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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> UNICORN TOWER LIMITED AND OTHERS AGAINST HSBC BANK PLC [2018] ScotCS CSOH_30 (03 April 2018)
URL: http://www.bailii.org/scot/cases/ScotCS/2018/[2018]_CSOH_30.html
Cite as: [2018] ScotCS CSOH_30, [2018] CSOH 30
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Page 1 ⇓
OUTER HOUSE, COURT OF SESSION
[2018] CSOH 30
CA25/12
OPINION OF LADY WOLFFE
In the cause
UNICORN TOWER LTD AND OTHERS
against
HSBC BANK PLC
Pursuers
Defender
Pursuers: Mitchell QC; John Mair Solicitors
Defenders: O’Brien; Shepherd & Wedderburn LLP
3 April 2018
Background
[1] The pursuers had the ambition to develop a large property in the centre of Glasgow
(“the Property”) in two phases, phase 1 being for 50 apartments and phase 2 being for
commercial space at ground level (“the development”). The indicative cost of phase 1 was
£14 million pounds. There are detailed averments about the arrangements amongst the
pursuers, but it suffices to note that the second pursuer is the parent company of the first
pursuer, which is a single purpose vehicle. The third pursuer, an individual, is a
shareholder and director of the second pursuer and became a guarantor of the obligations of
the first pursuer.
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2
[2] In early 2007 the defenders agreed to provide finance for the development. There is
no need to narrate the detailed averments about the pre-contractual communications (which
comprise Articles 2 to 8 of condescendence). The import is that the third pursuer had a
pre-existing business relationship with the defenders (in England), that the defenders were
keen to expand its business and to raise its profile in the West of Scotland, and that the
defenders were aware that the funding from the defenders was in substitution for funding
from the Clydesdale Bank.
[3] The documentation entered into among the parties relative to the provision of
financial facilities by the defenders to the first pursuer included the following:
1) A facility letter dated 25 January 2007 agreement (“the Facility Letter”), for a loan
account (“the Facility”) for £7,965,000;
2) A standard security granted by second pursuer over the property in favour of the
defenders (“the Standard Security”);
3) A guarantee granted by the third pursuer in favour of the defenders, dated 14
April 2008 (“the Guarantee”);
4) A security interest agreement, dated 14 April 2008 (“the SIA”); and
5) An interest rate swap agreement (“the IRSA”).
[4] The Facility bore to be repayable on demand and was due for review in 12 months’
time. It was also subject to the defenders’ Terms of Business, but no reference was made to
these in the debate before me. The Facility was continued in January 2008 for a further 12
months (the “2008 Continuation Letter”).
[5] The development did not proceed in the timescale envisioned. (The causes and
consequences of the delay are disputed.) By letter dated 13 February 2009 the defenders
outlined their concerns and stipulated for the provision of further reports and information to
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3
be provided (“the 2009 Continuation Letter”). Subject to satisfaction with these materials,
the Facility was continued on the same terms as set out in the Facility Letter. It stipulated
for a review of the Facility in two months’ time. The Facility was not further continued in
April 2009. At about this time the third pursuer granted the Guarantee. He also entered into
the SIA and deposited £700,000 with the defenders pursuant to it. By letter dated 8 June
2009, the defenders demanded immediate repayment of the Facility. The pursuers resist that
demand and have raised these proceedings.
The pursuers’ case
The Facility, the Standard Security, Guarantee and the SIA
[6] The pursuers challenge the defenders’ termination of the Facility. They seek
declarator (in conclusion 1) that the defenders were not entitled to terminate the Facility.
They seek damages of £8,000,000 (in conclusion 2) for breach of contract and breach of
undertaking. In support of these conclusions they argue:
1) That there was a collateral agreement (to be inferred rebus et factis) “negotiated”
between “the First Pursuer and the Defender (et separatim, a binding unilateral
promise made by the Defender)” that the Facility “was a fixed term facility and
(absent a breach by the First Pursuer of its terms) would not be terminated until
the completion of the development”.
2) Esto there was no collateral agreement or promise, they argue that the defenders
were personally barred from terminating the Facility; and
3) They also argue that the defenders’ power to demand repayment was subject to
an implied term that it would be exercised in good faith.
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4
The pursuers also seek declarators (in conclusions 3 and 4, respectively) for release and
discharge of the second pursuer from the Standard Security and of the third pursuer from
the Guarantee and the SIA. They rely on the same grounds as those advanced to challenge
the termination of the Facility and no separate argument was presented in respect of these
conclusions.
The IRSA
[7] The pursuers aver that there was a negligent misrepresentation in respect of the
entry into the IRSA. The defenders accept that the IRSA was mis-sold to the pursuers and
compensation has been paid via a scheme under the auspices of the Financial Ombudsman.
In these proceedings, the pursuers maintain a claim for consequential loss. They also seek to
imply into the IRSA five principles and six rules from the Conduct of Business Sourcebook
(“COBS”) governing regulated activities.
The defenders’ response to the pursuers’claim
[8] While this was a debate at the instance of the defenders challenging the relevancy of
the pursuers’ pleadings, it is helpful to note the defenders’ position. In response to the
argument that there was a collateral agreement, the defenders rely on the terms of the
Facility Letter and the 2008 and 2009 Continuation Letters and they argue that the Facility
was always repayable on demand. They invoke an exclusive jurisdiction clause in respect of
the pursuers’ IRSA claim. While the defenders have brought a counterclaim for repayment
of the sums due under the Facility, the counterclaim was not the subject of debate.
Page 5 ⇓
5
The pursuers’ pleadings
[9] The pursuers’ pleadings are detailed. Their pleadings in support of a collateral
agreement to the Facility are found in articles 9 to 20 and the pleadings anent the “purported
calling up of the loan” Facility are in articles 22 to 26. The case of personal bar is in article 21.
In relation to the IRSA, the pleadings are in articles 29 to 34. Averments of quantum are in
articles 35 and 36. For the purposes of the argument about the exclusive jurisdiction clause,
extensive reference was made to the pleadings in the Initial Writ. The relevant passages are
quoted or summarised in parties’ submissions.
