Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2009] CSOH 48
CA55/08	OPINION OF LORD GLENNIE in the cause FM FINNIESTON LIMITED Pursuers; against KENNETH JAMES GORDON HARVEY ROSS Defender: ­­­­­­­­­­­­­­­­­________________

Pursuers: McKenzie, solicitor advocate; Pinsent Masons

Defender: McIlvryde; Lindsays WS

26 March 2009

Introduction

[1] The pursuers are part of the FM Group, a business constructing residential and commercial property developments throughout Scotland. One of their developments is a residential project known as "Skyline Apartments". Apartments at the Skyline development were released for sale in early 2006. In July 2006 the defender entered into contracts for the purchase of 24 of those apartments from the pursuers. Each contract was for a separate apartment. Missives in respect of each of the apartments were concluded on 20 July 2006 on terms of the pursuers' pro forma offer to sell. Since a number of apartments were being sold to different buyers, and "to ensure uniformity amongst Purchasers", clause 14 provided that the purchaser accepted "that no alterations to or amendment of the pro forma offer will be accepted by the Sellers".

[2] Clause 3.1 in each case provided that payment of the purchase price, less certain sums already paid, was due in full on the date of entry and was "of the essence". It went on to provide that if the purchase price together with interest thereon was not paid in full within seven days of the date of entry, the sellers were entitled to treat the purchaser as being in material breach of contract and to rescind the missives without prejudice to their rights and claims.

[3] The pursuers contend that the date of entry for 22 of the apartments to be bought by the defenders was 31 August 2007; and for the other 2 was 21 September 2007. The defenders did not pay the purchase price within the time allowed for payment or at all. Accordingly, the pursuers rescinded the contracts by letters sent, in each case, on 1 November 2007. They claim damages of in excess of £880,000 from the defenders, the figure being calculated essentially on the basis of the difference between the net sums which they were able to obtain on the resale of the apartments and the full price due under the contracts with the defenders.

[4] The matter came before the court for debate on the defender's first and fourth pleas in law, which challenge respectively the relevancy of the pursuers' averments concerning rescission and one particular feature of the claim for damages.

The pursuers' claim to have validly rescinded the contracts

[5] The issue between the parties under this head focuses on the terms of the contracts relating to the "date of entry", that being the date upon which payment of the purchase price became due. The material terms of the contract are as follows:

"3 The date of entry will be fourteen days from the later of (a) the date on which the plot has been inspected and passed by Local Authority as habitable and fit for occupation (whether or not a formal certificate to that effect by the Local Authority is available at that time) and (b) the date on which a cover note has been issued by NHBC/Zurich Municipal/Premier Guarantee confirming that a final inspection has been carried out by them and that a new home warranty for the plot will be provided; or such earlier date within the fourteen day period as is mutually agreed. The Purchaser accepts that any remedial work outstanding at the date of entry will be carried out in terms of Condition 12 and will not delay the date of entry or payment of the full price. Entry and vacant possession and the keys released to the Purchaser will be given only on payment of the full purchase price (including the price of any extra items not previously paid for) and any interest due on the purchase price. Consignation of the price will not be accepted.

5. The plot will be completed to the satisfaction of the Local Authority and in accordance with plans thereof approved by the Local Authority. The Purchaser will have no concern with the terms of any planning permission, building warrant or the like which relate to the plot or the said development and shall not be entitled to demand sight of same but shall accept the Seller's assurance that all necessary permissions, warrants and the like have been obtained and will be complied with. No Superior's Certificate will be exhibited or delivered. A copy of the Completion Certificate will be delivered when made available to the Sellers by the Local Authority.

12 Provided that the dwellinghouse has been passed by the Local Authority Building Inspector for the purpose of issuing a Temporary Habitation Certificate and the NHBC/Zurich Municipal/Premier Guarantee cover note issued, legal settlement of the transaction shall not be delayed in the event of any minor remedial work outstanding at the date of entry. ..."

[6] Those provisions of the contract must be seen against the statutory background. References to the "Local Authority" and to the "Completion Certificate" require to be understood in the context of the provisions of the Building (Scotland) Act 1959 as amended. Section 9 of that Act provides as follows:

"9. Certificates of Completion

(1) After the completion of the construction of any building in respect of which a warrant has been granted by a local authority any person having an interest to do so may apply to the local authority for a certificate under this section (in this Act referred to as a "certificate of completion"), and within such period as may be prescribed the local authority shall, in accordance with the following provisions of this section, either grant the certificate or notify the applicant of their refusal to do so.

