Contract (Third Party Rights) Bill introduced in Parliament

This blogger is pleased to note that the statutory reform of the rights of third parties under contract has reached the stage when the Scottish Law Commission’s proposed Bill has been introduced in the Scottish Parliament. The text of the Bill as introduced is accessible in PDF form here. It is to be hoped that the Bill will have a smooth passage into law, so that this important area of the law quickly benefits from the reforms embodied in the Bill.

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The liability of golf clubs (again)

Reparation actions against golf clubs (or golfers) seem to be occurring with increasing regularity in recent years. In 2014, there were the cases of Phee v Gordon [2014] CSIH 18, which concerned a golfer struck by a golf ball hit by another player, as well as McMahon v Dear [2014] CSOH 100, which related to an injury sustained by a “ball spotter” during a golfing tournament. In 2016 two further golf-related cases are worthy of mention, one concerning product liability and the other personal injury.

In the first of the two cases, Renfrew Golf Club v Motocaddy Ltd [2016] CSIH 57, a Renfrewshire golf club (the pursuers) sued the importers and suppliers of a motorised golf trolley (the defenders). One of the pursuers’ members had purchased one of the defenders’ trolleys, which after use he had left at the entrance to the changing rooms in the clubhouse. In the early hours of the following day, a fire occurred at the clubhouse, causing approximately £500,000 of damage. The pursuers alleged that the fire was caused by wear and tear to the unprotected cabling in the trolley, which in exposing the wiring had caused a short circuit which led to the fire. The pursuers claimed that this amounted to a product defect present at the point of supply, as the design did not include adequate protection against electrical faults.

The pursuers claimed:
(1) that the defenders were in breach of a common law duty of care owed to them by the defenders, and (2) that the defenders were liable under the Consumer Protection Act 1987 (which provides for strict liability in respect of defective products). The defenders claimed that no duty of care was owed at common law, and that statutory liability was excluded by virtue of section 5(3) of the 1987 Act, which provided that

“A person shall not be liable … for any loss or damage to any property which, at the time it is lost or damaged, is not —
(a) of a description of property ordinarily intended for private use, occupation or consumption; and
(b) intended by the person suffering the loss or damage mainly for his own private use, occupation or consumption.”

The defenders argued that the clubhouse was not property ordinarily intended for “private use”.

At first instance, the judge held (1) that there was insufficient proximity between the parties to found a duty of care at common law, and that it was not fair, just and reasonable to impose such a duty, and (2) that a clubhouse which was used by over 700 members and by others was not property “ordinarily intended for private use”. He therefore held the defenders not to be liable under the 1987 Act for the damage caused.

On appeal, the appeal court affirmed the decision at first instance. As regards the common law duty of care, there was no proximity between a supplier of a golf trolley and the owner of a clubhouse in which the trolley happened to be, three years after the supply, and over which the supplier had no control. Whether or not its location at a clubhouse was foreseeable, it might foreseeably have been placed in any number of locations, to each of which it might cause indeterminate damage were it to catch fire. Furthermore, given the regime of the 1987 Act, and the fact that a contract of sale had governed the purchase of the trolley, there was little room for the common law of delict to be extended to a new situation such as the present, where the legislature had declined to act.

As regards the case under the product liability regime of the 1987 Act, the clubhouse was not property ordinarily intended for private use: the underlying idea behind this regime was that, whereas there should be liability for damage to property used in a person’s private life, notably, but not exclusively, in a domestic setting and whether that person was a consumer of the product or not, that liability should not extend to property used by what might loosely be described as economic entities (whether private or not). The pursuers were an economic operation, albeit that they were a “private club”. For these reasons, the case under the 1987 Act was irrelevant.

The judgment is of interest both for what it says about liability under the 1987 Act is concerned, as well as for its observations on the continuing availability of common law, Donoghue v Stevenson, delictual liability for defective products. As regards the meaning of “private use” property under section 5(3) of the 1987 Act, the court in considering what meaning should be attributed to this idea looked at the underlying intention of the EU product liability directive upon which the 1987 Act is based. The court considered that this background suggests that what is important is whether or not the property is used for individual/family/small group of friends’ use as opposed to communal use, based upon financial considerations, by a large number of members of the public. The concern thus seems to be both with the size of the group which might use the property as well as the relationship of that group to the owner. That might well produce a sensible answer in most cases, but one wonders what would view would be taken if the two considerations came into conflict, i.e. what if only one person at a time used the property but such persons had no personal connection to the owner (but used the property in return for payment)? The answer, one suspects, would be that such use would also not be “private use”, the presence of a hire charge being determinative of a commercial rather than a private use. In any event, the approach taken by the appeal bench to this question seems a robust and sensible one.

The second point of interest in the case relates to the extent to which use can be made of common law liability for defective products in cases where (i) a contract for the purchase of the product existed between consumer and supplier and (ii) liability might conceivably exist under the 1987 Act if the necessary requirements for such liability are fulfilled. The 1987 Act does not purport to replace the common law, Donoghue v Stevenson liability for defective products, so in theory a claim might be made under either form of liability. Nor does the presence of a contract necessarily exclude the possibility of delictual liability. The appeal court bench however cites the prior comment of Lord Rodger in Mitchell v Glasgow City Council that

“Where the position of the parties is regulated … by a mixture of contract and statute prima facie there is little room for the common law of delict to impose a duty of car …”

in order to suggest that the combined presence of such features mitigates against the creation of a duty of care at common law, adding that “it would no doubt be difficult for the defenders to obtain limitless product liability insurance, whereas the pursuers … could have insured the premises with reasonable ease”.

The decision of the appeal bench negating a common law duty of care is worthy of analysis. The focus of the bench on the question of the proximity of the pursuers and defenders is noteworthy: traditionally, in cases involving personal injury or damage to property, courts have not stressed proximity as a separate requirement, inferring it from foreseeability of harm (and in this case the type of harm and the mechanism by which it was caused appear to have been reasonably foreseeable). But this was not a classic case of harm caused to a consumer of products: the damage in this case was caused to the premises in which the consumer had left the product, owned by a different party. The concern appears to have been that the claim was being made by a peripheral party, one who fell within an indeterminate class of potential claimants.

The court noted that there was scant prior authority dealing with a similar sort of case: the court mentions only two mid-twentieth century cases that were cited to it. The court states that these two cases cannot be used as a springboard for extending liability of suppliers of defective products for damage caused to property “anywhere that the product might have been left by third parties”. However, the first of these two cases (Stennett v Hancock & Peters) [1939] 2 All ER 578 bears some resemblance to the facts of this case, in that a repairer of a motor vehicle was held liable to a member of the public when the repaired part came loose and struck the member of the public. Liability was founded on Donoghue v Stevenson, and the judge did not trouble himself with the worry that anyone might conceivably have been injured by the defective repair (compare the concern of the appeal bench in this case that the injury might be caused to any number of premises). Stennett has been founded on in subsequent cases, so it cannot be dismissed as an isolated authority or as a novel case. Given this, it might be argued that the dismissal by the appeal court of a common law claim on the basis that a finding of liability would amount to a “substantial increase in existing known fields of liability” was somewhat peremptory.

The second case from 2016 was the Outer House judgment in Taylor v Quigley and others [2016] CSOH 178. In this action, the pursuer, who was a member of the Colville Park Golf Club, sustained serious injuries to his leg when he stepped on a manhole cover between the clubhouse and the first tee, falling partly into the manhole. The pursuer raised an action of damages against eight named members of the Executive Committee of the golf club (the first to eighth defenders) and Tata Steel (UK) Ltd (the ninth defender), who owned the land in question and had appointed the second defender (the club secretary). The defenders challenged the relevancy of the action, claiming that the eight committee members could not be liable to the pursuer in a personal capacity and that the case against the ninth defender was irrelevant.

