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GLASGOW CITY COUNCIL v. CASTROP LIMITED [2001] ScotHC 101 (6th September, 2001)

OUTER HOUSE, COURT OF SESSION

CA25/00

OPINION OF LORD MACFADYEN

in the cause

GLASGOW CITY COUNCIL

Pursuers;

against

CASTSTOP LTD

Defenders:

________________

Pursuers: Wolffe; E. Bain

Defenders: Sandison; DLA

6 September 2001

Introduction

[1] By missives dated 18 October 1996, and 24 and 25 February and 27 March 1997 (Nos. 6/1 to 6/5 of process) the defenders purchased from the pursuers two plots of land at Kelbourne Street, Glasgow. The missives provided that in certain events the purchase price would be increased in accordance with a certain formula. In this action the pursuers seek payment from the defenders of a sum which they maintain has become due in accordance with that provision. The defenders deny that in the events which have happened the increased price is payable. Each party pleads that the averments of the other are irrelevant. The action was appointed to debate in respect of those pleas.

The Missives

[2] The missive letter of 18 October 1996 was expressed as an offer to purchase two plots of land at Kelbourne Street, referred to together as "the Subjects" and individually as "Plot A" and "Plot B". In terms of Clause 2.1 the price was to be Ł935,000, of which Ł635,000 was to be payable on the Plot A Completion Date, and Ł300,000 on the Plot B Completion Date. The Plot B Completion Date was defined in Clause 1.4 as meaning seven days after the date of purification or waiver of the suspensive condition contained in Clause 4 or such other date as might be agreed in writing.

[3] Clause 4.1 provided inter alia as follows:

"It shall be a suspensive condition of the Missives that the Purchaser obtains in writing on terms satisfactory to it (as to which the Purchaser shall be acting reasonably sole and absolute judge) all necessary planning permissions ... and other consents for the Purchaser's Works and to enable the Purchaser to use Plot B for the Purchaser's Proposed Use".

The Purchaser's Works were defined in Clause 1.7 as

"the demolition/partial demolition of the existing buildings on the Plot B and the erection on Plot B of a residential development of not less than 16 flats with ancillary car parking all as shown on the Schedule annexed and subscribed as relative hereto".

The Purchaser's Proposed Use was defined in Clause 1.6 as:

"the use of Plot B for a residential development of not less than 16 flats and ancillary car parking all as shown on the Schedule annexed and subscribed as relative hereto".

[4] Clause 12 of the qualified acceptance of 24 February 1997, which was subsequently accepted and thus became part of the concluded missives, provided inter alia as follows:

"In the event that the Purchaser achieves planning permission for the erection or redevelopment of the Subjects for more than forty-nine residential units then the purchase price shall be increased to such an amount as would correspond to the number of units for which planning permission is obtained multiplied by the purchase price of Ł935,000 divided by forty-nine".

It is on Clause 12 that the pursuers rely in making the claim which they make in this action.

The Planning History

[5] The pursuers aver that the purchaser has achieved planning permission for the erection or development of the subjects for 61 residential units. The stages by which they maintain that that result came about may be summarised as follows:

On or about 6 June 1997 the defenders applied (application No. 1480/97) for planning permission for demolition and conversion of buildings on Plot A. That application involved the creation of 32 flats and one house on Plot A. Planning permission for that development was granted.
On or about 22 September 1997 the defenders applied (application No. 2424/97) for planning permission for the erection of sixteen residential units on Plot B. On 25 March 1998 (not 1997, as averred) planning permission was granted in respect of that application subject to the condition that twenty five car parking spaces be provided.
On 3 October 1997 Sorbieridge Limited applied for planning permission (application No. 2569/97) for variation of the planning permission granted to the defenders in respect of Plot A by subdivision of five flats to create ten flats, by change of use of a commercial unit to create five flats and by change of use of two ancillary spaces to create two flats and parking. That application was granted.
On 26 October 1998 a further application by the defenders was granted reducing the number of car parking spaces mentioned in the condition attached to the permission dated 25 March 1998 to sixteen. The pursuers aver that by virtue of that variation of the condition about car parking spaces the suspensive condition in Clause 4.1 of the missives was purified, the defenders by that stage having obtained all that they had asked for in application No. 2424/97.

The Companies and Persons Involved

[6] The pursuers' contention that in the circumstances the "purchaser" has "achieved" planning permission for more than forty-nine residential units on the subjects involves counting as planning permission "achieved" by the "purchaser", i.e. by the defenders, the planning permission granted in respect of the application (No. 2569/97) made by Sorbieridge Limited. In support of their approach to that contention the pursuers make averments about a number of companies and persons involved in them.

[7] There was at an earlier stage in this action a dispute as to whether the purchasers under the missives were the present defenders (whose registered number is SC 169959) or a company now called Quillco 3 Limited (whose registered number is 79143). The present defenders were formerly called Quillco 3 Limited, and the present Quillco 3 Limited was formerly called Caststop Limited. The companies exchanged names on 17 February 1997. It is, however, now common ground that the present defenders were the purchasers.

[8] The pursuers aver that the defenders are controlled by Ronald Barrie Clapham ("RBC") and Mari Clapham ("MC"). The means by which that control is said to be exercised is that the defenders are a wholly-owned subsidiary of Credential Holdings Limited, of which company RBC and MC are the sole shareholders and the directors. In addition MC is the sole director of the defenders. It is further averred that Quillco 3 Limited is also controlled by RBC and MC. They are its directors and MC owns one of the two issued shares in it. The pursuers further aver that the defenders' financial statements for the years ended 31 March 1997, 1998 and 1999 contain a note in the following terms:

"The Directors regard Credential Holdings Limited as the company's ultimate parent company. Credential Holdings Limited, which is controlled by R B Clapham is the parent undertaking of the largest and smallest group of which Caststop Limited is a member and for which group accounts are drawn up".