The contractual documentation
[10] Having regard to the arguments presented, it suffices to note that the principal
features of the contractual documentation referred to were the “on demand” character of the
Facility and the stipulated periods before review. Mr Mitchell does not dispute these. His
principal argument is that these have to be read subject to the collateral agreement (or
promise etc) he contends for.
The defenders’ submissions
[11] The defenders challenge the relevancy of the pursuers’ case based on a collateral
agreement, personal bar, unilateral promise, the several implied terms and the averments of
quantum. They also invoke the exclusive jurisdiction clause.
The challenge to the pursuers’ case based on a collateral agreement/unilateral promise
[12] Mr O’Brien, who appeared for the defenders, relied on the provisions in the original
Facility Letter and in the two subsequent continuations of it, which stated that the Facility
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6
was repayable on demand. He also noted that there was provision for the Facility to be
reviewed periodically. All continuations thereof were for limited periods, the last of which
had expired by the time repayment of the Facility was demanded.
[13] The pursuers’ case appeared to be that the alleged collateral agreement was entered
into at the same time as the Facility Letter. He referred to articles 9 and 10 of
condescendence, averring that the Facility Letter was to be read alongside the collateral
agreement; and to article 21 of condescendence, where a fallback case of personal bar was
advanced “even if there was no collateral agreement at the time of the entering into the
original agreement on or about 25th January 2007”. Mr O’Brien noted, however, that the
pursuers made no averments of matters capable of giving rise to such an agreement. Article
12 of condescendence merely contained a generic assertion that the defenders’ employees
“constantly reassured the pursuers and other that the funding would be a term loan”. This
was wholly lacking in specification about when and in what terms such assurances were
supposedly given (particularly where they so obviously contradict the terms of the
contemporary contractual documentation). Mr O’Brien went through the averments in
articles 13 to 19 of condescendence in detail. These related to events after the Facility Letter
was entered into. At most, some of these narrated that the defenders were supportive.
There were no averments from which the court could infer that a collateral agreement had
been reached. The pursuers’ averments were insufficient to justify a departure from the
clear terms of the Facility Letter (or its two continuations) or such as to justify finding that
there was a collateral agreement in the terms contended for.
[14] In respect of the pursuers’ argument that there is a conflict or repugnancy between
the provisions that the Facility was repayable “on demand” and a provision for review in
12 months, he submitted that a provision that a loan is repayable on demand is not
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inconsistent with an expectation (or even a provision) that repayment will be made from the
proceeds of sale. Reference was made to Bank of Ireland v AMCD (Property Holdings) Ltd
[2001] 2 All ER (Comm) 894) at para 17. There was no repugnancy. Mr O’Brien submitted
that there were no relevant averments of a unilateral promise.
[15] In relation to Mr Mitchell QC’s reliance on Royal Bank of Scotland v Carlyle 2015 SC
(UKSC) 93, this case was readily distinguishable. On the facts of that case, the defender had
communicated that he would not enter into a first agreement (for the purchase of a
property) if he did not also have the bank’s firm commitment to fund the redevelopment
and that he required a full commitment to the proposal or nothing. The bank gave a verbal
assurance that these would both be provided. The parties entered into a written contract for
the provision of finance for the purchase. The bank subsequently refused to provide
support for the redevelopment. After proof, Lord Glennie held that the specific assurance
by the bank constituted an oral agreement. The fact that the parties had envisaged that there
would be a written agreement in due course did not preclude that oral agreement coming
into existence. The Supreme Court upheld this finding.
[16] Accordingly, Mr O’Brien submitted, the pursuers’ case based on the existence of a
collateral agreement or promise was irrelevant, or at least wholly lacking in specification.
Personal bar
[17] Mr O’Brien turned to the pursuers’ esto case (in article 21 of condescendence) that, in
the event that there was no collateral agreement as averred, the defenders were nonetheless
personally barred from seeking repayment on demand, by reason of the representations
allegedly made. He submitted that, even assuming that the elements of personal bar were
found to be proved, that would not provide a basis for the pursuers’ claim. “Personal bar
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8
only operates as a defence; it does not create any claim or positive right…”: Advice Centre for
personal bar could never have provided the pursuers with a right to draw down further
funds after the facility had expired. Nor can it provide a basis for a damages claim.
Accordingly, the pursuers’ claim so far as based on personal bar was also irrelevant. In
relation to the pursuers’ claim for discharges of the Standard Security, the Guarantee and
the SIA, the supporting averments, at articles 27 to 28 of condescendence, were premised on
the success of the first pursuer’s claim that the defenders were not entitled to demand
repayment of the loan. They were irrelevant for the same reasons.
Reliance on the IRSA transaction as a defence
[18] There was a discrete challenge to the pursuers’ averments in article of
condescendence 25. Mr O’Brien noted that the pursuers relied on the IRSA mis-selling claim
as a defence to the counterclaim, and in the principal action it is averred that, “the debit
balance had arisen as a result of the mis-selling” of the IRSA by the defenders to the first
pursuer and “as a result of the application” by the defenders of the IRSA “interest charges to
overdraft account, without any authorisation or entitlement to do so” (per article 25).
[19] Mr O’Brien’s submission was that, even assuming that there was mis-selling, any claim
arose under a separate contract and was irrelevant to the demand for repayment of the balance
due under the Facility. The obligations in the IRSA and the Facility were not counterparts to
each other, in the sense required by the principle of mutuality, so no right of retention would
any default on the part of the pursuers before the defenders were entitled to demand
repayment. Mr O’Brien argued that even if that claim were well-founded, it would constitute
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9
an illiquid claim for damages arising from a separate contract entered into at a later date. In
any event, the pursuers have already received compensation in respect of the charges that had
been incurred as a result of the IRSA agreement.
Implied terms for the IRSA
[20] Subject to issues of jurisdiction and quantum, Mr O’Brien accepted that the
averments in article of condescendence 29.1 was relevant for a proof of negligent
misrepresentation inducing contract. The passage at article of condescendence 29.2,
introduced by amendment, was a reformulation of 29.1. While repetitive, it was relevant.
Otherwise, he challenged the averments about the implication of a substantial number of the
COBs rules as terms to be implied into the IRSA.
