Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2009] CSOH 171
CA36/09	OPINION OF LORD GLENNIE in the cause THE SCOTTISH COAL COMPANY LIMITED Pursuer; against DANISH FORESTRY COMPANY LIMITED Defenders: ­­­­­­­­­­­­­­­­­________________

Pursuers: Tyre, QC; Davies; Harper Macleod

Defenders: Summers, QC; Robertson; Gillespie Macandrew LLP

15 December 2009

Introduction

[1] The defender ("DFC") is the heritable proprietors of land known as Dalgig Plantation ("the Subjects"). The Subjects are adjacent to a site at House of Water operated by the pursuer ("SC") as an open cast mine. On 9 and 12 February 2007, the parties entered into a Purchase Option and Coal Extraction Agreement ("the Agreement") in terms of which DFC granted to SC an option to purchase the Subjects. In the Agreement, SC is known as "the Company", DFC variously as "the Proprietor" and "Danish" and the Subjects as "the Option Area". The Option could be exercised by SC by notice in writing at any time up to 28 February 2008.

[2] If the Option was exercised, the Purchase Price had to be paid on the Settlement Date, that is to say a date 28 days after the date of service of the notice, in exchange for delivery of a valid disposition in favour of SC: cl.4.1. Cl.4.2 provided as follows:

"4.2 If the Purchase Price is not paid in full at the Settlement Date, interest shall be charged on such amount as is outstanding from the Settlement Date until [certain events]. ... The Company will not be entitled to take entry to the Option Area without payment of the Purchase Price in full. In the event of the Purchase Price or part thereof together with any interest due thereon remaining unpaid fourteen days after the Settlement Date, the Proprietor will, at their option but without prejudice to any other remedies open to them, be entitled to treat the non-payment as repudiation of the contract by the Company entitling them to rescind the contract without prejudice to any claims competent to them against the Company arising from breach of contract on giving written notice to the Company to that effect. In the event of the Proprietor exercising their right to rescind, they shall be entitled to proceed to re-sell the Option Area and shall be entitled to the continued payment of interest as aforesaid until [certain events] ... provided that the Proprietor will not be entitled to claim interest hereunder and the fourteen day period hereinbefore referred to will not be held to have commenced if and for so long as the delay in settlement is caused by the Proprietor or their agents. This Clause shall continue shall continue to be enforceable notwithstanding rescission."

Cl.7 provided that any notice requiring to be served under the Agreement was to be served by First Class Registered Post or Recorded Delivery and addressed to the relevant party at its registered office or last known trading address.

[3] In addition to the Purchase Price for the Subjects, under the Agreement SC agreed to pay to DFC certain royalties. This was dealt with in cl.9 of the Agreement in the following terms:

"9 COAL ROYALTY PAYMENTS

9.1 In addition to the Purchase Price the Company will pay to Danish (a) a royalty ("the Coal Royalty") at the rate of £1.60 per tonne in respect of each tonne of coal extracted and removed from the Option Area and (b) a royalty ("the Mineral Royalty") based on 10% of the sale price of any mineral other than coal (deducting any Aggregates Levy chargeable thereon) extracted and removed from the Option Area. ...

9.2 The Company will pay to Danish the Guaranteed Royalty Payment which shall be paid in four equal payments of Fifty Thousand Pounds (£50,000) Sterling in advance on the Scottish Quarter days with interest ..."

It is not necessary to set out the other details of the royalty payments.

[4] In cl.10 of the Agreement, provision was made for SC to establish a Standard Security in favour of DFC for sums due or becoming due under the Agreement and for the performance of SC's non-financial obligations. Cl.10 provided, so far as relevant, as follows:

"10 FIRST RANKING STANDARD SECURITY

10.1 The Company shall grant in favour of Danish at the Settlement Date a Standard Security over the Option Area for (1) all sums due and which may become due by the Company to Danish in terms of this Agreement and (2) the performance of the Company's non-financial obligations in terms of this agreement. Danish agrees to enter into an agreement with the Company and/or the Company's bankers reasonably to regulate the relationship between the sums which will be recoverable under the Standard Security and the terms under which these sums will rank ahead of any other sums due by the Company to their bankers from time to time ("the Ranking Agreement"). ..."

It is this clause which gives rise to the current dispute between the parties.

[5] By Recorded Delivery letter dated 25 February 2008, SC gave notice to DFC that they were exercising the Option pursuant to the Agreement. It is not in dispute that this was a valid exercise of the Option. The effect of exercising the Option on 25 February 2007 was to fix the Settlement Date as 27 March 2008. The purchase price calculated under the Agreement was agreed at £402,930.

[6] Following service of the notice, SC's agents, Messrs Harper Macleod ("HM"), prepared a draft Ranking Agreement between SC, DFC, SC's bankers, the Royal Bank of Scotland Plc ("RBS"), and certain others. The draft Ranking Agreement was sent to DFC'S agents, Messrs Anderson Beaton Lamont ("ABL"). It specified that the Standard Security over the Subjects in favour of DFC would have priority over all other standard securities and floating charges up to a limit to be agreed (in the event, £2 million). It further provided, by cl.4.11, that

"[DFC] shall not without the prior written consent of [RBS] exercise any of its powers of enforcement over [the Subjects] or otherwise have recourse to the same."

In due course, DFC's agents responded on the question of the draft Ranking Agreement. By e-mail on 31 March 2008 they stated that their clients were "happy to relinquish control to RBS but only if the sums due to them are paid." They proposed revisions to cl.4.11 to the effect that the clause should read:

"Provided that [DFC] Liabilities are paid in full, [DFC] shall not without the prior written consent of [RBS] exercise any of its powers of enforcement over [the Subjects] or otherwise have recourse to the same." [emphasis added]

Those revisions were not acceptable to RBS.

[7] It is agreed that the Purchase Price could not be paid and settlement concluded until agreement was reached as to the terms of the Ranking Agreement. On 30 April 2008, no further progress having been made in the quest for an acceptable solution to the wording of cl.4.11, and the price therefore not having been paid, DFC's agents faxed to SC's agents a letter purporting to rescind the Agreement on the ground that the Purchase Price had not been paid within 14 days of the Settlement Date. The letter was not sent by Registered Post or by Recorded Delivery, and further was not sent to SC's registered office or last known trading address. It is agreed between the parties that it was not a valid rescission notice in terms of cl.7 of the Agreement.

[8] In those circumstances, SC contends that the Agreement remains in full force and effect. In this action it seeks declarator: (i) that it validly exercised the Option to purchase the Subjects in terms of the Agreement; (ii) that the purported rescission of the Agreement by DFC was of no effect; and (iii) that, in terms of the Agreement, DFC were bound to sell to them, and they were bound to purchase, the Subjects, subject to DFC agreeing a ranking agreement with SC's bankers pursuant to cl.10.1 of the Agreement. It also seeks interdict, and interdict ad interim, but it was unnecessary to deal with the application for interim interdict since DFC gave undertakings on the commencement of the action.

[9] DFC, for its part, contends that it is under no continuing obligation to SC under the Agreement. Their argument, in short, is that the provisions of cl.10.1 amount to an agreement to agree an important term. No agreement having been reached on the terms of the Ranking Agreement, the Agreement as a whole is unenforceable.