[9] The pursuers aver that Sorbieridge Limited (which has subsequently changed its name, but which I shall continue to refer to as "Sorbieridge") was incorporated on 9 September 1997, and that it was and is controlled by RBC and MC. Since 19 September 1997 its issued share capital of Ł2 has been held by the defenders. Between 19 September 1997 and 10 September 1999 its directors were MC and John Brown, both directors of the defenders. Since 10 September 1999 MC has been its only director. Its financial statement for the period ended 28 February 1999 contained a note in the same terms mutatis mutandis as the one quoted in paragraph [8] above.

The Averments of Surrounding Circumstances

[10] The pursuers aver that:

"... at the date of conclusion of the missives the parties were aware that the purchaser was a company which was being used as a vehicle for property development by [RBC] and [MC]. The parties were aware that [RBC] was involved in property development. They were aware that he intended to develop the subjects of the missives. They were aware that he used a number of different corporate vehicles for his property development activities".

In response the defenders admit that the parties were aware that RBC was involved in property development, and that he was associated with a number of companies in that connection, one of which was the defenders.

[11] The defenders go on to aver that:

"... after the pursuers invited offers for the plots at Kelbourne Street in or around December 1996 [sic, notwithstanding the date of the defenders' offer], they received the defenders' offer and at least one other offer for the plots which would have given a materially greater price but involved the demolition of the existing buildings and their replacement with a densely residential development of 90 units. The development plans submitted by the defenders for the plots envisaged 33 residential units on plot A, 16 on plot B, and the creation of a restaurant, bar or other commercial enterprise in part of the old fire station engine hall at Kelbourne Street. The defenders' plans for Plot A involved the creation of only one more residential unit than already existed as firemen's accommodation on the plot. The pursuers determined that they preferred the defenders' plans and proceeded to negotiate missives with the defenders. ... During negotiation of the missives, in or around February 1997, [officials of the pursuers] indicated that they would prefer the development to be entirely residential in character. Those representing the pursuers were aware from the discussions between the parties that the defenders were prepared to consider such a change in the proposed use of the subjects of sale, and that the defenders might substitute further residential development by another company for the proposed commercial use. Against that factual background, and against the background that the pursuers wished the missives to be concluded and the price paid as soon as possible, so that they would be allowed to retain a greater proportion of the capital receipt by central government, the missives were concluded".

The pursuers admit the first four sentences of that passage, and also admit that they wished to conclude missives as soon as possible.

[12] The defenders aver, in contradiction of the pursuers' averment that the planning permission granted on 26 October 1998 resulted in purification of the suspensive condition in Clause 4.1 of the missives, that they (the defenders) have waived that condition.

[13] The pursuers aver that when Sorbieridge Limited applied for the planning permission mentioned in paragraph [5](3) above, and when that permission was granted, Plot A was owned by the defenders. The defenders admit that that was so. They aver that they have obtained planning permission for 16 flats on Plot B and for 32 flats and one house on Plot A, being a total of 49 residential units. They further aver that Sorbieridge Limited (a) has purchased from them the right to five flats on Plot A, and has planning permission to convert them to ten smaller flats, and (b) has purchased from them the right to turn an office on Plot A into five flats and to use a void space there as a further two flats. The pursuers admit that parts of the plots have been disponed by the defenders to Sorbieridge, but point out that that happened only after the planning permission was granted. They believe and aver that Sorbieridge applied for the permission on behalf of the defenders. In support of that inference they aver:

"On 3 September 1997 the Defenders sought advice from their Solicitors as to the avoidance of the price uplift by way of a transfer of parts of the Subjects to another company. Believed and averred that said application was made in the name of Sorbieridge Limited in a deliberate attempt to avoid the application of condition 12".

The pursuers further aver:

"The said permission was not granted to any particular named person. Planning consents enure to the benefit of the owner of the site for the time being. In all the circumstances, on a proper construction of the missives, the purchase price falls to be increased in terms of condition 12".

The Defenders' Submissions

[14] Mr Sandison for the defenders submitted that the issue between the parties was one of construction of Clause 12 of the missive of 24 February 1997. The defenders had obtained planning permission for the development of forty-nine residential units. Sorbieridge had obtained planning permission which increased the number of residential units that might be developed on the subjects to sixty-one. The question was whether on a sound construction of the clause the fact that the latter planning permission had been granted operated to trigger liability on the part of the defenders to pay an additional sum calculated by the application of the formula set out in Clause 12.