[21] A term may only be implied in a commercial contract where it is necessary to give
the contract business efficacy or where the term is so obvious that it goes without saying:
paras 21 to 23, per Lord Neuberger. Neither test was met. At most, the pursuers’ case was
that the term should be implied because the defenders were subject to the COBS Rules and
that these exist for the protection of customers, such as the first pursuer. However, such a
term was not necessary for business efficacy, nor was it so obvious that it went without
saying.
[22] Furthermore, the implication would be wholly inconsistent with the statutory
scheme under the Financial Services Market Act 2000 (“the 2000 Act”), in combination with
the Financial Services Market Acts 2000 (Rights of Action) Regulations 2001 (“the 2001
Regulations”), which carefully limited the extent to which breaches would give rise to a
private right of action, as opposed to regulatory consequences. This was provided for by
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section 150 (which was in force at the material time) of the 2000 Act, read together with
regulation 3 of the 2001 Regulations. The effect of the pursuers’ implied terms was to try to
rely on features of COBS, even though those rules were not directly enforceable by persons
such as the first pursuer.
[23] Mr O’Brien referred to a number of cases to support this proposition. Green and Anr v
Royal Bank of Scotland PLC (FCA intervening) [2014] Bus LR 168 was a case where the court
refused to imply a like term at common law which was found in the COBS rules but in
respect of which the plaintiff’s claim was precluded. The court held that there was no need
or justification for the independent imposition of a duty at common law on the defendant
bank where there was an express cause of action for breach of a statutory duty when the
bank was undertaking a regulated activity. Mr O’Brien looked at the cases of Crestsign Ltd v
Barclays Bank plc [2015] EWHC 3430 (QB), essentially to argue that the latter qualified the
failed on time-bar, it would have also failed on the implication of a term that was
inconsistent with the clear statutory scheme. He also referred to Flex-E-Vouchers Limited v the
Royal Bank of Scotland Plc [2016] EWHC 2604 (QB) in which the court refused to imply a term
that would cut across the statutory scheme (para 54). None of these cases provided support
for the kind of implication that the pursuers sought to do in this case.
No relevant averments of loss for the IRSA claim
[24] The pursuers’ case was for consequential loss flowing from the mis-selling of the
IRSA proceeded on the hypothesis that the defenders were entitled to terminate the Facility.
It was unclear what was meant by “excess interest”. It may mean that the pursuers paid
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more than anticipated by way of interest under the IRSA after the 2008 crash and the Facility
was not drawn down to the same extent because of the delay in progressing the
development. The tenor of the averments was that the pursuers therefore ended up owing
more to the defenders. Article 35 of condescendence appeared to be the primary basis of
loss (loss of profit if the Facility had not been terminated). Article 36 of condescendence
was the loss from the mis-selling. The averments of quantum were confusing. The pursuers
appeared to contend that but for the application of “excess interest” the Facility would not
have been terminated. The problem was that this was inconsistent with the pursuers’
averments about the change in policy on the part of the defenders (in articles 24 and 25 of
condescendence). The problem for the pursuers was that, on the hypothesis on which this
part of their case proceeded, the defenders were entitled to call up the Facility (because it
was repayable on demand or because any extension expired). If the pursuers averred that
the defenders wanted out of this type of lending, where was the causal link between an
alleged mis-selling of the IRSA and the demand for repayment of the Facility? The criticism
was more fundamental than just a lack of specification.
Plea of no jurisdiction in respect of the IRSA claim
[25] The pursuers’ case began in the sheriff court by initial writ. There had been two root
and branch rewritings of the pursuers’ case. The matter was appointed to the Commercial
Roll on 23 February 2012. The pursuers’ case of mis-selling of the IRSA was introduced by
adjustment in March 2012 and the defenders challenged jurisdiction at that point. The
pursuers accept that there is an exclusive jurisdiction clause in the IRSA but they wish to
override this on the basis, they say, that the defenders have accepted jurisdiction. The
apparent basis for this argument was the lodging of the defenders’ counterclaim (per article
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of condescendence 1). The pursuers appear to have departed from this, as there is no
reference to this in their Note of Argument. From that document, the pursers now seek to
invoke a discretion. (There were no pleadings for this but Mr O’Brien did not take that
point.)
[26] Mr O’Brien proceeded to go through the averments and craves in the initial writ in
detail, to the effect that the complaint in the sheriff court pleadings had nothing to do with a
case of mis-selling the IRSA. Accordingly, there was no occasion in those proceedings to
take a jurisdiction plea. As soon as that ground had been introduced in the pleadings in this
case, the plea was taken. It was unfounded to contend that there had been a submission to
jurisdiction. The claims in the two actions were quite different.
[27] In respect of the pursuers’ resort to a discretion, under reference to Donoghue v Armco
Inc [2002] 1 All ER 749 (at paras 24, 25, 27, 74 and 75), he argued that the court required a
very strong reason to permit a party to sue in a non-contract forum. He accepted that the
court has a discretion and that, on the facts of that case, it had been found preferable to have
a single composite trial of all issues. The facts were distinguishable, because in this case
there are two distinct claims, with no risk of conflicting proceedings. It was not artificial to
have two separate courts deal with the separate contracts, the Facility and the IRSA, as that
was what parties had contracted for. If the court upheld the plea, then the whole of the
IRSA claim fell away.
Disposal
[28] Mr O’Brien explained that if the court were with him on the basis that there was no
jurisdiction or that there were no relevant averments of loss, then the mis-selling case fell. If
the court was against him on both of these points, but with him on the relevancy of the
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implied terms, then what was left was a stand-alone claim of negligent misrepresentation.
In that event, the court should put the matter out By Order to identify what parts of the
pursuers’ pleadings fell to be excluded. On the primary case (of a collateral agreement), if
the pursuers failed, then the whole case fell. If the pursuer succeeded on the basis that there
was a collateral agreement, then, again the matter should be put out By Order.
Reply on behalf of the pursuers
Background
[29] Mr Mitchell QC, who appeared on behalf of the pursuers, began by going through
the background. He emphasised that an IRSA was no more than a bet on the direction of
interest rates. It demonstrably made no commercial sense whatsoever, especially if it
became disconnected from the Facility. It was incomprehensible to enter into an IRSA
unless to hedge a variable interest rate due under a loan. Mr Mitchell also explained the
detail of the proposed development and the relationship between the Facility and the IRSA.
The pursuer was paying interest for noting more than losing the bet.