[10] I heard a proof in this matter in August 2009. There was a considerable amount of agreement between the parties as to the basic facts and the relevant documents. It was agreed that DFC should lead at proof, since the onus was on it to establish that the agreement had come to an end. I heard evidence on behalf of DFC from Mr Bent Also (a director) and from Lydia Fotheringham (a partner within ABL - she is sometimes referred to in e-mails by her maiden name, Lydia Arbuckle, but I shall refer to her throughout as Lydia Fotheringham). On behalf of SC, I heard evidence from Grant Docherty (a partner and head of banking in BB), Peter Ferguson (the Group Lawyer within the group of which SC forms part, and acting in effect as SC's in-house solicitor) and Pamela Todd (a partner in HM). In addition, parties agreed that witness statements containing the evidence of Hugh Caldwell (the Estates Manager and, latterly, Land Director of SC) and Philip Rayson (Planning and Development Manager of the Scottish Resources Group Limited ("SRG"), SC's parent company) could be admitted without the need to call them to give evidence. I shall refer to this evidence in the course of narrating, in a little more detail, the relevant facts.

Prior dealings between the parties

[10] The Subjects are in North Lanarkshire. Since about 1996, SC has carried out an open-cast mining operation at the House of Water site in North Lanarkshire. I was told by Mr Ferguson that SC is the largest coal producing company in Scotland and the second largest in the UK. It produces about 4 million tonnes of coal each year. It operates eight open-cast sites, of which three are located in Lanarkshire. One of its rivals in the coal industry in Scotland is Keir Construction Limited ("Keir") which operates the Greenburn site nearby.

[11] In 2001 or 2002, SC was looking to extend the working area of the House of Water site. The proposed extension, known as the Burnston extension, includes the Subjects as well as other land owned by SC. In early 2002, SC agreed heads of terms with DFC, in terms of which SC could carry out test drilling works on the Subjects and were given an option to purchase the Subjects from DFC. A Coal Prospecting Agreement ("CPA") between the parties was executed in March 2003. It gave SC the right to carry out test drilling and other prospecting works to enable it to ascertain the quantity and quality of coal below the Subjects; and it granted SC an exclusive option to purchase the subjects. In terms of the CPA, on transfer of title to the Subjects, DFC were to be paid a capital payment reflecting the value of the land and standing timber as at the date of exercise of the option, but disregarding the value of any coal below the surface. Additional payments were to be made for royalties in respect of coal and other minerals extracted from the land.

[12] In December 2005 a dispute arose between DFC and SC as to the validity of a notice served by SC under the CPA. Negotiations ensued between the parties. In July 2006 DFC indicated that it was minded to do a deal with Keir, who were apparently prepared to offer more attractive commercial terms. The Subjects formed a potential extension to Keir's Greenburn site. In the event, SC negotiated a new Option Agreement with DFC. This is the Agreement which is the subject of the present proceedings.

The exercise of the option

[13] I have already noted that SC exercised the option by notice dated 25 February 2008. At the same time, they said that they would contact DFC's solicitors shortly to make arrangements for completion of the transaction. On the same day, Peter Ferguson, who, as I have said, acted as their in-house solicitor, took steps to set matters in train. He sent a copy of the option notice to Pamela Todd of HM, asking her to take matters over from there and deal with the completion of the purchase and the standard securities in favour of DFC and RBS. He also sent a copy of the option notice to Lydia Fotheringham of ABL, who e-mailed back on the same day to say that she had advised DFC and would be in touch to advance the conveyancing.

[14] On 28 February 2008, Chris Byrne, a solicitor at Biggart Baillie ("BB"), acting for RBS, sent SC an e-mail attaching a first draft of a revised Ranking Agreement which he had prepared.

The Ranking Agreement

[15] It is necessary at this point to say something about the Ranking Agreement which already existed and was to form the basis of the draft proposed by RBS to DFC. I take this from the evidence of Mr Docherty which, in this respect, was not challenged. The original Ranking Agreement was drafted in December 1994 in order to regulate the priority of various floating charges and standard securities granted by SC and other companies in the group. New securities in favour of RBS and, separately, the Secretary of State for Trade and Industry (as he was then known) were added on. The interest of the Secretary of State arose from the privatisation of SC in 1995 and the relevant security secured a deferred element of the purchase price. E.ON UK plc ("E.ON) were also included by virtue of their status of floating charge holders. The Ranking Agreement has been amended over the years as and when new creditors or new securities required to be added. It regulates the relationships between the holders of various fixed and floating securities granted by the SRG group of companies across Scotland, including SC, and includes various Standard Securities in respect of the areas of land wholly unrelated to the Dalgig site or SC's existing House of Water site. The purpose of the Ranking Agreement is to rank these securities held by various creditors in relation to specific asset classes, subject to an agreed priority amount in respect of each creditor. The priority amount is established on the basis of the actual value of the liability in respect of which security is sought. The securities are ranked in a "waterfall" arrangement, which sets out the order in which the proceeds of enforcement are paid out. These arrangements in respect of the Dalgig site in the ranking agreement are set out in cl.3.1.2 of the draft. RBS is the only party to the existing ranking agreement which holds Standard Securities over land forming part of the House of Water operation. Accordingly, it was the party whose interests would be most directly affected by the introduction of DFC into the Ranking Agreement.

[16] The draft Ranking Agreement sent by Chris Byrne on 28 February 2008 took as its base the existing Ranking Agreement and showed the proposed alterations in track changes. The parties to the original Ranking Agreement were (i) companies within the SRG group, viz. SRG, SC, Scottish Coal Contracts Limited, Castlebridge Plant Limited and SRG Estates Limited; (ii) RBS in various capacities, viz. as Agent, as Security Trustee, as Term Loan Bank, as GBI Bank and as Overdraft Bank; (iii) The Secretary of State for Business, Enterprise and Regulatory Reform (as he was then known); and (iv) E.ON. The revised draft added DFC and Thomas and Matthew Howie. The Howies held a Standard Security over Downieston Farm, an area of land unconnected with SC's House of Water operation. The introduction of DFC (and the Howies) into the Ranking Agreement obviously required the consent of all other parties (and intended parties) to it.

RBS' proposed wording

[17] As I have already said, the provision in the draft Ranking Agreement which ultimately led to the current dispute is contained in cl.4.11. That provides as follows:

"4.11 Danish Forestry shall not without the prior written consent of the Security Trustee exercise any of its powers of enforcement over the property subject to the Danish Forestry Standard Security or otherwise have recourse to the same."

Cl.4.12 contained a similar provision in respect of the Howies.

Discussions between the parties

[18] On 4 March 2008, Peter Ferguson forwarded Chris Byrne's e-mail to Jackie Campbell of HM (Pamela Todd's assistant), asking her to make a start on reviewing the draft agreement. She sent the draft Ranking Agreement to Lydia Fotheringham of ABL, asking for her comments for passing on to BB. Peter Ferguson was also in touch directly with Lydia Fotheringham. In an e-mail to her on 4 March 2008, he said that Jackie Campbell of HM would be dealing with "the conveyancing" from that point. Lydia Fotheringham responded the next day to the effect that she had already been in touch with Jackie Campbell at HM "to advance the conveyancing". It was not in dispute that the reference to the "conveyancing" was to be understood as a reference to all matters of drafting including the Ranking Agreement. In fact, however, as is apparent from the communications which followed, there were a number of different channels of communication as the discussions progressed.

[19] On 6 March 2008 Jackie Campbell e-mailed Peter Ferguson to say that Lydia Fotheringham had now looked over the draft Ranking Agreement but had made no revisals as yet because she needed to speak to her clients and then him to discuss what the secured amount would be. This was correct. The first substantive revisals to the draft Ranking Agreement were put forward on behalf of DFC only at the end of March 2008.