[15] Mr Sandison submitted that the task of construction of Clause 12 ought to begin with an inquiry as to the ordinary meaning of the words used (Bank of Scotland v Dunedin Property Investment Co Ltd 1998 SC 657, per Lord President Rodger at 661F-H). He drew attention to the fact that Clause 12 was couched in the active rather than the passive voice. The obligation to pay the additional price could have been expressed as arising in the event of planning permission for redevelopment of the subjects for more than forty-nine residential units being granted. Instead, however, the parties had chosen to provide that the increased price would be payable in the event that "the purchaser achieves" such planning permission. Used in that way, "achieve" means, Mr Sandison submitted, to acquire something, an abstract property or possession, by effort (Oxford English Dictionary, II 5 a). The same emphasis was to be found in the last sentence of Clause 12, which provided for the avoidance of doubt that there would be no reduction in the purchase price in the event that "the Purchaser obtains" planning permission for fewer than forty-nine residential units. "Obtains" was virtually synonymous with "achieves" (OED, 1 - "to come into the possession or enjoyment of (something) by one's own efforts ...; to procure or gain, as a result of purpose and effort"). Neither word was apt to describe the mere coming to pass of a state of affairs. The language of the clause contemplated that, for the obligation to pay the increased price to arise, more was required than the mere fact that the planning authority granted planning permission for the development of more than forty-nine residential units on the subjects. What was required in addition was that the planning permission be granted as a result of efforts made by "the Purchaser". The expression "the Purchaser" was defined in the missives. It was now common ground that it meant the defenders. The eventuality to which the clause referred was therefore the gaining of planning permission as a result of effort made on the part of the defenders. That should not be construed as encompassing the efforts of any other body related to or associated with the defenders. There were other provisions in the missives that referred expressly to such other bodies, e.g. Clause 11.2 of the offer of 18 October 1996 referred to the delivery of a disposition in favour of "the Purchaser or its nominees or trustees", and Clause 16 of the qualified acceptance of 24 February 1997 referred to Credential Holdings Ltd guaranteeing performance of the purchaser's obligations. There was, however, no reference to related bodies in Clause 12. It was therefore to be construed as contemplating only the achieving of planning permission by the defenders themselves. Leaving aside any question of Sorbieridge having acted as agent for the defenders in making the planning application, the planning permission granted on the application of Sorbieridge was not permission "achieved" by the "Purchaser" within the meaning of Clause 12.

[16] The second branch of Mr Sandison's submissions dealt with the consideration of the surrounding circumstances in construing Clause 12. He cited the following passage in the opinion of the Lord President in Bank of Scotland v Dunedin Property Investment Co Ltd at 665:

"I have reached this view as to the construction of Condition 3 by asking what is the ordinary meaning of the words used by the parties and without considering the background of the matrix of facts, known to the parties, in which the loan stock agreement was set. It is, however, trite that in interpreting a provision in a contract the court may 'enquire beyond the language and see what the circumstances were with reference to which the words were used, and the object, appearing from those circumstances, which the person using them had in view': Prenn v Simmonds [1971] 1 WLR 1381 at p 1384 per Lord Wilberforce, citing the speech of Lord Blackburn in Macdonald v Longbottom (1860) 1 E & E 977. See also Inglis v Buttery & Co (1878) 5 R (HL) 87 at pp 102-103 and Bovis Construction (Scotland) Ltd v Whatlings Construction Ltd 1994 SC 351 at p 357 per Lord President Hope. It would therefore be open to the court to consider the surrounding circumstances in which the words of Condition 3 were used; indeed we were urged to do so by counsel for the Bank.

As these authorities demonstrate, the rule which excludes evidence of prior communings as an aid to interpretation of a concluded contract is well-established and salutary. The rationale of the rule shows, however, that it has no application when the evidence of the parties' discussions is being considered, not in order to provide a gloss on the terms of the contract, but rather to establish the parties' knowledge of the circumstances with reference to which they used the words in the contract".

Mr Sandison submitted that there was little of materiality in the background circumstances mentioned in averment in the present case. The missives related to an old firestation which the pursuers wished to sell quickly. The pursuers favoured the defenders' proposals for redevelopment of the subjects. The pursuers were aware that the defenders were but one company in a group of associated property development companies in which RBC and MC were the "leading lights". Mr Sandison submitted that those circumstances suggested that the pursuers must have been aware of the possibility of other companies in the Credential group becoming involved in redevelopment of the subjects. They nevertheless took no steps to cover that eventuality clearly in the language adopted in Clause 12. Those circumstances provided modest support for the construction derived from linguistic analysis of Clause 12, namely that it was not intended to cover the obtaining of planning permission by any third party.

[17] Next, Mr Sandison examined the extent to which it was legitimate in construing a commercial contract to seek to identify the commercial purpose of the contract or search for the commercially sensible construction. He identified two separate approaches. One was to treat the commercial purpose of the contract as part of the surrounding circumstances or factual matrix. That approach was exemplified in the speech of Lord Wilberforce in Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989 at 995-996:

"No contracts are made in a vacuum: there is always a setting in which they have to be placed. The nature of what is legitimate to have regard to is usually described as 'the surrounding circumstances' but this phrase is imprecise: it can be illustrated but hardly defined. In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context the market in which the parties are operating. ...

... [When] one is speaking of aim, or object, or commercial purpose, one is speaking objectively of what reasonable persons would have in mind in the situation of the parties".

A different approach was to be found in Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 per Lord Diplock at 200:

"To the semantic analysis ... the arbitrators added an uncomplicated reason based simply upon business commonsense:

'We always return to the point that the owners' construction is wholly unreasonable, totally uncommercial and in total contradiction to the whole purpose of the NYPE time charter form. The owners relied on what they said was 'the literal meaning of the words in the clause.' We would say that if necessary, in a situation such as this, a purposive construction should be given to the clause so as not to defeat the commercial purpose of the contract.'

This passage in the award anticipates the approach to questions of construction of commercial documents that was voiced by this House in the very recent case, Miramar Maritime Corporation v Holborn Oil Trading Ltd [1984] AC 676, which dealt with a bill of lading issued under a charterparty in Exxonvoy 1969 form. There, after referring to various situations which might arise if the construction for which the shipowners in that case contended were correct, I added, at p. 682, in a speech concurred in by my fellow Law Lords:

'There must be ascribed to the words a meaning that would make good commercial sense if the Exxonvoy bill of lading were issued in any of these situations, and not some meaning that imposed upon a transferee to whom the bill of lading for goods afloat was negotiated, a financial liability of unknown extent that no business man in his senses would be willing to incur.'