[30] He urged the court to take a comprehensive, not a particularised view, of the
pleadings. The pursuers got in deeper and deeper as a consequence of the defenders’
encouragement until they turned around in 2009 and demanded repayment. They had
issued a bland letter. The pursuers cry “foul” and this was the basis for the averments of a
lack of good faith (in article 25 of condescendence).
Retention
[31] Under reference to Inveresk, Mr Mitchell argued that there was the requisite degree of
mutuality between the IRSA and the facility agreement to enable the pursuers to withhold
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sums due under the Facility, pending resolution of their consequential loss claim under the
IRSA. This wasn’t a case of retention but he invoked the court’s discretion to permit this.
Jurisdiction
[32] Mr Mitchell referred to statements 21, 25 and 34, 35 and 40 of the initial writ to
identify the references to the IRSA. There was arguably a crave relative to this, if one had
regard to the plural form of the fourth crave. The defenders took no plea of no jurisdiction.
They referred to clause 6.2 of the IRSA. He referred to answers 33 to 36. The defence was
derived from the IRSA. In the sheriff court process, therefore, the parties had joined issue on
the IRSA.
[33] Mr Mitchell advanced a subsidiary argument. The defenders strive to find
prorogation of a discrete claim. But there was no authority for that. In fact, the parties had
joined issue on the IRSA. It mattered not that there was no discrete claim based on the IRSA
in those proceedings.
[34] Otherwise, Mr Mitchell invoked the court’s discretion. Relevant to the exercise of
that discretion was the practical reality that this was all really one case. If the evidence were
split, the evidence about the Facility will be relevant to the evidence in relation to the IRSA.
The same witnesses would be required. One needed to understand why the IRSA followed
the Facility. If credibility was important, there could be different assessments. The English
courts would only have jurisdiction over the IRSA. They had no jurisdiction over the
counterclaim. If the English proceedings focused only on the IRSA then they would fail to
see the big picture and the commercial reality of the whole package. There were practical
difficulties. There were questions of economy, convenience and coherence because of the
unity of the two contracts.
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The Facility: Collateral Agreement and promise
[35] Mr Mitchell began by arguing that the defenders’ submissions only worked on a
narrow reading of the pleadings. The defenders were correct that there were no averments
of a collateral agreement at the outset. The pursuers were not offering to prove a particular
meeting where a particular representation was made. Mr Mitchell also accepted that the
representations to third parties could not be the basis of a contractual undertaking to the
pursuers. The pursuers’ averments proceeded on the basis of inference. Notwithstanding
the reference in the averments to representations at, or shortly after, the time the Facility was
entered into, Mr Mitchell also made a submission that, looking at the totality of the
averments, a collateral agreement could be inferred by March 2009. Everything was relevant
to the possibility of the court drawing the necessary inference. The date of any collateral
agreement could be earlier. On this basis, even the representations to third parties could be
relevant, rebus et factus. Mr Mitchell then looked in detail at his averments in articles 10 and
11, and 13 to 20 of condescendence. A proof should be allowed to see how it all hung
together. It could not be said that the pursuers could not possibly succeed. He had, he said,
averred enough. He made passing reference to the cases of Baillie v Fraser (1853) 15 D 747
and Sutherland v Montrose Shipbuilding Co (1860) 22 D 665 but indicated that these were not
particularly relevant.
[36] In relation to his alternative case that there was a unilateral promise, Mr Mitchell
rested on his note of argument and the submissions just made. He emphasised his reliance
on the collateral agreement argument.
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Personal bar
[37] The defenders had departed from their ability to call up the Facility on demand. He
deployed personal bar as a shield, that was only so far as it could be taken. He abjured the
use of the doctrine as a sword.
Implication of a term of an obligation of good faith
[38] Mr Mitchell argued that he had sufficient averments that the defenders had acted in
bad faith. He turned to his argument that there fell to be implied as a term an obligation of
good faith. This argument was developed toward the end of Mr Mitchell’s reply at the end
of the second day of the debate. While there were some averments in the pleadings, the case
not been included in the two-volume joint bundle of authorities. He made detailed
references to Yam. (Mr O’Brien handed up the case of Property Alliance Group Ltd v Royal
Mitchell emphasised that Leggat J looked at the contract as a whole and the greater prospect
for implication in a “relational” contract. Here, the on demand character of the Facility was
not inconsistent with a duty on the defenders to act fairly. The case of Property Alliance
followed a long proof. It exhibited an anglo-saxon individualism. Whether or not the IRSA
was actionable, parties were entitled to protection. The attempt in Property Alliance to push
back on Leggat J in Yam was unpersuasive.
[39] It was necessary to find a further day to enable the parties to conclude their
submissions. In advance of that date, parties both helpfully provided supplementary
submissions on the implication of a term of good faith which developed the arguments
significantly from their first submissions.
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[40] The parties’ submissions ranged widely, across centuries and jurisdictions, and
raised a number of interesting questions. Mr Mitchell proposed the following:
“(1) There is a principle in Scots Law that parties must act in good faith towards each
other in relation to their actings under a mutual contract. For the sake of brevity,
this principle is hereinafter referred to as an “obligation of good faith”;
(2) If it be the case that this principle has not yet been definitively declared, there are
compelling public policy reasons why this should now be done;
(3) Whether or not the court chooses to declare a general obligation of good faith in
contract under Scots Law, nonetheless, even an incremental approach to the
application of the concept of good faith to contractual relations should result in
the implication of a term into the present contract requiring good faith, in respect
of which the defender is alleged to have been in breach.”
