in the contract as a whole to show that a greater liability was assumed in respect of the warranty. What was being paid for was a piece of land. Awareness on the part of the sellers that residential units were to be built on the property differed from assuming the risk for any diminution in future rental streams. Nothing in the contract had the effect of expanding the liability that would naturally be assumed under clause 4. The averments about the value of the land to W & D were therefore irrelevant and should not be admitted to probation.

[18] Insofar as the averments in condescendence 6 focused on what was done to reach a settlement, they were not identifying the loss. They stated that Mrs Collins, not the pursuers, suffered a loss. The succeeding averments addressed her loss. There was no explanation of what a "rates value" was and why it was a measure of loss. The value of the land conveyed by Mrs Collins was neither here nor there. The loss consisted of the value of W & D's claim against the pursuers. The value of Mrs Collins' land was completely immaterial. These averments were irrelevant on both these bases and should not be admitted to probation. In particular, the averment at p 21B that the pursuers were under an obligation to pay Mrs Collins for the value of the land conveyed by her including the loss of build profit was irrelevant as it was not also averred that she was under an obligation to convey the land. In the averments at p 21C-D two sums were shown as adding up to £291,000 on an apparently new legal basis and a new approach to valuation. What were the loans referred to? The land in question could not be the subject of a loan as it went to a third party, W & D, and could not be reconveyed. One may be led to the conclusion that this was a sum of money which Mrs Collins lent, but there were no averments that she passed a sum of money to the pursuers and that the pursuers did anything with the money concerning W & D. These averments about loans were irrelevant: a loan could not arise by operation of law simply because she conveyed the property to a third party. A loan was a contract: it did not arise by operation of law. In the averments which followed the pursuers abandoned the notion of loans and referred to being "due to pay to Mrs Collins in respect of the value of the land conveyed in settlement".

[19] So far as the averments about the nature of the claim W & D would have had against the pursuers (at pps 21E - 22C) were concerned, they were irrelevant, for the same reason as the averments about the effect of the overriding interest (pps 20E - 21A). The averments at p 22C - E about what would have been in the reasonable contemplation of Mr Bree were irrelevant in the colloquial as well as the legal sense. They did not assist the pursuers in establishing the proper claim by W & D. Neither did they in any sense deal with the problem that the loss suffered was that of Mrs Collins, not of the pursuers.

[20] So far as concerned the calls made by the defenders in answer 6 at pps 27C - 28A were concerned, call (d) called upon the pursuers to aver what assessment, if any, was made of the effect of the overriding interest on the value of the subjects. That call was not answered by the pursuers' averments in condescendence 6 at p 23A. Nor did the pursuers answer call (e) about what advice, if any, they took as to the value of the claim made by W & D. Call (h), calling upon the pursuers to aver the agreement between them and Mrs Collins under which she conveyed the Bonds Drive land to W & D, was also not answered. Call (k), calling upon them to aver the basis on which it was claimed that they had an obligation to reimburse Mrs Collins, was met by averments which were unsound in law. The question had to be asked, if Mrs Collins were to sue the pursuers for the value of the land conveyed, what would be the legal basis of her claim? The averments of the pursuers about loans at p 21C - D were contradictory of other averments. Any loans would have to have been shown on the pursuers' balance sheet. Once the averments about loans were out of the picture, so were those averments about Mrs Collins having transferred property to W & D, something which was not a loss to the pursuers.

[21] The submission for the defenders on the first scenario could be summarised as follows:

(1)  There were no relevant averments as to the proper value of the claim that might have been made by W & D. What was averred by the pursuers about the claim by W & D did not address the correct measure of such a claim. That was sufficient to make the averments about the first scenario irrelevant.

(2)  The averments about the transfer of property by Mrs Collins to resolve any claim were irrelevant, simply because they did not aver the correct measure of loss. It was accepted that the pursuers might be attempting to claim less than the full value of the claim by W & D, in which event they fell foul of point (3) below.

(3)  There were no averments to the effect that the pursuers suffered loss arising out of the transfer of property by Mrs Collins to W & D.

