FIRST DIVISION, INNER HOUSE, COURT OF SESSION
Lord President Lord Clarke Lord Hardie	[2010] CSIH 56 CA36/09 OPINION OF THE COURT delivered by THE LORD PRESIDENT in the RECLAIMING MOTION in the cause THE SCOTTISH COAL COMPANY LIMITED Pursuers and Reclaimers; against DANISH FORESTRY COMPANY LIMITED Defenders and Respondents: _______

Act: Dean of Faculty, McNeill, Q.C., P G Davies; Harper Macleod LLP

Alt: Summers, Q.C., J P Robertson; Gillespie Macandrew LLP

25 June 2010

The agreement

[1] On 9 and 12 February 2007 the pursuers and reclaimers ("Scottish Coal") and the defenders and respondents ("Danish") entered into what bore to be a Purchase Option & Coal Extraction Agreement in respect of land at Dalgig Plantation, Ayrshire ("the Subjects") owned by Danish. We shall for convenience refer to the Purchase Option & Coal Extraction Agreement as "the Agreement", although a primary issue in this litigation is whether in terms of it a concluded and enforceable contract was entered into. Under clause 3.1 of the Agreement Danish granted to Scottish Coal an option to purchase the Subjects at any time during a period commencing on the "Date of Entry" (1 August 2006) and expiring on 28 February 2008. Provision was made for payment of a purchase price (£360,000, subject to increases in certain events) and for royalty payments on the extraction and removal of coal and other minerals from the Subjects. "The Settlement Date" was defined as meaning the date occurring 28 days after the date of service of a notice of intention to exercise the Option. Such a notice was deemed to have been served on the first business day occurring 48 hours after the date of posting. Such a notice was posted on 25 February 2008 and accordingly deemed to have been served on 27 February. The Date of Settlement was thus 26 March 2008. In terms of clause 4.1 the purchase price was to be paid on the Settlement Date in exchange for a valid disposition in favour of Scottish Coal or its nominee. Provision was also made for securing all sums which might (otherwise) be due or become due by Scottish Coal to Danish. Clause 10 provided as follows:

"10.1 The Company [Scottish Coal] 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'). The conditions contained in the Standard Security shall be those Standard Conditions set out in Schedule 3 to The Conveyancing (Scotland) Act 1970.

...

10.3 In the event that Danish assign their interests under this Agreement, the Company will, in exchange for an executed discharge of the Standard Security held by Danish, grant the assignee a fresh Standard Security in similar terms to the Standard Security originally granted to Danish and will procure that their bankers enter into a fresh Ranking Agreement again in similar terms.

10.4 In the event that the Company exercises the Option and thereafter wishes to sell the Option Area to a third party, provided that (1) the proposed purchaser is an operator demonstrably capable of carrying out the Use in accordance with standard industry practice and fulfilling the other obligations of the Company under this Agreement; (2) the purchaser is taken bound by the whole terms and conditions of this Agreement; and (3) the purchaser grants a fresh Standard Security and, if appropriate, procures a fresh Ranking Agreement by the purchaser's bankers, the Company will be entitled to proceed with the sale. In this situation, Danish will discharge the Standard Security granted by the Company in terms of Clause 10. The Company will also procure that the purchaser render his successors whomsoever bound in a like manner."

Clause 10 was headed "FIRST RANKING STANDARD SECURITY", though clause 1.2.5 provided:

"The clauses and paragraph headings in the body of the Agreement heading (sic) shall not affect the interpretation of this Agreement. ...".

Proposals for a ranking agreement

[2] Scottish Coal and its related companies had a complex agreement with its banker (the Royal Bank of Scotland plc) and other creditors whereby secured obligations owed to them were regulated by a ranking agreement. It was envisaged that the debts and future debts of Scottish Coal to Danish would be secured by a standard security which, as regards the Subjects, would rank ahead of all other securities. This required an adjustment to the existing ranking agreement with the concurrence of all other parties to it. Consequential adjustments might also be required.

