EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
Lord Kingarth Lady Paton Lord Hardie	[2010] CSIH 27 XA187/08 OPINION OF THE COURT delivered by LORD KINGARTH in the Appeal from the Sheriffdom of South Strathclyde, Dumfries & Galloway at Hamilton in the cause MILLER FABRICATIONS LIMITED Pursuers and Appellants; against J & D PIERCE (CONTRACTS) LIMITED Defenders and Respondents: _______

Act: Clancy, Q.C.,; Stirling; Burness LLP

Alt: Moynihan, Q.C.; Macroberts LLP

31 March 2010

Introduction

[1] The pursuers and appellants ("the pursuers") are a limited company who carry on steel fabrication work. The defenders and respondents ("the defenders") were sub-contractors to Muir Construction Limited in respect of works at a site at Straiton Retail Park in Edinburgh. In 2004 the defenders sub-contracted various aspects of these works to the pursuers, in particular the supply, delivery and fitting of a mezzanine floor at the site. The dispute between the parties arises from the fact that their contractual relationship ended in the latter part of June 2004 in circumstances for which each holds the other responsible.

[2] In 2006 the pursuers raised the present proceedings in the Sheriff Court of South Strathclyde, Dumfries & Galloway at Hamilton, seeking payment of damages for breach of contract by the defenders. On 14 May 2008 the sheriff, after proof, made, inter alia, the following findings in fact:

"4. The pursuers provided to the defenders a written quotation for the supply, delivery and fitting of a mezzanine floor at the site which was dated 25 May 2004. The defenders accepted that quotation verbally in a telephone conversation between Colin Kerr of the defenders and Douglas Donaldson of the pursuers on or about 26 May 2004.

5. The pursuers refused to commence work on site without bank and trade references. The defenders were under pressure to progress their works at the site. In the course of a telephone conversation on 2 June 2004, Mr Derek Pierce, Managing Director of the defenders, gave an assurance to Mr Robert Miller, Managing Director of the pursuers, that he would look after the defenders' account and Mr Miller agreed that the pursuers would commence work.

6. The pursuers commenced work on site on 3 June 2004. At that stage the pursuers had not obtained trade or bank references.

7. The defenders provided appropriate details to allow trade and bank references to be taken up by the pursuers. Satisfactory trade references were obtained by the pursuers. A reference from the defenders' bank was never obtained. The defenders were willing to provide the requisite permission to enable a bank reference to be given to the pursuers. Such permission was never sought from the defenders.

8. By 22 June 2004, the defenders were under significant pressure from the main contractors, Muir Construction Limited, to have the works which had been subcontracted to the pursuers completed. The mezzanine floor had been fabricated, shot blasted and painted and was ready for erection on site.

9. On 23 June Craig Paterson of Muir Construction Limited telephoned Mr Frank Hawthorn of the pursuers to enquire whether the pursuers would work directly with Muir Construction Limited. Mr Hawthorn indicated that the pursuers would have no objections to doing so provided the defenders agreed.

10. Later on 23 June Mr Paterson telephoned Mr Kerr of the defenders about the matter. The consent of the defenders was not given and Mr Paterson was told that the defenders would resolve the matter themselves. Mr Kerr understood from the conversation that the pursuers had the steel work ready to go on site but were not putting it on to site.

11. Later on 23 June Mr Kerr telephoned Mr Pierce and informed him of the terms of the telephone conversation. Mr Pierce instructed Mr Kerr to write a fax on his behalf to the pursuers. Mr Kerr did so. Mr Pierce phoned Mr Miller and informed him that the contract was at an end.

12. The defenders sent a fax, dated 23 June 2004, to the pursuers informing the pursuers that they would complete the works themselves without the assistance of the pursuers. The pursuers responded in a letter dated 25 June 2004 sent to the defenders by fax. In their letter the pursuers indicated that they would erect the mezzanine floor if a banker's reference was supplied.

13. The defenders sent a letter dated 25 June 2004 to the pursuers by fax informing them that the works had been completed by themselves. The pursuers accepted that the contract was at an end.

14. The defenders did not pay the pursuers for the construction of the mezzanine floor."

[3] In addition, the sheriff found in fact and law, inter alia, the following:

"2. The written quotation of 25 May 2004 and the verbal acceptance on or about 26 May 2004 constituted a contract entered into between the pursuers and the defenders.