[41] In support of these propositions, Mr Mitchell undertook a review of the development
of the obligation of good faith in Scots and English law as found in the case-law and
academic writings. The respective high points, as it were, in those two jurisdictions were
Lord Clyde’s observations in Smith v Bank of Scotland 1997 SC(HL) 111 at 121 and Legget J in
the case of Yam (and in which Lord Clyde’s observations in Smith were cited). Mr Mitchell
analysed further cases which he submitted supported the proposition that:
“in the context of the contract between the parties, including especially its whole
structure as a term loan to fund the entire project…the expected community norm
would have been…that the defender would exercise its contractual right to call in the
loan at any time if that would have the effect (as indeed it did) of frustrating the
carefully constructed contract between the parties”
[42] Under reference to more discursive materials, Mr Mitchell commended a principled
or inductive approach, which he submitted were established features of Scots law and
consistent with its Roman law roots, and urged the court to declare that there is, and always
has been, a “clear underlying principle pf good faith” in Scots contract law. He advanced six
reasons why the court should find that there is a general principle of good faith. In the
alternative, he contended such a term could be implied in this case, proceeding on an
incremental basis. To that end, he submitted that:
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18
“As already submitted in aural argument, the exercise of the apparent right to call up
the loan at will was wholly inconsistent with and frustrated the contractual scheme
which had been created by the parties. Whether or not it served the interests of the
defender, it did not serve the objectives of the mutual contract which the parties had
entered into. The parties, it is submitted, entered into the contract in the expectation
that both parties would observe the expected community norm, in this case that
(absent default or other similar event) the contract would be seen through to
completion on a basis of mutual trust.
In other words, this is a case of breach of the requirement for objective good faith.”
(Emphases added)
The defenders’ reply to the argument of implication of an obligation of good faith
[43] Mr O’Brien reviewed the Scottish cases and contended that none support the
pursuers’ argument for a general principle of good faith. He reviewed the English cases,
including cases subsequent to Yam, to note that Yam was more restrictive in its approach
than Mr Mitchell appeared to allow, and that it may be best understood as focused on
“relational” contracts (ie where the nature and duration of the contract pointed to a need for
active co-operation between the parties). Subsequent decisions in England supported this
reading of Yam. He referred to Compass Group UK & Ireland Ltd v. Mid Essex Hospital Services
NHS Trust [2013] EWCA Civ 2000, per Jackson LJ at paragraph 105; Globe Motors Inc v. TRW
and Ilkerler Otomotiv Sanayi Ve Ticaret Anonim Sirket v. Perkins Engines Co Ltd [2017] EWCA
(Comm), in which the court, having reviewed the authorities (at paras 262 to 270), held that
a contractual right to terminate could be exercised for any reason and did not have to be
justified (at para 261). He noted the court’s observation in TSG Building Services v South
Anglia Housing Ltd [2013] EWHC 1151 (TCC) (at para 51), that an implied term of an
obligation of good faith could not be used to restrict an express term of the agreement
between the parties.
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19
Discussion
The Facility Letter, Standard Security, Guarantee and SIA: Collateral agreement, unilateral
promise and personal bar
[44] I start with the argument directed to the terms of the Facility. The pursuers argue
that the provision that the Facility was repayable on demand was necessarily inconsistent
with a provision that it would be reviewed in 12 months. I accept Mr O’Brien’s submission
that there is no repugnancy between a facility repayable “on demand”, and other provisions
providing for a specified duration before review (eg in 12 months’ time), as is found in the
Facility Letter, for the same reasons expressed by the court in Bank of Ireland.
Collateral agreement
[45] The pursuers’ next argument, to elide the provision that the Facility was on demand,
was to contend that there was a “collateral agreement negotiated between the First Pursuer
and the Defender…that the facility was a fixed term facility and (absent a breach by the First
Pursuer of its terms) would not be terminated until the completion of the development”. In
the alternative, the same facts were said to instruct a unilateral promiser or an undertaking.
(No distinction was drawn between these alternatives and the case of collateral agreement.
The parties’ common approach was that these legal bases stood or fell together.)
[46] What facts and circumstances did the pursuers rely on to establish a collateral
agreement (or unilateral promise)?
[47] In relation to the averments about the parties’ conduct or communications,
Mr Mitchell was frank that he could not point to any specific representation or act of the
defenders when he could say that the collateral agreement he averred had come into
existence. He did not rely on any specific representation. Mr O’Brien characterised the
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pursuers’ averments that the defenders’ employees “constantly reassured the pursuers and
others that the funding would be a term loan” as no more than a generic assertion. I agree.
The pursuers do not even aver that a collateral agreement was created by any particular
representation or representations, or at any particular point. Rather, they averred that its
coming into existence (at some unspecified date) was to be inferred from certain statements.
I accept as well founded Mr O’Brien’s submission that if those statements did not
themselves create an obligation, nothing in the surrounding context could change that. The
case of Royal Bank of Scotland plc v Carlyle, relied on by Mr Mitchell, is readily
distinguishable. The defender in that case made clear from the outset that he would not take
the facility offered (for purchase of land), if he would not also be provided at a later point
with another facility (for development). Once the Bank gave a specific assurance to that
effect, the defender then accepted the first (of the anticipated two) facilities. The court held
that that constituted an oral agreement, notwithstanding that the parties anticipated a
written agreement at a later point, and which precluded the bank from refusing to provide
the second facility. There is nothing in this case equivalent to the clear stipulation by the
borrower or the specific acceptance of or statement by the bank in that case.
[48] If the pursuers fail to plead a relevant case for a collateral agreement or unilateral
promise, they will not fail for want of trying. After transfer of the case onto the Commercial
Roll, the pursuers adjusted in 2012; they adjusted on 3 more occasions (in 2016 and 2017);
and they further amended their pleadings on the first morning of the debate. The pleadings
are detailed and lengthy, particularly for a Commercial Action. Mr Mitchell’s cri de coeur, to
have the evidence all come out at proof to see if the court could infer from all of the evidence
that there was a collateral agreement at some point, is in my view misconceived. Even
allowing for the latitude afforded in Commercial Actions, the pursuers must identify or
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plead a relevant and sufficiently specific case to justify proof. What Mr Mitchell proposes is
not consistent with this court’s established rules of pleading and practice.
[49] I turn next to address the features the pursuer relied on in support of a collateral
agreement. The pursuers aver (in article of condescendence 10) that a collateral agreement
was to be inferred from four factors. The first is the “many and repeated comments,
assurances and representations made by the defenders…that the [Facility] would be
available to the end of phase 1 of the completion of construction”. I have just addressed this
feature. The second feature was the “structuring of the project” such that the Facility would
be repaid from the sale of the flats. The third feature was that the IRSA was structured in
such a way that (a) there was a progressive increase in the notional sum to reflect the
progressive drawdown of the Facility, and (b) that the IRSA would serve no purpose if the
Facility were terminated before completion of the development. The fourth factor was said
to be the unworkability of the scheme if the Facility could be arbitrarily terminated.
