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Cite as: [2005] ScotSC 25

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Cromarty Conservation Ltd v. Revack Lodge Estate Ltd [2005] ScotSC 25 (16 May 2005) SHERIFFDOM OF GRAMPIAN HIGHLAND AND ISLANDS AT INVERNESS

A174/04

		JUDGEMENT of SHERIFF PRINCIPAL SIR STEPHEN S T YOUNG Bt QC
		in the cause
		CROMARTY CONSERVATION LIMITED
		Pursuers and Appellants
		against
		REVACK LODGE ESTATE LIMITED
		Defenders and Respondents

Act: Mr Lachlan McNeill, advocate, instructed by The Mackenzie Law Practice, Inverness

Alt: Miss Jane Ferguson, solicitor, R & R Urquhart W.S., Forres

Inverness: 16^th May 2005

The sheriff principal, having resumed consideration of the cause, refuses the appeal and adheres to the interlocutor of Sheriff Booker-Milburn dated 12 November 2004 and the interlocutor of Sheriff Pollock dated 22 December 2004 subject to the qualification that the cause should now be continued to the Procedure Roll on a date to be afterwards fixed; finds the pursuers and appellants liable to the defenders and respondents in the taxed expenses of the appeal and allows an account thereof to be given in and remits the same, when lodged, to the auditor of court to tax and to report; quoad ultra remits the cause to the sheriff to proceed as accords.

Note

[1] In the principal action in this case the pursuers and appellants crave the court to grant decree for payment to them by the defenders and respondents of the sum of £119,338.88. It appears from article 2 of the condescendence that the parties agreed that the pursuers would carry out building works to properties belonging to the defenders on a running account basis. It is said that various interim accounts were submitted for payment. In the current version of the closed record (no. 11 of process) details of five of these accounts are given. In total these exceed the sum sued for, albeit that the first four total £107,500.30 which corresponds to the averment in the middle of article 2 which reads: "The balance of the account remaining unpaid for is £107,500.30, which is the sum now sued for".

[2] The defenders maintain that the pursuers were in material breach of the contract and have lodged a counterclaim against the pursuers. In this they crave the court to grant decree for payment to them by the pursuers of sums totalling £141,069.40 which is said to be the total cost of remedying the defective works carried out by the pursuers.

[3] On 28 July 2004 Sheriff Pollock closed the record on the pursuers' motion and of consent before answer allowed parties a proof of their respective averments and assigned 16 September 2004 as a diet for this purpose. But on 2 September 2004, on the motion of the defenders, he discharged this diet on the grounds that one day would be insufficient to hear all the evidence and assigned a fresh diet of proof before answer to take place on 22, 23, 24, 25 and 26 November 2004.

[4] On 13 October 2004 Sheriff Booker-Milburn, on the opposed motion for the defenders, allowed their minute of amendment to be received and form no. 16 of process, allowed the pursuers twenty one days in which to lodge answers, allowed parties a further six days for adjustment of the minute of amendment and answers and fixed 10 November 2004 as a hearing in terms of rule 18.3 of the Ordinary Cause Rules.

[5] On 15 October 2004 a motion, no. 7/3 of process, was lodged on behalf of the defenders. In part 1 of this they sought a discharge of the proof before answer assigned for 22 to 26 November 2004 due to the unavailability of an essential witness. Parts 2 and 3 of the motion read as follows:

To ordain the pursuer to find caution of £60,000 for past and future expenses and to find said caution within fourteen days, in respect that the defender has reason to believe that the pursuer will be unable to pay the defender's expenses in the event the defender were successful, as disclosed by the pursuer's accounts; and

Thereafter to sist the cause until the pursuer has found caution.

