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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Armlea Plc v. The Bank Of Scotland & Anor [2004] ScotCS 132 (04 June 2004)
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Cite as: [2004] ScotCS 132

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Armlea Plc v. The Bank Of Scotland & Anor [2004] ScotCS 132 (04 June 2004)

OUTER HOUSE, COURT OF SESSION

 

 

 

 

 

 

 

 

 

 

OPINION OF LORD MACKAY OF DRUMADOON

in the cause

ARNLEA PLC

Pursuers;

against

(FIRST) THE GOVERNOR AND COMPANY OF THE BANK OF SCOTLAND and

(SECOND) ROBERT EMMETT

Defenders:

 

________________

 

Pursuers: Howlin; Paull & Williamsons

First Defenders: Absent

Second Defender: Reid, Solicitor-Advocate; Maclay Murray & Spens

4 June 2004

Introduction

[1]     This is an action of reduction and interdict. The action arises out of a dispute between the pursuers and the second defender. The dispute relates to a call that the second defender has made under a guarantee granted in his favour by the first defenders. It is a dispute in relation to which the first defenders have adopted a neutral position.

[2]    
The summons in the action was signetted on 30 March 2004. On that date, the pursuer enrolled a motion for interim interdict in terms of the first conclusion of the summons. The first defenders had lodged a caveat. Before the motion was heard, solicitors acting for the first defenders were contacted by the Keeper of the Rolls. They informed the Keeper that the first defenders did not wish to oppose the granting of interim interdict. When the motion was heard on 30 March 2004, the second defender was neither present nor represented and interim interdict was pronounced.

[3]    
The action came before me on a motion at the instance of the second defender, seeking recall of the interim interdict that was pronounced on 30 March 2004. Although this motion was enrolled before calling, the second defender had helpfully lodged full written defences. Both parties had lodged productions. Additional productions were lodged during the hearing. The first defenders were not represented at the hearing. It is clear that they do not intend to play any part in these proceedings.

The dispute between the pursuers and the second defender

[4]    
The dispute between the pursuers and the second defender arises out of a contract they entered into on 10 September 2001. In terms of that contract, the second defender sold to the pursuers his whole ordinary shareholding in a company known as BSW Limited. It was agreed between the pursuers and the second defender that the consideration for that sale would be payable in two parts. Firstly, there was to be a cash payment of £650,000, which the pursuers paid in September 2001. Secondly the pursuers agreed to issue to the second defender Variable Rate Guaranteed Loan Notes 2002/ 2003/ 2004/ 2005 to the total value of £1,254,000 ('the Notes'). The Notes were constituted by and issued in terms of a Loan Note Instrument, which was executed by the pursuers on 10 September 2001('the Loan Note Instrument').

[5]    
The Notes provided that the pursuers would pay interest at specified rates and on specified dates to the second defender, as long as principal sums were outstanding to the second defender under the Notes. The principal sums, covered by the Notes, totalled £1,264,000 and were repayable to the second defender in four annual instalments of £313,500.

[6]    
The pursuers' obligations to the second defender in terms of the Notes were guaranteed by the first defenders. On 6 September 2001, the first defenders granted a written guarantee in favour of the second defender ('the Guarantee'). The Guarantee bears to have been granted in favour of 'the Noteholders', who are defined in the Notes as being the second defender. On 6 September 2001, the pursuers, for their part, granted a counter indemnity in favour of the first defenders ('the Counter Indemnity'), in respect of the financial liabilities the first defenders might incur under the Guarantee.

[7]    
It is agreed between the pursuers and the second defender that in November 2002, and again in November 2003, the pursuers repaid the second defender the sum of £313,500, in respect of two instalments of the principal sums covered by the Notes.

[8]    
It is also a matter of agreement between the pursuers and the second defender that between 10 December 2001 and 10 December 2003 there were a number of occasions on which the pursuers made interest payments to the second defender, which were for lesser sums and/or were paid on later dates than the Loan Note Instrument and the Notes provided for. It is unnecessary that I detail the discrepancies between what should have happened and what did in fact occur. Those discrepancies were vouched in one of the productions lodged on behalf of the pursuers. They were set out in some detail in the written defences and they are, as I have indicated, a matter of agreement. For the sake of completeness I should also record that it is also a matter of agreement that on two occasions, in December 2002 and March 2003, the amounts of interest paid by the pursuers were in excess of those due to the second defender.

[9]    
It appears that by January 2003 the second defender became aware that the pursuers had failed to pay interest in the correct amounts and on the correct dates. By letter dated 23 January 2004, the second defender gave notice to the pursuers that he considered them to be in 'Payment Default', as defined in the Notes. In respect of that 'Payment Default', the second defender sought immediate payment of the whole of the principal sums and interest outstanding under the Notes.

[10]    
When the pursuers refused to meet that demand for payment, the second defender wrote to the first defenders. He first did so on 27 February 2004. He maintains that by that letter, and in any event, by a subsequent letter of 22 March 2004, he made a call under the Guarantee, in respect of the sums he had unsuccessfully sought from the pursuers. The making of a call under the Guarantee has led to the raising of the present proceedings.

[11]    
On 5 March 2004, the pursuers paid off the arrears of interest. They have refused, however, to pay the outstanding balance of the principal sums covered by the Notes. That remains their position.

Remedies sought by pursuers

[12]    
The conclusions of the summons are in the following terms:

"1. For interdict restraining the first-named defender from making payment to the second-named defender in terms of a written demand made on or about 27th February 2004 by the second-named defender to the first-named defender, being a demand purportedly for payment in terms of a written guarantee dated 6th September 2001 granted by the first-named defender to the second-named defender with respect to a loan note instrument created by the pursuers on 10th September 2001 and entitled "EMMETT LOAN NOTE INSTRUMENT/ constituting £1,254,000 / principal of Variable Rate Guaranteed Loan Notes / 2002/ 2003/ 2004/ 2005".

2. For production and reduction of the said demand; and for interdict ad interim;

3. For the expenses of this action."

The relevant documents

[13]    
It is appropriate that I set out certain parts of the documents that were referred to during the hearing before me. The Loan Note Instrument contains the following provisions:

"1 DEFINITIONS

1.1 In these presents:-

1.1.1 ...

"Bank" means the Governor and Company of the Bank of Scotland";
...
"Instalment" means one of four instalments of £313,500 each".

...

"Notes" means the principal amount of £1,254,000 Variable Rate Guaranteed Loan Notes 2002/2003/2004/2005 of £100 each of (Arnlea plc) or (as the case may be) the number thereof for the time being issued and outstanding.

...

4 GUARANTEE
The repayment of the Notes to the Noteholders shall be guaranteed by the Bank in the form set out in Schedule 3 hereto.
...