[3] On 4 March 2008 the solicitors for Scottish Coal sent to the solicitors for Danish a draft ranking agreement. Comments were sought in order that these could be passed on to the solicitors for the Royal Bank of Scotland plc ("the Bank"). The draft ran to seventeen clauses, some of them elaborate. Its basis was the pre-existing ranking agreement with Scottish Coal's existing secured creditors but adjusted to take account of the security interests of Danish (together with those of another new creditor). With regard to Dalgig the draft ranked the standard security to be granted in favour of Danish ahead of all other securities. It also provided as follows:

"4.11 Danish Forestry shall not without the prior written consent of the Security Trustee [the Bank] 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 monetary amount up to which the liabilities of Danish were to be secured was left blank. On 26 March Danish's solicitors intimated the sum of £2 million as the maximum which should be secured under Danish's standard security. On 31 March Danish's solicitors e-mailed direct to Scottish Coal's in-house solicitor a revised ranking agreement adding an address for notices, making the Danish priority sum £2 million and amending clause 4.11. The amendment to the last mentioned clause involved the insertion at the beginning of that sub-clause of the words:

"Provided that the Danish Forestry Liabilities are paid in full ...".

The in-house solicitor immediately responded by confirming that "We are comfortable with the proposed £2 million priority for Danish". He made no comment at that time on the proposed amendment to sub-clause 4.11.

[4] By this time the Settlement Date (26 March) had passed. The solicitors for Danish and the in-house solicitor for Scottish Coal both in their e-mails expressed an anxiety to settle, the latter observing:

"The purchase price is available and we will be able to settle just as soon as the terms of the ranking agreement have been agreed between Danish and RBS".

The proposed revisals were passed to the solicitors for the Bank who sought their client's instructions. The instructions received were, first, to question whether the priority sum should be as high as £2 million and, secondly, to state that the proposed adjustment to clause 4.11 was not acceptable. A question posed was "surely if DF's liabilities have been paid in full, they wouldn't exercise their security anyway?" These instructions were subsequently confirmed. That position was intimated to the solicitors for Scottish Coal who passed it on to the solicitors for Danish, with certain observations suggesting that it would not be in Danish's interest to call up its security without the Bank's involvement. Danish's solicitors maintained their position, though adding that they would take their client's instructions. In the event Danish did not depart from their position. In August 2008 a quite different solution to the issue was proposed by the Bank.

The arbitration clause

[5] It will be necessary in due course to record certain other aspects of the history of this transaction but, subject to one matter, what has been narrated so far is sufficient to allow the primary issue between the parties to be addressed, namely, the enforceability of the Agreement. The other matter which should be noticed at this stage is clause 8 (headed "Arbitration"). It is in the following terms:

"Whether during the currency of this Agreement or at any time thereafter, in the event of any question, dispute or difference arising between the parties concerning the construction, meaning or effect of these presents or the rights or liabilities of the parties hereunder or howsoever otherwise arising in relation to the same or as to any act or omission taken or made by a party hereto in purported execution or compliance with these presents and which are not adequately explained hereby or over which these presents are silent then every such question, dispute or difference shall, as well as any matter specifically referred (failing agreement) to arbitration hereunder, in the absence of agreement between the parties or any other provision herein contained, be referred to the arbitration of such person as the Proprietor [Danish and its successors in ownership of the Option Area] and the Company [Scottish Coal] may agree to appoint or, failing agreement within fourteen days after either party has given to the other written notice to concur in the appointment of an arbiter, such person as shall be appointed by the Chairman for the time being of The Royal Institute of Chartered Surveyors in Scotland upon the request of the party serving the aforesaid written notice. The Law of Scotland shall apply to all such arbitration."

The conclusion of the summons

[6] The first conclusion of the summons is in the following terms:

"1. For declarator:

(i) that by Notice dated 25^th March 2008 the Pursuers validly exercised their Option to purchase ALL and WHOLE that area of ground known as Dalgig Plantation being the subjects registered in the Land Register of Scotland under title number AYR 34554 ('the Subjects') under and in terms of the Purchase Option and Coal Extraction Agreement entered into between the Pursuers and the Defenders and dated 9^th and 12^th February 2007 ('the Agreement');

(ii) that the purported rescission of the Agreement by the Defenders by fax dated 30^th April 2008 is of no effect; and

(iii) that in terms of the Agreement the Defenders are bound to sell and the Pursuers bound to purchase the Subjects, subject to the Defenders agreeing a Ranking Agreement with the Pursuers' bankers pursuant to clause 10.1 of the Agreement."

[7] A conclusion for interdict and for interim interdict follows.