The judge (Lord Uist) held that (1) the pursuer could not sue any of the first eight defenders in their capacity as members of the club or of its Executive Board. There was a rule against members of a club suing each other for injury allegedly arising in the course of membership, since there was no distinction between the members and the pursuer would in effect be suing himself, but this rule did not afford a defence if a duty of care had arisen independently of membership; (2) On the face of it the pursuer was suing the first to eighth defenders as members of the club: if they had not been members of the Executive Board they would not have been sued. In order to plead a relevant case, therefore, he had to make sufficient averments that they owed him a duty of care independently of their membership; (3) As the pursuer had failed to aver any relevant basis for such an independent duty of care, his case against the first eight defenders was irrelevant and had to be dismissed; (4) As regards the ninth defender, they were sued only on the basis that they were vicariously liable for the acts and omissions of the club secretary. As the club secretary owed no duty of care to the pursuer, it followed that the ninth defenders could not be held vicariously liable for his acts or omissions.  A principal could not be liable to a third party for the negligence of his agent if the agent owed no duty to that third party. The case against the ninth defender was therefore also dismissed.

The case is of interest for its discussion of the liability of committee members of unincorporated associations to fellow members of their club. Unincorporated associations (golf clubs often fall into this legal category) have no separate legal personality: they are merely the collection of individual members who at any one time make up the membership of the association. This judgment reaffirms the view that club members cannot sue committee members of the club in their representative capacity, because that capacity means that they represent all of the members, including the member who wishes to sue. The logic of this is that a member who wished to sue the committee would, in effect, be trying to sue him or herself, which is not permitted.

The exception to this basic rule relates to cases where, in the words of Charlesworth & Percy on Negligence (quoted by the judge):

“a duty of care has arisen independently of membership. So, the court can look to the circumstances, including the terms upon which a club officer or other servant or agent of the club has been appointed, or the club rules, to see whether some responsibility has been conferred upon that individual which caused a duty of care to arise.” 

The result is that, in some cases, courts have been willing to consider committee members liable in delict/tort where a specific duty has been delegated to such member(s). So, in Grice v The Stourport Tennis, Hockey and Squash Club [1997] EWCA Civ 1139, the English Court of Appeal thought that a possible reading of the Club rules was that responsibility had been delegated to the committee to maintain the premises and that this might give rise to a duty of care owed to individual members. It therefore permitted the plaintiff to add the relevant committee members as defendants to the action. This approach did not assist Mr Taylor in the Outer House because the judge thought that there was no evidence of any such delegated responsibility sufficient to support a duty of care owed to individual members.

Given the judge’s assessment of the factual position of the committee members in relation to individual club members, the decision seems a correct application of the law. However, there is the more fundamental question of whether the law needs to be reformed. The current legal rules leave members of unincorporated associations exposed to the hazard of injury without recourse in delict to any party owing a duty of care in respect of such injury. In 2009, the Scottish Law Commission made recommendations (thus far unimplemented in law reform) that not-for-profit unincorporated associations which have more than two members and a written constitution should have separate legal personality. Had those recommendations been implemented, Mr Taylor’s negligence claim might well have been successful. It is a pity that the Commission’s recommendations have thus far not been the subject of any Executive action.

This blogger will continue to monitor the fairways and greens of Scottish golf clubs to see whether 2017 throws up any further golf-related delictual claims.

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Unilateral promise within an employment context

A short Outer House judgment of Lord Malcolm from the end of July 2016 has caught this blogger’s attention for its reference to the peculiarly Scots obligation of unilateral promise. In Fisher v Applied Drilling Technology international Ltd the pursuer was arguing that his employer had undertaken to offer him an enhanced redundancy package. There was nothing express in his contract of employment making the commitment, rather the pursuer’s case rested on the basis of “an implied term arising from what is said to be a longstanding policy or practice to offer enhanced redundancy payments” (para [1]). Such an approach would usually rest upon a contractual analysis, but Lord Malcolm makes an interesting suggesting in paragraph 24 of his judgment:

“[24] In Park Cakes (paragraph 35) it was noted that an analysis by way of offer and acceptance “may seem rather artificial, as it sometimes does in this field”. In Scotland, unlike south of the border, we might discuss this in terms of an enforceable unilateral promise created by an inference from facts and circumstances which bar an employer from denying liability. In any event, it seems plain that no hard and fast rules can be laid down. Every case will depend upon its own facts, with phrases such as “reasonableness”, “notoriety”, “certainty” and “widespread knowledge and understanding” regularly figuring in judges’ opinions. The open-ended nature of the description of the proper approach to questions of this nature, as outlined in the cases referred to at the hearing, militates against dismissal without evidence.”

This is worthy of note. Lord Malcolm is suggesting that an employer might be taken to have made an implied unilateral promise to offer the employee an enhanced redundancy package, the implication deriving from an established common practice of the employer (the practice is described in paragraph [2] of the judgment).

The defender’s plea to have the action dismissed was rejected by Lord Malcolm, so we will expect to see much more being said about the conduct of the employer which could amount to an implied promise as the action proceeds. But it offers an attractive added dimension to the case of an employee in the position of the pursuer: a unilateral promissory based approach would not need to demonstrate any actions constituting acceptance on the part of the employee, merely actions which might demonstrate an intention on the part of the employer to be bound. Of course, given that the promise is said to be an implied one, one would expect the employee to have to demonstrate very clear conduct from which the inference of promissory intent can be implied.

Lord Malcolm draws attention to the requirements needed for a promise at the end of his judgment (paragraph [26]), when he notes:

“paragraph 35 in Lord Hodge’s judgment in Royal Bank of Scotland [v Carlyle] is of interest. It highlights that Scots law will enforce a unilateral undertaking that is intended to have legal effect, notwithstanding an absence of consideration. Such an undertaking may, but need not be, collateral to a separate contract, and will be subject to an objective test, ie that which a reasonable outside observer would infer from all the circumstances.”

It will be of interest to follow the progress of this case to see whether the pursuer takes sufficient care to describe the conduct from which an unequivocal promissory intent could be inferred by a reasonable observer.

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The “natural meaning” approach to interpreting contracts in the Court of Session

The decision of the Supreme Court last year in Arnold v Britton hinted at a shift in the thinking of the current Supreme Court justices in relation to the proper approach to the interpretation of contracts. In marked contrast to the scepticism of the Lord Hoffmann dominated House of Lords in relation to using the natural meaning of words as the starting point when interpreting a contract, the justices in Arnold showed themselves to be much more open to the utility of using natural meaning as an interpretative tool, and to not artificially creating ambiguities in the text of a contract in order to justify deviating from the natural meaning. Lord Neuberger referred in Arnold to the “sensible proposition that the clearer the natural meaning the more difficult it is to justify departing from it”, adding that this did not “justify the court embarking on an exercise of searching for, let alone constructing, drafting infelicities in order to facilitate a departure from the natural meaning” (para 18). Since Arnold, there have been signs that there is also a receptiveness in the Scottish bench to a shift away from the choppy waters of Lord Hoffmann’s wide matrix of fact approach to the safer harbours of a more traditional approach. Such signs have manifested themselves again in the latest decision of the Inner House of the Court of Session on the subject, Hill v Stewart Milne Group Ltd [2016] CSIH 35 (in which the bench comprised Ladies Smith and Clark and Lord Brodie, the latter delivering the most substantial judgment).

