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OUTER HOUSE, COURT OF
SESSION
[2009] CSOH 30
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CA38/08
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OPINION
OF LORD HODGE
in
the cause
THE
SCOTTISH COAL
COMPANY
LTD
Pursuers;
against
TRUSTEES
OF FIM TIMBER GROWTH FUND III
Defenders:
ญญญญญญญญญญญญญญญญญ________________
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Pursuers: Davies, advocate; Harper Macleod LLP
Defenders: Summers, Q.C.; Brodies LLP
27 February 2009
[1] This action arises out of a
coal prospecting agreement between the pursuers and feuars of land in Deepsyke Forest and Auchencorth
Moss, which was formerly part of Whitfield Farm, West Linton. The agreement, which parties entered into in
April 2003, conferred on the pursuers rights to prospect for coal in
afforested land and to obtain a lease of an area of land to enable the opencast
extraction of coal. The defenders are
the singular successors of the feuars with whom the pursuers contracted.
[2] The
pursuers seek decree of declarator (i) that the coal prospecting agreement
(as amended) was assigned by the feuars to the defenders, (ii) that that
agreement remains in full force and effect and binding on the pursuers and the
defenders and (iii) that the "Option Period" as defined in
clause 1.1.6 of the agreement has not commenced and will not commence
until the "Title Dispute Resolution Date" as defined in clause 1.1.12 of
that agreement is reached. The pursuers
submitted that they were entitled to decree de
plano as the defences were irrelevant. The pursuers have an alternative case which I
do not need to discuss. The defenders
invited the court to dismiss the action on the ground that the pursuers'
averments were irrelevant to support the conclusion.
The title dispute
[3] Of some importance to the parties'
disagreement which has led to this action is the existence of the title
dispute. This dispute is the challenge
which persons including the feudal superiors made to the right of feuars, with
whom the pursuers contracted, to exploit coal in the area which was the subject
matter of the coal prospecting agreement between the feuars and the pursuers. The parties to the coal prospecting agreement
considered that the title dispute had the potential to prevent the feuars from
granting a lease of the ground to the pursuers.
The dispute arose in the following way.
In 1987 Mr Alexander Weir, the owner of Whitfield Farm, conveyed by feu disposition 909 acres
of land to Mr Douglas Scarff and
entered into a minute of agreement with him to regulate the exploitation of
coal deposits on that land if the licensing restrictions then imposed by the
British Coal Corporation were relaxed before 1 July 1997 so as to enable
such exploitation. The agreement, which Mr Weir
entered into as trustee for a dissolved farming partnership, stated that its
terms could be enforced by Mr Weir, his heirs and successors against Mr Scarff
and his successors as feuars of the land.
[4] Members
of the late Mr Weir's family raised an action in the Court of Session in
July 2000 against Mr Scarff and the persons who had acquired most of
the land from him, namely Mr Henry Cotterrell and Wyvern Forestry Limited
("Wyvern"). In that action members of
the Weir family sought declarator (i) that Mr Cotterrell and Wyvern
were bound by the minute of agreement to co-operate with them in the working of
the coal deposits and to pay Mr Weir's executrix a share of the payments
received from the person who mined the coal and (ii) that Mr Cotterrell
and Wyvern had to grant them access to the land to work the coal. In that action the Weir family members
claimed that the agreement which entitled them to require the exploitation of
the coal had been incorporated into the feu disposition as a real burden and
was binding on successive feuars. The
action was sisted after it was raised and the court recalled the sist in 2003
on the motion of Mr Cotterrell and Wyvern who then lodged defences. The action was re-sisted for negotiation on
the motion of the pursuers in that action in September 2004 and has not
progressed since then.
The coal
prospecting agreement and the assignation
[5] In 2003 the pursuers entered into
the coal prospecting agreement with the then feuars of the land, namely Mr Cotterell
and Wyvern. The agreement is dated 28 January,
17 and 28 April 2003. The agreement conferred on the pursuers
(a) a right to prospect for coal and other minerals and (b) an option
to enter into a lease of land from which to extract coal. In the agreement the pursuers were referred
to as "the Company" and the feuars as "the Proprietor".