[22] So far as the second scenario was concerned, the loss was said to be that the pursuers entered into a contract whereas otherwise they would not have done. It was necessary to ask, were there any relevant averments overall that the pursuers' position was worsened as a result of entering into a contract, as opposed to not entering into it? There were no averments by the pursuers which addressed this. The only averment which came close was that in condescendence 3 at pps 10C - 11A:

"Esto W & D had declined to accept a qualification to clause 4 and had also declined to agree to the development being reconfigured once the overriding interest had been discovered in the circumstances hereinbefore averred and the contract had not been concluded, the pursuers would not have entered into a contract of which they were in breach and would not have been vulnerable to said claim."

There were no relevant averments of what the claim was which was the amount of the loss. On this approach, the difference was between a contract with a claim and no contract. The pursuers had to aver why they would have been better off had there been no contract: it was not possible to tell unless both situations were known. If there had been no contract the pursuers would not have received £670,000, but they would still have retained the subjects. The pleadings did not begin to address this issue and the pursuers' "no contract" case was therefore irrelevant.

[23] The pursuers' cases on both scenarios were therefore irrelevant. If the case on only one scenario were to be held irrelevant the action as a whole became irrelevant on the application of the rule of the weaker alternative. In essence the pursuers were offering to prove that negligence gave rise to either (a) a contract on different terms; or (b) a contract where otherwise there would have been no contract. If one scenario would have led to no recovery, the pursuers were not entitled to assume that they would succeed in proving one that would have led to recovery (Stewart's Exrs v Stewart 1994 SLT 466, per Lord President Hope at pps 475I - 476D). All that the pursuers were offering to prove was "either or". If legal liability arose only on proof that otherwise there would have been no contract and the pursuers were offering to prove that either there would have been no contract or there would have been a contract on different terms their pleadings were irrelevant. The action should be dismissed.

Submission for the pursuers

[24] The submission for the pursuer was that a proof before answer should be allowed. It was accepted by the defenders that a relevant case of negligence had been pleaded against them, but they maintained that no relevant loss had been pleaded. There were two possible outcomes if the defenders had not been negligent: (1) the defenders would have inserted a qualification to clause 4 and it would have been accepted; or (2) the proposed qualification would not have been accepted by the buyers and no contract would have been concluded. Each of those two situations would have led to a different loss. The defenders had submitted that in each situation no relevant loss was averred. It was not in dispute that the initial task was to identify the precise loss sustained. The pursuers were averring two possible outcomes: the position in this case was not the same as where a pursuer offered to prove only one thing or another. The pursuers offered to prove that the proposed qualification would have been accepted, but nevertheless canvassed the possibility of that not being the outcome. They were relying on the evidence of W & D and their solicitors and were offering to prove the first scenario, namely, that the proposed qualification would have been accepted.

[25] The question in relation to the first scenario was whether the pursuers had relevantly averred that they had suffered loss. The contract contained an absolute warranty that there were no overriding interests in the subjects. That clause should have added the qualification "as far as they or Mrs Collins are aware". Once the existence of the sewerage apparatus became apparent on 26 April 2004, it became impossible for W & D to construct some of the proposed buildings. The existence of the sewerage apparatus became apparent only after the contract had settled. The pursuers had had to make this good. If the qualification had been approved and accepted, clearly W & D would not have had any claim against the pursuers. As it was, W & D had a claim against the pursuers for breach of contract because the overriding interest reduced the capability for the proposed building development. Had knowledge of the overriding interest emerged before the conclusion of the contract the loss would have been that of the pursuers, but they sold the land with the overriding interest, which they had warranted did not exist. They were therefore placed in a position where they were vulnerable to a claim from W & D. In response to the defenders' submission that no relevant averments of loss had been made, it was submitted that whether that was so depended on the circumstances of the case. Here a contrast fell to be drawn between a contract with an unqualified warranty and a contract with a qualified warranty. W & D had a claim against the pursuers in respect of the warranty in the actual situation. The loss which the pursuers sustained arose from the fact that they were in the position they were in and that it was expedient for them to settle the claim. In Banco de Portugal v Waterlow & Sons Ltd [1932] AC 452 Lord Macmillan stated at p 506:

