Scottish Sheriff Court Decisions

(754/04)

JUDGMENT OF

SHERIFF PRINCIPAL EDWARD F BOWEN QC

 

in the appeal

in the cause

 

MRS CATHERINE BLACK

Pursuer and Appellant

 

against

 

FRASER McGREGOR

 

 

Act: Carlin, Solicitor, Friels

Alt: Brown, Advocate, instructed by McClure Naismith

 

glasgow, 13 MARCH 2006

 

The Sheriff Principal, having resumed consideration of the cause, sustains the appeal; recalls the Sheriff's interlocutor complained of dated 29 September 2005 and the interlocutor of 6 October 2005 in so far as it allows a proof before answer; excludes from probation the pursuer's averments in the second and third sentences of condescendence 4 and to that extent sustains the first plea in law for the defender; allows parties a proof before answer of their averments, the pursuer's claim being restricted to £1877.64; reserves all questions of expenses.

 

 

 

NOTE:

1. The pursuer and defender entered into Missives for the sale of a house in Helensburgh in the autumn of 2002. The price was to be £600,000. The date of entry and settlement was to be 28 November 2002. It is not disputed that the price has never been paid and that the pursuer remains owner of the subjects, having rescinded the contract in December 2003.

 

2. It is further accepted that the Missives contain a clause in the following terms: "Payment of the purchase price in full on the date of entry is of the essence of the contract. In the event of the purchase price or any part thereof remaining outstanding as at the date of entry, then notwithstanding consignation or the fact that entry has been taken by your clients, your clients shall be deemed to be in material breach of contract and further, interest will accrue at the base lending rate of 5 per centum per annum above the Clydesdale Bank plc base lending rate from time to time until full payment of the price is made or in the event of our clients exercising their option to rescind the contract until such time as our clients have completed a re-sale of the subjects and achieved the resale price and further, interest shall run on any shortfall between the purchase price hereunder and the resale price until such time as the shortfall shall have been paid to our clients. In the event that the said purchase price is not paid in full within 14 days of the date of entry, our clients shall be entitled to treat your clients as being in material breach of contract and to rescind the Missives on giving prior written notice to that effect to your clients without prejudice to any rights or any claims competent to our clients arising from the breach of contract by clients (sic) including our clients rights to claim all losses, damages and expenses sustained as a result of your clients breach of contract including interest on the price calculated as set out in this clause. For the purposes of computation of our clients' loss, the interest element of that loss shall be deemed to be a liquidate penalty provision exigible notwithstanding the exercise by our clients of their option to rescind the contract for non-payment of the price or any repudiation of the contract by your clients. This clause shall have effect always provided that any unreasonable delay in settlement is not attributable to us or our clients".

 

3. In the present action the pursuer seeks decree for payment against the defender of the sum of £62,806.43. Following standard averments that "as a result of the defender's breach of contract the pursuer has suffered loss and damage" the pursuer avers that she "incurred abortive solicitors' fees of £1,000 plus VAT of 171/2% amounting to £1,175 and estate agency fees of £702.64". The bulk of the claim however comprises the sum of £60,928.79 said to represent interest at the rate of 5% above the Clydesdale Bank's base lending rate from the date of settlement until 27 January 2004. It is understood that 27 January 2004 was the date of framing of the initial writ.

 

4. A debate took place before the Sheriff at which two matters were considered. The second of these concerned the defender's third plea in law which was a plea of personal bar, and the averments in support of it. The Sheriff held these averments to be irrelevant and repelled the plea. That matter is not the subject of appeal. The matter at issue now concerns the pursuer's entitlement to recover interest at the contractual rate agreed in the Missives which, as I have indicated constitutes the bulk of her claim. These are distinct issues in relation to the pursuer's claim for abortive solicitors and estate agency fees. These were not debated at any length before the Sheriff and are not dealt with in terms of his Note. It will be necessary for me to deal with these in the context of the overall disposal of the case.