The contentions of parties

[8] Before the Lord Ordinary and before us Danish contended that the second sentence of clause 10.1 was unenforceable. It was in effect an agreement to agree which lacked the requisite criteria to enable the terms of any ranking agreement to be ascertained. Agreement on a ranking agreement was an essential condition for the settlement of the purchase. A concluded contract was one which settled everything that it was necessary to be settled and left nothing to be settled by agreement between the parties (May & Butcher v The King, reported as a Note to Foley v Classique Coaches Ltd [1934] 2 KB 1, per Viscount Dunedin at page 21). Where a contract provided an objective criterion against which an unsettled matter could be determined by a court, such as "current open market value", the bargain was good; but not when it failed to do so (R & D Construction Group Ltd v Hallam Land Management Ltd [2009] CSOH 128, per Lord Hodge at para 40). But no such criterion was provided by clause 10.1. The adverb "reasonably" was not, in the context of a bargain such as this, apt to provide such a criterion.

[9] Scottish Coal contended that the second sentence of clause 10.1 was enforceable. It was to be seen in the context of a wider agreement which clearly provided for contractual obligation. A construction which gave the Agreement binding effect was to be preferred (R & J Dempster v Motherwell Bridge & Engineering Co Ltd 1964 SC 308, per Lord President Clyde at pages 327-8). The second sentence of clause 10.1 imposed on Danish a positive obligation to enter into any ranking agreement which, viewed objectively, was reasonable. As such it was enforceable. Even if the ranking agreement first proffered to the respondents was not, objectively speaking, reasonable (which, it was contended, it was), such an agreement had been proffered on 8 August 2008 after the Bank had offered a different solution which Danish had acknowledged met its concern (see below).

The Lord Ordinary's approach

[10] It should be noticed at this point that the Lord Ordinary did not accept the contentions of either party on this matter. He rejected Scottish Coal's contention on the ground that it was inherently unlikely that Danish would have been prepared to take whatever "reasonable" ranking agreement was put to them; it would wish to have regard to its own self-interest, including the matter of control over the calling up of its own security. He rejected Danish's contention on the ground that it failed to give proper effect to the word "reasonably". He preferred his own interpretation which was that, on a sound construction, the clause envisaged that Danish and the Bank (assuming that Scottish Coal would prefer to stay in the background on these matters) would negotiate to reach agreement on a clause which reasonably regulated, or regulated in a reasonable manner, the unsettled matters. He concluded that, to give effect to the word "reasonably", the clause had to be read as imposing an obligation on the part of Danish to use reasonable endeavours to enter into a ranking agreement with Scottish Coal and/or the Bank. Having so construed the clause, he concluded that so construed it was unenforceable. Subject to one matter (which is not now in issue) he assoilzied Danish from the conclusions of the summons.

[11] Neither party before us supported the Lord Ordinary's construction of clause 10.1. It is sufficient to notice that the clause makes no reference to negotiation (nor to the use of reasonable endeavours). The adverb "reasonably" appears to be directed at the content of the putative regulation rather than to the conduct of parties in relation to achieving it. As neither party sought to support the Lord Ordinary's approach (even on an alternative basis) and as we are not persuaded that the Lord Ordinary's construction should be adopted, we are left to decide between the two stark alternatives urged by the parties respectively.

Discussion - The principal issue

[12] Before an examination of the enforceability of the clause it is relevant to note that the syntax of the second (critical) sentence is very odd. Read literally, the regulation envisaged is 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 [Scottish Coal] to their bankers from time to time". Regulation between such matters does not make sense. Presumably this sentence was seeking to do two things: first, to provide in the body of the clause that the standard security was to be first ranking (the heading not being admissible for that purpose) and, secondly, to regulate the (other) terms upon which the sums secured to Danish were to relate to sums otherwise secured to the Bank and Scottish Coal's other secured creditors. But no point was taken before the Lord Ordinary or before us about this infelicity. We proceed on the basis that the latter part of the sentence is to be read as we have explicated it.

