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Scottish Court of Session Decisions

You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Waydale Ltd v DHL Holdings (UK) Ltd (No2) [2000] ScotCS 291 (20 November 2000)
Cite as: [2000] ScotCS 291

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in the cause










Pursuers: Emslie, Q.C., Clarke; Paull & Williamsons

Defenders: Sir Crispin Agnew of Lochnaw, Robertson; Bennett & Robertson


20 November 2000

The background

[1] In 1987 the Scottish Development Agency ("the SDA") was the heritable proprietor of various subjects, including Block Six, with the buildings thereon and the plant and equipment installed therein, ("the premises") at an industrial estate at Bothwellpark, Uddingston. By the Enterprise and New Towns (Scotland) Act 1990 the SDA was dissolved and its whole property, rights and liabilities (including the premises) vested in Scottish Enterprise. By section 22(2) of that Act the property, rights and liabilities so transferred included property, rights and liabilities whether or not capable of being transferred or assigned by the SDA. Subsequently Scottish Enterprise by feu disposition conveyed property, including the premises, to the pursuers, that transfer of interest being registered in the Land Register on 6 April 1993. The property so conveyed was subject to the lease of the premises hereinafter referred to.

[2] In 1987 Elan International Limited ("Elan") was the tenant of the SDA in respect of other subjects, namely, Block 2, Netherton Industrial Estate, Motherwell. In the early months of 1987 Elan and the SDA were in negotiation relative to the acquisition by the former from the latter of a leasehold interest in the premises. In anticipation of such a bargain, the defenders who were the parent company of Elan, executed on an unspecified date early in that year a guarantee of the prospective obligations of their subsidiary. Negotiations between Elan and the SDA, which were conducted by legal representatives on both sides, proceeded, the SDA writing to Elan's Scottish solicitors on 5 May 1987 enclosing (1) a formal missive of let of the premises, (2) a form of lease and (3) a further form of guarantee, the last for execution by the defenders. That offer of lease was formally accepted on behalf of Elan by its solicitors' missive dated 7 May 1987.

[3] The missives thus concluded provided for the lease by Elan from the SDA of the premises from Whitsunday 1987 to Whitsunday 2007 at a stipulated rent which the SDA was entitled to review at Whitsunday in each of the years 1992, 1997 and 2002. Elan was obliged under the missives when requested to do so to enter into a formal lease in conformity with the form of lease. A concessionary rent was payable during the first two years of the lease, but the concession was subject to detailed claw-back provisions concerned with the continuation of business at the premises and the achievement and maintenance of certain employment forecasts. Elan was taken bound to remove from the subjects at Netherton Industrial Estate. The bargain constituted by the missives was declared to be conditional upon Elan's obligations being guaranteed by the defenders in terms of the form of guarantee.

[4] Elan took entry to the premises under the missives with effect from Whitsunday 1987. On 5 July 1987 the defenders executed the form of guarantee. It was transmitted to the SDA on or about 21 July 1987. A formal lease in terms of the form of lease was executed by the SDA and Elan in 1990.

[5] Among other provisions the lease provided for the payment of rent and for the refunding to the landlords by the tenants of certain insurance premiums to be met primo loco by the landlords. It also imposed on the tenants certain repairing obligations "all to the sight and satisfaction of the landlords". In or about March 1994 Elan went into liquidation. The pursuers aver that since then Elan has failed to pay rent and insurance premiums due by it and has failed to keep and maintain the premises in accordance with the relative repairing obligations. The pursuers now seek to recover from the defenders various sums, including sums claimed in respect of dilapidations, allegedly due by Elan under the lease or by reason of breach of it. Although both guarantees, which were in identical terms, are referred to in the pleadings, it is the later executed of them which is now founded on.

The guarantee

[6] The title sheet of the guarantee in issue bears the following words -





ELAN INTERNATIONAL LIMITED ___________________________________________________

Subjects: Block 6

Bothwellpark Ind. Estate


The terms of that guarantee are as follows -

"We, DHL Holdings (UK) LIMITED... hereby guarantee (a) the payment of the rent and all other sums due and owing or to become due or owing in terms of the Missives and Lease to follow thereon between the Scottish Development Agency, 120 Bothwell Street, Glasgow G2 7JP ("the Agency") and Elan International Limited incorporated under the Companies Acts and having their Registered Office at Park Lane, Castle Vale, Birmingham ("the tenants") relative to the site and factory premises known as and forming Block 6, Bothwellpark Industrial Estate, Uddingston, dated said Missives 5th May and subsequent date(s) all in the year Nineteen hundred and eighty seven (b) the performance of all other obligations incumbent upon the tenants in terms of the said Missives and Lease. In the event of the tenants failing to make payment of rent or of any of the sums of money referred to in the said Missives and Lease or failing to implement any of the other obligations incumbent on them in terms of the said Missives and Lease we shall, if requested in writing by the Agency to do, forthwith liquidate the amount due by the tenants and/or implement the outstanding obligations of said Missives and Lease. This guarantee will subsist in full force and effect notwithstanding that the Agency may have permitted the tenants to delay payment of rent or the implementation of any outstanding obligations incumbent upon them in terms of said Missives and Lease and we declare that the Agency may enter into any arrangement with the tenants in connection with the said Missives and Lease without in any way prejudicing their rights against us hereunder. This guarantee will subsist in full force and effect until we have implemented these presents to the satisfaction of the Agency...".

