In 2014, the Supreme Court's decision in Morrison v ICL Plastics [2014] UKSC 48 the court reversed years of accepted authority and held that section 11(3) on of the 1973 Act required only awareness of loss for the prescriptive period to run rather than awareness of both loss and the cause of that loss. Accordingly, in Morrison the explosion at the ICL factory in Glasgow happened on 11 May 2004 and the prescriptive period started running as at that date because the pursuer knew they had suffered a loss. The fact that it was ignorant of the cause of its loss and whether its loss had been caused by a third party was not relevant.
The difficulties continued in Gordon's Trustees v Campbell Riddell Breeze Paterson LLP [2017] UKSC 75 in which solicitors had drafted and served a notice to quit on tenants but the tenants had failed to leave on the relevant day. Again, the court held that the prescriptive period started as at the date on which the tenants failed to leave because, as at that date, the pursuers knew everything that they needed to know other than the cause of their loss - i.e. whether it was caused by a defect in the notice to quit which rendered it ineffective or whether (as can, of course, sometimes be the case) it was caused by the tenant's intransigence. The Supreme Court also made it clear that for the prescriptive period to start running it isn't necessary for the creditor to know that they have suffered a detriment, it is sufficient that they have incurred expenditure in reliance on the defender's negligent advice.
It is this issue (i.e. expenditure incurred in reliance on advice) that was debated in the Midlothian Council case. In this case, a defective ground gas report led the Council to construct a development without sufficient ground gas defences. The report was prepared in 2004 and the development constructed between 2007 and 2009. However, it was not until 2013 when one of the residents became ill as a result of a release of gas that the problem became apparent. Lord Doherty held, on the basis of Gordon's Trustees, that the loss arose on construction of the development and that the prescriptive period was not postponed until 2013 because that loss was "expenditure in reliance on negligent professional advice" which was treated by the Supreme Court as sufficient to constitute awareness of loss.
Part of the rationale behind the decision in Gordon's Trustees was presumably that the Supreme Court did not want there to be one rule for physical damage and one for financial damage. However, if that decision is to be interpreted as it was in Midlothian Council then that is effectively what has happened. In the vast majority of cases of physical damage it will be perfectly apparent to the creditor that they have suffered a detriment. Contrast that with financial damage cases where invariably a party will very often not know that they have suffered a detriment if loss is to be defined as expenditure in reliance on advice.
It must be questionable whether looking at a property damage case like Midlothian from the standpoint of expenditure in reliance on advice is really helpful. On one view, the loss in this case did not arise as a consequence of expenditure on a ground gas defence system nor the construction of properties without one. Rather it arose when a lack of one caused a release of gas which led to occupants becoming ill. The fundamental unfairness in the decision is that the development was going to be built anyway, with or without the defender's advice on the ground gas defence system. So the expenditure incurred wasn't incurred as a consequence of negligent advice. It was simply that the advice led to a defect in construction which later led to a loss.
The Midlothian case is not being appealed and the courts recognise the unfairness that results following these decisions. Indeed, both the Inner House and the Supreme Court in Gordon's Trustees commented on these "difficult cases" in their decisions. That unfairness has led to the passing of the Prescription & Limitation (Scotland) Act 2018 which is anticipated to come into force early next year. That Act provides that for the prescriptive period to start running three facts will have to be known (1) that the loss has occurred; (2) that the loss was caused by a person's act or omission; and (3) the identity of the person who caused the loss. That legislation will hopefully go some way to countering the difficulties which claimants currently face but whether it will manage to reverse all the ills of the current law remains to be seen.
MacDonald and another v Carnbroe Estates Ltd
On 4 December 2019 the Supreme Court issued its judgment in the case of MacDonald and another v Carnbroe Estates Ltd [2019] UKSC 57. The case was based on a challenge under section 242 of the Insolvency Act 1986 to a purported gratuitous alienation of property by Grampian MacLennan's Distribution Services Ltd (the company in liquidation) to Carnbroe. Carnbroe defended the action on the basis that "adequate consideration" had been paid for the property. It had been successful in arguing that defence at first instance but the First Division of the Inner House had allowed the liquidator's appeal and Carnbroe, therefore, appealed again to the Supreme Court.