[13] The Agreement was framed by lawyers. It was solemnly executed by the parties. It seems clear that they intended that on its execution it should have contractual effect. Scottish Coal exercised the Option within the period provided for its exercise. The solicitors for both parties prepared for settlement of the purchase transaction - albeit, perhaps, without the expedition which the relatively short period provided for it allowed. In R & J Dempster v Motherwell Bridge & Engineering Co Ltd Lord President Clyde said at pages 327-8:

"... when a court of law is asked to construe a commercial arrangement couched in terms which are prima facie obligatory, and which are acted on by the parties as obligatory, the court will prefer a construction which gives the contract binding effect. For the essence of commerce is making bargains, and unenforceable arrangements are the exception and not the rule. As Lord Tomlin said in the House of Lords in Hillas & Co Ltd v Arcos Limited [(1932) 147 LT 503 at page 512] 'the problem for a court of construction must always be so to balance matters, that without violation of essential principle the dealings of men may as far as possible be treated as effective, and that the law may not incur the reproach of being the destroyer of bargains'."

At page 329 he distinguished May & Butcher v The King and cases to a similar effect, observing that these were all contracts of sale in which, of course, price was an essential. The instant case, he added, was not a contract of sale at all (it was a contract for the fabrication of oil storage tanks) but an arrangement "in which prices played no material part and were meant to be mutually settled when the work was done".

[14] In the present case it cannot be said that the finalisation of a ranking agreement played no material part in the transaction with which the Agreement was concerned. It was, in our view, critical to the settlement of the purchase. The parties' solicitors so regarded it (see para [4] above and para [26] below). The standard security, designed to secure due payment of the extraction royalties, could not achieve its objective of being the first charge on the property to be conveyed unless and until there was in place an effective ranking agreement which gave it that priority. It was accordingly necessary that an arrangement for ranking was certain or was capable of being made certain. Counsel for Scottish Coal argued that because Danish was taken bound by the opening words of the second sentence of clause 10.1 to enter into an agreement with it and/or its bankers "reasonably to regulate the relationship", a ranking agreement was capable of being made certain: the adverb "reasonably" provided an objective measure which allowed the terms of the ranking to be determined by a court or, in any event, by another third party (as to which see below).

[15] It is important to notice first that the second sentence of clause 10.1 in terms envisages a further agreement being entered into. It is expressed as an undertaking by Danish to enter into an agreement (rather than as a mutual agreement to agree) but it clearly envisages a fresh consensus being necessary - which might (and almost certainly would) involve the Bank, which was not a party to the Agreement. We reject the suggestion that this provision was conceived solely in the interests of Danish. It was also in the interests of Scottish Coal and the Bank that the relationship among the various secured creditors was satisfactorily ordered. The terms of the prospective agreement were not set out definitively (in a schedule or otherwise) so that the interested parties were not committed respectively to any particular terms.

[16] The circumstance that further agreement is contemplated is not necessarily fatal to a concluded bargain having been reached (Foley v Classique Coaches Ltd). But in that case there were a number of factors which, taken cumulatively, were sufficient to justify that conclusion. The matter yet to be agreed was, in writing, the price (of petrol to be purchased). The court held that in all the circumstances a "reasonable" price was, in default of agreement, to be paid.

[17] The word "reasonable" (and perhaps also the word "reasonably"), albeit itself imprecise, may in some circumstances require to be given a concrete meaning by a court of law (Gloag on Contract (2^nd ed.) at pages 11-12). Under section 8(2) of the Sale of Goods Act 1979 the court may be called upon to determine a "reasonable" price for the purchase of goods; under a lease it may require to determine a "fair" or "reasonable" reviewed rental. But these will, at least ordinarily, arise in the context of there being a market or other context against which a reasonable price or a fair or reasonable rental can be determined. The present case is different. There is, so far as appears, no market or settled practice for ranking agreements. While some of the terms of such agreements may be conventional, others will depend crucially on what the relevant parties, having regard to their respective - possibly conflicting - interests, are able mutually to agree. These terms may include, as here, the maximum sum to be secured by the prior ranking security and whether the holder of that security is to be free at its own hand, without reference to the other security holders, to enforce its security. How is the court, without more definite contractual guidance, to determine what is in these respects reasonable? It may be, though this so far as we can see was not explored in the evidence, that material could be placed before a court to demonstrate what amounts of coal and other minerals could reasonably be expected to be extracted and, by applying to these figures the respective royalty rates, a reasonable maximum sum might be determined; though we note that, in terms of clause 9, the royalties payable were dependent, subject to a minimum, on actual sums extracted. But the other element is much more difficult. In negotiations each side (Danish and, in effect, the Bank) in the event adhered to their respective positions in relation to control over the calling up procedures of Danish's standard security. It was only after a quite new arrangement was suggested in August that a solution appeared to emerge. Neither that nor any other solution was one which could have been determined (imposed) by a court. It required the consensus of parties. For aught yet seen, there may have been other terms to any proposed ranking agreement which also required consensus. If the court, without the benefit of such guidance, were to fix the terms of the ranking agreement, it would in effect be making the parties' bargain for them. That it cannot legitimately do.

