Scottish Sheriff Court Decisions

ALEX LAWRIE FACTORS LTD v. MITCHELL ENGINEERING LTD [2000] ScotSC 28 (31st October, 2000)

AC470/00

Glasgow 31 October 2000

NOTE:

In this action the pursuers sue as the assignee of Martin McCandless trading as MMS (hereinafter referred to as "MMS"). It was a matter of agreement between the parties that MMS had been instructed by the defenders to carry out painting works. The benefit under the contract namely the right to receive the contract sum had then been assigned by MMS to the pursuers. The defenders alleged that the works carried out by MMS were disconform to contract. As a consequence of the breach of contract by MMS the defenders sustained loss and damage. The amount of the loss and damage exceeded the contract value of the works. The defenders pled a right of retention as a defence to the action at the instance of the pursuers. However, they went on to counterclaim against the pursuers on the basis that the pursuers, by virtue of the assignation, had undertaken the liabilities in the contract. The defenders therefore sought to recover from the pursuers the difference between the loss and damage sustained by the defenders and the contract price.

Mr Cameron, solicitor appeared for the pursuers and Mr Parrot, advocate for the defenders.

Opening the debate Mr Cameron attacked the defenders' pleadings in a number of respects with regard to specification. In reply, Mr Parrot acknowledged that there was some force in the criticisms which had been made of the defenders' pleadings in this respect. Amendment would be necessary. I was therefore invited to give my views on what the pursuers described as their "root and branch" attack on the defenders' case and thereafter put the case out by order in order that further procedure might be discussed. I was happy to adopt this approach.

Mr Cameron first referred me to the decision of Sheriff Substitute Bryden in the case of Binstock Miller and Co v E Coia and Co Ltd 1957 SLT (Sh Ct Rep) 47. This case supported his submission that as assignees, the pursuers stood in the shoes of the cedent for any defence pled but the assignees were not exposed to any liability in damages in the event of the cedent being in breach of contract with the defenders. Unless the right of action arose independently of the assignation the defenders had no right to seek damages nor even repetition if the price had been paid to the assignee. This was the principle expressed in the maxim assignatus utitur jure auctoris. All that the defenders in this action could do was plead retention or compensation in the defence to the action. Sheriff Substitute Bryden referred to the counterclaim being a sword whereas all that was available to the defender was a shield. I was also referred to the case of Young v Kitchin (1878) 3 Ex D 127 being one of the English cases relied upon by the Sheriff Substitute.

Mr Cameron submitted that all that was open to the defenders was to plead retention or compensation in their defence to the action at the instance of the pursuers pending a claim for damages at the instance of the defenders against MMS. That claim could take the form of a separate action or could be achieved by invoking third party procedure in this process.

I was referred to Professor W A Wilson, Scottish Law of Debt (2nd Edn) at paragraph 27.7 where in a footnote the learned author considers the decision of Sheriff Substitute Bryden to be correct notwithstanding the criticisms levelled at it by Professor McBryde in the Law of Contract in Scotland at page 392.

Mr Cameron then directed me to the case of Pan Ocean Shipping Ltd v Creditcorp Ltd (1994) 1 AER 470. This was a decision of the House of Lords in an English appeal. Mr Cameron submitted that on the strength of the decision in Pan Ocean Shipping Ltd, and in particular the speech of Lord Goff, for the pursuers to come under an obligation to the defenders the assignation would have required to expressly assign the liabilities from MMS to the pursuers. Since there was no suggestion that anything other than contractual rights had been assigned then the counterclaim fell to be dismissed.

I was also referred to a text book entitled Factoring the Law and Practice of Invoice Finance (3rd Edn) by Freddy Sallinger. At paragraph  9.37 it was said that "Although a factor may have his own claim against a debtor reduced or extinguished by the debtor's countervailing rights, he incurs no positive liability to the debtor under the contract that gave rise to the assigned debt. Thus to create a positive liability on the part of the assignee there would need to be transferred to the assignee by way of delegation or novation the liabilities of the cedent. Mere assignation did not impose such positive liabilities."

For completeness I should also record that I was referred to Stair Memorial Encyclopaedia Vol 15 at paragraph  864 and also to an article in the Scottish Law and Practice Quarterly 1997 114 both written by Professor McQueen and in which he argues that the decisions in Binstock Miller and Pan Ocean Shipping Ltd are correct.

In reply Mr Parrot submitted that Binstock Miller was wrongly decided in principle and for reasons of policy. He acknowledged that Professor McQueen's writing in the Stair Encyclopaedia, The Law and Practice Quarterly and in the book which he co-authored with Professor Thompson, Contract Law of Scotland, was against him.