Hill concerned a dispute about the interpretation of a clause (2.13) in a contract entitling the pursuers, the Hill brothers, to a stipulated monthly penalty (not challenged as unenforceable under the penalty rule) to be paid by the defenders, Stewart Milne Group Ltd and Gladedale (Northern) Ltd, for each month after March 2008 in which certain sewerage works of the defenders, to which a development of the pursuers’ was to be connected, remained to be “completed and commissioned”. The defenders argued that the works had been completed, while the pursuers denied this, the issue between the parties turning on the proper interpretation of the phrase “completed and commissioned”. The pursuers’ principal argument was that the proper interpretation of that phrase fell to be made by reference to another clause (2.9) in the parties’ agreement, which referred to a requirement falling on the defenders to notify the pursuers within twenty-one days of the sewerage system having “been fully completed to the satisfaction of all relevant statutory authorities”. Because the relevant statutory authority, Scottish Water, had identified snagging issues with part of the works remaining for some considerable time after March 2008, despite those works being otherwise operational, the pursuers contended that this meant that, under clause 2.13, the works remained incomplete and un-commissioned (and thus that the monthly penalty sum continued to be owed). At first instance, the Sheriff had found in the pursuers’ favour, holding that they were owed £345,000 for the ongoing delay in the completion of the works. On appeal, the Inner House overturned this finding, holding that the Sheriff had approached the interpretation of clause 2.13 incorrectly.

A number of points are noteworthy in the substantive judgment of Lord Brodie on the interpretative question:

(1) The starting point: Lord Brodie takes as his starting point on contract interpretation the succinct summary of Lord Neuberger in Arnold:

“When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to ‘what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean’, to quote Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101,para 14. And it does so by focussing on the meaning of the relevant words, in this case clause 3(2) of each of the 25 leases, in their documentary, factual and commercial context. That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the lease, (iii) the overall purpose of the clause and the lease, (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party’s intentions.”

Lord Hoffmann is quoted in this summary of Lord Neuberger, but it is noticeable that the summary also makes express reference to the “natural and ordinary meaning of the clause”, a concept for which Lord Hoffmann had no time whatsoever. There is also reference to “commercial common sense” (language described by Lord Hope in another case involving Stewart Milne as a “makeweight”), a concept to which further reference is made below. The mention of the idea of the natural meaning of the words of the contract as the very first of the matters listed by Lord Neuberger makes for a striking contrast with the approach of Lord Hoffmann, and the reference by Lord Neuberger to Lord Hoffman looks, in that light, to be something of a polite piece of judicial realpolitik, intended to recognise the extent to which the Hoffmann approach has bedded in, before his Lordship sets out a new, preferable approach, one in which the natural meaning of words figures prominently (albeit as only the first consideration among a number of others). That Lord Brodie should begin his own comments on interpretation by referring to Lord Neuberger’s views looks to this blogger to be a clear sign of receptiveness in the Inner House to the shift away from the Hoffmann approach.

(2) The order of the words used: A further sign of the somewhat more traditional approach favoured by Lord Brodie is that he makes use of the order in which words appear in the contract as signifying temporal succession. His Lordship takes the view that the phrasing “completed and commissioned” suggests that completion is to be understood to be a temporally prior event to that of commissioning:

“… looking to the natural and ordinary meaning of the phrase, it can be said that the systems were “completed and commissioned” by December 2008. That conclusion is reinforced if it is to be inferred from the order of the words that commissioning is something that comes after completion, as would seem to make sense. What I mean by that is that the word order suggests the stage indicated by “completed” is a stage necessarily prior to the stage indicated by “commissioned” (para 31).

This approach places store on the importance of the text of the contract as drafted, suggesting that it is entirely legitimate to view the words chosen by the drafters of the contract as the best evidence of the underlying intention of the parties. We are some way, in such an approach, from the liberal “red pen” attitude to drafting of Lord Hoffmann.

(3) Unconnected clauses – independent meanings: The most significant piece of traditional thinking is seen in Lord Brodie’s attitude to the relationship between the wording in clauses 2.9 and 2.13. The Sheriff had taken the view that, because the word “completed” appeared in both clauses, the concept of completion was to be interpreted in a “unitary” fashion (and therefore that completion could not be taken to have occurred until the conditions required for notification in clause 2.9 were met). While Lord Brodie agreed with the Sheriff that
“construing any particular contractual provision requires examination of the other provisions and that, as a matter of generality, it would be wrong to read a particular provision (here clause 2.13) in isolation”, his Lordship took the view that a unitary interpretation was not appropriate in the context of this contract. He notes that:

“the result of such an examination may be to find that the various provisions inter-relate to a greater or lesser degree. Some may be inter-dependant [sic]. Some may be free-standing. It will be more readily apparent that provisions are inter-dependant where their drafting is coherent and consistent.” (para 33)

This is an important point. Merely because a similar phrase is used in different clauses does not mean that it serves the same purpose and hence warrants the same interpretation. Clauses in a contract may well serve independent purposes, and thus ought to be interpreted in a way which does not presume that a similar phrase in them was necessarily intended to convey the same meaning in one context as in another. Summing up this point, Lord Brodie comments:

“… any expectation of coherence in a contract may have to give way before the actual wording used by the parties to it. Where the wording is consistent then it may be assumed that the meaning is intended to be consistent. It is different where the wording is not consistent.”

In this contract, the wording was not consistent: cl 2.9 spoke of a date when the works “have been fully completed to the satisfaction of all relevant authorities”, and tied the concept of “completion” in that clause to this date; cl 2.13 spoke of the works being “completed and commissioned”. The wording and the purpose of each clause was different.

Building on this analysis, Lord Brodie sums up with a very clear defence of the importance of treating different wording differently, in accordance with the natural meaning of the phrase in question (emphasis added):

“Generally, when one is construing a text of any sort, if different words or combinations of words are used then it is to be presumed that different meanings are intended. I accept that if the words used are unclear or the drafting is otherwise poor, the more ready the court can properly be to depart from their natural and ordinary meaning. However, that does not justify the court in searching for or constructing drafting infelicities in order to justify a departure from the natural meaning: see Lord Neuberger in Arnold at paragraph 18. The language of the provision being construed is of prime importance and its meaning is most obviously to be gleaned from that language: see Lord Neuberger in Arnold at paragraph 17. In other words the meaning of a provision is primarily to be understood from the natural and ordinary meaning of the actual words used.” (para 34)

The message is very clear, and the supporting reference to Lord Neuberger in Arnold very pointed. Lord Brodie adds a remark which will be of particular interest to those drafting contracts:

“If the intention was to link 2.13 back to 2.9, the draftsman could have used that expression again to import “fully completed to the satisfaction of all relevant statutory authorities” into the Longstop clause. The draftsman did not, however, do so. Whilst that may not be determinative, it certainly puts in question the sheriff’s “unitary” construction of the paragraphs under consideration.” (para 34)

So, if a similar though not identical phrasing is to be used in different parts of a contract, and a drafter wishes the phrases to bear the same meaning despite the difference in wording, a clear link will need to be made between the clauses to show that the same meaning is intended. Going further, of course, one might suggest that providing a definition clause in which the phrase in question is defined would be the surest way of preventing any dispute from arising in the first place.

(4) Commercial common sense: Lord Brodie undertakes a short discussion of the idea of the “commercially sensible” approach to contract interpretation. This blogger has shown a degree of scepticism in the past of the extent to which this concept may prove helpful to courts (given that parties will often be able to adduce perfectly reasonable but opposing commercially sensible considerations, which courts may not be best suited to arbitrate), and to some extent Lord Brodie’s judgment also reinforces the risk in using such a concept to reach a preferred interpretation of a contract. First, he notes that:

“The sheriff saw what she considered was the commercial purpose of the agreement as supporting her construction of clause 2.13 … With all respect to the sheriff, this seems to amount to no more than an assertion on her part with nothing much by way of underpinning in the findings-in-fact (presumably because no relevant evidence was led).”

To this blogger’s mind this criticism highlights that the perennial trotting out of the idea by courts in support of preferred outcomes may have created a culture where it is used in an unreflective way. If “commercial sense” is indeed a makeweight, as Lord Hope previously suggested, it is nonetheless one which, if referred to, will require some support from an analysis of the commercial considerations underpinning the contract.