[18] With regard to the maximum sum to be secured by the standard security we should note that Mr McNeill, who appeared for Scottish Coal at the resumed hearing, drew our attention to para [44] of the Lord Ordinary's opinion where he recorded:

"On 28 August 2008 Pamela Todd [Scottish Coal's solicitor] sent the revised draft to Lydia Fotheringham [Danish's solicitor, otherwise referred to as Lydia Arbuckle] 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."

That observation was made under a chapter headed "An acceptable solution" and was concerned with whether by August 2008 the parties were at one as to the terms of a ranking agreement. But the fact that no point was taken in that regard about whether or not the maximum sum had been agreed by August 2008 does not affect the fact that, when the agreement was entered into in February 2007, there was no consensus on that figure. Nor was any consensus reached within a reasonable time (see below).

[19] In the present case the situation is compounded by the interest of the Bank in the terms of the ranking agreement. The Bank was a key player, which would be concerned to ensure that the complex security arrangements involving itself and other creditors of Scottish Coal were not prejudiced. Hence its insistence on having control over the calling up of Danish's security. The Dean of Faculty for Scottish Coal recognised that the Bank, not being a party to the Agreement, could not be bound by any judicial or other third party determination of what was a reasonable ranking agreement. But, he argued, that did not matter. The parties to the Agreement would be bound - albeit, if the Bank did not concur, the agreement would be frustrated. But that, in our view, will not do. The second sentence of clause 10.1 envisages an agreement being made which will regulate the terms which will apply to the Bank's security as well as to that of Danish - without the Bank being bound by any such arrangement unless it chose to agree to it. It envisages something which cannot be secured by judicial or other third party determination.

[20] In these circumstances the second sentence of clause 10.1 was, in our view, unenforceable and, it being critical to the settlement of the purchase (and thus not excisable), the Agreement, or at least that part of it concerned with the purchase, was not a concluded bargain. At the date of its execution and thereafter it was, in at least that respect, inchoate only. It was capable of being concluded if all the interested parties (Danish, Scottish Coal, the Bank and possibly Scottish Coal's other secured creditors) timeously agreed on a ranking agreement but, although certain steps towards such an agreement were subsequently taken (to which we shall return), no such agreement was in fact executed.

[21] Before leaving this chapter it is perhaps worth noticing that sub-clauses 10.3 and 10.4 also suffer from uncertainty as to the terms of the ranking agreement envisaged in the respective situations there provided for. Under clause 10.3, in the event of Danish assigning its interests under the Agreement, Scottish Coal "will procure that their bankers enter into a fresh Ranking Agreement again in similar terms". Under clause 10.4 in the event of Scottish Coal wishing to sell the Subjects it will be entitled to proceed provided "... the purchaser ... if appropriate, procures a fresh Ranking Agreement by the purchaser's bankers".

The issue of the arbitration clause

[22] In the course of the reclaiming motion the Dean of Faculty introduced a contention which had not been advanced before the Lord Ordinary. That contention turned on clause 8 of the Agreement (the arbitration clause). Despite opposition by Mr Summers for Danish we allowed that contention to be developed, affording to Mr Summers an adjournment to prepare a response to this and another matter. The argument ran as follows. The Agreement contained in clause 8 an arbitration clause in the widest terms. If the court could not determine what was in the circumstances a reasonable ranking agreement, an arbiter, who was a man of skill, could. It was immaterial that the envisaged arbiter was, failing agreement, a person to be appointed by the Chairman of the Royal Institute of Chartered Surveyors in Scotland, rather than a specialist in securities. The fact that there was an arbitration clause in the disputed agreement in Foley v Classique Coaches Ltd had been relied on by the Court of Appeal as a factor in persuading it that there was a binding contract. That decision had been approved of by Lord Wright in Scammell (G) & Nephew Ltd v Ouston (HC & JG) [1941] AC 251 at page 273.