[50] It seems to me that these three additional features are of no avail to the pursuers’
case. These features did not emerge, unanticipated, after the parties contracted and they did
not compel some accommodation or change in their position as a consequence (cf.
Scanmudring SA v James Fisher MFE Limited [2017] CSOH 91, where the fact that the seabed
conditions were not as expected of necessity led to a variation in the parties’ contract).
Rather, these features existed or were reasonably anticipated at the outset. They were
expressly part of the parties’ agreed contractual arrangements. The proposed payment of
the Facility from the sale of the flats may reflect a degree of commercial pragmatism, but
that is not necessarily inconsistent with the on demand character of the Facility which the
pursuers had accepted. Had the pursuers wanted the contractual protection of a term loan
of a minimum duration, or to the completion of the development, they should have
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contracted expressly for this. For aught yet seen, in that circumstance, the defenders might
have insisted on other terms to match that character of lending or extended period of risk.
[51] The third feature, of the risk of the payments under the IRSA becoming out of step
with the proposed payments under the Facility reflects, is, at most, a potential inadequacy of
the IRSA (from the pursuers’ perspective). The absence of a contractual mechanism in the
IRSA to tie its duration to the subsistence of the Facility resulted in the continuation of
payments being made under the former even after the latter had been terminated. The
pursuers contend that this serves “no continuing legitimate commercial purpose” (per article
10 of condescendence ). In the circumstances that transpired, the IRSA may have become
“uncommercial” from the pursuers’ perspective. The fundamental flaw in this argument, in
my view, is that this simply flows from what parties agreed at the time. It was not
unforeseeable. Furthermore, in advancing this argument, the pursuers do not appear to rely
on the contended for collateral agreement. The pursuers’ complaint about the operation of
the IRSA may, or may not, be relevant to a challenge of the IRSA on other grounds (eg the
mis-selling referred to). That issue does not arise here. Be that as it may, I am not
persuaded that this feature of the IRSA provides a basis to infer a collateral agreement to
vary a different contract (the Facility Letter), at least where those two contracts are not
counterparts (in an Inveresk sense) and where each may be interpreted and capable of due
performance in the absence of the desiderated collateral agreement.
[52] In relation to the pursuers’ fourth factor, it may assist to consider the pursuers’
assertion of a lack of commerciality or workability from the perspective of the other party, as
part of the facts and circumstances. The collateral agreement contended for is the availability
of the Facility until the development was completed. There is an inherent lack of clarity as
to what this means. It is not clear whether this was phase 1 or phase 2. What is meant by
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completion? The collateral agreement contended for takes no account of the uncommercial
character (viewed from the defenders’ viewpoint) of the term proposed. The effect of the
collateral agreement would be to commit the defenders to a loan for an extended but
indeterminate period of time, and where the event that would trigger repayment was
uncertain and dependent on the acts of third parties. At times in his submissions, Mr
Mitchell referred to the parties’ common purpose or the “contractual scheme”, and their
need to work together to achieve its fulfilment. However, the contractual arrangements
between the parties did not constitute a joint venture. Those had no features that would
support the kind of gloss that Mr Mitchell seeks to place on them.
[53] I have addressed the parties’ pleadings and submissions. In my view, there are three
further difficulties with the pursuers’ argument that there was a collateral agreement. The
first concerns the time by which the collateral agreement had to come into effect, the second
difficulty concerns the 2008 and 2009 Continuation Letters subsequently entered into by the
parties, and the third is the consequence of the expiry of the Facility Letter before any
termination was exercised. In order to argue that they relied on the collateral agreement, eg
by drawing down the Facility or by entering into a contract for the construction of the
development, the pursuers must establish that a collateral agreement came into existence
before then. This necessarily confines the relevant time frame to a period soon after the
Facility Letter was signed. The pursuers appeared to recognise this, as they aver (in article
20 of condescendence) that in reliance on representations (as to the defenders’ support) they
expended substantial funds in progressing the development and incurring substantial legal
obligations to third parties. The latter included the construction contract, which they aver
that they entered into this on the basis of representations “which had been made by early
2007”. However, there are no relevant or sufficiently specific averments of any
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representation or conduct by the parties that instruct (or enable the court to infer) that there
was an “agreement” reached at the material time, much less one that was explicable “only”
on the basis that there was a collateral agreement (per Minevco).
[54] The second difficulty follows on from this. Even if there were relevant averments
about a collateral agreement being established in the months following the Facility Letter,
there is the (in my view) insurmountable difficulty of the two continuations of the Facility
(in January 2008 and February 2009). Parties cannot but have applied their minds on those
occasions to the material terms and the nature of the financial support the defenders
provided. On both of those occasions the continuation of the Facility was expressly on the
same terms as the Facility Letter in respect of the “on demand” nature of the Facility.
Furthermore, on each occasion, it was noted that the Facility would be reviewed after a
stipulated timeframe, eg in 12 months (in January 2008) and after two months (in February
2009). Even had there been a collateral agreement in the terms averred “by early 2007”, the
express terms of the 2008 and 2009 Continuation Letters are manifestly inconsistent with the
collateral agreement contended for and would have superseded it. Thirdly, there is the fact
that the Facility Letter was not further continued after it expired in April 2009. Mr Mitchell
did not argue that a collateral agreement had been constituted between April and June 2009.
In any event, the pleadings do not support such a case.
[55] The legal test, of whether the pursuers have established that there was a collateral
agreement which augmented the terms of the Facility, is found in the observation of the
Second Division in Minevco Ltd (at para 16): the party seeking to maintain that a written
agreement has been varied required to identify facts and circumstances that are explicable
“only on the basis that there was an express or implied agreement” (emphasis added). I
accept Lord Tyre’s observation, at paragraph 25 of Scanmudring SA, that it is correct to
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emphasise “only” in that passage, as the test to be applied in determining whether a
variation of a subsisting contract had been effected by the conduct of the parties. The case of
Scanmudring AS, relied on by Mr Mitchell, is in my view readily distinguishable on its facts.