Second, in discussing the parties’ conflicting suggested interpretations of clause 2.13, Lord Brodie appears to this blogger to suggest (in para 37) that the differing outcomes deriving from each interpretation might each be argued to have some commercial sense underpinning them. That being so, it is unsurprising that he appears ultimately to place no reliance on the conflicting arguments about commercial sensibility in reaching his preferred interpretation. In this blogger’s eyes, we have another example of a case where the vague concept of “commercial sensibility” has been shown to be of elusive assistance in a court’s deliberations.

Overall, this is an interesting and noteworthy decision of the Inner House. The result reached by Lord Brodie and his judicial colleagues looks to this blogger to be the right one. The decision does a number of things: (1) in general, it sets down a marker that the Court of Session appears to be receptive to the flow of contract interpretation doctrine in the Supreme Court away from the Hoffmann “wide matrix of fact” approach (in which interpretation and rectification became so blurred as to be almost indistinguishable) towards a more traditional approach in which the courts begin from the natural meaning of the words used, in the expectation that the parties intentions will usually best be found within the context of the words of the written contract; (2) it reminds us that, while the entire contract forms the context in which words in particular clauses are to be interpreted, similar phrases in unconnected clauses need not be interpreted in a uniform way; and (3) it also reminds us that citing commercial common sense is not some totem which can magically justify a specific interpretation. If commercial common sense is to be cited in support by a court, that court must explain clearly what the commercial factors at play are, and why they support a particular outcome; even then, when commercial common sense is examined, it may be found that equally plausible arguments can be advanced on each side of the debate, so that the concept furnishes no support to the interpretative task of the court.

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Some further thoughts on the penalty clause rule in the Supreme Court

The Edinburgh Law School’s Private Law Centre held a very enjoyable lunchtime seminar last week, at which the subject for discussion was the penalty clause rule. There was a good round table discussion, including some interesting observations on how the Cavendish Square/ParkingEye cases were pled before the Supreme Court (Bobby Lindsay, a Glasgow PhD student, had been present during the appeals, and gave us his insights on pleading and on questions from the bench). The attendees were also reminded by Professor George Gretton of a case in the Sheriff Court in which Edinburgh University had sought to recover unpaid parking charges from a repeat non-payer: the case is University Of Edinburgh v Onifade, reported at 2005 SLT (Sh Ct) 63. I was able to add some news of a very recent incident similar to the ParkingEye v Beavis litigation, concerning an individual who repeatedly overstayed at a car park in Glasgow which provided 2 hour free parking for customers using a McDonalds restaurant (the story is reported here).

In leading the discussion at the seminar, I made the following points about the Cavendish Square Holding v Makdessi and ParkingEye v Beavis conjoined appeals before the UK Supreme Court:

• The decision is another example of ever longer judgments, this one running to 316 paragraphs. A lot of this is a recitation of earlier case law – do we really need this? Even allowing for the fact this was a conjoined appeal, the courts need to get a hold of these overly long judgments. If the Bundesgerichthof can deliver judgments on contract cases in 30 paragraphs, our highest court should be able to do the same.
How has the decision changed the law? The shift in the law is that, before this case, the view had taken hold that clauses for the payment of an agreed sum on breach (or forfeiture of an agreed sum) had to equate to the reasonably foreseeable losses arising on breach (with an exception allowed for cases where likely losses were too uncertain to predict). This is now no longer to be taken as being so. As Lords Neuberger and Sumption put it in para 28, the correct approach is that “A damages clause may properly be justified by some other consideration than the desire to recover compensation for a breach. This must depend on whether the innocent party has a legitimate interest in performance extending beyond the prospect of pecuniary compensation owing directly from the breach in question.” In taking this decision, it is interesting to note that the Supreme Court is adopting the same view as the Scottish Law Commission did in its draft Penalty Clauses (S) Bill published in 2010, clause 1(2) of which said: “Any rule of law under which such a clause [i.e. a penalty clause] is unenforceable if it is not founded in a pre-estimate of damages ceases to have effect”. (This Bill has not thus far become law, but the SLC is going to return to considering the penalty clauses rule as soon as its third party rights Report has been completed.)
What has not changed? The penalty clause rule is still tied to a sum payable on breach of a primary contractual obligation, which sum is extravagant or unconscionable: Lords Neuberger and Sumption said that a clause is an unenforceable penalty if it is “a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation” (para 32). Similarly, Lord Hodge expressed the matter as being: “whether the sum or remedy stipulated as a consequence of a breach of contract is exorbitant or unconscionable when regard is had to the innocent party’s interest in the performance of the contract” (para 255). Lords Sumption and Neuberger add (see para 30) that describing penalty clauses as a deterrent, or as in terrorem, is not helpful, as any deterrent effect it may is not what gives it the character of an unenforceable penalty.
• Note also that: (1) the penalty rule was not abolished (as some had thought it might be); and (2) the rule was not extended: the concept of a penalty clause remains restricted to one of a secondary obligation triggered on the breach of a primary obligation, and (unlike developments in Australian law) the SC did not recognise “an equitable jurisdiction to relieve against any sufficiently onerous provision which was conditional on a failure to observe some other provision, whether or not that failure was a breach of contract” (para 41). Lord Hodge notes, in relation to possible extension of the doctrine, that “There is no freestanding equitable jurisdiction to render unenforceable as penalties stipulations operative as a result of events which do not entail a breach of contract. Such an innovation would, if desirable, require legislation” (para 241). This may well be one of the issues which the SLC will consider in due course.
• At the seminar, I offered a few words on the penalty rule’s basis in the distinction between primary and secondary obligations. From what I could tell from a reasonably quick Lexis search conducted in the week before the seminar, there is no UK case law analysing the meaning in general of the language of “primary” and “secondary” obligations. There are a number of different meanings that can be given to such terms in obligations law. A secondary obligation might be an obligation which is triggered if another obligation (the primary obligation) is breached. Or it might be one which is triggered if another obligation is fulfilled. One can add further permutations by bringing in more than two parties: a secondary obligation might be an obligation of C’s which is triggered if an obligation to be performed by B in favour of A is not so performed (in this sense, cautionary obligations are secondary obligations). (As my colleague Lorna Richardson noted at the seminar, a distinction has also been drawn in the case law on retention between primary and secondary obligations, which provides a further sense in which the words have been used) The penalty rule does not embrace all of these meanings: it applies only to secondary obligations in the sense of an obligation of B’s triggered by a failure of B to perform a different (the primary) obligation. But the Supreme Court in these appeals do not explore these different permutations in the meanings of “primary” and “secondary”. Speaking of clause 5.1. Lords Neuberger and Sumption simply state it is “in no sense a secondary provision”, without saying what “senses” they might have in mind. If in reality clause 5.1 is a penalty clause, then it has clearly been well disguised.
• And indeed parties can attempt to disguise penalty clauses, sometimes successfully, sometimes not. So, one can come across clauses referring to one party not doing something which is framed in conditional and not mandatory terms: e.g. without saying that B is obliged not to do something, a clause might just say: “if B doesn’t do x, B will have to pay £1,000”. Lords Neuberger and Sumption say (in para 15) that such a clause can still be a penalty: if the substance of the term is a penalty, it doesn’t matter what its form is. One can see how courts can dig a bit to thwart a clause of the sort “if B doesn’t do x, B will have to pay £1,000”, as there is still a negative act which attracts payment of a sum.
• But what if one disguises potential penalties even further, by seeming to present two positive acts simply as alternative options? e.g. a provision which says: if A pays before 1st January, the price will be £1,000; if A pays after 1st January, the price will be £5,000. Could payment of the higher price be attacked as being in substance a penalty? It’s hard to see how. Such a provision could without too much difficulty be justified as an increased price on account of allowing the buyer more extended payment terms. In the same way, the clauses at issue in CSH were in fact characterised by Lords Sumption and Neuberger simply as providing an alternative basis for payment: £X if Mr Makdessi doesn’t compete against the company; lesser sum £Y if he does. If Lords Neuberger and Sumption are right, then it seems to me that one can without too much difficult simply avoid the penalty rule altogether in many cases. The CSH case doesn’t address this problem of evasion of the rule, but it is perhaps irresoluble: attempts to enable a scrutiny of more subtly disguised penalties might open up all manner of contractual clauses to investigation of whether they are fair or not. Not only would that cause huge certainty, but it is arguably unnecessary given that we already have unfair terms legislation addressing the wider issue of unfairness in contracts. It’s true, however, that such legislation does not allow scrutiny of the fairness of the primary obligations of the parties, including price. So, e.g., the Consumer Rights Act 2015, s 64(1) excludes from scrutiny as to its fairness a term of a contract to the extent that “(a) it specifies the main subject matter of the contract, or (b) the assessment is of the appropriateness of the price payable under the contract …” So, one can still disguise penalties by providing for fluctuating prices which depend on the circumstances of payment. It’s hard to see how one can avoid this happening, and indeed the policy of the Consumer Rights Act is that one ought not to investigate such things.
• The arguably disguised penalty in CSH caused disagreement among the Justices as to whether the penalty rule was engaged: three of the Justices (Neuberger, Sumption, & Carnwath) didn’t think the clauses in question amounted to a penalty they were merely “price adjustment clauses”, thus the penalty clause rule wasn’t engaged. Lords Sumption and Neuberger note that “It is not a proper function of the penalty rule to empower the courts to review the fairness of the parties’ primary obligations, such as the consideration promised for a given standard of performance”. Lord Mance thinks that the penalty rule is engaged, but that the clauses are not extravagant or exorbitant and so are enforceable. Lord Hodge doesn’t seem to reach a concluded decision on one of the clauses: he notes the view of Neuberger and Sumption on cl 5.1, saying “But even if it were correct to analyse clause 5.1 as a secondary provision operating on breach of the seller’s primary obligation, I am satisfied that it is not an unenforceable penalty clause for the following six reasons. …” (para 270); he does see cl 5.6 as a secondary obligation however (see para 280)(Lord Clarke takes the same view: he has an “open mind” on the nature of clause 5.1, and thinks cl 5.6 is a secondary obligation: see para 290). One might argue that there is something wrong with a doctrine whose application depends on a distinction between primary/secondary obligation that seems to be difficult to draw in relation to specific clauses, and something wrong with judgments in which, on a crucial issue, Supreme Court justices feels they can have an “open mind”.
• What about the other appeal? There was agreement among the Justices that the relevant clause in ParkingEye did conceivably engage the penalty rule. But they thought that ParkingEye had a legitimate interest in enforcing the clause: the clause had two purposes (1) to manage the efficient use of parking space in the interests of the retail outlets, and of the users of those outlets who wished to find spaces in which to park their cars, and (2) to provide an income stream to enable ParkingEye to meet the costs of operating the scheme and make a profit from its services, without which those services would not be available. “These two objectives appear to us to be perfectly reasonable in themselves” say Lords Neuberger and Sumption. I agree.
• As to whether the charges were excessive, I think those in the press stirring up ideas of hard done by members of the public forget that ParkingEye was not running a parking business like NCP, so to compare ParkingEye’s charge with usual car park charges misses the point. The amount charged had to be high enough to dissuade people from over-parking. But I agree with Lords Sumption and Neuberger that: “None of this means that ParkingEye could charge overstayers whatever it liked. It could not charge a sum which would be out of all proportion to its interest or that of the landowner for whom it is providing the service. But there is no reason to suppose that £85 is out of all proportion to its interests.” (para 100)
• Three further interesting issues struck me about these appeals: (1) could penalty clauses now be used to disgorge profits from a wrongdoer, if such a measure of recovery could be justified by reference to a ‘legitimate interest’ of the party seeking to enforce the clause? If so, a penalty clause could achieve what was not permitted in common law damages under Teacher v Calder. It is interesting that in a famous case allowing an account of profit for breach of contract, AG v Blake, the House of Lords also used the phraseology of the government having a “legitimate interest” in preventing the defendant’s breach of contract and thus in disgorging profits from a contract breaker.
• (2) Roman law: one use of stipulationes poenae was to ensure protection of the interests of a third party which was unable to protect its own interests directly. There is some similarity here with allowing ParkingEye to enforce the charge in order to protect the interests of the landowner. I think this is worth pointing out because we see in the Roman law an earlier recognition that there are other legitimate interests that one might have in enforcing a penalty other than recovering one’s own losses, so the Roman approach offers an extra justification for severing the link between penalties and reasonably foreseeable losses: penalties can be a useful means to encourage performance rather than to insulate oneself against loss. This point about Roman law was not advanced in the appeals, it is simply my own observation.
• (3) There is a further subsidiary issue of interest for English law: one might question whether Mr Beavis really did have a contract with ParkingEye. It’s had to see what consideration he gave. Lord Toulson appears to regard his using the car park as itself consideration: “the use of the car park by Mr Beavis was sufficient consideration for a contract governing the terms of its usage” – para 295 – but this seems to me an entirely fanciful notion of consideration. (Perhaps, it is just about arguable that by parking there Mr Beavis had impliedly promised not to park for more than 2 hours, and that this implied promise was consideration). But I think there is a good argument for saying that this looks very much like a case of a gratuitous licence to park, an arrangement which is not necessarily contractual under English law. And if it’s not contractual, then the penalty rule wouldn’t be engaged. This possibility did not seem to trouble the Supreme Court, however, Lords Neuberger and Sumption briefly noting only that: “Mr Beavis had a contractual licence to park his car in the retail park on the terms of the notice posted at the entrance, which he accepted by entering the site … Moore-Bick LJ in the Court of Appeal was inclined to doubt this analysis, and at one stage so were we. But, on reflection, we think that it is correct.” It’s a pity that this point was not explored properly in the Sup Ct, however. Of course, this issue wouldn’t have troubled Scots law: a gratuitous contract is entirely valid in Scotland. (I should add that Bobby Lindsay offered the useful observation, gleaned from his hearing of the pleadings, that had the ParkingEye arrangements not been considered contractual, less favourable tax consequences would have resulted from this, so that it suited ParkingEye to argue the contractual approach.)
• My conclusion on these appeals was (1) that the realignment of the penalty clause rule away from requiring that stipulated sums represent a reasonable pre-estimate of loss is a sensible one. As the Roman law showed, there are other legitimate interests that one might have in enforcing a penalty other than recovering one’s own losses. The danger of over-charging can be regulated by the courts; (2) that the continuing characterisation of the rule against penalties in terms of the enforcement of a secondary obligation triggered by breach of a primary obligation will inevitably allow some penalties to be disguised and to escape the rule. It is debatable whether the CSH clauses were an example of such a disguised penalty or whether, as Lords Sumption and Neuberger argue, they were simply part of a flexible mechanism for adjusting the final price payable. It is difficult to see how such disguised clauses can be got at, unless one is conceivably to open up all manner of contract provisions to scrutiny, a course of action I think would be undesirable.

There was some good discussion following my presentation, for which I thank the colleagues and students who attended. My further observation during those discussions that the decision could be viewed as a more performance-oriented approach to contract law – i.e. that contractual obligations are not just things to be valued in terms of damages for non-performance, but to be valued as undertakings to be enforced wherever possible – led my Edinburgh colleague Dr Descheemaeker to ponder whether the decision might cause ripples for other aspects of English contract law: might it lead to developments in other areas more receptive of the enforcement of contracts, rather than just compensating for their breach, for instance in changes to the approach taken with specific performance? That would be quite a leap for English law to take, given that specific performance is a remedy of equitable origin in English law, but it will be interesting to see whether any such ripples can indeed be detected in due course.