The background was straightforward. In around August 2005 Grampian bought the property in question for £630,000. In March 2013 the property was valued at £1.2million on the open market with the valuation falling to £800,000 assuming a restricted marketing period of 180 days. In around May 2014, Carnbroe intimated an interest in purchasing the property for £950,000. In around June 2014, ownership of Grampian changed and it was bought by Kevan Quinn. It had substantial liabilities at the time. Mr Quinn realised shortly thereafter that he would be unable to keep Grampian going and he entered into further discussions with Carnbroe (conducted by Mr Gaffney on Carnbroe's behalf, who Mr Quinn had known for over 30 years). Mr Gaffney was aware of Grampian's financial distress and mentioned that he could buy the property after it had been repossessed.
Mr Gaffney's evidence was that Mr Quinn was looking for a quick sale because of mortgage arrears and the risk that the property would be repossessed. These issues were reflected in the price of £550,000. Importantly, no evidence was led by the pursuers as to the likely price which the secured lender could have obtained if it had called up its security nor what the liquidator would have likely obtained on a sale in the context of the winding up.
The transfer of property itself raised some questions at first instance as the purchase price of £473,604.68 was paid from Carnbroe directly to the secured lender rather than the agreed consideration of £550,000 being paid to Grampian. Accordingly, the actual purchase price that was initially paid was sufficient only to pay the secured creditor and no-one else. It was only after proof before Lord Woolman (who concluded that £473,604.68 would not have been adequate consideration) that Carnbroe paid the balance of the purchase price to the company which was, by that time, in liquidation.
At proof, the expert surveyors had given evidence to the effect that the consideration of £550,000 was appropriate in the context of an immediate off-market sale by a financially distressed seller. So, the issue which became centrally important in the Inner House and Supreme Court was whether there was an objective justification for an urgent off-market sale which caused such a radical reduction in the value of the property in comparison with its open market value.
Adequate Consideration
The leading Scottish authority on adequate consideration, which was relied upon in all courts, is Lafferty Construction Ltd v McCombe 1994 SLT 858 in which Lord Cullen stated the principle as follows:
"In considering whether alienation was made for adequate consideration, I do not take the view that it is necessary for the defender to establish that the consideration for the alienation was the best which could have been obtained in the circumstances. On the other hand, the expression "adequate" implies the application of an objective standpoint. The consideration should be not less than would reasonably be expected in the circumstances assuming that persons in the position of the parties were acting in good faith and at arm's length from each other".
Lord Hodge (giving the unanimous judgment of the Supreme Court) held (at para 32) that this means that a hypothetical purchaser would not have knowledge of the seller's financial distress unless the insolvent's financial embarrassment was known in the relevant market. It would not, therefore, be a relevant consideration that the seller had actually disclosed its financial distress to the purchaser and that the purchaser had exploited that disclosure in its negotiation of the purchase price.
So what are the relevant circumstances which the court has to take into account? First, the mere fact of the company's insolvency. Secondly, the objective purpose of the sale. The court expands on this to say that where the property is not exposed to the market, there is clearly a risk that an inadequate price will be paid. But there will be cases in which "it may be objectively reasonable for the insolvent to accept the lower price from a quick sale of an asset in order to gain the chance of saving the business, as that outcome is likely to be in the interests of its creditors" (para 34).
Where there is no question of a sale to preserve liquidity or to remain in business and where the insolvent company has ceased trading and is winding up its business informally, what is adequate consideration? The answer, according to the court, depends on the circumstances of the particular insolvency. Accordingly, where an insolvent company is not able to support a proper marketing exercise the adequacy of the consideration achieved must be measured by comparing the consideration which the insolvent company has accepted against the likely outcomes which the formal insolvency would achieve through the sale or other disposal of the asset by the liquidator, taking into account any fees levied by the insolvency practitioner.