The issues and the relative procedural history

[7] The first conclusion of the summons in this action is in the following terms -

"For declarator that the pursuers are entitled to enforce the Guarantee executed by the defenders on 15 July 1987."

The remaining conclusions are for payment to the pursuers by the defenders of various sums allegedly due and unpaid by Elan.

[8] The defenders resist the whole remedies sought by the pursuers. The former's pleas include a general plea to the relevancy and specification of the pursuers' averments (plea 5) and two further pleas which, although seeking absolvitor, are essentially preliminary in nature. They are in the following terms -

"3. The Guarantees being incapable of assignation, the defenders should be assoilzied.

4. The pursuers having no title to sue and having no means of acquiring such title due to the nature of the guarantee, the defenders should be assoilzied."

The latter of those two pleas was used as the foundation for two arguments, first, that the guarantee relied on was not itself apt to confer any rights on the pursuers as succeeding landlords and, second, that, if the rights conferred on the SDA (and vested by force of statute in its successor Scottish Enterprise) were assignable (which was disputed), they had not been effectually assigned by certain instruments later executed by Scottish Enterprise.

[9] This action is the second between the present parties, the first having been dismissed by Lord Penrose on 21 December 1995, his Lordship having held, on the basis of the materials and arguments presented to him, that the guarantee was not assignable without the consent of the guarantor (the defenders); his Lordship also rejected a contention then advanced by the pursuers that the conveyance of the heritage to them had itself operated as an assignation of the guarantee in their favour. A reclaiming motion was marked against Lord Penrose's interlocutor. While the reclaiming motion was in dependence an assignation dated 16 April 1996 was granted by Scottish Enterprise in favour of the pursuers. The defenders having responded to a relative minute of amendment by the pursuers with the contention that an assignation granted after the raising of an action could not cure any defect in the pursuers' title to raise it, the pursuers abandoned their reclaiming motion which was, of consent, refused. Subsequent to that abandonment, but before the raising of this action, a further assignation was granted by Scottish Enterprise in favour of the pursuers; that assignation was dated 11 February 1998.

[10] The assignation dated 16 April 1996 provided -

"WE, SCOTTISH ENTERPRISE... IN CONSIDERATION of the sale by us to WAYDALE LIMITED... DO HEREBY ASSIGN and MAKE OVER to the said Waydale Limited and to their successors and assignees whomsoever with effect from Thirty-first March, Nineteen Hundred and Ninety Three notwithstanding the date or dates thereof, our whole right, title and interest in and to (FIRST) a Guarantee by DHL Holdings (UK) Limited in favour of The Scottish Development Agency dated an unspecified date in Nineteen Hundred and Eighty Seven; and (SECOND) a Guarantee by the said DHL Holdings (UK) Limited in favour of The Scottish Development Agency dated Fifteenth July Nineteen Hundred and Eighty Seven...".

The assignation dated 11 February 1998 was in the following terms -

"WE, SCOTTISH ENTERPRISE... CONSIDERING that we granted in favour of WAYDALE LIMITED... and their successors and assignees whomsoever an Assignation of our whole right, title and interest in and to (First) a Guarantee by DHL Holdings (UK) Limited dated an unspecified date in Nineteen hundred and eighty seven; and (Second) a Guarantee by the said DHL Holdings (UK) Limited dated Fifteenth July, Nineteen hundred and eighty seven ("the said Guarantees") said Assignation being dated the Sixteenth day of April, Nineteen hundred and ninety six; FURTHER CONSIDERING that by the said Assignation we intended to assign and make over to Waydale Limited (First) our whole right, title and interest in and to the said Guarantees in respect of (a) the payment of rent and all other sums due and owing or to become due or owing by Elan International Limited all as referred to in the said Guarantees, and (Second) all past, present and future claims, demands and rights of action competent to the Scottish Development Agency and to ourselves as statutory successors thereof against DHL Holdings (UK) Limited whatever the date or dates of default by the said Tenants under the relevant Lease (all collectively referred to hereafter as "the whole rights and claims"); AND FURTHER CONSIDERING that it is desirable that there should be no room for doubt regarding the scope of the rights and others assigned by us in favour of the said Waydale Limited; Now THEREFORE we, SCOTTISH ENTERPRISE, DO HEREBY ASSIGN AND MAKE OVER to the said Waydale Limited and to their successors and assignees whomsoever the whole rights and claims referred to above except to the extent that these or any of them have already been carried to the said Waydale Limited under and in terms of the said Assignation which we granted in their favour in 1996...".

[11] In earlier procedure in this action a plea of res iudicata taken by the defenders was repelled. That having been done, the case was sent for further debate. The principal issue then discussed was whether the guarantee dated 15 July 1987 was, on a sound interpretation, conceived not only in favour of the SDA but also of its singular successors as landlords under the lease (an issue not discussed in the previous action). There was also discussed whether, if that issue fell to be determined against the pursuers, rights under the guarantee were assignable and, if so, whether they or any of them had been effectually assigned to the pursuers.