[6] Sheriff Booker-Milburn heard parties on this motion on 10 November 2004 and thereafter made avizandum. On 12 November 2004 he pronounced an interlocutor in the following terms:

The Sheriff, having continued consideration of the defenders' opposed motion, No. 7/3 of Process, to ordain the pursuers in terms of Section 726(2) of the Companies Act 1985 to find caution for expenses in the sum of £60,000, grants said motion and ordains the pursuers to find caution for expenses in the sum of £60,000, said sum to be lodged with the Sheriff Clerk, Inverness, no later than 4.00pm on 17 December 2004; on the pursuers' opposed motion, discharges the diet of proof before answer fixed for 22, 23, 24, 25 and 26 November 2004; on the pursuers' motion prorogates the time for lodging answers to the defenders' minute of amendment No. 16 of Process to 17 December 2004; continues the cause to 22 December 2004 at 10.00 am to settle further procedure; and reserves all matters of expenses until 22 December 2004.

[7] The pursuers subsequently sought leave to appeal against this interlocutor to the extent that they had been ordered to find caution in the sum of £60,000. But on 6 December 2004 Sheriff Booker-Milburn refused to grant leave to appeal.

[8] The pursuers evidently failed to find caution, and on 22 December 2004 Sheriff Pollock pronounced an interlocutor in the following terms:

The Sheriff, on the Defender's unopposed motion Assoilzies the Defenders from the Crave of the Writ and finds the Pursuer liable to the Defender in expenses as the same may be taxed and allows an account thereof to be given in and when lodged to remit to the Auditor of Court to tax and to report; on the Defenders unopposed motion allows the cause to proceed in respect of the Counterclaim and continues the cause to the Procedure Roll of 16 February 2005 to allow the pleadings to be updated.

[9] On 5 January 2005 a note of appeal was lodged on behalf of the pursuers. This narrated that they appealed the interlocutor of 22 December 2004 insofar as it dismissed (sic) the principal action and made a finding of expenses therein against the pursuers. It is then said that decree of dismissal (sic) was pronounced as a result of the failure of the pursuers to lodge caution in the sum of £60,000 by 17 December 2004 as had been ordered in the sheriff's interlocutor of 12 November 2004 and that leave to appeal had been sought and refused. Various detailed grounds of appeal were then specified. In the event, at the hearing of the appeal counsel for the pursuers indicated that he wished to argue only parts 1(c) and 3 of these grounds which read as follows:

In the exercise of his discretion in ordaining the pursuers to find caution, the sheriff erred in the following respects:-

.......

.......

he failed to take proper account of the fact that the majority of the pleadings to date and of the court time that would be taken up at proof and therefore of the expenses in the cause would be occasioned in the determination of the defenders' counterclaim which the defenders have chosen to bring and which the pursuers have been obliged to defend.

Separatim the interests of justice require the recall of said interlocutor.

[10] In support of his interlocutor dated 12 November 2004 Sheriff Booker-Milburn wrote a very full and careful note explaining why he had ordered the pursuers to find caution in the sum of £60,000. This speaks for itself and it is unnecessary to set it out in full here. Unfortunately it is not dated. But on page 6 the sheriff recorded that his purpose in writing it was to assist parties following the lodging of the pursuers' motion for leave to appeal against his interlocutor dated 12 November 2004. I infer from this that the note must have been written some time between 19 November 2004, when the motion was lodged, and 6 December 2004 when leave to appeal was refused. The significance of this is that the note would have been available to the pursuers' agents when they drafted the grounds of appeal in the note of appeal. And even if the note had not then been available, following its production the grounds of appeal could have been amended at any time up to fourteen days before the date assigned for the hearing of the appeal - see rule 31.4(5)(a) of the Ordinary Cause Rules.

[11] Opening the appeal, counsel for the pursuers indicated that he did not challenge the proposition that decree of absolvitor with expenses was the appropriate disposal where a pursuer had failed to obtemper an order to find caution and hence was in default. Thus he accepted that Sheriff Pollock had properly granted decree of absolvitor on 22 December 2004, but only on the assumption that the interlocutor dated 12 November 2004 pronounced by Sheriff Booker-Milburn stood. Counsel explained that it was this interlocutor that he wished to challenge primarily, and he moved me to recall it to the extent that the pursuers had been ordained to find caution in the sum of £60,000 and to recall accordingly also Sheriff Pollock's interlocutor dated 22 December 2004.

