Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION
	[2014] CSOH 47
A366/13	OPINION OF LORD BANNATYNE in the cause DEBORAH ANNE REEVES (A.P.) Pursuer; against DAVID WILLIAM YATES Defender: ________________

Pursuer: Speir; DAC Beachcroft Scotland LLP

Defender: Party

12 March 2014

Introduction

[1] This action came before me as a procedure roll discussion in terms of the pursuer's fourth plea-in-law which was in the following terms:

"The defender's averments being irrelevant et separatim lacking in specification decree should be granted de plano et separatim said averments should be excluded from probation."

The pursuer in terms of the action sought payment from the defender of two sums of money, each being one half of the proceeds paid to the defender on the maturing of an endowment policy. In addition she sought declarator that she was entitled to an equal share of the proceeds to be paid to the defender on the maturing of four other endowment policies.

[2] The pursuer was represented by Mr Speir, advocate. The defender represented himself.

Background

[3] The parties were formerly married. They were divorced in terms of a decree pronounced at Dumbarton Sheriff Court on 23 March 2012. Prior to said decree of divorce the parties negotiated a settlement of their respective financial claims. The terms of said settlement were set out in a minute of agreement ("the minute") entered into between them dated 18 and 31 January 2002 and recorded in the Books of Council and Session on 4 February 2002. In the minute the pursuer is referred to as the First Party and the defender is the Second Party.

[4] For the purposes of this action the following clauses of the minute of agreement were of significance:

"(Third) The parties hereby agree that the Title to the subjects at ...will remain in the joint names of the parties until the parties' youngest child attains the age of eighteen years. During this period the First Party and the said children will reside in the said subjects and the Second Party hereby undertakes not to occupy or enter the subjects without the prior agreement of the First Party. The Second Party hereby undertakes to allow the First Party peaceable enjoyment of the property during her occupation of it. During the said period of occupation, the Second Party hereby renounces his whole rights to occupy the said property, and further renounces all rights he possesses or may possess to require the said property to be sold or to secure any debt on the said property, or to take any action which will prejudice the First Party's interest in and occupation of the said property. For the avoidance of doubt, during the said period the Second Party shall be responsible for the mortgage, the relative insurances and the council tax in respect of the said former matrimonial home. At the end of the said period of occupation, on the parties' youngest child attaining the age of eighteen years or at any other date which may be mutually agreed between the parties, the subjects at ...will be marketed for sale on the open market. The net proceeds of sale after payment of all Estate Agency, conveyancing expenses and all other expenses arising out of the sale and after redemption of the mortgage will be divided equally between the parties. The Second Party will then be released from all his obligations in terms of the mortgage.

(Fourth) The parties hereby agree that the endowment policies referred to hereafter shall continue in force until maturity and the Second Party shall be responsible for payment of the premiums in respect thereof. On maturity of each of the said policies:- (all as fully set out in the conclusions of the summons) the proceeds shall be applied to repayment of the mortgage over the said former matrimonial home at.... Any balance remaining from the proceeds following redemption of the said mortgage in full shall be divided equally between the parties."

[5] With respect to clause (Third) of the minute the defender accepted on record that in terms thereof on the sale of the former matrimonial home, ("The house"), both parties were entitled to an equal share of the net free proceeds of sale (see: pages 9A and page 74A-75E of the Closed Record). In addition it was accepted by the defender on record that on the sale of the house in August 2008, the parties youngest child having reached the age of 18 in January 2008, the net free proceeds of approximately £60,000 after redemption of the mortgage over the property were divided equally between the parties (see: page 9A of the Closed Record).

[6] With respect to clause (Fourth) of the minute it was accepted by the defender that the endowment policies referred to therein ("the policies") were either held in joint names or in the defender's sole name and were at the relevant date matrimonial property (see: page 9A of the Closed Record). Beyond that, the maturity value of the various policies were also admitted by the defender (see: page 86C to page 89C of the Closed Record). It was in relation to the proceeds of the policies that the pursuer's various conclusions were directed. All of the policies matured after the sale of the house. It was a matter of agreement between the parties that it had not been necessary to apply any of the proceeds of the policies to the repayment of the mortgage.