The submissions on the principal issue

[12] In relation to the principal issue Mr Robertson, junior counsel for the defenders, submitted that guarantees, being cautionary obligations, fell to be construed strictly. While the intention of the parties was the guiding principle, it was important to observe any limitations, including any limitation as to the person in whose favour the guarantee was granted. Reference was made to Bell - Commentaries (McLaren's Edition) pps. 390 and 392, Stewart v Scott (1803) Hume's Decisions 91 and Philip v Melville, 21 February 1809, F.C. The rule as formulated in Gow - Mercantile and Industrial Law of Scotland at p.312 ("that the cautioner's obligation is to be construed in the narrowest sense which the words will reasonably bear") was supported by the authorities there cited - Veitch v National Bank of Scotland 1907 S.C. 554 and Harmer v Gibb 1911 S.C. 1341. A strict approach accorded with the formulations in Bell's Principles (10th Edition) sections 251 and 285 and in Gloag and Irvine - Rights in Security pps.767-8. On a sound analysis Watt v National Bank of Scotland (1839) 1 D. 827 was not inconsistent with that approach. It was important, in determining the scope of a guarantee, to have regard to the person to whom it was addressed (Bowie v Watson (1840) 2 D. 1061; Stewart v Scott; Philip v Melville). The SDA, to which expressly this guarantee related, was a government agency, not an ordinary commercial body; its position might be equiparated with that of the addressee (Sandeman) referred to in Stewart v Scott. In this case, where the guarantee was formal and clear, it was unnecessary to go to extrinsic material for the purposes of interpretation (cf. Gloag and Irvine - Rights in Security pps.735-6). The present position was to be contrasted with situations where a guarantee was not addressed to any particular person (Fortune v Young 1918 SC 1; Robinson v National Bank of Scotland 1916 SC (HL) 154.) In this case, while the opening sentence did not expressly state that the guarantee was to operate in favour only of the SDA, all the subsequent sentences made it plain that the SDA alone was to benefit; the guarantee was to be triggered by a request from the SDA, it was to subsist notwithstanding concessions by the SDA to the tenants and it was to remain in force until implemented to the satisfaction of the SDA. The references adopted in the first sentence ("the Agency" for the SDA and "the tenants" for Elan) recognised that, while other persons might succeed to the leasehold interest, the guarantee was in favour of the SDA alone. Even if reference was made to extrinsic materials such as the terms of the missives and the forms of lease and of guarantee enclosed with the missive of 5 May 1987, the terminology chosen tended to support rather than to negative the proposition that the guarantee was intended to be in favour only of the SDA. There was no such coterminous relationship of landlord, tenant and guarantor as was to be found in some styles of lease. Reference was made to Halliday - Conveyancing Law and Practice in Scotland (1st Edition) Vol.III para.29-43 and to Hunter on Landlord and Tenant Vol.I p.382 and Vol.II p.153. The authorities relied on by the pursuers relative to the significance of extrinsic circumstances could readily be distinguished. The defenders' construction did not render the transaction futile or absurd. In so far as there was any ambiguity, it fell to be resolved in favour of the cautioner (Baird v Corbett (1835) 14 S. 41 at p.47). In so far as any question of construction contra proferentem arose, the approach in Aitken's Trustees v Bank of Scotland 1944 S.C.

[13] Mr Clarke, junior counsel for the pursuers, submitted in relation to the principal issue that the pursuers were entitled to decree de plano on the merits, proof being restricted to quantum; which failing, a proof before answer should be appointed. The guarantee, on a sound construction, was intended to be for the benefit of all landlords under the lease. In approaching the construction of any contractual instrument, it was appropriate to have regard to the relative factual matrix (Prenn v Simmonds [1971] 1 W.L.R. 1381, especially per Lord Wilberforce at pps.1383-4, and Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 W.L.R. 989, especially per Lord Wilberforce at pps. 995-7, including the references there to the speeches of Lord Kinnear and Lord Dunedin in Charrington & Co Ltd v Wooder [1914] A.C. 71). It was accordingly necessary to have regard to the lease and to the missives, both of which were referred to in the guarantee. It was also appropriate to interpret the guarantee consistently with sound commercial sense. Reference was made to Watt v National Bank of Scotland, especially per Lord Gillies at pps.830-1 (misprinted in the report as pps. 630-1). Watt v National Bank of Scotland had been correctly regarded in Gloag and Irvine - Rights in Security at p.700, Gloag on Contract (2nd Edition) p.27 and McBryde on Contract at para.2-51 as a case concerning a guarantee. Commercial agreements ought to be construed broadly and in accordance with business commonsense (Adamastos Shipping Co Ltd v Anglo-Saxon Petroleum Co Ltd [1959] A.C. 133, especially per Viscount Simonds at p.158 and Lord Keith of Avonholm at p.178; Wickman Tools v Schuler A.G. [1974] AC 235, especially per Lord Reid at p.251; Antaios Compania S.A. v Salen A.B. [1985] 1 A.C. 191, especially per Lord Diplock at p.201). It was not disputed that, where there was a real ambiguity in a cautionary instrument, it fell to be construed in favour of freedom; but ambiguity truly arose only once the ordinary rules of interpretation had been applied and had failed to provide a solution (McBryde on Contract para.19-28; Royal Bank of Scotland v Brown, especially per L.J.C. Wheatley at p.100). Reference was also made to Laidlaw v John M Monteath & Co 1979 S.L.T. 78, per Lord Allanbridge at p.81, London and Lancashire Fire Insurance Co v Bolands Ltd [1924] A.C. 836, per Lord Sumner at p.848; Bowers v Gloucester Corporation [1963] 1 Q.B. 881, per Lord Parker, C.J. at p.887 and Pepper v Hart [1993] AC 593, per Lord Oliver at p.620 and per Lord Browne-Wilkinson at pps.634 and 640. In interpreting a guarantee it was appropriate to give to it a fair and reasonable construction. It should be construed prima facie in a sense commensurate with the principal obligation (here, the lease). It was for the guarantor to spell out explicitly any limitations on the scope of the guarantee (Watt v National Bank of Scotland; Bell's Principles section 251). The observations in Gloag and Irvine - Rights in Security at pps.734-5 had to be read subject to Tennant and Co v Bunten (1859) 21 D. 631. The views of L.J.C. Inglis and of Lord Cowan in the latter case (at pps.633-4) were directly in point. The substantive obligation of guarantee (which in the present case was not addressed to any particular person) ought not to be cut down by ancillary provisions unless the latter were clear and imperative. Calder & Co v Cruikshank's Trustee (1889) 17 R. 74, especially per Lord Shand at p.82, was to the same effect. The observations in Bell - Commentaries at pps.390-2 had to be read in that context. A distinction ought to be drawn between a guarantee addressed