(2) A buildings authority shall grant a certificate of completion in respect of any building if, so far as they are able to ascertain after taking all reasonable steps in that behalf, the building complies with the conditions on which the relative warrant was granted.

...

(5) Subject to the next following subsection, no person shall occupy or use a building (being a building which has been constructed by virtue of a warrant granted under this Act) before a certificate of completion in respect of the building has been issued by the local authority, and any person who wilfully contravenes this subsection shall be guilty of an offence under this Act:

Provided that nothing in this subsection shall apply to any occupation or use which is solely for the purpose of the construction of the building.

(6) Where on application made to them it appears to a local authority that, because of exceptional circumstances, it is reasonable that a building to which the last foregoing subsection applies should be temporarily occupied or used before a certificate of completion in respect of it has been issued that they may (whether or not the construction of the building has been completed) grant written permission for such occupation or use during such period as may be specified in the permission (which period may be extended from time to time by a like permission); and while any permission under this subsection is in force in relation to any building the last foregoing subsection shall not have effect in relation to that building."

[7] In relation to the date of entry and the accrual of the obligation to pay the purchase price, the pursuers aver in Article 6 of Condescendence that the relevant cover notes were issued on various dates in August 2007. They then go on to aver the following:

"The pursuer applied for a building warrant for the 'Skyline Apartments' on 7 April 2005. It was therefore necessary for the pursuer to comply with the provisions of the Building (Scotland) Act 1959. ... In terms of section 9(1) of the Building (Scotland) Act 1959, the pursuer contacted the local authority in early August 2007 with a view to completion certificates being granted. In terms of Section 9(2) of the Building (Scotland) 1959 and Section 6 of the Building (Procedure) (Scotland) Regulations 1981, Local Building Officer Brian Tierney inspected [all but two of the plots] on 17 August 2007. In terms of Section 9(2) of the Building (Scotland) Act 1959, the Local Authority confirmed that on this date the properties were recorded as having been completed to the satisfaction of the Local Authority and in accordance with the approved plans. Accordingly, [those plots] were inspected and passed by the local authority on 17 August 2007. ... The pursuer submitted the written application for a formal certificate on 1 October 2007. Formal completion certificates for these plots were issued on 3 October 2007. In terms of [clause 3 of the contract] the date of entry is fourteen days from the later of the issuing of the cover notes or the date on which the property was inspected and passed by the Local Authority as fit and habitable for occupation (whether or not a formal certificate to that effect by the Local Authority is available at that time). In terms of 'the contracts' the date of entry for [those plots] was accordingly 31 August 2007."

It is to be noted, as Mr McIlvryde pointed out, that in the above passage the pursuers use the expression "fit and habitable for occupation" rather than that used in the contracts, which is "habitable and fit for occupation". The pursuers make similar averments about the other two plots, though in the case of those plots the date of inspection and passing is said to have been 7 September 2007 leading to the date of entry being 21 September 2007. For these plots also the application for a formal certificate was only submitted on 1 October 2007 and completion certificates were issued on 3 October 2007. The pursuers then aver that the defender failed to make payment of the purchase price on or before the relevant date of entry from each plot; that he failed to pay despite requests made by the pursuers in September and October 2007; and that the pursuer accordingly rescinded the contracts by letters of 1 November 2007.

[8] I was referred to the terms of a letter dated 3 June 2008 from Glasgow City Council to the pursuers. In that letter, the Glasgow City Council (the Local Authority for present purposes) confirmed that Mr Tierney inspected the flats on 17 August 2007 and 7 September 2007 and that "on these dates the properties are recorded as having been completed in accordance with the approved plans as far as could be ascertained after taking all reasonable steps in that behalf". The letter went on to stress that the building warrant completion process had no such features as "verbal habitations". This is a reference to the expression used by the pursuers' solicitors when they wrote to the defenders on the 17 August and, I assume, also on 7 September 2007 advising that the various plots had "obtained verbal habitation" on those dates.