3. It was not a term of the parties' contract that the defenders required to produce references. The parties' contract was not varied to introduce such a term. The contract contained no reference to the timing of performance by the pursuers.

4. The contract price for the supply, delivery and fitting of the mezzanine floor was £16,165 less 2.5 per cent main contractor's discount. £3,000 of that sum was attributable to the cost of fitting of the floor.

5. The defenders' letter of 25 June 2004 constituted a repudiation of the contract entered into between the pursuers and the defenders. The repudiation by the defenders constituted a breach of contract. The repudiation was accepted by the pursuers."

[4] In the light of these findings the sheriff granted decree for payment by the defenders of damages amounting to £12,835.88.

[5] The defenders appealed to the Sheriff Principal. On 3 October 2008 he confirmed the sheriff's findings in fact, although adding at the end of finding 10: "... until they had received a banker's reference. This was confirmed in the pursuers fax to the defenders of 25 June 2004", and further adding at the end of finding in fact and law 3: "It was however understood by the pursuers that there was a great deal of urgency for the mezzanine floor". (It may be noted at this stage that although some criticism was made of these additions in the written grounds of appeal to this court, these criticisms were not, in the event, pressed to any extent). More significantly the Sheriff Principal deleted finding in fact and law 5, and substituted in its place: "The pursuers' refusal to deliver the fabricated mezzanine floor on site without a banker's reference, to which they were not entitled, constituted a material breach of the contract and repudiation of the contract by the pursuers. The defenders were entitled to rescind the contract." It is clear from the Sheriff Principal's Note that he formed the view that the pursuers' refusal to deliver the fabricated mezzanine floor on site without a banker's reference amounted to an anticipatory breach of contract. In particular, at para 90, he said:

"In this case the pursuers and respondents made it clear in writing, and in the evidence of their managing director, both to the defenders and appellants and Muir Construction, that they did not intend to perform their part of the contract without a banker's reference. They were not entitled to take that stance. In my view, in the words of Lord Hamilton in Edinburgh Grain Limited (In Liquidation) v Marshall Foods Group Limited.... there was:

'conduct demonstrative of an intention not to perform fundamental contractual obligations as and when they fell due.'"

The Sheriff Principal therefore allowed the appeal and granted decree of absolvitor in favour of the defenders.

[6] It is against this interlocutor which the pursuers have appealed to this court.

Submissions on behalf of the pursuers

[7] The Sheriff Principal erred in making new finding in fact and law 5. In the first place, in finding that the defenders were entitled to rescind the contract in respect of the pursuers' refusal to deliver the fabricated mezzanine floor on site without a banker's reference, he failed properly to take account of the sheriff's finding, as noted at para 52 of his decision, that "the trigger point for the defenders terminating the contract was the approach, as they thought, of the pursuers to Muir Construction". This referred to the apparent misapprehension of Mr Pierce of the defenders, as disclosed in his evidence and stressed in the defenders' fax dated 23 June 2004, that it was the pursuers who had approached Muir Construction about the possibility of working directly with them rather than, as was the true position, Muir Construction approaching the pursuers. On a proper reading of the sheriff's decision as a whole, it was clear that he found that this misapprehension was the reason for the defenders' decision to terminate the contract, albeit he found in addition that the pursuers' stance in relation to refusing to complete the works without a banker's reference could not be said to amount to an anticipatory breach of contract. That being so, there was no proper basis for the Sheriff Principal to interfere with the sheriff's decision that the defenders were not entitled to terminate the contract. In the second place, the Sheriff Principal erred in finding that the pursuers' said stance amounted to an anticipatory breach of contract. There were no sufficient findings to justify an inference that the pursuers had unequivocally indicated by words or conduct that their intention was not to perform the contract. Reference was made to McBryde, The Law of Contract in Scotland, 3^rd Edition, paras 20-23 to 20-32. Reference was also made to Edinburgh Grain Limited (In Liquidation) v Marshall Food Group Limited 1999 SLT 15, Sweet & Maxwell Limited v Universal News Services Limited [1964] 2 QB 699 and Woodar Investment Development Limited v Wimpey Construction UK Limited [1980] 1 WLR 277. Whether a party's conduct could be said to have amounted to anticipatory breach was essentially a matter of fact to be determined after consideration of the whole circumstances. An appellate court should be slow to interfere with the findings of the judge who saw and heard the witnesses. Reference was made to Forslind v Bechely-Crundall 1922 SC (HL) 173, at pages 179 and 191-2. In circumstances where the sheriff had found that the pursuers' conduct did not amount to such anticipatory breach, the Sheriff Principal had no proper basis upon which to interfere with that finding. In any event, having regard to a number of factors, it was not reasonably open to the Sheriff Principal to reach the conclusion which he did. It was plain in their communications with Muir Construction that the pursuers were ready to do the work. Further, it could not be said that their refusal to do the work without the banker's reference was anything more than the position which they were adopting at that stage. In addition, the pursuers had already done much of the work, in particular the fabrication of the floor. Further, it could be said that both parties had, at the relevant time, been working in the expectation that a bank reference would be obtained. Reference was made to short passages in the evidence of Diane Paterson, the pursuers' office manager, of Roy Smillie, relationship director with the Royal Bank of Scotland and of Mr Pierce. It was important to notice that the sheriff had not found that the pursuers were at fault in failing to obtain the bank reference, his findings on that matter being entirely neutral. Reference was made, in particular, to para 62 of the sheriff's Note.