[14] Sir Crispin Agnew, senior counsel for the defenders, adopting and developing Mr Robertson's submissions, argued in relation to the principal issue that it was appropriate in the first instance to have regard only to the terms of the guarantee. Only in circumstances where adopting that approach would give rise to an unworkable, nonsensical or similar result, or where it was necessary to give colour to some particular expression, was it necessary or appropriate to have regard to any factual matrix beyond the immediate context of the instrument under construction. This was especially so with a formal instrument. Evidence of surrounding circumstances was inadmissible for the purposes of putting a peculiar meaning upon plain and unambiguous words (Charrington & Co Ltd v Wooder, per Lord Kinnear at p.80). In considering whether a construction was consistent with commercial sense, it was necessary to have regard to what would make sense to both parties. It would make equally good commercial sense if the guarantee were held to be in favour of the SDA alone. It was legitimate to take into account the particular situation of the SDA as a statutory body subject to the directions of the Secretary of State and charged with the provision, maintenance and safeguarding of employment in Scotland (as reflected in the claw-back provisions in the missives). It was important to recognise and to give effect to the special rule under Scots law that a guarantee was to be construed strictly in favour of the cautioner, any doubt or ambiguity being resolved in his favour. So far as concerned the grantee, the guarantee referred only to the Agency. No reference was made to any successor in title as landlord. It was to be presumed in such circumstances that the granter relied upon the prudence and discretion of the named authority and was not exposing itself to the requirements of other landlords such as a commercial property company which might, in questions with the tenants and ultimately with the guarantor, have a quite different agenda. The choice in the guarantee of "the Agency" rather than "the landlords" as the shorthand expression for the SDA confirmed that it was the SDA alone in whose favour the guarantee was granted. The ancillary provisions in the guarantee all pointed to the scope of the grant being so restricted. The physical document of guarantee was delivered to the SDA. If it was appropriate to go to contemporary documents, it was appropriate to go to all of them, namely, the missives, the form of lease and the form of guarantee. The missives (in which again "the Agency" was used as an abbreviation for the SDA) gave rise to a number of obligations, including obligations of payment in certain events to the SDA, which were personal to it and were not dependent on the SDA remaining the landlord of the premises. A number of further obligations in the missives were owed personally to "the Agency". It was not be assumed that the SDA, charged as it was with statutory responsibilities, envisaged that it would dispose of the premises. The expression generally used in the lease ("the landlords") rather than the more usual expression ("the landlords and their successors") may have been adopted advisedly. The only clause in the lease which referred to "successors" (clause Twelfth) also contemplated that there might not be a guarantor.

[15] The Dean of Faculty, senior counsel for the pursuers, adopted and developed the submissions made by Mr Clarke. It was plain on authority, he argued, that legitimate regard to the factual matrix was not restricted to circumstances where there was some ambiguity. It was always proper for the court to put itself into the position in which the parties were at the time of their contracting. In the present case the guarantee expressly referred to the missives and the lease. The guarantee must be construed with an appreciation of the nature and terms of the other documents referred to in gremio. The issue was whether the parties could sensibly be taken to have intended that the SDA alone should benefit under the guarantee or (as the pursuers contended) that the guarantee be coextensive with the tenant's obligations under the lease, with the result that it might benefit a person who became the landlord during its subsistence. The construction of the lease properly involved a search for "the fair bona fides of the transaction" (Watt v National Bank of Scotland, per Lord Gillies at p.830). This was a mercantile deed; its solemn form (which was not legally required) was less important than its nature and context. The exercise of construction was to discover its true and fair import. Strictness of construction meant no more than that the document was not to be construed more widely than had actually been expressed. If the scope of an otherwise unqualified guarantee was to be limited in a cautioner's favour (such as to a particular creditor, period or transaction), that could only be achieved by distinct and express language. A fully and completely expressed primary obligation of guarantee, as with a dispositive clause, could not be cut down by a later ancillary provision unless by clear words. Where an accessory obligation (such as one of guarantee) was granted, prima facie one would expect to find that it was coextensive with the principal obligation. In the guarantee under construction, the primary obligation was not addressed to any particular creditor but was in respect of obligations owed by the tenants under the lease. The ancillary provisions were not apt to confine the scope of the primary obligation so that it was owed solely to the SDA, which had been referred to in the primary obligation only as a party to the missives and the lease; the use of "the Agency" was simply a convenient shorthand. Clause TWELFTH of the lease, which had been introduced in the course of negotiations, did not assist the defenders; clause SECOND also referred to "the landlords and their successors". On a sound construction of the missives "the Agency" must include successor landlords. It would not make commercial sense if the creditor under the guarantee were to be confined to the original landlords.

