Albatown Ltd v Credential Group Ltd [2001] ScotCS 211 (24 August 2001)

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[1] The pursuers are the heritable proprietors of subjects at 21 Watson Street, Glasgow. They purchased the subjects from Federal Securities Limited ("FSL") on 9 November 2000, and their title was registered on 23 November 2000. FSL had previously purchased the subjects from the defenders. That purchase was effected in terms of missives of various dates between 6 July 1995 and 7 February 1997. The subjects were disponed by the defenders to FSL by a disposition which is dated 28 March 1996 (although the date of conclusion of the missives suggests that that may be an error and that the true date of execution may have been later). On 11 February 1997 FSL granted in favour of the defenders a standard security over the subjects in security of their whole obligations under the missives. The standard security was registered on 16 December 1997. The pursuers aver that, although a substantial part of the purchase price payable by FSL to the defenders remains unpaid, the obligations of FSL under the missives are no longer enforceable. On that basis they maintain that there is nothing that remains secured by the standard security.

The defenders, as well as disputing the relevancy of the pursuers' pleadings, challenged the competency of granting a declarator that the standard security had been discharged in that way. When the case called for debate, Mr Summers for the pursuers tendered a Minute of Amendment to alter the terms of the first conclusion. The effect of the proposed amendment, if granted, would have been that the conclusion was for:

I allowed the Minute of Amendment to be received, but it seemed to me to be questionable whether the reference to "releasing the pursuers from any further obligations to perform under the missives" was appropriate, since the pursuers were never parties to the personal obligations constituted by the missives. I therefore deferred consideration of whether to allow the summons to be amended, and if so in what terms, until I had heard parties' submissions. At the end of the debate Mr Summers' motion was for:

Mr Dewar for the defenders did not dispute the competency of a declarator in that form, although he questioned whether the Conveyancing and Feudal Reform (Scotland) Act 1970 ("the 1970 Act") provided any procedure for obtaining discharge in the circumstances of the present case (c.f. section 18(2)(b) and (3) and Schedule 5, Form D, No. 2). In that situation, I shall allow the summons to be amended to the extent indicated in Mr Summers' ultimate motion. What further procedure may require to be followed in the event that the pursuers obtain declarator in the terms sought is not a question which can be determined in this action.

[3] The contract between FSL and the defenders was originally constituted by missives dated 6 and 27 July and 10, 11 and 16 August 1995. It was then amended on six successive occasions, namely (1) by missives dated 11 and 26 October 1995, (2) by missives dated 27 and 28 March and 3 April 1996, (3) by missives dated 2 and 10 July 1996, (4) by missives dated 4 and 8 October 1996, (5) by missives dated 20 and 26 November 1996, and (6) by missives dated 5 and 7 February 1997. The missives are produced as No. 6/4 of process.

[4] In their eventual form, the missives provided that the price would be £65,000, that entry would be on 2 December 1996, that in exchange for delivery of a valid disposition in FSL's favour FSL would grant a standard security in terms of the draft annexed to the missive of 5 February 1997, and that FSL would pay the purchase price by 30 June 1998.

[5] Clause 6 of the missive of 27 July 1995 (No. 6/4/2 of process) was in the following terms:

Clause 3 of the missive of 11 August 1995 (No. 6/4/4 of process) was to substantially the same effect.

[6] The disposition granted by the defenders in favour of FSL (No. 6/2 of process) bears, as I have already mentioned, to have been executed on 28 March 1996. It is not material for present purposes whether the date of execution is correctly stated in the testing clause, since Mr Dewar accepted that the disposition had been delivered and that effect had been given to it in the Land Register. The disposition runs in inter alia the following terms:

I was offered no explanation of why the disposition declared in such emphatic terms that the price had been paid, when the parties were agreed (see paragraphs [8] and [9] below) that in fact it had not. Mr Summers, however, did not base any submission on the fact that the disposition includes a receipt for and discharge in respect of payment of the purchase price.

