Interpreting Clause 27 & 2.1.3 in Scottish Property Sales Legal Dispute, Lecture notes of Construction

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SHERIFF APPEAL COURT 2018 SAC (Civ) 27 [FAL-A101-17] Sheriff Principal M M Stephen, QC Sheriff Principal M W Lewis Appeal Sheriff P J Braid OPINION OF THE COURT in the appeal SHAHZAD WASEEM ANWAR AND AISHA ANWAR Pursuers and Respondents against DAVID BRITTON AND LINDA BARCLAY Defenders and Appellants Appellants: Clancy QC; Burness Paul LLP Respondents: Howie QC; Manson, advocate, Dentons UKMEA LLP 8 October 2018 Introduction [1] The primary question of law raised in this appeal, from the sheriff at Falkirk, is the correct construction to be placed on two clauses which appear in the Scottish Standard Clauses (Edition 2) issued by the Convenor of the Law Society of Scotland Property Law Committee on 14 March 2016 and registered in the Books of Council and Session on 15 March 2016 (“the standard clauses”). 2 [2] The standard clauses are frequently, if not invariably, incorporated into missives for the sale and purchase of heritable property in Scotland and, as such, their meaning is we assume a matter of no little importance to the legal profession in Scotland, as well as to the parties in this action, not least as the purpose of having standard clauses is, presumably, so that the terms on which heritable property is bought and sold are clear and unambiguous, in order that litigation as to their meaning is avoided. As this case shows, in that regard, at least, the exercise has not been entirely successful. [3] The clauses the meaning of which is the subject of controversy are clauses 27.1 and 2.1.3. [4] Clause 27.1, a so called entire agreement clause, is in the following terms: “27 ENTIRE AGREEMENT 27.1 The Missives will constitute the entire agreement and understanding between the Purchaser and the Seller with respect to all matters to which they refer and supersede and invalidate all other undertakings, representations, and warranties relating to the subject matter thereof which may have been made by the Seller or the Purchaser either orally or in writing prior to the date of conclusion of the Missives”. [5] As the numbering suggests, clause 2.1.3 forms part of clause 2, that clause being in the following terms: “2 AWARENESS OF CIRCUMSTANCES AFFECTING THE PROPERTY 2.1 So far as the Seller is aware (but declaring that the Seller has made no enquiry or investigation into such matters) the Property (including in respect of Clauses 2.1.3 and 2.1.4 the Building, if appropriate) is not affected by: 2.1.1 any Notice of Potential Liability for Costs registered in terms of the Tenements (Scotland) Act 2004 or the Title Conditions (Scotland) Act 2003; 2.1.2 any Notices of Payment of Improvement/Repairs Grants; 5 before answer on the whole of the pursuers’ averments and excluded certain of the defenders’ averments from probation. [12] As regards the third issue – whether, esto clause 2.1.3 had the meaning contended for by the pursuers, it amounted to a misrepresentation upon which the pursuers could found an action of reduction – the defenders’ position before the sheriff was that if he found against them on the construction of clause 27, as he did, the point became academic and was not insisted upon. As the sheriff did find against the defenders on the meaning of that clause, he therefore did not require to reach any decision on the third issue. However, he did express the view that, if he was wrong as to the meaning of the clause, reduction was not necessarily barred simply because the representation was embodied in a term of the contract, in circumstances where the clause was introduced at a stage prior to the conclusion of the missives. [13] The defenders have appealed against all three aspects of the sheriff’s decision. Their first ground of appeal relates to the correct construction of clause 27; their third to the correct construction of clause 2.1.3 and their second to the question of remedy in the event that the representation contained in that clause turns out to be false. Those grounds of appeal were dealt with by counsel in that order, and we do likewise in this judgment. Approach to contractual interpretation [14] Before turning to consider those three grounds of appeal we will first say something about the approach to contractual interpretation, since both the first and third grounds of appeal directly turn on how the clauses in question ought to be interpreted. The parties were not in dispute as to the principles governing the interpretation of contracts in Scotland. It was common ground that those principles are derived from the following authorities: 6 Rainy Sky SA v Kookmin Bank [2011] 1WLR 2900 per Lord Clarke at paras 21-23; Arnold v Britton [2015] AC 1619 per Lord Neuberger at paras 14-23 and Lord Hodge at paras 76-77; & @SIPP Pension Trustees v Insight Travel Services Ltd 2016 SC 243 at paras 17 and 44; Hoe International Ltd v Andersen 2017 SC 313 at para 19; and Wood v Capita Insurance Services Ltd [2017] 2 WLR 1095 per Lord Hodge at paras 10-14. Counsel for the pursuers summarised the principles as follows (counsel for the defenders taking no issue with this formulation): i. The task for the court is to seek to objectively determine what a reasonable person with all the background knowledge reasonably available to both parties at the time of contracting would have understood the parties to have meant by the words they have used. ii. The court should be concerned to give effect to the natural and ordinary meaning of the words used