Submissions on behalf of the defenders

[8] It could not be said that the Sheriff Principal had erred in making new finding in fact and law 5. On a proper understanding of the sheriff's decision, although he found that the defenders were concerned about what they understood was the pursuers' approach to Muir Construction, this simply provided the occasion on which their underlying concerns about the pursuers' refusal to do the work without a banker's reference came to a head. He did not find that it was the reason for their decision to treat the contract as at an end. It could not be said that the Sheriff Principal erred in finding that the pursuers' stance amounted to an anticipatory breach of contract. As to the law, there was no dispute. Although the judge who heard the evidence was best placed to decide whether the relevant inference could be drawn, it was plain that the sheriff had misdirected himself. In particular it was clear that he asked not whether the pursuers' conduct was demonstrative of an intention not to perform the contractual obligations as and when they fell due, but rather whether they were already in breach of a term of the contract requiring them to complete the works within an agreed timescale. Reference was made to paras 55, 56 and 58 of the sheriff's Note. As a result the sheriff had purported to find "Other than forming part of the factual background, the bank reference is not of any particular significance" (para 62). This could not be supported. In these circumstances it was open to the Sheriff Principal to consider the appropriate question anew. Nor could it be said that he had reached the wrong conclusion. It was accepted that the defenders had not argued that the agreed time for performance had arrived when the pursuers refused, on or about 22 June 2004, to install the floor. Nevertheless it was plain that it could then have been installed without further delay, and that it would have been but for the pursuers' insistence on obtaining first a banker's reference to which they were not entitled. For the pursuers to stress that they would have been prepared to perform for Muir Construction was of no assistance to them. There was nothing in the circumstances to suggest that their insistence on a banker's reference would change. It was plain that the suspension of performance by one party to a contract until the terms of the contract were changed was capable of amounting to anticipatory breach. Reference was made to Dymocks Franchise Systems (NSW) Pty Limited v Todd and Others [2002] 2 All ER 849, in particular page 870. As emphasised by the Sheriff Principal, it was plain that the pursuers' position, as disclosed in their faxed letter of 25 June 2004, even after being alerted to the defenders' significant concerns, remained that they were prepared to carry out the work only if a banker's reference was supplied. The fact that they had done much of the work was neither here nor there, and there were no findings, nor was there any evidence, from which the inference could be drawn that at the critical time both parties were working in the expectation that a banker's reference would be obtained. Reference was made to parts of the evidence of Frank Hawthorn, the pursuers' production manager, and of Mr Miller, Mr Kerr and Mr Pierce.