[7] The Standard Security granted by FSL in favour of the defenders (No. 6/3 of process) was, as I have said, dated 11 February 1997 and registered in the Land Register of Scotland on 16 December 1997. It was in inter alia the following terms:

[8] Notwithstanding the terms of the disposition, the pursuers aver that FSL's obligation under the missives, as finally amended, to pay the purchase price by 30 June 1998 remained unfulfilled on 2 December 1998, and to their knowledge remains unfulfilled. They contend, however, that the personal obligation to pay the price was extinguished (along with any other outstanding obligations under the missives) by virtue of the provisions quoted in paragraph [5] above on the expiry of two years from the date of entry, i.e. on 2 December 1998. In these circumstances they maintain that the standard security is no longer enforceable against the subjects.

[9] The defenders aver that the sum of £9250 has been paid towards the purchase price payable by FSL, but that the balance and the relative interest remain unpaid. Nothing turns for present purposes on the fact that the parties are not in agreement as to the amount of the purchase price that remains unpaid. It is sufficient that they are in agreement that there is an unpaid balance.

[10] Mr Dewar's submission was that I should sustain the defenders' second plea-in-law (a plea to the relevancy of the action) and dismiss the action. In essence, he said, the pursuers' case was that, since a disposition had been granted by the defenders in favour of FSL, and since no action had been taken to enforce payment by them of the balance of the purchase price payable by them within the two year period after the date of entry mentioned in the non-supersession clauses mentioned in paragraph [5] above, the missives were no longer enforceable and as a result the defenders could not now rely on the standard security in order to obtain payment of the unpaid balance of the purchase price. That proposition, Mr Dewar submitted, was not well-founded.

[11] The pursuers' contention depended on the rule of law which has now been displaced by section 2(1) of the Contracts (Scotland) Act 1997 ("the 1997 Act"). That provision came into force on 21 June 1997, and therefore, by virtue of section 4(3), did not apply to the missives, which had been finally concluded on 7 February 1997. For a summary of the law as it stood before the 1997 Act came into force, Mr Dewar referred to Pena v Ray 1987 SC 1, per Lord Wylie at 3, where his Lordship said:

Although a number of cases had been concerned with the effect of non-supersession clauses, none of them, Mr Dewar submitted, had dealt with the situation which had arisen in the present case. Only Spowart v Wylie (Lord Penrose, 2 June 1995, unreported save in 1995 GWD 28-1257) concerned the effect of a non-supersession clause in a context in which a standard security had been granted. The fact that the standard security had been granted, and the terms in which it was granted, made the present case fundamentally different from other cases about non-supersession clauses. The standard security in the present case was of the type contemplated in Form B in Schedule 2 to the 1970 Act, i.e. one where the personal obligation in security of which it was granted was constituted in a separate document, whereas the standard security in Spowart had been held to be of the Form A type, in which the personal obligation was constituted in the standard security itself. Mr Dewar recognised that the pursuers might seek to derive support for their argument from a passage in Lord Penrose's opinion where he said (at page 10):

He submitted, however, that that observation was obiter. It dealt with the very different case of a collateral obligation, whereas in the present case the payment of the price was fundamental to the sale of heritage. Mr Dewar submitted that the fact that the standard security created a real right in an interest in land took the present case out of the line of authority so far developed in relation to non-supersession clauses. The defenders' position as standard security holders was fundamentally different from that of a party seeking merely to rely on and enforce personal rights created by missives. They had a real right in respect of the security subjects, and were entitled to exercise the statutory remedies for enforcement of a standard security. A standard security holder seeking to enforce his statutory rights in respect of the security subjects could not be said to be enforcing the missives, or contractual rights arising from the missives.