 

5. The interlocutor pronounced by the Sheriff following debate was dated 15 September 2005. It dealt only with the defender's plea of personal bar. In his note the Sheriff set out his view that the pursuer's claim for interest was competent and in an interlocutor dated 29 September 2005 the defender's first plea in law, being a general plea to the relevancy, was repelled. On that date the case was continued to a case management conference on 6 October 2005 on which date parties were allowed a proof. It is necessary to mention this procedure because the pursuer's solicitor took objection to the present appeal which was lodged following pronouncement of the interlocutor of 6 October. Whilst it was accepted that the appeal of that date was an appealable interlocutor it was contended that it was too late for the defender to challenge the interlocutor pronounced following debate. I had no difficulty in rejecting this contention. It appeared to me that the only stage at which the defender could appeal the interlocutors following debate without the necessity of obtaining leave was after 6 October 2005 and on the principle that an appeal opens up earlier interlocutors to review as explained in McCue v Scottish Daily Record and Sunday Mail Ltd 1998 SCLR 742 there was no reason why the earlier interlocutor should not be examined.

 

6. Turning to the central issue in the appeal it is clear that in the discussion before the Sheriff considerable attention was paid to the case of Lloyds Bank plc v Bamberger 1993 SC 570, a case in which interest was sought on an unpaid price following an abortive commercial property transaction. In that case the contract had been rescinded following non-payment of the price. The relevant clause founded on by the pursuers was in the following terms: "Payment of the purchase price in full on the completion date is of the essence of the contract. In the event of the purchase price or any part thereof remaining outstanding as at the completion date, then notwithstanding consignation or the fact that entry has not been taken by your clients interest will accrue at the rate of 4 per centum per annum above Lloyds Bank plc base lending rate from time to time until full payment is made. In the event that the said purchase price is not paid within 14 days of the date of entry, our clients shall be entitled to resile from the Missives on giving prior written notice to that effect to your clients without prejudice to any right or any claim competent to our clients arising from the breach of contract by your clients". The Court held that the contractual provision relating to interest did not cover a situation where the price was not being paid and that in consequence the pursuers were not entitled to interest on the unpaid price. The Sheriff in the present case was informed that the style of clause used was intended to overcome the difficulty encountered in Bamberger by making specific provisions for the running of interest in a situation where the contract was rescinded.

 

7. In Bamberger, the Lord Justice Clerk said (at page 574G) "The interest which is provided for is interest on the purchase price or any part thereof outstanding, and in my opinion, interest cannot be payable under this clause when the purchase price itself is not being paid. In the sentence dealing with interest it is stated that interest is to run "until full payment is made". That is the only terminus ad quem which is mentioned in the clause. What the pursuers appear to me to be endeavouring to do is to read that sentence as if it provided that interest was to be paid "until full payment is made or the contract is rescinded". I do not consider that it is legitimate to read into the clause words which are not there". In the present case the Sheriff was referred to a passage in Professor McBryde's book Law of Contract in Scotland (2^nd Ed), paragraph 22(143) where it is stated "The date when interest starts to run should be clear. A reference to interest on "sums unpaid" may be obscure unless the exact day of payment is specified. It should also be clear when interest ceases to run".

 

8. In his note the Sheriff said this: "I respectfully agree with what is said in Bamberger and in McBryde to the effect that if there is an obligation to make payment of interest there has to be a terminus ad quem. In my opinion the Missives in this case unlike in Bamberger provide for a terminus ad quem following rescission. It is the date upon which the pursuer receives the resale price. Further in the event that resale price is less than the purchase price interest will continue to run until that shortfall is paid by the defaulting purchaser. There are therefore strictly speaking two potential termini depending upon the factual scenario. It matters not in my opinion that both termini are indeterminate". The Sheriff went on to say that it was clear that the clause in question was one which the parties intended should survive rescission. There was no reason in his view why the pursuer had to await the relevant terminus before she could enforce her rights. He said that the clause "imposes a continuing obligation on the defender to make payment of interest to the pursuer until such time as the pursuer sells the property. The pursuer will have the obligation to act reasonably in the sale of the subjects. If she acts unreasonably then the usual rules with regard to mitigation of loss will apply".

