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OUTER HOUSE, COURT OF
SESSION
[2009] CSOH 14
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A91/08
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OPINION
OF LORD EMSLIE
in
the cause
ROBERT
MARK GIBSON and ANOTHER
Pursuers;
against
THE
ROYAL BANK OF SCOTLAND plc and OTHERS
Defenders:
ญญญญญญญญญญญญญญญญญ________________
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Pursuers: MacColl; Thorntons
First Defenders: McBrearty; Dundas
& Wilson
3 February 2009
Introduction
[1] In this action the pursuers, who are
husband and wife, seek reduction of a standard security which was granted over
their home in St Andrews in late January 2006. That
standard security was granted by the former husband of the second-named pursuer
("Mr McAlister"), in whose name the title to the property was originally taken,
and was correspondingly accepted (and recorded in their own favour) by the
Royal Bank of Scotland plc ("the Bank") who appear in this process as first
defenders.
[2] The pursuers' position is that the
granting of the standard security was in breach of certain pre-existing
contractual arrangements concluded between themselves and Mr McAlister on
and after 8
February 2005. Initially these comprised (i) an option
conferred on the pursuers to purchase the subjects from Mr McAlister
within a two-year period, and (ii) a lease of the property to the pursuers in
the meantime, but by written notice dated 2 March 2005 the pursuers
formally exercised their option and stipulated 8 February 2006 as the date
for entry and completion. These somewhat
unusual temporary arrangements were apparently conceived as a means by which a
debt owed by Mr McAlister could in due course be recouped by the pursuers
in the form of a discounted option price.
[3] Although none of the option
documentation was registered or recorded, the pursuers complain that in taking
and recording the standard security in their favour the Bank acted in bad faith
and cannot now be allowed to retain the benefit of the transaction. In that context it is averred that at the
material time the Bank were aware of the antecedent purchase option but took no
steps to inquire into its nature and result before accepting the security. According to the pursuers the Bank's averred
knowledge was sufficient to put them on inquiry; the Bank's failure to inquire was sufficient
to constitute bad faith on their part;
and in conjunction with such bad faith the pursuers' antecedent option
rights provided a relevant and sufficient basis for the present action of
reduction.
[4] For their part the Bank seek to maintain
the validity of the security transaction in their favour, contending that the
pursuers' action should be dismissed as irrelevant. In that connection I have now heard an
interesting and wide-ranging debate on the procedure roll, in which the
principal competing arguments concerned the circumstances in which a recorded grant
of heritable rights might be defeated by considerations of bad faith on the
part of the grantee. On the one hand,
there was the long-established principle of the law of property whereby a party
transacting with heritage was entitled to do so on the faith of the public
records, and whereby recorded real rights would prevail over merely personal
rights of whatever nature. On the other,
there was the well-known equitable principle of contract law, whereby no-one
should be permitted to benefit from his own breach of the basic obligations of
good faith and fair dealing. In broad
terms the main issue before me was the degree to which these potentially
competing principles could be reconciled, and in particular whether the Bank's
standard security was susceptible to reduction where their averred bad faith
concerned the pursuers' personal and unrecorded option rights. The Bank's position was that such rights
afforded the pursuers no relevant basis for challenging the subsequent standard
security in their favour;
furthermore, that the Bank's averred state of knowledge gave rise
to no duty of inquiry on their part; and
that in any event the initial option agreement was formally defective because
the pursuers' written acceptance had not been witnessed.
[5] If the last of these contentions was
correct, parties were agreed that it would be a matter for proof whether (as
the pursuers alleged) any formal invalidity had been cured by the subsequent
actings of parties. It was further
agreed that the Bank's averred state of knowledge, which was disputed on
Record, would also be a matter for proof in due course if required. However, the need for proof on such issues
would fly off altogether if the Bank's primary contentions were upheld to the
effect that, even if they were proved to have known of the pursuers'
pre-existing option rights, the recorded standard security which they held was
still valid and unreducible.
[6] For convenience I propose to deal with
the debated issues in turn, beginning with the Bank's subsidiary argument on
the formal validity of the initial option agreement.
Formal validity of the initial option agreement
[7] The
Bank's contention here was that, on any view, certain of the pursuers'
averments at page 8 of the Record should be excluded from probation. The option agreement was said to have been constituted
by written offer and acceptance, both dated 8 February 2005, and the
problem arising in this context was that the written acceptance (No. 6/5 of
process) had failed to comply with the formal requirements laid down in the
offer (No. 6/4 of process).
Clause 8 of that offer was in the following terms:-
"8. FORMAL DOCUMENTATION REQUIRED
Neither the
Grantor nor the Grantee shall be bound by any acceptance hereof or any other
letter purporting to form part of the Option Agreement or any amendment or
variation of the Option Agreement unless the same satisfies the requirements of
Section 3 of the Requirements of Writing (Scotland) Act 1995."
Section 3 of the
1995 Act prescribed the circumstances in which valid subscription by the
granter of a deed or document would be presumed. Although perhaps not strictly "requirements"
as such, unlike those set out in sections 1 and 2 of the Act, there was nothing
else to which clause 8 of the offer could sensibly be thought to
refer. The heading of the clause
confirmed that formalities of execution were in issue; the fact that the offer was itself
witnessed was a pointer in the same direction;
and on the pursuers' contrary argument the clause would be deprived of
all content.
[8] For these reasons the pursuers'
averments on Record at page 8 were irrelevant and should be excluded from
probation. These were in the following
terms:-
"Further
explained and averred that, notwithstanding the terms of Clause 8 of the
offer letter of 8 February 2005, the offer
and de plano acceptance both dated 8 February 2005 constituted
a binding option agreement between the Pursuers and the Second Defender. Properly construed, Clause 8 of the
offer letter does not impose a requirement that any acceptance of the offer
would only be valid if it was witnessed.