In that case, the conduct and communings that Lord Tyre found proved occurred after the
expiry of the contractual deadline and could be explicable only on the basis that the parties
had varied the original contract. The conduct averred in this case, such as the drawdown of
the Facility or the pursuers contracting with third parties, was equally consistent with the
unaltered terms of the Facility Letter. In my view, the Minevco test is not met in relation to
the pursuers’ four features or the remainder of their pleadings. The parties’ conduct is
readily referable to the agreement agreed, not to a collateral agreement supplemental to it.
For these reasons, the pursuers’ case based on a collateral agreement fails.
Unilateral promise
[56] In relation to the pursuers’ argument for a unilateral promise (per article 10 of
condescendence) or undertaking (per the 1st plea in law), Mr Mitchell did not advance a
separate argument in relation to this. He did not point to any statement by or on behalf of
the defenders that had the requisite qualities of certainty and clarity. At most, these were
expressions of encouragement without conferring any concrete expectation (much less
constituting an undertaking or promise). Further, had there been any specific statement
relied on, the difficulties identified above (at paras [53] and [54]) would also apply. How
was any promise made, say, in mid-2007, that the Facility had been a term loan, reconcilable
with the continuation of the Facility (in 2008 and in 2009) on terms patently inconsistent
with a promise in such terms? It follows that I accept Mr O’Brien’s submission that there are
no relevant pleadings to support the pursuers’ case of a collateral agreement or promise to
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the effect that the Facility was converted to a term loan that would subsist until completion
of the development. The pursuers’ case was presented on the basis that the separate
conclusions in respect of the Guarantee, the Standard Security and the SIA stood or fell with
their argument based on the case of a collateral agreement. The pursuers’ averments are
irrelevant.
Personal bar
[57] The pursuers’ averments of personal bar are brief and are on a further esto basis that
there was no collateral agreement or unilateral promise (per article 21 of condescendence).
The defenders are said to be personally barred from seeking repayment on demand by
reason of representations made in the course of the contract.
[58] I accept Mr O’Brien’s submission that the case of Money Advice is not as limited as
the analysis that personal bar operates as a shield, not a sword. The pursuers’ case is
predicated, in part, on a right to draw down further funds and their damages claim based on
the consequences (it is said) of not being able to do so. The assertion of a right of this
character is, in my view, an impermissible use of the doctrine of personal bar. But in my
view, the difficulty for this part of the pursuers’ case is more fundamental. Once the Facility
Letter had not been renewed (from April 2009), there was no possible argument that the on
demand character of the Facility could be qualified by reference to a time period or
postponed to the occurrence of some future event. There are no relevant pleadings to
preclude the defenders exercising the right to demand repayment, much less are there
relevant pleadings to confer the positive entitlement of the pursuers to draw further sums.
This aspect of the pursuers’ case is also irrelevant.
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Reliance on the IRSA as a defence
[59] In the light of my decision that the pursuers’ have no relevant case based on
collateral agreement, unilateral promise or personal bar, this particular criticism is academic.
On this point, I prefer the submissions of Mr O’Brien. I accept that the Facility and the IRSA
are not counterparts in an Inveresk sense such as to enable the pursuers to exercise the de
facto or quasi-retention they wish to exercise.
IRSA: averments of loss
[60] The issues of mis-selling and any compensation flowing from that have been
determined in a different forum. The pursuers’ claim for damages arising from the IRSA are
for consequential loss only. The pursuers’ averments are predicated on the hypothesis that
the defenders were otherwise entitled to demand payment. The point is a short one. I
accept as well made the defenders’ submission that there were no averments of a causal link
between the alleged mis-selling of the IRSA and the defenders’ decision to demand
repayment of the Facility, which had already fallen due for repayment. The pursuers’
averments of quantum of their consequential loss claim in respect of the IRSA are
fundamentally irrelevant. Had it been a matter of specification, I would have been minded
to permit the pursuers an opportunity to address this by further adjustment.
IRSA: the implied COBS terms
[61] In terms of the scheme under the 2000 Act and the 2001 Regulations, no right of
action is conferred on non-natural persons acting in the course of a business for
contravention of the COBS rules. Mr O’Brien founded on this. The first pursuer was not
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within the scope of any extension of the actionability beyond “private persons”. Mr Mitchell
does not dispute the proposition that the pursuers had no right of action under the
regulatory scheme. Notwithstanding this, the pursuers sought to imply principles 2, 6, 7
and 8, and for COBS Rules 2.1, 5.2, 5.3, 5.4, 5.5, 7.1 and 7.5 into the IRSA. The basis for
implication was simply that, as the defenders were already subject to these provisions as
part of the regulated context in which they operate, they should be implied into the terms of
the IRSA.
[62] The parties accepted that the text for implication of a term are authoritatively set out
by Lord Neuberger in Marks & Spencer plc at paragraphs 21 to 23. A term is implied into a
commercial contract only where it is necessary to do so to give the contract business efficacy
or where the term is so obvious that it goes without saying. In my view, neither condition is
met in this case.
[63] The starting point is that the provision of the IRSA, as a regulated activity, is subject
to a detailed regulatory regime under, inter alia, the 2000 Act and the 2001 Regulations.
Parties cannot contract out of this. It is accepted that, in terms of that regulatory regime, the
first pursuer is expressly precluded from having a cause of action in respect of any breach by
the defenders of the COBS rules. Given that this is all expressly provided for by a statutory
scheme, it cannot be maintained that implication of a term conferring such a right of action
is “necessary”. It cannot be necessary if Parliament has excluded it. For the same reason, it
is not a term which would have satisfied the second limb of the Marks & Spencer Plc test (of
obviousness). Rather, had such a term been proposed, it might have been remarked to be
obviously inept (because expressly excluded by the regulatory scheme). I accept that all of
the cases Mr O’Brien cited support this conclusion and vouch the proposition that a term
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cannot be implied that is inimical to the statutory scheme governing the IRSA. In my view,
this part of the pursuers’ case is also irrelevant.
IRSA: no jurisdiction plea
[64] Given that I have found the pursuers’ case based on the implication of terms into the
IRSA and their case for consequential loss flowing irrelevant, I can deal with the defenders’
jurisdiction plea shortly.