While deprecating the extension of the use of the expression 'purposive construction' from the interpretation of statutes to the interpretation of private contracts, I agree with the passage I have cited from the arbitrator's award and I take this opportunity of re-stating that if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense."

The latter approach, Mr Sandison submitted, did not justify an unrestricted search for the commercially sensible construction, although it did justify the rejection of a construction that yielded a result that was not commercially sensible.

[18] Mr Sandison referred also to the more general point made by Lord Reid in L. Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 at 251:

"The fact that a particular construction leads to a very unreasonable result must be a relevant consideration. The more unreasonable the result, the more unlikely it is that the parties can have intended it, and if they do intend it the more necessary it is that they shall make that intention abundantly clear".

He also cited the following further passage from the speech of Lord Wilberforce in Prenn v Simmonds at 1385:

"It may be said that previous documents may be looked at to explain the aims of the parties. In a limited sense this is true: the commercial, or business object, of the transaction, objectively ascertained may be a surrounding fact. Cardozo J thought so in the Utica Bank case [Utica City National Bank v Gunn (1918) 118 NE 607]. And if it can be shown that one interpretation completely frustrates that object, to the extent of rendering the contract futile, that may be a strong argument for an alternative interpretation, if that can reasonably be found. But beyond that it may be difficult to go: it may be a matter of degree, or of judgment, how far one interpretation, or another, gives effect to a common intention: the parties, indeed, may be pursuing that intention with differing emphasis, and hoping to achieve it to an extent which may differ and in different ways. The words used may, and often do, represent a formula which means different things to each side, yet may be accepted because that is the only way to get 'agreement' and in the hope that disputes will not arise. The only course then can be to try to ascertain the 'natural' meaning. Far more, and indeed totally, dangerous is to admit evidence of one party's objective - even if this is known to the other party. However strongly pursued this may be, the other party may only be willing to give it partial recognition, and in a world of give and take, men often have to be satisfied with less than they want. So, again, it would be a matter of speculation how far the common intention was that the particular objective should be realised".

It was, Mr Sandison submitted, not legitimate for the court to form a judgement as to the commercial purpose of the contract, then to apply a forced construction of the provisions of the contract in order to enable that purpose to be achieved.

[19] Finally, Mr Sandison referred to various passages in the judgments and speeches in Charter Reinsurance Co Ltd v Fagan [1997] AC 313, in particular per Mance J (at first instance) at 325-326, per Staughton LJ (in the Court of Appeal) at 354-355, 356, 361 and 368, and per Lord Mustill (in the House of Lords) at 388. Of those passages it is convenient to quote from Staughton LJ's judgment at 356:

"Mance J thought that considerations of reasonableness were of particular relevance in a commercial context; but I am not sure that I would agree with him on that. ... One often reads in the cases of commercial common sense, or business common sense; but that is not some arcane substance of a special and unusual nature. It is common sense or reasonableness in the context of the business in question.

So in this case we must first consider what the contracts say on the literal meaning of their wording, and how clearly they say it; and then whether that meaning would be unreasonable, and if so how unreasonable. (I do not of course exclude surrounding circumstances)".

At 368 his Lordship said:

"There must come a time when efforts to bend meaning (or, as I would say, reverse it) have to stop".

A similar view was expressed by Lord Mustill at 388:

"There comes a time at which the court should remind itself that the task is to discover what the parties meant from what they have said, and that to force upon the words a meaning which they cannot fairly bear is to substitute for the bargain actually made one which the court believes could better have been made. This is an illegitimate role for the court. Particularly in the field of commerce, where the parties need to know what they must do and what they can insist on not doing, it is essential for them to be confident that they can rely on the court to enforce their contract according to its terms".

[20] Applying those authorities to the present case, Mr Sandison submitted, there was no basis in the commercial purpose of the contract or in commercial common sense for displacing the ordinary meaning of the language of Clause 12 in the way the pursuers sought to do. There was no clear averment of the commercial purpose of the transaction. In the absence of such averment, the court should be slow to form any view of the commercial objectives underlying Clause 12. The considerations underlying the workings of the commercial property market were not necessarily obvious. Without more than was disclosed in the pleadings, the court could not hold that any reasonable property developer would have understood Clause 12 in the sense contended for by the pursuers. As had been pointed out in Charter Reinsurance, there was a legitimate and important commercial interest in the enforcement of contracts according to their natural meaning.

[21] Further, Mr Sandison submitted, the construction contended for by the pursuers involved an attack on a commercially important principle - the separate legal personality of companies forming a group, or related in terms of ownership or control. Such companies were entitled to structure their activities so as to avoid a liability that might arise if they were not treated as separate entities, so long as there was no deception or sham. In that connection, Mr Sandison referred to Adams v Cape Industries plc [1990] Ch 433, at 536:

"... the court is not free to disregard the principles of Salomon v A Salomon & Co Ltd [1897] AC 22 merely because it considers that justice so requires. Our law, for better or worse, recognises the creation of subsidiary companies, which though in one sense the creatures of their parent companies, will nevertheless under the general law fall to be treated as separate legal entities with all the rights and liabilities which would normally attach to separate legal entities".

If (a) Clause 12 was construed according to its terms, and (b) the separate legal personality of Sorbieridge was respected, no liability to pay the increased price had, in the circumstances, been incurred by the defenders.

[22] Finally, Mr Sandison submitted that if necessary the defenders were entitled to have the missives construed contra proferentem. He referred to Tam Wing Chuen v Bank of Credit and Commerce Hong Kong Ltd [1996] 2 BCLC 69, per Lord Mustill at 77, as support for the proposition that the principle of construction contra proferentem remained available where there was ambiguity. Here Clause 12 had been put forward by the pursuers, the language of the clause was of their drafting, and it was they who sought to rely on it. If, contrary to the defenders' primary submission, there was any room for regarding the clause as ambiguous, construction contra proferentem led to the conclusion that, in the events which had happened, the additional price was not payable.