Section 3 of the Requirements of Writing (Scotland)
Act 1995 imposes no requirement for any contractual document to be
witnessed. The formalities of any
acceptance of the offer were governed by Clause 10 of the offer, which
provided: 'This offer is open for
immediate written acceptance only'. The
provisions of Clause 10 of the offer were met by the acceptance of 8 February 2005."
[9] In response, counsel for the pursuers
confirmed that these averments fairly reflected his clients' position. Properly understood, section 3 of the
1995 Act set forth no "requirements".
Provided that a document or deed was in writing and subscribed by the
granter, as required by sections 1 and 2, the presumption offered by
section 3 was merely evidential and need not arise at all. The intention behind clause 8 of the
offer of 8 February
2005 was therefore unclear, and it was
unsurprising that in his unwitnessed acceptance of even date the pursuers'
solicitor had plainly considered himself to be concluding a binding
contract. Clause 10 of the offer
was also significant, since it simply provided for immediate written
acceptance. If clause 8 was
intended to erect a further hurdle capable of invalidating an important
agreement, it had not clearly achieved that object. It would have been easy for the offer to
provide in terms for any acceptance to be formally witnessed, but that had not
been done. And if the intended import of
clause 8 was open to doubt, the court should be slow to exclude the
averments from probation at this stage.
It could not be said, in other words, that the necessity for witnessing was
so plain that the pursuers would be bound to fail on this aspect of the
case.
[10] While in my view there is some force in
the Bank's contentions on this matter, I am not prepared to exclude the
averments from probation. On a proper
construction of the 1995 Act, it does not seem to me that section 3
contains any "requirements" worthy of the name.
The primary requirements of the Act are to be found in sections 1
and 2, and by comparison section 3 does no more than identify particular circumstances
in which a presumption regarding the granter's subscription will arise. Had clause 8 referred simply to "the
requirements of the Act of 1995", I do not think that the informed reader would
have contemplated looking for these in section 3. To my mind, therefore, it is a matter of
speculation whether the wording of clause 8 was deliberately intended, and
if so what that wording was supposed to convey.
[11] In my opinion, a party desiring to
stipulate for particular formalities in a contract must do so clearly and in a
fair manner. Clause 8 here was not
highlighted in any way as being of special or unusual importance; on the contrary it appeared among other
clauses on a different page from clause 10; where there was no obvious point in having a
solicitor's signature witnessed, its terms might strike even a careful reader as
containing a misprint for section 2 of the Act; and in the circumstances I regard it as
preferable to defer any decision on the relevancy of the challenged averments
until after any proof at which the matters in issue might be raised with
relevant witnesses. It is not clear, for
example, whether clauses of this type are in common use among
conveyancers. The Bank make no averments of custom and practice in that regard. And at this stage I do not feel able to rule
out the possibility that, after proof, clause 8 will be held to have been
an unclear source of doubt and confusion - a trap for the unwary - and thus a
purported stipulation to which effect could not fairly be given.
[12] In reading this conclusion I am also
influenced by the fact that this highly technical point is being advanced by
the Bank in circumstances where (if the pursuers' averments turn out to be
true) Mr McAlister and his agents, including the solicitor who prepared
and signed No. 6/4 of process, have never sought to deny the creation of a
valid and binding option agreement.
Foundation of the pursuers' claim to reduction
The Bank's approach
[13] In
inviting me to dismiss the pursuers' action altogether, counsel for the Bank
referred me to a series of authorities in which relevant principles had been
discussed and affirmed. According to
him, it was essential to the application of the "offside goals rule" - that is,
the doctrine whereby a transaction might be invalidated by the grantee's bad
faith - that there should be in existence a pre-existing right in favour of
another; that
that right would be breached by the transaction in question; and in particular that the right in question
must itself be a real right, or at least one capable of being made real. It was only where these conditions were
fulfilled that any actual or constructive knowledge on the part of the
subsequent grantee might put at risk the validity of the later
transaction. Pre-existing rights which
were merely collateral or personal could not, even if known about, be allowed
to fetter a party's freedom to transact with heritable property on the faith of
the public records. In the Bank's submission
the pursuers' option rights fell into the latter category, and were thus in law
incapable of adversely affecting the Bank's standard security.
[14] An appropriate starting point, it was
said, was the decision of the Inner House in Rodger (Builders) Limited v Fawdry
& Others 1950 SC 483. Leaving
aside other special features, that was a case in which a seller concluded
successive missives of sale with different purchasers. Although the second purchaser was fully aware
of the existence of the earlier missives, he had been assured that they were no
longer in force. Nevertheless, having
taken no independent steps to check the matter, he was held to be in bad faith with
the result that his missives, and the recorded disposition which followed, were
reduced at the instance of the first purchaser.
The leading opinion was given by Lord Jamieson who (at p. 499)
said:
"In such
circumstances the law is not in doubt.
If an intending purchaser is aware of a prior contract for the sale of
the subjects, he is bound to inquire into the nature and result of that prior
contract, and his duty of inquiry is not satisfied by inquiry of the seller and
an assurance by him that the contract is no longer in existence. If he merely obtains such an assurance, he
cannot rely on the missives or on a disposition following thereon. Mr Clyde argued that, in order to have
the missives reduced, it must be shown that Mr Bell (the third party purchaser) acted fraudulently and that he was, in
consequence, barred from insisting in his contract. But fraud in the sense of moral delinquency
does not enter into the matter. It is sufficient
if the intending purchaser fails to make the inquiry which he is bound to
do. If he fails he is no longer in bona
fide but in mala fide."