[9] Mr McIlvryde for the defender invited me to sustain his first plea in law, a plea to the relevancy of the pursuers' averments, and dismiss the action. Under reference to the terms of section 9 of the Building (Scotland) Act 1959, he pointed out that, although clause 3 of the contract in each case provided that the date of entry was to be fixed by reference to the date on which the property was inspected and passed by the Local Authority as "habitable and fit for occupation", nothing in the Act required the Local Authority to make a determination in those terms. What section 9 did provide for was the grant by the Local Authority of a certificate of completion or written permission (as to which there was no requirement of formality) for the temporary occupation or use of the building. Without either a completion certificate or such written permission, it was an offence for a person to occupy or use the building. On a sensible reading of clause 3, it was plain that it provided for the date of entry to be 14 days after the grant of the Completion Certificate or of written permission for temporary use or occupation of the buildings. The words in parenthesis ("whether or not a formal certificate to that effect is available at that time") were apt to cover the situation where a Completion Certificate had not been issued but written permission for temporary use and occupation, for which there was no prescribed form, had been given. The words "habitable" and "fit for occupation" must have been intended to refer not only to the physical attributes of the buildings but to their being "habitable" in all senses of the word, including the sense of being legally habitable. The contract had to be read as a whole. Clause 12 dealt in detail with the case where a "Temporary Habitation Certificate" was issued. That was not a term used in the Act, but it clearly referred to written permission under section 9(6). It could not have been intended that the purchaser was bound to complete on the basis of some approval falling short of that. He submitted that his construction was that which was the most reasonable and made the most commercial sense. It made sense because it equated the notion of the property being passed as "habitable" with the time at which it became legally "habitable". He reminded me that many of these apartments will be sold, on precisely the same terms, to domestic purchasers who would want to, and would assume that they could, move in physically on the completion date when they had paid the price.

[10] For the pursuers, Mr McKenzie invited me to allow a proof before answer leaving the defender's plea outstanding. He suggested that before coming to a final conclusion on the meaning of the contract the court should be in a position to understand fully how the contract had operated. The contract was in non-statutory language. It did not refer to the grant of a Certificate of Completion, nor to any written permission to use or occupy the building temporarily. It referred to the property having been inspected and passed by the Local Authority as "habitable and fit for occupation". This was not an expression used in the Act and could not be construed as importing the provisions of the Act. In simple terms, on the facts averred in the summons, there was no doubt that the apartments were inspected on the two dates. That was the first part of the test. They were also passed or approved on those dates. That was notified to the pursuers and recorded in some form in the records of the Local Authority. He accepted that there had been no application for a Completion Certificate by that time - indeed the application was only made in October 2007 - but that did not matter; the date of entry was triggered by the date of inspection and passing "whether or not a formal certificate to that effect is available at that time". Mr McKenzie explained that, in the usual case, the application for a Completion Certificate is made to the Local Authority at the same time as a request for inspection. In terms of section 9(1) of the Act, the Local Authority is required to issue it within 14 days or to refuse it within that time. There was, he submitted, in the language in parenthesis ("whether or not a formal certificate to that effect is available at that time") an "express disconnect" between the inspection and passing which triggered the date of entry and the grant of a Completion Certificate. In the present case there had been a departure from the usual course in that the pursuers did not apply for a Completion Certificate until later. However, that did not prevent clause 3 operating. The defender had been told that "verbal habitation" had been granted and he was given the means by which to check with the inspector. Under reference to the example of a domestic purchaser, Mr McKenzie accepted that in the ordinary case a person could expect to move in to a property when he had paid the purchase price, but he did not accept that this pointed in favour of the defender's construction. There were practical solutions to any difficulties inherent in the Completion Certificate not being available on the date of entry. The defender's agents would be aware of the terms of the Act and, if no Completion Certificate or written permission for temporary use or occupation was proffered by the sellers, they could press for the appropriate documents to allow their clients to move in.

[11] There was no dispute between the parties as to the principles to be applied in construing the contract terms. The words used should, so far as possible, be given their ordinary meaning. The particular provisions must be construed in the context of the contract as a whole. They must be construed objectively, that is to say according to the standards of the reasonable third party who is aware of the factual and legal background. The court will normally favour the construction which produces a reasonable result against that which produces one which is unreasonable. And there is a presumption in favour of legality. I accept these propositions.