[20] In view of the way in which the case has been presented, it is unnecessary to go through the whole of the correspondence between the various parties in detail. The following gives a flavour of what was going on, set against the background that the Settlement Date was 27 March 2008. Jackie Campbell went on leave for a week on about 21 March 2008 and left her file with Pamela Todd to progress during her absence. On 21 March 2008 Pamela Todd e-mailed Lydia Fotheringham to say that the conveyancing appeared to be "well progressed" and her clients, SC, had the funds in hand to settle; but before they could proceed "the ranking arrangements in respect of your clients and the bank's securities need to be finalised". She noted that there did not appear to have been agreement as to the limit of DFC's prior ranking, and she was "a little confused" about what amendments if any DFC had proposed to the draft Ranking Agreement. Lydia Fotheringham responded on 25 March 2008 to say that DFC had made no revisals to the Ranking Agreement, but that she was to speak to Peter Ferguson about the limit of their ranking. On the same day, Alan Macdonald, the Senior Documentation Manager at RBS, e-mailed Chris Byrne asking whether he has heard back yet from Peter Ferguson in relation to the Ranking Agreement, and in particular with comments of the other parties' agents. Chris Byrne replied that he had not heard anything from Peter Ferguson, but understood that HM would be dealing with matters on his behalf.

[21] In the meantime, other parties also had to be consulted. On 21 March 2008 Pamela Todd e-mailed the solicitors for the Howies. On the same day, Chris Byrne of BB, the solicitors for RBS, e-mailed Pamela Todd to point out that both E.ON and the Department for Business, Enterprise and Regulatory Reform ("DBERR") would also have to agree the Ranking Agreement. He thought it would be a "tall order" to do that this week. Pamela Todd responded on the same day saying that she had now received the draft Ranking Agreement back from ABL via Peter Ferguson, with DFC's prior ranking marked at £2 million. On 25 March 2008, Chris Byrne e-mailed Peter Ferguson asking how he was getting on with E.ON and DBERR. He said that he had received an e-mail from Pamela Todd of HM on the previous Friday indicating that the expectation was to settle the Ranking Agreement that week, which seemed "quite tight" to him if E.ON and DBERR were still to approve the draft.

[22] On 26 March 2008, Lydia Fotheringham sent Pamela Todd the Standard Security and stated that she was dealing separately with Peter Ferguson regarding the amount to be secured by the Ranking Agreement.

[23] The Settlement Date of 27 March came and went. There was, however, a flurry of activity on 31 March 2008. From this point it is necessary to look in rather more detail at some of the exchanges.

DFC's revisal to the Ranking Agreement

[24] Lydia Fotheringham e-mailed Peter Ferguson on 31 March 2008 to say that she was sending the draft Ranking Agreement as further revised. She had added ABL's address for notices, fixed the level of priority at £2 million in agreement with SC, and amended cl.4.11. She added this comment:

"Our clients are aware we are the small players in the agreement and are happy to relinquish control to RBS but only if the sums due to them and paid".

The amendment made to cl.4.11 was as follows:

"Provided that the Danish Forestry Liabilities are paid in full, Danish Forestry shall not without the prior written consent of the Security Trustee exercise any of its powers of enforcement over the property subject to the Danish Forestry Standard Security or otherwise have recourse to the same."

The amendment is shown by underlining. She concluded by saying that DFC were anxious that settlement had not yet taken place and asked Peter Ferguson to let her know when he expected to be in a position to settle.

[25] Peter Ferguson responded half an hour later to say that they were comfortable with the proposed £2 million priority for DFC. They too were anxious to settle. The purchase price was available and they would be able to settle just as soon as the terms of the Ranking Agreement had been agreed between DFC and RBS.

[26] Lydia Fotheringham replied immediately, asking him to let her know when RBS had agreed the terms of the Ranking Agreement.

[27] By 4 April 2008 Pamela Todd complained to Chris Byrne that she had still not heard from the Howies in relation to the draft Ranking Agreement.

[28] It was only on 9 April 2008 that Chris Byrne sent Alan Macdonald of RBS the draft Ranking Agreement as revised on behalf of DFC. He commented on the amendment to cl.4.11 in these terms:

"Danish Forestry only want to have to seek the Bank's consent to exercise enforcement if Danish Forestry's liabilities have already been paid in full. I doubt that this will be acceptable but thought I should check anyway."

He concluded by saying that they were still awaiting comments from the Howies' lawyers and from others.

[29] The response from Alan Macdonald of RBS sent on 11 April 2008 was that the proposed amendment by DFC was not acceptable. He asked:

"surely if DF's liabilities have been paid in full, they wouldn't exercise their security anyway?"

That response was passed on by Chris Byrne to Pamela Todd, who in turn forwarded it to Lydia Fotheringham of ABL with this additional comment:

"I understand why your clients will not want their ability to exercise their security rights fettered by the Bank, but in practical terms I am not sure that it would ever be in their interests to call up the security without the bank's involvement. By calling up the security your clients would be entitled only to market the land for sale or lease it for a period of up to 7 years. Your clients land does not form the entire opencast site, only a part of it. For your clients to be due further monies, opencast extraction will have been carried out on the land and I struggle to see how Kiers as neighbouring operators would be able to purchase it at a price that would cover the debt them due to your clients. Without the rest of the site also being marketed none of the other operators would have an interest at all.

The best option for your clients at that point would be to act in concert with the bank, which has security over the rest of the site, and the bulk of the consents and contracts required to work it (either by direct security or through the floating charges).

I have to say that we went through precisely the same debate with the solicitors acting for the Howies at the time of the purchase from them, and the result was agreement that they would not exercise their rights without the prior consent of the bank.

Please can you take your clients instructions on this once more?"

[30] Lydia Fotheringham responded to Pamela Todd on 18 April 2008 in the following terms:

"I have been thinking about Dalgig - I note that Chris Byrne has suggested we could always sue your clients but I think that misses the point in that we have a security we shouldn't have to sue to constitute a debt. My concern is that we lose all control unless we can modify condition 4.11.

I appreciate your point that we are re-possessing might have become a 'hole in the ground' but our security does still cover the minerals so it will still be worth something.

I don't think we are being unreasonable here but I will speak to my client and see if he will agree a different wording, what I have in mind is that we will not enforce our security as long as the annual royalty payments are being made and the bank does not act so as to prejudice our first ranking security for the whole DFC liabilities.

All of this is without instruction at the moment. I will speak to my clients and hope to speak to you this afternoon to try to advance matters."

[31] On 21 April 2008 Pamela Todd responded to Lydia Fotheringham in the following terms:

"Thanks for that. Your clients are not being in any way unreasonable - the problem is neither are the bank.

As you will appreciate, the bank are taking security over the whole of the site, including the Coal Authority licence. Thus if your clients have the ability to remove a chunk of this site it will be impossible for Scottish Coal or anyone purchasing from the bank to work the site without applying for revised consents. This site as currently designed would be unworkable without your clients' cooperation. The value of the site would be reduced to its agricultural value only. As you will appreciate the bank will have based its security value, and indeed its willingness to allow your clients to have a prior ranking for the stated amount on it having security over an opencast site rather than farmland with no coaling value.

In that light, I am not sure that your suggestion will be acceptable to the bank. If the annual royalty payments are being made the debt due to your clients will be smaller or perhaps non-existent and your clients will be less inclined to call up the security anyway. The only way the bank would have of protecting its security value from the threat of the removal of a chunk of the site by your clients would be to pay your clients' debt itself, and that would effectively be placing your clients' security above and beyond the normal first priority ranking.

The bank has agreed that your clients should have a first ranking for the relevant amount, and that is not actually undermined by the restriction they have asked for in the security. In the event of everything going wrong and the bank enforcing its security your clients would have priority whether or not they took any steps in relation to their own security.

For the avoidance of doubt, Chris Byrne did not suggest the action for debt route - Chris very studiously avoided making any comment other than that you should propose a further revisal for consideration.

I am not sure that I understand what you mean about requiring to sue to constitute a debt - there is no question of that. If the debt is incurred and not paid, the security stands. Nothing that the bank does or does not do can unilaterally affect your clients' agreed priority. The point of the suggestion was not that your clients should have to actually take those steps to recover the debt but more that the bank could not afford to act capriciously in refusing a request by your clients for consent, because its hand could be forced. If the bank were faced with the choice of allowing your client to exercise its rights in the standard security or face having the whole enterprise put into insolvency your clients would be assured of the bank's attention.