6 INCORPORATION OF CONDITIONS

The Notes shall be held subject to and with the benefit of the Conditions and the provisions set out in Schedules 1 and 2. The Conditions and the provisions set out in Schedules 1 and 2 shall be binding on the Company and the Noteholders ..."

....

SCHEDULE 1

CONDITIONS

1 RANKING AND DEFINITIONS

...

1.3 In these Conditions except as otherwise provided:-

1.3.1 ...
"Interest Payment Dates" mean(s) 10th December, 10th March, 10th June and 10th September in each year up to and including the date on which the Notes are fully redeemed.
"Interest Period" means a twelve month period commencing on the date hereof or an anniversary thereof, as applicable, in one year and expiring on 09th September (being the day before an anniversary of the date hereof) in the following year;
...
"Payment Default" means the failure of the Company to make payment of any principal monies or interest accrued thereon on the due date for repayment thereof (excluding any sums which the Company is entitled to withhold or deduct in accordance with any provision of this Instrument ... or any applicable law in any jurisdiction) where no remedy is agreed between the Company and the Noteholders within a period of one month from the due date for payment.

"the Rate" means interest at LIBOR for the Interest Period in question less 0.5%.

"Redemption Dates" means 30 November 2002, 30 November 2003, 30 November 2004 and 30 November 2005.

"Redemption Notice" means a notice in the form or substantially in the form attached hereto giving notice to the Company of the exercise of redemption rights by a Noteholder.

....

2 PAYMENT OF INTEREST AND PAYMENTS GENERALLY

2.1.1 So long as any principal moneys shall be outstanding on any Notes the Company shall pay to the holders of the Notes interest on the principal moneys outstanding on the Notes held by them in arrears on the Interest Payment Dates in respect of each Interest Period at the Rate. ....

....

3 REDEMPTION

3.1 Redemption by the Noteholder.

3.1.1 Any Noteholder may by giving not less than twenty-eight days prior written notice to the Company (to be given by sending his Certificate together with the Redemption Notice duly completed or on any other manner which the Directors of the Company may approve) require the Company on the due date for redemption of the relevant Instalment of the Notes or any Redemption Date thereafter to repay at par all or any part ... of the relevant instalment of the Notes of which such Noteholder is the registered holder

....

4 EVENTS OF DEFAULT

4.1 ... [T]he principal moneys outstanding on the Notes registered in the name of the Noteholders ... upon written notice by such Noteholder to the Company whilst the same is continuing shall become immediately repayable at par together with interest accrued thereon at the Rate ... on occurrence of any of the following events ...:-

4.1.1 if Payment Default is made by the Company;

....."

[14]    
The Guarantee granted by the first defenders on 6 September 2001 is in the following terms:

"1. We, the Governor and Company of the Bank of Scotland incorporated by Act of Parliament and having our head office at The Mound, Edinburgh, EH1 1YZ (hereinafter called the Guarantor") hereby irrevocably guarantee, subject to the terms herein contained, the payment to the Noteholders (as defined in the Instrument referred to below) of the principal sum due by Arnlea plc (Registered Number SC217919) ("the Company") in terms of the instrument dated on or about this date entered into by the Company ("the Instrument") constituting £1,254,000 of Emmett variable rate guaranteed loan notes 2002, 2003, 2004 and 2005 of the Company ("the Notes") together with any amount of interest outstanding from time to time in respect of the principal sum in accordance with the terms of the Instrument subject to the proviso to this paragraph 1 as set out below. PROVIDED that, notwithstanding any other provisions of this Guarantee, the maximum aggregate liability of the Guarantor under this Guarantee is limited to £1,254,000 in respect of principal plus £200,640 in respect of accrued interest.

2. If the Company fails to make payment on a due date in accordance with the Instrument of the principal sum guaranteed in terms of this Guarantee or any part or instalment thereof, the Noteholder (as defined in the Instrument) in respect of whom such default occurs shall be entitled, to demand payment from the Guarantor, stating the amount of principal due and payable to him or them, within six months of the date of such non-payment and stating that such default has occurred. Any demand properly served by a Noteholder under this Guarantee shall be paid by the Guarantor in accordance with the terms of this Guarantee within twenty-eight days of the date of such demand, failing which interest shall run (before as well as after judgement) on the amount outstanding at the rate equal to the aggregate of 4% and the base rate of the Guarantor from time to time. Any claim under this Guarantee must be received by the Guarantor not later than the expiry of such six month period failing which this Guarantee shall be null and void in respect of the amount of principal and interest for the time being due to the Noteholder who has failed to timeously serve the demand under this Guarantee.
No notice or demand given by any Noteholder shall be deemed to be a notice or demand given by or on behalf of any other Noteholder.

3. Subject to the provisions of paragraphs 2 and 7 of this Guarantee, no failure or delay by any Noteholder in exercising any right, power or privilege hereunder shall operate as a waiver thereof.

4. The undertakings contained in this Guarantee are continuing undertakings and (without prejudice to the generality of the foregoing) shall remain in force notwithstanding:-
4.1 that any obligation of the Company in respect of the Notes may be void or unenforceable; or
4.2 the liquidation or dissolution of the Company or any appointment of any receiver or administrator or judicial factor of all or any part of the assets of the Company.

5. Subject to the provisions of paragraph 1 above and of paragraphs 6, 7 and 8 below, the liability of the Guarantor shall continue throughout the duration of the Guarantee as if it were the primary and principal debtor for the principal sum of up to £1,254,000 and interest accrued thereon payable under the Notes and the Guarantor shall be fully liable and its liabilities shall not be released, impaired, lessened, discharged or in any way affected by reason of any invalidity or irregularity or defect in or the unenforceability against the Company of any of the provisions of the Instrument or by reason of any time or other compounding or indulgence or of any relief which the Noteholders or any of them may grant to the Company or by any forbearance whether as to payment or time or otherwise nor by any variation, compromise or release of the obligations of the Company or by any other dealing or thing including (without limitation) circumstances affecting or preventing the recovery of any amount under the Notes which, but for this provision, might operate to exonerate or discharge the Guarantor from its obligations under this Guarantee.

....

7. No demand under this Guarantee shall be valid or result in any liability on the part of the Guarantor hereunder unless it is made and received by the Guarantor, in accordance with the provisions of this Guarantee, on or before 31 December 2006.

....