"Where the sufferer from a breach of contract finds himself in consequence of that breach placed in a position of embarrassment the measures which he may be driven to adopt in order to extricate himself ought not to be weighed in nice scales at the instance of the party whose breach of contract has occasioned the difficulty. It is often easy after an emergency has passed to criticise the steps which have been taken to meet it, but such criticism does not come well from those who have themselves created the emergency. The law is satisfied if the party placed in a difficult situation by reason of the breach of a duty owed to him has acted reasonably in the adoption of remedial measures, and he will not be held disentitled to recover the cost of such measures merely because the party in breach can suggest that other measures less burdensome to him might have been taken."

In Clippens Oil Co Ltd v Edinburgh and District Water Trustees 1907 SC (HL) 9 Lord Collins said at p 13:

"I think that the wrongdoer is not entitled to criticise the course honestly taken by the injured person on the advice of his experts, even though it should appear in the light of after events that another course might have saved loss. The loss which he has to pay for is that which has actually followed under such circumstances upon his wrong."

[26] In light of these dicta it was not open to wrongdoer to criticise the injured party to too great a degree provided the latter took a reasonable course. The value of the claim by W & D against the pursuers was what the pursuers had to pay to satisfy the claim. The pursuers averred (at p 20D) what was the loss to them of having to settle the claim. They averred by way of background that the value of W & D's claim would have been more than it was settled for. It was then necessary to consider the cost of the settlement that was achieved. The approach that W & D would have been entitled to take to the loss still had to be justified. The defenders maintained that W & D could not have claimed for the loss of profit on the houses having regard to the terms of the warranty and that the loss was restricted to the reduction in the value of the land, but that was not so in light of the contract and its whole commercial background (Lord Hoffmann in Transfield at pps 68-71, paras 12 -25). By agreeing to clause 4 in a commercial conveyancing transaction such as this the sellers were, objectively viewed, to be taken to assume the risk for the loss of development units and the loss of income therefrom. The pursuers must be taken to have known W & D were a housing association (clause 6 of the offer 6/1 of process) intending to build 59 houses on the subjects. It was reasonable to assume that a housing association was in the business of renting out houses at a modest rent. It was clear that the purpose of the warranty in clause 4 was for the purchasers to insure themselves against loss from an overriding interest arising. W & D's loss would have been the loss of profit on the houses built. The pursuers were offering to prove that W & D would have made £14,000 a year less profit because of the overriding interest. The loss came from the loss of rental rather than from the subjects being worth less. In the situation in which the pursuers found themselves they wished to try to settle the claim against them. Even if it were wrong W & D could have claimed against the pursuers on the basis set out at pps 20D - 21A, that approach was certainly stateable when the pursuers were considering what steps to take to settle the claim. The pursuers should succeed if that was a reasonable basis for them to think that W & D might succeed in the claim as stated. The situation in which the pursuers found themselves was covered by the above dicta of Lord Macmillan and Lord Collins. The formulation of W & D's claim was a legitimate one on the basis of which the pursuers settled. It was reasonable to consider whether that approach might have succeeded in law. The approach was sufficiently stateable at the time for the pursuers to succeed on the basis of it. It was not irrelevant to aver the loss of future rental in W & D's claim. The loss of rental income was something for which the pursuers assumed the risk. The amount of the loss was not relevant, drawing the distinction between the type of loss and the measure of loss. The pursuers were warranting against this type of loss in clause 4. The clause had to be looked at in its whole commercial context, not exclusively in its terms. The pursuers were at least entitled to a proof before answer. It was reasonable for the pursuers to have settled W & D's claim on the basis that they had assumed the risk of the rental loss. The pursuers averred that they had settled for a sum which was less than the value of W & D's claim. It could not be said that this was an irrelevant approach.