Whether or not your clients' Security covers the minerals is, at the point that excavations have started, largely irrelevant. Once the site has been disturbed, the value of the site is effectively the agricultural (restored) value unless the plot is being marketed together with the remainder of the site. Only someone acquiring the planning consent, the Coal Authority lease and license etc will be able to realise the coal. Non-coal minerals will either be valueless or if they are worth taking, will be covered by the planning consent for the site and be extracted with the coal, and the coal is excluded from your clients' security.

For the period of time that your clients' security is of an unworked piece of agricultural land, their fixed security will work in practical terms to allow them to recover the debt then owed by calling-up and sale. Once the site operations have started this ceases to be true. However if at that point your clients work in concert with the bank, they will still have their priority ranking and will also have the benefit of the fact that as a whole the site is more likely to find a market.

From my client's perspective this debate is irrelevant - it is a discussion about what happens at a point when control of the site has been put beyond them for whatever reason. They are however very keen to complete the purchase of Dalgig and are conscious that this cannot take place until this is resolved to the satisfaction of your clients and the bank."

[32] Lydia Fotheringham responded the same day stating that she appreciated why the bank wanted to control the whole site, and pointing out that DFC had always been concerned that the bank were not able financially to control matters themselves. She did not think that, by asking for the royalty payments to be honoured, DFC were asking for an unfair advantage. She explained that the coal was to be paid for in advance, at least by E.ON, which meant that the bank would have received the whole payment, making over only the royalty percentage to DFC. The point about constituting the debt was that if DFC were barred from calling up the security they would have to wait to be paid. Their only alternative would be to sue on the contract, which would not be acceptable to them but was what they would have to resort to in order to get the bank's attention. She continued:

"I might be missing something but I think that as soon as the ranking agreement has been signed we have lost the power to call up without the bank's consent, whether excavations have started or not.

I notice that your client wants to settle as soon as possible. My clients have their Danish AGM tomorrow and will have to report that although your clients exercised their option the sale has not yet concluded.

I appreciate that the only way forward here is to come up with wording which will be acceptable to the bank.

I will have a go at another draft this afternoon and e-mail it to you."

[33] On 23 April 2008 Pamela Todd e-mailed Lydia Fotheringham asking her whether she had been able to give any more thought to the proposed wording.

DFC's rescission notice on 30 April 2008

[34] Lydia Fotheringham did not respond until 30 April 2008, explaining that she had been awaiting her clients' instructions. She continued:

"They were having their AGM last week and had a board meeting as well.

I have been instructed to send a formal letter rescinding the agreement. I am about to fax it now.

No doubt I will hear from you on this later today."

The letter was sent by fax from Lydia Fotheringham to Pamela Todd. It provided as follows:

"Dear Sirs,

On behalf of and as instructed by our clients [DFC] ... considering that the purchase price due to be paid to DFC ... has not been paid within fourteen days of the settlement date as defined in the [Agreement] we HEREBY RESCIND the said [Agreement] and hold all negotiations between our respective clients to be at an end.

Yours faithfully"

[35] Pamela Todd responded on the same day (30 April 2008) by letter to ABL. The relevant part of her response was as follows:

"We acknowledge receipt of your faxed formal letter of today's date.

Your clients are not entitled to rescind the contract on the ground stated in the letter. Your clients are in breach of the positive obligation on them in terms of clause 10.1 of the contract to enter into an agreement to regulate ranking. Until that agreement has been entered into our clients cannot grant the security referred to in that clause.

The fourteen day period referred to in clause 4.2 of the contract does not commence if any delay in settlement is caused by your clients or their agents. It will not commence until your clients have entered into the agreement in terms of clause 10.1.

We have repeatedly confirmed that our clients are in funds and willing to settle but that this could not be effected until the ranking of your clients' and our client's other creditors' securities had been agreed, as provided for in the contract.

The correspondence between our firms rest with Mrs Fotheringham's e-mail of 18 April 2008 confirming that she would further revise the ranking agreement with a view to accommodating your clients' concerns but we have received neither a further revised draft from you nor confirmation that your clients insist on the terms previously proposed by them.

In any event your clients position on the wording in issue between them and the Royal Bank of Scotland is unreasonable in respect that the wording in no way compromises the ability of your clients to secure the crystallisation of their fixed charge in the event of default by our client in discharging the secured obligations.

Please note that unless you forthwith withdraw your letter purporting to rescind the contract our clients will raise an action seeking declarator that your clients are not entitled to rescind with ancillary remedies."

[36] On 2 May 2008 ABL replied, refuting the suggestion that DFC were in breach of their obligations in terms of cl.10.1 of the Agreement. DFC's obligation was to enter into a ranking agreement "reasonably". The terms of the ranking agreement proposed by RBS were "not reasonable". It had been conceded in e-mail correspondence that DFC's position in this regard was not unreasonable. They said that whilst DFC's position remained as outlined above, it would be willing to meet with SC and RBS to renegotiate. They suggested a meeting on the 15, 16 or 17 May.

Subsequent exchanges

[37] There was further correspondence between the parties. I do not propose to set it all out in detail. On 16 May 2008 Lydia Fotheringham e-mailed Pamela Todd to say that she had spoken further to DFC and thought that there was scope for agreement to be reached. She continued:

"I think the key issue is that the purpose of my clients' security is only to secure their royalty payment. The payment due to my clients is a tiny proportion of the overall sale price of the coal. Scottish Coal agreed to make these payments in advance but we understand that Eon are pre-paying for the coal so no liability to my clients will arise until Scottish Coal already have the payment for the coal. If payment for the coal is made through Scottish Coal's RBS account, could the bank not (with the agreement of SC) guarantee payment of the royalty to my clients? I have no expertise in this area but the above is simply what my clients want to achieve. If we can agree that the royalty payments are guaranteed then my clients will agree not to call up without your clients' consent."

[38] Lydia Fotheringham's e-mail was discussed between the bank and their solicitors, BB. Grant Docherty of BB, passing on the e-mail to Alan Macdonald of the bank, noted that this was not something he anticipated that the bank would want to agree. He suggested that he should press forward with a proposal which he had previously made to DFC, which was that the banks' consent should not be unreasonably withheld or delayed. It is clear from an e-mail dated 16 May 2008 from Alan Macdonald that the issue of a bank guarantee was "the last thing that [RBS] would agree to in the current circumstances!" He suggested that BB should pursue that suggestion that the bank's consent should not be unreasonably withheld or delayed.

[39] Grant Docherty e-mailed Lydia Fotheringham on 19 May 2008, correcting her misapprehension that E.ON were pre-paying for the coal. He emphasised that the bank was not prepared to increase its exposure by offering a guarantee or undertaking in relation to the royalty payments. The bank was happy to "soften its position" by agreeing that its consent could not be unreasonably withheld or delayed. He asked her to take instructions on this. He set out the bank's position in the following passage:

"The problem with any other position is that the Bank may not have sufficient control over the calling up of the Standard Securities and the sale process. It needs to be remembered that the site will achieve a higher sale price if sold at mining value, rather than agricultural value and that the Bank is the only party which can secure that higher value, given its security package and control of the mining rights. In addition, once excavation activities commence at the options site, the 2 sites will effectively become inseparable. Given the smaller economic interest your client will have in the sale proceeds, it seems appropriate for the Bank to have a strong degree of control in maximising the sale proceeds. That in itself should give your client a degree of comfort.