 

9. In presenting the appeal counsel for the defender stated that he took no exception to the first part of the Sheriff's observations. The Sheriff had however fallen into error first in characterising the termini as indeterminate and second in looking at the matter simply as an issue of whether the clause survived rescission. The fundamental point was that there was no right to the seller to claim interest, in a situation of rescission, until the subjects had been resold. Thus the clause made reference to interest accruing "in the event of our client's exercising their option to rescind the contract until such time as our clients have completed a resale of the subjects and achieved the resale price". The contractual provision went on to contemplate a situation where the house would be resold at a lower price than that agreed by parties, in which event interest would run on any shortfall between the purchase price and the resale price until such time as that shortfall was paid by the purchaser. But there was no room for a "middle way" of the seller rescinding the contract, keeping the house and claiming interest. Any suggestion that this was covered by the terms of the clause failed to take into account that the right reserved to the pursuer following rescission was a right "to claim all losses, damages and expenses sustained as a result of your client's breach of contract including interest on the price calculated as set out in this clause". It was thus necessary to look at what was said elsewhere in the clause about interest. That was, as above quoted, that it accrued until a resale price was obtained, or until any shortfall on the resale price was made good. Counsel further drew attention to that part of the clause which described the interest element as a liquidate penalty provision. That did no more than fix a measure of loss in appropriate circumstances. It did not cover a situation where there was no loss, as might arise in a situation where the value of the house had risen since the date of the aborted transaction. The point, counsel argued, was essentially the same as in Bamberger. The clause had been drafted to get round the problem which arose in Bamberger by making specific provision for interest to run on rescission but only until such time as the subjects were resold. As in Bamberger the clause simply did not apply to the situation which had arisen; it did not say that if the pursuer did not resell the subject she was entitled to interest. The Sheriff's reasoning was entirely dependent on the view that resale was a certain event.

 

10. In response the solicitor for the pursuer submitted that this was a situation in which the parties had entered into a bargain in clear terms and the Court should be slow to interfere with it. He submitted, as I understood him, that the words "achieved the resale price" were not significant in the present context because they were intended to ensure that interest would continue to run even if there was a second abortive transaction. He contended that the case of Bamberger was only authority for the view that one could not sue for interest unless the clause founded on survived rescission. In the present case it clearly did survive rescission. Rescission was in fact the point at which a right to interest was triggered. An obligation on the part of the purchaser existed from that point on. The terms of the provision whereby interest was deemed to constitute liquidate damages could not be regarded as constituting a penalty. That being so damages became payable whether there was a loss or not. In the course of his submissions the solicitor referred to a paper by Professors K G C Reid and G L Gretton commenting on an unreported case of Kerr v McCormack, Sheriff Baird, Glasgow Sheriff Court 12 January 2005.

 

11. I consider that the defender's submissions are well founded and that this appeal must be allowed for the following reasons. First, as in Bamberger, I consider that regard must be had to the precise terms of the contractual provision. The clause on which the pursuer relies contemplates the running of interest from the date of entry "until payment of the price is made or in the event of our clients exercising their option to rescind the contract until such time as our clients have completed a resale of the subjects and achieved a resale price". That much is clear, and I see no scope for argument that this provision was intended only to cover a second abortive transaction. Whilst I accept the point that at least in theory interest starts to run as soon as the contract has been rescinded, it does not appear to me that interest is recoverable until the terminus ad quem has been reached. I agree with Professor McBryde that a provision of the type which is relied on in this case should make it clear when interest ceases to run. The present provision does make that clear but the event itself has not occurred. Where I consider that the Sheriff has erred is in treating resale of the house as a certainty. On the pursuer's argument, so long as she appears to act reasonably, there is no reason why that should happen.

 

12. I am reinforced in this view by considerations of (1) practicality and (2) the principles upon which the pursuer should be compensated for her loss. On the first of these it seems to me that the practical consequence of reaching the conclusion that the pursuer has an enforceable right to recover interest prior to arrival of the terminus ad quem is to open the way for a series of demands for accrued interest with no obvious terminal date for such claims being made. The pursuer could raise another action for interest in six months time, or at whatever intervals she chooses. That problem is overcome if the contract is construed as providing that interest is only recoverable when the specified terminus ad quem is reached.

 

13. What I consider to be more important arises from an examination of the underlying principles upon which the pursuer is entitled to recovery anything. From the opening words of the clause under consideration, one has the impression that it owes its origins simply to the situation when settlement might be delayed - either the purchaser takes entry without paying the price, or the purchase price is consigned pending clarification of some issue of title. In either situation as a matter of law the seller would be entitled to interest on the price, and it is wholly appropriate that parties should agree the rate of it. In the event, however, that the sale falls through, any resultant claim by the seller would not, in principle, give rise to a claim for interest - it would be a claim for damages.