In that context, the court explained that the duties incumbent on the liquidator are relevant (as indeed are the duties to obtain the best possible price incumbent on a secured lender). The liquidator must take reasonable care in choosing the time at which to sell the property and must also take reasonable care to obtain the best price that the circumstances of the case, as he reasonably perceives them, permit. The sale by the company must, therefore, be measured against that standard.
For all of these reasons the court held that there was no justification for the price paid. There was no evidence to support the view that the secured lender or liquidator would have been likely to achieve a price that was comparable or less than the price Grampian accepted. Absent evidence that the £550,000 which Carnbroe eventually paid for the property was the equivalent to such a price, Carnbroe failed to establish that it had been sold for adequate consideration.
Remedies
While that decision was not particularly surprising (albeit that it was based on slightly different grounds to those in the Inner House) the Supreme Court went on to discuss the statutory remedies available to the court as these had been addressed by parties at the hearing.
The normal remedy for gratuitous alienations is reduction or annulment of the transaction in question. However, reduction can provide for disproportionate and unfair consequences in the context of insolvency proceedings. Indeed, commentators have questioned whether the remedy of reduction in this regard is compliant with Article 1, Protocol 1 of the ECHR because the effect is that the alienated property is returned to the company in liquidation but the transferee is left with an unsecured claim for unjustified enrichment in the liquidation. It is simply left to prove in competition with other creditors for the price it paid which is hard on the transferee and, as the Supreme Court explains at para 51 of its judgment, provides an unjustified windfall for the company which would not have received the price but for the impugned sale.
The Supreme Court did not consider, however, that it was restrained to interpret the 1986 Act so as to lead to such a harsh result. It held that the words of section 242(4) are broad enough to allow the court to take account of the consideration which a purchaser in good faith has paid to the insolvent party when considering what the appropriate remedy is in these circumstances. As the court points out at para 58 of its decision, the general principle in actions of reduction is that they ought only to be successful where restitutio in integrum is possible - i.e. the parties can be restored to the pre-contractual position. However, where the insolvent had sold at an undervalue the law doesn't provide for that but it should do so.
Accordingly, while section 242(4) does not mandate restitutio in every case it also does not exclude it as an appropriate part of the remedy chosen by the court. The court considered that there may be cases in which it would be "wholly disproportionate and unfair to annul the property transfer without giving the bona fide purchaser credit for the consideration which it has paid" (para 65). The court has sufficient power to devise an "appropriate remedy". Consequently, the Supreme Court allowed the appeal but only to the extent that it remitted the case to the Inner House to consider what that appropriate remedy might be.
How the Inner House deals with this question (assuming that the parties don't now reach agreement) will be interesting. The two most likely options are that reduction is granted but that the liquidator is ordered to compensate Carnbroe or that Carnbroe is allowed to keep the property but on the condition that it tops up the purchase price to what would be considered to be adequate consideration.
Commodity Solution Services Limited and others v First Scottish Searching Services Limited
On 7 March 2019, Lady Hale, the then President of the Supreme Court gave the Freshfields Lecture at the University of Cambridge. The title of the lecture was "Principle and Pragmatism in Developing Private Law". As Lady Hale explains, "Most Scots lawyers would probably still agree with the great Professor TB Smith that the unwritten law of Scotland was derived from different sources from the English and gave more weight to principle than to pragmatism". As England looked inwards and developed its law on a case by case basis, Scots lawyers looked to European and Roman law for inspiration eventually leading to Stair's Institutions of the Law of Scotland being published. Lady Hale continues to say that "These differences of approach are no longer associated with nationality. There are those of us who start from a basis of legal principle and those of us who start from a basis of pragmatism…But from whichever end we start, we are all guided to some extent by our view of which solution will work best, which will be the most practical, both in this case and in others like it". But which does work best? Principle or pragmatism?