A further observation offered during the discussion was the thought that the penalty clause doctrine might now effectively be dead in the water, given that so long as some legitimate interest of the enforcing party can be adduced to justify the sum sought, it should (assuming it is not too outrageous in amount) be enforceable. The point is that there are many interests that might conceivably be advanced by a contracting party for enforcement. Whether the courts will take a liberal approach to this matter will be one of the aspects of this decision worthy of tracking as it is received and applied by lower courts.

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New Privy Council decision on interpretation of contract

On 19th November, the Privy Council handed down its judgment in the case of Krys v KBC Partners LP [2015] UKPC 46, available here. The Privy Council reach a decision on the complex contract provisions which accords with the natural meaning of the words, which they find to be unambiguous even if they lead to economically harsh results for one of the parties.

Worthy of particular note is a remark of Lord Sumption (for the majority) in response to an argument that the apparent language of the contract would have an extraordinary result for a class of partners, because it would leave them with nothing more than their nominal capital contributions, however valuable the investments remaining in their hands: his Lordship comments that “[e]ven if the Board regarded these consequences as absurd, such arguments have limited force in the face of the clear language of the articles” (para 15). This constitutes a clear application of the natural meaning of words in a case where the terms of the contract give no cause to doubt their apparently clear meaning.

Also worthy of note are further comments of Lord Sumption in which he observes that the idea of commercial common sense or wisdom would be hard to bring to bear on the facts of the case before their Lordships: “It is far from clear by what standards of commercial normality any particular provisions are to be measured. There is little to be gained by imagining more or less far-fetched examples of cases in which the articles of partnership would operate harshly if construed according to the ordinary meaning of the words …” (para 16).

Lord Mance dissents, believing that the majority pay too much attention to the natural meaning of the words, and not enough attention to the context as a whole (para 18). One might imagine Lord Hoffmann having made similar remarks, but it is not a view which persuades the majority.

Coming after the cautious Supreme Court decision in Arnold v Britton (the subject of analysis in the forthcoming January 2016 edition of the Edinburgh Law Review), an observer of current trends in the field of contractual interpretation might venture to suggest we seem to be seeing something of a shift away from a heavy reliance on commercial common sense and on a wider contextual approach, at least where the wording of the contract appears to be unambiguous to the court. If this is not quite a resurgence of the traditional “natural meaning” approach to interpretation, it may at least be a reining in of the Hoffmann approach developed in ICS v West Bromwich Building Society. Future decisions in this field will be watched with interest.

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New Supreme Court judgment on penalty clauses

The UK Supreme Court has handed down (on 4th November 2015) its judmgent in two conjoined appeals on the application of contractual penalty clauses: Cavendish Square Holding v Makdessi and ParkingEye Ltd v Beavis [2015] UKSC 67. The judgments are important ones, and have generated a degree of press interest in this morning’s newspapers. Not all of this is accurate or helpful. Even The Times has rather missed the point by reporting the story under the headline “Judges clear car parks to charge huge penalty fees.” In fact the Justices of the Supreme Court have done no such thing, their judgments specifically reinforcing the existing penalty clause rule that, to be valid, any contractually stipulated sums payable on breach must not be extravagant, unconscionable or incommensurate with the interest of the party seeking to enforce the clause. Indeed, in the ParkingEye appeal, the charge which the respondent was seeking to enforce was less than the amount of parking penalties regularly enforced by local authorities. One should not always believe what one reads in the press.

Reading the judgment itself is much more illuminating. The first matter worthy of note is that the Supreme Court has taken the opportunity to reiterate its belief that the rule against contractual penalty clauses does not need to be reformed or abolished. Cavendish Square Holding’s argument that the rule ought to be abolished flew in the face of prior recommendations by both the English and Scottish Law Commissions that the rule be retained. The Justices noted that Cavendish’s argument was “made without the benefit of the sort of research into the consequences and merits of such a step, which the Law Commission or Parliament would undertake before venturing upon it” (Para 43). The decision of the Supreme Court is likely to solidify the position of the penalty clause rule in both English and Scots law, securing its status for the foreseeable future.

Two important points about the operation of the penalty clause rule, emerge from the Supreme Court’s decision in the two appeals. First, the rule only operates as a break on the validity of a secondary obligation, i.e. an obligation which comes into being if a primary obligation (of payment or performance) under the contract is broke. The rule does not operate to allow assessment of the reasonableness or potentially exorbitant nature of primary obligations themselves. As Lord Roskill noted in a previous decision of the House of Lords: “it is not and never has been for the courts to relieve a party from the consequences of what may in the event prove to be an onerous or possibly even a commercially imprudent bargain” (Export Credits Guarantee Department v Universal Oil Products Co [1983] 1 WLR 399, at 403). This point was crucial in the determination of the outcome in the first of the two conjoined appeals, Cavendish Square Holding v Makdessi. The two clauses in question in that appeal had the effect of entitling Cavendish Square to deprive, in certain circumstances, Mr Makdessi of a substantial sum that would otherwise have been payable to him (and to force him to transfer shares he owned). Lord Neuberger and Lord Sumption (with whom Lord Carnwath agreed) noted that there was uncertainty in English law of whether a forfeiture provision of this sort could even count as a penalty, commenting “there is some, albeit rather unsatisfactory, authority that such a clause may be a penalty” (para 69). But, proceeding on the assumption (though not deciding) that a contractual provision might in some circumstances be a penalty if it disentitled the contract breaker from receiving a sum of money which would otherwise have been due to him, they concluded that the clause before the court was not a penalty clause; on the contrary, it was “in reality a price adjustment clause. Although the occasion for its operation is a breach of contract, it is in no sense a secondary provision” (para 74). So, although in some cases English law allows a disguised penalty clause to be recognised for what it is (and hence for the disguise to be ignored), a clause which states that a party is only to earn certain consideration if it complies with various restrictive covenants (which Mr Makdessi had not) is fundamentally a clause about the circumstances in which a primary obligation will be due under a contract. As such, it does not fall within the ambit of the penalty clause rule and thus cannot be scrutinised under that rule as to its fairness or proportionateness.

The second important point arises out of the second of the conjoined appeals, that of ParkingEye v Beavis. In this case, Mr Beavis had been charged £85 for overstaying a free two hour parking limit by 56 minutes (i.e. by almost 50% more time than that allowed). He argued that this charge was a penalty clause. ParkingEye did not own the car park in which Mr Beavis had parked; they merely managed it for the owner. That meant that Mr Beavis’s overstaying in the car park did not cause ParkingEye any pecuniary loss at all. Did that mean that its £85 charge was a penalty, being wholly out of proportion to any loss they might suffer? Hitherto, it might have been maintained that the stipulation of a sum payable upon breach could only be justified if some losses accrue to the victim of the breach, and therefore that, if a party cannot or does not suffer any loss as a result of a breach, then it cannot claim any sum stipulated as payable on breach. But that is not so, say the Justices in this judgment: Lords Neuberger and Sumption assert that the real question is – what is the nature and extent of the innocent party’s interest in the performance of the relevant obligation; such interest is not necessarily limited to the mere recovery of compensation for the breach (para 23). In this case, ParkingEye (and the landlord for whom they acted in managing the car park) had a legitimate interest in ensuring that only customers of the shopping centre used the car park, and that such customers did not stay too long in the car park (otherwise they would prevent others from shopping). The £85 charge was designed to act as a deterrent against overstaying, and “deterrence is not penal if there is a legitimate interest in influencing the conduct of the contracting party which is not satisfied by the mere right to recover damages for breach of contract” (para 99). Importantly, they added (in opposition to the newspaper headline’s suggestion of “huge penalty fees” that:

“None of this means that ParkingEye could charge overstayers whatever it liked. It could not charge a sum which would be out of all proportion to its interest or that of the landowner for whom it is providing the service. But there is no reason to suppose that £85 is out of all proportion to its interests” (para 100).

