BAILII [Home] [Databases] [World Law] [Multidatabase Search] [Help] [Feedback]

Scottish Court of Session Decisions


You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Lloyds TSB Foundation For Scotland v Lloyds Banking Group Plc [2011] ScotCS CSIH_87 (29 December 2011)
URL: http://www.bailii.org/scot/cases/ScotCS/2011/2011CSIH87.html
Cite as: 2012 GWD 5-81, 2012 SC 259, [2011] ScotCS CSIH_87, [2011] CSIH 87

[New search] [Printable version] [Help]


FIRST DIVISION, INNER HOUSE, COURT OF SESSION

Lord President

Lord Carloway

Lord Kingarth

[2011] CSIH 87

CA115/10

OPINION OF THE COURT

delivered by THE LORD PRESIDENT

in causa

LLOYDS TSB FOUNDATION FOR SCOTLAND

Pursuer and Reclaimer;

against

LLOYDS BANKING GROUP PLC

Defender and Respondent:

_______

Act: Currie, Q.C., Munro; Simpson & Marwick

Alt: Wolffe, Q.C., Barne; Maclay Murray & Spens LLP

29 December 2011


[1] The trustees savings banks which operated prior to 1986 had a tradition of charitable giving. When TSB Group plc was floated in that year there were established several charitable foundations, of which the pursuer and reclaimer was one, to carry forward that tradition. Arrangement were put in place for the funding of these foundations. In the case of the reclaimer this was done by a Deed of Covenant dated 10 September 1986 by which TSB Group plc ("the Company") bound and obliged itself at quarterly terms to pay to the reclaimer the greater of "(a) the amount equal to one quarter of one third of 0.1946 per cent of the pre-tax profits (after deducting pre-tax losses) for the accounting reference periods ... or (b) the sum of £9,730". "Pre-tax profit" and "pre-tax loss" in relation to an accounting reference period were defined as meaning "... respectively the 'group profit before taxation' and the 'group loss before taxation' (as the case may be) shown in the Audited Accounts for such period adjusted to exclude therefrom any amounts attributable to minority interests, such adjustment to be determined by the Auditors on such basis as they shall consider reasonable, which determination shall be conclusive and binding on the parties thereto". "Audited Accounts" were defined for certain specified periods as "the consolidated accounts of the TSB Group plc for those respective periods ..." and for subsequent periods as "the audited consolidated accounts of the Company and its subsidiaries for that period".


[2] The 1986 Covenant was amended in 1991 and again in 1993. The 1991 amendment is not material for present purposes, except that it substituted an annual payment for four quarterly payments. The 1993 amendment provided that, with effect from 1 January 1994, the Covenant should be varied by incorporating in the definition of "pre-tax profit" and "pre-tax loss" after the words "minority interests" the words "and any profits or losses arising on the sale or termination of an operation" and by a consequential amendment to the like effect. The background to those agreed amendments, the Lord Ordinary found, was that it was contemplated that one-off, non-trading losses might arise on the sale of Hill Samuel Bank and TSB Property Services, whilst profits might arise from the sale of Swan National Leasing and Noble Lowndes. Accounting Standard FRS 3, issued by the Accounting Standards Board in October 1992, had required profits or losses on a sale or termination to be included within pre-tax profits, even though they were not included in the profit on which tax would be assessed.


[3] Following the merger of Lloyds Bank and TSB Group Ltd to form Lloyds TSB Group plc and a change in accounting period, a Deed of Covenant dated 23 January and
4 February 1997 was entered into between Lloyds TSB Group plc (the respondent in this reclaiming motion) and the reclaimer. It was in effect a consolidation of the earlier deeds. Clause 2(1) was in the following terms:

"The Company hereby covenants with the Foundation that on every Covenanted Payment Date during the period specified in Clause 3 the Company will subject to the provisions of this Clause pay to the Foundation whichever shall be the greater of:

(a) an amount equal to one third of 0.1946 per cent of the Pre-Tax Profits (after deducting Pre-Tax Losses) for the Accounting Reference Periods all or part of which fall within the Base Period but excluding in the case of any Accounting Reference Period part of which falls outside the Base Period that proportion of the Pre-Tax Profit or Pre-Tax Loss therefor which the duration of the said part bears to the duration of that Accounting Reference Period; and

(b) the sum of £38,920

TOGETHER with interest thereon for the relevant Interest Period calculated at the Interbank Rate".