by the parties. iii. In circumstances where there are ambiguities or rival meanings, the court is entitled to test the competing constructions with reference to business common sense. iv. Finally, the “internal context” of the contract at issue should be considered in seeking to construe a particular term. The court should therefore be concerned to read the contract as a whole in a coherent and consistent way with the result that terms complement rather than contradict one another. [15] We now go on to consider each of the disputed clauses, and grounds of appeal, in turn. We will begin with clause 27, to which the first ground of appeal related. First ground of appeal: clause 27. The issue here is whether clause 27 prevents the pursuers from founding on the email of 14 July 2016, which predated the conclusion of missives. Submissions for the defenders [16] Senior counsel for the defenders adopted his written note of argument (as did senior counsel for the pursuers in relation to his note) and, for the avoidance of doubt, we have had 7 regard both to the notes of argument and submissions made at the bar. We simply narrate a summary of the submissions made by each party. Counsel for the defenders submitted that the clause had dual effect. The first part of the clause prescribed what constituted the contract. The second part (from the words “supersede and invalidate” to the end) had the effect of excluding reliance by the pursuers on any representations which were not contained within the missives. The key words were “understanding” and “representations”. “Understanding” must signify something other than an agreement; and “representations” were to be distinguished from contractual terms and also from an undertaking and a warranty. The email, which related to flooding, clearly referred to the same matter as clause 2.1.3 and therefore to the subject matter of the contract. It formed part of the understanding of the pursuers but did not form part of the missives. Accordingly, the end product was that the pursuers were unable to rely upon it. The words “supersede” and “invalidate” did not prevent the clause from having that meaning and the sheriff erred in so far as he found otherwise. The word “supersede” was the more apposite of the two. It made perfectly good legal sense to say that the email was superseded by the terms of the contract. It was simply a question of contractual interpretation as to whether or not a clause had the effect of preventing a party from relying on a misrepresentation. There did not have to be an express reference to non-reliance, for a clause to have that effect. While the wording of the clauses in the case law referred to non-reliance, those words did not require to appear. Other wording could equally have the same effect. In support of his submission, counsel referred to Deepak v Imperial Chemical Industries plc [1998] 2 Lloyd’s Rep 139 and [1999] 1 Lloyds rep 387, and to Watford Electronics Ltd v Sanderson CFL Ltd [2002] FSR 19. In Deepak, at first instance, the judge had placed significance on the omission from the clause in that case of the word “representation”. By contrast, that word appeared in clause 27. 10 This positioning makes it even more unlikely that the intention of the draftsman was that “representations” was intended to include something which had induced the contract or that the clause achieves two different consequences: the deprivation of legal effect from a representation which may otherwise have had that effect, and an exclusion of any entitlement to rely on a representation which turned out to be false. The natural and ordinary meaning of the words, therefore, points towards the construction contended for by the pursuers. However, to the extent that the tautology in the clause, or the other language used, does give rise to ambiguity or rival meanings, we then turn to consider the context. We note that this is a standard form contract designed to be used for many years in a variety of situations in contracts for the purchase and sale of residential property in Scotland. It is unlikely that the drafters intended that a purchaser of heritable property should, in ordinary course, not be entitled to pursue a legal remedy which he would otherwise have had. Had that been the intention, one would have anticipated that it would have been made crystal clear. It is one thing to provide for certainty as to what the contract comprises; quite another to agree not to rely on a pre-contractual misrepresentation. It is also pertinent to have in mind that, as counsel also submitted, the drafter can be taken to be aware of the pre-existing case law and of formulae which were known to work; and had it been the intention that the clause not only be an entire agreement clause but also one which excluded the right to rely on pre-contractual misrepresentations, it is not unreasonable to proceed on the basis that had the intention been as the defenders contend, wording would have had to be used which put the matter beyond doubt and had withstood the scrutiny of the courts rather than leave the matter to chance. [20] This point is reinforced by the further submission made by counsel for the pursuer, with which we also agree, that, in effect, the construction of the clause contended for by the 11 defenders is to exclude liability which one party would otherwise have together with the corresponding surrender of rights by the other party. As such, we agree with the dictum of Mr Justice Jacob in Thomas Witter Ltd v TBP Industries Ltd (1994) 12 Tr L 145 at 168C, cited with approval