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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> DFR Properties Ltd v. Glen House Properties & Anor [2006] ScotCS CSIH_48 (10 October 2006) URL: https://www.bailii.org/scot/cases/ScotCS/2006/CSIH_48.html Cite as: [2006] ScotCS CSIH_48, [2006] CSIH 48 |
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EXTRA DIVISION, INNER HOUSE, COURT OF
SESSION |
|
Lord Osborne Lord Dawson Lord Drummond Young |
[2006] CSIH 48 XA75/05 OPINION OF THE COURT delivered by LORD OSBORNE in APPEAL from the Sheriffdom
of Tayside Central and by D.F.R. PROPERTIES LIMITED Pursuers and Appellants; against GLEN HOUSE PROPERTIES and ROBERT SIM DUNLOP and MRS. HILARY JENNIFER SUSAN DUNLOP Defenders and
Respondents: _______ |
Act:
Beynon; Brodies,
LLP (Rollo Davidson & McFarlane, Cupar) (Pursuers and Appellants)
Alt:
Dewar, Q.C.,
The background circumstances
[2] Following
the sale of the flats to the appellants, the parties entered into a Minute of
Agreement, which is No. 5/8 of process, dated
"1. The duration of this agreement shall be
for the period from
2. The agent agrees to let the properties on short-term agreements according to the booking conditions. It is clearly understood that vacant possession is available on commencement of this agreement and can be obtained at any time during the agreement, subject to three months notice being given by the owner to the agent in writing whilst honouring all forward confirmed bookings.
3. The agent agrees to pay the owner the
sum of £39,000 sterling per annum net of VAT payable in twelve equal monthly
payments in arrears on the first day of each month during this agreement. The agent will execute and deliver to the
owner a standing order for these monthly payments and that by
4. Interest shall be payable by the agent on the sums detailed in paragraph 3 at an annual rate of 3 per cent per annum above the Royal Bank of Scotland plc, base rate at the dates or terms upon which said payments became due, running said interest from the respective dates or terms of payment during non-payment thereof. In the event of payment being in excess of 30 days late the owner shall have the right to terminate the contract with immediate effect.
...
6. The agent shall be responsible for the dispersements of all property charges including feu duty and service accounts including all local authority rates and taxes and all telephone, electricity, sewerage and water rates, building and contents insurance. For the avoidance of doubt any disbursements made in terms of this agreement are exclusive of any Value Added Tax exigible in respect thereof. The agent shall insure subjects together with all contents provided by the owners against damage by fire, lightening, explosion, aircraft and other aerial devices (other than such are hostile) or articles dropped therefrom, earthquake, storm or tempest, malicious damage, riot and civil commotion, bursting or overflowing of water apparatus or pipes, flood, impact by road vehicles and such other commercial risks as may be agreed between the parties for a sum to represent the full reinstatement value of the subjects together with all professional fees. Insurance cover shall also be taken for three years loss of income suffered by both the owner and the agent. ... The agent undertakes to provide the owner with copies of the insurance cover and evidence of the payment of premiums. Buildings insurance will be in the name of the owner, the sum to be not less than £390,000 and the contents not less than £20,000.
7. The agent shall preserve the furniture, fixtures and fittings specified in the attached inventory from destruction and damage and make good, repair or restore the same, fair wear and tear excepted, leaving a full inventory at the termination of the agreement. In order to satisfy this condition, the agent undertakes to incur expenditure not exceeding the value of £750 per flat per annum on repairs and renewals, details of such expenditure to be provided to the owner on a quarterly basis. The agent undertakes to advise the owner in the event of expenditure in excess of this sum being required in which event the excess contribution will be made by the owner.
8. The owner undertakes to meet the owner's share of the cost of maintaining the properties in wind and watertight condition throughout the period of the agreement, by maintenance, repair and where necessary renewal of the exterior of the subjects which shall include without prejudice to the foregoing generality the roof and all exterior walls and gables, gutters, down pipes, windows and drains outwith the subjects.
...
11. It is clearly understood that all advertising, housekeeping and property management expenses shall be the responsibility of the agent.
12. In the event of the agent forming a partnership or limited company to let and factor the properties herein referred to, the owner hereby legally obliges themselves, their successors and assignees to enter into a new Minute of Agreement with the said partnership or limited company in identical terms to this Minute of Agreement... ".
[3] There was in fact no agreement between the parties to vary the payment of £39,000 per annum for the second year of the operation of the agreement. Accordingly the rate of payment remained for that year at £39,000 per annum.
[4] At the commencement of the operation of the agreement, the flats were categorised as of 3 star standard by the Scottish Tourist Board. They were furnished to a high standard and were in good condition, consistent with that grading. However, from the outset of the operation of the agreement, the furniture, fittings and fixtures in the flats began to deteriorate. For a variety of reasons, not the least being the high turnover of tenants and the expectation of such tenants that minor repairs were the responsibility of the lessor, the contents of property let as holiday flats are apt to deteriorate more rapidly than the contents of other property lets. As a result of this deterioration, during the first year of the operation of the agreement, the flats were downgraded by the Scottish Tourist Board from a 3 star to a 2 star rating. In about June 1999, they were further downgraded from a 2 star to a 1 star rating.
[5] Around
the beginning of 1999 the third named respondent informed Mr. Douglas
Rolland that improvements were urgently required. At that stage, he indicated that the
appellants were not prepared to spend any money on the flats. On
[6] However,
the appellants carried out no repairs or renewals. As a result, the level of the respondents'
booking declined and their rental income was therefore reduced. On
[7] By
about October 1999 the flats had deteriorated in condition below a tenantable
standard for the purposes of holiday letting.