Discussion of the principal issue

[16] In my view the guarantee must be interpreted in the transactional context in which it was granted. The obligations which are guaranteed by it are defined by reference to "the Missives and Lease to follow hereon". It is not disputed that the missives there referred to are those of 5 and 7 May 1987 (in the event in existence prior to the execution of the relevant guarantee on 15 July) and that the lease, albeit not executed formally until several years later, had prior to the execution of that guarantee been entered into in binding terms under the missives, as read with the form of lease referred to in them. The missives, lease and guarantee were clearly part of a single transaction. Although the defenders were not formally party to the missives or to the lease, their subsidiary, Elan, was. The defenders may reasonably be taken to have been, on executing the guarantee, familiar with the terms of both the missives and the form of lease by which their obligations under the guarantee were defined. In these circumstances it is proper, in my view, to have regard to the terms of these other documents for such assistance, if any, as they may afford in construing the guarantee. The nature and terms of those parallel documents may also assist in identifying the commercial or business object of the relative transaction - which, ascertained objectively, may itself be a surrounding fact (Prenn v Simmonds, per Lord Wilberforce at p.1385 A-B). In modern times the propriety of having such regard is not restricted to circumstances where the instrument to be construed is, when viewed in isolation, ambiguous (Chitty on Contracts (28th Edition) para.12-116 and cases there cited). Nor is it excluded when the instrument is executed formally (Prenn v Simmonds, per Lord Wilberforce at pps.1383-4). The rule which excludes reference to prior negotiations has no application to the present circumstances. Whether and, if so, to what extent the transactional context in the event assists in the exercise of interpretation is, of course, a separate matter.

[17] Any exercise of interpretation of a contractual instrument is, broadly stated, an attempt to ascertain objectively the mutual intention of the parties to it from the language which they have used viewed in the setting in which they have used it. Although the present instrument is a unilateral deed by the defenders, it was one which the SDA had, as a condition of the missives, insisted be granted by the defenders in these terms. In such circumstances it is, in my view, legitimate to address the mutual intention, as objectively ascertained, of the defenders and the SDA.

[18] While the ultimate objective of any exercise of interpretation is as stated, special rules may affect the approach to be adopted in that exercise. There seems little doubt that, in construing a cautionary instrument, an approach favourable to a narrower rather than a broader construction of the cautioner's obligations has in Scots law been favoured. This has been variously expressed. In Baird v Corbett the unanimous opinion of the whole court included at p. 47 the statement -

"Besides, if we had any doubt, then, when there is doubt or ambiguity, in such a letter of credit, the construction ought to be in favour of the cautioner."

In Tennant and Co v Bunten L.J.C. Inglis at p.633 acknowledged that doctrine but held that it was "not to be taken without limitation, because there are certain rules of construction, applicable to all writings, by which it must be modified." Lord Wood concurred. Lord Cowan, also concurring, observed at p.634 -

"A letter of guarantee must receive its fair grammatical construction, and if there is any real question as to its meaning and effect, the cautioner is entitled to the benefit of the ambiguity."

In Bell - Commentaries at p.390, under the heading "Limitation of Guarantees and Letters of CrediT", it is stated -

"It is important to observe any limitation in respect of the transaction, the person or the time to which a guarantee may be meant to extend. The language used, the nature of the transaction, and the plain understanding between the parties, must all be taken into consideration. But the general rule is, that the strict words of the agreement, where intelligible, must be adhered to, and at all events never carried beyond the plain and manifest intent of the party."

Gloag and Irvine - Rights in Security at p.734 contains the following passage -

"It has frequently been laid down as a general rule, applicable at least to obligations constituted by formal bond, that the obligation of a cautioner, being stricti juris, is to be strictly interpreted. The strict interpretation of a bond of caution, however, means little more than that the obligation of the cautioner will not be extended to any other subject, to any other person, or to any further period of time, than is expressed or necessarily implied in the contract. In short, the obligation of a cautioner will not be in any way extended by mere latitude of interpretation beyond the precise terms of his engagement; and where there is doubt or ambiguity in the construction of the obligation, the cautioner has the benefit of the doubt."

Bell's Principles (10th Edition), published in 1899, states at section 251 -

"Cautionary obligations are very strictly interpreted, though not so literally as to evade the true and fair construction of the engagement."

