Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2011] CSOH 213
CA164/10	OPINION OF LORD GLENNIE in the cause ALUMNO MILLER TELFORD LIMITED Pursuer; against THE BOARD OF MANAGEMENT OF EDINBURGH'S TELFORD COLLEGE Defender: ­­­­­­­­­­­­­­­­­________________

Pursuer: Cormack, McGregor; McGrigors LLP

Defender: Moynihan QC, Borland; Harper MacLeod LLP

21 December 2011

INTRODUCTION

[1] In this action, the pursuer, Alumno Miller Telford Limited ("AMT"), seeks to enforce an agreement, known as the Nomination Agreement, entered into between itself and the defender, the Board of Management of Edinburgh's Telford College ("the College"), on 21 and 22 December 2009. It sues for declarator that the Nomination Agreement is binding upon the parties and enforceable against the College, for declarator as to its proper construction and as to how it is to operate (with an alternative claim for rectification), and for payment of sums allegedly due thereunder.

[2] The defender contends that the Nomination Agreement is not binding and enforceable, for three main reasons, namely because: (a) it is insufficiently certain in its terms to be enforceable; (b) it was ultra vires the defender; and (c) it was entered into without the authority of the defender.

[3] It was agreed between the parties that all questions of liability, focusing on these three issues, should be dealt with first. A three day proof was fixed for that purpose. It subsequently became clear, however, that further factual investigations were necessary before the issue of authority could be determined. In those circumstances the parties agreed, with the approval of the court, to deal at this stage only with the first two issues, namely (a) certainty of terms, and (b) the question of ultra vires, with the third question, that of authority, to await a further hearing should it arise.

[4] Evidence was adduced from a number of witnesses of fact. So far as concerns the development of the project and the negotiations leading to the conclusion of the Nomination Agreement, Ben McLeish (who was at the material time Assistant Principal and Director of Finance at the College) took the lead on behalf of the College. He gave evidence, as did Dr Jennifer Rees, a member of the Board of Management of the College (whose evidence was taken on commission). There was evidence too from David Campbell, Alan Baxter and Maurice Bourne, who were all closely involved on behalf of AMT (Mr Bourne's evidence was taken on commission). Evidence was led also from the solicitors involved in drawing up the Nomination Agreement, namely Roger Cotton, of Brodies LLP, for the College, and Sophie Black and Natalie Todd, both of McGrigors LLP, for AMT. In the case of Ms Black and Ms Todd, they had both lodged witness statements and these were agreed to be their evidence without the need for them to be called. Anthony Kopsch, James Godfrey, and Christopher Brown (a chartered accountant in the firm of Scott-Moncrieff) gave evidence relating to the assessment within AMT of the project and of the Nomination Agreement after its conclusion. In relation to the ultra vires issue, Grant Macrae of KPMG gave evidence for AMT by reference to his Report which had been lodged in process and was cross-examined on it; while Martin Fairbairn, from the Scottish Funding Council, was called to give evidence by the College. It seemed to me that no real issue of credibility arose. Where the witnesses differed in their accounts, I give my conclusions, in so far as relevant, in the body of this Opinion.

RELEVANT FACTS

Events relating to the conclusion of the Nomination Agreement

[5] The events leading up to the conclusion of the Nomination Agreement in late December 2009 can best be taken from the evidence given at the proof by Ben McLeish, supplemented from time to time by the evidence of other witnesses. Mr McLeish was, at the material time, the Assistant Principal and Director of Finance at the College. He had originally joined the College in June 2002 on secondment from the Scottish Funding Council ("SFC"). In 2008-2009, the period with which this action is concerned, he had responsibility, within the Senior Management Team at the College, for finance, estates, facilities and, latterly, information technology. He explained in his evidence that he led on the acquisition of residences by or for the College, in line with the agreed College strategy and objectives. Mr McLeish remained with Telford College until he was placed on gardening leave in about mid-April 2010, at a time when questions were first raised about the Nomination Agreement. He left his position with the College in May 2010 and thereafter became Director of Sector Development with Scotland's Colleges, a position which he held until the end of March 2011. He is a qualified chartered accountant.

[6] The College had for some years been interested in exploring the possibility of providing student residences on site. Having the residences on campus, or immediately adjacent thereto, was perceived as being likely to make the College more attractive to both domestic and international students. The College had a long term growth agenda to develop international and domestic business - or, put more simply, to increase student numbers - as well as taking up other commercial opportunities such as arrangements with language schools over the summer periods. The possibility of achieving a single site campus with student residences was raised during discussions between the College and Morrisons supermarket in 2004/05 relating to a possible re-location of the College to a site owned by Morrisons in Granton. Those discussions progressed to the point where the College moved to the Morrisons' site in Granton in 2006.