One area which Lady Hale identifies as being particularly susceptible to this dilemma is the law of tort or delict. The law in this area, she says, is "littered with concepts redolent of pragmatism - proximity, 'fair, just and reasonable', even causation and remoteness". However, as Lord Reed explains in Robinson v Chief Constable of West Yorkshire [2018] UKSC 4 in most cases, established principle will be able to provide an answer. It is only where the case is a novel one that the courts need to look beyond those principles to decide whether a duty of care should be recognised. He says that "Where the existence or non-existence of a duty of care has been established, a consideration of justice and reasonableness forms part of the basis on which the law has arrived at the relevant principles. It is therefore unnecessary and inappropriate to reconsider whether the existence of the duty is fair, just and reasonable (subject to the possibility that this court may be invited to depart from an established line of authority). Nor, a fortiori, can justice and reasonableness constitute a basis for discarding established principles and deciding each case according to what the court may regard as its broader merits. Such an approach would be recipe for inconsistency and uncertainty…"
Nonetheless, the decision in Robinson and the development of the law of tort and, by extension, delict in the UK gave rise to comment by the Sheriff Appeal Court recently in the case of Commodity Solution Services Limited and others v First Scottish Searching Services Limited [2019] SAC (Civ) 4. In this case, the question for the court was whether a firm of professional searchers instructed to carry out a search of the Register of Inhibitions owes a duty of care to a creditor who has registered an inhibition in that register? This action was necessary because the search exhibited to the purchasers had failed to disclose the creditor's inhibition and that, therefore, the purchaser's title was registered without qualification. The effect of such registration was that the creditor's inhibition was "terminated" in terms of section 159 of the Bankruptcy & Diligence (Scotland) Act 2007 and treated as if it had never existed.
The principal decision of the court was given by Sheriff Braid who followed the approach in Robinson. The first task was, therefore, to consider whether the court was faced with a novel situation or whether the case can be decided simply by following established principles. He concluded that there was no case directly in point and that precedent, therefore, did not provide the answer. The Sheriff then continued to look at potentially analogous cases and, in accordance with Robinson, had to decide which one provided the closest analogy. In accordance with the submission by the respondent, the Sheriff identified the case of Ministry of Housing and Local Government v Sharp [1970] 2 QB 223 as providing the closest analogy. The only difference being that, in that case, a public official had carried out the search rather than a private business operating for profit. Having done that, the Sheriff then decided whether that case law could be "extended incrementally by holding that a duty is owed not only by the keeper of the register (or a clerk to whom the search function has been entrusted) but by a private firm of searchers".
The Sheriff concluded that the application of the incremental approach and of established principles in this case could justify the imposition of a duty of care on the search firm. As he explained "…the very function of the search was to discover the existence of inhibiting creditors who were there to be found, and having regard to the fact that the appellants voluntarily undertook the search…that does give rise to…a relationship of sufficient proximity as to give rise to a duty of care". That led to the Sheriff considering the final question - was it fair, just and reasonable to impose a duty on the search firm? He paraphrased Lord Mance in Sharp asking whether "it would be unjust if no compensation could be obtained for the adverse consequences on property rights of negligence of a private firm of searchers, undertaking that task for profit?" He concluded that it would indeed be unjust and that the imposition of such a duty was justified. Indeed, if no duty of care was owed in such circumstances then there would be very little incentive on searchers to carry out such instructions with due care. Other factors were also relevant including the ability of searchers to insure against the risk and the inability of an inhibiting creditor to do likewise. Accordingly, as per Robinson, the case was decided by going beyond established principle.