After referring
with approval to certain prior authorities, his Lordship then went on to say:
"It follows that
the disposition in favour of Mrs Bell also falls to be reduced. The right to rely on the register does not
extend to one in knowledge of prior obligations or deeds affecting the
subjects."
In the same case
the Lord Justice Clerk reached the same conclusion, observing:
"The appellants
assumed that their title would be safe once the goal of the Register House was
reached. But in this branch of the law,
as in football, offside goals are disallowed.
In certain states of knowledge a purchaser is regarded as not being in
good faith and goes to the Register House at his peril. Where, as here, Mr Bell and his advisers
knew that a prior contract had existed, and that the Rodgers were asserting
that it still existed, they took the risk of the Rodgers being right when they
themselves went to the Register House.
The Rodgers having been shown to have been right, Mr Bell is not
allowed to rely on the registration which in the knowledge which he possessed
he succeeded in obtaining."
[15] For the Bank it was submitted that Rodger (Builders) correctly stated the
law, so long as it was remembered that the pursuers' antecedent rights were there
contained in formal missives of sale, and were thus immediately capable of
being converted into real rights. The
case was not authority for any wider principle whereby recorded heritable
rights could be defeated by knowledge of prior personal rights in other
categories.
[16] Ten years later, in Wallace & Another v Simmers
1960 SC 255, this limitation on the doctrine was made explicitly
clear. The owner of a farm had sold it
to his son, and his reservation of a right of occupancy in favour of himself,
his wife and his daughter was not included in the recorded disposition which
followed. When the farm was subsequently
sold on by the son, his sister (the daughter) was still in occupation,
and the purchasers having completed title sought to have her ejected. It was held that, as the daughter's right of
occupancy was a mere personal right, exercisable only against the granter (her
father), and not capable of being made into a real right, it was not valid
against a singular successor even if he had prior knowledge of it. On these grounds decree of ejection was
pronounced in the purchasers' favour.
[17] The basis of the decision was made clear
by the Lord President (Clyde) at pp. 259-60 to the following effect:
"The general
rule is clearly stated in Gloag on Contract, (2nd ed.) at p. 178, to
the effect that the purchaser is entitled to rely on the title as it stands in
the Register of Sasines, and is not bound by any agreement, although binding on
the seller, of which he had no notice. But
there is an exception to this general rule where the purchaser is aware that
the seller has entered into a prior agreement to dispose of the subjects. In each case, the purchaser is bound to inquire
into the nature and result of that prior agreement,
otherwise he may be barred from disputing it.
It is this exception which the defender here seeks to invoke.
But the present
case, in my opinion, clearly falls outside the exception. The exception applies in cases such as Rodger (Builders) and Stodart v Dalzell. In the former of
these cases there was a prior contract of sale of the subjects, in the latter
an informal acquisition of a right of feu.
From the decisions, it is clear that the exception only operates where
the right asserted against the later purchaser is capable of being made into a
real right. If it is nothing but a mere
personal obligation not capable of being so converted, then the ultimate
purchaser is not in any way bound or affected by it. Any other result would be surprising indeed,
for it would convert what was and has never been anything but a mere personal
right into something real and enforceable against a singular successor. As Lord Low said in the case of Morier v Brownlie & Watson (at p.74): 'If the personal obligation did
not affect the lands, then knowledge on the part of the purchasers that such an
obligation had been granted appears to me to be of no moment. Assuming that they knew of the obligation,
they knew also that it did not affect the lands.'...
Accordingly, it
follows that in the present case no element of bad faith or lack of bona fides can be affirmed; for any rights which the defender has under
the minute of agreement in no way affected or modified the rights which the
pursuers as singular successors acquired.
Any right on the defender's part which there may have been did not
affect the lands, and was not capable of being converted into a real
right. She had throughout, at the best,
a purely personal right against the granter of the minute to occupancy of a
portion of the farm, rent free. If so,
then the contention put forward by the defender before us fails, and the
present case does not fall into the exception, but under the general rule
stated by Gloag..."
[18] In both Trade Development Bank v
Warriner & Mason (Scotland) Limited 1980 SC 74 and Trade
Development Bank v Crittall Windows
Limited 1983 SLT 510, the court applied the bad faith exception although
the competing rights were not correlative.
The earlier case involved a competition between the Bank's initial standard
security and a sub-lease granted in breach of its terms, whereas the later
involved a competition between the defenders' missives of purchase and a
standard security which followed in favour of the Bank. In both instances the subsequent right was
held reducible on the ground of the grantee's bad faith, but at the same time
the court bore to re-affirm what I shall call "the Wallace limitation" on the bad faith exception. In Warriner & Mason,
referring to a challenge to the pursuers' standard security, the Lord President
(at p. 97) said:-
"The submission
that (the defenders' averments) were
at least sufficiently relevant to entitle them to inquiry rested upon the
well-known cases of Rodger (Builders)
Limited v Fawdry 1950 SC 483, Marshall v Hynd 1828 6S 384; Petrie v Forsyth 1874 2R 214, Stodart
v Dalzell 1876 4R 236 and Wallace v Simmers 1960 SC 255. From
these cases it is clear that a party who takes a heritable title, including a
sub-lease, from another is not in bona
fide when he knows that the granter has already bound himself to grant that
right to another, ie, has granted to
another a right which is capable of becoming a real right. Even if he does not actually know all this he
will still be in bad faith if he knows that some sort of right has already been
conferred upon another in respect of the relevant subjects, but proceeds
without any inquiry."