Your client will still be in a position to push matters, given its ability to serve a statutory demand or to litigate and the Bank would be forced to come to the table to agree a way forward. The addition of the 'not to be unreasonably withheld or delayed' wording would improve your clients position in practical terms, as it would mean that the Bank would need to come to the table at an even earlier stage. The mere threat of action would be enough to trigger the need for the Bank to cooperate, in the mutual interests of both parties."

[40] Lydia Fotheringham spoke to Pamela Todd on 28 May 2008. DFC was still not happy with the wording proposed by the bank, but was keen to make progress. A meeting was suggested. In early June 2008 Lydia Fotheringham told Pamela Todd that DFC had instructed her not to meet her at all, because they had "come to regard the option agreement as being at an end": see the e-mail from Pamela Todd to Peter Ferguson of 13 June 2008. The position adopted by SC, relayed to Lydia Fotheringham by Pamela Todd's e-mail of 16 June 2008, was that DFC was under a positive obligation in terms of the option agreement to enter into a ranking agreement with the existing creditors of the pursuers. DFC had not explained their concerns with the latest wording put forward by the bank. She put forward a further suggestion on behalf of SC, namely that DFC would not require the bank's consent to call up their security in the period prior to the implementation of the mineral extraction planning permission relevant to the site; but that the bank's consent would be required after the permission had been implemented. Pamela Todd explained in her evidence that he reasoning behind this was that DFC would have control of calling up the security at the time when it would most benefit them, i.e. before operations commenced; after that, the best value would be obtained by DFC working with the bank.

[41] Lydia Fotheringham responded on 25 June 2008, making two points: first, that DFC's opinion was that the site could stand alone and could be sold separately if it had to be repossessed; and, secondly, that DFC would not be due any money from royalties until after extraction started, so the suggestion put forward by SC did not in fact improve the position.

An acceptable solution

[42] On 31 July 2008 Peter Ferguson e-mailed Lydia Fotheringham to report that the bank was now prepared to accept that DFC would have the ability to call up the security and exercise the power of sale with only one qualification. The qualification was that prior to taking steps to call up the security, DFC would give the bank formal notice of the default by SC, and the bank would then have a period of 30 days within which either to ensure that SC remedied that breach or to remedy that breach themselves . If the breach was not remedied within 30 days, DFC would be entitled to go ahead and call up the security without any further information to, or consent by, the bank. He pointed out that this would, in effect, give DFC full control of the calling up and power of sale process.

[43] This proposal was acceptable to DFC. Lydia Fotheringham e-mailed Peter Ferguson on 8 August 2008 in the following terms:

"I have discussed with my client the terms of your recent emails. My client is delighted with the progress that has been made. The provision whereby the Bank have 30 days notice within which to remedy Scottish Coal's default before we call up is acceptable. The scenario you envisage with a bank guarantee replacing the security would be my client's preferred option but I appreciate of course that you are not able to offer that at the moment. My client still feels that a meeting with your clients would be helpful. In the first place he would like to discuss with your client their actual plans for the site including timescales etc. He also feels that there has been such a significant delay in settling the sale because of the position adopted by the bank that it would be equitable for your client to meet our fees in connection with the delay. Further, and again this has been brought into sharp focus by the delay in settlement, my client wonders whether there would be any scope to renegotiate on the level of royalty given the significant increase in the price of coal during the period when settlement was delayed."

She said that her client could arrange to be in Scotland from 19 to 25 August 2008.

[44] On 27/28 August 2008 Chris Byrne e-mailed a revised draft of the ranking agreement to a number of people, including Pamela Todd. Cl.4.11 of this revised draft provides as follows:

"Save with the prior written consent of the Security Trustee [i.e. RBS in that capacity], Danish Forestry shall not be entitled to take any steps to enforce the Danish Forestry Standard Security unless:-

4.11.1 SCC has breached the Purchase Option & Coal Extraction Agreement by failing to pay a sum due and payable to Danish Forestry under Clause 9 of the Purchase Option & Coal Extraction Agreement (but not otherwise);

4.11.2 Danish Forestry has first given the Security Trustee written notice of such breach by SCC; and

4.11.3 such breach has not been remedied (by either SEC or the Security Trustee) within 30 days of receipt by the Security Trustee of the notice referred to at 4.11.2 above

whereupon Danish Forestry may enforce the Danish Forestry Standard Security without further consultation with the Security Trustee."

On 28 August 2008 Pamela Todd sent the revised draft to Lydia Fotheringham asking for her comments. The amount of the "Danish Forestry Priority" in the ranking agreement was left blank in that draft, with a note to the effect that the amount of £2 million, which had been inserted in a previous draft, had not yet been agreed by the bank - however, no point is taken on this.

Negotiations break down

[45] On 5 September 2008 Peter Ferguson e-mailed Lydia Fotheringham to say that an updated Ranking Agreement reflecting the agreed solution between DFC and the bank would be with her early next week. He had asked HM to draft a side letter to deal with the proposal that the Standard Security might in the future be replaced with a bank guarantee. They were unable to re-open the question of the royalty levels, since the agreed rate had been factored into SC's forward business plan and important business decisions had been taken on the back of it. They were, however, on a without prejudice basis, prepared to meet DFC's additional legal fees incurred as a result of the ranking complications and additional delay, and to pay interest on the purchase price at 2% over LIBOR.

[46] Lydia Fotheringham responded to Pamela Todd on 9 September 2008 to say that DFC had a board meeting the next day and that she would get back to her thereafter on the terms of the revised draft. There were suggestions of dates for a meeting between the clients. Eventually the meeting was fixed for 30 October 2008. At that meeting DFC made it clear that they regarded the existing option as "dead"; but they were prepared to negotiate new terms. SC's position was that the contract was still live; and that, now that the ranking issue had been resolved, they were in a position to settle.

[47] Negotiations eventually broke down. On 13 February 2009 DFC entered into an agreement with Kier for Kier to purchase the Subjects. On 20 February 2009 Lydia Fotheringham wrote to Peter Ferguson saying that DFC had instructed her to discontinue negotiations with him. She reminded him that DFC had rescinded in terms of the formal letter of 30 April 2008.

Commencement of proceedings

[48] The pursuers commenced proceedings concluding for declarator (i) that they validly exercised their option to purchase the subjects by their notice dated 25 March 2008; (ii) that the purported recession by the defenders on 30 April 2008 is of no effect; and (iii) that the defenders are bound to sell and the pursuers are bound to purchase the subjects, subject to the defenders agreeing a ranking agreement with RBS pursuant to cl.10.1. They also concluded for interdict against the defenders from selling, leasing, disposing, or otherwise disposing of, alienating or burdening the subjects, and for interim interdict meanwhile. In the event it was not necessary for the court to decide the question of interim interdict since the defenders gave an undertaking in suitable terms, such undertaking not to be withdrawn except on 14 days written notice to the pursuers' agents. That undertaking remains in place.

Submissions

[49] Before summarising the parties' submissions, it is helpful to begin by identifying the points that do not arise for decision.

[50] First, cl.4.1 requires the Purchase Price to be paid on the Settlement Date in exchange for a valid disposition in favour of SC. The Settlement Date was 27 March 2008. At the Settlement Date, SC was required to grant in favour of DFC a Standard Security over the subjects. Furthermore, DFC was required to enter into a Ranking Agreement with SC and/or RBS. The Agreement does not state in terms that the Ranking Agreement was to be concluded by the Settlement Date. Nor does cl.4.1 state in terms that agreement upon a Ranking Agreement was to be a condition precedent to SC's obligation to pay the price. However, both parties proceeded on the basis that the requirement in cl.10.1 to enter into a Ranking Agreement was a material term and indeed a condition precedent to settlement. SC could not be expected to pay the Purchase Price, nor DFC grant a disposition in favour of SC, until the Ranking Agreement was concluded. Accordingly, although in its notice of 30 April 2008 DFC purported to rescind on the ground that the Purchase Price had not been paid, Mr Summers QC, for the defenders, very properly did not seek to argue that SC's failure to pay the Purchase Price before the terms of the Ranking Agreement were agreed was a breach of the Agreement or, of itself, provided any basis for rescission.