[6] Clause 2
of the agreement contained a grant by the feuars to the pursuers of an
exclusive right to carry out the prospecting works in consideration of the
payment of ฃ2,000 in two equal instalments, the first being payable on the
[Title] Dispute Resolution Date and the second on the first anniversary of that
date. Clause 1.1.10 of the agreement
defined the prospecting works as:
"the carrying on
of works of drilling, testing and exploring for coal and other minerals within
the Prospecting Area and all other matters works and processes which the
Company may carry out with a view to obtaining the Consents".
[7] Clause 3
provided that "the agreement shall commence on the Date of Entry and shall
endure thereafter until the expiry date of the Option Period." The date of entry was defined in
clause 1.1.4 as the last date of execution of the agreement (which was 28 April 2003).
[8] Clause 4
defined "the Option" in these terms:
"4.1 The Proprietor hereby grants to the Company
an exclusive option to enter into the Lease. The Option shall be exercised by the Company
serving written notice of its intention to do so within the Option Period which
notice shall specify the area to be let by reference to the plan annexed
thereto. In the event that the Company
has by the date occurring three calendar months prior to the termination of the
Option Period failed to obtain all Consents required for the Use and there is
no realistic prospect that such failure can be rectified within the Option
Period and without prejudice to the foregoing generality if an appeal in
respect of a decision on the application for planning permission to be made for
coal extraction by the Company has been lodged by said date, it shall be in the
power of the Company by written notice served upon the Proprietor to extend the
Option Period by such period or periods up to two years, as the Company in its
discretion may consider to be appropriate, in order to allow it to obtain such
of the Consents as have not been obtained or are unlikely to be obtained before
the end of the Option Period as at the date of the service of such notice or
notices and the Proprietor shall be bound and obliged to extend the Option
Period by the period or periods specified in such notice or notices.
4.2 The Company shall notify the Proprietor
of any area within the Prospecting Area which the Company is satisfied can be
excluded from land over which the Lease may be sought by virtue of the results
of the Prospecting Works."
Clause 1.1.13 defined "the Use" to mean:
"working and
removing Coal and other minerals from under inter alia the Prospecting Area by
opencast, augering or other operations, storage of overburden, soils, erection
of offices, processing the same and all other ancillary matters".
[9] Other
provisions which are relevant are clause 5, which allowed the pursuers to
enter the Prospecting Area on giving notice and to apply for consent to extract
not less than 190,000 tonnes of coal unless otherwise agreed by the
parties, and clause 12 which contained, among other things,
warranties. In clause 12.1 the
Proprietor warranted that it had title to grant the rights under the agreement
and that there were no other rights affecting the prospecting area which would
affect the pursuers' rights in terms of the agreement. Clause 12.2 was in the following terms:
"Whilst this
Agreement is in force, the Proprietor will not, except compulsorily, sell,
lease, dispone or otherwise dispose of, or alienate the Prospecting Area or any
part or parts thereof or any rights therein except wholly subject to this
Agreement and without taking the purchaser, lessee, disponee or assignee thereof,
as the case may be, bound by the whole terms and conditions of this Agreement,
and requiring said purchaser, lessee, disponee or assignee to render his
successors whomsoever bound in like manner."
[10] A draft
lease was annexed to the agreement. Clause 3
of the draft lease conferred a right of occupancy to extract coal and other
minerals by opencast methods and carry on all ancillary works. Clause 4 provided that the term of the
lease was six years from the date of entry (which was defined in Clause 11
of the agreement as occurring twenty eight days after the date of the pursuers'
notice exercising the option). Clause 12
of the lease conferred on the pursuers an option which could be exercised on
one or more occasions to extend the area to be leased by serving written notice
on the landlords, but the option ceased to have effect if the pursuers did not
exercise such an option within two years after the date of entry.
[11] In the
agreement the parties defined certain terms which are of importance to the
arguments which counsel advanced in the debate.