[19] Importantly, in Crittall Windows, the Lord President (at p. 517) confirmed that the
decision in Rodger (Builders) "... rested
upon the broad principle in the field of contract of fair dealing in good
faith." At the same time, however, he
recalled (i) that the Lord Ordinary in Warriner
& Mason had proceeded on the basis inter
alia that the Wallace limitation applied,
and (ii) that in the Inner House none of the judges had seen fit to comment
adversely upon the Lord Ordinary's opinion.
He then went on:
"... I see no
reason why, if it is established that the pursuers had knowledge that some sort
of right, which might be capable of becoming a real right in the security
subjects, had already been conferred upon the defenders, the defenders should
not be entitled on the Rodger (Builders) principle
to prevent the pursuers from exercising their rights in security..."
[20] Recognising, however, that Warriner & Mason did not obviously
involve a pre-existing right capable of being made real, in respect that the
pursuers held only a standard security carrying a prohibition against
sub-leases, counsel for the Bank sought to question the basis on which that
case was decided. More significant, in
his submission, were cases in which purely personal antecedent rights had been
held ineffectual against singular successors of the granter. These included Campbell's Trs v Glasgow
Corporation 1902 5F 752 (where, in the absence of any allegation of bad
faith, the defending local authority unsuccessfully sought to enforce an option
to use a strip of ground for street purposes);
Optical Express (Gyle) Limited v
Marks & Spencer plc 2000 SLT 644
(where tenants holding monopoly trading rights under an unrecorded back letter
were refused interdict against competition from incoming tenants elsewhere in a
shopping centre); and The Advice Centre for Mortgages v McNicoll 2006 SLT 591 (where an
unexercised option to purchase was held (a) not to be binding on the defender
as a singular successor of the original landlord, and (b) not to have been
breached by the subsequent sale). These
were all cases, it was said, in which the Wallace
limitation or its equivalent had applied, and in the face of such authorities
little weight should be given to textbook opinion (for example the Stair Memorial Encyclopaedia of the Laws of Scotland, Vol. 18,
at paras. 695ff.) to the effect that the bad faith exception might apply more
widely to personal rights of any kind which were compromised by a later
grant. The Advice Centre case was of particular significance here, since Lord
Drummond Young had declined to apply the exception in connection with an
unexercised option to purchase, and had adversely criticised the sheriff court
case of Davidson v Zani 1992 SCCR 1001 which appeared to
support a contrary view. It had to be conceded,
however, that that option was granted by someone other than the author of the subsequent
right under challenge.
[21] Even acknowledging that the Lord
President's analysis of the bad faith exception in Crittall Windows had attracted favourable comment from
Professor McBryde in his work on
contract, and had been mentioned with approval by the House of Lords in Smith v Bank of Scotland 1997 SC HL 111, the Wallace limitation on that exception in connection with heritable
rights was now too well established to be ignored. The exception was in any event based on
equitable considerations, and the pursuers could have no legitimate recourse to
equity where they had dealt so incautiously with Mr McAlister, and had in
particular failed to obtain security for performance of the option agreement in
their favour.
[22] Against that background, the Bank's
position was that the pursuers' averments fell well short of making a relevant
case for reduction of the standard security.
The pursuers' initial option agreement was a merely personal right which
could not be breached by the granting of a standard security; it was more than one step removed from
the possibility of being made real by means of a disposition; and since it was
the bare existence of that agreement, and nothing more, which the Bank were
said to have known, they could not have been under any duty of inquiry and
their standard security was not open to challenge. On any view, it was said, the averments (in
four places) regarding clause 4 of the option agreement were irrelevant, since
that clause comprised only a personal prohibition on the granting of security
rights which could never have been made real.
The pursuers' response
[23] After
reminding me of the special and unusual facts of this case, whereby the
short-term option conferred by Mr McAlister on the "true purchasers" was
fenced with an explicit prohibition against further burdening of the subjects, counsel
for the pursuers reminded me of the high test which would have to be met before
his clients' claim could be dismissed as irrelevant. That was the well-known test affirmed by the
House of Lords in Jamieson v Jamieson 1952 SC (HL) 44, to the effect
that a case was not irrelevant unless, assuming proof by the pursuers of all
their averments, it must still necessarily fail.
[24] With that test in mind, it was said, the court could not properly deny the pursuers a proof
before answer. Even if the defenders' main
contentions were correct, based on their understanding of the Wallace limitation on the bad faith exception,
the pursuers had nevertheless averred enough to avoid dismissal of the action
at this stage. In particular they had
averred the existence, not only of an option agreement, but of an exercised
option in their favour. This could be
equated with completed missives of sale, since it brought into play obligations
on Mr McAlister, not merely to deliver a good marketable title on the
stipulated completion date, but also to avoid derogating from that obligation
in the meantime. By the time the
standard security was taken and recorded, therefore, the pursuers held adverse rights
in the subjects which were plainly capable of being made real; the granting of the security was in breach of
Mr McAlister's corresponding obligations;
and in addition the Bank were averred to have had sufficient knowledge
of the option arrangements to put them on their inquiry, and to set up bad
faith on their part in having proceeded without taking effective steps to
ascertain the true position. Further,
where clause 4 of the option agreement was an integral part of the arrangements
of which the Bank could and should have been aware, no credible argument had
been advanced as to why the averments in that regard should be excluded from
probation.