by Mr Justice Rix, the first instance judge in Deepak, at page 168 that: “…if a clause is to have the effect of excluding or reducing remedies for damaging untrue statements then the party seeking that protection cannot be mealy-mouthed in his clause. He must bring it home that he is limiting his liability for falsehoods he may have told”. [21] Finally, one of the principles of contractual interpretation is that contracts should be read as a whole. We note that clause 26 of the standard clauses expressly provides for limitation of liability and it is therefore unlikely that clause 27, which immediately follows that clause, is also intended to have that effect, by implication. [22] Accordingly, we consider that the sheriff was correct in interpreting clause 27.1 as he did. Insofar as the first ground of appeal is concerned, we will adhere to the sheriff’s interlocutor. The third ground of appeal: clause 2.1.3 [23] The issue over clause 2.1.3 is a narrow one. The difference between the parties is whether the clause amounts to a warranty only as to the current condition of the property and no more, or whether it amounts to a warranty as to the defenders’ knowledge of any history of flooding at the property, within the last five years. The defenders contend for the former. They argue that the plain meaning of the clause is that it is a statement as to a present state of affairs – (“that the property is not affected by”) which has been caused by a past state of affairs – (“flooding from any river or water course which has taken place within the last five years”). The pursuers argue that the sheriff’s interpretation of the clause was 12 correct and that it should be read as a warranty that the property has not been affected by flooding within the last five years. Underlying these different approaches is a difference in the application of the relevant principles set out above, and, in particular, a dispute as to the whether the application of commercial common sense has any role to play in the interpretation of the clause. Submissions for the defenders [24] Counsel for the defenders submitted that business common sense had no role to play in a case where the natural and ordinary meaning of the words was clear. Here, there was no ambiguity and hence no need to resort to commercial common sense. In any event the court should always be very wary about attributing that label to any proposed construction since it was a nebulous concept. The defenders’ proposed construction, counsel submitted, was more sensible than the pursuers’ in any event. The pursuers’ example of a property flooding every other day was fanciful. It was inconceivable that a property which flooded every other day would not be affected by flooding. It would equally be draconian to require a seller to disclose a single incident of flooding which occurred four years and eleven months ago. It would be obvious to a seller what he had to disclose since the property would require to have been affected to a material extent. Submissions for the pursuers [25] Counsel for the pursuers submitted that the leading authority which advocated the use of commercial common sense as a tool in interpreting a contract was Rainy Sky. Commercial common sense had in no way been departed from as a principle of construction. Counsel accepted that the factual context was of no assistance where the court 15 [29] We further observe that the word “materially” – as in, “materially affected by”: a phrase which counsel for the defenders used at one stage of his submissions – is conspicuous by its absence, and indeed would make no sense when applied to the matters referred to in clauses 2.1.1 and 2.1.2. [30] Accordingly, applying a literalist approach, the clause could have either of the meanings respectively contended for by the parties. Turning then to check those potential meanings against their consequences – that is, adopting the iterative approach referred to by Lord Hodge – the meaning contended for by the defenders makes little sense. It is unlikely that a purchaser would wish to have a warranty that the property is not presently affected by flooding when such a circumstance might be expected to be obvious to the purchaser or his surveyor in any event. It is also unlikely that he would not wish to know about the propensity to flood. The defenders’ construction also gives rise to uncertainty, since it introduced an element of subjective assessment into what must be disclosed. How is a seller to judge whether the property is or is not affected by flooding, assuming he knows what “affected by” means. Does it mean “materially affected”? If so, how is a seller to know the property is presently affected by flooding to a material extent and, if so, whether that is due to flooding which occurred in the last five years. Suppose the property had been severely flooded six years ago and less severely flooded four years ago. Would the seller be entitled to say that the remaining effect on the property was down to the earlier flood, not the latter and therefore not disclose it? [31] Conversely, the pursuers’ interpretation not only makes sense but is easy for a seller to comply with. All they need to do is disclose any flooding which, to their knowledge, has occurred within the last five years. Whether it was big or small makes no difference. The risk will then be a matter for the purchaser to take an informed decision on. 16 [32] It was submitted for the defenders that draconian results would arise if the purchaser became entitled to resile due to a minor flood nearly five years