On
[8] Subsequently,
the appellants raised the present action against the respondents in
[9] Both
parties tabled preliminary pleas, on which a debate was held on
Submissions of the appellants
[10] Counsel for the appellants commenced by explaining the pattern which his submissions would take. He intended to begin with certain introductory comments; secondly he would deal with the test which he had to satisfy; thirdly he would deal with the findings-in-fact made by the sheriff; fourthly he would address certain evidential issues; and fifthly he would consider specifically the appellants' five grounds of appeal. In his introductory remarks, he drew attention to the matters with which we have already dealt. He explained that the central issue in dispute at the proof before answer was whether there existed an implied condition in the contract under which the appellants were obliged to maintain the five flats in a condition equivalent to that which existed at the commencement of the operation of the agreement in February 1998; or, in any event, in a tenantable condition.
[11] Moving on, counsel considered the test which had to be applied
in the appeal. In that connection he
drew attention to
[13] Counsel next proceeded to the third branch of his submissions, concerned with the sheriff's findings-in-fact. In this connection he drew attention to a note lodged on behalf of the appellants setting forth alternative findings-in-fact, which, the appellants argued, ought to be made by this court. If the court favoured the appellants' contention that there had been no implied term in the contract, effectively that would be an end of the matter. It would not be necessary to consider in detail the correspondence which had passed in 1999. The findings-in-fact of particular significance in relation to the issue of the implied term were findings 14 to 26. In place of them, it was contended that the court should find as follows:
"That the defenders had no contractual basis for making deductions and for failing to pay monthly instalments due to the pursuers under the Minute of Agreement from August 1999 until the agreement's end in February 2001."
[14] Moving on to deal with evidential matters, counsel made four points. First, no independent or forensic accountant's report had been produced for the respondents, relating to the two periods in respect of which loss was claimed, that is to say, from February 1998 to November 1999, at the end of which period the respondents had argued that a material breach of contract had occurred and that the appellants' alleged repudiation of the contract had been accepted; and secondly the balance of time that the agreement had to run, namely to 26 February 2001. Further, there was no accountant's report from respondents' own accountants.
[15] Secondly, no accounts or tax returns had been produced by the
respondents for the period prior to the start of the operation of the agreement
in February 1998 when the flats had been owned by the respondents and let on a
short term basis. In addition, no such
documents had been produced for the period covered by the Minute of Agreement,
[16] Thirdly, it was hardly surprising to see the terms of findings-in-fact 36 and 38, on pages 61 and 62 of the appeal print. In finding 36 the sheriff had found that:
"As a result of the deterioration in the flats, the defenders suffered a loss of profits of an undetermined amount between February 1998 and October 1999".
In finding in fact 38, the sheriff had found:
"Had the pursuers maintained the flats in an equivalent condition, the defenders would have earned profits of an undetermined amount during the remaining period of the agreement."
[17] Fourthly, it was submitted that the essential problem for the respondents was that, in their productions, there was not a clear specification or disclosure of what the total income and outlays had been for the five flats during the period of the respondents' ownership and letting of them and also during the period of operation of the Minute of Agreement from February 1998 until October or November 1999.
[18] Thus, in the absence of the kind of documentary evidence desiderated, that the respondents should have produced, the sheriff was left in a financial vacuum. In these circumstances it was necessary to look at the evidence of the witnesses who dealt with the situation. Evidence for the respondents had come from Mrs. Hilary Dunlop, the third named respondent. It was to be found in section 15 of volume III of the evidence. Reference was particularly made to pages 94 and 95. It was also relevant to consider production 6/17 at pages 94 to 95 of section 8 of volume I of the appendix. There was no clear evidence as to what was the purpose of production 6/17. This document, the high point of the respondents' case, it was submitted could not be relied upon as an essential basis in fact to entitle the sheriff to hold that an implied term was necessary. Nor could the document, in association with other evidence be a sufficient basis for any implied term. For example, in production 6/17, there was an entry relating to a sum of £7,000 in respect of repairs and running costs. It was not clear to what property that figure related, as appeared at page 98B-C of Mrs. Dunlop's evidence. Counsel submitted that the accounting and economic realities were of crucial importance in relation to the business efficacy test for the existence of an implied term. At page 110 of her evidence Mrs. Dunlop disputed the need for any economic analysis of the respondents' business. Her view, expressed at page 110 in volume III of her evidence, was to the effect that the market was not relevant to the determination of whether or not the business made a loss or profit. She did not consider that any accountant's report was necessary, as appeared from pages 113 to 114 in the same volume.
[19] In examination of the respondents' case the evidence of Derek Leslie McGuire, a property consultant and previously property letting agent, was material. His evidence appeared at section 16, volume III of the appendix. The essential part of his evidence was at pages 60A to 62B, also at page 54 and following pages. He there dealt with what might be called the conventional situation where a factor of property took a commission. However, this was not such an arrangement. There was no evidence of the genesis of this particular Minute of Agreement, since it was objected to. Mr. McGuire thought that the Minute of Agreement was "madness", or a "penal agreement" at pages 92 to 94. He, however, accepted that, in order to reach a specific answer as to the need for an implied term, it would be necessary to do a proper economic analysis. He had not done that.
[20] Counsel next referred to evidence led for the appellants. He relied particularly on that of Mr. James Grant Honeyman. His curriculum vitae appeared in production 5/45. The key part of his evidence was to be found at page 49D and following pages in section 12 of volume II of the appendix. His view was that the landlord's obligation was to keep the property wind and watertight, but that he would not have an obligation to redecorate the property during the period of the lease. However, counsel reverted to the point that there was an economic vacuum in this case. There was no evidence as to the actual potential of the property; how easily the rental income could fall below a point where the £39,000 per annum could be paid. At this point, counsel reminded the court that a Mr. Guy Bailey had given evidence for the defenders. He intended to deal with his evidence in connection with the grounds of appeal.