Not surprisingly Mr Parrot relied heavily on Professor McBryde's criticism of the decision in Binstock Miller as set out in The Law of Contract in Scotland at paragraph 17 - 87. Mr Parrot took me through the passage in the text book and adopted the position adopted by Prof McBryde in the five numbered paragraphs. It was the terms of the second and third numbered paragraphs which Mr Parrot developed.

It was submitted that an assignee is liable to all pleas competent against his author. Mr Parrot started with the case of Shiells v Ferguson Davidson & Co 1876 4 R 250 where Lord President Inglis at page 254 said:-

The question was what Lord President Inglis meant by the expression "all pleas". Mr Parrot acknowledged that if it was only defences which were in his Lordship's mind then there would be no possibility of a counterclaim. In The Scottish Widows Fund and Life Assurance Society v Buist and others 1876 3 R 1078 at 1082 Lord President Inglis adopted the formula that the assignee was "subject to all the exceptions and pleas pleadable against the original creditor" (my emphasis). Finally Mr Parrot referred me to Johnstone-Beattie v Dalzell and others 1868 6 M 333 at page 343 where Lord President Inglis on this occasion expressed himself by saying "...and the assignees will be exposed to all the contingencies to which the cedent would have been exposed" (my emphasis).

Mr Parrot then took me through the expressions used by Stair, Erskine, Bell, Gloag and Irvine in Rights in Security and Gloag on Contract (2nd Edn.). Stair in Book III, Title 1, paragraph 20 referred to "all exceptions competent against the cedent being relevant against the assignee" Erskine Book III Title V paragraph 10 used the expression "all defences" competent against the cedent. Erskine wrote in 1871 and therefore pre-dated the decision in Johnstone-Beattie. At first blush Mr Parrot acknowledged that the use of the expression "defences" was against him. He submitted however that at the end of the nineteenth century the concept of defences was different from that of today. In the eleventh edition (Guthrie) of Bells Principles at paragraph 1468 the expression used by the author was that "all defences" competent to the debtor would be effectual against the assignee. Gloag and Irvine in The Law of Rights in Security at page 546 state that the debtor is entitled to plead against him "any defence" which he could have urged against the cedent. In the second edition of Gloag at p 428 the learned author quotes Lord President Inglis in the Scottish Widows Fund v Buist (wherein the expression "all the exceptions and pleas" is adopted) but then in his own commentary at page 428 states "and the assignee is subject to any defence which would have been available in a question" (my emphasis) with the creditor. Thus, concluded Mr Parrot, since in his submission a defence had a broader meaning than at present, the expressions adopted at the latter part of the nineteenth and early part of the twentieth century were sufficiently broad to permit a counterclaim as a "defence" or an exception.

Returning to paragraph 17.87 in Professor McBryde's book Mr Parrot examined the case of Redfearn v Ferrier 1813 1 Dow 50 where at page 67, in a quotation from Bankton, reference is made to the assignor taking the benefit subject to "all the objections and exceptions that lay against the right" in his author. At page 68 Lord Redesdale uses the expression "the exceptions or counterclaims" which the original debtor might have against his creditor.

I was then referred to Volume 15 of the Stair Memorial Encyclopaedia and in particular to footnote 8 at page 560 where Professor McQueen, refers to a different report of the case of Redfearn v Ferrier, and under a different sub nom, where instead of using the expression "exceptions or counterclaims" it was said that the doctrine applied to "a defence" against the demand.

Mr Parrot then commended to me the approach taken by Professor McBryde in numbered paragraphs 4 and 5 of paragraph  17.87. This led him into his submission based upon public policy that an assignee should not be given a better right than resided in his cedent. Thus if the third party could have counter claimed against the cedent he should also be entitled to do so against the assignee.

Decision

Both parties were agreed that there was no binding authority deciding the issue. It was also common ground that the assignation by MMS to the pursuers, ex facie its terms, transferred only the benefit of the contract between MMS and the defenders. It was further agreed that the defenders were entitled to defend the action by pleading retention or compensation in the defences to the extent that the pursuers' claim might be extinguished. The issue was whether the defenders could counterclaim and be made liable in damages for a sum in excess of the sum which the pursuers maintained they were entitled to receive by virtue of the assignation in their favour.

In my opinion it would be unsafe to place too much significance on the words used in the trilogy of cases decided at the end of the nineteenth century when Lord President Inglis chaired the First Division. The remarks made by Lord President Inglis must be viewed in context. In none of the three cases was there an issue such as that which falls to be decided in this case.