Clause 1 had included the following definitions:

"'Audited Accounts' in relation to any Accounting Reference Period, means the audited consolidated accounts of the Company and its subsidiaries for that period".

"'Pre-Tax Profit' and 'Pre-Tax Loss' means in relation to any Accounting Reference Period ... respectively the 'group profit before taxation' and the 'group loss before taxation' (as the case may be) shown in the Audited Accounts for such period adjusted to exclude therefrom any amounts attributable to minority interests and any profits or losses arising on the sale or termination of an operation, such adjustment to be determined by the Auditors on such basis as they shall consider reasonable, which determination shall be conclusive and binding on the parties hereto."

"Accounting Reference Period", "Base Period" and "Covenanted Payment Date" were also defined but these definitions are not material for present purposes. That Deed remains in force. Its construction and application are the issues which arise in this reclaiming motion.


[4] The respondent's Annual Report and Accounts for 1997 included a consolidated profit and loss account containing an item described as "Profit on ordinary activities before tax", with figures for the current and immediately preceding accounting reference periods. Generally accepted accounting practices - which the respondent followed - did not at that stage require "negative goodwill" to be accounted for as part of profits before tax. "Negative goodwill" arises when the price paid for an acquired entity is less than the aggregate fair value of its identified separable net assets. This may occur either because the acquired business is loss-making or because the acquirer has made a good bargain.


[5] On
19 July 2002 (EC) Regulation No. 1606/2002 was adopted. It was published in the Official Journal of the European Communities on 11 September 2002. It came into force on 14 September 2002. Article 4 of the Regulation provided that from 1 January 2005 UK listed entities, of which the respondent is one, had to prepare their consolidated accounts in accordance with International Financial Reporting Standards ("IFRS"). For the purpose of the Regulation the IFRS for UK listed entities, so far as concerned the treatment of goodwill, was IFRS 3, which was adopted by the International Accounting Standards Board ("IASB") in March 2004. In December 2002 the IASB had issued an exposure draft ED 3. From 1 January 2005 the respondent, as it was required to do, adopted IFRS 3.


[6] Paragraph 56(b) of IFRS 3 required the immediate recognition of negative goodwill as a gain in the group consolidated income statement (the successor to the group consolidated profit and loss account). This had already been proposed in the consultation document ED 3, which invited comments on a number of issues relating to accountancy for business combinations. The expert witnesses for the parties to this action explained in slightly different ways the reasoning behind this treatment. Mr Simmonds, the expert led on behalf of the respondent, testified that, as set out in the Basis for Conclusions in IFRS 3, negative goodwill relates to a bargain purchase and is therefore treated as an immediate gain to be recognised immediately in the consolidated income statement notwithstanding that the gain is unrealised (since the related net assets of the acquired entity have not been realised through use or sale). Mr Merris, the expert led on part of the reclaimer, testified that, at the date of acquisition, the acquirer is immediately better off by the amount by which the fair value of what is acquired exceeds the consideration paid for it. This treatment was different from that required under previously applicable accountancy principles and statutory provisions. It was, however, directly applicable Community law and the respondent, naturally, complied with it. No amendment to the 1997 Covenant was made in anticipation or furtherance of this change in treatment.


[7] In its accounting period ended
31 December 2009 the respondent acquired HBOS. It did so for a consideration significantly below the fair value of HBOS's identified separable net assets. Negative goodwill accordingly arose and required to be reflected as a positive entry in the respondent's group consolidated income statement for that period. The figure so entered was £11,173 million. The effect of that entry was to translate the next entry into "Profit before tax" of £1,042 million, whereas if no figure had been entered for negative goodwill a loss (of more than £10,000 million) would have been brought out. For the purposes of the Deed of Covenant the figure of £1,042 million fell to be adjusted by deduction of the profit attributable to minority interests (agreed at £135 million). On that basis, according to the reclaimer, the "Pre-Tax Profits" for the Accounting Reference Period ending 31 December 2009 was £907 million. The amount payable on that basis to the reclaimer by the respondent is agreed to be £3,543,433. If, however, negative goodwill does not, for the purposes of the Deed of Covenant, fall to be treated in this way, the reclaimer's entitlement is restricted to the minimum sum of £38,920.