[7] The issue before the court in this case related to clause (Fourth) of the minute. It was in respect to this clause that I heard argument at the procedure roll. The issue between the parties was this: on a proper construction of this clause to what sum of money was the pursuer entitled on the policies maturing?

[8] The two competing constructions of the clause advanced on behalf of the parties were these:

[9] On behalf of the pursuer: the clause provides for an equal division of the balance of the proceeds of the policies, after their application towards repayment of the mortgage over the house.

[10] On behalf of the defender: the pursuer's entitlement is to one half of the difference between the original target values and the maturity values of the policies.

[11] In my view the above contended for construction on behalf of the defender is a fair distillation of the argument put forward by the defender at various points on record (see: page 11C-D; page 13B-C; page 15D-E; page 31E-32A; page 35C-D; page 68E; page 76A-79C; page 86C-92C; page 98A; page 98B-C and page 129B-D.) and what he said in the course of oral argument.

The submissions on behalf of the pursuer

The law

[12] Mr Speir submitted that the general approach of the Scottish courts to the construction of a contract was as set out by Lord Hope of Craighead in his observations in Multilink Leisure Developments Limited v North Lanarkshire Council 2011 SC (UKSC) 53 at paragraph 11:

"The court's task is to ascertain the intention of the parties by examining the words they used and giving them their ordinary meaning in their contractual context. It must start with what it is given by the parties themselves when it is conducting this exercise. Effect is to be given to every word, so far as possible, in the order in which they appear in the clause in question. Words should not be added which are not there, and words which are there should not be changed, taken out or moved from the place in the clause where they have been put by the parties. It may be necessary to do some of these things at a later stage to make sense of the language. But this should not be done until it has become clear that the language the parties actually used creates an ambiguity which cannot be solved otherwise."

[13] However, Mr Speir conceded that this approach of the Scottish courts had to some extent been modified by the decisions of the House of Lords in a number of English cases, see: Mannai Investments Co Ltd v Eaglestar Life Insurance Co Ltd 1997 AC 749 and Investors Compensation Scheme v West Bromwich Building Society 1998 1 WLR 896 and in particular the speech of Lord Hoffman. The modification had been to this effect: that regard may be had to admissible surrounding circumstances in the construction of a contract though there is no ambiguity.

[14] As the editors of Gloag and Henderson, The Law of Scotland, 13^th Edition state at page 157, paragraph 6.23:

"These decisions have been referred to in many subsequent Scottish decisions, without it being clear that the English approach is to be generally adopted."

[15] It was Mr Speir's primary submission that there was no ambiguity and that therefore the approach of Lord Hope of Craighead should be followed. However, his position was that, if I were to follow the approach set out in the English cases and to have regard to the surrounding circumstances, even where there was no ambiguity, this made no difference and the pursuer's contended for construction was shown to be the correct construction.

[16] The submissions on behalf of the pursuer, in their essentials, can be summarised very briefly. First, it was Mr Speir's position, that the plain meaning of clause (Fourth) was this: the balance of the proceeds of the policies after redemption of the mortgage were to be divided equally between the pursuer and defender. The words in the clause were clear in their meaning and effect. There was no ambiguity in the clause. There was no other possible interpretation of the clause.

[17] Secondly on a plain reading of clause (fourth) there was no basis for the defender's interpretation. The reference to "mortgage" in said clause was specifically tied to the mortgage over the house. The clause was not habile to include the defender's apparent argument that in this context "mortgage" was synonymous with the original target values of the policies.

[18] Thirdly he submitted that on a proper reading of clause (Fourth) for the defender's interpretation to be correct, words which were not present within the clause would have to be added to it. Under reference to the observations of Lord Hope of Craighead, earlier referred to, he submitted that this would not be an appropriate approach. It was his submission that it was not for the court to carry out a rewording or a reformulation of the minute. He submitted that for the defender's interpretation to be correct that was what was required.

[19] Fourthly it was his position that there were no technical words within the agreement or any other reason requiring extrinsic evidence as regards surrounding circumstances to be referred to.