[12] In what seemed to me to be a separate line of argument, Mr Dewar submitted that the issue between the parties turned on the proper construction of the missives, and in particular of the non-supersession clauses. The question was what the intention of the parties to the missives had been. It was, he submitted, inconceivable that the intention was that the obligation to pay the purchase price should be time limited. The non-supersession clauses were inserted in the missives at an early stage, long before any question arose of postponing the payment of the price until after the disposition had been delivered. Once the stage was reached at which it was agreed that the disposition should be delivered before the price was paid and that payment of the price should be secured by the standard security, it was inconceivable that the intention of the parties, judged objectively, was that the defenders would have to raise legal proceedings if they wished to preserve the standard security in effect after the expiry of two years from the date of entry. The reality of the situation was that what was being secured by the standard security was payment of the price. That being so, it was not commercially sensible to construe the non-supersession clause as bringing the obligation to pay that price to an end two years after entry unless an action were raised. The device of granting a standard security for the purchase price where payment of the purchase price, or part of it, was not to be made until after a disposition had been delivered was recognised in Cusine and Rennie on Missives, second edition, paragraph 7.02. It was inconceivable that the defenders would have delivered the disposition, knowing that the standard security which they were accepting in respect of the purchase price was not a normal one, but one which would only be effective beyond the expiry of two years from the date of entry if within that period they raised court proceedings founding on the missives. The commercially sensible construction of the non-supersession clauses was that they had no application to the obligation to pay the purchase price.

[13] Mr Summers submitted that the passage quoted in paragraph [11] above from the opinion of Lord Penrose in Spowart, although obiter, was clearly sound. If, as here, the standard security was of the Form B type, the measure of the personal obligation in respect of which the security was granted was to be found in the separate document referred to. Here, that meant that the measure of the personal obligation in respect of which FSL had granted the standard security was to be found by sound construction of the missives, since the standard security was granted "in security of [FSL's] whole obligations to [the defenders] by virtue of the missives".

[14] There was, Mr Summers submitted, only one possible construction of the missives. The obligation on the part of FSL to pay the purchase price by 30 June 1998 was constituted by the missives. It had no other foundation. That obligation would, at common law, have been superseded by the delivery of the disposition. The obligation only survived the delivery of the disposition by virtue of the non-supersession clauses. Those clauses did three things. First, they provided that the obligations constituted by the missives would continue to be enforceable, notwithstanding delivery of the disposition, for a period of two years after the date of entry. Secondly, they provided that the obligations constituted by the missives would cease to be enforceable on the expiry of that period. Thirdly, they provided that notwithstanding the expiry of that period those obligations would remain in force thereafter, if but only if the missives were founded on in legal proceedings within that period. In the events which had happened, the whole obligations constituted by the missives, including FSL's obligation to pay the purchase price by 30 June 1998, had ceased to be enforceable, because the two year period from the date of entry had expired without the missives having been founded on in legal proceedings.

[15] In advancing those submissions, Mr Summers made reference to two other cases. The first was Smith v Lindsay & Kirk 2000 SLT 287, which was concerned with the construction of the phrase "shall cease to be enforceable" in a non-supersession clause. It was held that "enforceable" was not to be construed narrowly as meaning enforceable by specific implement, but meant that when the obligations ceased to be enforceable no action of any kind could be founded upon them. Secondly, Mr Summers referred to Hamilton v Rodwell 1998 SCLR 418. In that case a flat was sold under missives which contained a non-supersession clause in terms similar to those in the present case. The missives also provided that the defender would be liable for the cost of all repairs instructed prior to the date of entry. At the date of entry there was an outstanding repair notice affecting the subjects. The parties agreed that part of the purchase price would be retained on joint deposit in respect of the repair notice works. When the defender refused to pay the cost of those works, the pursuers sued for declarator that the cost should be borne out of the deposited sum. They did not, however, raise that action until after the expiry of the two year period mentioned in the non-supersession clause. It was held that the defender's obligation to pay for the works arose from the missives, that the deposit was solely to cover his liability under the missives, that the obligation under the missives had expired, and that accordingly the pursuers had no claim on the deposited sum. Mr Summers submitted that the circumstances of that case were analogous to those of the present case.