[12] Mr McKenzie was at pains to stress the non-statutory language used in clause 3. I accept that the terms "habitable" and "fit for occupation" are not themselves used in section 9 of the Act. However, the statutory framework cannot be ignored. Clause 5 in terms refers to as the Completion Certificate being made available by the Local Authority. In clause 12, the expression "Temporary Habitation Certificate" clearly means the written permission for temporary use and occupation of the buildings referred to in section 9(6) of the Act. Further, as Mr McKenzie explained, in the ordinary course of events, the application for an inspection is coupled with the application for a Completion Certificate. In those circumstances it is clear that the inspection envisaged by clause 3 is the inspection which is part of the statutory application for a Completion Certificate. Similarly, so it seems to me, it must follow that the reference to the Local Authority passing the property as "habitable and fit for occupation" is a reference, at the very least, to the Local Authority expressing its satisfaction on such an inspection as to the habitability and fitness for occupation of the property. I accept, of course, that the words in parenthesis in the clause, "whether or not a formal certificate to that effect is available at that time", are of importance. Mr McIlvryde contended that they left open the possibility that the date of entry could be triggered by a temporary permission in writing being given under clause 9(6). Mr McKenzie, on the other hand, suggested that this pointed to the date of entry being triggered by the Inspector's "passing" of the property as habitable and fit for occupation at the time of the inspection, notwithstanding that the Completion Certificate is not yet available. Each of these contentions has force, though I prefer that advanced by Mr McIlvryde since it appears to me to sit more happily with the terms of clause 12, which require the purchaser to proceed, notwithstanding that there is certain remedial work still to be done, if written permission for the use or occupation has been given in terms of section 9(6) of the Act. It would be odd if the effect of clause 3 was that the obligation to pay was triggered by the Local Authority "passing" the property as habitable land fit for occupation in a way which stopped short of this written permission. Such a construction of clause 3, if accepted, would appear to render much of clause 12 redundant. However, I do not have to decide this, since on any view in this particular case the inspection did not take place as part of an application for a Completion Certificate. In those circumstances, whatever the merits of Mr McKenzie's submission generally, it cannot help the pursuers in the present case. The terms of clause 3, as Mr McKenzie accepted, assume that an application for a Completion Certificate has been made. I cannot accept that the date of entry and the obligation to pay can be triggered by an inspection and approval given by the Local Authority which was not linked to an application for a Completion Certificate.

[13] In my view Mr McIlvryde was right to stress the situation of the domestic purchaser of one of the apartments. It is, to my mind, axiomatic that a purchaser will, upon paying the price, be entitled to enter into the property immediately. He would be amazed if, having done so, he was told that he would have to wait for entry, indeed that it would be unlawful for him to move in, because there was as yet no Completion Certificate nor any written permission for temporary use and occupation of the property. That would, in my opinion, also be the reaction of a reasonably informed third party. It would be of no comfort to such a purchaser to be told that he should apply to the local authority for temporary permission to use or occupy the premises. Why should he have to bear the risk of any delay by the Local Authority in granting such permission? Why should he have to bear the risk that they will not in fact grant it?

[14] In these circumstances I have formed the view that the pursuers have not pled a relevant case that the dates of entry for the apartments were 31 August and 21 September 2007 respectively. The pursuers' contention that they were entitled to rescind for non-payment persisting for 7 days after the due date for payment is premised, in the Summons, upon those being the dates of entry. That contention is therefore also irrelevant. Mr McKenzie confirmed to me that he did not offer or seek to put forward an alternative case to the effect that the date of entry was 14 days after the Completion Certificates were in fact granted on 3 October 2007; or that the letters of rescission sent on 1 November 2007 could be justified on the basis that payment was required to be made on 17 October 2007 and the right to rescind therefore arose by 24 October 2007.

Quantum
[15] This issue, of course, only arises if I am wrong in the above conclusion that the pursuers' averments in support of their case that they were entitled to rescind are irrelevant. Nonetheless, in case the matter should go further, I shall deal with it briefly. Clause 1 of each of the contracts is in the following terms:

"The purchase price payable as aftermentioned shall be ONE HUNDRED AND EIGHTY NINE THOUSAND POUNDS (£189,000) STERLING. A discount of THIRTY ONE THOUSAND ONE HUNDRED AND EIGHTY FIVE POUNDS (£31,185) STERLING will be given at settlement provided that missives are concluded, the deposit due thereon received timeously and settlement effected in terms of conditions 2 and 3 hereof."