[27] The defenders had submitted that the pursuers themselves had suffered no loss, the loss being that of Mrs Collins, but the pleadings taken as a whole could be taken as offering to prove that Mrs Collins, by conveying the land to W & D, was agreeing to lend the value of that land to the pursuers and that the pursuers were under an obligation to pay her the value of this loan. The appropriate averment was to be found at p 20B, where it was averred that the pursuers procured that the Bonds Drive Land was disponed by Mrs Collins to W & D. At p 21B it was averred that the pursuers were under an obligation to pay Mrs Collins for the value of the ground conveyed including the loss of build profit. Mrs Collins had not conveyed the land out of the goodness of her heart. The pursuers could not aver a written contract between them and Mrs Collins, but they clearly were closely connected persons. The averments at p 21C - D reflected the understanding between them. Had she sued the pursuers for £291,000 she would have succeeded. The concept of the legal "black hole" in cases of breach of contract was discussed by Lord Drummond Young in McLaren Murdoch & Hamilton Ltd v The Abercromby Motor Group Ltd 2003 SCLR 323 at p 339C, para 33 et seq. His Lordship stated at para 33:

"This argument raises the issue of the legal 'black hole', a phrase originally used by Lord Stewart in GUS Property Management Ltd v Littlewoods Mail Order Stores Ltd 1982 SC (HL) 157 at p 166. That expression is normally used to refer to the situation where a breach of contract has occurred, and loss has resulted from the breach, but that loss has been sustained, wholly or partly, by a person other than the party to the contract. That occurs typically in two categories of case: where one family member has concluded a contract on behalf of himself or herself and other members of the family, and where a contract has been concluded by a company forming part of a group and the subject matter of the contract belongs to or has been transferred to another member of the group. In such cases the argument for the person responsible for the breach is typically that the other party to the contract has suffered no loss, and thus is not entitled to damages, whereas the party who has sustained the loss is not a party to the contract, and accordingly has no title to sue. The claim for breach of contract accordingly disappears, it is said, into a black hole. That result is clearly undesirable; in a well-regulated legal universe black holes should not exist."

Here the pursuers' primary position was that they had suffered loss as they considered themselves under an obligation to pay Mrs Collins for the value of the land conveyed. Alternatively, there clearly was a loss which Mrs Collins had suffered. The pleadings on this point were not fundamentally irrelevant. Sufficient was said to make clear that the pursuers were suing on behalf of Mrs Collins. The averments were sufficient to go to proof on the value of W & D's claim and that it was reasonable for the pursuers to have settled the claim in the way in which they did, even though the land conveyed in settlement was conveyed by Mrs Collins and not themselves. Enough had been pleaded by the pursuers for inquiry into their loss.

[28] So far as the second scenario was concerned, the pursuers had to canvass the possibility that W & D would not have accepted the qualification proposed to the clause. In that event the pursuers would have had no contract for the sale of their land, but what happened was that they did have a contract of which they were in breach and they were thus placed in the position of incurring cost and trouble to resolve the matter (Wilkie v Brown 2003 SC 573). The two scenarios represented two alternative outcomes for the same breach of contract. Having regard to the decision in Stewart's Exrs, even if one scenario did not have a loss flowing from it, it did not follow that the other case should be deleted. If the defenders' submission were to be accepted, only the pursuers' alternative case should be deleted.

Response for the defenders

[29] So far as the first scenario was concerned, the defenders agreed that the pursuers' loss consisted of the claim by W & D against them. It was then necessary to ask: (1) What was the value of the claim that W & D might have made against them? (2) How did the pursuers, as opposed to someone else, suffer loss?

[30] In relation to the value of the claim by W & D, this was only the starting point, not the last word. The difficulty for the pursuers was that they had no relevant averment of the value of that claim. The decisions in Banco de Portugal and Clippens were not relevant. The defenders were not criticising the detail of the actions undertaken by the pursuers: the challenge was to the relevancy of W & D's claim and the pursuers' loss. It was common ground that the averments made by the pursuers would be relevant only if the pursuers had assumed responsibility for the loss of future rental and that was a question of interpretation of the missives which could be dealt with at debate as a question of relevancy. The pursuers had not pointed to any averments which, if proved, would alter the interpretation of the missives. If the interpretation of the missives did not depend upon evidence there was no need for a proof. The pursuers had not indicated any basis upon which the seller of land could be taken to have assumed liability for lost rental. The reason why W & D wanted clause 4 was not the same as the assumption of liability for loss of future rental. The point could be tested in this way. The price of the land was £370,000 (plus £300,000 for services). The pursuers pleaded that the loss of five houses generated a loss of future rental amounting to £290,000, but what if the loss had been of 25 houses, resulting in a loss of future rental amounting to just less than £1.5 million? Can it be said that such an open-ended liability was accepted by the sellers just because it was known that there would be a development on the land? It was accepted that, in accordance with the decision of the House of Lords in Transfield, the size of the loss did not have to be foreseen, but the point was whether, on the basis of the missives, the sellers could be taken to have assumed an open-ended responsibility. On the pursuers' approach the defenders would have received nine-tenths of the land for £79,000.