[21] Fifthly, counsel then did indeed proceed to examine the appellants' grounds of appeal, dealing first with ground 2.1. Counsel said that he accepted the sheriff's finding in fact 11, which followed the wording of clause 7 of the Minute of Agreement. However, counsel challenged the sheriff's conclusion regarding "fair wear and tear". He submitted that "wear and tear" might become "destruction and damage" in the end. It was necessary to look at the whole clause. It provided for an obligation to incur expenditure not exceeding £750 per flat per annum on repairs and renewals. Counsel submitted that, if his interpretation of clause 7 were correct, that would be inconsistent with the implication of a term such as had been affirmed by the sheriff in finding in fact and law 2. In this connection, counsel drew attention to the note of submissions for the appellants, item 2 in volume I of the appendix, where five principles relevant to the construction of clause 7 were set out.
[22] Counsel moved on to deal with ground of appeal 2.2.1. The sheriff had erred in holding in finding-in-fact-and-law 2 that the implied term there set forth was part of the contract, because there was an absence of economic evidence or financial evidence justifying that conclusion. The findings-in-fact contained insufficient material to support it. Proceeding on to ground of appeal 2.2.2, looking at the evidence as a whole the same was the position. The terms of the agreement were unusual and accordingly evidence as to the practice in the holiday letting industry as a whole was not material.
[23] In connection with these submissions counsel relied upon B.P. Refinery (Westernport) Pty Limited v President and Others of the Shire of Hastings [1977] 180 CLR 266, a decision of the Privy Council. The Board had held that, in order to justify the implication of a term in a contract, which the parties had not thought fit to express, the following conditions had to be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it; (3) it must be so obvious that "it goes without saying"; (4) it must be capable of clear expression; and (5) it must not contradict any express term of the contract. Reference was made in particular to page 283.
[25] Reverting to ground of appeal 2.2.1, looking at paragraph 17 of the sheriff's Note at page 71 of the appeal print, counsel accepted that the sheriff was correct as regards his view concerning the onus of proof of an implied term. The problem was that the sheriff had been placed in an evidential vacuum regarding the pertinent considerations for the implication of a term. The heart of the sheriff's decision regarding the implied term was paragraph 20 of his Note. It appeared from that paragraph that the sheriff regarded Mr. Bailey's evidence as of limited value, but that he found Mr. McGuire's evidence important and preferred it to that of the appellants' witness Mr. Honeyman. At page 74 of the appeal print the sheriff observed that the appellants' return was "much greater than the norm" in terms of the Minute of Agreement, but that was not a complete basis for implication of a term such as that desiderated. The important feature of the situation was that the Minute of Agreement was a special type of contract, not a conventional one. It was submitted the sheriff was not entitled to conclude that the respondents' return in relation to turnover was low in terms of the industry. The sheriff was not entitled to reach such a conclusion in any event the problem in the present case had been that the letting figures fell off through time because of lack of maintenance, which the appellants regarded as the responsibility of the respondents, who refused to do it. The essential difficulty was that the parties adopted different interpretations of the contract. To say, as the sheriff did, that the respondents' return was low was simply to say that the respondents had made a bad bargain, which could not be the basis for implication of a term. Findings-in-fact 17 and 20 were important in this context. However, the court ought to look at the necessity test in relation to this contract, not in relation to the holiday letting industry as a whole.
[26] Counsel next addressed ground of appeal 2.3. It was submitted that, assuming that the implied term desiderated had been proved, the sheriff had erred in making finding-in-fact-and-law 3, to the effect that the appellants were in material breach of the applied term; also in paragraph 26 of his Note. In this connection it was relevant to look at findings-in-fact 21 to 32. Little significance could be attached to the categorisation of the flats by the Scottish Tourist Board. There was no witness from the Scottish Tourist Board and no evidence as to how its grading system operated. There was no evidence that the grading had had an economic impact. Finally, in this connection, it was submitted that at no stage had there been a clear call upon the appellants by the respondents (a) to operate any implied obligation; and (b) holding the appellants in material breach of contract. At best there was a series of increasingly acrimonious letters exchanged between the parties.
[27] Counsel for the appellants next turned to ground of appeal
2.4. It was concerned with whether the
respondents had established the date on which they accepted the pursuers'
alleged repudiation of the Minute of Agreement.
The sheriff had held that the respondents had accepted the appellants'
repudiation by sending their letter of
[28] Counsel for the appellants turned finally to ground of appeal 2.5, to the effect that the sheriff had erred in making an award of damages to the respondents in the sum of £12,500, under reference to finding-in-fact-and-law 10. The background to this was findings-in-fact 36 and 38, which referred to a loss of profits of an "undetermined amount" between February 1998 and October 1999 and in the remaining period of the operation of the Minute of Agreement. This sum was made up of £4,000 in relation to head 1 of the heads set forth in paragraph 35 of the sheriff's Note and £8,500 in relation to head 3.
[29] In connection with these submissions counsel relied upon Dowling and Rutter v Abacus Frozen Foods Limited 2002 S.L.T. 491 where the court, in the face of difficulties regarding quantification of what was an acknowledged loss, stated that it would have made a "nominal award of £5,000." Counsel made three points. First, given the state of the financial evidence in the present case, there was no basis for holding that there had been a loss of profit for either of the periods concerned. The sheriff had referred to "undetermined amounts". In these circumstances there was no basis for making any award at all. Second, the sheriff was required to give reasons for any award. He had not done so. However, in Dowling and Rutter v Abacus Frozen Foods Limited, the contemplated award of £5,000 would have been in connection with disruption costs associated with withdrawal of labour. That was a comprehensible basis. Third, the absence of reasons given by the sheriff opened up the issue for this court. In these circumstances the submission was made that the figures selected by the sheriff were grossly excessive. They were respectively 50% and 56% of the sums sought at the stage of submission. Such sums could not be seen as nominal.