[8] The Lord Ordinary considered that there were two approaches towards construction which might be adopted by him: to address first the words used in the contract and thereafter to consider whether any relevant background caused him to depart from the meaning suggested by the words or, alternatively, to conduct a single exercise by addressing the words used against the context of any relevant background. He adopted the first approach. Having done so he concluded (para [72]) that, on the natural meaning of the words and expressions used in the Deed, the parties had settled upon a formula which plainly pointed, in the circumstances, to the result for which the reclaimer contends, viz a percentage of the group profit before taxation (after deducting group loss before taxation) shown in the audited consolidated accounts of the respondent. The Lord Ordinary then proceeded to the second stage of the approach he had adopted. He took into account what he regarded as relevant background and concluded (para [76]) that the parties "did not intend that [the reclaimer] should receive a percentage of profits which included a figure for negative [goodwill] which was neither realised, subject to tax nor capable of distribution". Having referred to Debenhams Retail plc v Sun Alliance and London Assurance Co Ltd [2006] P & CR 8 and Lian Hwee Choo Phebe and Another v Maxz Universal Development Group Pte Ltd and Others [2009] SGCA 4 he posed himself the question (para [80]) what were the "purposes and values" expressed or implicit in the wording of the Deed as understood in the context of the facts and matters in existence at the time it was entered into; having identified those purposes and values (put short, that [the reclaimer] was to participate in the group's trading profits (para [81]) he sought to reach an interpretation which applied the wording of the Deed to the changed circumstances in a manner most consistent with them. He then said that "the court should, in a case where it is necessary to do so to achieve those purposes and values, disregard the words 'shown in the Audited Accounts' in the definition of Pre-Tax Profit and Loss in the Deed". This, he suggested, might involve doing some "slight" violence to the wording of the Deed. He then reformulated the definition of Pre-Tax Profit and Pre-Tax Loss as:

"respectively the 'group profit before taxation' and 'group loss before taxation' (as the case may be) for such period adjusted to exclude ...".

He concluded:

"On this definition the expression 'group profit before taxation' is ambiguous. In construing it in accordance with the parties' objectives, it is not necessary to identify any particular wording to express what is or is not included. It is sufficient to say that it does not include the figure for negative [goodwill] resulting from the HBOS acquisition."

On that basis he granted decree of absolvitor.


[9] Before us Mr Wolffe for the respondent did not seek to support the whole of the Lord Ordinary's reasoning. In particular, he did not support the proposition that the court should disregard the words "shown in the Audited Accounts" in the definition of Pre-Tax Profit and Loss in the Deed. The approach to interpretation which he urged was that the critical words of the contract should be construed having regard to (a) the terms of the contract as a whole and (b) the relevant background, including the accountancy context. It was not, he said, in dispute that at the time the Deed was entered into it was not in the contemplation of parties that an unrealised gain by way of negative goodwill would be brought into account in the consolidated income statement of the respondent. The outcome for which the respondent contended was consistent with the natural meaning of the words used as they would have been understood at the time the Deed was granted. The wording of the definitions of "Pre-Tax Profit" and "Pre-Tax Loss" included an exclusion of any profits or losses arising on the sale or termination of an operation; it would be absurd if the unrealised gain constituted by the negative goodwill arising on the acquisition of HBOS would be brought into account, while real profits arising on any future sale of that operation were to be left out of account. The language of the definition, when read in context, did not inevitably point to a single line in the account. It was legitimate to take into account the preceding line in the account ("Gain on acquisition"), recognise it for what it was (an unrealised gain) and conclude that in truth there was a "Pre-Tax Loss" in excess of £10,000 million. The change in accountancy practice since the Deed was entered into was of such a nature as to take a "single-line" approach out of the contemplation of parties. The wording in inverted commas ("group profit before taxation") did not appear in the consolidated income statement nor in the statutory provisions brought into force in 1991 (Companies Act 1985, Schedule 4 and Schedule 4A (as amended): the requirement in para 3(6) of Schedule 4 was to show "profit or loss on ordinary activities before taxation" and para 12(b) required that "only profits realised at the balance sheet date shall be included in the profit and loss account"; these requirements applied to group accounts (Schedule 4A paras 1(1) and 2(1)). Reference was also made to the Companies Act 1985 (Bank Accounts) Regulations 1991 (1991 SI No.2705), which applied to the respondent, especially Regulations 3 and 5 and Schedule 1, paras 1(1), 15, 16 and 19. Even if parties contemplated that a single line in the accounts was to be used, that was in the context of the accounting provisions current at the time of the Deed. Where what emerged was of sufficient novelty, even a widely expressed provision would not encompass such new matter. Reference was made to Bank of Credit and Commerce International SA v Ali [2002]
1 AC 251 ("BCCI"). Such an approach was entirely orthodox. It did not involve reading out or excising any words; it simply meant reading the words used in the context as a whole. The objective behind the original Deeds in favour of the reclaimer and other foundations was to allow them to participate in the profits of the Group as a whole. If the court concluded that the change which had occurred in accountancy practice was not within the contemplation of the parties when the Deed was entered into, it could, in order to give effect to the parties' intention, "adjust" the figure appearing against "Profit before tax" in the 2009 consolidated income statement. The respondent's contention was consistent with Lord Rodger's approach in Multi-Link Leisure Developments v North Lanarkshire Council 2011 SC (UKSC) 53 at para [28]; the definition had to be read as a whole, including the exclusion of extraordinary profits. If the parties had given express consideration to the possibility of the treatment now required for negative goodwill, they would surely have provided for its exclusion from the calculation; any other conclusion would flout business commonsense (Lord Clarke at para [45]). Reference was also made to Rainy Sky SA v Kookmin Bank [2011] UKSC 50.