[12] In support of this motion, counsel submitted in the first place that the sheriff had been plainly wrong to order caution to be found at all, with the result that the interests of justice clearly required the recall of the interlocutor dated 12 November 2004 to the extent that the pursuers had been ordered to find caution. And in the second place counsel submitted that, if I were against him on his first submission, I should nonetheless find that the sheriff had been plainly wrong to order caution to be found in an amount of anything like £60,000. Counsel then confirmed that he was relying on part 3 of the grounds of appeal in support of his first submission and part 1(c) in support of his alternative submission.

[13] Section 726(2) of the Companies Act 1985 provides:

Where in Scotland a limited company is pursuer in an action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the company will be unable to pay the defender's expenses if successful in his defence, order the company to find caution and sist proceedings until caution is found.

[14] Counsel acknowledged that this section imposed a two-stage test. In the first place the court had to decide whether or not it appeared by credible testimony that the company in question would be unable to pay the defenders' expenses if successful in his defence. And in the second place if, and only if, this condition were met the court then had to consider whether in the exercise of its discretion it should order the company to find caution. Upon the assumption that the initial condition had been satisfied, counsel did not suggest that the sheriff had erred in the exercise of his discretion in ordering the pursuers in principle to find caution. He acknowledged too that the material which had been put before the sheriff at the hearing on 10 November 2004, the details of which he had recorded in his note, constituted testimony within the meaning of section 726(2). But he submitted that the sheriff had been plainly wrong in concluding that the initial condition had been satisfied. Therefore he should never have proceeded to the second stage of considering whether or not to exercise his discretion to make an order for caution against the pursuers.

[15] Counsel drew attention in particular to a passage on page 9 of the sheriff's note where he wrote:

In my opinion, in the light of what has been said by (the defenders' solicitor) and the productions referred to, it is within my power to make an order for caution under section 726 of the Companies Act 1985. Whether I should do so is a matter for my discretion. In exercising my discretion to make the order for caution as moved for by the defenders, I adopt, with respect, what was said by Lord Maxwell in (Dean Warwick Limited v Borthwick 1981 SLT (N) 18 at page 19): "In my opinion it is proper for me to look at this matter objectively and primarily to ask myself whether, on the information before me, there is a substantial risk that, should the defender be successful in the action, and it is only on that hypothesis that the question will arise, he will be unable to recover the expenses which might then be found due to him from the pursuers. So far as I can judge, on the information which is before me, there is a serious likelihood that this pursuer company, bearing in mind its nature and its structure and its membership as a company and the fact that an unsatisfied decree has passed against it, would be unable to pay a heavy amount of expenses which might be due as a result of a proof which, on the pleadings, is likely to be a long one".

[16] Counsel submitted that the sheriff had erred in relying on this passage from the judgement of Lord Maxwell in considering whether or not to exercise his discretion to order the pursuers in this case to find caution. In counsel's submission, in the passage quoted Lord Maxwell was considering whether or not the initial condition had been met.

[17] Turning to his second, alternative, line of argument, counsel pointed out that at the hearing before Sheriff Booker-Milburn on 10 November 2004 the state of the pleadings had been as set out in the closed record which is no. 11 of process. Before the hearing a very substantial minute of amendment (no. 16 of process) had been lodged by the defenders, and the question whether or not amendment should be allowed in terms of this was still outstanding on the date of the hearing. The first page and a half of this minute of amendment proposed various amendments to the answers in the principal action, and the remaining seventeen and a half pages proposed amendments to the counterclaim.