ago but we do not consider that to be draconian at all. All the seller has to do to avoid that situation is to disclose flooding of which he is aware. [33] We therefore consider that the draftsman intended that clause 2.1.3 should have the meaning contended for by the pursuers, and that the sheriff was correct in so holding. Insofar as the third ground of appeal is concerned, we also adhere to the sheriff’s interlocutor in this regard. The second ground of appeal: remedy [34] The remaining (second) ground of appeal relates to the issue of whether, in the event that clause 2.1.3 has the meaning contended for by the pursuers, and the defenders were aware of flooding within the last five years which had not been disclosed, the pursuers are entitled to regard that not only as a breach of contract but also as a misrepresentation which entitles them to the remedies of reduction of the contract and to repetition of the purchase price (and, perhaps, damages). As we have already observed, before the sheriff this became something of a non-issue, since the defenders conceded that if they were unsuccessful on the meaning of clause 27, and the pursuers were entitled to rely on the email as containing a misrepresentation, the point became academic. Before us, however, the defenders’ counsel insisted on this ground of appeal and sought to have certain averments excluded even if the defenders’ first ground of appeal failed (as it has done). 17 Submissions for the defenders [35] The argument before us was striking inasmuch as each counsel sought to persuade us of the correctness of their respective positions by reference to first principles, there being little authority on the point: certainly, no direct authority. In the defenders’ written note of arguments, it was submitted that the remedy of reduction was available where the consent of a party to the existence or terms of a contract was impaired to an extent recognised in law as properly requiring that party to be afforded the opportunity of having the contract set aside and be restored to his pre-contractual position. It was a fundamentally different remedy from rescission. That latter remedy was a means provided to enable a contract to be brought to an end because it had been breached. Unlike reduction it was a remedy which a party could invoke without recourse to legal authority. The pursuers’ case ignored those basic legal points. The remedy of reduction was not competent for a breach of clause 2.1.3. The pursuers’ consent to enter the contract was in no way impaired by the existence of terms of clause 2.1.3. The fact that the clause contained a statement about a quality or attribute of the subjects of sale did not transform it into a pre-contractual misrepresentation capable of giving rise to a defect in consent on the part of the pursuers. At the hearing before us, counsel also drew a distinction, under reference to McBryde, The Law of Contract in Scotland 3rd Edition, para. 5.45, between a term of a contract, and a representation which was part of the negotiation leading up to the contract. A statement could be one or the other but not both. The pursuers’ argument that a pre-contractual representation could acquire an additional status as a contractual term was ingenious, but untenable. The clause in question was first introduced into the contract by the pursuers’ offer and could not amount to a representation by the defenders. 20 [38] The question remains as to whether the pursuers have averred a relevant case, since it would not be enough simply to aver that the clause has been breached. Such an averment would amount to no more than an averment of breach of contract. The pursuers’ position in submissions was that the representation, and therefore misrepresentation, was made as soon as the qualified acceptance was issued. The defenders’ counsel sought to make something of the fact that the standard clauses were first mentioned by the pursuers in their offer, and that the representation was therefore made by them, but we do not consider that to be a correct analysis. To go back to the example of B buying a car from A, if B says to A “I will buy your car but only if you tell me that it has done no more than 5,000 miles” and A says “I agree to sell it to you on that basis” that then becomes a representation by A, and the position is no different here. The pursuers offered to purchase the subjects on the basis (as we have found) that the defenders were unaware of any flooding within the previous five years, and as soon as the qualified acceptance accepting that term was issued, that did become a representation by the defenders to that effect (whether the pursuers themselves were aware of the standard clauses is of course a different matter, but that goes to reliance rather than to the question of whether a representation was made). As far as the pursuers’ averments are concerned, we concede that they might be clearer insofar as the timing of the misrepresentation is concerned. However, on balance we consider that they are sufficiently specific to found a case based upon reliance on the representation constituted by the issuing of the qualified acceptance. In particular the averment that “But for the misrepresentations the pursuers would not have entered into the missives of sale” in article 12 of condescendence makes the pursuers’ position clear. [39] The defenders’ second ground of appeal must therefore also fail. 21 Decision [40] For all of the foregoing reasons, we propose to refuse the appeal and adhere to the sheriff's interlocutor of 11 December 2017.