[25] In developing his submission, counsel
further relied on inferences to be drawn from the "market value" formula for
calculating the option price; on the fact that the standard security was
granted only two weeks before the stipulated completion date for the option;
and on the Bank's recording of that security only two days before the
completion date arrived. By this late
stage Mr McAlister was plainly disabling himself from giving the pursuers
a good marketable title in implement of their exercised option, and by their
bad faith the Bank had encouraged and facilitated Mr McAlister's breach of
contract. For a duty of inquiry to
arise, the authorities showed that only general knowledge of the existence of
prior rights which might be compromised was enough, and in that connection
special reliance was placed on the references to "... some sort of right" by the
Lord Justice Clerk in Stodart and by the Lord President in
the two Trade Development Bank cases. On the whole matter, it was said, the
pursuers' averments were plainly relevant and sufficient to justify a proof
before answer, and conversely the high test for dismissal of the action had not
been met by the Bank.
[26] The pursuers, however, went on to argue
that the Bank's approach was also ill-founded on wider grounds. In particular, on a proper consideration of
the authorities, both heritable and moveable transactions were open to
reduction on bad faith grounds, and prior personal rights could qualify for
protection even where they were not immediately "... capable of being made real". The apparent limitation derived from Wallace was inconsistent with both prior
and subsequent authorities, and should not be seen as narrowing down the scope for
protection in all cases where heritable rights were in issue. The argument here rested on three broad
propositions, namely (i) that a property right granted in breach of any
pre-existing contract or other obligation was voidable at the instance of the
creditor in that obligation if the grantee knew or ought to have known of the
obligation (or if the subsequent grant was not for value); (ii) that the rationale for this rule
was that no-one was entitled to grant a subsequent right in breach of a
pre-existing obligation: the granter
would be acting "fraudulently" in that regard, and if the grantee knew or
should have known of this he must be deemed an accomplice to the fraud and to
have acted in bad faith; and (iii) that there
was no requirement in law for the pre-existing right or obligation to be real
or capable of being made real. According
to counsel, the key issue in most of the decided cases was whether an
antecedent right had or had not been breached.
[27] Morrison
v Somerville 1860 22D 1082 was a clear
case in which the first defender held subjects in trust for the pursuer. In breach of his trust obligation he
purported to sell the subjects to the second and third defenders, who knew of
the trust at the relevant time. It was
held that, on equitable grounds, the pursuer had pled a relevant case for
inquiry. The decision contained no hint
of any limitation to antecedent rights "... capable of being made real", and on
its facts concerned no more than the personal entitlement of trust
beneficiaries. Lang v Magistrates of
Dumbarton, Faculty Collection, 29 June 1813,
involved an offer to sell a strip of land on a riverbank to the local
authority. Acceptance was noted only in
the local authority records, and no deed was recorded, but thereafter a quay
and other municipal works were built on the subjects. In the Inner House, the local authority's
defence to removing was upheld on the ground that the pursuer had knowledge of
the transaction and works when his subsequent title was taken. Once again, the bad faith exception was
brought into play by knowledge of no more than a potentially competing
right.
[28] Marshall (cited by the Lord President in Warriner
& Mason) was characterised as a case involving successive grants of
licence to enter land to harvest and remove the same wood. It was held that knowledge of the former
arrangements barred any bona fide
completion of the latter. The case was
similarly founded on by Lord Jamieson in Rodger
(Builders), and Lang was mentioned
there in argument. While it might be
said that Marshall truly concerned
competing sales of growing timber, rather than ancillary licence arrangements,
the pursuers' contention was that none of these cases (nor indeed Rodger (Builders) itself) supported any
limitation of the bad faith exception along the lines subsequently suggested in
Wallace.
[29] According to the pursuers the observations
of the Lord President in Wallace had
to be read as referable to the particular facts of that case, where the prior
right in question was no more than a personal right of occupancy granted by a
father to his daughter. At the same time
the father had sold the property to his son, and it was the son's singular
successors who were held entitled to remove the daughter from the
property. The true ground of decision
was that a mere licence was precarious; that it could only subsist for so long
as the granter (the father) continued to own the land; that it would therefore not be breached by
any subsequent sale or, a fortiori,
resale; and that knowledge of such a licence by the eventual purchaser could be
of no significance. Against that
background, the Lord President's observation should be read as no more than a
colourful way of expressing the decision in that case. It was not in terms vouched by the prior
authorities cited, and it was significant that other decisions such as Morrison and Lang were not then before the court.
[30] It was true that in the two Trade Development Bank cases the
Lord President had appeared to affirm the Wallace limitation, but importantly Warriner & Mason (which was then mentioned with approval in Crittall Windows) concerned only a
prohibition in a standard security against sub-letting. The court there had, in other words, upheld
prior rights which were not themselves "... capable of being made real".
[31] No doubt prior rights to be protected
would require to relate in some way to the land in question, as the cases
indicated, but the Bank went too far in suggesting that only rights immediately
"... capable of being made real" could qualify for protection against later
transactions completed in bad faith. Petrie (again cited by the Lord
President in Warriner & Mason) was another important Inner House decision focusing on the
existence of bad faith as the principal concern, and both Lords Ormidale and
Gifford in that case delivered opinions (at pp. 222-3) confirming the wide protection
available. Two years later Stodart was in the same general
category, with the same judges again discussing the matter in apparently
unqualified terms. Bell, Principles, 10th
ed, at para. 13A was similarly unqualified in its
terms, as was para. 695 of the relevant article in the Stair Memorial Encyclopaedia. Indeed para. 698 of that article bore to
confirm that unexercised options and rights of pre-emption would be sufficient
to bring the bad faith exception into play.