The Pursuers' Submissions

[23] For the pursuers, Mr Wolffe's primary submission was that, in the admitted or uncontroversial circumstances, it could be held that "the purchaser" had "achieved" planning permission for sixty one residential units, and that accordingly in terms of Clause 12 the additional price was payable. On that basis he sought decree de plano. His alternative submission was that a proof before answer should be allowed to enable the pursuers to substantiate their averment that Sorbieridge acted as agent for the defenders in obtaining the planning permission mentioned in paragraph [5](3) above, and the other disputed matters of fact.

[24] Mr Wolffe submitted that Mr Sandison's stage-by-stage approach to the process of construction was unsound. He submitted that the stages of considering the literal meaning of the words, the effect of surrounding circumstances, and whether the construction contended for was commercially sensible were related in a subtler and more complex way than Mr Sandison's approach allowed. He suggested that the search for the ordinary or natural meaning of the words should be conducted looking through the spectacles of the reasonable person possessed of the knowledge of background circumstances that had been available to the parties at the time when they entered into the contract. The words should be read as they would be read by a reasonable, commercially aware, person who was not particularly impressed by an unduly technical approach to language.

[25] In support of those submissions Mr Wolffe referred to two passage from speeches by Lord Steyn, first in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 at 771:

"In determining the meaning of the language of a commercial contract, and unilateral contractual notices, the law therefore generally favours a commercially sensible construction. The reason for this approach is that a commercial construction is more likely to give effect to the intention of the parties. Words are therefore interpreted in the way in which a reasonable commercial person would construe them. And the standard of the reasonable commercial person is hostile to technical interpretation and undue emphasis on niceties of language";

and then to substantially the same effect in Society of Lloyd's v Robinson (otherwise Lord Napier and Ettrick v R F Kershaw Ltd) [1999] 1 WLR 756 at 763D-E:

"Loyalty to the text of a commercial contract, instrument or document read in its contextual setting is the paramount principle of interpretation. But in the process of interpreting the meaning of the language of a commercial document the court ought generally to favour a commercially sensible construction. The reason for this approach is that a commercial construction is likely to give effect to the intention of the parties. Words ought therefore to be interpreted in the way in which a reasonable commercial person would construe them. The reasonable commercial person can safely be assumed to be unimpressed with technical interpretations and undue emphasis on niceties of language".

He then referred to the following passage in the speech of Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912:

"The principles may be summarised as follows.

(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2) The background was famously referred to by Lord Wilberforce as the 'matrix of fact', but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. ...

(4) The meaning which a document ... would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax ...

(5) The 'rule' that words should be given their 'natural and ordinary meaning' reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention that they plainly could not have had".

As Mr Wolffe pointed out, parts of that passage were referred to with approval in Bank of Scotland v Dunedin Property Investment Co Ltd, (see per Lord Kirkwood at 670E-G and Lord Caplan at 677A-D).

[26] The commercial purpose of the contract, provided it could be objectively ascertained from the words used and the general nature of the transaction (Reardon Smith Line Ltd v Hansen-Tangen per Lord Wilberforce at 996F), was, Mr Wolffe submitted, properly to be taken into account. Here the broad purpose of clause 12 could be seen objectively to be to enable the seller to share in any increase in the development value of the subjects brought about by the obtaining of planning permission for a denser development than the one primarily contemplated.

[27] In response to Mr Sandison's submission that the pursuers' approach involved piercing the corporate veil, Mr Wolffe submitted that when the matter under consideration was whether the actings of a subsidiary or related company fulfilled an obligation or condition contained in a contract to which the parent company was the party, the process did not involve piercing the corporate veil. The question was simply a matter of construing the contract, and asking whether, on a sound construction of the contract, the events which had happened constituted fulfilment of the obligation or condition. In addition, however, he referred to the proposition that the corporate veil might be pierced where the corporate structure was merely a device, façade or sham (Guilford Motor Co v Horne [1933] 1 Ch 935 per Lord Hanworth MR at 954; Yukong Line Ltd of Korea v Rendsburg Investments Corporation of Liberia [1998] 1 WLR 294 per Toulson J at 305-306). Mr Wolffe submitted that if, on a proper construction of clause 12 the additional payment could be triggered by actings on the part of a related company, the court should not be deterred from that conclusion by a fear of piercing the corporate veil. It was not, in the circumstances of this case, necessary to characterise Sorbieridge as a sham. It was sufficient that the reference to planning permission being "achieved" by the "Purchaser" covered the obtaining of planning permission by a subsidiary set up by the defenders for that purpose. The subsequent sale of parts of the subjects to Sorbieridge did not affect the matter. The defenders' position was not improved by the fact that one apparent purpose of making the application for planning permission in the name of Sorbieridge was to avoid the effect of clause 12, but that was not an essential part of the pursuers' case.