[18] Counsel drew attention too to the terms of parts 2 and 3 of the defenders' motion no. 7/3 of process (which I have quoted in paragraph [5] above) and suggested that the sum of £60,000 had been selected on the basis that the proof in this case would last for five to six days. There was, said counsel, otherwise no indication how this sum had been calculated and he suggested that it was a surprisingly high estimate of the defenders' expenses for a proof which might last five to six days. In the event, as indicated on page 9 of his note, the sheriff had accepted, because it was not suggested to the contrary, that the proof would take perhaps twelve days. It appeared that it was on this basis that the sheriff had assessed the sum of £60,000 as reasonable.

[19] I did not understand counsel to dispute that, if the defenders' amendment were to be allowed, the proof would be likely to last twelve days and that £60,000 would be a reasonable estimate of the expenses that would be incurred by the defenders in preparing for and conducting such a proof. But counsel submitted that there was no basis in section 726(2) for ordering the pursuers to find caution for the expenses that might be incurred by the defenders in pursuing their counterclaim. The purpose of the section was to stop a company presenting a claim recklessly rather than to stop it defending a claim which had been made against it. In these circumstances it was submitted that, even if he had been right in principle to order the pursuers to find caution, the sheriff had been plainly wrong to fix this in the sum of £60,000. On the basis that £60,000 was a reasonable estimate for a twelve day proof, counsel suggested that £25,000 (five twelfths of £60,000) would be a reasonable estimate for a five day proof of which £10,000 to £15,000 might be attributable to the expenses incurred by the defenders in defending themselves against the pursuers' claim. Accordingly, if an order for caution was to be made at all, a sum of the order of £10,000 to £15,000 should be selected for this purpose.

[20] In response, the defenders' solicitor drew attention to the terms of parts 1(c) and 3 of the grounds of appeal and submitted in the first place that I should reject both the lines of argument advanced for the pursuers on the basis that no fair notice of these had been given to the defenders in the grounds of appeal. In any event, it was submitted under reference to The New Mining and Exploring Syndicate Limited v Chalmers & Hunter 1909 SC 1390 that I would not be entitled to interfere with the decision of Sheriff Booker-Milburn to order the pursuers to find caution unless I was satisfied that he had gone completely wrong.

[21] Referring to counsel's first line of argument, the defenders' solicitor pointed out that at pages 3 to 8 of his note the sheriff had narrated fully all the information about the pursuers' financial circumstances that had been put before him during the hearing on 10 November 2004. At page 9 of his note the sheriff had gone on to say that in light of what had been said to him and the productions to which he had been referred it was within his power to make an order for caution under section 726(2). He had then proceeded to decide whether or not he should exercise his discretion to make the order for caution which had been sought. In these circumstances it could not be said that the sheriff had gone completely wrong in his approach to the issue before him.

[22] Turning to the second line of argument for the pursuers, the defenders' solicitor pointed out (as appears from the sheriff's note) that no suggestion was made by the pursuers' solicitor during the hearing on 10 November 2004 that £60,000 would not be an appropriate sum to order the pursuers to find by way of caution. Thus it was not open to them to challenge this in the appeal. Besides, the suggestion that the proof might take up to twelve days had come from the pursuers' agents at some stage before the hearing on 10 November 2004, and it was on this basis that she (the defenders' solicitor) had suggested to the sheriff that the proof might last for twelve days.