Discussion - construction of the Deed of Covenant
[10] The principles of interpretation applicable to the Deed are not in doubt. As was said very recently by the Supreme Court in Rainy Sky SA v Kookmin Bank at para [14] the authorities show that the ultimate aim of interpreting a provision in a contract, especially a commercial contract, is to determine what the parties meant by the language used, which involves ascertaining what a reasonable person would have understood the parties to have meant. The relevant reasonable person is one who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.


[11] The 1997 Deed of Covenant, although primarily concerned with an obligation on the respondent to make payment, was a bilateral deed; although concerned with provision for charitable purposes, it was entered into in a commercial setting. The principles of interpretation applicable to commercial contracts accordingly apply to it.


[12] The relevant reasonable person addressing what the parties meant on entering the 1997 Deed would not have known that in
2002 a European Regulation would come into force which would require negative goodwill to be brought into account as a positive figure in the drawing up of the respondent's consolidated income statement (or consolidated profit and loss account). He would, however, have known (as was accepted on behalf of the respondent) that it was possible that the accounting rules which had to be applied in drawing up such a statement or account might change. In 1992 the Accounting Standard FRS 3 had required that profits or losses on a sale or termination of an operation be included within pre-tax profits, even though these were not included in the profits on which tax had to be assessed. In 1993 the parties to the 1986 Deed had consensually amended the definition of "pre-tax profit" and "pre-tax loss" to deal with that situation. Otherwise, the parties in 1997 adhered to the amended definition. The relevant reasonable person might know that a background to the 1986 Deed was a preference - for tax reasons - to adopt an arrangement focused on a Deed of Covenant rather than on an entitlement to dividends; but he would also know that changed perceptions about what constituted a true and fair view of a group's financial position - including changed rules to give effect to such perceptions - might affect the figure brought out as "group profit before taxation". He would not know that in 2009 the figure for negative goodwill would be as large as it turned out to be; but the size of the figure in any year cannot affect the issue of interpretation, which must have the same result however large or small (or even absent) the figure might be.


[13] Against that background the relevant reasonable person would address how the parties had chosen to formulate the obligation in question. He would see that they had selected in clause 2(1)(a) a precise percentage of "Pre-Tax Profits" as the amount to be paid for each Accounting Reference Period. He would also see that "Pre-Tax Profit" was defined as "group profit before taxation" (that expression appearing in the definition in inverted commas) shown in the Audited Accounts (a term in turn defined as meaning the audited consolidated accounts of the [respondent] and its subsidiaries for the relevant period). He would understand from that that parties meant that the amount payable was to be identified not only from the relevant audited consolidated accounts but from an item in these accounts shown as "group profit before taxation". Given that items in such accounts are ordinarily set out in lines, he would expect to find the figure in question in the line carrying the description "group profit before taxation" (or some equivalent expression). He would not expect to be faced with adjusting that figure, upwards or downwards. Addressing the 2009 consolidated accounts of the Group he would find the figure £1,042 million against the line carrying the description "Profit before tax". He would not be troubled by the omission of the tautological word "group" or by "Profit" being in the upper case. Subject to making the arithmetical calculation in clause 2(1)(a) his task would be complete. By contrast, in our opinion, the construction advanced by Mr Wolffe, carefully presented though it was, flies in the face of what we take to be the clear and unambiguous wording of the provision and, in effect, involves rewriting it by the addition of a further exception to those expressly provided for.