[16] In my opinion it is necessary first to examine the standard security to see what was secured by it. It was, according to its terms, granted "in security of [FSL's] whole obligations to [the defenders] by virtue of the missives between [them]". In my opinion that is unequivocally a Form B type of standard security. The personal obligations in respect of which it was granted were constituted by the missives. There was nothing in the standard security itself to constitute the personal obligations. I agree with Lord Penrose (see the passage from page 10 of his opinion in Spowart quoted in paragraph [11] above) that the standard security cannot, in such circumstances, support a real right against the security subjects of wider import than the personal obligation constituted by the missives properly construed. Mr Dewar was in my view right in his submission that the defenders' right under the standard security is a real right distinguishable from the personal right constituted by the missives. That real right is exerciseable, however, only in security of the personal right defined in the missives. If that personal right, properly construed, was of limited duration, the real right cannot be enforced after the personal right has expired.

[17] The issue therefore, in my opinion, turns on the proper construction of the missives. The question is whether the pursuers are right in arguing that the effect of the non-supersession clause is that the personal obligation incumbent on FSL to pay the purchase price has expired. In my view the inescapable conclusion is that they are right. The obligation on FSL to pay the purchase price was constituted by the missives. It had no other foundation. If there had been no non-supersession clause, the delivery of a disposition (unless it had acknowledged - as it very clearly did not do - that the price remained unpaid) would have resulted at common law in the supersession of the missives. The non-supersession clauses prevented that consequence, but only for the two year period from the date of entry. They expressly provided that on the expiry of that period the missives would become unenforceable. An exception was provided, where legal proceedings founding on the missives were brought during the non-supersession period, but in the event no such proceedings were raised. The result, in my opinion, is clear - the personal obligation incumbent on FSL by virtue of the missives to pay the purchase price ceased to be enforceable on 2 December 1998. There is in my view no possible basis for construing the non-supersession clause as not having that effect on the obligation to pay the purchase price.

[18] There is, in my view, no merit in Mr Dewar's submission that it is commercially inconceivable that the missives should be construed in the way contended for by the pursuers. I accept that, in a competition between two possible constructions of a commercial contract, one which is commercially sensible will ordinarily be preferred to one which is not. I do not consider, however, that it can be said that the pursuers' construction of the missives makes no commercial sense. In the context of an obligation to pay the outstanding purchase price by a date some sixteen months or so after the date of conclusion of the missives (and some nineteen months after the date of entry), and of the granting of a standard security to cover primarily payment of that sum, there is in my view no absurdity about a provision in terms of which the personal obligation will expire two years after the date of entry, provided no proceedings to enforce the missives are taken before then. There was nothing to stop the defenders from seeking to exercise their remedies under the standard security at any time between 30 June and 2 December 1998. Nor was there anything to stop them from raising legal proceedings against FSL before 2 December 1998 to enforce the personal obligation. If they had done so, the personal obligation would not have been cut off on 2 December 1998 and the remedies under the standard security would have remained available.

[19] I am also of opinion that the argument that the non-supersession clauses should be construed as not applying to the obligation to pay the purchase price is of no avail to the defenders. In the first place, there is, in my view, no room for such a construction in view of the language of the clauses. But in addition, it seems to me that such an argument yields the reverse of the result for which the defenders contend. If the non-supersession clause has no application to the obligation to pay the purchase price, the effect is not that that obligation survives indefinitely, unaffected by the two year cut off provided for in the non-supersession clauses, but rather that the common law rule would apply to the effect of cutting off the obligation on delivery of the disposition.

[20] In my opinion, therefore, the effect of the non-supersession clauses in the events which have happened is that FSL's personal obligation to pay the purchase price became unenforceable on 2 December 1998, and that there is accordingly no longer any obligation secured by the standard security.

[21] I am therefore of opinion that the defences are irrelevant and that the pursuers are entitled to decree of declarator that:

[22] I shall accordingly allow the summons to be amended to the effect ultimately sought by Mr Summers (see paragraph [2] above), sustain the pursuers' pleas-in-law, repel the defences and grant decree de plano in the terms set out in paragraph [21] above. I shall reserve the question of expenses.

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Scottish Court of Session Decisions