[32] Against that background, it was said,
little weight could be given to the Optical
Express decision which concerned nothing
more than a monopoly trading assurance given by previous landlords to the
tenants of different subjects. Equally,
the views of Lord Drummond Young on bad faith in the Advice Centre case were essentially obiter since the prior option there was derived from previous
landlords and had not in any event been exercised or breached; and the first of the remedies
suggested (at p. 604G-H) involved inserting an obligation in a lease which
was not itself "... capable of being made real". Even Professor McDonald in his
conveyancing manual had subjected the Wallace
limitation to criticism in one edition before purporting to accept it in the
next.
[33] Taking all of the foregoing considerations
into account, the pursuers' position was that the bad faith exception could be
prayed in aid by any party whose antecedent rights were compromised by a
subsequent recorded grant. Expressions
of opinion in "double grant" cases, where prior rights were in fact "... capable
of being made real" should not be read as imposing a universal limitation in
all cases involving heritable transactions.
Up to and including Rodger
(Builders) in 1950, neither case law nor academic writings supported any
such limitation. The Bank's primary
argument should therefore be rejected as unsound.
Discussion
[34] In
the circumstances of this case as averred on Record, I have reached the
conclusion - ultimately without much hesitation - that the Bank's motion for
dismissal is not well-founded and that a proof before answer should be allowed.
As affirmed by the
court in Wallace, by reference to Gloag on Contract at p.178, a party
transacting with heritable property is generally entitled to do so on the faith
of the public records, and is not bound by any agreement, although binding on
the other party, of which he has no notice.
There is, however, an exception to this general rule where the
transacting party knows of the existence of a prior agreement affecting the
subjects. The question is how far, and
on what basis, that exception may be thought to extend.
[35] Even taking the Bank's argument at its
highest - namely that the bad faith of a grantee of heritable rights will count
for nothing unless the transaction breaches antecedent rights which are
themselves immediately "... capable of being made real" - I am not at this stage persuaded
that, if the pursuers were to prove all of their averments, they must
necessarily fail to bring themselves within the ambit of the bad faith exception. In their pleadings they offer to prove that from
an early date the Bank were aware of the existence of
the option agreement, and that as a matter of good faith and fair dealing this
gave rise to an obligation to inquire into its nature and result. In my opinion it cannot be said that these
averments reflect an approach which is necessarily wrong in law, nor one which
would not be capable, after proof, of fixing the Bank with constructive
knowledge of (i) the exercise of the option in March 2005, (ii) the imminence
of the stipulated completion date in February 2006, and (iii) the whole factual
matrix in which the relevant arrangements proceeded.
[36] In terms of contractual significance it is
in my view hard to differentiate an exercised, although unrecorded, option to
purchase heritable subjects, or an asserted right of pre-emption for that
matter, from completed missives of sale, and I am unable to accept that the
holder of any such rights should in law be held powerless to challenge bad
faith encroachment. For this purpose, it
would not in my view matter whether a later transaction involved taking title
to the subjects or only (as in the present case) a standard security. If in either instance the grantee would be
taking valuable competing rights in derogation of antecedent obligations of
which he was, or ought to have been, aware, I see no good reason why breach of the
fundamental requirements of fairness and good faith in contractual dealings
should not bar him from doing so.
[37] So far as the Bank's averred duty of
inquiry is concerned, I am satisfied that the pursuers offer to prove
sufficient facts and circumstances to bring it into play. On the authorities, all that is required is
knowledge of "... some sort of right" in respect of the subjects, or "... any right
in any third party, or any circumstances imposing a duty of inquiry" (Stodart, per the Lord Justice Clerk and
Lord Gifford respectively, at pp. 241 and 243); "... prior obligations
or deeds affecting the subjects" (Rodger
(Builders), per Lord Jamieson at p. 500);
"... some sort of right ... already ... conferred upon another in respect of
the relevant subjects" (Warriner &
Mason, per the Lord President at p.
97); or "... some sort of right which might be capable of becoming a real right
in the security subjects" (Crittall
Windows, per the Lord President at p. 517).
[38] The general entitlement of a grantee to
transact with heritage on the faith of the public records alone is sometimes
expressed as being conditional on (i) complete good faith on his part and (ii)
the giving of value. To my mind the
former condition tends to suggest that even quite limited knowledge of
antecedent rights will be sufficient to put a party on his inquiry, and to
expose a transaction to challenge if, in bad faith, no such inquiry is carried
out. It would, moreover, be strange if
(as was argued for the Bank) no such duty of inquiry could arise unless the
party concerned already knew that pre-existing rights were of a kind which
qualified for protection. On the
contrary, it is where a grantee has or acquires some relevant knowledge that he becomes bound to take proper steps
to ascertain "... the nature and result" of the relevant rights (Rodger (Builders), per Lord Jamieson at p. 499),
or to make himself aware of "... what were the terms of the bargain ... and whether
it was at an end" (Marshall, per the Lord Justice Clerk at p.
390).
[39] If the pursuers' averments were all to be
proved, I consider that this case would be substantially on all fours with Crittall Windows, where a subsequent
security was cut down on bad faith grounds by reference to pre-existing
missives for the acquisition of
leasehold interests in the security subjects.
The purchase option on which the pursuers rely is averred to have been
formally exercised in March 2005, with a stipulated completion date of 8
February 2006, and it is correspondingly agreed that the Bank's standard
security was granted on 24 January 2006 and recorded on 6 February 2006, some
months after the Bank allegedly became aware of the existence of the
option. It may be that, as counsel for
the Bank suggested, significantly extended timescales for completion might
allow a temporary security to be granted without necessarily putting the
granter in breach of contract or the grantee in bad faith, but in my opinion these
would be matters of fact and degree to be determined in the circumstances of
each individual case. Here, the pursuers
offer to prove a stipulated completion date for their option only two weeks
after the offending security was granted, and only two days after it was
recorded by the Bank.