[20] However it was his submission that if regard were to be had to the factual matrix this made no difference to the proper construction of the clause. The same result was arrived at.

[21] For the above reasons he submitted that I should grant decree de plano in terms of all three conclusions.

[22] In any event counsel submitted that even if I were not with him in respect to his primary argument, nevertheless, I should grant decree in favour of the pursuer in the sum of £8,608.55. He submitted under reference to the defender's pleadings at page 87B to 88A and 129B-D that the defender admitted on record, on the basis of his own construction of the minute of agreement, that that sum was due to the pursuer.

[23] Beyond that, Mr Speir submitted, if I were not prepared to grant decree de plano, and was minded to allow the case to go to proof I should sustain the second part of his fourth plea-in-law and exclude certain averments from probation. It was his position that the averments from either 11C or the bottom of page 15 of the Closed Record to the end of the defender's answer 6 at page 129 of the Closed Record, other than the admissions regarding the values on maturity of the policies, were irrelevant in that these passages did not raise any matters which could have any bearing on the construction of the minute.

The reply on behalf of the defender

[24] The defender's oral submissions were short. He maintained his position as to the proper construction of the clause, as earlier set out. With respect to the reasons why he maintained this was the proper interpretation he broadly reiterated points which he had set forth in his answers and his written note of argument. As I understood his position he wished me to have regard to the terms of his answers and written argument in reaching my decision.

Discussion

[25] First, in reaching my decision I have had regard to the defender's written argument and his answers on record. With respect to his answers they ran to approximately 120 pages (the pursuer's pleadings on the other hand ran to approximately 4 pages).

[26] Having regard to the length of the answers I believe it necessary, before turning to the legal issues to summarise the points put forward by the defender in his pleadings and note of argument.

[27] First between pages 22 to 30 of the Closed Record the defender sets out the history of the marriage and stresses that from the date of separation he sought to act in a reasonable manner (page 29C).

[28] Secondly between pages 31 and 43 he sets out the circumstances surrounding the drawing up of the minute and again stresses that he sought to be fair and reasonable (see: example at 31C, 32A and 35C).

[29] Thirdly from page 44 to page 68 of the Closed Record he sets out what has happened since the entry into the minute. In particular at pages 65 to 68 he sets out various payments and loans which he has made in honouring the terms of the minute.

[30] Beyond that in this section of the Closed Record the defender laid particular emphasis on the raising of an action in Dumbarton Sheriff Court by the pursuer. This was an action brought by the pursuer in terms of the Family Law (Scotland) Act 1985 to set aside the minute. The background to the raising of this action was this: it became apparent that regard had not been had to the defender's pension when the financial settlement following separation was entered into. The reason, I was advised, that this had happened was this: it had been overlooked by the pursuer's then solicitors. The action to have the minute set aside was opposed by the defender and eventually, on the advice of counsel, that action was abandoned by the pursuer. Thereafter an appeal was marked on behalf of the pursuer relative to an award of expenses which had been made in favour of the defender. The pursuer lost this appeal. Eventually the pursuer paid the defender the expenses awarded.

[31] At the same time that that action was being argued a professional negligence action was raised by the pursuer against her original legal advisors based upon their failure to have taken into account when settling her financial claim the issue of the defender's pension. This action was ultimately successful and was settled by the solicitor's professional negligence insurers for a sum of approximately £60,000.

[32] The defender believed that the above was of considerable significance: it was his position that the present action had only been raised by the pursuer because the previous action in Dumbarton Sheriff Court had been unsuccessful. He believed that the pursuer's present legal advisors, who also acted in the Dumbarton Sheriff Court case, had pushed the pursuer into raising the present action. It was his position that they had pushed her into putting forward an interpretation of the minute which she did not in fact accept. It was clear to me from the lengthy pleadings on this issue and the number of references to it in the course of his address to me that the defender was deeply embittered by the action in Dumbarton Sheriff Court and the actings of the pursuer's current solicitors and the actings of the Scottish Legal Aid Board (SLAB) in granting the pursuer legal aid in that action and in the present action.

[33] Fourthly, from page 69 to 118 the defender set forth various averments relative to the abandonment of the action in Dumbarton and as regards the policies and their maturity.