[23] This contention falls, in our view, to be rejected. The arbitration clause only becomes binding on the parties if there is a concluded contract. Otherwise it has no force and effect, however wide its terms (Ransohoff & Wissler v Burrell (1897) 25 R 284; see also Heyman v Darwins [1942] AC 356, per Lord Macmillan at pages 370-1). Although a reference was made in Foley v Classique Coaches Ltd to the arbitration clause, which was described by Maugham LJ as "in an unusual form", we do not construe the Court of Appeal as holding that, if the court could not by reason of uncertainty adjudicate upon the effect of a clause, an arbiter could. In any event, there is nothing unusual about clause 8. It is designed to provide an arbitral mode of resolution if there is a "question, dispute or difference arising between the parties" to the Agreement. Here there is no such question, dispute or difference to be resolved. Clause 8 is not a provision designed by mutual agreement to confer on a third party the responsibility of settling a term of the parties' contract; rather it provides a mode of determining, in the case of dispute, issues arising between the parties. In doing so the arbiter is to apply the Law of Scotland, as would a court (clause 16). It thus imports an adjudicatory process.

Waiver

[24] In these circumstances it is necessary to notice only briefly an argument advanced by Mr Summers that Scottish Coal had waived any right to proceed to arbitration on this matter. In that connection reference was made to Presslie v Cochrane McGregor Group Ltd 1996 SC 289 at pages 292-3 and La Pantofola D'Oro Sp.A v Blane Leisure Ltd 2000 SLT 105. We would not have sustained this argument. Scottish Coal is not, at least at present, seeking to have the issues raised in the action, or any of them, remitted to arbitration. A number of distinct preliminary legal issues are raised by the first conclusion of the summons. Scottish Coal is entitled to have these issues adjudicated upon by the court before any issue arises of any possible operation of the arbitration clause for determining what ranking agreement would be reasonable. We are not persuaded that in these circumstances Scottish Coal can be said to have waived its right to insist on arbitration - should that become a live issue.

[25] These reasons are sufficient for determination of this reclaiming motion, which we shall refuse. Certain other issues raised before us should, however, be noticed. Before doing so we should resume the historical narrative.

Other issues - time

[26] On 30 April 2008 the solicitor for Danish sent by fax a letter to the solicitor for Scottish Coal. It was addressed to the firm of solicitors acting for Scottish Coal. Read short, it was in the following terms:

"Dear Sirs,

On behalf of and as instructed by our clients [Danish] ... considering that the purchase price due to be paid to [Danish] ... 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

[Signed by the firm of solicitors acting for Danish]."

The solicitors for Scottish Coal responded that:

"[Your] clients are not entitled to rescind the contract on the ground stated in your 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 have been agreed, as provided for in the contract."

The solicitors for Danish insisted that they were entitled for the reasons given to rescind.

[27] No issue at that stage arose between the parties about the formalities requisite for a valid notice of rescission. However, it was later noticed that in two respects the notice failed to meet the contractual requirements (under clause 7): the notice was not addressed to Scottish Coal at its registered office (but to their agents at the agents' address) and it was not sent by First Class Registered Post or Recorded Delivery (but by fax). It was conceded in the Outer House and before us that in these circumstances the notice was ineffectual to rescind the Agreement.

[28] To resume the historical narrative, the parties continued to be in disagreement over the terms of the ranking agreement. A suggestion was made on behalf of Danish that a bank guarantee or undertaking be given in relation to the royalty payments; but this was rejected by the Bank. A counter proposal was made but not accepted. Suggestions of a meeting were made but on 13 June Scottish Coal's solicitor reported that Danish's solicitor had been instructed not to attend a meeting. That was "largely because her client has come to regard the option agreement as being at an end".

[29] On 31 July 2008 Peter Ferguson of Scottish Coal faxed Danish's solicitor with a new proposal. He said:

"I am pleased to report that [the Bank] is prepared to accept that [Danish] would have the ability to call up the security and exercise the power of sale. The only qualification to this is that prior to taking steps to call up the security [Danish] would give [the Bank] formal notice of the default by Scottish Coal and [the Bank] would then have a period of 30 days to either ensure that Scottish Coal remedied the breach or to remedy the breach for themselves. If the default was not remedied within the 30 days, [Danish] would be entitled to go ahead and call up."