[40] As a matter of relevancy I am far from
being persuaded that the pursuers will, after proof, necessarily fail to
establish Mr McAlister's averred breach of contract and corresponding bad
faith on the part of the Bank. Counsel
for the Bank sought to distinguish Crittall
Windows, on the basis that the disputed security there was granted after
the due date for completion of the antecedent missives, but in my view that is
a point without substance. As in the
present case, no impediment to the security appeared on the face of the record,
and the basis of the decision was simply bad faith on the part of the
Bank. From an equitable standpoint, I do
not see why it should matter whether the offending security was taken and recorded
just before, or just after, the stipulated completion date. Either way, the point is that in taking and
recording a security without attempting to ascertain the true position
regarding known prior rights, the grantee would arguably be facilitating, if
not actually inducing or encouraging, the granter's breach of contract. For these reasons the pursuers are in my view
entitled to a proof before answer on all aspects of their claim.
[41] In that context,
I am not persuaded that there is any basis on which the averments regarding
clause 4 of the initial option agreement should be excluded from
probation. Far from standing alone, as
the Bank's argument suggested, that clause formed an integral part of the
agreement, and its explicit nature would be among the factors to be discovered
by the Bank in the event of a proper inquiry being carried out. To my mind the option arrangements must for
present purposes be considered as a whole, and where excluding the averments in
question would achieve nothing in procedural terms, or any saving of time, I am
at a loss to see why they should not be remitted to probation along with the
remainder of the pursuers' claim. It
would in my view be absurd if the extent and effect of the Bank's constructive
knowledge, or any issue regarding breach of the option arrangements, had to be
determined under the pretence that clause 4 (or any equivalent implied term
arising on exercise of the option) did not exist.
[42] Having decided to allow a proof before
answer on these grounds, it is not strictly necessary for me to express a
concluded opinion on the wider questions of law which were canvassed at the
debate. However, in recognition of the careful
and detailed arguments which were persuasively advanced on both sides of Bar, I
would propose at this stage to offer certain brief observations in the hope
that parties may find these helpful.
[43] On a fair reading of the various
authorities cited to me, I am not convinced that any of them can be regarded as
comprehensively prescribing the circumstances in which recorded real rights may
be susceptible to challenge on bad faith grounds. On the
contrary it may be said that a universal rule would be difficult to devise, and
that in consequence individual decisions have tended to turn on their own
particular facts. For example, in "double
grant" cases involving successive sales, the court has had little difficulty in
applying the bad faith exception where, at the time of the second grant, the
grantee knew of a prior right which was in fact "... capable of being made
real". The decisions in Lang, Marshall, Stodart and Rodger (Builders) may all be thought to
fall within that category, and it was thus unnecessary for the court to
consider how far other forms of prior right might qualify for protection on
equitable grounds.
[44] Recognising that the settled general rule
is designed to protect an acquirer of heritable rights who, in good faith, relies
on the face of the public records, it may well be reasonable to require that a
competing prior right should itself be of a kind potentially capable, in due
course, of affecting these records in some relevant way. According preference to known rights which
could never do so might effectively subvert the settled rule, and in my
judgment none of the cited authorities can be understood as supporting an
approach along such lines. The case of Morrison may, moreover, be distinguished
for present purposes, since it concerned specialities of trust law and, in that
context, defects in a granter's title to transact with trust property.
[45] In Wallace,
for instance, the court was concerned to uphold the real right of a singular
successor in preference to a precarious personal occupancy right derived from a
different author. Similarly, in the Optical Express case, the court was not
prepared to allow a commercial tenancy to be compromised by a mere personal
monopoly assurance given to the tenants of different subjects by a previous
landlord. No doubt the qualification
"... capable of being made real" was stated by the Lord President in the
former case and by the Lord Ordinary in the latter, but in my view this was
arguably intended, not as a rigid universal requirement to be met in all cases,
whatever their circumstances, but rather as a means of expressing the court's refusal,
on the particular facts under discussion, to allow the established precedence of
recorded real rights to be subverted. Since these decisions concerned personal
rights granted by a different author and/or in respect of different subjects, and
so precarious that they were not breached by a subsequent sale, there was no
need for the court to lay down any qualification of wider scope.
[46] Significantly, the same qualifying words
were mentioned without disapproval by the Inner House in the two Trade Development Bank cases, but in neither
of these was the court faced with a "double grant" situation of a kind in which
the bad faith exception had previously been applied. For example, Warriner & Mason concerned only a prohibition against sub-letting
comprised in a standard security, the terms of which were not fully recorded. Although this prohibition, had it stood
alone, could never "... have been made real", the court nevertheless appears to
have been prepared to treat it as an integral part of the security and, as
such, capable of bringing the bad faith exception into play against the
defending sub-lessees. Importantly, the
Lord Ordinary's opinion in that case (which was upheld in the Inner House and
subsequently quoted with approval in Crittall
Windows) contained the following observation:
"No case was
cited to me in which (the bad faith exception)
had been applied as between a heritable creditor and a tenant of his debtor as
distinct from purchaser and seller but I would not regard this as fatal to the
defenders' argument. If it is based on
the doctrine of personal bar I see no reason why it should not apply to this
type of case also."