[30] Summarising his position, counsel said that if the court was with him in relation to the issue of the implied term, the appellants would succeed in relation to the principle action and the counter-claim. On that scenario it would be possible to deal with the expenses without difficulty, by awarding them to the appellants. Counsel moved the court to alter the award made to the appellants from £13,676.07 to one of £47,511.51. In that situation the court would also recall the interlocutor of the sheriff to the extent that it made an award of damages of £12,500 to the respondents.
Submissions of the respondents
[31] Senior counsel for the respondents moved the court to refuse the appellants' appeal and adhere to the sheriff's interlocutor to the extent that it was challenged by the appellants; further he moved the court to sustain the cross-appeal by repelling the appellants' second, third and fourth pleas in law and sustaining the respondents fourth plea in law; that would involve decree of absolvitor being pronounced in the principal action.
[32] Senior counsel then set out his response to the appellants' appeal. He said that he would begin by considering the approach which the court should take in an appeal in which review of decisions of fact was sought. Then he would consider and respond to the individual submissions made on behalf of the appellants; finally he would make submissions on the cross-appeal.
[33] In developing the first part of his submissions senior counsel
drew attention to Thomas v Thomas 1947 S.C. (H.L) 45. The case set forth the principles which an
appellate court should follow where there was a challenge to a finding in fact
made by a court of first instance. There
was no dispute about these principles.
He relied particularly on what was said by Viscount Simon at pages 47 to
48 and Lord Thankerton at pages 53 to 55.
He agreed that an appeal court had greater freedom where what was
involved was a review of inferences drawn from primary facts as opposed to
findings of primary fact. He also relied
upon what was said by Lord Macmillan at page 59. It had to be demonstrated that the judge of
first instance in making findings of fact had gone "plainly wrong". He submitted that it had not been
demonstrated that the sheriff in the present case had done that. He went on to rely on the observations of
Lord Hope of Craighead in Thomson v Kvaerner Govan Limited, 2004 SC (HL) 1 at pages 16 and 17. Senior counsel
also drew our attention to Simmons v British Steel Plc 2004 SC (HL) 94,
on which he relied. Reliance was also
placed on
[35] Senior counsel next turned to his individual submissions on the pursuers' grounds of appeal. He began by dealing with ground 2.1, the issue of construction of clause 7 of the Minute of Agreement. On any plain reading of this clause it was obvious that there was a distinction between "destruction and damage" and "fair wear and tear". The latter could not merge into the former. The second part of clause 7 was of an operational nature and related to the first part of the clause. It was quite obvious that the expenditure for which the agent was liable, up to the extent of £750 per annum, was expenditure on items destroyed or damaged. "Renewals" did not relate to items required to be renewed because of "fair wear and tear", in the context. It would cover the replacement of items completely destroyed. In any event, clause 7 did not cover decorative finishes; the agreement was silent on that. No particular significance attached to the word "preserve" in the first line of clause 7. The interpretation of clause 7 was of importance, since an implied condition could not conflict with an express provision of a contract.
[36] Turning to the evidence, Mr. Guy Bailey at page 5 and following pages of his evidence in volume III of the evidence dealt with "fair wear and tear". While the Minute of Agreement was unusual, Mr. Bailey stated that he had never encountered a factoring agreement in which the agent had accepted responsibility for the consequences of fair wear and tear. The distinction between fair wear and tear and injury or dilapidation was of long standing and reflected in Bell's Principles, 10th edition paragraph 1254. There was in effect a moral obligation on an owner to face the consequences of fair wear and tear. The sheriff had been criticised for not making a well reasoned finding in relation to these matters. However, in finding-in-fact 11 and paragraph 11 of the sheriff's Note at page 69 of the appeal print, the sheriff had clearly explained the basis of his view, which was correct.
[37] Senior counsel next proceeded to consider ground of appeal 2.2.1 of the appellants. What the appellants' contention amounted to, in relation to this ground, was that there was only one way in which it could be established that there was an implied term, as contended for by the respondents; the appellants' contention was that the only means was by the leading of financial or economic evidence. It was submitted for the respondents that there was no authority to that effect whatsoever. The proposition was unsound.
[38] It was appropriate to look at the authorities concerning the implication of contractual terms. The first of these was the Moorcock 1889 XIV P.D. 64. At page 68, the requirements for the implication of a contractual term, where necessary to give business efficacy to a transaction, were set out. If the appellants' arguments were correct, they would have isolated themselves from all risk attached to the transaction. That was not what business efficacy was about. It was to be assumed that two business persons would not agree to all risks being faced by one party to the transaction and all benefits available to the other. Senior counsel went on to draw attention to Rockcliffe Estates plc v Co-operative Wholesale Society Limited, at page 594; and B.P. Refinery (Westernport) Pty Limited v The President etc. of the Shire of Hastings, at page 282. There was no dispute concerning the relevant principles regarding implied terms; the difficulty was in their application to particular circumstances.
[39] It was submitted that the sheriff's treatment of the case had been appropriate. In findings-in-fact 14 to 20 and finding-in-fact-and-law 2 he had reached a conclusion which was justified in the light of the evidence and a proper interpretation of clause 7 of the Minute of Agreement. It was accepted that there was some ambiguity in the terms of finding-in-fact-and-law 2, in respect that it referred only to tenantable condition, but, on the evidence, there was no problem. Findings-in-fact 14 to 20 were based on the evidence before the sheriff and, in making those findings, it could not be said that the sheriff had gone "plainly wrong". The sheriff's reasoning underlying his decision was to be found in paragraphs 17 to 22 of his Note. While there had been some difficulty over the availability of accountancy evidence, the fact was that all of the respondents' relevant paperwork was before the court and it was not suggested that the material which it contained was erroneous.