10.1 If the Company notifies the Guarantor in writing that it is entitled to exercise a right of set off against the Noteholders, and such notice sets out the amount which is due by the Noteholders under Clause 6.6.1 of the share sale agreement between Robert Emmett, Christine Emmett, Owen Walmsley and Arnlea PLC dated on or around the date hereof (the "Share Sale Agreement") or the amount which is claimed from the Noteholders under Clause 6.6.4 of the Share Sale Agreement, any subsequent demand for payment from the Guarantor by a Noteholder will be subject to the remaining provisions of this paragraph 10 and the obligation of the Guarantor to make payment to a Noteholder will be qualified accordingly.

10.2 The Company will serve a copy of any notice pursuant to paragraph 10.1 on each Noteholder and supply the Noteholders with all necessary papers required to set out a joint account in the names of the Company and the Noteholders with all instructions to the relevant bank to require joint signatures by or on behalf of the Company and the Noteholders.

10.3 Where the Guarantor is in receipt of a notice pursuant to paragraph 10.1 and is provided with the account number and bank sort code of a joint account of the Company and the Noteholders then, upon any subsequent demand for payment by any Noteholder pursuant to this Guarantee, the Guarantor will pay the amount specified in the notice into the joint account and such amount will be distributed to the Company and the Noteholders in accordance with Clause 6.9 of the Share Sale Agreement. The Guarantor will pay to the relevant Noteholder the balance of the amount demanded by such Noteholder and in doing so the Guarantor will satisfy its payment obligation in full. If the Guarantor receives a notice pursuant to paragraph 10.1 but not bank account details it may ignore the notice and pay the full amount demanded by the Noteholder to the Noteholder.

10.4 If the Guarantor receives a notice pursuant to paragraph 10.1 and an affidavit sworn by a director of the Company to the effect that the Noteholders were served with a copy of the notice at least fourteen days before the date of the affidavit and had failed to return the papers required to establish a joint account, then, upon any subsequent demand for payment by a Noteholder pursuant to this guarantee, the Guarantor will only be required to pay such sum as is contained in the demand less the amount specified in the notice pursuant to sub-clause 10.1 and in doing so the Guarantor will satisfy its payment obligation in full.

10.5 Subject to the provisions of this paragraph 10, but notwithstanding anything else to the contrary in this Instrument, it is hereby confirmed that this Guarantee constitutes the direct obligation of the Guarantor to make payment in accordance with the terms of this Guarantee without reference to the Company and without examination of the liability of the Company in respect of any Note.

....

14. Any notice (including a written demand for payment) to the Guarantor may be given or sent by post in a prepaid letter addressed to the Guarantor at the address specified in paragraph 1 above or such other address as the Guarantor may from time to time notify to the Noteholders but, notwithstanding anything to the contrary herein, no notice shall be effective unless and until actually received by the Guarantor."

[15]     The Counter Indemnity granted in favour of the first defenders was in the following terms:

"We Arnlea PLC, incorporated under the Companies Acts (Registered Number SC217919) and having our registered office at Investment House, 6 Union Row, Aberdeen, AB10 1DQ, CONSIDERING that you have at our request agreed to issue a guarantee to the Noteholders as designed in the instrument (the 'Instrument') dated on or around this date entered into by Arnlea PLC in respect of the payment by us of the sum of up to £1,254,000 together with interest accrued thereon in accordance with the provisions of the Instrument (such guarantee being hereinafter referred to as "the Guarantee", which expression shall include any extension, renewal, amendment or increase of the Guarantee whatsoever, approved in writing by us) THEREFORE WE:

1. hereby agree to keep you indemnified against all actions, proceedings, liabilities, claims, damages, costs and expenses which may be raised against you or incurred by you in consequence of your having issued the Guarantee or in connection therewith in any manner;

2. irrevocably authorise you to make any payments appearing on their face to be proper (but without you being under any obligation to make enquiry) and comply with any demands appearing on their face to be proper (but without you being under any obligation to make enquiry) which may be claimed from or made upon you by any of the Noteholders under or purporting to be under the Guarantee without any reference to or further authority from us and agree that any payment which you shall make in response to any such demand shall be binding upon us and shall be accepted by us as conclusive evidence that you are liable to make such payment or comply with such demand;

3. irrevocably undertake to pay to you on demand an amount equal to each amount demanded from or paid by you under the Guarantee in accordance with Clause 2 hereof provided always that without prejudice to the provisions of Clause 1 hereof, our maximum aggregate liability in respect of principal and interest under Clause 2 of this counter indemnity is limited to £1,254,000 in respect of principal plus £200,640 in respect of accrued interest;

4. irrevocably authorise you at your discretion to debit any of our accounts with yourselves with sums due and payable by us hereunder;

5. agree that this counter indemnity shall be a continuing security remaining in force until all liabilities, claims, damages, costs and expenses incurred or sustained by you under the Guarantee on or before 31 December 2006 shall have been paid or discharged in full; and

6. agree that this counter indemnity shall be governed by and construed in accordance with Scots law."

[16]    
On 23 January 2004 the second defender wrote to the pursuers in the following terms:

"Dear Sirs

The Emmett Variable Rate Loan Notes 2002/ 2003/ 2004/ 2005

In the sum of £1,254,000 issued by Arnlea Plc to Robert Emmett on 10th September 2001 ("the Emmett Loan Notes")

I hereby give you written notice pursuant to condition 4.1.1 of the Emmett Loan Notes that I require immediate repayment of the principal moneys in the sum of £627,700.00 and all interest accrued thereon. To the 21st January 2004 I calculate arrears of accrued interest to be £4,981.60.

I enclose a schedule of the LIBOR rates for the relevant period. It will be recalled that the interest rate applicable to the Loan Notes is LIBOR for the 'interest period' in question less 0.5%.

As the schedule demonstrates a number of interest payments have been under paid due to the wrong interest rate being applied. A Payment Default has therefore occurred pursuant to the Emmett Loan Notes. As a consequence of this the principal and interest become immediately payable in their entirety.

The payment of principal and interest referred to above should be made forthwith in the following account: (Details of which were provided)"

That was the first occasion on which the second defender had ever raised with the pursuers any question as to the amounts or the dates of payment of the interest payments due and payable to the second defender, in terms of the Notes.

[17]    
On 27 February 2004, Eaton Smith, Solicitors, acting on behalf of the second defender, wrote to the first defenders in the following terms:

"Dear Sirs

Arnlea plc

We are acting for Mr Emmett of Meetings View, 11 Holme Farm Close, Wray, Lancaster, LA2 8QB in relation to the Emmett Loan Note Instrument dated the 10th September 2001 supported by the Bank of Scotland Guarantee dated the 6th September 2001. Copies of both documents are enclosed.

We also enclose for your information a copy of a letter dispatched by our client to the Directors of Arnlea plc on the 23rd January 2004 together with attached Libor rate schedule. This letter requires payment of the principal sum and interest. No payments have been made by Arnlea plc.