"The Title Dispute" was defined in clause 1.1.11 as:
"the dispute
between the Proprietor and the feudal superiors regarding the sharing of income
derived from the Prospecting Area in respect of which an action has been raised
in the Court of Session".
"Title Dispute Resolution Date" was defined in
clause 1.1.12 as:
"the date on
which the Title Dispute is resolved or on which it becomes apparent that the
Company or the Use will not be adversely affected as a result of the Title
Dispute, as to which the Company shall, acting in good faith and reasonably, be
the sole judge".
"The Option Period" was defined in clause 1.1.6
as:
"the period of
two calendar years (or longer if extended by the Company in terms of Clause 4
hereof) commencing on the Date of Entry or, if later, the Title Dispute
Resolution Date".
[12] The
parties to the coal prospecting agreement amended its terms by an exchange of
letters dated 17 and 21 April 2003, before Mr Cotterell, one of the
feuars, executed the agreement but after the other signatories had done
so. The pursuers offered to make the
following amendments to the agreement, which the feuars' solicitors accepted:
"(1) For the avoidance of doubt, the Company
shall be entitled to carry out the Prospecting Works from the date falling two
months from the date of your acceptance hereof unless the parties, both acting
reasonably, agree that the timing of such Prospecting Works would have an
adverse affect on the Title Dispute.
(2) In the event that the Title Dispute is
not resolved to the satisfaction of the Company within two years of the Date of
Entry, the Company shall be entitled to terminate the Coal Prospecting
Agreement without penalty on giving written notice to the Proprietor to that
effect.
(3) With regard to clause 13.1 of the
Coal Prospecting Agreement one half of the payment referred to therein will be
paid within 7 days of your acceptance hereof.
The remaining half will be paid on the Dispute Resolution Date."
[13] Paragraph 1
of those amendments clarified that the pursuers could carry out the prospecting
works without having to wait for the resolution of the title dispute. Paragraph 2 gave the pursuers a right to
terminate the agreement if the title dispute were not resolved to their satisfaction
within two years from 28 April
2003. Paragraph 3
provided a time scale for the pursuers to reimburse the feuars their legal and
professional costs in relation to the agreement.
[14] On 15
and 23 November 2006 Mr Cotterell
and Wyvern and the first two defenders executed an Assignation which was
recorded in the Books of Council and Session on 7 December 2006. In that document Mr Cotterell and Wyvern
assigned the coal prospecting agreement to the defenders who purchased from
them land which included the prospecting area.
The sale of the land was completed on 28 November 2006. The Assignation assigned for no consideration
to the assignee "the Assignors' whole right, title and interest in and to the
Agreement ... with effect from 28 November 2006 (hereinafter referred
to as 'the Effective Date')" and declared that the assignee "undertakes to the
Assignors and by the Assignee's execution hereof obliges the Assignee to perform the whole
obligations of the Assignors contained in the Agreement from and after the
Effective Date". In the court hearing
counsel agreed that the pursuers had consented to the assignation so that
assignation was to be treated as effective to transfer not only the assignors'
rights but also their obligations to the defenders. It appears to me that this is strictly a
novation of the agreement rather than a transfer of rights. I proceed on agreed basis that the defenders
have taken on the obligations of Mr Cotterell and Wyvern under the
agreement.
[15] The
pursuers carried out the prospecting works in 2004 but thereafter the
title dispute remained unresolved. In
correspondence between the parties the pursuers took up the position that the
option period had not started while the defenders argued that the option period
had expired or that in any event they were not bound by the agreement. This action resulted.
Relevancy of
pursuers' averments
[16] The defenders at debate sought the
dismissal of the action or at least the excision as irrelevant of the averments
which supported the declarator referred to in paragraph 2 above. Mr Summers advanced three grounds. First, he submitted that the contract had
been frustrated by the assignation which had rendered it impossible to perform.
He described this as an "atypical
example of frustration". Secondly, and
alternatively, he submitted that on a proper construction of the agreement as
amended the option period has expired because amending letter impliedly amended
clause 1.1.6 so that the option period commenced in June 2003 (two
months after the acceptance of the amending letter) and not on the Title
Dispute Resolution Date. Mr Summers
accepted that the court could not determine without proof his third argument of
personal bar which he pleaded in relation to the pursuers' fall back case that
they had exercised the option in 2004.