The application of the common law penalty rule meant therefore that the £85 charge was not a penalty, but a proportionate sum payable on breach of the obligation not to park for more than the 2 hours permitted.

By way of an aside, it is of interest that the Supreme Court thought that Mr Beavis’s parking was the result of a contract he had entered into with ParkingEye. Mr Beavis gave no obvious consideration for the 2 hour free parking he was permitted by ParkingEye. This looks very much like a gratuitous permission to park, an arrangement which one might have thought would not be a valid contract under English law. That did not seem to trouble the Supreme Court, however, Lords Neuberger and Sumption briefly noting only that:

“Mr Beavis had a contractual licence to park his car in the retail park on the terms of the notice posted at the entrance, which he accepted by entering the site … Moore-Bick LJ in the Court of Appeal was inclined to doubt this analysis, and at one stage so were we. But, on reflection, we think that it is correct.”

This blogger at least would have liked to have heard more from the Supreme Court about why this was, under English law, a valid contract, and not merely a gratuitous licence to occupy land for a period of time.

By way of conclusion, and to return to the main thrust of this blog post, this judgment of the Supreme Court is a significant one. It represents a clear defence of the continuing appropriateness of a rule alleviating against excessive contractual penalties. It serves as a reminder of a crucial aspect of the rule, that it only operates so as to allow an assessment of secondary obligations, arising upon breach, and not of primary obligations relating to payment or transfer of property. It also develops the law by holding that, although the victim of a breach may not suffer any pecuniary loss as a result of the breach, that does not mean that it cannot recover a stipulated sum from the breaching party. It can, so long as it has a legitimate interest in so recovering. Such an interest is perfectly possible of arising in relation to a property management scheme, such as the operation of a car park by an agent of the owner of the car park. That said, any sum stipulated cannot be out of all proportion to its interest. There is no danger of this judgment leading to huge or excessive parking charges of the sort suggested in the newspaper reports on the case.

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New blog on the Nobile Officium

Having attended the recent book launch at Parliament House of the excellent new Avizandum book “The Nobile Officium” by Edinburgh Law School graduate Professor Stephen Thomson, I was pleased to learn that he has also set up a blog to track new developments relating to the extraordinary equitable jurisdiction of the Scottish supreme courts (that being the so-called nobile officium). The blog can be accessed at the easily remembered address www.nobileofficium.com. The new book is a fascinating study of an often understood aspect of the Scots legal system, and well worth a read.

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Accessory liability of a solicitior for losses caused by a client’s fraud

The duty of confidentiality incumbent on solicitors in respect of their clients’ affairs is well known, and is narrated in both the Code of Conduct published by the Solicitors’ Regulation Authority and in the Rules relating to the conduct of solicitors published by the Law Society of Scotland. The relevant rules embodied in each instrument neither require nor permit a solicitor who discovers that a client has been engaging in criminal conduct to communicate this to a third party (or their legal agent) who may be adversely affected by such criminal conduct: on the contrary, the English Code of Conduct provides for no exception to the duty of confidentiality in relation to knowledge of criminal conduct, and the Scottish rule makes an exception only in relation to circumstances where a client indicates that he or she will commit a crime in the future (thus apparently excluding cases of the communication of past criminal acts from the exception). However, despite there being no indication of this exception in these rules, the duty of confidentiality does not extend to circumstances where fraud or some other illegal act is alleged against a party whose law agent has been directly concerned in the carrying out of the very transaction which is the subject-matter of inquiry. That exception, established in prior case law (see Micosta SA v Shetland Islands Council 1983 SLT 483), has been reaffirmed in a recent decision of the Inner House of the Court of Session, a decision which has in addition explored the nature of the potential liability which may fall on a law agent for losses caused to a third party as a result of complicity in his or her client’s fraud.

The decision in question is Frank Houlgate Investment Co Ltd v Biggart Baillie LLP ([2014] CSIH 79, 2014 SLT 1001, [2015] PNLR 3). The relevant facts were that the defenders, a firm of solicitors, had a client who had fraudulently represented to the pursuer (an investment company) that he owned an estate in Fife worth £2.6 million. Discussions followed between the fraudster and the pursuer relating to the possibility of a joint venture to create a luxury golf development on the estate. In reality, an entirely unconnected party (whom the fraudster was impersonating) lived at and owned the estate, this individual knowing nothing of the fraudster or his deception. The defenders, to whom the fraudster had also fraudulently purported to be the owner of the estate, acting through one of their directors (a Mr Mair), prepared a standard security over the estate in favour of the pursuer, incorporating a personal bond for £300,000 in the name of the actual owner of the estate. On the strength of this security (which the fraudster executed), the pursuer advanced various sums of money to the fraudster in furtherance of the purported development of the site. The security was registered in September 2006. In January 2007, Mr Mair received information suggesting that the true owner of the estate was not his client. When Mr Mair confronted the fraudster with this information, he admitted the truth but said that he would clear matters up directly with the pursuer. On the basis of that undertaking, Mr Mair undertook not to approach the pursuer’s solicitors, at least until his client had had a chance to speak to the pursuer. Later that month, the pursuer, still knowing nothing of the fraud, advanced the fraudster the further sum of £100,000. Thereafter, the fraudster fraudulently discharged the standard security.

The pursuer sought this sum of £100,000 by way of damages from the defenders. The pursuer claimed that Mr Mair, once he knew the true position, and while not intending to deceive, had acted in furtherance of his client’s fraud, thereby exposing the defenders to liability to damages in delict. The defenders argued that Mr Mair had not been actively engaged in any fraud, neither was he liable for fraudulent concealment (there having been no duty of disclosure on Mr Mair’s part) nor for a reckless omission. At first instance, the judge (Lord Hodge, later apppointed to the Supreme Court) found the defenders liable in damages in delict to the pursuer. They, through Mr Mair, had been an accessory to fraud, because Mr Mair had failed to dissociate himself from his client’s continuing fraud by withdrawing from acting and had failed to warn the pursuer or its solicitors that they could not rely on the invalid security. Mr Mair had thereby acted in furtherance of his client’s fraud, causing the pursuer to lose £100,000.

The description of what Lord Hodge thought had been the duty of Mr Mair on discovering his client’s fraud is noteworthy: the first of the two mandated requirements – that Mr Mair cease immediately to act for the client – is notorious and unexceptional; the second – that he communicate either to the other party or to its legal agents that the other party “could not rely on the security” – is an injunction that might have caused surprise to some members of the legal profession. While such a statement would not expressly communicate any confidential information relating to the client to the other party, it might at least be strongly suggestive of some impropriety on the client’s part. However, Lord Hodge (and, as discussed below, the Inner House) issued a useful reminder that the duty of confidentiality is inapplicable where a fraud, disclosed by a law agent’s client, is one which the solicitor has wittingly or unwittingly facilitated through his conduct. Mr Mair was thus unable to rely on any alleged duty of confidentiality in relation to the admission by his client of a fraud with which he had been associated (through preparing the security documentation). This useful reminder is one of which members of the legal profession would be well advised to take note.

The defenders appealed, arguing that Mr Mair was not an accessory to the fraud as (i) he did not meet the criteria for liability as a joint wrongdoer, and (ii) there was no common design between him and the client to defraud the pursuers. The appeal court upheld the finding of the judge at first instance that the defenders were liable for the pursuer’s loss, and dismissed the defenders’ appeal. There was however some disagreement on the bench regarding the proper basis of liability for such loss.