The purpose of this letter therefore is to advise you that if we do not receive from Arnlea plc payment of the full amount due to our client within 7 days of the date of this letter our client will look to you for payment of the sum referred to in the letter of 23rd January - £627,700.00 plus accrued interest to the date of payment pursuant to paragraph 2 of the Guarantee. Please acknowledge receipt of this letter."

[18]    
On 9 March 2004, Eaton Smith, the second defender's solicitors, wrote to the first defenders, giving details of the principal sum and interest which the second defender was claiming under the Guarantee.

[19]    
On 10 March 2004, Paull and Williamsons, the solicitors acting on behalf of the pursuers, wrote to Eaton Smith inviting them to "retract (their) clients' call under the guarantee".

[20]    
On 15 March 2004 the first defenders wrote to Messrs Eaton Smith in the following terms:

" Arnlea plc

I refer to your letter of 9 March. As you know from our subsequent telephone conversation I was passing the file to our legal agents for review. I have now been advised that the call under the Bank's guarantee should now be met on the grounds of the mis-calculation of the interest.

To assist with the practicalities here it would be of benefit to all if you agreed the figure with Arnlea plc prior to submitting the documented claim to me."

[21]     On 16 March 2004, Eaton Smith sent a fax to Paull & Williamson, enclosing a schedule of the amount which they maintained that the first defenders were due to pay in terms of the second defender's call under the Guarantee. On 22 March 2004 Eaton Smith wrote a letter to the first defenders intimating that they had not received any response from the pursuers or their solicitors and seeking confirmation that the first defenders would make payment to the second defenders.

[22]    
On 22 March 2004, Eaton Smith sent a fax to the first defenders in the following terms:-

" We refer to recent correspondence.

We have had no response from Arnlea or its solicitors in respect of the calculations of the amount due.

In these circumstances, and given that we are merely talking about simple arithmetic, can you please confirm that payment will be made forthwith in the amount referred to in our letter of 9 March 2004, not forgetting the accumulating interest at the daily rate of £56.365 making a total of £627,732.68 to 23 March."

Submissions on behalf of second defender

[23]    
In seeking the recall of the interim interdict granted on 30 March 2004, the principal submission of the solicitor advocate appearing for the second defender was that it was clear from the pursuers' pleadings and the documents that had been lodged as productions that the pursuers have no prima facie case warranting either the granting of interdict or the reduction of the written demand dated 27 February 2004. It was contended that, as the pursuers accepted that certain interest payments had been of incorrect amounts and /or had been made on later dates than they should have been, it could not be disputed that the pursuers had been in 'Payment Default', as that term is defined in the Conditions set out in Schedule 1 to the Loan Note Instrument and incorporated into the Notes. Such 'Payment Default' had entitled the second defender to seek immediate repayment of the principal sums outstanding in terms of the Notes. Such a demand had been made on the pursuers, in the letter dated 23 January 2004. It had not been met. That failure had entitled the second defender to make a call under the Guarantee, which was of the nature of a demand guarantee. The second defender had done so. Having regard to the nature and terms of the Guarantee, the first defenders were obliged to meet the call made on them by the second defender, unless either they or the pursuers were in a position to aver and prove that there had been fraud on the part of the second defender in making his call upon the first defenders. The first defenders were prepared to meet the call that had been made under the Guarantee. No allegation of fraud on the part of the second defender was made by the pursuers. In the circumstances of the present case, what was described as the 'fraud exception' rule applied. In the absence of averments that there had been fraud on the part of the second defender in making his call under the Guarantee, the first defenders were not entitled, let alone required, to investigate the validity or accuracy of the call which the second defender had made. Nor, in the absence of any averments of fraud, were the pursuers entitled to interdict against the first defenders paying up under the Guarantee. Reference was made to Edward Owen Limited v Barclays Bank International Limited and another [1978] Q.B. 159, per Lord Denning MR at pp 169 - 172, Centri-Force Engineering Limited v Bank of Scotland 1993 S.L.T. 190, per Lord Abernethy at pp.192H - 193F, and The Royal Bank of Scotland plc v Holmes 1999 SLT 563, per Lord Macfadyen at p.569C - J. It is important to note, in passing, that whilst the first two of those cases involved transactions in international commerce, that was not the position in The Royal Bank of Scotland plc v Holmes.

[24]    
On an esto basis it was argued on behalf of the second defender that even if the Court took the view that the 'fraud exception' rule did not apply in the circumstances of the present case, then at best the pursuers' case on the merits could be described as being weak. It was admitted by the pursuers that some of the interest payments paid to the second defender had been late. Others had been less than they ought to have been. It was clear that there had been a series of 'Payment Defaults'. There was no provision in the Notes that allowed the pursuers to clear any arrears of interest and thereby avoid having to repay, immediately, the outstanding principal sums, in accordance with the provisions of Condition 4 of the Notes. The second defender had not waived his right to enforce the remedies available to him in the event of 'Payment Default'.

[25]    
The solicitor advocate for the second defender also addressed an argument foreshadowed in the summons to the effect that it was open to the pursuers to set off against the arrears of interest their claim to seek repayment of the sum of £313,500, which they alleged had been paid by them erroneously in November 2003. The pursuers' claim for repayment was founded on the assertion that the Redemption Notice issued by the second defender, which had sought repayment of £313,500 on 30 November 2003, had been invalid, because of a drafting error and because it had not been served on the pursuers by the correct date. On the basis of that claim for repayment, the pursuers appeared to be contending that there had not been any 'Payment Default' in existence whether on 23 January 2004 or 27 February 2004 or indeed on 22 March 2004. It was argued, on behalf of the second defender, that the pursuers had no right to seek repayment of the sum of £313,500 paid by them in November 2003 nor any right to set off such a claim against the arrears of interest that had been outstanding to the second defender at that time or subsequently.

[26]    
The comparative strengths of the parties' cases were factors which supported the view that the balance of convenience favoured recall of the interim interdict. The prima facie case on behalf of the second defender was stronger than that of the pursuers, for the reasons set out in the written defences and developed during submissions.

Submissions on behalf of the pursuers

[27]    
In responding to those submissions, counsel for the pursuers argued (i) that no proper demand had been made under the Guarantee, (ii) that in seeking to interdict the first defenders from paying up under the Guarantee, the pursuers do not require to aver fraud, because the Guarantee is not in the nature of a demand guarantee, and (iii) that, even if the Guarantee is a demand guarantee, it was only the first defenders, as the guarantors, who were restricted to averring fraud on the part of the second defender, if they wished to resist making payment under the Guarantee. In other words the 'fraud exception' rule did not apply to the pursuers, if they wished to prevent the second defender from making a call under the Guarantee. Counsel accepted that if those submissions were to be rejected by the Court, then the pursuers would have no prima facie case for seeking interdict and reduction.