In Johnstone-Beattie the contract in question was an ante-nuptual marriage contract in which it was provided that the husband was to receive £5,000 on the death of his wife. Shortly after the marriage the husband assigned his right to receive the £5,000 to a person from whom he borrowed money. The parties were subsequently divorced on the grounds of the husband's adultery. The wife thereafter died. The Court held that the entitlement to receive the £5,000 had been forfeited and, thereby, the assignee's entitlement to receive the £5,000 had also been extinguished. Therefore there was no issue before the Court as to whether the assignee could be made liable in damages.

In The Scottish Widows Fund v Buist the issue was whether a policy of life assurance fell to be reduced after the proposal form contained a false declaration. The Court held that it did and the assignee of the policy was unable to look to Scottish Widows for payment under the policy. It was not an issue in the case that Scottish Widows might have a claim against the assignee.

Finally, in Shiells v Ferguson Davidson & Company the question before the Court was whether a charge for payment following upon an extract decree should be suspended. As in the two other cases there was no question that the assignee of the decree might be called upon to make payment of any sums in excess of the sum specified in the decree.

It is also significant that Lord President Inglis used different expressions in each of the three cases. The assignee was said to be liable to "all pleas", "all the exceptions and pleas" and "all the contingencies" to which the cedent would have been exposed. Similarly the language used by the institutional writers and authors is far from uniform although I accept that when reference is made to "defences" in the late nineteenth century that expression is capable of including a counterclaim (see for example Mackay The Practice of the Court of Session published in 1877 at pages  428 and 429).

Even the two reports of Redfearn v Ferrier succeed in using different words as can be seen from footnote 8 on page 560 of Vol 15 of the Stair Memorial Encyclopaedia. We there find one report referring to "exceptions or counterclaims" whereas the other report refers only to "defence". In both reports Lord Redesdale cites Bankton, with approval, in a passage where the author uses the expression "objections and exceptions".

None of the cases decided the point which arises in the present case and the older writings were similarly not dealing with this specific point. I therefore felt obliged to treat these cases and writings with some caution when trying to decide the competency and relevancy of the counter claim.

Not surprisingly the pursuers relied heavily on the decision of the House of Lords in Pan Ocean Shipping Ltd v Creditcorp Ltd. In this case Trident Shipping were the owners of a vessel known as the Trident Beauty and entered into a time charter party with Pan Ocean Shipping Ltd. Pan Ocean then assigned their interest in the receivables under the charter party to Creditcorp. Payment of the hire was due in advance. Following intimation of the assignation Pan Ocean paid, in advance, an instalment of time charter hire to Creditcorp. The Trident Beauty was not made available to them for the period covered by the advance payment. They therefore sued Creditcorp for repetition of the advance payment. It was argued that the payment was conditional and fell to be repaid if the money turned out not to be earned. The Court of Appeal and the House of Lords rejected this argument. The basis upon which the Court came to its view turned on the terms of the contract between Trident and Pan Ocean and on the terms of the assignation between Trident and Creditcorp. Lord Goff at page 475 h said that "serious difficulties arise if the law seeks to expand the law of restitution to redistribute risks for which provision has been made under an applicable contract." The contract between Trident and Pan Ocean provided, as Lord Wolffe makes clear at page 477, that an adjustment of account between the parties would have to be made if, after advance payment was made, there was a failure in performance by Trident. The Court also proceeded on the basis that ex facie the assignation by Trident to Creditcorp it was only the benefit and not the burden of the contract which was assigned to Creditcorp. If it was open to Pan Ocean to recover against Creditcorp they would have two routes by which they could recover their payment since in terms of their contract with Trident they would also be able to look to Trident. This was thought to be unfair.

Their Lordships did not opine as to whether a debtor could claim damages from the assignee of an assigned debt. The reason for this is to be found in the judgment of Lord Justice Neill when the case was in the Court of Appeal. The report, to which I was not referred, can be found in [1993] 1 Lloyds Rep 433.  Lord Justice Neill records part of Pan Ocean's submissions at p 447:-

"It was accepted that a debtor cannot make a claim for damages against the assignee of the assigned debt, but he was entitled, it was argued, not only to the benefit of a set off, if sued by the assignee, but also to claim a sum equivalent to the amount of the set off in a separate claim against the assignee."

What I take from the foregoing is that it was accepted by Pan Ocean, who were in an analogous position to the defenders in this case, that the assignee's claim could be defeated, one way or another, but the assignee could not be subjected to a claim in excess of the assigned debt. That, in effect, is the position adopted by the pursuers in this case albeit that the pursuers might not accept that there could be a separate claim against them as assignees, even if only to reduce the value of the assigned debt to nil. In other words the defenders in this action submitted that the common law gave them greater rights than the rights claimed by Pan Ocean. The House of Lords considered that Pan Ocean, having made a payment directly to the assignees, were not entitled to repetition of the payment upon there being a total failure in performance by the cedent. Accordingly it seems to me that the position of the assignees in the present case, no payment having been made to them, is stronger than in Pan Ocean.