Two of the three judges (Lords Menzies and McEwan) agreed with the approach of Lord Hodge that Mr Mair had been an accessory to the fraud of his client, this founding liability for the pursuer’s loss. In addition, one of them (Lord Menzies) was of the view that the principal ground of liability was that Mr Mair, being under a duty of honesty towards those with whom he interacted, had made an implied, continuing representation that he did not know the information provided by his client to be untrue; when he discovered that that representation was no longer true, and failed promptly to correct it, he became liable for any losses flowing from it. This flowed from the duty of a solicitor to act honestly.

While agreeing with Lord Menzies that Mr Mair was under a duty of honesty, the third judge (Lord Malcolm) disagreed with Lord Hodge’s view that the liability of the defenders could be based on Mr Mair being an accessory to the fraud of his client: a person could not make himself liable as an accessory to a crime without having, to some degree, the mental element necessary for commission of the wrong itself, and Lord Hodge had found, as a matter of fact, that Mr Mair had not been subjectively dishonest. Nonetheless, Lord Malcolm took the view that Mr Mair was liable in delict for the pursuer’s loss, arguing that he was bound by the equivalent of a Hedley Byrne type assumption of responsibility on his part for the accuracy of the information provided by him.

The statements on the exception to the duty of confidentiality were, at the appeal stage, not as helpfully expressed as those of Lord Hodge at first instance. Lord Malcolm talks simply of a “fraud exception”, and Lord McEwan of the “the fraud of his client relieving [Mr Mair] of any duty of confidentiality”. Caution needs to be shown here: it is not a mere confession of a client’s criminal activity which negates a solicitor’s duty of confidentiality towards the client; were that so, no one could confidently seek legal advice in relation to past criminal activity without fear of its being disclosed. Lord Hodge’s formulation – that what is exempted from the duty of confidentiality is knowledge of a fraud committed by a client which the solicitor has facilitated (as well as any disclosure by the client of an intention to commit criminal activity in the future) – is the more accurate formulation.
The disagreement between the judges of the Inner House of the Court of Session as to the basis of the defenders’ liability is noteworthy. Lords Menzies and Malcolm agree that a solicitor comes under a duty of honesty not just to his or her client, but also to other members of the legal profession and to the general public. This duty is described by Lord Menzies as deriving, not from the law of delict, but from an individual’s position as a solicitor. It gave rise, on the facts of this case, to a “continuing implied representation” on Mr Mair’s part that he was not aware of any fundamental dishonesty or fraud which might make the security transaction worthless. Lord Menzies seems to suggest that liability resting on such a basis would not be constrained by the usual limitations that would affect liability for misrepresentation arising on the basis of Hedley Byrne, that is, by the considerations of foreseeability, proximity, and justice, fairness and reasonableness (the Caparo limitations ). If so, the untrammelled consequences of such a breach of honesty have the potential to be very far-reaching and onerous (one wonders whether Lord Menzies turned his mind to that issue this when reaching his decision).

Lord Malcolm’s analysis of the consequences of Mr Mair’s dishonesty is couched in more overtly delictual language, and is more akin to descriptions of the usual consequences of misrepresentation in delict: he says that “the case for liability is at least as strong as in Hedley Byrne … the obligations flowing from Mr Mair’s position as a solicitor can be seen as the equivalent of a voluntary assumption of responsibility.” But Lord Malcolm does not say whether, in his view, Caparo type limitations on liability would apply in the case of breach of this duty, which again leaves liability in a potentially unlimited state.

The disagreement between the majority and minority on the issue of the defenders’ accessory liability for fraud may be an even more significant point. Lord Menzies, for the majority, re-emphasises that there is no Scottish authority for the proposition that it is necessary for an accessory to have the same intent as the fraudulent principal. The lack of a subjective dishonest intent on Mr Mair’s part was thus irrelevant: honesty had to be measured by an objective standard. An analogy with the criminal law was appropriate, and it did not matter that English criminal law differed in the approach taken to this question. By contrast, Lord Malcolm, as noted earlier, was of the view that the mental element, in some degree, necessary for commission of the fraud was required by an accessory. No clear answer to this issue is given in the older authorities: the passage from Stair’s Institutions of the Law of Scotland concerning accessory liability gives examples of conduct which are of a more active sort than mere failure to alert another of fraud, and makes no mention of the mental state required of the accessory. Lord Malcolm raised his concerns by posing some examples concerning what is required to establish accessory liability for fraud based on an omission to do something:

“Suppose someone overheard [the fraudster] plotting his scheme? Would that person’s inaction create a liability in damages to the victim? To think more generally, imagine that a user of a bank cash machine notices a suspicious device designed to steal the users’ details. Does he become liable as an accessory if he fails to warn the others in the queue? In my opinion, more is needed before legal responsibility is imposed.” (para 64)

These examples give rise to somewhat phantom concerns however, because the facts of the case before the court did not involve the potential for imposing accessory liability on a complete stranger to a fraudulent transaction who merely happened to learn of it; in the case before the court, Mr Mair had prepared the very legal instrument which was used to defraud the pursuer, and he had done this on the basis of information presented to the pursuer by the fraudster which Mr Mair subsequently discovered was false. One might suggest that if ‘more is needed’, this intimate involvement in the mechanism of the fraud should have been sufficient (as indeed it was thought to be so by the majority judges). Nonetheless, the potential consequences of this judgment for an expansion of accessory liability in delict in Scots law, especially when compared to the lack of such liability in English law, give cause for concern: the courts will require to give fuller consideration to what sorts of omission might trigger such accessory liability.

An intended appeal by the defenders against the decision of the Inner House to the Supreme Court was abandoned. While therefore this decision serves as an important reminder that a solicitor’s duty of confidentiality does not extend to information regarding fraud by a client which the solicitor has wittingly or unwittingly facilitated, the two other important matters raised in the case – a duty of honesty/duty of care as the potential basis of liability of a solicitor towards a third party, and the mental element required to be an accessory to fraud – will not now be subject to what might have been useful further consideration by the Supreme Court, at least in the context of the Houlgate litigation.

[A shortened version of this blog post will appear in a forthcoming edition of the Journal of Professional Negligence]

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Enforcing promises/contracts of a social nature

Undertakings given within a social context are often held not to give rise to any legally enforceable contracts (or unilateral promises). A story, on the BBC’s website (here) therefore makes for interesting reading. A boy (or perhaps his parents, it is unclear from the story exactly who) has been invoiced for costs resulting from his failure to attend a friend’s birthday party. The precise item billed by the birthday boy’s disgruntled parents is listed in the invoice as being “Birthday Party No Show Fee”, though what this actually relates to seems to be be an amount charged by the ski slope at which the party took place in respect of the absent boy.

The issuing of such an invoice may be a bizarrely cold and formal way to complain about the absence of a party guest, but it raises the interesting question of whether the sum can be claimed at law. The birthday boy’s parents seem to think it can: they are suing the absent boy (or his parents) in the small claims court for the amount of £15.95. But is there legal liability here? For any claim to be contractual in nature there would require to be a determination that the absentee boy’s parents, in accepting the invitation, had intended to enter into a contract obliging the child to attend. That seems an unlikely inference, albeit that there would be (as it seems there was in this case) wasted expenditure incurred by the birthday boy’s parents if the invited child did not in fact attend (a pecuniary interest can sometimes clothe an otherwise unenforceable agreement with contractual force). If there was no contract (or, had the events taken place in Scotland, no unilateral promise either), then it is hard to see what else might provide the basis for the claim. Did the absent boy’s parents make an actionable misrepresentation in stating he would attend, or in not intimating his non-attendance when it became clear that he could no longer attend? It seems unlikely that any such misrepresentation, if such there was, would be held to give rise to a duty of care in tort/delict in respect of the economic loss suffered by the birthday boy’s parents.

All in all, this looks like a small claim which is destined to be thrown out by the court if the matter does indeed get that far. A finding otherwise would certainly make this blogger think twice before accepting any future birthday party invitations.

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