[28]    
On the basis that he was correct in submitting that the 'fraud exception' rule only applied to the first defenders, counsel for the pursuers also argued (a) that the second defender was personally barred from founding on 'Payment Default' arising out of the incorrect and late payments of interest and (b) that, in any event, the pursuers had the right to reclaim payment of the sum of £313,500 they had paid in November 2003 and the right to set off that sum against any arrears of interest that they had been due to the second defender.

[29]    
Counsel argued that it was an implied term of the contract between the pursuers and the second defender that the pursuers had a right to seek repayment of any sum they had paid to the second defender, when they had not been under any contractual requirement to do so. The pursuers' claim for repayment arose out of the same contract as the interest payments due to the second defender. That entitled the pursuers to exercise their right of set-off. Standing the fact that the pursuers right to seek repayment had existed when the second defender had submitted his demand of 23 January 2004, as at that date the pursuers had been entitled to withhold payment to the second defender of any arrears of interest. That had remained the position up to and beyond the date on which the arrears of interest had been settled.

Discussion

[30]    
In dealing with this motion for recall of interim interdict, the first issue I require to consider is whether the pursuers have demonstrated that they have a prima facie case for seeking the remedies they do. I do so, of course, against the background that the pursuers do not dispute that certain of the interest payments they made to the second defender were paid late and/or in the wrong amounts. In addressing the issue of whether the pursuers have demonstrated that they have a prima facie case, a number of questions arise.

Whether the second defender has made a demand under the Guarantee?

[31]    
Counsel for the pursuers submitted that it had not been established that the second defender had made a demand under the Guarantee. Any such demand required to be peremptory and unconditional. Reference was made to Re a company [1985] BCLC 37. In considering that submission, it requires to be noted that the terms of both Conclusions are framed on the basis a written demand has been made. Both the terms of Conclusion 1 and the Condescendence refer to the letter of 24 February 2004 as being a 'demand purportedly for payment'. But that, of itself, does not establish that a valid call under the Guarantee has been made.

[32]    
It is certainly open to argument that the terms of the letter dated 27 February 2004, when looked at in isolation, may not constitute a definite call under the Guarantee granted by the first defenders, as opposed to written notice that such a call may be made. However, in my opinion, that letter does not fall be looked at isolation. It was not the only written notice that the first defenders received from the second defender. It is, in my opinion, also appropriate to have regard to the terms of certain other items of correspondence, which have either been lodged in process or are referred to in those productions that are before the Court. Such productions were, of course, freely referred to during the course of the submissions before me.

[33]    
It is clear from such letters that (a) within 7 days of 27 February 2004, the second defender did not receive full payment from the pursuers of the sum referred to in the letter of 23 January 2004, together with accrued interest, (b) by letter dated 9 March 2004 the second defender advised the first defenders of the amount of which he sought payment, under the terms of the Guarantee, and (c) by letter dated 15 March 2004 the first defenders advised the second defender that they would meet the call that had been made on them under the Guarantee. The fax of 22 March 2004 provided the first defenders of further written notice of the extent of the call being made by the second defender. In my opinion, it is perfectly clear from the correspondence lodged that from shortly after the second defender sent the letter of 27 February 2004, all parties involved proceeded on the clear understanding that the second defender had made a call upon the first defenders, under the terms the Guarantee, the existence and extent of which were confirmed by the letter of 9 March 2004, acknowledged by the first defenders in their letter of 15 March 2004 and reconfirmed in the fax dated 22 March 2004.

[34]    
Whilst the pursuers might have been disputing whether or not the second defender had been entitled to make such a call, the letters of their solicitors, dated 10 March 2004 and 26 March 2004, proceed on the clear basis that a call has been made. Indeed in the earlier of the two letters, the solicitors acting for the pursuers asked the second defender's solicitors to 'retract (their) client's call under the Guarantee'. On the basis of the documentation currently available, it would, in my opinion, be quite unrealistic to proceed on any other basis than that the second defender has made a call under the Guarantee, with the faxed letter of 22 March 2004 giving the first defenders clear written notice that a call had been made and of the sum in respect of which payment was being sought.

Is the Guarantee a 'demand guarantee'?

[35]    
Wallace and McNeil on Banking Law (10th Edition) contains the following passage at pp.78-79 :-

"Banker as surety

In recent years banks have been called upon to provide bonds and guarantees in connection with contracts undertaken by their customers both at home and abroad. There are two basic types - default bonds and demand guarantees. A default bond is regarded as a conditional undertaking obliging the guarantor to make good any loss suffered by the buyer as a result of the failure of the seller to complete the contract in accordance with its terms and conditions. Before the guarantor pays, there must be an unremedied breach of contract by the seller and the buyer must prove his loss. Demand guarantees on the other hand entitle a buyer to payment on demand without proof of loss through breach of contract or other default. Such guarantees are either guarantees payable "on first demand" or provision is made for the guarantees to be payable on demand provided that stated conditions acceptable to both parties and contained in the guarantees are met. For such guarantees to be in an acceptable form from the bank's point of view the maximum amount of the bank's liability should be stated or be capable of being readily established from the terms of the document. Similarly, the maximum duration of the bank's liability should be fixed or be capable of being determined by reasonable notice. The terms should require the bank to pay on the simple demand of the beneficiary or on production of some clearly stated piece of evidence.

If a demand guarantee is called, the bank must pay the amount of the guarantee forthwith whether or not the seller is in default under the contract. A bank has no duty imposed on it to inquire whether or not the seller has failed to fulfil his obligations under the contract and is in no way concerned with any contractual dispute which might have arisen between the buyer and the seller. Only the contracting parties are bound by the terms of the basic contract; the commitments of the guarantor and the seller are independent. Only in exceptional cases will the courts interfere with the machinery of irrevocable obligations assumed by banks and the only possible exception would be in a case where the bank had notice of clear fraud on the part of the buyer. The position of the seller is that he has virtually no power to prevent payment by a bank under a 'first demand' guarantee and he will ultimately become liable for this payment himself because of the counter-indemnity required from him by the bank when it agreed to undertake the obligation for him."