 

14. In the present context, parties have agreed that, for the purposes of computation of the pursuer's loss "the interest element of that loss shall be deemed to be a liquidate penalty provision exigible notwithstanding the exercise by (the pursuer) of (her) option to rescind the contract". I note that in the paper referred to by the solicitor for the pursuer Professors Reid and Gretton expressed doubts as to "what is to be gained" by a declaration of this nature. I agree with that observation and can only conclude that the use of the word "liquidated" constitutes an attempt to steer away from the notion that a pactional rate of 5% above base constitutes a pure penalty. The use of the words "for the purpose of computation of our client's loss" nevertheless indicates an acknowledgement that the pursuer's claim in the event of the transaction falling through is in substance a claim for damages. The first pre-requisite of such a claim is that there must actually be a loss. I reject the contention - which was not vouched by any authority - that liquidate damages are payable when there is no loss at all. On one view such a provision would be deemed to constitute a penalty and as such be unenforceable. The absence of loss is directly relevant in cases such as the present where, due to at times dramatic rises in house values, the property which is the subject of the transaction rises markedly in value after the sale falls through. Where is the pursuer's loss if the house is now worth £750,000? It may well be that she is entitled to recover her outlays needlessly incurred, but what is the justification for a further sum, contractually described as a "liquidate penalty provision"? The short answer in my view is that there is no such justification; the contractual provision relating to interest was never intended to apply in a situation where the pursuer retains the house.

 

15. In these circumstances the first plea in law for the defender falls to be sustained to the extent of excluding from probation those averments which relate to her right to recover interest. The question arises as to disposal of the rest of the case. As I have indicated the pursuer has averred that she "incurred abortive solicitors' fees of £1,000 plus VAT of 171/2% amounting to £1,175.00 and estate agency fees of £702.64". Counsel for the defender accepted that no issue had been taken with the relevancy of these averments either in the note of argument lodged prior to debate, or at the debate itself. He maintained however that the averments relating to the solicitors fees were of questionable relevancy. The pursuer would have occurred solicitors fees even if the transaction had proceeded. In cases where an initial sale fell through but a subsequent transaction proceeded there was a conflict of authority as to whether the pursuer was entitled to recover legal fees incurred in respect of the abortive transaction or the transaction which proceeded. In Johnston v Harris 1977 SC 635 Lord Ross expressed the view (at page 374) that it was fees in respect of the abortive transaction which were recoverable. However in Grant v Ullah 1987 SLT 639 Lord Davidson had taken the view, applying the principle of restitutio in integrum, that the first set of fees would have had to be paid if the transaction had proceeded and accordingly that what was recoverable was the fee incurred for the second transaction. I was urged to take the view that the latter view was correct, and to conclude that the pursuer's claim for fees incurred in respect of an abortive transaction were irrelevant. That, it was maintained, would reduce the pursuer's claim in the present case to such a level as to justify dismissal of the whole action.

 

16. I am disposed to agree with the view expressed by Lord Davidson, namely that where a conveyancing transaction falls through the fees which are recoverable by the seller are those incurred in connection with the second transaction which successfully proceeds. The present situation is however different. There has been no second transaction. In the type of situation with which the cases of Johnston v Harris and Grant v Ullah were concerned the seller had paid for two transactions and it was a matter of deciding which set of expenses fell to be regarded as the loss occasioned by the purchaser's breach of contract. There is no such choice to be made in the present situation, and whilst it is not entirely clear what the term "abortive solicitors fees" relates to I am of the view that the pursuer would, as a matter of principle, be entitled to recover fees needlessly incurred. I consider that use of the description "abortive" is sufficient to make this deed of claim relevant.

 

17. Overall I consider that the pursuer is entitled to proceed to proof only in respect of the claim for solicitors and estate agency fees amounting together to £1,877.64. For the sake of simplicity I have simply excluded from probation the sentences in the condescendence of loss which contain the claim for interest. Although this represents substantial success on the part of the defender I shall at this stage reserve all questions of expenses.