[34] Fifthly from page 119 to 123 he made various averments regarding SLAB and their granting of funding to the pursuer.

[35] Sixthly from page 124 he set out what was described in the Closed Record as further mitigation. In this section of his pleadings he emphasised the number of years since the minute was entered into and that it was only now claims were being made against him, following the abandonment of the action in Dumbarton Sheriff Court. He set forth how hard he had worked to maintain payments to the pursuer.

[36] Seventhly overall looking to his averments there appears to be a general appeal to equity and fairness with respect to the interpretation of the minute. In summary he said that the whole claim was unfair.

[37] Having set out the defender's position, as I understand it, I now turn to consider the relevant law and in particular set out general principles of construction which I believe require to be followed when considering what is the sound construction of the said clause of the minute. These principles are set out in a series of propositions contained in the Scottish Law Commission, Discussion Paper on Interpretation of Contract (2011), DP, number 147, chapter 7, paragraph 5.13 and are as follows:

"1. The words used by the parties must generally be given their ordinary meaning.

2. A contractual provision must be construed in the context of the contractual document or documents as a whole.

3. In construing a contract drafted by lawyers, the words may be expected to have been chosen with care and to be intended to convey the meaning which the words chosen would convey to a reasonable person.

4. The process of construction is objective, according to the standards of a reasonable third party aware of the commercial context.

5. Regard is to be had to the circumstances in which the contract came to be concluded to discover the facts to which the contract refers and its commercial purposes objectively considered, although this is limited to matters known or reasonably to be known by both parties.

6. Where more than one construction is possible, the commercially sensible construction is taken to be what the parties intended.

7. The court must not substitute a different bargain from that made by the parties."

[38] Beyond the above having considered the various authorities I have concluded that background circumstances can be referred to in circumstances where there is no ambiguity. The approach I have adopted relative to this issue is based on the guidance of Lord Hodge in Luminar Lava Ignite Ltd v Mama Group Plc 2010 SC 310 at paragraph 38 where he observes as follows:

"But I see no error in law in the Lord Ordinary's approach of considering first the words in question and then reassessing his view of them after having regard to the relevant background circumstances. It is not part of our law of contract that the court can have regard to relevant background circumstances only if there is ambiguity in the words of an agreement. The Lord Ordinary is supported by Lord Mustill's view, which he quotes, that in most cases 'the enquiry will start, and usually finish, by asking what is the ordinary meaning of the words used' (Charter Reinsurance Co Ltd v Fagan, p 384B-C)."

[39] Looked at in terms of that legal framework it is clear that much of what the defender put forward within his pleadings and in his note of argument is irrelevant to the issue before me, namely: to answer the question; what is a sound construction of clause (Fourth) of the minute?

[40] Generally I would observe conduct of parties post agreement is not admissible. All of the averments relative to the action in Dumbarton in my view have no bearing on what is a sound construction of this clause of the minute. The fact that the pursuer raised such an action, the issues raised in that action and the fact that the pursuer lost that action cannot have any effect on the construction of this clause. They are not relevant background circumstances.

[41] From a layman's point of view it may seem odd, if not suspicious, that (a) the pursuer sought to reduce the minute and now relies on it; (b) the pursuer did not raise the issue now before this court in the sheriff court action; and (c) that only following that action has the present action been raised. These were all points which were made by the defender in the course of his submissions to me. However none of that is to the point when it comes to the issue of construction of the clause.

[42] The defender's averments regarding the actings of the pursuer's present agents and SLAB are equally it seems to me irrelevant. With respect to the pursuer's present agents the point which the defender appeared to be seeking to make was that they were putting forward in the present action an argument which the pursuer did not accept and were accordingly acting without instructions. He appeared to argue that it was they rather than the pursuer who were behind this and the action in Dumbarton Sheriff Court. That is simply not the case. Agents and counsel who were acting on behalf of the pursuer, would simply not have been in court, had they not received instructions from the pursuer to present the case.