[36]    
In my opinion, the Guarantee in the present case is a demand guarantee, sometimes referred to as a 'first demand guarantee'. That is clear from the terms of the Guarantee itself. I refer, in particular, to the provisions of paragraphs 1, 2, 5, 9 and 10.5 of the Guarantee, which I have previously quoted. The fact that paragraph 1 of the Guarantee does not contain the words 'unconditionally' or 'on first demand' does not persuade me to the contrary conclusion. I agree with the submission of the solicitor advocate for the second defender that the terms of paragraph 10.5 are crucial. Once the pursuers have failed to make payment on a due date of the principal sum (or any part or instalment thereof), the second defender is entitled to demand payment of such sum from the first defenders. When that occurs, the first defenders are under a direct obligation to pay the sum demanded to the second defender, without reference to the pursuers and without examination of the liability of the pursuers to the second defender under the Notes. The terms of the Guarantee also make it clear that the written guarantee, the first defenders gave to that effect, is irrevocable.

[37]    
In my opinion, such a construction of the Guarantee is entirely consistent with the surroundings circumstances, in which the Guarantee was granted by the first defenders, including (i) the nature of the contract between the pursuers and the second defender, (ii) the terms of the Loan Note Instrument, some of which were incorporated into the Notes themselves, and (iii) the terms of the Counter Indemnity granted by the pursuers to the first defenders. The terms of Paragraph 2 of the Counter Indemnity are, in particular, entirely consistent with the view that the Guarantee is a demand guarantee, under which the first defenders are bound to pay the second defender on his simple demand to them.

[38]    
The position in the present action is different from that in The Royal Bank of Scotland v Dinwoodie 1987 SLT 82. In that case the pursuers had granted a performance bond, in respect of construction works being carried out by a corporate customer, who had entered into a contract with a third party. The corporate customer went into liquidation and the pursuers paid up to the third party the sum specified in the performance bond as being their maximum liability. When the pursuers sought to recover that sum from guarantors of their customer's liabilities to the Bank, their action was opposed on the ground that the performance bond had not been a demand guarantee. That was because there was no provision in either the performance bond granted by the pursuers or the counter indemnity in their favour from their corporate customer, that a demand by the beneficiaries under the performance bond, for payment of a specific sum, should have been treated by the pursuers in that action as being conclusive evidence that the sum was due by their customer. In such circumstances, before making any payment to the third party, under the performance bond, the pursuers had required to be satisfied that the third party had sustained loss and damage and as to the quantification of the damages involved. In my opinion, that is not something that the first defenders required to do in the present case, once they were in receipt of a call from the second defender under the Guarantee.

If the Guarantee is a' demand guarantee', do the pursuers require to aver and prove fraud against the first defenders, before they can obtain the decrees of interdict and reduction that they seek?

[39]    
This question proceeds on the assumption that the Guarantee is a demand guarantee. On that basis, counsel for the pursuers and the solicitor advocate for the second defender were agreed that the only basis on which the first defenders could themselves have avoided making payment to the second defender would have been for them to have established fraud on the part of the second defender, in the making of his call under the Guarantee. Their agreement to that effect was based on the line of English authority to which I have already referred.

[40]    
Counsel for the pursuers argued, however, that in seeking to interdict the first defenders from making payment under the Guarantee, the pursuers were not similarly restricted to pleading fraud on the part of the second defender. Counsel argued that whilst the first defenders may not be entitled to enquire into the merits of any dispute between the pursuers and the second defender arising out of the Notes, the pursuers themselves were under no such restriction. Counsel submitted that it was open to the pursuers to seek to prevent the first defenders from meeting the second defender's call under the Guarantee on grounds relating to the merits of the dispute between the second defender and themselves. Two such grounds were available in the circumstances of the present case, firstly that the second defender is personally barred from making a call under the Guarantee and secondly that the pursuers had a right to set-off their claim to seek repayment of the sum of £315,000 against the arrears of interest that had admittedly accrued. These are grounds that I consider later in this Opinion.

[41]    
No authority was cited by counsel for the pursuers for the proposition that whilst the first defenders would have been subject to the 'fraud exception' rule, had they sought to resist the call under the Guarantee, the pursuers are not so bound. In my opinion, such a proposition is difficult to reconcile with the terms of the Guarantee, the Notes, the Loan Note Instrument and the Counter Indemnity, which I have quoted. Significantly, it is it difficult to reconcile with highly persuasive reasoning justifying the 'fraud exception' rule that is to be found in the English authorities placed before me. Moreover, the proposition finds no support in the passage from Wallace and McNeill to which I have referred. On the contrary, it is inconsistent with the views expressed in an edition of that well established work, which was edited by Donald Caskie, a lawyer with extensive practical experience of the banking law.

[42]    
It is also difficult to reconcile with what was said by Lord Macfadyen in The Royal Bank of Scotland plc v Holmes, at p.569C - D, where he talked about the fraud exception being deployed by a bank's customer in support of an application for interdict to prevent the bank from meeting a demand made by the beneficiary under a guarantee, where the bank's customer was in a position to satisfy the court that the beneficiary was acting fraudulently in making the claim.

[43]    
If the pursuers' argument were to be correct, it would seriously frustrate the whole purpose of demand guarantees and performance bonds. In amplification of that view, I refer by way of example to a short passage from the Judgment of Potter L.J. in Comdel Commodities Ltd. v Siporex Trade S.A. [1997] 1 Lloyds Rep 424 at p.431, which is also relevant:-

"Comdel submit that they have a strong case on the merits in their claim against Siporex. The substantive issue between the parties is whether, as Siporex contends, Siporex are entitled to keep the full amount paid under the performance bonds regardless of the amount of damage which Siporex suffered as a result of Comdel's breach of the original contracts of sale

The law in this respect has recently been the subject of an illuminating decision of Mr Justice Morison, in Cargill International SA v Bangladesh Sugar and Food Industries Corporation, [1966] 2 Lloyd's Rep. 524 in which the authorities are reviewed, most notably decisions in two Australian cases and dicta of Lord Denning, M.R. in State Trading Corporation of India Ltd v E.D. & F. Man (Sugar) Ltd., July 17, 1981, transcript.

Those authorities are to the effect that it is implicit in the nature of a performance bond that, in the absence of some clear words to a different effect, when the bond is called, there will at some stage in the future be an 'accounting' between the parties to the contract of sale in the sense that their rights and obligations will finally be determined at some future date. The bond is a guarantee of due performance; it is not to be treated as representing a pre-estimate of the amount of damages to which the beneficiary may be entitled in respect of the breach of contract giving rise to the right to call for payment under the bond. If the amount of the bond is not enough to satisfy the seller's claim for damages, the buyer is liable to the seller for damages in excess of the amount of the bond. On the other hand if the amount of the bond is more than enough to satisfy the seller's claim for damages, the buyer can recover from the seller the amount of the bond which exceeds the seller's damages.

It does not appear that there is anything in the words of the contracts of sale in this case to exclude the implication that there would at some stage be an 'accounting' between the parties in the sense that their rights and obligations would be finally determined at some future date."

