2019 brought some interesting and important case law of relevance to Scottish commercial contract lawyers. Summarised below are our pick of 2019's top contract law cases from north and south of the border.

Contractual Notices

Our Generation Limited v Aberdeen City Council [2019] CSIH 42

Cases concerning the service of contractual notices arise regularly in the Scottish courts. The matter to be decided in Our Generation v Aberdeen City Council was whether an email sent on behalf of Our Generation to an employee of the Council attaching a document headed "Statement of Account" constituted a written notice requiring payment in terms of the contract between the parties.

The Inner House concluded that the email and its attachment did not constitute such a notice, commenting that, whatever language is employed, it must be seen as drawing the recipient's attention to something which will happen if he or she does not react.

The Inner House otherwise went on to reinforce the applicability of the two stage approach set out in Hoe International v Anderson 2017 SC 313. Firstly, do the terms of the notice convey the necessary information to the recipient? Secondly, has the notice been issued in accordance with the contractual provisions? Here the Inner House endorsed the view in Hoe that, the more drastic the consequences of the notice, the greater the need for strictness.

Once again, we have a reminder of the need to consider the drafting of contractual notices very carefully.

Collateral Warranties

British Overseas Bank Nominees Limited v Stewart Milne Group Limited [2019]CSIH 47

In British Overseas Bank v Stewart Milne, it was held that no new prescriptive period (within which any claim must be brought) is commenced when a collateral warranty is granted. The Inner House focused on the commercial purpose of the collateral warranty which it regarded as being to provide the beneficiary with the same rights as those enjoyed by the employer under the original building contract. The existence of both a “no greater liability” clause and an “equivalent rights of defence” clause within the collateral warranty supported this conclusion.

Contract Interpretation

British Overseas Bank Nominees Limited v Stewart Milne Group Limited [2019] CSIH 47

Burnett v International Insurance Company of Hanover Limited [2019] CSIH 9

Scanmudring AS v James Fisher MFE Limited [2019] CSIH 10

EOP II Prop Co III SARL v Carpetright Plc [2019] CSOH 40

Drum Income Plus Limited v LS Buchanan Limited [2019] CSOH 94

The Lord President and Lord Drummond Young promoted a purposive approach to contract interpretation in the cases outlined below in 2019, with commercial common sense regarded as playing a key role. However, this has not been embraced by all of the Scottish judiciary.

In British Overseas Bank (discussed above) it was, stressed that commercial common sense should be central to the interpretative exercise, which should be purposive, as well as contextual.

Similarly, in Burnett v International Insurance Company of Hanover Limited, which concerned the interpretation of an insurance policy, the Inner House indicated that a purposive approach to interpretation should be followed: "the construction given to the contractual wording should reflect the intention of the parties and the commercial sense of the agreement…. commercial common sense is an important factor in construction of the contractual wording".

In Our Generation (also discussed above) the Inner House echoed its comments in Hoe International that "a purposive construction was appropriate and commercial common sense should be applied".

The challenge with these statements is that they leave lawyers unclear as to whether the actual language selected by the parties will be regarded by our judges as providing the primary indicator of a contract's meaning; or whether other factors (such as the overall purpose of the contract and commercial common sense) will be ascribed equal, or perhaps greater, weight.

Members of the Scottish judiciary seem to have differing views. In Scanmudring AS v James Fisher MFE, the majority of the Inner House found that James Fisher was liable to pay Scanmudring for the services of a sub-sea excavator and its crew after the excavator became stuck on the seabed for around four months. The rates payable would have ceased to apply in the event of a "breakdown". Lord Menzies and Lord Brodie prioritised the ordinary and natural meaning of the language used in the contract in concluding that the excavator had not broken down. It was operational but stuck on the seabed. The Lord President gave a dissenting opinion focused on commercial common sense. The Lord President's conclusion was that a fundamental requirement for the successful operation of the contract was that the excavator was capable of doing what it was designed to do. The machine had broken down because it could not be moved.

There are also indications that some of our Outer House commercial judges consider commercial common sense to have a more restricted role in the exercise of contract interpretation than that envisaged by the Lord President and Lord Drummond Young. The view that we have seen expressed is that, where the language used is unambiguous, commercial common sense has no role to play in the interpretative exercise.

In EOP v Carpetright, the correct interpretation of the notice provisions in a creditor's voluntary arrangement became a disputed matter. Lord Bannatyne's view was that the defender was "not entitled to" have recourse to commercial common sense because the language used was, in his Lordship's view, clear.

Similarly, in Drum v Buchanan, the correct interpretation of a dilapidations provision in a lease was disputed. Lord Ericht's view was that "questions of which of two possible constructions best accords with commercial common sense do not arise" because based on the language used there was "no room for the defender's alternative construction".

We can hope for a more consistent approach in 2020 but prospects of consensus do not seem high.

Expert Determination

Ashtead Plant Hire Company Limited v Granton Central Developments Limited [2019] CSOH 7

Cine UK v Union Square Developments Ltd [2019]CSOH 3

Expert determination is entirely a creature of contract. The expert’s remit and powers are dependent on what the parties have agreed in the contract between them.