Discussion

[9] The first question which arises is whether, on a proper understanding of the sheriff's decision, he found that the reason for the defenders' decision to bring to an end their contractual relationship with the pursuers was their concern that the pursuers had, as they wrongly thought, approached Muir Construction Limited to discuss the possibility of working directly for them. As to that it is certainly true that Mr Pierce was under that misapprehension (as recorded by the sheriff at para 55), and his "disappointment" about this was emphasised in the defenders' fax of 23 June 2004 (and repeated, albeit with less prominence, in their faxed letter of 25 June 2004). It is also clear that the pursuers, in their fax of 25 June 2004, were anxious to point out that this was indeed a misapprehension. Further, at para 52 of his Note, the sheriff said: "It is clear from the evidence that the trigger point for the defenders terminating the contract was the approach, as they thought, of the pursuers to Muir Construction". But it is important to notice the way in which the sheriff expressed himself. He was, it seems, careful not to say that this was the reason for the defenders' decision to treat their contractual relationship with the pursuers as at an end. Rather it is, we think, reasonably clear, considering the sheriff's Note as a whole, that what he was intending to convey was that the defenders' misapprehension was the occasion for their decision, which truly related to the underlying and continuing insistence of the pursuers that they would not complete their performance of the works without obtaining a bank reference. It is, in particular, clear from para 56 of the sheriff's Note, and thereafter, that the question of whether this insistence provided the defenders with a good reason for treating the parties' contractual relationship at an end was "the matter for decision" for him. That this was truly what concerned the defenders is entirely consistent with their assertion, in the faxed letter of 25 June 2004, that "As we were being put under pressure by Muir Construction to complete the works, and Miller Fabrications made it clear to both parties they were not willing to attend site, we had no option but to inform you that your services would no longer be required".

[10] In these circumstances the critical question is whether it can be said that the Sheriff Principal erred in finding, contrary to the sheriff, that the pursuers' stance in relation to the obtaining of a bank reference could be said to have amounted to an anticipatory breach of contract.

[11] On this matter there is no dispute between the parties as to the law which falls to be applied. In particular it is agreed that there is anticipatory breach "when a party to a contract unequivocally indicates, by words or conduct, that party's intention not to perform the contract", (McBryde, para 20-23). Both parties also referred (as did the Sheriff Principal), to Lord Hamilton's opinion in Edinburgh Grain Limited (In Liquidation) v Marshall Food Group Limited where, at page 22, he said:

"What in my view is required for repudiation is conduct demonstrative of an intention not to perform fundamental contractual obligations as and when they fell due."

It is agreed that the question in any case requires to be answered by reference to all the circumstances. It is also agreed that whether a party's conduct can be said to have amounted to anticipatory repudiation is essentially a matter of fact which the trier of fact is in the best place to determine. As was said by Viscount Haldane in Forslind v Bechely-Crundall, at page 179:

"Whether what amounted to such repudiation actually took place is largely a question of fact, to be determined by consideration of the circumstances and of the action of the respondent in these circumstances. It is a question on which the Judge who sees the parties and hears their witnesses, as well as reads the documents, is in the best position for disposing of what is in this sense really a question of individual conduct. For the law on the subject is not obscure. In Scotland, as in England, it is that the pursuer is dispensed from waiting for the arrival of the stipulated period for performance, if the defender has intimated in advance an intention to refuse to perform his obligations under it, and the pursuer elects to treat this as an entire breach and to act on it. If the defender has behaved in such a way that a reasonable person would properly conclude that he does not intend to perform the obligations he has undertaken, that is sufficient. The defender's words and the state of his mind are less important than the intention to be gathered from what he does, as evidenced by his attitude."

Further in the same case, Lord Shaw of Dunfermline said (at page 192):

"The question whether the stage has been reached when procrastination or non-performance may be so construed is an inference of fact upon which I should be slow to disturb the verdict of a jury or a Judge of first instance."

[12] Against that background the first question which arises is whether the Sheriff Principal had any proper basis for interfering with the apparent conclusion of the sheriff that the pursuers' actions could not be said to have amounted to anticipatory breach. In our opinion, it was open to the Sheriff Principal to consider this question anew. In particular it seems clear from the sheriff's Note that he asked himself ultimately not whether it could be said that the pursuers' conduct was demonstrative of an intention not to perform fundamental contractual obligations as and when they fell due, but rather whether it could be said that they were already in breach of contract by failing to perform in due time. In particular, having noticed at para 57 that the terms of the contract included no reference to the time of performance, he concluded at para 58:

"They were, of course, refusing to install the steel without the banker's reference, but time was not of the essence of the contract. At the stage of 23 or 25 June 2004, the pursuers were not in breach of contract and accordingly had not repudiated the contract." (emphasis added)

In our opinion this amounted to a misdirection (and senior counsel for the pursuers found it difficult to support this reasoning). When as a result, the sheriff later said (at para 62):

"Other than forming part of the factual background the bank reference is not of any particular significance."

this was, on any view, seriously to underplay its importance.

[13] The question thus comes to be whether it can be said that the Sheriff Principal erred in reaching the conclusion which he did. We have come to the view that it cannot.