Whether the 'fraud only' exception applies to 'demand guarantees' used in domestic commerce?

[44]     It is appropriate that I should deal briefly with an argument advanced by counsel for the pursuers to the effect that the 'fraud exception' rule only applies to demand guarantees or performance bonds involved in international commerce. Although this submission was modified to some extent, as the submissions of counsel for the pursuers progressed, it was not departed from entirely. Although Harbottle and Comdel concerned guarantees in the nature of performance bonds issued in the course of international commerce, I see no reason in principle why the reasoning and approach adopted by the courts in such cases should not be equally applicable to demand guarantees, in the nature of performance bonds, which may be used in domestic commerce. When there is a performance bond in place, which is related to the carrying out of one party's obligations under a contract, the beneficiary under the bond (who would normally be the other party to the contract) is entitled to make a call under the bond, in respect of any failure on the part of that other party. If such a call is met, there can, if necessary, be a subsequent accounting between the parties to the contract. It would significantly diminish the value of such performance bonds in domestic commerce, if the party whose contractual performance was being guaranteed under the performance bond had the right to prevent payments being made under the bond by founding on the details of any dispute between the other party to the contract and itself.

[45]    
Such a right in respect of a demand guarantee issued in domestic commerce would be entirely inconsistent with the decision which Lord Macfadyen reached in The Royal Bank of Scotland plc v Holmes. Whilst the point taken in the present case, in relation to application of the 'fraud exception' rule, was not raised before Lord Macfadyen, it is of interest to consider the issues that parties considered it appropriate to raise having regard to the circumstances of that action. It may also be of significance that, although the point was also not taken in the earlier case of The Royal Bank of Scotland v Dinwoodie, there is absolutely nothing in Lord Sutherland's Opinion to suggest that he would not have been prepared to grant summary decree merely because the performance bond related to a domestic construction contract, as opposed to a contract relating to international commerce.

[46]    
From the documents before me, it is clear that the whole contractual arrangements relating to the pursuers' purchase of the second defender's shareholding proceeded on the footing that if the pursuers defaulted on their payment obligations under the Notes, then the second defender would have the right to 'demand' payment from the first defenders, in terms of the Guarantee. There is nothing in the documentation available to suggest that the pursuers and the second defender can be held to have intended, let alone that they explicitly agreed, that in the event of a dispute about payment under the Notes, the amount in dispute would require to be resolved, whether by negotiation or by court action between them, before the second defender could lodge a call under the Guarantee, in order to meet any shortfall in the payments he claimed were due to him. In my opinion, the 'fraud exception' rule applies in this action in respect of the call under the Guarantee for the same reasons as it would apply were this case concerned with international commerce. Accordingly, standing the fact that the pursuers do not offer to prove fraud on the part of the second defender in making his call under the Guarantee, the pursuers have, in my opinion, failed to demonstrate that they have a prima facie case to obtain the remedies they seek.

Personal bar and set-off

[47]    
As I have indicated, in addition to arguing that the 'fraud exception' rule did not apply to calls made under the Guarantee, counsel for the pursuers submitted that there were two bases on which the pursuers were entitled to argue that the second defender was not entitled make a call under the Guarantee. These were (a) that the second defender was personally barred from founding on 'Payment Default', arising out of the incorrect and late payments of interest, and (b) that the pursuers had the right to reclaim payment of the sum of £313,500, which they had paid in November 2003, and had had the right to set that sum off against any arrears of interest they may have been due to the second defender, at the time that the 'Payment Default' was alleged to have occurred. Notwithstanding the views I have already expressed on the issue of whether the pursuers have demonstrated that they have a prima facie case, I should deal briefly with the submissions I heard in relation to these grounds.

[48]    
On the issue of personal bar, counsel for the pursuers argued that as at 23 January 2004 and 27 February 2004 it was too late for the second defender to rely on the admitted failures on the part of the pursuers to pay the correct amounts of interest on the correct dates. The second defender's claim under the Notes and his call under the Guarantee were 'stale'. It was submitted that if account was taken of the overpayment of £315,000, since November 2003 the pursuers had been in credit to the second defender. Accordingly on 23 January 2004 and again on 27 February 2004, it had been the second defender who had been under an obligation to pay the pursuers, rather than the reverse. Reference was made to Paterson v Tod (1828) 6 S 1062.

[49]    
In response to that particular submission, the solicitor advocate for the second defender argued that a party can only be personally barred from exercising a right, if he was aware that he had such a right. There was no evidence that the second defender had been aware that the pursuers were in 'Payment Default'. Reference was made to Assets Company v Bain's Trustees (1904) 6 F 692, per Lord President Kinross at p. 705 and Lord Traynor at pp. 739 -740 in support of the contention that mere lapse of time will not on its own constitute the basis for an effective plea of personal bar. Actings or conduct by one party calculated to mislead another party, or cause the other party to alter his position to his prejudice, are also required. In any event, paragraph 3 of the Guarantee prevented the pursuers from seeking to rely on waiver. Whether or not the second defender was barred in asserting his rights against the pursuers, it was open to the second defender to make a call under the Guarantee against the first defenders.

[50]    
In my opinion, the submissions relating to the right to plead personal bar can, at best, be described as 'weak'. There are no averments on behalf of the pursuers, let alone documentary productions, which provide any indication as to when, prior to 23 January 2004, the second defender first became aware that interest payments were being paid in the wrong amounts and on the wrong dates. Furthermore, there is no suggestion that prior to their receipt of the letter of 23 January 2004, the pursuers were themselves aware of errors relating to the interest payments, that they believed or had reason to believe that the second defender was also aware of such errors and, most importantly of all, that they had placed any reliance on the fact that the second defender had apparently failed to take any action in respect of previous errors in relation to interest payments.

[51]    
It is a matter of admission between the pursuers and the second defender that there were interest payment shortfalls in both September 2003 and December 2003. Both of these gave rise to 'Payment Defaults'. In my opinion, the provisions of paragraph 2 of the Guarantee do not prevent the second defender from making a call under the Guarantee following upon either of those 'Payment Defaults'. Furthermore, Paragraph 3 of the Guarantee supports the view that any delay on the part of the second defender, prior to his sending the letter of 23 January 2004, does not fall to be treated as his having waived his right to found on those particular 'Payment Defaults'. Paragraph 3 of the Guarantee provides that, subject to paragraphs 2 and 7, (which respectively allow the second defender six months, from the occurrence of a 'Payment Default', within which to demand payment under the Guarantee and require that any such demand shall be made by 31 December 2006), no failure or delay on the part of the Noteholder in exercising any right, power or privilege under the Guarantee shall operate as a waiver. As it was part of the contractual arrangements between the pursuers and the second defender, that the pursuers would arrange for the first defenders to grant the Guarantee in favour of the second defender, it is not, in my opinion, open to the pursuers to argue that the second defender is now barred from proceeding with a call under the Guarantee.