Gow - Mercantile and Industrial Law of Scotland, published in 1964, states at p.312 -

"The two fundamental rules are (i) that the cautioner's obligation is to be construed in the narrowest sense which the words will reasonably bear..." -

though the formulation there made does not appear to be in terms supported by the authorities (Veitch v National Bank of Scotland and Harmer v Gibb) cited for it.

[19] It is not altogether easy to reconcile all these formulations. It appears, however, that the central principle remains the ascertainment objectively of the parties' mutual intention. In that exercise it is, it seems, legitimate to make use of such aids to construction as are recognised by the general law. Where, however, an ambiguity or real doubt remains, that ambiguity or doubt is to be resolved in favour of the cautioner. An ambiguity or real doubt is not, however, in my view, to be confused with a difficulty. A cautionary obligation may be difficult to construe and open to perfectly respectable competing arguments over its interpretation. But that will not of itself create an ambiguity or real doubt. On the general matter of the approach to construction I should also note that the pursuers' counsel in argument placed some reliance on the expression "the fair bona fides of the transaction" used by Lord Gillies in Watt v National Bank of Scotland at p.830. However, that case involved certain specialities, including the use of a letter of obligation in place of the endorsement of a drawn bill. I doubt whether the concept of bona fides, at least in any modern usage of the expression, has in the present context much relevance.

[20] In relation to limitation of a guarantee "in respect of the person", Bell - Commentaries at p.392 states -

"Guarantees and letters of credit are limited to the persons to whom they are addressed, in whose discretion the writer is presumed to have peculiar confidence. So, 1. A letter addressed to one person, authorising him to introduce the bearer to dealers, will not authorise another to introduce him, to the effect of making a guarantee by the writer. 2. A letter of credit addressed to a dealer will not authorize him to send the bearer of it to another dealer...".

Two cases (Stewart v Scott and Philip v Melville), both from the first decade of the nineteenth century, are cited in support of those propositions. Some aspects of the commercial practices against which they were decided are not wholly clear when viewed from the beginning of the twenty first century. Stewart v Scott concerned a sealed letter addressed by a bank official (Scott) to a named individual (Sandeman) "of the Shore Dues Office at Leith" requesting that he introduce three corn dealers "to any of your corn or grain merchants, assuring them of their safety in what bargains they may make with them...". Two of the three dealers, without making any approach to the addressee of the letter, took it to a merchant at Leith (Stewart) who in reliance on it entered into a grain contract with the two dealers. A loss having occurred on the transaction, the merchant sued inter alios the bank official. According to the report, there was some doubt among the judges whether the letter constituted a guarantee (or was merely a letter of introduction) but the case was decided in Scott's favour on two grounds, first, that any guarantee was in respect only of bargains to which all three corn dealers had been parties and, second, because

"the letter had been used with Stewart, a stranger, to whom it was not addressed, and in whom Scott could have no confidence, instead of being used with Sandeman, Scott's own correspondent, on whose prudence and judgment he had relied for a check on the three purchasers, to prevent them from going too far on his credit, or engaging in any rash or unprofitable adventure."

A critical aspect of any guarantee was accordingly the role to be played by a trusted individual, Sandeman, as a check on the prudence of any transactions which might be entered into between the dealers and any merchant. The case is thus somewhat special in that it is not concerned with any confidence placed, at least directly, by the cautioner in any creditor in the guarantee but with confidence in an intermediary who would have some control, it appears, over what bargains were entered into and with whom.

[21] Philip v Melville concerned a letter of credit on behalf of a publican addressed to a particular merchant. That merchant, not being himself able to supply the publican, had without the authority of the cautioner, passed the letter with an endorsement to another merchant who had supplied the goods. The purchaser having become bankrupt, the supplier sued the cautioner. The action failed, the court observing -

"that where the letter of credit was addressed to a particular person, it must be considered as limited to him, and that the party granting it must be understood to have been induced to grant it by a reliance on his prudence and discretion in acting upon it. That therefore, where the letter did not contain the power of generally interposing the credit of the granter, it was not transmissible."

That case is authority for the proposition that where a guarantee is addressed to a particular person, contemplating a transaction or transactions only with that person, it does not, in the absence of express provision to that effect, extend to transactions with another. Bowie v Watson, though a narrower decision, is to a similar effect. All those cases were concerned with situations where the content of the transactions to be guaranteed was, when the guarantee was executed, unknown.

[22] In the present case by contrast the transactions with which the guarantee was concerned were effectively in place and their terms known (or at least knowable) by the defenders when they executed the guarantee. The primary clause of obligation does not expressly identify a particular person as the obligee under the letter of guarantee, the reference in that clause to the SDA being confined to its being named as a party to the two relative transactions. The extent of the obligations is particularised by reference to obligations arising out of specified transactions rather than by reference to any specified creditor. The obligations which are guaranteed include obligations of a tenant under a lease with a duration of twenty years, in the course of which the landlord might, at least conceivably, change; heritable property vested in the SDA was not inalienable. The absence of any express identification of a particular creditor in the guarantee may, indeed, be deliberate in circumstances where the creditor in some of the obligations under the missives (such as the claw-back provisions in respect of concessionary rent) might be expected to remain the SDA (or possibly any statutory successor of it), whereas the creditor under the lease obligations might come to be a stranger. An attempt to formulate that expressly might lead to unnecessary complexity. The absence of a specified creditor in the primary obligation may be contrasted with, for example, the provision discussed in Royal Bank of Scotland v Brown at p.91 where the document, being specifically addressed to the bank, the guarantors "hereby jointly and severally and personally and individually guarantee you full and final payment..." (emphasis added). Accordingly, so far as concerns the primary clause of obligation, the guarantee presently under discussion is not prima facie "addressed" exclusively to the SDA, with the limitation on its scope which such addressing might imply. By contrast, it appears to be a guarantee of due performance of obligations under particular contractual relationships rather than one designed in favour of a particular creditor in these relationships. The fact that no creditor is named in a guarantee does not, if the transactional scope is sufficiently defined, prevent one or more persons having the benefit of it (Fortune v Young). There is in these circumstances force in the pursuers' contention that the guarantee was intended to be co-extensive with the guaranteed obligations.