[31] The pursuers claimed that, even if what they averred about the value of W & D's claim was wrong, they were entitled to assume that it might be right. That was a gloss which the pleadings would not bear. The pursuers had not averred that they were advised about the value of the claim by W & D, although they were called upon by the defenders at p 27D to aver what advice, if any, they took as to the value of the claim by W & D. If the pursuers wished to say that they took certain advice they had to aver it. Nothing in the submission for the pursuer supported the view that the averments made about the W & D claim were relevant. There were no relevant averments that the pursuers suffered the loss of £291,000. It was plain that there was no legal obligation on the part of the pursuers to pay Mrs Collins for the land that she conveyed. The reference was to "an understanding". Mrs Collins could not succeed in any action against the pursuers. It could not be said that there was a contract of loan, or even that there was a contract.

[32] In relation to the "black hole" cases, the pursuers had not made any averments to bring their case within this category: in fact, their averments were quite inconsistent with it. In McLaren Murdoch and Hamilton Ltd Lord Drummond Young stated at pps 344D - 345A, para 40:

"It is clear in my opinion that the existence of legal 'black holes' is undesirable; if a breach of contract has caused loss, it should be possible to obtain redress for that loss from the party in breach. ... In effect the rule comes to this: if a breach of contract occurs, causing loss that can be measured in financial terms, the party who is not in breach may recover substantial damages even if that loss has been sustained by another person; if a loss has been sustained by a person other than the contracting party, however, the contracting party must sue on behalf of that other, and must accordingly account to that other for the damages recovered. The right to raise an action in this way is deemed by the law to exist in any case where the breach of contract occurs to a person other than the contracting party. It should not in my view be based on the intention of the parties: the right is rather conferred as a matter of general legal policy, to ensure that if a loss results from a breach of contract damages can be recovered from the party responsible for the breach."

Accordingly, the contracting party had to sue on behalf of the other person: not only that, the contracting party had to sue for the loss caused to the other person. There were no averments in condescendence 1 of this action that it was raised on behalf of anyone other than the pursuers. The first plea-in-law for the pursuers stated: "The pursuers, having suffered loss and damage as a result of the breach of contract of the defenders, are entitled to reparation therefor." The first sentence of condescendence 6 averred: "As a consequence of the defenders' said breach of contract the pursuers have suffered loss and damage." The whole of the pursuers' case was that Mrs Collins did not suffer any loss, that it was all the pursuers' loss. The "black hole" approach was therefore not open to the pursuers.

[33] So far as the second scenario was concerned, the defenders did not object to a case being pleaded on that basis. The defenders' challenge was based on the absence of relevant averments of loss. The case of Wilkie v Brown was not germane to the issues which arose. The loss was the difference between the first scenario (a concluded contract and a claim for breach of warranty) and the second scenario of no contract at all. That being common ground, the claim for breach of warranty did not represent the difference between these two scenarios. The pursuers did not aver why they were worse off having a contract with a claim rather than no contract at all. They had not made any averments of loss on the basis of the second scenario.

Discussion and conclusion

[34] In my opinion the correct approach in the circumstances of this case is to ask for what loss to W & D the pursuers would have been liable for a breach of the warranty in clause 4. That clause warranted that there were no overriding interests affecting the subjects save, if appropriate, insofar as disclosed in the Land Certificates exhibited in respect of the subjects. The pursuers were in breach of warranty because there was a water storage tank within the subjects connected to piping running through the subjects constituting sewerage apparatus vested in Scottish Water, which had power under the Sewerage (Scotland) Act 1968 to enter onto the land to undertake repairs. No building was permitted over the sewerage apparatus that might interfere with or obstruct access to it without the consent of Scottish Water and its location rendered construction of some of the houses proposed by W & D impossible.