[52]    
As far as the claimed right of set-off is concerned, this proceeds on the basis that when the second defender sought payment of the second payment of £315,500 in November 2003, the Redemption Notice served on the pursuers was invalid. It was alleged to be invalid (a) because it had been sent to the pursuers less than 28 days before the relevant Redemption Date, 30 November 2003, and (b) because it had not been accompanied by the relevant certificate, since it was accompanied by a certificate that bore the redemption date 30 November 2004/5. On the basis of those apparent irregularities, it was argued that the payment of £315,500 had been made in error on the part of the pursuers. It was argued that it was an implied term of the contract between the pursuers and the second defender that if the pursuers made such a payment in error, at a time when they were not required to do so, then the pursuers had the right to reclaim the sum paid from the second defender. Such an implied term was one that was necessary to give business efficacy to the contract between the pursuers and the second defender. It was also argued that it was obvious that such a term would have been agreed to by both parties, had the need for such a term been raised when the contract between the parties had been entered into.

[53]    
Counsel for the pursuers argued that this contractual right to reclaim the payment of £313,500 arose out of the terms of a 'tightly framed contractual structure'. He argued that to allow the second defender to retain the payment would throw that whole contractual structure into 'disarray'. In order to make the contract work, it was necessary to imply the term that he had defined. The pursuers had the right to reclaim the sum paid in error. They also had a common law right to set off that claim against the arrears of interest they had been due. Such arrears were, of course, significantly less than the sum the pursuers had been paid in error.

[54]    
It is acknowledged, on behalf of the second defender, that there had been errors in the Redemption Notice that was sent on 25 November 2003. It was argued, however, that there was no necessity to imply any term to give the contract business efficacy. If the pursuers had a claim for repayment of that sum, it was one based on unjust enrichment, not on contract. In any event, what the pursuers were seeking to do was to set an illiquid claim off against a liquid one. It was not open to the pursuers to do so (Smart v Wilkinson 1928 SC 383 and Niven v Clyde Fasteners Ltd 1986 SLT 344).

[55]    
At this stage in the proceedings, it cannot be said that the pursuers do not have any prospects of establishing that they have the right to seek repayment of the sum of £315,500, which they paid to the second defender in November 2003, and the right to set such a claim off against the arrears of interests that they were due to the second defender in January and February 2004. However, such contentions are not without difficulty. I recognise, of course, that during the hearing before me, I did not receive a full citation of authority. But on the basis of the submissions I did receive, I am far from having been persuaded that the contractual term, which the pursuers seek to rely on, falls to be implied into the contract between the pursuers and the second defender. I must also bear in mind that whenever the pursuers discovered the errors relating to the Redemption Notice, they have not yet raised any court proceedings to recover the payment they made over 6 months ago. The summons in the present action certainly does not contain the necessary conclusion. Furthermore, even if the pursuers could establish that they are entitled to recover the payment of £315,500, there is the further issue of whether they were entitled to set such a claim off against the arrears of interest that were due to the second defender, arrears of interest which the pursuers paid off after the second defender made his call under the Guarantee.

[56]    
In all these circumstances, even if, contrary to the views I have previously expressed, the 'fraud exception' rule does not apply to the pursuers, the grounds on which the pursuers seek to interdict and reduction are far from straightforward. Before those grounds could be established, a number of complex factual and legal issues would require to be resolved in favour of the pursuers. At this stage, accordingly, I am firmly of the view that it is much more likely that the second defender will succeed in opposing decree of interdict and reduction being pronounced, than that the pursuers will prevail in their action.

Balance of convenience

[57]    
Turning to the question of the balance of convenience, it was submitted on behalf of the pursuers that if the interim interdict continued in force the second defender would remain in the same position as he would have been in had the contract between the pursuers and the second defender proceeded as had originally been intended. Interest payments would continue to be payable. He would be entitled to seek payment of the two further payments of £315,500 in November 2004 and November 2005. On the hand, if the interim interdict were to be recalled and the first defenders met the second defender's call under the Guarantee, there would be disadvantages for the pursuers if they required to sue the second defender in an effort to recover any losses they may suffer as a consequence of their requiring to indemnify the first defenders under the Counter Indemnity.

[58]    
On behalf of the second defender it was contended I should have regard to the relative strengths of the parties' cases, it being submitted that the second defender's case was much stronger than that of the pursuers. If interim interdict were not recalled, the second defender would in all likelihood lose the benefit of his rights under the Guarantee. It would be several months before the action could be finally resolved. Furthermore, the pursuers had an alternative remedy available to them, which it was open to them pursue if they wished to do. They could raise proceedings against the second defender, seeking to recover any losses they claimed to have sustained. In any such proceedings, exactly the same issues could be raised as those that the pursuers seek to raise in the present action. The only additional issue would be that of quantifying any loss that the pursuers sought to recover. No suggestion was made that the second defender did not have sufficient financial assets to meet any decree that might pass against him in such further proceedings.

Decision

[59]    
Having reached the view that the pursuers have failed to demonstrate that they have a prima facie case for obtaining the remedies they seek, it is strictly speaking unnecessary for me to express any views as to where the balance of convenience lies. My conclusion that the pursuers do not have a prima facie case is, by itself, sufficient to justify my recalling the interim interdict.

[60]    
In view of the further submissions I heard, I have, however, given consideration to where the balance of conveniences lies. In my opinion, it clearly favours recalling the interim interdict. Both parties were agreed that in considering the issue of interim interdict, it was appropriate for me to look at the strengths of their respective cases. For the reasons I have previously set out, I have reached the view that the second defender's case is significantly stronger than that of the pursuers. In my opinion, its very likely that the second defender will succeed in his argument that, in the absence of any averments of fraud against the first defenders, the pursuers' case is irrelevant. Against that background, I consider that there is considerable force in the submissions made on behalf of the second defender that if the pursuers incur any loss as a consequence of the call made under the Guarantee, they have the right to seek to recover that loss from the second defender, if there is any legal basis for their being entitled to do so.

[61]    
I have, of course, taken into account the other factors relied upon by the pursuers in seeking to justify the continuation of the interim interdict. However, none of them persuades me that the balance of convenience favours the interim interdict remaining in place.

[62]    
For these various reasons, I will accordingly grant the motion at the instance of the second defender and recall the interim interdict pronounced on 30 March 2004.

 

 


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