[23] The guarantee must, of course, be read as a whole. The succeeding clauses might appear to contemplate that a specific creditor, namely, the SDA, will be concerned with triggering performance of the guarantee, that its acts of indulgence towards the tenants will not prejudice its rights against the creditor and that the guarantee will subsist until implemented to its satisfaction. The circumstance that a convenient abbreviation ("the Agency") is used in these clauses rather than a repetition of the full name and designation of the SDA does not detract from the fact that prima facie a particular person, rather than a person of a particular class, is envisaged in these clauses. However, while these succeeding clauses have given me some pause, I have come to the view that they are essentially ancillary provisions and that, in the absence of clear language in them, delimiting the scope of the primary obligation as expressed, it would be inappropriate to read the primary obligation more restrictively than its own terms justify. It may be noted in this connection that an abbreviation is used not only for the SDA ("the Agency") but also for Elan ("the tenants"). The ancillary clauses envisage "the tenants" failing to discharge their obligations and "the tenants" being permitted indulgences. If read strictly, these references are exclusively to Elan, it and it alone being the subject matter of that abbreviation. But under the lease Elan may, without the consent of the landlords, assign the leasehold interest to any company within the same group of companies as itself. It seems difficult to suppose that the mutual intention of the defenders and the SDA was that these ancillary clauses would not apply in circumstances where at some stage such an assignation had taken place. I find that circumstance more compelling than any contrast between the nominate abbreviation ("the Agency") and the generic abbreviation ("the tenants"). The above at least raises a question whether "the Agency" was intended to be read so as to refer exclusively to the SDA. While the result may not be as obvious as in Tennant and Co v Bunten, the principle of that case, namely, that a complete obligation of guarantee will not readily be cut down by unclear adjections to it, appears to be in point.

[24] It is, as I have held, proper for the purposes of interpretation to take into account the factual matrix, and in particular the transactional context, of the guarantee. I have not, however, found the use of abbreviations in the missives or in the lease to be of material assistance for that purpose. The use of "the Agency" as an abbreviation in the missives appears to be appropriate and convenient in that document without assisting materially in construing the guarantee. Even in the missives "the Agency" is not throughout used plainly in a restricted sense; for example, clause 2 (which relates to rent review), when read with the relative clause of the form of lease (clause SECOND), the latter being construed as a whole, is consistent with the entitlement to review rent being available to singular successors. The use of "the landlords" or "the landlords and their successors" in the lease displays a certain measure of inconsistency and likewise offers no real assistance. The duration of the lease and the possibility, which cannot be excluded, of a stranger acquiring the heritage during the subsistence of the lease are, however, relevant circumstances and give rise to a question as to the commercial object of the guarantee in so far as relating to the lease obligations (whether constituted by the missives as read with the form of lease or by the formal lease subsequently to be executed). These external factors, while not identifying conclusively the commercial object of the grant of guarantee, give some support to the proposition that it was to secure the performance of the primary obligations, whosoever was the obligee in respect of them. There is also some force in the pursuers' contention that it would make commercial sense if the guarantee were intended to be available to whomsoever happened to be landlord under the lease. It would certainly make the heritage more marketable if the SDA (or any statutory successor of it) were able to offer it to a purchaser with the tenants' obligations secured by the defenders' guarantee. On the other hand it cannot, in my view, be said to make commercial nonsense to have a guarantee restricted to the SDA as creditor. The possibility of a private disposal of the industrial estate or of any part of it may well not have been in contemplation in 1987; or the SDA may have been content simply to protect its own position while landlord. The attitude of the guarantor at the material time is unknown. In these circumstances it cannot, in my view, properly be said that a restrictive interpretation "leads to a very unreasonable result" (Wickman Tools v Schuler A.G., per Lord Reid at p.251E) or "flouts business commonsense" (Antaios Compania S.A. v Salen A.B., per Lord Diplock at p.201D-E). That aspect is accordingly, in my view, only of limited force in the matter of interpretation.

[25] I have not found the circumstance that the deed of guarantee was physically delivered to the SDA as of material assistance in the matter of interpretation. Delivery to it was inevitable in circumstances where it was in the first instance the creditor under it. Such delivery does not exclude the possibility that in certain circumstances others might have the benefit of it. Nor do I find persuasive the circumstance that the guarantee was a separate document rather than contained within the lease - particularly where the guarantee was intended to apply also to obligations in the missives which were unrelated to the lease.