I do not need to consider that argument.
[17] I will
deal with the defenders' second argument first.
It was that the amending letter should be construed as altering the
definition of the "Option Period" in clause 1.1.6 of the agreement: as to
which see paragraph 11 above. The
defenders' argument proceeded on the basis that the parties had contracted that
the pursuers could carry out the prospecting works only during the option
period and that the amending letter, by altering the time when the prospecting
works could commence, impliedly altered the start date of the option
period. I do not accept that
argument.
[18] The
agreement falls to be construed in its commercial context. There were three hurdles to be surmounted
before the coal deposits could be exploited.
First, the title dispute had to be resolved by judicial determination or
compromise or the pursuers had to be satisfied that the dispute did not
adversely affect them. See the definition
of "Title Dispute Resolution Date" in paragraph 11 above. Secondly, the pursuers had to carry out
prospecting works to establish that there were adequate coal deposits of
sufficient quality and to inform their applications for consents: see clause 2, which is set out in
paragraph 6 above. Thirdly, the
pursuers had to obtain the necessary consents from public authorities to work
the coal. The prospecting works were not
constrained by the title dispute and did not involve the pursuers in great expense
when compared with the obligations contained in the draft lease and the costs associated
with open cast mining.
[19] It is
central to this part of the defenders' argument
that clause 2 of the agreement should be construed to mean that the
prospecting works could be carried on only after the Title Dispute Resolution
Date and thus, it was submitted, the amending letter had the effect of advancing the start of the option period as
well as the start of the prospecting works.
But clause 2 did not restrict the commencement of prospecting works
until after the Title Dispute Resolution Date; it merely postponed the payment
of the first instalment of the sum due
in consideration of the right to carry out the prospecting works until then. The amending letter simply clarified when the
prospecting works could begin and altered the dates of payment of the
instalments. It may well be that when
drafting the agreement the parties thought that the pursuers would not carry
out the prospecting works until after the Title Dispute Resolution Date but
their agreement did not impose any such restriction.
[20] I am
supported in this view by observing that if the defenders were correct, the
pursuers would not have required paragraph 2 of the amending letter which
enabled them to terminate the agreement on giving notice if the title dispute
had not been satisfactorily resolved within two years of the date of
entry. I recognise however that it is
not uncommon for the drafters of commercial contracts to include provisions
which are not strictly needed and therefore I do not attach much weight to this
point. What is more significant in my
opinion is the observation that the warranty in clause 12.1 of the
agreement (paragraph 9 above) would have had the potential to expose the
defenders to liability unless the agreement provided that the pursuers could
exercise the option only after the Title Dispute Resolution Date. As Mr Davies submitted on behalf of the
pursuers, the structure of the agreement made commercial sense. The prospecting works were separate from the
option period and the exercise of the option had to postdate the Title Dispute
Resolution Date.
[21] I turn
then to the defenders' first argument, namely that the agreement has been
frustrated by supervening impossibility of performance caused by the sale of
the land and the assignation, or more strictly novation, of the agreement. In support of this argument Mr Summers
referred to Davis Contractors Limited v Fareham Urban District Council [1956] AC 696, National Carriers Limited v Panalpina (Northern) Limited [1981] AC 675, James Fraser & Co
Limited v Denny Mott and Dickson Limited 1944 SC (HL) 35, and J. Lauritzen AS v Wijsmuller BV (The "Superservant Two") [1990] 1 Lloyd's Rep 1. He also
referred to McBryde, The Law of Contract in Scotland (3rd ed)
para 20.11 in relation to supervening impossibility.