The decision in Ashtead Plant Hire Co Ltd v Granton Central Developments Ltd indicates that the courts will not readily conclude that their jurisdiction has been ousted by a contractual provision for disputes to be resolved by way of expert determination. Ashtead concerned a dispute between a landlord and a tenant as to the correct interpretation of rent review provisions in a lease. The parties disagreed over the correct interpretation of “the leased subjects” and the assumption and disregard provisions.

Lord Doherty concluded that, on a proper construction of the lease, the parties did not confer exclusive jurisdiction on the expert to decide, as a matter of law, what “the leased subjects” were, or to decide the legal effect of the assumptions and disregards. It was for the court to determine the correct interpretation.

On the one hand, the courts’ approach is to be welcomed – judges with the benefit of reasoned argument from both parties’ representatives have the best chance of arriving at the correct interpretation when matters of law arise. However, it is a double-edged sword, with the anticipated benefits of adopting a quick and low-cost dispute resolution process likely to evaporate rapidly.

Cine-UK Ltd v Union Square Developments Ltd indicates that, with carefully selected wording, parties can exclude recourse to the courts. Cine-UK also concerned the interpretation of a rent review provision. The question of the appropriate level of revised rent was referred to an independent surveyor for determination. The lease provided that the surveyor’s decision was to be “final and binding on the parties hereto both on fact and law”. Notwithstanding this “finality provision”, the tenant challenged the surveyor’s decision on the basis that she erred in law.

In her judgment, Lady Wolffe stressed that it was a matter of contractual interpretation whether parties have conferred exclusive jurisdiction on an expert to determine questions of both fact and law. In this instance, the finality provision “could not be clearer in its terms”. Cine-UK illustrates that this type of finality wording closes the door completely on challenging the way in which the expert has reached his or her determination.

Frustration & Brexit

Canary Wharf Limited v. European Medicines Agency [2019] EWHC 335 (Ch)

In Canary Wharf Limited v European Medicines Agency, the High Court in England concluded that a commercial lease between the European Medicines Agency (EMA) and its landlords would not be frustrated by the UK’s withdrawal from the EU.

The English contractual doctrine of frustration is similar to that in Scotland and operates to relieve parties of their contractual obligations because of the effect of a supervening event. The event must significantly change the nature of the outstanding contractual rights and obligations to the extent that it would be unjust to hold parties to the terms of their bargain in the new circumstances.

The EMA argued that the relocation of its London headquarters to Amsterdam as a result of Brexit amounted to circumstances which could not have been contemplated at the time of entering into the lease. However, the High Court disagreed, concluding that there was no legal necessity for the EMA to leave the premises and pointing out that the EMA had the ability to assign or sub-let the premises.

The doctrine of frustration therefore remains narrow in scope and it will be difficult to argue that Brexit has the effect of frustrating a contract.

Good Faith

Bates & Others v Post Office Limited Judgment (No 3)

Common Issues [2019] EWHC 606 (QB)

In recent years, we have seen the High Court in England show a willingness to imply a duty to act in good faith into a category of agreements, which it has termed "relational contracts". We are awaiting the point to be considered in an appropriate case in Scots law so it is a trend to watch.

The English case law continued to develop in 2019. The most notable development was the common issues judgment in Bates v Post Office, group litigation brought by around 550 sub-postmasters against the Post Office. Fraser J implied a duty on the part of the Post Office to act in good faith towards the sub-postmasters into their contractual arrangements which were considered to be relational contracts.

Guidance was provided as to factors to consider in determining whether a contract is relational, including whether the contract is mutually intended to be long term; whether the parties intend that the roles will be performed with integrity and fidelity to the bargain; whether the parties are committed to collaboration; and whether the contract relies on a high degree of cooperation, mutual trust and loyalty. There is a question mark over how helpful this guidance actually is as arguably most long term contractual arrangements will fulfil most of these criteria.

Seventeen specific terms were implied into the contracts between the Post Office and the sub-postmasters as a result of the relational status. Some were general in nature, for example not to take steps which would undermine the relationship of trust and confidence. Some however, amounted to specific obligations which did not feature in the parties' written contract, such as to provide an accounting system that is fit for purpose; to disclose errors in the accounting software; to accurately produce relevant records; and to investigate apparent shortfalls.

The decision in Bates is notable for the expansive approach taken to the content of an implied duty of good faith and raises the question of whether the implication of specific obligations in this manner risks undermining the terms that the parties have agreed to in their written contract.

Liquidated Damages

Triple Point Technology, Inc. v PTT Public Company Ltd [2019] EWCA Civ 230

The Court of Appeal considered the issue of whether a liquidated damages provision applied in circumstances where work was never completed. The liquidated damages provision in the contract between Triple Point and PTT for the installation of a software system provided for payment of damages at a set rate "per day of delay from the due date for delivery up to the date PTT accepts [the] work".

The Court of Appeal held that the clause did not apply to work that the contractor did not complete. It stressed that the application of liquidated damages clauses in such circumstances is dependent on the drafting of the clause. In this case, the language focused specifically on delay between the contractual completion date and the date when work was actually completed by the contractor. As that never occurred, the liquidated damages clause did not apply.

The case provides a reminder to contract drafters to expressly address entitlement to liquidated damages in respect of incomplete works in the event of termination. Clauses which refer to liquidated damages accruing until the works are complete are not likely to cover incomplete work at the point of termination. The decision also highlights the need for careful advice on the implications of terminating a contract prior to completion due to delay.