[26] In the whole circumstances and applying as best I can the relevant principles of construction to the material before me, I have come to the view that in relation to the guarantee there is, to use the words of Lord Cowan in Tennant & Co v Bunten, no "real question as to its meaning and effect" - that is, that its terms are sufficient to entitle the pursuers, in the events which have occurred, to enforce its terms in their favour. In reaching that view I have not found it necessary to rely upon any rule of "contra proferentem". The true application of that rule in circumstances such as the present is far from clear. The observations on this topic in Royal Bank of Scotland v Brown are not readily reconcilable with those in Aitken's Trustees v Bank of Scotland to which the later court does not, so far as appears from the report, appear to have been referred. For the reasons I have given the pursuers are, in my view, entitled to the declarator which they seek.

The alternative basis

[27] In these circumstances it is unnecessary for me to reach a decision on the alternative basis upon which the pursuers seek remedies in this action. I should, however, briefly indicate the issues arising and my views on them. It is convenient first to summarise the pursuers' contentions.

[28] The pursuers contended that, if the guarantee on a sound construction did not entitle them to the benefit of it, the rights of the SDA were assignable to a succeeding landlord and have been effectually assigned to them. There was, it was argued, nothing in principle (and nothing raised on averment by the defenders) to support any delectus personae in relation to the SDA. In any event, the various obligations arising under the material principal relationship (the lease) had to be regarded discretely. At least in relation to liquid money debts (such as unpaid rent and insurance premiums) there could be no delectus personae. Even in relation to claims for dilapidations, which might involve some scope for variation of attitude as between landlords, to whose "satisfaction" such work had to be carried out, this was circumscribed by the requirement of "reasonableness", thus giving to it an objective quality inconsistent with delectus personae. In so far as any question arose as to the legal effect of the assignation (of which argument no prior notice had been given by the defenders) that essentially went to the value of the pursuers' claims and might appropriately be reserved to be dealt with as an aspect of quantum.

[29] The defenders contended that, having regard to delectus personae in the SDA, the rights under the guarantee were not assignable and, even if they were, the claims advanced had not validly been assigned to the pursuers by the SDA's statutory successor. On assignability the defenders relied to some extent on the views expressed by Lord Penrose on this topic in the earlier action. It was inappropriate to sever one type of lease obligation from another. Under clause SIXTH of the lease the repairing obligations were all to be "to the sight and satisfaction of the landlords". This imported an "element of confidence" in the particular landlord. The provisions in the guarantee which envisaged the landlord permitting delay in the payment of rent or the implementation of outstanding obligations also pointed to the personal qualities of the initial landlord being important. Moreover, there had been no effectual assignation. When the purported assignations were granted (the first in 1996 and that now relied on in 1998) the SDA and its statutory successor had long ceased to have any right, title or interest to assign. The claims now made had never been claims available to the SDA or its successor.

[30] It is clear that the pursuers seek to rely on the guarantee not for the performance of any obligations at any time owed to the SDA or to its statutory successor. The particular claims for rent, insurance premiums and dilapidations all arose after these statutory bodies had ceased to be landlords of the premises. The relevant principal obligations thus emerged and were owed by Elan to the pursuers and to the pursuers alone. No question arises of a party pursing as an assignee particular claims first vested in its assignor. Accordingly, in my view, the issue here is not the assignability of particular obligations but the assignability of the contract of guarantee as a whole so as to be effectual to the purported assignee in respect of obligations in which it is or will be the original creditor under the lease. I see no reason why in some circumstances a contract of guarantee might not be assignable as a whole. Where, as in Royal Bank of Scotland v Brown, the creditor in the guarantee was expressly referred to in the primary clause, it might be that the guarantee could, even without the consent of the cautioner, be assigned, along with the contract of loan, to a third party for the performance of future obligations under the contract as and when these fell due. Whether it was so assignable would turn on the intention of parties (McBryde on Contract para.17-38). In the present case, however, the person in right to the benefit of the guarantee was not expressly named or referred to as being in such right. If I had held under the principal issue that the guarantee was conceived solely in favour of the SDA, that would in the circumstances of this case have been on the basis that the parties' mutual intention, objectively ascertained, was to the effect that it and it alone should have the benefit of it. It would, in my view, have been inconsistent with that conclusion to hold that the parties' mutual intention, objectively ascertained, was that it should be assignable, without the consent of the cautioner, to a third party. Accordingly, had I been against the pursuers on the principal issue, I would not have been in their favour on this alternative contention.


[31] There was some discussion of the appropriate disposal of the action in the event of the defenders being successful. That does not in the event arise. The defenders' counsel, under reference to the views of the judges of the Inner House when this case was earlier before it in relation to the matter of res iudicata (reported 2000 S.C. 172 at pps.183-4), moved me in the circumstances to grant absolvitor. However, in view of the radically different arguments presented on this matter as against those presented to Lord Penrose, dismissal would, in my view, have been in such an event the appropriate disposal.

[32] In the whole circumstances I shall repel the defenders' fourth plea-in-law, sustain the pursuers' second plea-in-law (which is directed to the pursuers' contention on the principal issue), grant decree in terms of the first conclusion of the summons and allow to parties a proof before answer restricted to the remaining conclusions. The case will be put out By Order for discussion of further procedure.

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