[51] Second, Mr Summers accepted that DFC's rescission notice of 30 April 2008 did not satisfy the notice provisions in cl.7, in that it was not sent by Registered Post, or by Recorded Delivery, and it was addressed not to SC but to SC's solicitor. Since it did not meet the requirements of the Agreement, it could not be treated as a valid notice in terms of cl.4.2.

[52] Third, although there were averments in the Answers, supported by pleas-in-law, to the effect that, by not taking the point at the time, SC had waived the irregularities in the rescission notice or were personally barred from relying on them to assert that the notice was invalid, Mr Summers conceded at the beginning of the proof that no evidence would be led in support of these pleas-in-law and that they should be repelled (as they were).

[53] Despite the terms of the rescission notice of 30 April 2008, therefore, DFC's case does not depend their having rescinded the Agreement under cl.4.2 on the grounds of SC's failure to pay the Purchase Price on the Settlement Date or within 14 days thereafter. But Mr Summers submitted that, irrespective of that, the notice nonetheless communicated an intention by DFC to end negotiations and, in effect, to terminate the Agreement, a position which it was entitled to take. This is an argument which will be considered below.

[54] Fourth, the 14 day period in cl.4.2 does not commence to run if and for so long as the delay in settlement is caused by DFC or its agents. Had the case turned on the validity and effect of DFC's notice of 30 April 2008, it would have been necessary to consider the reasons for the delay in settlement. There is no doubt that the non-payment of the Purchase Price by 30 April 2008 resulted, in whole or in part, from the failure to conclude a Ranking Agreement by that time. So the question would have been whether the delay in concluding the Ranking Agreement, in the period from 25 February 2008 (the date of notice of intention to exercise the Option) up to 28 March 2008, or perhaps up to 15 April 2008 (being 14 days before the rescission notice), was itself caused to any material extent by DFC. In the event, I do not need to reach any decision on this. But I record, lest it be relevant later, that Mr Summers, very fairly, acknowledged that there had been delays by DFC in the early stages in failing to respond about the wording of the Ranking Agreement until after the Settlement Date. He also made it clear that he did not seek to place any reliance on the time taken by E.ON, DBERR and the Howies to approve the terms of the Ranking Agreement.

[55] The issues between the parties at proof therefore took on a very different shape from those which initially seemed likely. They appear from the submissions of the parties which, so far as now relevant, were as follows.

[56] For DFC, Mr Summers QC submitted: (i) that the parties had failed to reach agreement as to the terms of the Ranking Agreement; (ii) that cl.10.1 of the Agreement was an agreement to agree and, as such, was unenforceable; and, therefore, (iii) that DFC could not be compelled to negotiate with a view to agreeing a Ranking Agreement; (iv) that an obligation to agree (or use reasonable endeavours to agree) a contract which is reasonable was also unenforceable; (v) that the pursuers did not seek to prove that DCL were under an obligation, express or implied, to act reasonably; but (vii) esto there was an obligation on DFC to act reasonably, it had fulfilled that obligation - it was entitled, acting reasonably, to act in its self interest. The central issue was, therefore, the construction of the second sentence of cl.10.1 of the Agreement. It was only relevant to look at the reasonableness of DFC's actions with regard to agreeing the Ranking Agreement if the court adopted a construction which neither party put forward, namely that DFC were under an obligation to use reasonable endeavours to reach agreement on the terms of the Ranking Agreement.

[57] In support of his submission that an agreement to agree, or to use reasonable endeavours to agree, was unenforceable, Mr Summers referred to a number of well-known cases, viz. the decisions of the House of Lords in May and Butcher v The King (1929) (reported only as a note to Foley v Classique Coaches Ltd [1934] 2 KB 1, 17); Love and Stewart Ltd. v S. Instone & Co Ltd. (1917) 33 TLR 475; Hillas v. Arcos (1932) 147 LT 503; and Walford v Miles [1992] AC 128; and to the Court of Appeal decisions in Courtney & Fairbairn Ltd. v Tolaini Bothers (Hotels) Ltd. [1975] 1 WLR 297 and Phillips Petroleum Co. UK Ltd. v Enron Europe Ltd. [1997] CLC 329. If that part of cl.10.1 was unenforceable, a material part of the Agreement fell away, and the Agreement fell with it. Further, the Phillips Petroleum case also showed that, absent contrary indications in the contract, even if a party could be required to use reasonable endeavours to reach agreement on matters fundamental to a contract, he was entitled in doing so to have regard to his own self interest. DFC had had regard to its self interest in seeking to insist on a clause in the Ranking Agreement that gave it control of calling up the security. It was entitled to take the position that it took. In light of the failure, despite reasonable endeavours, to reach agreement on this essential point, i.e. on the terms of the Ranking Agreement, within a reasonable time, DFC was entitled to walk away. It manifested its intention so to do by the notice (albeit invalid for the purpose for which it was served) of 30 April 2008. But notice was not required. Even if that notice was invalid, or premature, DFC was still entitled to say now that the contract just fell away. If later notice was needed, it was to be found in the actings of the defenders in May/ June 2008 and, again, later in September/ October 2008. In support of this approach, Mr Summers referred also to Yewbelle Ltd. v London Green Developments Ltd. [2008] 1 P&CR 17 and Total Gas Marketing Ltd. v Arcos British Ltd. [1998] 2 Lloyd's Rep. 209.

[58] For the pursuers, Mr Tyre QC made submissions as to the failure of DFC at an early stage which meant that they could not rescind in terms of cl.4.2 on 30 April 2008. Since that argument is not pursued, I do not need to set out these submissions in any detail. As to the points put forward by Mr Summers, Mr Tyre submitted: (i) that the second sentence of cl.10.1 was not an agreement to agree but rather was a specific and positive obligation on the defender to enter into a Ranking Agreement with the pursuers' bank; and (ii), in so far as it was material, the purported rescission by DFC on 30 April 2008 (which was invalid, both because it did not comply with the formal requirements of the contract and because it was, in any event, unjustified, since the delay until then had been caused in whole or in part by DFC), was no more than a material (repudiatory) breach by the defenders, which, since it was not accepted by the pursuers, was of no effect and did not bring the Agreement to an end.

[59] Mr Tyre submitted that the Agreement had three functions: it granted an option to purchase (cl.3); it set out the terms of purchase and sale in the event that the option was exercised (cll.4-7); and it provided for the payment of royalties (cl.9). Cl.10 placed an obligation on SC to grant a first ranking Standard Security; and obliged DFC to enter into a Ranking Agreement with SC and/or RBS. These were not separate detachable obligations; they were essential components of any sale. Without performance of those obligations, the contract would be incapable of implementation. DFC would not get what they contracted for - they would not get a first ranking security since, in the absence of agreement, ranking would be determined in accordance with statutory provision. Set in this context, it was apparent that the second sentence of cl.10.1 was not merely an agreement to agree. Rather it was part of a wider agreement and imposed an obligation on DFC to do something positive. The case was to be distinguished from an agreement to agree between two would-be contracting parties, A and B. This case involved a contract between A and B, in terms of which, if the option was exercised, B was to enter into a contract with C. There was no authority for the proposition that such an agreement was unenforceable. Total Gas Marketing Ltd. v Arcos British Ltd. (supra), relied upon by Mr Summers, did not support that proposition. He referred to McBryde, The Law of Contract in Scotland at paras.5-11-5-12 and also to R & J Dempster Ltd. v The Motherwell Bridge and Engineering Co. Ltd. 1964 SC 308, 327-8, for the well-known statement by Lord President Clyde that "the court will prefer a construction which gives the contract binding effect." The word "reasonably" in the second sentence of cl.10.1 meant "reasonably in the interests of both parties". There might be a range of reasonable solutions to the ranking question. The clause imposed an absolute obligation on DFC to enter into any ranking agreement which, objectively, was reasonable, even if it was not the ranking agreement which it would have preferred. It could not be said that DFC's notice of 30 April 2008 brought the contract to an end. As at that time there was no reason for DFC not to continue to try to seek agreement with RBS. If RBS had adopted a take it or leave it approach, DFC might have been entitled to say: "this is going nowhere, there is no point in continuing to negotiate". But this was not the position at the time of the purported rescission. It was simply a case of Mr Also having got to the end of his (very short) tether. There were proposed solutions to the perceived difficulties in the ranking agreement throughout May and June, and offers of a meeting which were refused by DFC. Although DFC had said that the deal was dead, their rescission notice was ineffective, and they continued to negotiate while the contract remained alive.