[35] The breach of contract which occurred in this case was a breach of a contract for the sale of land. I therefore consider that one must seek to apply the basic principle of damages for breach of contract to this contract for the sale of land. So far as damages for breach of contract in general are concerned, it is hardly necessary for me to state the general principle, which was first set out in the case of Hadley v Baxendale (1854) 9 Exch 341. The most up-to-date statement of the law is to be found in the speeches of their Lordships in the House of Lords in Transfield. I refer in particular to the passages from the speech of Lord Hoffmann quoted above. As his Lordship pointed out in the earlier South Australia case, before one can consider the principle on which one should calculate the damages to which a pursuer is entitled as compensation for loss, it is necessary to decide for what kind of loss he is entitled to compensation. A foreseeable loss will not be recoverable if it is not the kind of loss for which the law allows recovery. The consequences for which a contracting party is liable should not be extended so as to impose on him a greater liability than he thought he was undertaking (Transfield at para 16).

[36] In this case the pursuers aver that they would have been liable to W & D for the loss of rental on the houses which were to have been built on the subjects but which could not have been built due to the existence of the overriding interest. I do not accept that the loss of rental income on those houses represents the value of the claim which W & D would have had against the pursuers. W & D paid a certain price for the subjects on the basis that there was no overriding interest affecting the subjects. What they obtained in return for the price was land affected by an overriding interest, for which presumably they would not have paid the same price. In my opinion their claim for breach of contract falls to be calculated as the difference between the value of the land without the overriding interest and its value with the overriding interest. Such an approach is consistent with that taken by Evershed MR in Cullinane. There is no provision in the contract which suggests that the pursuers were undertaking liability to W & D for loss of rental income for a breach of the warranty in clause 4. The warranty given by the pursuers was about the condition of the land, not about the income which it could generate. It does not follow from the fact that the pursuers were aware that houses would be built on the subjects that they were undertaking, at the time that they entered into the contract, liability for loss of future rental flow from those houses. The dicta in the cases of Banco de Portugal and Clippens Oil which were founded on by the pursuers are, in my opinion, of no assistance to them in this case as nothing said in those two cases can turn what is a legally irrecoverable loss into a legally recoverable loss.

[37] Moreover, I am satisfied that the averments about the transfer of property by Mrs Collins to W & D are irrelevant as the value of that property cannot be the correct measure of the pursuers' loss. There are no averments that the pursuers suffered loss because Mrs Collins transferred land to W & D. In my opinion the submission for the defenders that there was no legal obligation on the part of the pursuers to pay Mrs Collins the value of the land she conveyed is correct. As was rightly pointed out, it could not be said that there was a contract of loan, or indeed any contract at all, between Mrs Collins and the pursuers in relation to the plot of land conveyed by her to W & D. I am also of the opinion that this case does not fall within the category of "black hole" cases. In such a case the contracting party must sue on behalf of the third party for the loss caused to that third party. It is not averred in this action that the pursuers are suing on behalf of Mrs Collins and it is plain from the terms of the averments of loss in condescendence 3 and their first plea-in-law that the pursuers are suing for the loss caused to themselves. That being so, this case plainly cannot fall into the category of "black hole" cases.

[38] Turning to the second scenario, this is what was described in the submission for the defenders as the "no contract" case. I accept the submission for the defenders that on this scenario the pursuers have failed to make relevant averments of loss in that they have not set out in their pleadings why they were worse off having a contract with a claim as opposed to no contract. If there had been no contract the pursuers would not have received the purchase price of £670,000, but they would have retained ownership of the land.

[39] I am therefore of the opinion that the pursuers have failed to make relevant averments of loss on both scenarios and that their entire case is therefore irrelevant.