[23] As for the submission for the pursuers that section 726(2) did not afford a basis for ordering the pursuers to find caution for the expenses that might be incurred by the defenders in pursuing their counterclaim, the defenders' solicitor explained that the present dispute arose out of a building contract between the parties. The pursuers were seeking payment of the interim accounts which had been rendered to the defenders. The defence to this claim was that the works which had been undertaken by the pursuers had been seriously defective with the result that they had been in material breach of the contract so that there was no contractual obligation on the part of the defenders to pay the accounts. It was pointed out that in terms of answer 2 in the principal action the averments in statements of fact 3, 4, 5 and 6 in the counterclaim had been incorporated therein brevitatis causa. The purpose of this was to give notice to the pursuers in the principal action of the evidence which would be led to demonstrate that the works undertaken by them had been seriously defective. Thus this was not a situation in which the proof would be reduced in length from twelve days to five or six days if the counterclaim were to be dealt with separately. In order to substantiate their defence to the principal action all the evidence foreshadowed in the statements of fact would in any event have to be led by the defenders. Finally, the defenders' solicitor suggested that, even if the proof were to last for only five or six days, the sum of £10,000 to £15,000 would be very low as an estimate of the defenders' expenses. Junior counsel had already been involved in the case on both sides and it was likely that they would be instructed to attend a proof as well. Evidence would be led from experts in the building trade including an architect, so that the expenses of the proof on one side only could well be of the order of £3,000 to £4,000 per day. In addition an estimate of £40,000 for the preparation for a six day proof on each side was on the low side. In these circumstances the sum of £60,000 selected by the sheriff should not be disturbed.

[24] I deal firstly with the submission for the defenders that no fair notice had been given by the pursuers in their grounds of appeal of the two lines of argument advanced on their behalf by counsel. I have already quoted parts 1(c) and 3 of the grounds of appeal, and in my opinion the defenders' solicitor was quite right to say that these give no fair notice of the pursuers' first line of argument. In truth they give no notice at all of this line of argument. The pursuers had ample opportunity following receipt of the sheriff's note to draft or re-draft their grounds of appeal to give notice of the lines of argument that would be presented on their behalf at the appeal itself. In these circumstances I am not prepared to entertain the pursuers' first line of argument. As for their second line of argument, I can accept that part 1(c) of the grounds of appeal does foreshadow this at least in part and accordingly, with some hesitation, I am prepared to entertain this line of argument.

[25] Even if I had been prepared to entertain the pursuers' first line of argument, I should have had little difficulty in rejecting it. In my opinion, on a fair reading of the sheriff's note as a whole, it is perfectly clear that he appreciated that he had to apply a two-stage test in considering whether or not to make an order for caution under section 726(2), and that he did apply this test. He had ample material before him to entitle him to be satisfied by credible testimony that there was reason to believe that the pursuers would be unable to pay the defenders' expenses if successful in their defence and I do not consider that he can be said to have erred in concluding that this condition had been satisfied in this case. Moreover, I reject the submission for the pursuers that the sheriff misdirected himself in relying upon the passage from the judgement of Lord Maxwell at page 19 of Dean Warwick Limited which he quotes at page 9 of his own note. In this passage it appears to me that Lord Maxwell was considering, not whether the initial condition had been met for the purposes of section 726(2), but whether he should exercise his discretion to make the order for caution which had been sought. Thus, further up page 19 Lord Maxwell stated: "In my opinion, in the light of information, it is at any rate within my power to make an order for caution under the 1948 Companies Act. It still remains a question whether I ought to do so as the matter is discretionary".

[26] Turning to the second line of argument for the pursuers, I should only be entitled to interfere with the selection by the sheriff of the sum of £60,000 if I had been persuaded that he had gone completely wrong. Here I need only say that nothing that was said by counsel for the pursuers on this aspect of the matter has persuaded me that this was so and I therefore reject this line of argument too.

[27] In addition to the authorities already mentioned, I was also referred to UK Leasing Limited v Bremners plc 1990 SLT 684, Edinburgh Entertainments Limited v Stevenson 1925 SC 848, Pioneer Seafood Limited v The Braer Corporation 1992 SCLR 1126 and Keary Developments Limited v Tarmac Construction Limited 1995 3 All ER 534.

[28] It was not in dispute that the expenses of the appeal should be awarded to the defenders in the event that the appeal were unsuccessful.

[29] Counsel for the pursuers moved that I should certify the appeal as suitable for the employment by the pursuers of junior counsel. This issue is now academic. If I had had to decide it, I think that I should have rejected the motion. In my opinion the matters canvassed in the course of this appeal were well within the capability of a competent and experienced solicitor.