[22] The
defenders' submission turns on their interpretation of clause 1.1.11
(paragraph 11 above) which defines Title Dispute. Mr Summers submitted that on a proper
construction of that clause (i) there had to be a current dispute with the
proprietor as defined in the agreement (namely Mr Cotterrell and Wyvern)
or, if that were not correct, (ii) there had to be an existing dispute
such as court action to which the assignees (namely the defenders) were a party
and there was none. There was no
obligation on the Weir family to sue the present defenders and they had not
done so. Thus, he submitted, on
assignation, there was no longer a trigger to start the option period because
there was and could be no title dispute in terms of clause 1.1.11. He accepted that the reference in that clause
to an action included an action as adjusted or amended as it progressed; but he
submitted that it could only refer to an action in which Mr Cotterrell and
Wyvern were parties. They no longer had
title and interest to defend and so the title dispute could not be resolved.
[23] I do
not accept that interpretation of the clause.
It is important to interpret a provision in context of the agreement as
a whole. The court construes the words
of the contract in order to ascertain objectively the intention of the original
contracting parties with the aim, where there is ambiguity, of making
commercial sense of the contract. But it
is not the function of the court to re-write a contract. The question to be addressed is what meaning
would the words convey to a reasonable person who was aware of their
context. The court should not strive to
make the agreement unenforceable, but should give effect to the words the
parties have used having regard to their context. It does not
make commercial sense that the original contracting parties should have
intended that the agreement would be incapable of implementation on novation or
assignation. It is clear from
clause 12.2 (paragraph 9 above) that parties envisaged the
possibility that Mr Cotterrell and Wyvern might dispose of their interest
in the land and provided that other parties were to stand in their shoes in
relation to the rights and obligations under the agreement. In that context it makes no sense for the
parties to have provided that the agreement would be inoperable on alienation
of the land and novation of the agreement.
I construe clause 1.1.11 as referring to the claim by the feudal
superiors that the agreement to share the returns on the exploitation of coal
was a real burden on the title to the land (paragraphs 3 and 4 above)
and the reference to the action in the Court of Session as no more than a means
of identifying the nature of the dispute.
In my opinion in that clause the "dispute" refers to the actual or
potential dispute between the feudal superiors and the original feuar or
successive feuars on that issue.
[24] If, as
appears to be the case, the defenders are concerned that the option may hang
over the subjects for an indeterminate time, they can seek to resolve the
dispute by raising their own action of declarator against the feudal
superiors. In any event I am not
persuaded that there is any impossibility of performance if the clause falls to
be construed as referring to a dispute delimited by the Court of Session
action. In my opinion it lies within the
power of the defenders to seek to have themselves sisted as defenders in the
action at common law: Lord Blantyre v Lord Advocate (1876) 13 SLR 213, Mavor v Governors of Aberdeen
Educational Trust (1902) 10 SLT 156 and Parker v Welsh (1894) 2 SLT 129. As Lord Macphail states in Sheriff
Court Practice (3rd ed) at para 12.14, where a party to an
action has alienated his interest in the subject matter of the action, the
transferee is as a rule entitled to take his place. The defenders have title as well as interest
to be so sisted, in contrast with the minuters in Muir v Corporation of Glasgow 1917
2 SLT 106. Finally, the
contract is not incapable of performance so long as the pursuers may reach an
agreement with the feudal superiors to bring about a circumstance in which they
and their intended use of the land were not adversely affected by the title
dispute. In doing so they would achieve
the alternative result under clause 1.1.12 (paragraph 11 above) by
which to bring about the Title Dispute Resolution Date.
[25] For
these reasons I am not persuaded that it has become impossible for the parties
to perform their obligations under the agreement.
[26] Having concluded that the contract has not been
frustrated by reason of supervening impossibility of performance as the
defenders contended, I do not need to determine whether frustration is excluded
as the alleged impossibility was the result of an act by a contracting party in
novating the agreement: see McBryde,
paras 21.37-21.43. I incline to the view that the defenders
cannot rely on the novation in which they were active parties to plead
frustration. In the words of
Bingham LJ in Lauritzen at p.10,
the novation of the agreement was an event which the defenders had the means
and opportunity to prevent but nevertheless caused or permitted to come
about. The defenders took on
responsibility for performance of the contract with knowledge of the feudal
superiors' claim. The fact that the
defenders believed when they purchased the land that the coal prospecting
agreement could not be performed is not relevant.