The concurring decision of Sheriff Principal Pyle highlighted what he saw as the dangers of the Robinson approach. The two principal issues he considered were first, that if the law of negligence was developed in the way outlined by the Supreme Court then it risked being "no more than a conglomeration of individual decisions on individual facts". Secondly, "there is a danger that in the absence of the law of negligence being based upon principle, rather than precedent, judges are tempted…to force the facts and circumstances of a present case to fit in with the facts and circumstances of a previous case when in truth there is little in each of them which can be said to be the same". The Sheriff Principal expressed his discomfort at the idea that the law was based as much on precedent than on principle and, while ultimately accepting that the decision of the Supreme Court was the law of the UK and required to be followed suggested that a better approach by counsel in this case would have been "to identify the broad principle or principles in each case and then to decided whether it or any of them applied to the factual circumstances of this appeal". He accepted, however, that the incremental approach was capable of being deployed in this case without forcing the analogy with Sharp and ultimately concurred with the decision of Sheriff Braid.
Accordingly, the SAC were able to reconcile principle and pragmatism but it is clear, as Lady Hale suggests, that in this jurisdiction lawyers and judges are loathe to abandon principle in the interests of pragmatism. And it is not just Scots lawyers who take that view. Lady Hale concludes her lecture with a quote (and a warning) from Lord Kerr in Michael v Chief Constable of South Wales [2015] UKSC 2: "A decision based on what is considered to be correct legal principle cannot be lightly set aside in subsequent cases where the same legal principle is in play. By contrast, a decision which is not the product of, in the words of Lord Oliver, 'any logical process of analogical deduction' holds less sway, particularly if it does not accord with what the subsequent decision-maker considers to be the correct instinctive reaction to contemporaneous standards and conditions".
M7 Real Estate Investments Partners Vi Industrial Propco Ltd v Amazon UK Services Ltd
In May 2019 the Scottish Law Commission published a discussion paper on aspects of leases dealing, in particular, with the question of termination. There are few aspects of Scots law in a bigger mess. The main difficulty surrounds tacit relocation and notices to quit. The principle of tacit relocation provides that unless express notice is given of one party's intention to terminate the lease, then it continues on the same terms after the expiry date. In order to prevent the operation of tacit relocation the party seeking to terminate has to serve a notice to quit. However, the method and timescales involved in serving a notice to quit are far from clear. At common law, the minimum notice period is 40 days. However, the Sheriff Courts (Scotland) Act 1907 introduced different periods of notice for different types of lease and different procedures. Section 34 of that Act provides that where there is a written lease of land extending to more than two acres, notice of not less than one year is required. But the Act is unclear whether this notice period applies in all circumstances and, therefore, displaces the common law rule or whether it only applies where the particular method of removing specified under section 34 of the 1907 Act is used by the landlord.
The lack of clarity in the 1907 Act has been the subject of both judicial and academic criticism. In the case of Lormor v Glasgow City Council [2014] CSIH 80, Lord Menzies said that "Sections 34 to 37 of the 1907 Act cannot be regarded as the finest example of the parliamentary draftsman's art". Professors Reid and Gretton in their conveyancing text are even more scathing, saying that "Countless examples could be given of the poor condition of the statute book, but this is as good an example as any. One of the problems is that the section has not been updated. But even in 1907 it was a disgrace. Why is a provision about the law of leases to be found in a statute about the Sheriff Courts? More fundamentally, what does the section mean? To what extent is it about warrants to remove (which is how it starts off) and to what extent is it about length of notice and tacit relocation?"
It was these difficult questions that led to this litigation. By notice of 7 February 2019 the pursuer's agents gave notice to quit. The notice period was slightly under 6 months. Accordingly, it met the requirements of the common law but was less than the year long period which would have been required under section 34 of the 1907 Act.
The defender's submission was that the position was straightforward. A year's notice had to be given. The legislation was designed to give new rights to the landlord in return for greater protection for the tenant. Essentially, section 34 displaced the common law rule. The pursuer disagreed. The proviso that a year's notice had to be given was only relevant if the landlord had opted to use the procedure for removing provided for in section 34, which it had not. The proviso was not of general application and, therefore, if section 34 was not used, a year's notice did not apply. It made no change to the common law on notices to quit and tacit relocation.