On 8 August Danish's solicitor, having taken instructions, responded by fax saying:

"... 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."

In the same fax, however, she made the suggestion that Scottish Coal might meet her firm's fees in relation to the delay and enquired "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".

[30] On or about 27 August a revised ranking agreement was framed reflecting the "acceptable" solution. It was e-mailed to Danish's solicitor on 28 August. The amount of the "Danish Forestry Priority" was left blank, with a note to the effect that the amount of £2 million, which had been inserted in a previous draft, had yet to be agreed by the Bank; but, as mentioned above, at the proof no point was taken about this. In the event, although there were further discussions, no ranking agreement was ever executed. In February 2009 Danish entered into an agreement with a third party to sell the Subjects to it. That agreement, we were informed, is itself subject to a term which relieves Danish of its obligations to sell in the event that it is judicially determined that Danish is bound by the Agreement.

[31] Against that further narrative it is appropriate to address certain further issues which were canvassed before us. We do so briefly.

[32] The Agreement does not in express terms stipulate a period within which a ranking agreement had to be settled. Mr Summers submitted in the first place that it was clearly implied that settlement of the ranking agreement would be achieved not later than the settlement date of the purchase and sale provisions, namely, 27 March 2008. Alternatively, he submitted that the period to be implied was a reasonable period, being in the circumstances a short period after the settlement date; he suggested 14 days, taking one to 9 April 2008. On any view a reasonable period had, he argued, long expired before there was any measure of accord among the parties as to the terms of a ranking agreement. Reference was made to Aberfoyle Plantations Ltd v Cheng [1960] AC 115 and to T Boland & Co Ltd v Dundas's Trustees 1975 SLT (N) 80.

[33] The Dean of Faculty submitted that time was not of the essence of the stipulation in the second sentence of clause 10.1. In these circumstances, if time was to be made of the essence, it was necessary for a party seeking to make it so to adopt the procedure envisaged by the Lord Ordinary (Lord Sorn) in Rodger (Builders) Ltd v Fawdry & Others 1950 SC 483 at page 492. Danish had not done so. Alternatively, if a reasonable time was to be implied, the second sentence of clause 10.1 being conceived solely in Danish's favour, it was necessary for Danish to accede to the proffered ranking agreement (which was reasonable) within a reasonable time and, it having failed to do so, Danish had waived its right to a ranking agreement. Mr McNeill submitted that, if a reasonable time had to be implied, a candidate, regard in particular being had to clause 2 of the Agreement, was a period expiring on 31 December 2008. As the Dean had earlier submitted, Danish having by its defective notice sent on 30 April 2008 wrongfully repudiated its obligations under the Agreement could not rely on any time which elapsed after that date.

[34] An issue arose between the parties as to the correct classification of the provision set forth in the second sentence of clause 10.1. Scottish Coal submitted that it was not a condition precedent to, nor suspensive of, the Agreement and in so describing it, at para [67] of his Opinion, the Lord Ordinary had been in error. It could accordingly be distinguished from provisions such as those discussed in Aberfoyle Plantations Ltd v Cheng and T Boland & Co Ltd v Dundas's Trustees. Mr Summers submitted that, whatever its classification, the provision was much more akin to those discussed in these cases than to situations where the ultimatum procedure envisaged in Rodger (Builders) Ltd v Fawdry & Others would be apt.

[35] The Lord Ordinary noted (at para [67]) that the "parties are agreed that the entering into a Ranking Agreement is an essential part of the Agreement". We have already observed that the enforceability of the second sentence of clause 10.1 was critical to the settlement of the purchase. The first sentence of clause 10.1 provided for Scottish Coal granting to Danish a standard security - essentially to secure payment of the royalties to be paid in respect of the extraction of coal and other minerals. That standard security was to be granted "at the Settlement Date". As Scottish Coal had other secured creditors, it was necessary, if Danish was to have a security over the conveyed subjects ranking ahead of other securities, that there be in existence and duly recorded and registered a ranking agreement giving it that priority. A natural, if not a necessary, arrangement was that the executed standard security and the executed ranking agreement be delivered contemporaneously so that they could be recorded and registered together. A period of 28 days was allowed for settlement after service of the Option notice. While the timetable was tight, there was no prima facie reason why a ranking agreement could not be finalised within that period - particularly in circumstances where there was a prior ranking agreement in existence which required only adjustment to accommodate any specialities arising from this particular transaction. In these circumstances we find that, on the hypothesis that the Agreement had some, albeit limited, contractual effect, it was implied in the second sentence of clause 10.1 that the ranking agreement there envisaged be settled by the Settlement Date.