[40] As regards the suggestion that a property graded 1 star could be let for a holiday let, the answer lay in finding in fact 31 to the effect that "by about October 1999 the flats had deteriorated below a tenantable standard for holiday letting." The progression down from a 3 star rating to a 1 star rating had taken place in the period ending June 1999. It was evident from paragraph 20 of the sheriff's Note that he had relied upon the evidence of Mr. McGuire as well as that of the third named respondent. At this point in his submissions senior counsel referred in detail to the evidence of Mr. McGuire in section 16 of volume III of the evidence, at pages 52 and following, 72, 85, 98, 99 and 118. These passages constituted an evidential basis for the sheriff's conclusion, which could not be said to be plainly wrong.
[41] Turning to the evidence of Mr. Douglas Rolland, on a proper reading, he had actually accepted the need for an implied term in the course of his evidence. He agreed, at pages 57 to 58 of section 11 of volume II of the evidence, that any reasonable landlord would have agreed to the obligation to keep the property up to the original standard, though not to improve it. However, the appellants undertook no work of repair or renewal at all. In summary, the sheriff's decision on the existence of the implied term was justified by the evidence and could not be said to be "plainly wrong". No separate issue was raised by the appellants' ground of appeal 2.2.2.
[42] Senior counsel moved on to deal with the appellants' ground of appeal 2.3, which raised the issue of whether the implied term, if established, had been shown to have been breached. He submitted that, having regard to finding-in-fact 28, to the effect that the appellants had carried out no repairs or renewals, with the result that the level of the respondents' bookings declined and their rental income was reduced, there could be no real dispute about this issue. The result was described in finding-in-fact 31, already mentioned. The sheriff's overall conclusion in this regard was expressed in finding-in-fact-and-law 3. These findings were sound and could not effectively be criticised. Reference was also made to paragraph 26 of the sheriff's Note. It was eloquent of the deterioration in condition which had occurred. The sheriff's decision did not rest merely on grading; there was more evidence of deterioration from Mr. Taylor and the third named respondent. In short, there was a wealth of material demonstrating a breach of the implied term on the part of the appellants. Reference was made to findings in fact 23 to 33 which clearly demonstrated a repudiatory breach of contract on the part of the appellants, reflected in findings-in-fact-and-law 3 and 4. Accordingly there was no substance in this ground of appeal. No submission had been made in support of the point made in the last paragraph of ground 2.3.
[43] Senior counsel then turned to deal with the appellants' ground
of appeal 2.4, which raised the issue whether the respondents had established
the date on which they accepted the pursuers' repudiation of the Minute of
Agreement. In this connection he
referred to the evidence of Mr. Rolland in volume II, section 11, pages 18 to
19. It was quite obvious from the terms
of the letter written on behalf of the respondents, dated
[44] Senior counsel moved on to consider the appellants' ground of appeal 2.5, alleging an error on the part of the sheriff in awarding to the respondents the sum of £12,500 by way of damages. Findings-in-fact-and-law 10 and 11 were pertinent to this matter. The figure of £12,500 was made up of £4,000 in respect of the period from February 1998 to October 1999 and £8,500 in respect of the period from October 1999 to February 2001, the date at which the Minute of Agreement would naturally have ended. It was perhaps not appropriate to refer to these sums as nominal, but rather to refer to them as the sheriff had done in finding-in-fact-and-law 10 as "a reasonable estimate". It was appropriate to look at the sheriff's findings-in-fact 36 and 38, in which he referred to profits of an "undetermined amount". In developing his submission senior counsel drew attention to paragraphs 35 to 37 of the sheriff's Note; he did not seek to challenge what was said in paragraph 36. Reference had been made in the course of the debate to Dowling & Rutter v Abacus Frozen Foods Limited. In that case there had been, by way of evidential material, only a spreadsheet. In the present case there had been a mass of evidential material, which made the present case different from that cited. What the sheriff had done here was not to make a "nominal award", but to proceed upon a very broad brush approach, in the light of the material available to him. That approach could not be criticised. What the sheriff was saying in paragraph 37 of his Note was that there must have been some loss of profit, which he had estimated.
[45] Senior counsel endeavoured to support his position by reference to the outline submissions for the respondents which had been made to the sheriff, which now appeared as item 5 in volume I of the appendix. The figures contained in those submissions were based on material before the court. The ten flats referred to therein included the five involved in the present litigation. While the sheriff had not accepted the figures contained in these submissions the point was that he could be satisfied that there was in fact a loss of profit, which he could then estimate. He had not been simply plucking figures out of the air. The material set forth in the outline submissions had in fact been derived from the documentary material which was available to the court. From time to time the court had to make estimates of loss, which could not be precise, as appeared from Mack v Glasgow City Council (30 March 2006; unreported), paragraph [7].
[46] In summary it was submitted the sheriff was entitled to take the course which he did. He adopted a broad brush approach, but against a background of evidence from which it could be inferred that an actual loss of profit had occurred. It could not be said that the sheriff, in taking the course he did, had gone "plainly wrong".
[47] Senior counsel then proceeded to make submissions in relation
to the grounds of cross-appeal for the respondents. These involved the contention that the
sheriff had erred in sustaining the appellants' third and fourth pleas in law,
repelling the appellants' fourth plea in law and granting decree for the sum of
£13,676.07 with interest at 8 per cent per annum from 10 April 2002 until
payment; and in failing to sustain the respondents' fourth plea in law and to
grant decree of absolvitor in the
principal action. He made clear that he
did not intend to argue the proposition contained in paragraph (iii) of the
grounds of appeal; his
submissions would be confined to the contents of paragraphs (i) and (ii) of the
grounds. The sheriff had awarded
£13,676.07, the basis of the award being seen in findings-in-fact-and-law 6, 7
and 8. However, the appellants' case had
been one for damages for the respondents' wrongful repudiation of the contract
on
[48] The result was that the interlocutor of the sheriff should be altered. Pleas in law 2, 3 and 4 for the appellants should be repelled and plea 4 for the respondents should be sustained. Decree of absolvitor in the principal action should be pronounced.