[14] Mr Wolffe relied heavily on BCCI. There the House of Lords was concerned with interpreting the scope of a general release which had been granted by the respondent employees as part of a redundancy settlement. The question was whether subsequent claims for "stigma" damages (damages attributed to the appellant's breach of an implied obligation owed to the employees not to carry on a dishonest or corrupt business, which damage, it was alleged, had handicapped the employees in obtaining other employment) fell within the scope of the general release ("of all or any claims whether under statute, common law or equity of whatsoever nature that exists or may exist ..."). It was acknowledged that a party could agree to release claims or rights of which he is unaware and of which he could not be aware, even claims which could not on the facts known to the parties have been imagined, if appropriate language were used to make plain that that was his intention (per Lord Bingham of Cornhill, at para 9). But "a long and in my view salutary line of authority shows that, in the absence of clear language, the court will be very slow to infer that a party intended to surrender rights and claims of which he was unaware and could not have been aware" (para 10). This was described (para 17) as "a cautionary principle which should inform the approach of the court to the construction of an instrument such as this". Lord Bingham held (paras 18-19) that on a fair construction of the document in question he was unable to conclude that the parties intended to provide "for the release of rights and the surrender of claims which they could never have had in contemplation at all". These observations were made on the application of the "cautionary principle" established with respect to general releases.


[15] Lord Browne-Wilkinson agreed. Lord Nicholls of Birkenhead, agreeing, acknowledged (para 27) that the mere fact that parties were unaware of the particular claim was not a reason for excluding it from the scope of the release; but said (at para 28) that, however widely drawn the language "the circumstances in which the release was given may suggest, and frequently they do suggest, that the parties intended, or, more precisely, the parties are reasonably to be taken to have intended, that the release should apply only to claims, known or unknown, relating to a particular subject matter".


[16] Lord Hoffmann dissented. Lord Clyde, agreeing with the majority, noted (para 80) that it had been accepted by the appellant that the scope of the release was not universal. At para 86, addressing the particular circumstances, he concluded, for a variety of reasons, that the claim was "correspondingly remote from what the parties might reasonably be taken in the circumstances to have contemplated".


[17] All the observations made by the majority were made in the context of addressing a particular class of contract namely, that of a general release of liabilities and in relation to language arguably capable of more than one meaning. They do not support a contention that, in relation to contractual liabilities generally, it is necessary, for the obligant to be bound according to the contract's plain terms, that he should have been aware of a future novel contingency affecting the burden of that obligation; even if he could not have been aware of that contingency, he remains bound. The meaning of the provision is not affected by the contingency which arises.


[18] The Lord Ordinary's approach was somewhat different. He was persuaded by an argument that the parties did not intend that the calculation be affected "in a dramatic way" by changes in accountancy practice (para [75] - [76]) - counsel had not insisted on an argument that parties did not intend the calculation of the payment to be affected in any way by changes in accountancy practice. But that concession is, in our view, destructive of the argument. The calculation of the payment was not affected "in a dramatic way" merely by the new accountancy treatment of negative goodwill. The amount of that goodwill in any accounting period might be nil or some relatively small amount. It was the size of the negative goodwill arising from the acquisition of HBOS in 2009 which might be regarded as "dramatic". But the particular outcome in one year cannot affect the meaning of the parties' agreement.