The missives were concluded and the deposit paid and received timeously. Clause 2.1 and 2.2 referred to payment of a non-refundable reservation fee on reservation of the plot and a further non-refundable deposit on conclusion of missives. Both of these were paid on time and no point arises on them. However, clause 2.3 provides for payment of the balance of the purchase price at the date of entry. It concludes with the words: "the full balance of the purchase price will be payable at that date."

[16] The pursuers claim damages calculated on the difference between the price which they obtained on resale of the properties and that which they say they would have received had the contracts with the defenders not been rescinded. There are also claims for professional fees, loss of interest, advertising costs and so on, but no point arises for present purposes on these. The issue between the parties is as to the correct comparator: while the pursuers compare the resale price with the full purchase price payable for each apartment, the defenders argue that the comparison should be with the discounted purchase price.

[17] The starting point for the defender's argument is the proposition, vouched inter alia by Houldsworth v. Brand's Trustees (1887) 4 R 369, but for which no authority is required, that the object of an award of damages for breach of contract is to put the innocent party as nearly as possible in the same position as he would have been in if the contract had been performed. Mr McIlvryde explained, by reference to the Summons, that the pursuers' case was based on the breach being the non-payment of the balance of the purchase price on the date of entry. Had that breach not occurred, in other words had the contract been performed according to its terms, the defenders would have paid on the date of entry and would have been entitled to the discount referred to in clause 1. The comparison should therefore be between the resale price and the discounted price which the defenders would have paid had they not been in breach. What the pursuers had lost out on was receipt of the (discounted) price on the due date.

[18] Mr McKenzie, for the pursuers, argued that the effect of clause 1 was to identify the price of the apartment ("the purchase price payable"). That was the price which the pursuers were entitled to receive. True it was that the defender was entitled to a discount if he complied with certain stipulations, including making payment of the balance of the purchase price on the date of entry, but those stipulations were simply conditions precedent to the entitlement to the discount: in support of this analysis, he referred me to Euro London Appointments Ltd v Claessens International Ltd [2006] 2 Lloyd's Rep. 436. On the date of entry the pursuers were entitled to the "purchase price". On payment in terms of the contract on the date of entry, provided that all of the conditions precedent were satisfied, the defender was entitled to a discount. But the conditions precedent were not satisfied, or at least not all of them. As a result, the pursuers were entitled to the full undiscounted price. The true price, he argued, is that which applies while the contingency remains a contingency. On breach, by definition, the contingency has not been fulfilled.

[19] On this point I have no hesitation in preferring Mr McKenzie's argument. It needs little elaboration. As at the date of entry the pursuers were entitled to be paid the sum of £189,000 for each apartment. Only if the defender paid on time were the pursuers obliged to allow him a discount. He did not pay on time. Accordingly, the sum due at the date of entry remained £189,000 for each apartment. That is the figure against which the price obtained on resale should be set. It would be very odd if the defender, having failed to pay on time and thereby disentitled himself from claiming the contractual discount, was able by the back door to reap the advantage of it; or if the pursuers, being entitled to the full price because of the defender's failure to take advantage of the contractual discount on offer if he met certain conditions, were to have their damages for breach assessed on the basis that he had in fact met those conditions.

[20] I am fortified in this conclusion by a consideration of the general principles applicable in the case where one party rescinds because of a material or a repudiatory breach by the other. The principles are well known. Where one party to a contract commits a material or repudiatory breach, the other party can choose whether, on the one hand, to affirm the contract or, on the other, to accept the repudiation and bring the contract to an end. Unless and until the innocent party adopts the latter course, the contract remains alive for performance. Rights and obligations under the contract continue to accrue. Upon rescission or acceptance of the repudiation, the contract comes to an end, but only from that date. The termination of the contract is not retrospective. In other words, the contract is terminated with effect not from the date of the breach but only from the date of acceptance of the breach. When assessing damages in such a case, the aim of an award of damages is to put the innocent party so far as possible in the same position as he would have been in had the contract not come to an end as a result of the breach by the other party. This is what is meant, in the context of rescission for material or repudiatory breach, by the general rule to which I have referred in para.[17] above. In the present case, there is no doubt that as of the date of rescission the defender had no entitlement to any discount on the purchase price. The pursuers were entitled to claim the full purchase price for each apartment. That is the appropriate comparator.

Disposal

[21] For the reasons I have given, however, I shall sustain the defender's first plea in law and dismiss the action.