[28] Mr Wolffe drew attention to clause 4.1 of the offer of 18 October 1996. It provided for a suspensive condition that the defenders obtained satisfactory planning permission for the Purchaser's Works and to enable them to use Plot B for the Purchaser's Proposed Use (as to the meaning of which expressions, see clauses 1.6 and 1.7 - paragraph [3] above). The defenders were placed under an obligation to make application for such permission. Clause 12 of the qualified acceptance of 24 February 1997, however, was not tied to the achievement of the particular planning permission for which the defenders were obliged by clause 4.1 to make application. Clause 12 addressed the eventuality that planning permission was achieved in terms other than those contemplated in clause 4.1. The obligation imposed on the defenders to apply for planning permission in order to comply with clause 4.1 therefore could not be construed as restricting the meaning of clause 12. The simple question was whether the events which happened supported the conclusion that the purchaser achieved planning permission for sixty one residential units. It was clear from the letter of 3 September 1997 from the defenders to their solicitors (No. 6/13 of process) that the defenders were contemplating the development of more than 49 residential units, by the conversion of the commercial part of the premises into flats, the subdivision of certain flats, and the utilisation of entrance halls and attic space for the construction of flats. In the letter the contemplated course was the transfer of those parts to another company. Part at least of the motivation was the avoidance of the obligation under clause 12 to pay an increased price (see sub-paragraph (c) - "which will then permit their sub-division without the payment of this penalty of Ł19,000 per additional flat"). Sorbieridge was incorporated on 9 September 1997, a mere six days after that letter was written. Its whole issued share capital of Ł2 was held by the defenders from 19 September 1997. Its directors were directors of the defenders. Both it and the defenders were treated for accounting purposes as part of a group of which Credential Holdings Limited was the ultimate parent company. On 3 October 1997 Sorbieridge made the planning application No. 2569/97, the granting of which resulted in the total number of flats for which there was planning permission rising from 49 to 61. Irrespective of the identity of the party on whose application that planning permission was granted, the permission enured to the benefit of the land and thus to the benefit of the owner of the land for the time being (Town and Country Planning (Scotland) Act 1997, section 44(1)). It was a matter of admission that, at the time when that permission was applied for and granted, the defenders, not Sorbieridge, were the owners of the subjects.

[29] Mr Wolffe submitted that in those circumstances it was proper to hold that the purchaser had achieved planning permission for sixty one residential units. He expressed himself as content to accept Mr Sandison's submission that the word "achieved" meant "acquired by effort". His contention was that the circumstances disclosed that the defenders had expended effort in putting in place the situation in which the planning permission granted on the application of Sorbieridge was obtained. Clause 12 did not require that the defenders be the actual applicant in whose name or on whose behalf the application bore to have been made. A reasonably informed reader of clause 12, aware of the background circumstances known to the parties, would know (i) that planning permission was not personal to the applicant but enured to the benefit of the land and thus to the benefit of whoever happened for the time being to be owner of the land; (ii) that there were a number of companies associated with the defenders and controlled by RBS and MC; and (iii) that it was possible for the defenders to procure that an associated company obtain planning permission for denser development of the subjects. In those circumstances it would be surprising if the obligation to pay the additional price contemplated in clause 12 turned on the identity of the applicant for planning permission. In the events which happened, the defenders, having purchased the subjects under the missives containing clause 12, took active steps to procure that planning permission for more than forty nine residential units was obtained. They raised with their solicitors the question whether by involving another company the additional price payable under clause 12 (which they described as a "penalty") might be avoided. A few days later they acquired a wholly owned subsidiary (Sorbieridge). While they remained owners of the subjects, and thus the party to whose benefit planning permission would enure, their recently created subsidiary then proceeded to apply for and obtain planning permission for denser development of the subjects. Those circumstances were sufficient to constitute the "achievement" by the defenders as "purchaser" of planning permission for sixty one residential units on the subjects. The defences were therefore irrelevant and decree de plano should be pronounced as concluded for.

The Defenders' Response

[30] Mr Sandison submitted that, contrary to Mr Wolffe's disavowal of any reliance on piercing the corporate veil, that was what the pursuers invited the court to do. The circumstances were not, however, such as to justify that course. Guilford Motor Co was explained in Yukong Line at 307 as a case in which the company was being used as a device to enable the individual to act through it in a way that amounted to a breach of his own contractual obligations. That was a very different thing from using a subsidiary to undertake certain activities, in order to ensure that a liability which would arise to the parent company if it undertook those activities itself did not arise. In reality the pursuers were inviting the court to pierce the corporate veil and treat the actings of Sorbieridge as if they were actings of the defenders.

[31] So far as the letter of 3 September 1997 (No. 6/13 of process) was concerned, Mr Sandison submitted that it was not appropriate to reach a view as to what it showed without evidence. Its terms did, however, support the inference that the defenders had not at the time when the missives were concluded already formed any intention of seeking to avoid the consequences of clause 12 by using introducing another company into the development of the subjects.

[32] Finally, Mr Sandison submitted that there was no relevant averment to the effect that Sorbieridge acted as agent for the defenders in making the application for planning permission. The bare averment, "Believed and averred that Sorbieridge Limited applied for said permission on behalf of the Defenders", required to be supported by averments of circumstances from which the inference of agency could be drawn. No such circumstances were averred. Mr Sandison referred to Yukong Line at 303, where Toulson J quoted the following passage from the judgment of Staughton LJ in Atlas Marine Co SA v Avalon Maritime Ltd (The Coral Rose) (No. 1) [1991] 4 All ER 769 at 779:

"The creation or purchase of a subsidiary company with minimal liability, which will operate with the parent's funds and on the parent's directions but not expose the parent to liability, may not seem to some the most honest way of trading. But it is extremely common in the international shipping industry, and perhaps elsewhere. To hold that it creates an agency relationship between the subsidiary and the parent would be revolutionary doctrine."

In substance, the pursuers in the present case pointed to nothing more than the relationship between Sorbieridge and the defenders in support of the averment of agency. That was not a relevant case of agency.