[36] Payment of the purchase price was contracted to be made on the Settlement Date (clause 4.1), as was the granting of the standard security (first sentence of clause 10.1). Delivery of a valid disposition was to take place on that date (clause 4.1). Time was not of the essence of any of these stipulations, nor was it of settlement of the ranking agreement. In contrast, however, to those other stipulations, performance was not exclusively in the power of one of the parties. The agreement involved the consent of a third party (the Bank) and possibly others (Scottish Coal's other secured creditors). In these circumstances we see no place for the ultimatum procedure envisaged in Rodger (Builders) Ltd v Fawdry & Others - which contemplates that the party upon whom the ultimatum is served has it within his own power to fulfil the condition in question. While it may be going too far to describe the settlement of the ranking agreement in terms of the second sentence of clause 10.1 as suspensive of the Agreement as a whole, it was a precondition to the settlement of the purchase transaction - that is, settlement of the property transaction was not envisaged as being possible, or at least obligatory, until the ranking agreement was in place. Neither the settlement of the ranking agreement nor the settlement of the property transaction on which is depended could be delayed indefinitely. Some terminus must be implied in the Agreement (in so far as effectual) by which agreement on ranking was to be reached. No period having been stipulated for that purpose, a reasonable period falls to be implied - if agreement by the Settlement Date is not to be implied. A period expiring 14 days, or possibly 28 days, after the Settlement Date would, in our view, be reasonable, that is, until 9 or possibly 23 April. Such a period had, in our view, expired prior to the service by Danish of the defective notice on 30 April 2008. In these circumstances it is unnecessary to address the possible legal implications of the service of the defective notice of rescission on that date - though we offer a view below.

[37] If, contrary to our view, the second sentence of clause 10.1 was enforceable (because an objective criterion was there set against which a court or an arbiter could adjudicate), there must likewise be implied a reasonable time within which litigation or arbitration proceedings on that matter were to be initiated. A like period for that purpose to that discussed in the preceding paragraph appears to be reasonable. No such initiation of proceedings occurred within that period (or has even as yet occurred). Accordingly, on its expiry the contractual obligations relative to the purchase fell. The Dean of Faculty maintained that, by service of the notice on 30 April 2008 and its attitude thereafter that it was not bound by the Agreement, Danish had repudiated its contractual obligations. It could not, he argued, thereafter rely on any passage of time. He cited no authority in support of the latter proposition. Although it is unnecessary for our decision, we offer the following tentative view. On the assumption that Danish's actings amounted to a repudiation of the Agreement (upon which we express no concluded view), it is trite law that Scottish Coal could either accept the repudiation or decline to do so and insist on performance. The latter course would, on the hypothesis that clause 10.1 was enforceable, entitle it to insist on a third party adjudication of the terms of a ranking agreement. That entitlement would not, however, persist indefinitely. Initiation of proceedings for adjudication would require to be within a reasonable time. Even if a reasonable time was in the circumstances more extensive than we have suggested above, it had surely expired before it was overtaken, if it was, by any accord reached in August 2008.

"Reasonable regulation"

[38] We should add that, on the premise that the second sentence of clause 10.1 was enforceable, Scottish Coal maintained that Danish were in breach of that clause by failing to accede to the draft ranking agreement transmitted on 4 March 2008. It, objectively speaking, reasonably regulated the matters to be regulated, so ran the argument. We observe that in that connection the Lord Ordinary made no finding that it was a "reasonable regulation" and we were not referred to anything from which that inference could properly be drawn. The Lord Ordinary's findings at para [69] are rather to an opposite effect.

Disposal

[39] However, for the above reasons, the Lord Ordinary, in our view, reached the correct conclusion by assoilzing Danish from conclusion 1(iii) of the summons, albeit he did so for reasons which to some extent differ from our own. The reclaiming motion is accordingly refused.