[49] Senior counsel finally commented upon certain proposed findings in fact set before the court by the appellants. As regards the proposed findings 14 to 26, these were rather more detailed than the findings made by the sheriff; senior counsel had no difficulty with that in principle. However, as regards findings proposed as 27 onwards, the court should not make such findings. There had been no submissions made as to why those findings should be substituted for the findings made by the sheriff. No evidence was cited to show why such findings should be made.
Reply by counsel for the appellants
[50] Counsel accepted that as regards findings of fact made by the sheriff, the test which he had to pass was that of showing that the sheriff was "plainly wrong". Nevertheless, the court had to consider the evidence and consider whether he was entitled to make findings in fact and the finding in fact and law on the implied term. That latter question did not involve matters of credibility or reliability, but the application of legal principles. The evidence of the third named respondent alone was insufficient to justify the finding of an implied term. The court should give proper scrutiny to the evidence of Mr. McGuire. Counsel reiterated the submission previously made that there was a lack of financial and economic evidence.
[51] In relation to ground of appeal 2.2.1, while it was necessary to bear in mind Mr. Rolland's evidence at page 57 in section 11 of volume II, regard should be had also to what he said at pages 82 to 83 and at pages 111 to 112. It had to be noted that the sheriff himself had not relied upon what had been described as Mr. Rolland's concession at page 57 of his evidence. The terms of clause 7 of the Minute of Agreement were complicated. Much of the questioning of witnesses at the proof unfortunately did not get to grips with the terms of that clause. As regards the implication of a term, it was the facts of this particular case which were critical. Counsel agreed that there was no authority to the effect that economic or financial evidence was necessary before a term could be implied on the basis of business efficacy. However, the basis on which it was alleged in this case that term should be implied was an economic one. Thus it would have been appropriate for such evidence to have been led.
[52] Turning to the respondents' claim for damages, it was submitted that the sheriff had no basis for holding that there had been loss of profits for either of the two periods involved. The case was not comparable to that of Dowling and Rutter v Abacus Frozen Foods Limited. Counsel then went on to seek to justify the alterations to findings in fact which he had proposed.
[53] Turning to the cross-appeal, counsel accepted the principles enunciated in Morrison's Associated Companies Limited v James Rome & Sons Limited. In this connection the respondents' reading of the pleadings was excessively narrow. It was accepted that there were no pleas in law stated for the appellants regarding contractual payments. However, there were sufficient averments to give notice that the appellants were seeking payment of contractual sums. At this point in the argument counsel sought a short adjournment to consider whether he should seek leave to amend by adding a plea in law relating to contractual payment. Thereafter he moved the court to allow amendment by the addition of a plea in law No. 8 for the appellants to the following effect:
"8. Separatim the pursuers being entitled to payment in respect of the unpaid monthly instalments from August 1999 until the date of determination, decree should be pronounced as craved."
There followed discussion as to whether this amendment should be allowed. The court decided that it was appropriate that it should be.
The decision
The general approach
[54] In this case, this court has been invited to disturb the
findings of the sheriff following upon the proof. That makes it necessary for us to recognise
the general approach which, in a situation such as that, this court ought to
take. It is right to point out that, in
the debate before us, there was no dispute over that matter. In Thomas
v Thomas and a series of
succeeding cases, the most recent of which is
"But the existence of these constraints does not absolve this court from its obligation as a court of appeal on matters of fact to reconsider the evidence led before the Lord Ordinary and to determine upon such reconsideration whether critical findings of fact, both primary and secondary, made by the Lord Ordinary were justified. ... Moreover, in so far as concerns the evaluative exercise of drawing, or declining to draw, factual inferences from primary facts, an appellate court should exercise due caution before reversing such an evaluation."
The proper interpretation of clause 7 of the Minute of Agreement
[55] It will be apparent from our narrative of the submissions made to us that the parties were in dispute concerning the proper interpretation of clause 7 of the Minute of Agreement. Having regard to the principle that any implied condition in a contract must not be inconsistent with its express provisions, it is necessary, at the outset, to reach a view upon the proper interpretation of that clause. The position of the appellants was that fair wear and tear would, in due course, reach such a degree that it amounted to "destruction and damage", within the meaning of the clause. While it is undoubtedly the case that clause 7 is not a model of lucidity, we are unable to accept that contention. It is provided in the opening sentence of the clause:
"The agent shall preserve the furniture, fixtures and fittings specified in the attached inventory from destruction and damage and make good, repair or restore the same, fair wear and tear excepted, ... ".
The appearance of the words "fair wear and tear excepted" in that sentence appears to us to militate against the appellants' contention. If it had been the intention of the draftsman of this clause that "fair wear and tear" could reach such a degree that it amounted to "destruction and damage", then the reference to "fair wear and tear" in that sentence would, we consider, have been inappropriate. Furthermore, we think that the appellants' interpretation is in conflict with the well-known categorisation to be found in Bell's Principles, paragraph 1254, where the learned author refers to the distinction between the two kinds of disrepair:
"One allied to injury or dilapidation, and arising from negligence or hard usage; the other from the inevitable and imperceptible tendency of all the works of man to decay and destruction by use."