Discussion

[33] The issue between the parties in this case turns principally on the proper construction of clause 12 of the qualified acceptance of 24 February 1997. Counsel suggested different approaches to the task of construction, and each urged me to follow what he submitted was the correct approach. It does not seem to me, however, that the differences are as great as was suggested. On the one hand, the approach adopted by the Lord President in Bank of Scotland v Dunedin Property Investment Co Ltd involved first inquiring as to the ordinary meaning of the words used, then, having reached a conclusion on that matter, considering the surrounding circumstances in which the contract was entered into to see whether they affected the result of the original inquiry. On the other hand, the approach advocated by Lord Hoffmann in Investors Compensation Scheme Ltd runs those two stages together, by regarding the task of construction as the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge reasonably available to the parties in the situation in which they were at the time of the contract. Whichever of these approaches is adopted, it seems to me that the result should be the same. The language of the contract is of paramount importance. As Lord Mustill said in Charter Reinsurance Co Ltd v Fagan [1997] AC 313 at 384B, in a passage quoted with approval by the Lord President in Bank of Scotland v Dunedin Property Investment Co Ltd at 661G:

"The inquiry will start, and usually finish, by asking what is the ordinary meaning of the words used".

A similar point was made by Lord Steyn in Society of Lloyd's v Robinson at 763D:

"Loyalty to the text of a commercial contract, instrument or document read in its contextual setting is the paramount principle of interpretation".

As Lord Hoffmann pointed out in Investors Compensation Scheme Ltd at 913D:

"The 'rule' that words should be given their 'natural and ordinary meaning' reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents".

The danger inherent in too ready a departure from the ordinary meaning of the language used was pointed out by Lord Mustill in Charter Reinsurance Co Ltd v Fagan at 388:

"To force upon the words a meaning which they cannot fairly bear is to substitute for the bargain actually made one which the court believes could better have been made".

On the other hand, many words have more than one shade of meaning, and the understanding of what the parties who used the words actually meant by them depends on an understanding of the circumstances known to the parties at the time when the words were used. It is for that reason that the court is entitled to expect to be placed, by evidence of the surrounding circumstances, in the same position as the parties were in when they entered into the contract. None of the authorities cited would exclude reference to evidence of the surrounding circumstances as an aid to understanding the language used by the parties. The point is perhaps put with the greatest emphasis by Lord Hoffmann in Investors Compensation Scheme Ltd at 912. The importance of the background circumstances is, however, it seems to me, a matter of degree. There may be cases in which they have no effect on the objective understanding of the language used by the parties; there may, on the other hand, be circumstances in which they make a crucial difference. On that account, they cannot safely be left out of account. So long, however, as proper weight is given both to the language used by the parties and to the circumstances known to the parties at the time when that language was used, it does not seem to me that much turns on which approach is adopted in taking those two considerations into account.

[34] In my opinion Mr Sandison was right in detecting two separate lines of authority, one dealing with the preference for a commercially sensible construction and the other treating the commercial purpose of the contract, objectively ascertained, as part of the background matrix of fact. In my opinion, however, those are both legitimate considerations which ought, if they are available in the circumstances of the particular case, to be taken into account. The preference for a commercially sensible construction seems to me to be but an instance of the broader consideration identified by Lord Reid in L. Schuler AG v Wickman Machine Tool Sales Ltd at 251, namely that a construction which yields a reasonable result is to be preferred to one which yields an unreasonable result. In the context of a commercial contract, reasonableness is to be judged from the point of view of the person experienced in the relevant aspect of commerce. If therefore the language of a commercial contract is capable of bearing either of two meanings, one of which yields a result that would appear to a reasonable man experienced in the relevant business as sensible, and the other of which yields a result that would be regarded by such a person as making no commercial sense, the former construction is to be preferred (Antaios Compania Naviera SA v Salen Rederierna AB per Lord Diplock at 201). I agree with Mr Sandison, however, that that consideration does not justify abandonment of the attempt to understand the language used. The other consideration, namely that the commercial purpose of the contract forms part of the factual matrix, is also in my view a legitimate aid to construction, provided it is borne in mind that the commercial purpose must be objectively ascertainable. If it is, it can properly be taken into account. On the other hand, the difficulties which may lie in the way of objective identification of the commercial object of the contract were clearly identified by Lord Wilberforce in Prenn v Simmonds at 1385.

[35] In the present case the issue is what is meant by clause 12 when it provides for an increased price "in the event that the Purchaser achieves planning permission for the erection or redevelopment of the Subjects for more than forty-nine residential units". Bearing in mind Lord Hoffmann's warning that the meaning of a document is not the same thing as the meaning of its words (Investors Compensation Scheme Ltd at 913B), it is in my view nevertheless appropriate to start by considering the meaning of the words in which the clause is expressed. I accept, as Mr Wolffe did, Mr Sandison's submission that the word "achieves" connotes acquiring by effort. The clause, expressed as it is, appears to require more than that planning permission be granted for more than forty-nine residential units. It requires that that result be "achieved" by the purchaser. Had the relevant planning permission been obtained on the application of a third party unconnected in any way to the defenders, I do not consider that that could be regarded as planning permission "achieved" by the purchaser. Although planning permission enures to the benefit of the land, it is not impossible to envisage circumstances in which a third party might apply for planning permission in respect of the subjects, without any involvement on the part of the defenders and without their consent. It is, in my view, clear that clause 12 does not contemplate that in such circumstances a successful third party application for planning permission which resulted in permission existing for the development of more than forty-nine residential units on the subjects would trigger a liability on the defenders' part to pay the additional price. I do not consider, however, that the clause means that for liability to arise the relevant planning permission must be granted on an application made by the purchaser. That would be one way (perhaps the most obvious) in which the defenders, as purchaser, might "achieve" the relevant result, but it is not in my opinion the only way for them to do so. In my opinion the defenders can be regarded as "achieving" the relevant grant of planning permission if they have made some material contribution to bringing the grant about. In my view therefore the question whether the defenders "achieved" the planning permission granted on the application of Sorbieridge cannot be answered in the negative simply because the application was made by Sorbieridge rather than by the defenders. It is necessary to consider whether the circumstances disclose that steps taken by the defenders made a material contribution to bringing about the result that the planning permission granted on the application of Sorbieridge was obtained.