[7] The student accommodation on the new campus at Granton was created by the renovation and conversion of an existing shell building on the site. The work was carried out by AMT, who purchased the building from Morrisons in December 2009 under a Ground Lease for a term of 175 years at the same time as the Nomination Agreement was entered into. AMT took a loan of approximately £4.5m from Alliance & Leicester plc ("A&L") to fund the development, and granted a standard security over the property in favour of A&L. The intent was that AMT, having developed the accommodation block, would let the rooms directly to students of the College. AMT required some assurance that if it were to incur the cost of development there would be sufficient take-up by students of the accommodation thereby made available to make the development commercially viable. The Nomination Agreement, which I shall describe in more detail below, was entered into between the College and AMT to provide AMT with this assurance, by means of an "occupancy guarantee". It is this occupancy guarantee which is at the heart of the dispute between the parties. The Nomination Agreement takes its place, therefore, as one amongst a number of contractual arrangements entered into between the College, AMT and A&L relating to the conversion of the shell building within the new campus at Granton, and its conversion into student accommodation, those other agreements including the loan by A&L and the security provided by AMT. To complete the circle, as further security for its loan to AMT, A&L took from AMT an assignation in security of its rights against the College under the Nomination Agreement, that assignation being reinforced by a Step-in Agreement, enabling it, in circumstances in which it was entitled to enforce its security, to step into the shoes of AMT under the Nomination Agreement and be in a position to exercise rights under the occupancy guarantee directly against the College.

[8] The accommodation itself, once the conversion was complete, comprised 21 five bedroom flats, each with a common kitchen and living room area, plus two single bedrooms on the ground floor, configured for use by disabled students, and a further three single rooms on other floors, all of the single rooms having their own kitchen and living room areas. Accordingly, there were, in total, 110 rooms, five of which were single room flats (two for disabled students) while the remaining 105 were arranged as five bedroom flats with common kitchens and living rooms.

[9] Mr McLeish explained that in the four or five years before the negotiations leading up to the Granton development, there had been at least six previous attempts by the College to get a similar project off the ground with other potential providers of student accommodation, but those had not come to anything. The College had no interest in running accommodation itself, since this was very resource intensive and, in any event, not seen as part of its core functions. Nor did the College itself want to undertake the building or conversion of residences - this posed too much risk for it and, since it could not use the annual grant from the SFC towards such a development, would be unaffordable. The most the College wanted to do was to provide a revenue commitment, one that was off balance sheet. Outsourcing the provision and running of the residences was suited to this strategy; and it tied in with the College's approach to outsourcing ancillary services such as cleaning, catering and plant maintenance.

[10] The discussions which eventually led to the conclusion of the various agreements began in mid to late 2008. At that time, other corporate entities were involved as potential partners, but in due course AMT became the intended provider of the accommodation. One of the individuals with whom Mr McLeish was in discussions about the project was Mr David Campbell a director both of Ely Property Group UK, a company involved at an earlier stage, and also, though later, of AMT. Mr Campbell sent Mr McLeish a rough draft of an agreement in January 2009. At that time it was contemplated that Ely Property UK Ltd would be the contracting party. The proposal from Mr Campbell suggested that the development would be completed by about September 2010. The proposal at this stage differed from that which was ultimately agreed. The proposed duration was 15 years. It was anticipated that the accommodation would comprise 75 rooms, and that the college would guarantee to nominate 98% of rooms each letting year, that being, in effect, a guaranteed minimum occupancy level. Mr McLeish explained that the occupancy guarantee was a quid pro quo for having high quality accommodation provided on campus at no cost to the College. The developer required to make a long term commitment in fitting out, developing and running the accommodation. His understanding was that a developer would not make a return on this type of investment until around the 12 year mark. Accordingly, the developer required a commitment from the College both as to the duration of the agreement and as to the take up of accommodation by students.

[11] Mr McLeish responded in January 2009 noting some comments in track changes on the Heads of Terms sent to him. His particular concern was the expected completion date. He had originally been proceeding on the basis that completion would be achieved by September 2009 rather than September 2010. If the new accommodation was only to become available in 2010, he would need to make arrangements for accommodation for the year before that. The College already had an agreement with a company called UNITE Accommodation Management 8 Ltd ("UNITE"), in terms of which it had the use of 50 rooms for student accommodation on an annual basis, and it had another agreement with Jewel & Esk College for the use of a number of other rooms to be made available for student accommodation.