In addition, we note that clause 7
relates only to the manner of the handling of "furniture, fixtures and fittings
specified in the attached inventory". The clause does not purport
to deal at all with, for example, decorative finishes in the properties
concerned, which were an important feature in the present case.
[56] In
these circumstances we conclude that the Minute of Agreement was in fact silent
upon responsibility for fair wear and tear in relation to furniture, fixtures,
fittings, decorative finishes and other features material to tenantability. Thus, as we see it, there were no express
conditions in the Minute of Agreement which would be in conflict with the term
which the sheriff decided should be implied in it.
The implied term
[57] We are happy to record that, in
the debate before us, there was no issue between the parties in relation to the
legal principles which have to be applied in relation to the implication of a
term in a contract. They were set out in
the majority judgment of the Privy Council in BP Refinery (Western Port) Pty
Limited v The President Etc. of the
Shire of Hastings, at pages 282-283.
In relation to the concept of "business efficacy" Lord President Hope,
as he then was, in Crawford v Bruce, at page 531 said:
"The concept of giving such
efficacy to the transaction as both parties must have intended it to have is of
wide application, as Lord McLaren said in Morton
v Muir Brothers (1970) 15 S.L.T.,
page 255:
'The conception of an
implied condition is one with which we are familiar in relation to contracts of
every description, and if we seek to trace such implied conditions to their
sources, it will be found that in almost every instance they are founded either
on universal custom or in the nature of the contract itself. If the condition is such that every
reasonable man, on the one part, would desire for his own protection to
stipulate for the condition, and that no reasonable man, on the other part,
would refuse to accede to it, then it is not unnatural that the condition
should be taken for granted in all contracts of the class without the necessity
of giving it formal expression.'"
In Rockcliff
Estates plc v Co-operative Wholesale
Society Limited, at page 594, Lord MacLean elaborated the requirements
in this way:
"The parties seeking such an
implication must aver that the contract is incapable of practicable performance
without the implied term, and that both parties would have agreed to the
inclusion of such an implied term when regard is had to the other express terms
of the contract. It follows, also, that
the terms cannot be implied that are contradictory of the express terms of the
contract. It is always a question of
construction of each contract whether a term can be implied, and it has further
to be borne in mind that it is more difficult to imply a term in a written
contract than in an oral one. If the
parties have simply made a bad bargain, at least in the view of one of them,
the court will not accede to a submission that a term should be implied in
order to remedy that position."
[58] The
sheriff deals with these principles among other matters in paragraphs 17-22 of
his Note. It was not submitted to us
that he had erred in law in any way in relation to the principles
themselves. The appellants' criticism of
the sheriff was concerning his application of them to the particular
circumstances of this case. It was also
common ground between parties that the onus of establishing the existence of an
implied term lay upon the party who sought to
establish its existence, in this case the respondents. One of the principal points made on behalf of
the appellants was that the sheriff had not been entitled to conclude that a
term should be implied in the Minute of Agreement on account of the lack of
what was described as financial or economic evidence. We are not persuaded that the existence of
such evidence is a sine qua non for
the establishment of an implied term. We
are unaware of any authority to that effect.
None was cited to us.
[59] The
sheriff's conclusion that a term was to be employed in the Minute of Agreement
in terms of finding-in-fact-and-law 2 is to be found in findings-in-fact
14-20. His reasoning in relation to
these matters appears in paragraph 17-22 of his Note. In particular, in paragraph 20, he
considers the issues relating to the implied term in detail. It is evident from what the sheriff there
says that his conclusion was substantially based upon the evidence of
Mr. Maguire, which evidence the sheriff found "particularly pertinent and
useful". Having carefully considered the
sheriff's findings and reasoning, we cannot conclude that his decision to hold
that the circumstances demanded the implication of the term upon which he
decided was plainly wrong. In the light
of the evidence to which he referred, we consider that he was quite entitled to
reach the conclusion that he did. Having
regard to the terms of the Minute of Agreement and the appellants' attitude
towards maintenance, as ultimately exemplified in the letter of
The issue of
material breach of the implied term
[60] The findings-in-fact made by the sheriff
in relation to the relevant matters are findings 21-33. In that section of his findings, the pursuer
concludes that in fact during the course of the operation of the Minute of
Agreement the appellants carried out no repairs or renewals at all. As a result of that, the level of the
respondents' bookings declined and their rental income was reduced. By about October 1999 the flats had
deteriorated to such an extent that they were below a tenantable standard for
holiday letting. It appears to us that
these findings, which we consider that the sheriff was entitled to make, fully
justify his conclusion in finding in fact and law 3 that the appellants were in
material breach of the implied term.
[61] During
the course of the appellants' submissions the point was made that the evidence
did not explain the significance of the star ratings accorded to the flats by
the Scottish Tourist Board. They were,
at the outset, rated with 3 stars, but, during the first year of the agreement,
the flats were downgraded from 3 to 2 stars.
In about June 1999 they were downgraded further from 2 stars to 1 star,
which was said to be a rating too low for the purposes of holiday letting. While it may be that the detailed criteria
applied by the Scottish Tourist Board in connection with categorisation of let
property was not the subject of evidence, we are satisfied that the evidence
did in general set forth the significance of the ratings. In any event, be that as it may, over the
period of the operation of the agreement the pursuers carried out no repairs or
renewals and, as is found in finding-in-fact 31, by about October 1999 the
flats had deteriorated below a tenantable standard for holiday letting. That state of affairs, in itself, appears to
us to justify the conclusion which the sheriff reached.
The date of
the respondents' acceptance of the appellants' repudiation
[62] In ground of appeal 2.4, the appellants
have raised a point concerning the alleged uncertainty of the date on which the
respondents accepted the appellants' repudiation of the agreement and rescinded
the contract. That ground of appeal was
developed in argument. In essence, the
point seemed to amount to the suggestion that the letter from the respondents'
solicitors to the appellants' solicitors, dated 7 December 1999, No.6/13
of process, did not indicate that any actual decision to rescind the contract
had been arrived at by the respondents, or that any such decision would be
implemented by them at a future specified time.