[36] In my opinion the circumstances do disclose a material contribution made by the defenders to the obtaining of the planning permission granted on the application of Sorbieridge. As at the beginning of September 1997 the defenders were undoubtedly bound by a contractual provision that obliged them to pay an additional price for the subjects if they "achieved" planning permission for more than forty-nine residential units on the subjects. Between 9 and 19 September 1997 Sorbieridge was incorporated, the defenders became holders of its whole issued share capital, and directors of the defenders became its directors. By the latter date, therefore, Sorbieridge was a wholly-owned subsidiary of the defenders under the management of directors representing the defenders. That state of affairs cannot have come about otherwise than at the behest of the defenders. On 3 October 1997, Sorbieridge applied for planning permission in respect of the subjects, and that application was in due course granted. The planning permission was in terms which, if granted on the application of the defenders themselves would undoubtedly have triggered liability to pay the increased price. Those circumstances are, in my opinion, sufficient to amount to "achievement" of the planning permission by the defenders. It was obtained as a result of effort on their part in the form of setting up their subsidiary, Sorbieridge, and procuring that it made the relevant application. That is, although not an irrebuttable inference from the circumstances, at least one which it is, in my view, appropriate to draw in the absence of any contrary explanation proffered by the defenders.

[37] In reaching that conclusion I have left out of account the terms of the letter of 3 September 1997 from the defenders to their solicitor. If, however, it is legitimate to take the terms of that letter into account, which in my view it probably is, they reinforce the conclusion which I have reached. That letter appears to me to show that at its date the defenders were contemplating the involvement of other companies in the development of the subjects, and considering in that context whether liability for the additional price (described as a "penalty") could be avoided. It therefore seems to me to reinforce the inference that the application for planning permission made in name of Sorbieridge was instigated by the defenders. As I have said, however, that consideration does not form a necessary part of my decision.

[38] In my view the approach which I have adopted to the construction of clause 12 and its application to the circumstances of the case involves no piercing of the corporate veil. If clause 12 had said, "In the event of planning permission being granted on the application of the purchaser", to hold that planning permission granted on the application of Sorbieridge was planning permission granted on the application of the purchaser would have involved piercing the corporate veil and treating Sorbieridge as an emanation of the defenders. That is not, however, the issue that arises, given that clause 12 is expressed as it is. The focus is not on whether Sorbieridge should be treated as if it were the same thing as the defenders, but on whether the defenders can be said to have done enough to be regarded as having "achieved" the planning permission granted on Sorbieridge's application. Inferring in the circumstances that Sorbieridge's application was the result of active steps taken by the defenders to set up the subsidiary company and have it make the application involves, in my view, no piercing of the corporate veil. It is therefore unnecessary for me to consider in what circumstances it is legitimate to pierce the corporate veil.

[39] I do not consider that in the circumstances of the present case consideration of the background circumstances known to the parties at the time of contracting makes any material difference to the construction of clause 12. The conclusion I have reached was reached primarily on the basis of the terms of the clause. In my view, however, there is nothing in the surrounding circumstances to make that conclusion inappropriate. The construction which I have adopted is, in my view, the commercially sensible one. It steers a middle course between, on the one hand, holding the defenders liable to pay the additional price only if they themselves obtained the planning permission for more than forty-nine units, which would make it very easy for the obligation to be circumvented by their procuring that the application was made in name of another party, and, on the other hand, holding them liable to pay the additional price even if planning permission was obtained by a meddling third party without their participation or consent. It seems to me to make commercial sense that they should be liable if they have brought about the situation in which planning permission for the denser development exists, whether by making the application themselves, or by taking other active steps which bring that result about. I place no reliance, on the other hand, on any perception of the commercial objective of clause 12. I do not feel able to form any view of the commercial purpose of the clause which would not involve prejudging the issue of construction of its scope which I have to resolve.

[40] I do not consider that in the circumstances any question of construing clause 12 contra proferentem arises. There is, in my view no such ambiguity as would justify resort to that approach.

[41] In the circumstances it is unnecessary to consider the relevancy of the averments in support of the pursuers' case based on the proposition that in applying for planning permission Sorbieridge acted as agent for the defenders. As Staughton LJ pointed out in Atlas Marine, the fact that a subsidiary does its parent's bidding may not be sufficient to demonstrate agency. My decision does not depend on Sorbieridge having acted as agent for the defenders in applying for the planning permission. Rather it turns on regarding the actions of the defenders, admitted or inferred from admitted facts, as sufficient to support the conclusion that the defenders achieved the relevant planning permission.

Result

[42] For the reasons which I have set out I have come to the conclusion that the proper construction of clause 12 is that the additional price is payable if the defenders played an active part in bringing about the result that planning permission existed for the development of more than forty-nine residential units on the site. I have come to the further conclusion that in the undisputed circumstances of the case the defenders did play such a part. In the absence of any explanation to the contrary proffered by the defenders, I am of opinion that the proper inference in the circumstances is that, having set up Sorbieridge as their subsidiary, they procured that it applied for and obtained the relevant planning permission. Those circumstances are, in my opinion, sufficient to satisfy the requirements of clause 12. I do not understand there to be any dispute about the amount of the pursuers' claim if it is well founded. I shall therefore sustain the pursuers' pleas-in-law and grant decree de plano in terms of the first conclusion of the summons. I shall reserve the question of expenses.