[14] The Sheriff Principal was, we consider, entitled to pay particular regard to the fact that by 22 June 2004, despite the urgency of the situation as known to them, and despite the fact that they were in a position to install the floor that day, the pursuers were still nevertheless insisting that they would not perform their part of the contract without obtaining a bank reference to which they were not, in terms of their agreement, entitled. It is not without significance that the pursuers' primary case on Record, prior to the proof, was that they were indeed entitled to such a bank reference under the terms of the contract (whether as originally agreed or as varied). Following proof it was accepted that this primary position was not supported in the evidence. Although it was submitted initially in argument before us that the pursuers' position could perhaps be explained by a misapprehension as to the contractual terms, it was accepted ultimately that the evidence did not support that either. Instead it is plain that the pursuers wished to proceed only on terms, apparently consistent with their standard practice, which they were determined to introduce.

[15] Against that background none of the particular factors relied on by the pursuers persuade us that the Sheriff Principal could be said to have erred. Reference was made to the pursuers' apparent willingness to do the work directly to the orders of Muir Construction Limited. That, in our view, does no more than emphasise the determined stance which the pursuers were prepared to take in relation to the one contract which matters - that with the defenders. Further it was, as we understood it, argued that it could not be said to have been clear that their position in relation to the obtaining of a bank reference would not change. We were referred to no evidence which suggested that there could be circumstances in which their position might change, and even when on 23 June 2004 the pursuers became aware of the defenders' obvious reluctance to allow matters further to drift, the pursuers still insisted, as the Sheriff Principal pointed out, on their position in relation to the bank reference. They were, in effect, suspending performance until the contract terms were changed. That, in our opinion, plainly could be said to amount to an anticipatory repudiation. As was said by Lord Browne-Wilkinson in Dymocks Franchise Systems (NSW) Pty Limited v Todd and Others at page 870:

"a suspension of performance until the terms of the contract are changed is capable of being a repudiation ...".

[16] Further, although reference was made to the fact that the pursuers had fabricated the steelwork, this simply serves to emphasise the high risk strategy which they were prepared to adopt. Indeed, while this could perhaps have been seen by them as a powerful lever, in the circumstances of urgency which prevailed, towards achieving the terms which they wished, it is not open to one party to a contract who maintains, in the face of apparent insistence on the agreed terms by the other, that he will not perform unless changes are made to its terms, to seek to argue that he is not in anticipatory breach because he has reason to believe that the other party will in due course comply with his wishes. Although it was argued that both parties were, at the critical date or dates, working in the expectation that a banker's reference would be obtained, the sheriff made no findings to that effect. Instead, on the findings which were made (and indeed having considered such parts of the evidence as were referred to us) the inference, in our view, is plain that whatever readiness to co-operate the defenders may earlier have evinced, by the time the pressure was on, on 22 June, and certainly by the time the fax was sent on 23 June, their position was simply to stand on the terms of the agreed contract (as supplemented by the personal assurances which had been given by Mr Pierce). As the sheriff said of Mr Pierce, at para 55: "Having thought he had sorted out the question of references to Mr Miller's satisfaction in the telephone conversation of 2 June (Pierce 120, 141) he might understandably be concerned to find that the pursuers were still refusing to deliver the steel to site without the banker's reference being provided". Further, Mr Hawthorn, of the pursuers, said in evidence that before he had any discussions with Muir Construction Limited there was "an impasse between ourselves and Pierce, I understand, due to an inability to get either a bank or trade references". By the time the pursuers received the defenders' fax of 23 June 2004 they could have been in no doubt that the defenders' patience in respect of this particular matter was at an end.

[17] In these circumstances the appeal is refused. The parties are agreed that in that event the pursuers should be found liable in the expenses of it.

[18] We would only add that it is somewhat surprising to this court, (as it was, it seemed, also to senior counsel for the defenders) that before the sheriff and Sheriff Principal the defenders sought to advance their position by reference only to whether the pursuers' stance amounted to an anticipatory breach of contract. In particular at no stage was the contention advanced before the sheriff (or the Sheriff Principal) that in the circumstances there could be said to have been an implied term of the contract that the pursuers would perform the works as soon as they reasonably could; further that, in the circumstances, time was of the essence and thus that, in failing to install the floor on 22 June when they could have done, the pursuers were in material breach of contract entitling the defenders to rescind. Our impression is that had such an argument been advanced it would be likely to have had reasonable prospects of success. Since, however, this matter was not developed before us we say no more about it.