[19] The Lord Ordinary concludes that, against the background of the 1986 Deed, the parties did "not intend that the foundation should receive a percentage of profits which included a figure for negative [goodwill] which was neither realised, subject to tax nor capable of distribution" (para [76]). It is, of course, not the parties' actual intention which is material; but, proceeding on what a reasonable person with the relevant background knowledge would have understood the parties to have meant by their agreement (Rainy Sky, at para 14), it is impossible, in our view, even bearing in mind the background to which the Lord Ordinary refers, to avoid the conclusion that they must be understood as meaning that the figure in the line "group profit before taxation" was to be definitive of what was to be used in the calculation. The Lord Ordinary's approach drove him to disregard the words "shown in the Audited Accounts" (para [81]). Such disregard, as Mr Wolffe accepted, is not legitimate and the authorities upon which the Lord Ordinary relies do not warrant that course of action. Far from doing "some slight violence" to the wording, the exercise involves flying in the face of the clear and unambiguous wording and cannot be supported.


[20] We should say something about the two cases - Debenhams Retail plc v Sun Alliance and London Assurance Co Ltd and Lian Hwee Choo Phebe and Another v Maxz Universal Development Group Pte Ltd and Others - on which the Lord Ordinary relied. The first of these concerned the interpretation of the phrase "gross amount of total sales" in a commercial lease which had been entered into during the purchase tax regime but which had to be interpreted and applied when purchase tax had been abolished and value added tax substituted for it. We have no difficulty with the decision or indeed the reasoning. The Lord Ordinary, however, quoted a passage from the judgment of Mance LJ (as he then was) which included the sentence:

"We have to promote the purposes and values which are expressed or implicit in [the lease's] wording, and to reach an interpretation which applies the lease wording to the changed circumstances in the manner most consistent with them".

But Mance LJ had agreed with Jacob LJ's reasons (and conclusion) which included agreement with Etherton J's view that the words did not have a single, plain and unambiguous meaning. The phrase "'group profit before taxation' shown in the Audited Accounts" has, in our view, a plain and unambiguous meaning. It is not legitimate, in the light of the perceived "purposes and values" of the contract, to create an ambiguity (by disregarding the critical words "shown in the Audited Accounts") and then to construe the remainder of the expression against these purposes and values.


[21] The other case (a decision of the Supreme Court of Singapore) was concerned with the effect of supervening legislation on an article in a company's Articles of Association. The issue was whether the legislation had rendered the article otiose. The sentence quoted above from the judgment of Mance LJ was referred to and applied. But the application went no further than taking account, in construing the article in question (in pari materia with an article in Table A of the relative Singaporean Companies Act), of the legislative framework in existence when the article was adopted by the relevant company. "Share capital" in that article had then meant "authorised share capital". Thus, on the concept of authorised share capital being removed by subsequent legislation, the article became otiose. Despite the reliance on Mance LJ's dictum the court's approach to construction followed conventional lines.


[22] For the above reasons the reclaiming motion must be allowed.


[23] Before us, as before the Lord Ordinary, the respondent advanced an alternative contention. That was that, in the event of the court being against it on the issue of construction, it should, by applying a concept referred to as "equitable adjustment", exclude from the calculation of profit before taxation the sum brought in for negative goodwill, thus in effect holding that the respondent had for 2009 no liability to the reclaimer under clause 2(1)(a); the amount due would accordingly be restricted to £38,920.


[24] The Lord Ordinary rejected this contention. Before us Mr Wolffe relied primarily on two authorities in Scots law - though he maintained that a consideration of comparative materials and certain European proposals provided at least a reassurance that what was contended for was not incompatible with a modern legal system. The two Scots authorities were Muir v McIntyres (1887) 14 R 470 and Wilkie v Bethune (1848) 11 D 132.


[25] Muir v McIntyres was concerned with an issue between an agricultural landlord and his tenant. The subjects had in the course of the lease been badly affected by fire. The landlord sued for the contractual rent; the tenant responded by claiming an abatement by reason of the reduced value of the subjects. The issue before the court was a technical one of whether the tenant's claim was truly one for abatement of rent or rather one of an illiquid claim for damages (which was not pleadable in answer to a demand for rent). Lord President Inglis observed at page 472:

"... it is quite settled in law that an abatement is to be allowed if a tenant loses the beneficial enjoyment of any part of the subject let to him either through the fault of the landlord or through some unforeseen calamity which the tenant was not able to prevent. There are many examples of this in the books."

He then goes on to illustrate that proposition. He accordingly held that there was a good claim for abatement and that it was competent to plead that claim as a defence to the action for the full rent. The other judges agreed.