[43] With respect to SLAB the defender is upset that the pursuer has been granted legal aid by them. Once more the fact that SLAB have granted her legal aid to pursue this action as they seem to have done to pursue the case in Dumbarton Sheriff Court is simply not relevant to the issue of interpretation of the minute.

[44] Further the fact that the defender has paid money to the pursuer and his children or leant them money since the coming into effect of the minute once more has no bearing on how the clause is to be interpreted. Accepting that the defender has done this, does not in any way, support the defender's argument relative to construction.

[45] With respect to the defender's averments relative to the drawing up of the minute these are irrelevant as they refer to negotiations and because they are founded on an appeal to fairness which argument I deal with separately below.

[46] Generally the defender argued that it would only be fair to prefer his interpretation of the clause. Fairness and equity do not enter the construction exercise. There is no question of any equitable principle entering into the interpretation of the minute. These averments are accordingly irrelevant.

[47] For the foregoing reasons I am in agreement with counsel for the pursuer that the defenders averments from the bottom of page 15 to the end of answer 6 are irrelevant, except first those setting out the valuations on maturity of the policies between 86C and 92D. Secondly, I would also, had it been necessary, have allowed the following averments to proceed to proof: 31E to 32A; 35C-D; 68E; 76A to 79C; 98A to C and 129B-D which in my judgment set out the arguments which I identified earlier supporting the pursuer's contended for construction. Accordingly even if I were to allow this matter to go to proof I would not allow to go to proof a significant body of averments made on behalf of the defender.

[48] Having considered what are the relevant averments regarding the construction issue I turn now to consider on the basis of these averments: what is the proper construction?

[49] Other than the above points the defender's argument as to why the clause should be interpreted in the manner he contended for was perhaps most clearly set out in the following passages at pages 11, 12 and 13 of the Closed Record:

"Although the marital property was sold on the 13 August 2008 and the value of the Low Cost Endowment Mortgage then in operation was deducted from the proceeds of sale, this is not the same as redeeming the values of the corresponding Property and Life Endowment Insurance policies that the agreement refers to. Low Cost Endowment or Property and Life mortgage products were becoming very popular when I (alone) bought my first property in 1983 - about the same time as I met Deborah. The idea of these products is that money (in the form of a mortgage) is lent by a lender (usually a bank or building society) to purchase a property, and (as in all of my/our cases) during the course of the loan, only the interest on the mortgage is repaid according to the variable Bank of England base rate and interest is continued to be paid until the loan is repair (sic) (or redeemed). As security for the loan (in case of death) a directly associated Endowment Insurance Policy must be taken out to provide life insurance cover for the corresponding amount. These types of insurance policies were also designed to redeem the actual loans (or target amounts) at the date of the policy's maturity. The hope was that, through wise investments, insurance policies would far exceed the mortgage sums, and not only provide enough funds to redeem the target amounts, but also pay considerable credit balances. Debit balance performances were warned against, but in the early 1980's these were not really envisaged. Any Financial Advisor will be able to verify this understanding. My, sole-life only policies more than met the target values, and provided enough money to redeem those mortgages (although this action has so far not been taken). Our joint-life policies were not so lucky, and none of them reached their target values, leaving insufficient funds to fully redeem those mortgages (when the sums are finally paid by the insurance companies).

In terms of what should happen when couples separate and property and associated life insurance assets are to be divided, the important factor to bear in mind is how any separation agreement is worded, as there are many different options available to such couples, depending on how others aspects of the separation agreement are incorporated. In our case, if each of the entire maturity values were to be viewed as totally free proceeds and were to be equally shared, then this should have specifically said so, and instructions should have also declared how each of the actual mortgage values should then be redeemed. Our agreement does not say this. It only awards Deborah a half share of any balances (the only remaining free proceeds of our marriage) after the policies have been redeemed. As our agreement does not state otherwise, this obviously means that it is, as the sole policy payee (as confirmed in the agreement), my responsibility to redeem each mortgage sum (the only remaining non free proceeds) although the agreement does not actually state the dates when these payments should be made."

[50] Without hesitation it is my view that the interpretation of the pursuer is to be preferred as the sound construction.

[51] The first principle I earlier outlined, namely that words used should be given their ordinary meaning clearly favours the pursuer's construction.