Relevancy of the defences

Submission for the pursuers

[40] In light of the view I have taken on the relevancy of the pursuers' pleadings the relevancy of the defences does not arise as a practical matter, but I must nevertheless deal with it.

[41] Plea-in-law 3 for the pursuers is in the following terms:

"The defenders' averments in answer being irrelevant et separatim lacking in specification, proof should be restricted to quantum."

The submission for the pursuers in support of that plea was as follows.

[42] In condescendence 3 at p 9A the pursuers averred, with reference to clause 4:

"Mr Bree of the defenders agreed to this clause being in the final draft and then accepted it by said letter of 13 March 2003. In doing so he took no instructions from Mrs Collins of the pursuers, nor did he explain the import of the said clause to her. He did not seek to exclude the existing services and infrastructure installations from clause 4. He did not seek to qualify the clause by reference to matters within the pursuers' knowledge."

In response the defenders averred in answer 3 at p 12C:

"Admitted that by letter dated 13 March the defenders accepts (sic) BTO's letter on behalf of the pursuers."

The defenders made no averments about any explanation of the import of clause 4 by Mr Bree or about any instructions taken by him. There was only a general denial. For a denial to be relevant the defenders required to specify what instructions they took or what explanation they gave. In answer 3 at p 13C - D the defenders averred:

"When the disposition for the subjects was being revised Mr Bree of the defenders amended it to make an exception to the warrandice clause in respect of servitudes and wayleaves relating to any existing sewers, drains, pipes and cables. Mrs Collins assured him that there were none and instructed Mr Bree not to so revise the draft disposition. She and the pursuers were accordingly in a position to give the warranty sought by W & D in clause 4."

The defenders failed to aver when that instruction was given. Unless the defenders could offer to prove that the instruction was given before the conclusion of missives on 13 March 2003 that averment was irrelevant. The averment that she and the pursuers were accordingly in a position to give the warranty sought by W & D in clause 4 did not follow at all. The pursuers averred that Mr Bree did not seek to qualify clause 4 by reference to matters within the pursuers' knowledge. Even had Mrs Collins on behalf of the pursuers been inclined (on the assumption that her instructions had been taken before conclusion of the missives) to indicate that there were no sewers etc that might constitute an overriding interest, it would obviously have remained the case that there might have been an overriding interest of which she was unaware. She could never have been in a position safely to give the warranty sought by W & D in clause 4. The defenders' averment that she was in a position to give the warranty (which appeared to be based on the averments about her instructions concerning revision of the disposition and ignored the possibility of overriding interests of which she was unaware) was not soundly based on the defenders' preceding averments, was irrelevant and should be deleted.

[43] In answer 4 at pps 17C - 18A the defenders averred:

"At the time of conclusion of the missives the defenders, and to the defenders' knowledge, Mrs Collins, the pursuers, the local authority and Scottish Water were unaware of any apparatus situated in the subjects. In terms of section 21 of the Sewerage (Scotland) Act 1968 a party may apply to Scottish Water for consent to erect a building over a sewer. Scottish Water may not unreasonably withhold consent to such a request. The pursuers are called upon to indicate what steps, if any, were taken, either by them or W & D, to obtain consent to erect buildings over apparatus on the site and, if such application was made, on what basis consent was withheld."

The defenders did not go on to aver that had such consent been sought to erect the buildings proposed by W & D over the sewerage apparatus in question that consent would have been granted or any withholding of consent would have been held to be unreasonable. For the same reasons the defenders' averment in answer 6 at p 25C - D "It is possible to obtain the consent of Scottish Water to erect buildings over a sewer" was irrelevant and should be deleted.

[44] In condescendence 5 the pursuers averred that a number of duties were incumbent upon the defenders in the exercise of the knowledge, skill and care of a reasonably competent solicitor in the performance of an implied term of the contract between them. Answer 5 admitted the contract and the implied term but otherwise simply averred "Quoad ultra denied". That general denial involved a denial by the defenders of all the other specific duties averred by the pursuers in condescendence 5. The defenders did not explain in answer 5 why any of these specific duties were not incumbent on them. Nor did they aver that they performed the duty which they conceded was incumbent upon them to act as reasonably competent solicitors and how they might have done that. Answer 5 was irrelevant, should be refused probation and any proof should therefore be restricted to quantum.