[47] The Trade
Development Bank cases may in my opinion be seen
as affirming the court's willingness, in modern conditions, to penalise
contractual bad faith in circumstances where a subsequent transaction puts the
granter in breach of some prior personal obligation relating to heritable
subjects. For this purpose, however, the
prior obligation must not be so obviously collateral, precarious
or ineffectual as to require adherence to the established general rule. The cases may also be thought to reflect a
broader, more liberal understanding of the Wallace
limitation than was urged upon me by the Bank in these proceedings, especially
with regard to the stated "capacity" test and the means by which that test may
be satisfied. Key observations by the
Lord President in Crittall Windows have
attracted favourable comment from the House of Lords in Smith, and from Professor McBryde in his work on contract, and against
the background of today's enhanced emphasis on considerations of fairness and
justice in all branches of the law it would I think be unfortunate if, to an
extent more than necessary, transactions in
mala fide had to be upheld simply
because they related to heritable property.
By way of illustration, would it be an acceptable result if composite
missives of sale, covering (say) valuable earthmoving vehicles as well as the
hangar which housed them, were deemed reducible on bad faith grounds quoad the machinery alone? No doubt the underlying heritable and
moveable rights would be different, requiring independent consideration on
their merits, but prima facie the bad
faith exception should in my view be capable of extending to both parts of the
transaction unless some compelling contrary reason could be identified. The issue here is perhaps not so much how far
the preference conferred on recorded real rights should extend, but rather
whether parties in bad faith should be permitted to acquire and retain such
rights at all.
[48] This is, I think, a relevant ground of
distinction between the present case on the one hand
and, on the other, the Campbell's Trs, Optical Express and Advice Centre cases where the question
for the court was whether a prior personal obligation could be held to have
transmitted, and thus become enforceable, against singular successors of the
granter. Neither
there, nor in the most recently cited cases of Jacobs, Bisset and Davidson,
was there any claim to reduce the acquirers' title, and in such
circumstances it is perhaps not surprising that technical considerations
regarding the transmissibility of personal obligations in a leasehold context
weighed so heavily in the decisions.
Importantly, however, for present purposes, the Lord Ordinary in the Advice Centre case did not reject the
pursuers' option to purchase on the ground that it was not "... capable of being
made real", nor because it was unexercised, but simply on the basis that, as a
purely personal obligation of a kind which was not inter naturalia of the relevant lease, it was not breached by sale
of the landlord's interest to the defender.
Otherwise "... some sort of knowledge of prior rights" (p. 603D) might have
been held sufficient to bring the bad faith exception into play, and on the
question whether an unexercised option might be more in the nature of a power
than a right the Lord Ordinary observed:
"Nevertheless,
this sort of distinction does not appear to have been taken in any of the cases
in this area of the law."
At pp. 602-4,
moreover, he bore to acknowledge the "...extended form" in which the Rodger (Builders) rule now stood
following the decision in Crittall
Windows, and the principle of fair dealing and good faith which underlay
that extension.
[49] With these considerations in mind I would
not, if pressed, have been inclined to support either party's submissions to
their fullest extent. In particular, I
would have declined to accept the pursuers' contention that the Wallace limitation had no place in our
law, and that mala fide knowledge
should be a valid ground of reduction in any case where a prior right (of
whatever nature) was compromised by a subsequent transaction. Conversely, I would not have been inclined to
uphold the Bank's contention that the Wallace
limitation should be construed and applied so narrowly as to deny any
possibility of protection to prior rights unless these could immediately be "...
made real" by the granting and recording of a disposition. In my view the authorities tend to support an
intermediate position whereby, consonant with the established general rule, the
bad faith exception may be applied in a wide range of different circumstances. It would be unusual (and undesirable) for an equitable
exception to be more rigidly confined, and it is perhaps only where prior
rights are not the subject of any supervening breach of contract, or concern a
different granter or different property, or are of a kind which could never
relevantly affect the public records, that serious continuing problems in this
area may be expected.
[50] On the foregoing basis I would have declined
to dismiss the pursuers' claim as irrelevant even if (contrary to the views
expressed above) the validity of the Bank's security had fallen to be tested by
their averred knowledge of the existence of the option agreement alone, or if hypothetically the pursuers'
option had not been exercised by the date of the security transaction. Both the Lord Ordinary's
observations in the Advice Centre case,
and para. 698 of the article in the Stair
Memorial Encyclopaedia,
appear to acknowledge the potential application of the bad faith exception in
favour of options to purchase and rights of pre-emption in general, and for
present purposes I am not persuaded that that approach must be regarded as
unsound. From the outset a formal
written option to purchase (or a right of pre-emption) is plainly intended to
affect the subjects in question, especially where fenced (as in this case) with
an explicit prohibition against alienation in the meantime; its unilateral exercise or assertion would
bring the usual completion obligations into play; and thereafter (consistent with the essential
purpose of such arrangements) a completed title would appear on the face of the
register. In my judgment there is no
good reason why the bad faith exception must necessarily be disapplied where
rights of that character are involved, especially at the stage of relevancy and
without proof of the precise facts and circumstances of a given case. In particular, on a broad view of the Wallace limitation, it seems to me that
such rights - even if unexercised - ought prima
facie to qualify as "... capable of being made real" or "... capable of
becoming a real right", and that breach of an explicit prohibition against
alienation should be sufficient to satisfy any further legal requirement in
that connection.
[51] Accordingly, had it been necessary for me
to resolve the wider issues which were debated before me, I would have held the
pursuers' averments to be relevant to go to inquiry even if (i) they had fallen
to be tested by reference only to the limited knowledge actually averred
against the Bank, or (ii) hypothetically the pursuers' option had yet to be exercised.
Disposal
[52] For
all of the foregoing reasons, I shall refuse the Bank's motion for dismissal of
this action, and instead allow a proof before answer on the parties' whole
averments with all pleas standing.