[52] The word "proceeds" used in clause (Fourth) applying the ordinary meaning to that word is the amount paid by the relevant insurance company on the maturity of the relevant policy. The clause is thereafter clear as to what should be done with the proceeds: first it "shall be applied to repayment of the mortgage over the said former matrimonial home". Secondly the clause sets out what should happen to any balance remaining from the proceeds following the redemption of the said mortgage in full. Applying ordinary language to the word "balance" it means the sum remaining following the repayment of the mortgage. With respect to that balance the clause directs it "shall be divided equally between the parties."

[53] The above language could not it appears to me be clearer. It is wholly unambiguous. The construction contended for on behalf of the pursuer is it appears to me obviously correct applying the ordinary meaning of the words used in the clause.

[54] For the defender's construction to be correct the ordinary meaning of the language used would have to be strained out of all recognition. The concept of target values which is the foundation of the defender's argument does not appear at all in the clause or at any other point in the minute. On no ordinary meaning of any of the language within the clause could it be argued that the balance which was to be divided was in any way related to the concept of target values of the policies.

[55] Having said the above that is perhaps sufficient to decide the issue however, I would also observe:

[56] Turning to the second principle, that a contractual provision must be construed in the context of the contract document itself. This also in my view supports the pursuer's contended for construction. The equal division of the balance after repayment of the mortgage fits in with the equal division of the proceeds of sale of the house after the redemption of the mortgage. It also fits in with the equal division of the surrender proceeds of certain other life policies referred to in clause (Fifth).

[57] Further with respect to the use of the word "mortgage" in clause (Fourth) this must mean the same mortgage as is referred to in clause (Third) when the two clauses are read together. I agree with the submission made to me on behalf of the pursuer that the reference to mortgage in clause (Fourth) is specifically tied to the mortgage over the house. Further I agree that the clause is not habile to include the defender's apparent argument that in this context mortgage is synonymous with the original target values of the policies. This would necessitate the word mortgage having a different meaning in clause (Third) and clause (Fourth). In my view looking to the agreement that is not a construction that it could possibly bear.

[58] Turning to the third principle, as I understand it, this document was drafted by a lawyer (the pursuer's then legal advisor). Applying this principle to the clause it once more supports the pursuer's contended for construction. It seems to me that the words used must convey to the reasonable third party the pursuer's interpretation.

[59] The fourth principle equally supports the pursuer's contended for construction.

[60] In my view the meaning of the clause is clear and unambiguous and it is the meaning contended for on behalf of the pursuer.

[61] However, for reasons which I have earlier stated, I believe it is appropriate to check this against the admissible background circumstances. Taking this approach I find no reason to depart from my conclusion that the pursuer's contended for construction is a sound one. There is nothing in the relevant background circumstances to cause me to believe to the contrary. There is it seems to me nothing in these circumstances which could lead to an interpretation of the type contended for by the defender.

[62] The sixth principle I do not believe arises in the instant case.

[63] As regards the seventh principle it is clear to me that to have accepted the defender's construction would have breached the seventh principle.

[64] For the above reasons I conclude that the pursuer's construction is to be preferred. Given the admissions on record relative to the policies and their value on maturity I believe it appropriate to grant decree de plano as sought by the pursuer. Had I not been granting decree de plano I would, as I earlier set out have excluded from probation certain averments in that they are irrelevant. Further even if I had preferred the defender's construction I would have granted decree in favour of the pursuer in the sum of £8,608.55 which was admitted to be due.

Disposal

[65] For the above reasons I repel the defender's pleas-in-law and sustain the pursuer's fourth plea-in-law, in so far as granting decree de plano, it not being necessary to sustain the rest of the plea. I accordingly grant decree in terms of the all three conclusions. In terms of the first and second conclusions interest was sought from certain specific dates. In the course of his submissions to me counsel for the pursuer accepted that it would not be appropriate for interest to be payable from these dates but rather that interest should be payable from the date when this action was raised. I agree with that submission. I accordingly grant interest at the rate of 8% per annum from the date which the action was raised, namely 7 June 2013 until payment. I reserve all issues of expenses.