Discussion

[60] The cases cited to me clearly establish that an agreement to agree, or an agreement to negotiate, is unenforceable because it is too uncertain: see, for example, May and Butcher v The King, per Lord Buckmaster at p.20, and per Viscount Dunedin at p.21; Love and Stewart Ltd. v S. Instone & Co Ltd., per Lord Loreburn at p.476; Courtney & Fairbairn Ltd. v Tolaini Bothers (Hotels) Ltd., per Lord Denning Mr at p.301-2 and per Diplock LJ at p.302; and Walford v Miles per Lord Ackner at p.138C-G. In general terms, the same may be said of an agreement to use reasonable endeavours to agree: see Little v Courage Ltd. (1994) 70 P&CR 469, per Millett LJ at p.476; and Phillips Petroleum Co. UK Ltd. v Enron Europe Ltd. per Potter LJ at p.343 (though it is not clear whether the other members of the court decided the case on that basis). The reason is set out in the judgment of Potter LJ at p.343:

"... the unwillingness of the courts to give binding force to an obligation to use 'reasonable endeavours' to agree seems to me to be sensibly based on the difficulty of policing such an obligation, in the sense of drawing the line between what is to be regarded as reasonable or unreasonable in an area where the parties may legitimately have differing views or interests, but have not provided for any criteria on the basis of which a third party can assess or adjudicate the matter in the event of dispute. In the face of such difficulty, the Court does not give a remedy to a party who may with justification assert, 'well, whatever the criteria are, there must have been a breach in this case'. It denies the remedy altogether on the basis of the unenforceability in principle of an obligation which may fall to be applied across a wide spectrum of arguable circumstances. ..."

In that passage, Potter LJ adds the qualification that the parties have not provided for any criteria on the basis of which the reasonableness or unreasonableness of their conduct can be assessed. In some cases the agreement between the parties does lay down, expressly or by implication, objective criteria of that sort; and in such cases the courts have held an agreement to use reasonable endeavours to agree to be enforceable: see, for example, Didymi Corporation v Atlantic Lines and Navigation Co. Inc. [1988] 2 Lloyd's Rep. 108. The authorities are discussed by Kennedy LJ in Phillips Petroleum Co. UK Ltd. v Enron Europe Ltd. at p.336 and recently by Lord Hodge in R & D Construction Group Ltd. v Hallam Land Management Ltd. (unreported, [2009] CSOH 128) at para.[40].

[61] There are suggestions in the cases that the courts will view more favourably a clause in a contract between A and B which requires one of the parties to use all reasonable endeavours to enter into a contract with C: see e.g. per Millet LJ in Little v Courage Ltd. at p.476. In para.[54] of his Opinion in R & D Construction v Hallam Land Management Ltd., Lord Hodge refers to the case of Lambert v HTV Cymru (Wales) Ltd.
[1998] EMLR 629 in which Morrit LJ expressed the view that a contract between A and B in which B undertook to use all reasonable endeavours to agree a contract with C was enforceable. Another example is provided by the case of Total Gas Marketing Ltd. v Arco British Ltd., in which the House of Lords appears to have proceeded upon the basis that an obligation placed on one party to "use its reasonable endeavours to ... become party to the Allocation Agreement" gave rise to an enforceable obligation on that party: see per Lord Slynn at pp.212 and 215 and per Lord Steyn at p.220. I have some doubt whether there can be any valid distinction between (a) the case where parties are to use best endeavours to agree a contract between themselves and (b) a contract in terms of which one party is under an obligation to use reasonable endeavours to conclude a contract with a third party. In both cases it seems to me that the question of enforceability must depend on the existence or otherwise of objective criteria by reference to which the efforts to secure the contract may be judged. An obligation to use reasonable endeavours to obtain an import or export licence (the authorities are replete with such cases, and Yewbelle Ltd. v London Green Developments Ltd., to which I was referred is but an instance of this type of case) is readily amenable to enforcement; there will be procedures and qualifying criteria applicable to the appropriate application, and there is an objective yardstick by which to assess the reasonableness of the endeavours (unsuccessfully) used. So also with planning permission. Similarly, in Total Gas Marketing Ltd. v Arco British Ltd. the obligation was to use reasonable endeavours to become a party to an existing agreement. It is not difficult to see that such an obligation is, in principle, sufficiently certain to be enforceable, though there will often be difficulties in establishing breach. But it does not follow that every obligation to use reasonable endeavours to contract with a third party will be enforceable in the same way. In my opinion the reasons given by Potter LJ in the passage cited from Phillips Petroleum Co. UK Ltd. v Enron Europe Ltd. apply equally to such a situation. Unless there are some applicable objective criteria, there is no way of policing it. And in any event, I am not sure that an obligation to enter into a Ranking Agreement with SC and/or its bankers can properly be regarded as an obligation to contract with a third party.

[62] It is unnecessary to go further into this line of authority because Mr Tyre did not seek to argue that the obligation on DFC was an obligation to use reasonable endeavours to enter into a satisfactory ranking agreement with SC and/or RBS. His argument was that it was under an absolute obligation to enter into an agreement with SC and/or RBS which regulated in a reasonable manner (i) the relationship between the sums recoverable under the Standard Security (and, though this is omitted from the wording of cl.10.1, the sums recoverable under any security held by RBS) and (ii) the terms under which those sums would rank ahead of any other sums due by SC to RBS. There was no question of DFC having to negotiate with SC or RBS. If the terms of the Ranking Agreement presented to them were objectively reasonable, they were under an obligation to enter into a ranking agreement on those terms.

[63] Mr Tyre's formulation removes entirely any qualification on the obligation by reference to reasonableness of endeavours. On his argument, the obligation is absolute once the reasonableness of the proffered ranking agreement is objectively established. This avoids the difficulties discussed above. There is no difficulty, so it seems to me, in holding enforceable an absolute obligation on one party to a contract to enter into an agreement with a third party. If, therefore, on its proper construction, the second sentence of cl.10.1 had the effect for which Mr Tyre contends, I would have little difficulty in holding that it imposed on DFC an enforceable obligation.