The defenders' position is that as a matter of law an assignee must take the burden with the benefit. The fact that the assignation ex facie its terms assigns only the benefit matters not. Looking to the Court of Appeal's decision in Pan Ocean one finds Lord Justice Beldam saying exactly the opposite. At page 452 he opines:-

In the course of the debate before me there was no examination of the assignation. It was accepted that it purported to assign only the benefit of the contract. In the discussion there was also no examination of the contract between the defenders and MMS. It was not suggested that the nature of the rights and obligations created by the contract between MMS and the defenders was in any way different from those created in the contract between Trident and Pan Ocean. Perhaps it was not so suggested because it could not be. Accordingly I have difficulty in accepting the defenders' proposition. There may well be cases where it is correct, but each case will require to be examined on its own merits. Indeed there may well be cases where due to the operation of delectus personae the third party's consent to the assignation of the burden would be required. The House of Lords in Pan Ocean did not consider that advance payment of hire was so inextricably linked to the obligation to provide the goods hired. Accordingly, it is difficult to see how payment in arrear for the provision of painting services should be treated differently. But in any event to explore this is to seek to make a case which the defenders did not advance.

Should the defenders' proposition be correct the counterclaim would be competent. But what if the pursuers abandoned their action and it was dismissed? A counterclaiming defender would ordinarily be able to continue with his claim. Taking the argument a stage further why should the third party have to wait to be sued in order to recover from the assignee the loss sustained by the cedent's breach of contract? There seems no obvious reason why. Thus taking the defenders' argument to its logical conclusion the third party could initiate proceedings against the assignee leaving the assignee to plead an entitlement to set off the contract sum if that had not been taken into account in the quantification of the third party's loss. If the defenders are correct in their analysis then it would cause considerable problems for the factoring business in this country. Financial institutions might be reluctant to give consideration for an assignation of a debt if, by operation of law, the assignee must take on the whole liabilities of the contract. Although the assignee may have a right of relief against the cedent, the prospect would not appear attractive. One way around the problem would be for the parties to construct a tripartite agreement to provide that notwithstanding the common law of Scotland (if the common law be as contended by the defenders) the burden would not pass to the assignee. However, the position in Scotland would then be the opposite of that in England. As Lord Justice Neill commented at page 449 of the report of the Court of Appeal decision in Pan Ocean:-

At no time in the debate was it suggested that the common law of Scotland was different from its counterpart in England in a context relevant to the issue before this court.

I also have difficulty in seeing how the result for which the pursuers contended is inequitable and on public policy considerations should not represent the common law of Scotland. The pursuers, on any analysis, are not able to obtain payment of the assigned debt until the defenders right of retention or compensation, if relevantly pled in the defence to the action, has been explored at proof. If the defenders wish to claim damages in excess of the assigned debt they can bring MMS in as a third party or raise separate proceedings against MMS and have the proofs conjoined. (In fact the defenders did move to introduce MMS as a third party some two weeks before the debate. The motion was refused on the basis that it came too late and the debate would have to be discharged and the hearing thus postponed for several months). This does not seem to me to be inequitable.

In the foregoing I have assumed that the defenders' position is that if the liabilities under the contract as well as the right to receive the contract sum have been assigned, the cedent no longer has any rights or liabilities. According to my notes this was a point not specifically addressed at the debate. If my assumption is wrong and what was being said was that the liabilities can reside in both the cedent and the assignee simultaneously then a further problem presents itself to the defenders in that they would then have a choice as against whom they should direct their action. Like the judges in Pan Ocean I have a problem with this outcome for the same reasons as they had.

Perhaps the way in which the point falls to be analysed is to say that an assignee gets no better right than had the cedent. That however is different from saying that the assignee is exposed to the same liabilities as the cedent. Thus if the cedent's entitlement to the contractual sum in a contract with a third party could have been extinguished by the third party pleading retention or compensation so the assignee's rights fall to be similarly qualified. On this analysis the assignee does not assume any of the liabilities of the cedent. By virtue of the assignation he obtains only a right which may or may not be qualified. This approach does not appear to me to be inconsistent with what was said by Lord President Inglis and the other writers referred to earlier in this judgment.

For the foregoing reasons therefore I am of the opinion that the counterclaim falls to be dismissed. As agreed I will put the case out by order for a discussion on further procedure. If convenient for the parties the case will call on Wednesday 8 November at 2.00pm.