Lord Ericht agreed with the pursuer for three reasons. First, section 34 was not a substantive legal provision but a procedural one. It did not alter the parties' substantive rights and so the defender was wrong in its submission that it bestowed greater rights on the landlord or indeed greater protection on the tenant. Secondly, if the lease did continue on tacit relocation then how could the landlord ever terminate the lease? If a year's notice was required but the lease continued on a year-by-year basis, then sufficient notice could never be given. Thirdly, the proviso directly relates to the procedural remedy introduced by section 34 and must be read in that way. Finally, if any common law provision is to be altered by statute, clear, definite and positive words have to be used. As Lord Menzies and Professors Gretton and Reid have commented, this provision is far from clear.
Accordingly, the pursuer was successful. However, the uncertainty in this area will not be resolved until the provisions of the 1907 Act are repealed. In response to the Scottish Law Commission's discussion paper both the Law Society of Scotland and the Faculty of Advocates were strongly in favour of a repeal. The other issue that remains is whether in a modern commercial world, the concept of tacit relocation is really fit for purpose. Surely, if two parties agree an end date in a lease then that ought to be the date on which the lease ends. Why is further notice required? Again, the reform of Scots property law may require that issue to be dealt with but with no legislation currently planned it will remain a difficult question for the courts for the foreseeable future.
Our Generation Ltd v Aberdeen City Council
This is another case about the notice provisions in contracts. In this case the owner and operator of solar energy equipment raised an action against the local authority seeking declarator that it had validly terminated site agreements in an email dated 25 July 2017. The email was sent by the pursuer's agents, identified its subject matter as being a "statement of account" and attached a document with the same name. It simply read "Please see attached statement of balances now overdue, owing to Our Generation Solar". Following non-payment the pursuer's solicitors wrote to the defender on 24 August 2017 purporting to terminate the agreements on the basis of clause 8.4.3 of the lease between the parties which provided for the possibility of termination with immediate effect by written notice "If the other Party fails to make punctual payment of any amount properly due to the former Party under this agreement and such amount remains unpaid at the expiry of 20 Banking Days after receiving written notice from the former Party requiring payment…"
The pursuer relied on two well-known cases Hoe International Ltd v Andersen and Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd. They argued that it was the term of the contract that required to be construed, not the notice itself. The only relevant question was whether strict compliance with the contract was necessary and key to that, according to the court in Hoe, was (a) the purpose of the notice and the formal requirements of the contractual term; and (b) whether the recipient would be prejudiced by a failure to comply with these requirements. The notice itself did not require absolute clarity and precision. All that mattered, in terms of the relevant clause, was compliance with clause 8.4.3. The pursuer had complied with these provisions. The notice was written, it was from the known agents of the party who issued it and it made clear that there was a balance outstanding to the pursuer. A reasonable recipient of such a notice would have understood that they were being required to make payment, which was all that was asked for by the relevant clause.
The defender also made its submission with reference to Hoe but also to the Inner House's decision in West Dunbartonshire Council v William Thompson and Son (Dumbarton) Ltd . The consequence of the notice, according to the defender, was a drastic one as it allowed the pursuer to bring the contract to an end long before its expiry date. That, in turn, had significant financial consequences. The notice clearly did not convey to a reasonable recipient the meaning that was required for the purposes which clause 8.4.3 served. All that it did was suggest that invoices were overdue. A commercially sensible construction pointed to the need for strict compliance with the provisions of the agreement.
The Inner House agreed with the defender (as the Lord Ordinary had also done at first instance). In both Hoe and Mannai Investment there had been a document which clearly stated that it was a notice of some sort. In clause 8.4.3 the words "notice…requiring payment" carried with them a sense of warning. It continued that "Although it is no doubt correct to say that no particular words need to be used, whatever phrase is employed must be seen as drawing the recipient's attention to something which will happen, if he or she does not react to the admonition. There is nothing of that nature in the email of 25 July 2017. All that it did was enclose a "statement of account" for the recipient to "see". That simply does not constitute a notice for the purposes of the clause". What was required, according to the court, was a clear statement not just that the sums were overdue, but that the pursuer was requiring the sums by a certain date.