[64] However, having given careful consideration to Mr Tyre's arguments, I am unable to accept that the clause has this effect. I have approached the matter mindful that the court should, if possible, prefer a construction which gives the contract binding effect: see e.g. per Lord President Clyde in R & J Dempster Ltd. v The Motherwell Bridge and Engineering Co. Ltd. at p.328. Nonetheless, I have come to the view that the clause envisages that DFC and RBS (assuming that SC will prefer to stay in the background on these matters) will negotiate to reach agreement on a clause which reasonably regulates, or regulates in a reasonable manner, both the relationship between the sums secured and also the terms under which those secured by the DFC Standard Security will rank ahead of other sums due by SC. The language of the clause seems to me to point clearly to this construction. It suggests that the parties between them are to shape an agreement which regulates these matters in a reasonable manner. Further, it seems to me inherently unlikely that DFC would have been prepared simply to take whatever "reasonable" ranking agreement was put to them. They would want to have regard to their own self-interest, and the Agreement does not suggest that they should not do so. In those circumstances they would wish to attempt to secure a Ranking Agreement which served their purposes, rather than simply take one which was designed by RBS to suit their needs, albeit it might pass muster as "reasonable". The issue that arose between the parties as to who should have control of the decision to enforce the security, although post-contractual and therefore irrelevant to the construction of the agreement, illustrates the sort of dispute which was likely to arise in the course of seeking to negotiate a reasonable Ranking Agreement. The construction put forward by Mr Tyre assumes that DFC would have been happy to leave control of such matters in the hands of RBS. Although the actual reaction of DFC to the clause proposed by RBS is irrelevant, it confirms, to my mind, the likely reaction of any businessman entering into an agreement such as this. They would want to have control over the calling up of their own security. They might, of course, be willing in the negotiations to give this up, but that would depend on other aspects of the deal and their assessment of its value.

[65] I therefore reject the construction advanced by Mr Tyre on behalf of SC. That does not mean that I accept the alternative construction advanced by Mr Summers, to the effect that the second sentence of cl.10.1 is no more than an agreement to agree. That construction gives no effect to the word "reasonably" in the clause. To give effect to that word, the clause has to be read as imposing an obligation on the part of DFC to use reasonable endeavours to enter into a ranking agreement with SC and/or RBS. That is the construction which I prefer.

[66] But this construction does not assist SC in this case. In the absence of some objective criteria by reference to which to judge the reasonableness of the endeavours, such an obligation is unenforceable for the reasons I have sought to explain. And even if it were held to be enforceable, how would the court be able to stigmatise DFC's failure to enter into a Ranking Agreement as unreasonable when it was entitled, in negotiating with SC and RBS, to act in its own self-interest?

[67] What is the effect of a finding that the obligation anent the entering into of a Ranking Agreement is too uncertain to be enforceable? The parties are agreed that the entering into of a Ranking Agreement is an essential part of the Agreement. It is a condition precedent (or suspensive condition) to the coming into force of any sale of the Subjects pursuant to the exercise of the Option. That being so, the Agreement itself, or at least the potential sale of the Subjects as a result of the exercise of the Option, must fail upon the failure to agree the terms of the Ranking Agreement, and that without any actionable fault on the part of DFC. Nor, since the obligation is unenforceable, was DFC required to attempt to agree the terms of the Ranking Agreement for a reasonable period or any other period. It was entitled to say that it was not going ahead, that the Agreement was at an end. It made its position clear on this, albeit it sought to justify that position in the notice on 30 April 2008 with reasons which were invalid, and it re-iterated that position on subsequent occasions (see e.g. para.[40] above).

[68] The fact that DFC made it clear that it considered the Agreement to be at an end is of importance. Although it was under no obligation to reach agreement with SC and/or RBS on a Ranking Agreement, had DFC in fact been able to agree the terms of a Ranking Agreement with SC and/or RBS, the effect would have been that the suspensive condition was purified and there would have been no further impediment to the sale going ahead, nor any legal entitlement on the part of DFC to get out of it. But having made it clear that the Agreement was at an end, DFC were entitled to continue discussions with SC and RBS without any agreement reached on the terms of the Ranking Agreement retrospectively reviving the Agreement. In short, they were entitled to negotiate on the basis that the whole deal was up for discussion, including the level of royalty payments.

[69] In case this dispute goes further, and in case it is later held that DFC was under an enforceable obligation to use reasonable endeavours to agree its terms, I should briefly state my views on the question of the reasonableness of DFC's endeavours to enter into a Ranking Agreement with RBS in the period from the exercise of the Option on 25 February 2008. Clearly DFC was slow in giving its initial response on cl.4.11. That response was to the effect that they were happy to relinquish control to RBS but only if the sums due to them were paid. Mr Tyre submitted that this made no sense, since if they were paid there would be no basis for calling up the security. This submission reflected the views expressed in correspondence by solicitors for SC and RBS. And, of course, in terms of legal formulation that submission is correct. But what DFC was saying was simply this: if you (RBS) want to have control of the exercise of the security rights, then you (RBS) give us an undertaking that we will get paid. There is nothing inherently unreasonable in this. In the end, after a considerable display of reluctance, this is, in effect, what the bank agreed to. Subject to RBS being given an opportunity to remedy any default by SC, if DFC was still unpaid after 30 days, it could go ahead and enforce its security without reference to the bank. In practice this meant that if the bank wanted to prevent the disruption which would arise from DFC enforcing its security unilaterally, it would ensure that DFC was paid.

[70] Mr Also and Lydia Fotheringham were cross-examined as to the practicalities of DFC trying to enforce its security unilaterally. The points put to them were those which appear in the e-mail correspondence from Pamela Todd, which I have for this reason set out at length, as amplified in evidence by the witnesses called by SC. Those points are entirely reasonable from the point of view of the bank and in terms of the most effective way of securing the best result in the event that all the securities had to be exercised. The difficulties of DFC attempting to sell the Subjects once mining had commenced are obvious. In addition, as was pointed out, DFC could force the issue by suing SC for any outstanding sums and, in default of payment, putting Sc into liquidation. But so far as DFC was concerned, those arguments miss the point. It was a small player in this, and wanted to exert leverage. The bank did not want the DFC security to be exercised unilaterally, for obvious reasons, and DFC knew it. It was in a position to extract a price for giving up control of the enforcement of its security. Why should it give that up? It was entitled to act in its own perceived self-interest and did so.

[71] I should make it clear that in assessing the reasonableness of DFC's position for this purpose, I have attempted to look at the matter objectively. There were parts of Mr Also's evidence as to his thinking which I found difficulty in accepting. He said that he was concerned with SC's financial position, and that he was particularly concerned when it emerged from the draft Ranking Agreement that it had so many creditors. I have not placed any weight on this. It seemed to me that these reasons were ultimately irrelevant to any justification of the stance taken by DFC.

[72] For those reasons, had I held that there was an enforceable obligation on DFC to use reasonable endeavours to agree a Ranking Agreement with RBS, I would not have held that it was in breach of that obligation. Further, it was, on that basis, entitled after failing to reach agreement within a reasonable time, entitled to bring the negotiations to an end: c.f. Yewbelle Ltd. v London Green Developments Ltd. What is a reasonable time must depend on the whole circumstances. The Agreement contemplates that Settlement will be 28 days after the exercise of the Option, with a right to rescind if payment was not made within 14 days after that. On this basis, it might be said that a reasonable time would come to an end somewhere around 42 days after discussions started in earnest about the terms of the clause, unless the negotiations were so poised that it would be reasonable for more time to be allowed. If one starts from the time when DFC put forward their revisals on 31 March 2008, the notice of 30 April 2008 might be regarded as too early. But by early June 2008, when Lydia Fotheringham told Pamela Todd that she had been instructed not to meet because DFC regarded the Agreement as being at an end, another month had gone by without any prospect of agreement. The bank were still insisting on having control, subject to their consent to the enforcement of the security not being unreasonably withheld or delayed. There was no sign of an imminent breakthrough. It was another month before the bank put forward the suggestion that found favour with DFC. I consider that by early June 2008 DFC were entitled to bring the negotiations to an end and make it clear to SC, as they did, that the Agreement was at an end.

Disposal

[73] As agreed, I shall grant declarator in terms of conclusion 1(i). Otherwise, for the reasons I have given, I shall sustain the second plea-in-law for the defenders and assoilzie the defenders from the conclusions of the summons.