We consider that there is no substance whatever in this point. In the letter it is said:
"...we are advised that no
monies will be remitted to your client unless in exchange for the executed
agreement which your client has so far refused to return.
Our client's intention is to
remove all of your client's properties from their agency and remitting all
future council tax bills to his home as a result of his failure to maintain the
flats to a reasonable standard. This
letter is entirely without prejudice to our client's future rights and pleas."
It is quite clear to us that the terms of that letter
show that, as at the date of it, the respondents were holding themselves no
longer bound by the terms of the Minute of Agreement. In our view, that amounts to rescission by
them, in the face of a material breach of contract by the appellants. We consider that the sheriff was therefore
quite entitled to make finding-in-fact-and-law 5. Indeed, we note that in the cross-examination
of Mr. Rolland at page 19 of section 11 of vol.II of the Notes
of Evidence, he accepted that nothing could be clearer than that the
respondents were indicating that, so far as they were concerned, the Minute of
Agreement was at an end and that they were not going to be bound by their
obligations in terms of it.
The award of
damages to the respondents
[63] Before us there was considerable
discussion of the decision of the sheriff to award £12,500 to the defenders as
damages, reflected in finding-in-fact-and-law 10. It is clear from paragraphs 35 to 37 of
the sheriff's Note that the sum of £12,500 was made up of £4,000 in relation to
the period between February 1998 and October 1999 and £8,500 in relation to the
period from October 1999 to February 2001, the date on which the Minute of
Agreement expired. It is necessary to
recognise that in findings in fact 36 and 38 the sheriff held that the
respondents had suffered a loss of profits of an "undetermined amount" between
February 1998 and October 1999 and that, had the appellants maintained the
flats in an equivalent condition, the respondents would have earned profits of
an "undetermined amount" during the remaining period of the agreement. Against this background it was contended that
the sheriff should have declined to make any award in favour of the respondents
for either of the periods concerned, even on a nominal basis. It was submitted that there was no evidence
or, in any event, insufficient evidence that established, or was capable of
establishing, that any loss of profit had been suffered by the respondents
during either period. The sheriff's
reasoning in connection with the award which he made is to be found in
paragraph 37 of his Note. There he
observes that, with regard to the period between February 1998 and October
1999, no proper accounts or tax returns were produced and there was no report
from an accountant. What was presented
was a mass of material relating to a variety of properties, including those the subject of this litigation. The difficulties were even greater in
relation to the period from October 1999 to February 2001. During that period, no income was received
and no expenses were incurred by the respondents, because the contract had been
terminated. The sheriff was therefore
faced with a calculation based solely on estimates where the previous record
was subject to the difficulties indicated in relation to the first period. The sheriff goes on to observe that he
considered the evidential position in the present case to be similar to that in
Dowling and Rutter v Abacus Frozen Foods Limited, where a
"nominal award" of £5,000 would have been appropriate. However, he goes on:
"I think it appropriate to
make nominal awards under both heads in acknowledgement of the fact that it is
clear that there was some loss of actual profit in the period up to the
termination and that further profit would have been gained had the agreement
run its full course."
[64] While
we recognise the difficulty the sheriff faced in this part of the case, the
conclusion which we have reached is that his award ought to stand. What is clear is that there was put before
the sheriff a substantial amount of documentary material relating to the flats
which were the subject of this litigation, along with others, although a
coherent picture was not presented in the form of accounts or tax returns for
the earlier period. In addition to that,
the respondents did formulate their claims for loss in the schedule attached to
the outlined submissions which was put before the sheriff in writing. In these circumstances, while we take issue
with the sheriff's description of the awards which he made as "nominal", we do
not consider that it can be said that he was plainly wrong in making those
awards. The selection of an appropriate
award, if any, was very much a matter for him, in the light of such material as
had been put before him. In these
circumstances, we shall not interfere with the award which he made. Finally, in this connection, we should make
clear that we did not find the observations in the case of Dowling and Rutter v Abacus
Frozen Foods Limited of particular significance in the circumstances of the
present case. What was described as a
"nominal award" of £5,000 would have been made in that case; however, we consider that the
circumstances there were so different from those of the present case that that
observation is not of assistance. In the
business of awarding damages, the court must, in every case, proceed upon the
material available to it in the particular case before it.
The cross
appeal
[65] The cross appeal was focused upon the
decision of the sheriff to sustain the appellants' third and fourth
pleas-in-law, repelling the respondents' fourth plea-in-law, and granting
decree for the sum of £13,676.07, with interest. Two points were made,
first, there was no claim on record for damages in respect of a breach of the
respondents' obligations to make payments.
The appellants' sole case on record was that they were entitled to
damages flowing from the respondents' alleged material breach of contract on
Proposed
findings in fact tendered by the appellants
[66] As already narrated, during the course of
the hearing before us, a note of proposed findings in fact was set before the
court on behalf of the appellants.
Having regard to the views which we have formed, explained above,
particularly in relation to the sheriff's decision on the implied term, we do
not propose to give effect to those findings in fact, which are inconsistent
with the decision of the sheriff, which we uphold, concluding that there was an
implied term in the contract.
[67] In all
these circumstances, we shall refuse the appeal and adhere to the interlocutor
of the sheriff dated 11 May 2005, save that we shall recall that
interlocutor to the extent that it sustained the appellants' third and fourth
pleas-in-law, which fall to be repelled; however we shall sustain the
appellants' new eighth plea-in-law as a basis for the award which the sheriff
made in their favour.