[45] In answer 6 at p 25C - D the defenders averred:

"It is possible to reconfigure development proposals to avoid erecting buildings on the area affected by buried apparatus. These factors are relevant to consideration of the effect on the value of the land purchased of the facts not being as warranted by the pursuers."

As the defenders did not aver that any such rerouting or reconfiguring would have been possible and successful in this case these averments were irrelevant and should be deleted.

Submission for the defenders

[46] It was submitted for the defenders that a general denial was not an irrelevant defence. Reliance was placed on what was said by Lord Justice-Clerk Ross in Gray v Boyd 1996 SLT 60. In particular, at p 63H - J he said:

"I am unaware of any principle which would favour the view that if there was lack of candour in a denial the averments should be treated as admitted. Apart from anything else, it is difficult to understand how a court at the stage of a debate on relevancy is in a position to judge whether one party is or is not showing a lack of candour. ... However, where a defender has confined himself to a bare denial, I see no justification for the court holding that it should proceed upon the basis that the pursuer's averments are well founded ... If ... it has ... become the practice to treat a general denial as amounting to an implied admission merely because there has been a lack of candour the practice is not, in my opinion, a sound one."

In the same case Lord McCluskey stated at p 65H that none of the previous cases from the sheriff court or the Outer House which had been cited to the court appeared to hold that a simple denial could be construed as a judicial admission.

[47] There was in the present case no lack of candour on the part of the defenders. It was not accepted by Mr Bree that he had not given advice, but the defenders were not in a position to aver any specific circumstances in which he did give advice. That was why no positive case was averred by the defenders in response. The pursuers' submission that in order relevantly to make a general denial in answer 3 the defenders had to aver what instructions they took or what explanation they gave was unsound in law.

[48] The averments in answer 3 at p 13C - D were relevant for two purposes: it could be inferred from them that the defenders would have taken instructions on the previous occasion and they were also intended to answer the averments by the pursuers in condescendence 3 that Mrs Collins would not have been prepared to give the warranty contained in clause 4. What the defenders were doing in their averments was pointing to her response about the warranty at a later stage in the transaction in the context of the disposition.

[49] So far as answer 4 was concerned, the pursuers had sought to take small snippets of the defenders' case out of context. When the defenders' case was read as a whole it was quite apparent why the averments in question in answer 4 were relevant. In answer 6 at p 25C the defenders averred that the liability of the pursuers in respect of the breach of contract was limited to the effect on the value of the land purchased of the facts not being as warranted by the pursuers. The averments in answer 4 had to be seen in the context of the proper measure of loss. It was appropriate to insert the averments about section 21 of the Sewerage (Scotland) Act 1968 in answer 4. That Scottish Water could not unreasonably withhold their consent to the erection of a building over a sewer was of clear significance to the claim for breach of warranty. The call at the end of answer 4 was asking what steps the pursuers took to see if there was a way round the problem which had arisen without another piece of land having to be given away.

[50] In relation to the averments in answer 5 responding to the averments of duty in condescendence 5, a general denial was a relevant defence (Gray v Boyd). The pursuers had not originally mentioned the travelling draft in their pleadings (p 12E - 13A). The situation was that there had already been an attempt to delete clause 4 which the purchasers had refused to accept. The duties incumbent on the defenders depended on the facts and it was for the pursuers to establish those duties, that is, that Mr Bree should have tried something else after the proposed restriction to clause 4 had been rejected by W & D.

[51] The criticisms of the defenders' pleadings were without foundation and the pursuers' third plea-in-law should be repelled.

Discussion and conclusion

[52] I can deal briefly with the points taken by the pursuers about the relevancy of the defences. On the basis of Gray v Boyd it cannot be said that a general denial is an irrelevant defence. The criticisms of parts of the defences made in the submission for the pursuers were, in my view, properly answered in the submission for the defenders. Had the pursuers pleaded a relevant case I would have repelled their third plea-in-law.

Decision

[53] For the reasons given above I shall sustain the first plea-in-law for the defenders and dismiss the action.