Relevancy of
defenders' frustration by delay argument
[27] It is necessary also to consider the
pursuers' challenge to the relevancy of the defences. The defenders aver that delay by the pursuers
in exercising the option has imposed a much greater economic burden on them
than had been envisaged as the market price of coal has increased materially
since the agreement was entered into in 2003 while the rent, royalties and
compensation to be paid under the lease were fixed for its duration. They aver that as time passes the market
price of coal will become increasingly disconnected from the price which
applied when the agreement was made.
Thus, Mr Summers submitted, it would be inequitable for the courts
to force the defenders to enter into the lease at some indeterminate time in
the future or to compel them to await an event which might never occur.
[28] Mr Davies
submitted that those averments were irrelevant and referred to Davis Contractors Limited and National Carriers Limited. In particular, in the former case
Lord Radciffe at p.729 stated that hardship, inconvenience or
material loss did not of themselves call the principle of frustration into
play. In the latter case Lord Simon
of Glaisdale at p.700 F-G stated that a significant change in the expense
or onerousness of contractual obligations was not of itself sufficient. At p.707 C he asked the question whether
outstanding performance in accordance with the literal terms of the contract
would differ so significantly from what the parties reasonably contemplated at
the time of execution that it would be unjust to insist on compliance with its
literal terms. In this case the
agreement envisaged that prices could remain fixed for up to ten years even if
the option period started in 2003 as the two year option period, which
under clause 4 could be extended by up to two years (see paragraph 8
above), would have been followed by the six year lease. While it did not appear to be disputed that
when the original contracting parties entered into the agreement they both
thought that the title dispute would be resolved in the near future, only the
pursuers protected themselves from the possibility that that resolution might
not occur so promptly. The amending
letter gave the pursuers the right to cancel the agreement if the title dispute
was not resolved within two years. Mr Cotterrell
and Wyvern did not obtain a similar right nor did the defenders on novation of
the agreement. Thus in 2003 the
parties contemplated that the financial provisions in the lease would be fixed
for a substantial period and that the title dispute might not be resolved
speedily. Having regard to the
authorities to which Mr Davies referred I consider that the defenders'
averments of loss, or perhaps more correctly deprivation of increased profit,
arising from delay and alleged changes in the market price of coal are
irrelevant.
[29] Further,
the defenders have a remedy in their own hands if they are concerned by passage
of time; they can arrange to sist themselves into the action raised by the
feudal superiors to bring about a resolution of the title dispute. See paragraph 24 above. Mr Summers contended that it was
illegitimate to look beyond the contract for a remedy to avoid
frustration. He submitted that so long
as the contract did not contain a mechanism by which it could be performed and
the option period brought to an end, it was irrelevant that other remedies to
do so were available outside the contract.
He cited no authority for that proposition. I see no reason why this should be so. Parties in this context are in my opinion to
be deemed to be aware of their rights and remedies under the general law both
when they enter into a contract and when they are subsequently faced with what
one party asserts is a frustrating event.
Such remedies are part of the context or circumstances in which
performance is called for and are relevant to the assessment whether such
performance in those circumstances is radically different from that which was
undertaken in the agreement.
[30] In Lauritzen at p.8, Bingham LJ, in enunciating five propositions in relation to the doctrine of
frustration, stated in his first proposition that the object of the doctrine:
"was to give
effect to the demands of justice, to achieve a just and reasonable result, to
do what is reasonable and fair, as an expedient to escape from injustice where
such would result from enforcement of a contract in its literal terms after a
significant change in circumstances".
In executing the assignation the defenders took on
responsibility to implement the agreement which confers on the pursuers an
option exercisable once the title dispute is resolved. The defenders can take steps to achieve
resolution of that dispute. It appears
to me that the doctrine of frustration has no role in such circumstances.
Conclusion
[31] As I am satisfied that the averments in
the summons are relevant and those in the defences are irrelevant, I repel the
defenders' first plea in law, sustain the pursuers' first and fifth pleas in
law and grant decree de plano in
terms of the first conclusion of the summons.