[26] As the Lord President noticed, there was a long tradition in the Scots law of landlord and tenant of an entitlement in the tenant to an abatement of the contractual rent in the event of the subjects of lease being partially destroyed. Although neither the judges in Muir v McIntyres nor the earlier authorities cited explain the jurisprudential foundation of that entitlement, it is no doubt, as Lord Cooper observed in an article entitled "Frustration of Contract in Scots Law" (1946) 28th Journal of Comparative Legislation 1 at page 4, related to the concept of rei interitus. That concept, however, as its Latin expression imports, is concerned with the destruction (partial or total) of property. There is nothing in the authorities to suggest that the concept of abatement extends more widely.


[27] Wilkie v Bethune is an extraordinary case. Its background was the failure of the potato crop in 1846. The pursuer was a farm servant who had been engaged under an agreement which entitled him, in addition to money wages, to certain allowances, part of which were "nine bolls of potatoes laid down at his door". As a result of the failure of the crop, the market price of potatoes rose dramatically. No potatoes having been delivered, the servant sued his master for their market price. Lord Jeffrey, who delivered the fullest opinion in the First Division, described the contract as one "inter rusticos", construing its nature, in relation to the potatoes, as being "an undertaking by the master to furnish a certain amount of aliment. The price of provisions may rise, but the master is bound, at whatever cost, to supply aliment in one shape or another" (page 139). Lord Mackenzie had observed that the servant, and his fellow servants, were "entitled to an equivalent amount of sustentation" (page 137). A doctrine expounded in Chitty on Contracts (3rd ed) at page 735 was distinguished, having regard to the peculiar nature of the contract under discussion (see Lord Jeffrey at page 139). A "very equitable adjustment" between the respective figures contended for by the parties was settled upon by the court.
Bell's Principles (Guthrie's edition) at para 29, footnote (i), describes this as a "remarkable and exceptional case of supervening difficulty". Gloag on Contract (2nd ed) page 339 describes it as "a very special case". Both these descriptions are well justified. All that can be taken from Wilkie v Bethune is that, in a very unusual case where the parties had contracted for an alimentary provision, the court was able to settle the dispute by fixing upon a sum which was regarded equitably as the money equivalent of the obligation. No general principle can be derived from it.


[28] McBryde on Contract (3rd ed) at para 21.21 refers to Wilkie v Bethune in the context of a discussion of frustration of contract. But it is not suggested that the present contract has been frustrated. We are unable to find in Scots law any general doctrine of "equitable adjustment" which would allow the court to moderate the obligation contractually owed by the respondent to the reclaimer under clause 2(1)(a).


[29] We were referred to the decision of the Court of Appeal in Pole Properties v Feinberg (1982) 43 P & CR 121, another case of landlord and tenant. In a situation where there had been a radical change in the way in which heating was provided to residential flats and where it was accepted on both sides that the provisions in respect of payment for that service were no longer operable, the court fixed an equitable charge. But this does not help in establishing any broad principle which could apply in the present case. We were referred to a Feasibility Study (dated
3 May 2011) by the Commission Expert Group on European Contract Law on a possible Future Instrument in European Contract Law. This includes an article (Article 92) on obligations and remedies of the parties to a sales contract which provides for a situation in which performance of an obligation under such a contract has become excessively onerous because of an exceptional change of circumstances. This proposal, which appears to relate only to contracts of sale, is not uncontroversial. The Scottish Law Commission has responded with the observation that it is "not convinced of the utility of Article 92". The Commission noted that, "there is no doctrine of equitable adjustment in Scots law to deal with change of circumstances, as distinct from the law of frustration". While it appears that certain European jurisdictions do have some form of equitable adjustment of contracts, there is, as yet, no foundation for it, as a generality, in Scots law. It would be beyond the proper scope of judicial power to develop it in any way which would assist the respondent in this case.


[30] In these circumstances the cross-appeal falls to be refused.


[31] We shall recall the Lord Ordinary's interlocutor of 17 June 2011, sustain the first and second pleas-in-law for the pursuer and reclaimer, repel the respondent's whole plea-in-law and grant decree of declarator in terms of the first conclusion of the Summons and decree for payment of the principal sum in terms of the second conclusion; continue the cause in relation to interest and expenses.


BAILII: Copyright Policy | Disclaimers | Privacy Policy | Feedback | Donate to BAILII
URL: http://www.bailii.org/scot/cases/ScotCS/2011/2011CSIH87.html