[65] Mr Mitchell’s basic proposition was that in the sheriff court proceedings parties
“joined issue” on the IRSA mis-selling claim, and that the defenders did not take a plea of no
jurisdiction in those proceedings. They had submitted to the jurisdiction. Their plea to that
effect, in these proceedings, came too late. (He did not advance an argument that the
lodging of the counterclaim had the same effect.) Having considered the terms of the sheriff
court proceedings, I do not accept that there was such an identity of issues or pleas that the
defenders can be taken to have submitted to the jurisdiction of this court in respect of the
first pursuer’s claim concerning the IRSA. I accept the defenders’ analysis of the pleadings.
Mr O’Brien is in my view correct that the pleadings in the initial writ were not habile to
include the pursuers’ claim based on the IRSA. It follows that I accept Mr O’Brien’s
submission that it cannot be said that the defenders have submitted to the jurisdiction of this
court in respect of the IRSA by bringing their counterclaim for repayment of the sums due
under the Facility.
[66] In relation to Mr Mitchell’s subsidiary “joining issue” argument, I do not accept that
this is well-founded. A party can hardly be expected to invoke an exclusive jurisdiction
clause if there is no direct claim asserted against and based on the agreement or document
containing that clause. Mr Mitchell’s approach has the prospect of being profoundly
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disruptive, if it compelled the taking of such pleas absent a relevant claim. On a fair
reading, the averments in the initial writ anent the IRSA did not assert a claim in respect of
that against the defenders, but were included simply as background. As there was no claim
in the sheriff court pleadings in respect of the IRSA, no issue of the defenders’ possible
submission to the jurisdiction of this court in respect of such a claim could arise. The
defenders have not conceded jurisdiction in respect of the pursuers’ IRSA claim.
[67] That leaves the question of whether I should nonetheless exercise my discretion to
permit that part of the pursuers’ case to remain part of these proceedings, notwithstanding
the terms of the exclusive jurisdiction provision of the IRSA. The arguments advanced in
favour of the exercise of a discretion in favour of the defenders were based on the practical
consideration of avoiding duplication of evidence, the inextricable link (it was said) between
the IRSA and the Facility, and the risk of inconsistent outcomes (if the IRSA claim were
decoupled and litigated in England). Given that I have held that the arguments relative to
the Facility (ie the collateral agreement, unilateral promise, personal bar) have failed, these
considerations fall away.
[68] Even had I been persuaded that the pursuers’ case that there was a collateral
agreement was relevant, I would not have been minded to exercise the discretion in favour
of the pursuers. The IRSA and the Facility Letter (and its continuations) were entered into at
different times. Their terms are not interdependent or counterparts to each other. While
there might be overlapping evidence about the circumstances, or evidence from the same
witnesses, the issues before the court in respect of these two agreements are different. I was
not persuaded that expediency justified overruling the exclusive jurisdiction clause. In any
event, the expediency issue may not in fact arise. The pursuers’ IRSA claim proceeds on the
hypothesis that the pursuers’ primary case (that there was a collateral agreement to the
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Facility) failed. In my view it has. In that event, the only remaining substantive issue is the
pursuers’ IRSA claim for consequential loss. This is independent of the defenders’ claim in
the counterclaim. There is therefore no risk of inconsistent outcomes or duplication of
evidence. All that remains will be the pursuers’ claim in England, for consequential loss
flowing from mis-selling or misrepresentation about the IRSA.
The implied term of a duty of good faith
[69] I have already referred to the supplementary submissions and additional volumes of
cases helpfully provided in advance of the resumed diet, which was concerned with the
pursuers’ more developed argument for implication of a term of good faith. I am grateful to
parties for their efforts. However, having considered those materials, and the pleadings and
productions, I have come to the view that, in the particular circumstances of this case, it is
not necessary to decide this issue.
[70] There are two principal difficulties for the pursuer. The first is that Mr Mitchell’s
gloss of the parties’ contractual arrangements (the passage underlined in para [42], above)
does not, in my view, accurately reflect the contractual arrangements the parties entered
into. He also appears to presume a common and overriding purpose, for which there is no
support in the documents or in the pursuers’ averments. The more fundamental difficulty
concerns the term he seeks to imply (see para [6(1)] and the passage highlighted bold, in
para [42], above). The term he proposes is utterly inimical to the express terms of the
Facility Letter and to the 2008 and 2009 Continuation Letters.
[71] The second difficulty is this: leaving aside for the moment that the basis of
implication is argued to be a duty of good faith (whether expressed as a general principle
nascent in Scots private law or to be developed incrementally on a case by case basis), the
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term sought to be implied must still satisfy the test for implication in Marks & Spencer Plc.
Even assuming an obligation of good faith is available as a matter of Scots private law as a
possible term for implication (on which I express no view), I am not persuaded by any of Mr
Mitchell’s submissions that such a term satisfies the tests of necessity or obviousness. The
test for implication has simply not been met. I am fortified in this view by the observations
where he stated (at para 51):
“Even if there was some implied term of good faith, it would not and could not
circumscribe or restrict what the parties had expressly agreed in clause 13.3,
which was in effect that either of them for no, good or bad reason could
terminate at any time before the term of four years was completed. That is the
risk that each voluntarily undertook when it entered into the contract, even
though, doubtless, initially each may have thought, hoped and assumed that
the Contract would run its full term.”
Those observations apply with equal force in this case. The express terms of the Facility
Letter and the two continuations thereof in 2008 and 2009 provided that the Facility was
available for a fixed period (of 12 months) and, in terms of the 2009 Continuation Letter, a
very limited period (of 2 months). On each occasion, too, the “on demand” character of the
Facility was reiterated. These features necessarily preclude the implication of a term that is
so directly inconsistent with it, regardless of the basis of implication (ie such as good faith).
[72] For these reasons, the pursuers’ case for implication of a term of good faith also fails
for want or relevancy. As a consequence, and with some regret, I find there is no need to
adjudicate upon the parties’ submissions as to whether Scots private law recognises an
obligation of good faith (whether generally expressed or developed from first principles).
Disposal
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[73] It remains for me to thank Counsel for their very helpful written submissions and
bundles of authorities, including the supplementary submissions and cases produced in
relation to the interesting and as-yet-to-be-determined issue of whether Scots law permits
the implication of an obligation of good faith in a contract. I shall put the case out By Order
to discuss the terms of the interlocutor and to deal with any motion for expenses or other
matters.