[12] On 27 January 2009 Mr McLeish wrote to Mr Campbell setting out the position of the College in relation to the development. By this time, it seems, Mr Campbell was acting in his capacity as a Director of Alumno Developments Ltd, who had come in in place of Ely. So far as the management of the College was concerned, Mr McLeish explained that the College was an independent autonomous body under the terms of the Further and Higher Education (Scotland) Act 1992/2005 and was governed by a Board of Management. All major decisions regarding the operation of the College had to be approved by the Board of Management. Full Board support was required before major contracts could be entered into. Although that formal support had yet to be obtained, the Board was broadly supportive of the idea of entering into an occupancy agreement with Alumno for a significant period of time (possibly 15 years). This would involve underwriting room voids and agreeing a maximum occupancy level; working with the company to market the residences to their students; and developing a partnership model (probably through the College's commercial company) with the company for the summer holiday period. This last point related to a suggestion that, outwith the core period of 42 weeks term time, the College might be able to let the rooms for summer lettings and receive 50% of the income (less a service charge to cover maintenance and utilities). Mr McLeish said that it was their intention to take that position to the Board's strategy meeting on 3 February 2009 and it was anticipated that the Board would then delegate the matter to its Finance & Property Committee for decision. That Committee was due to meet on 24 February 2009, and Mr McLeish was hopeful that a supportive decision would be made. Mr McLeish stressed in his evidence that the willingness to underwrite occupancy levels was linked to the fact that the College would be involved in marketing the rooms to students. As he put it, it was in the College's gift to make sure that the rooms were occupied.

[13] The Board met on 3 February 2009. Mr McLeish produced a paper for the meeting. He explained in his evidence that, before papers of that sort went to the Board or any of its committees, the "Senior Team", which included the Principal and Depute Principal, held a "pre-meeting" at which they went through the papers and made any necessary amendments to them. In his view, therefore, the paper went to the Board with the backing of the Senior Team. The proposals put before the Board in that paper were (a) to access student accommodation in the Granton area, and (b) to market the accommodation to Telford students in conjunction with the provider. The paper identified certain "measures of success" by which the success or otherwise of the proposal might be judged. These included attaining access to student accommodation in Granton, meeting international and commercial targets (i.e. as part of the College's objective in promoting itself to international students and generating income streams from them), and making a positive contribution to the student experience. Under the heading "Rationale", the following comments were made:

"4.1 Currently the College has access to Student Accommodation in the Centre of Edinburgh through our relationship with UNITE Ltd. This has been a successful relationship, with all 50 bed spaces under our Occupancy Guarantee being filled over the last two academic sessions. However, the construction of Student Accommodation on our doorstep within the Morrisons Development presents the College with a unique opportunity to have access to Student Residences (nearly) on campus, without incurring the capital outlay to do so.

4.2             Internal stakeholders have indicated that having access to bespoke Student Accommodation would clearly assist the International and National markets we seek to penetrate further as well as providing opportunities to an additional income during the Summer period, through vacation lets to Summer Schools, Festival goers and the like."

The paper explained that the only alternative available to the College was to continue its existing arrangements with UNITE for 50 rooms in their city centre site pursuant to the annual arrangement with them. So far as concerned the proposed new accommodation, the paper pointed out that College management continued to be convinced that the management of the hall of residence "in-house" gave rise to too much risk and diversionary activity to make it worth considering. Under the heading "Resource Implications", the paper pointed out that the proposed arrangement "would have no recurrent cost to the College unless the terms of our Occupancy Agreement are not met". It noted that the proposed arrangement, involving the College signing up to a minimum occupancy level, was "the same arrangement we currently have with UNITE for the 50 rooms we guarantee", though it pointed out that the arrangement with UNITE was on an annual rolling basis as opposed to the 15 year basis proposed for the new development. Finally, so far as is relevant to the issues in this case, the paper noted, under the heading "Time Scale", that this was the sixth time that College Management had looked at the provision of student accommodation on the Morrisons site with an external provider, and that this proposed deal was the first one which had the potential to bear fruit. The provider was looking for a decision from the College by the end of February in order to put all their funding and works programme in place. The paper recommended that the Board agreed the proposal in principle and delegate to the Finance and Property Committee at its meeting on 24 February 2009 the decision whether or not to enter into an arrangement with the provider for an Occupancy Agreement for 15 years subject to the commercial details being agreed.

[14] The Board met on 3 February 2009. Some concern was expressed about the length of the agreement and the Board asked the Finance and Property Committee to investigate whether there could be a break clause earlier than the 15 year term. Authority was delegated to the Finance and Property Committee to approve the arrangements subject to commercial details being agreed.

[15] On 24 February 2009 the Finance and Property Committee met. In advance of that meeting Mr McLeish submitted a paper on the provision of access to residences within the Granton development. Attached to that paper was a copy of the paper put before the Board together with the draft Heads of Terms. The key points of the proposed contract were summarised as follows: the College was willing to underwrite a 15 year Occupancy Guarantee; there were 75 bed spaces within the development; the minimum occupancy level to be guaranteed by the College (the current suggestion being 98%) was to be determined; that Occupancy Guarantee was to be for 42 weeks of the year; and the College would have the opportunity, working with the providers, to deliver a public accommodation service in the annual 8 week void.

[16] The Finance and Property Committee duly considered that paper at its meeting on 24 February 2009. The matter was dealt with in paragraph 8 of the Minutes of the meeting under the heading "Residences":

"Committee received the Residences paper ... Management reminded Committee that at its meeting on 3 February, the Board had agreed in principle to pursue the provision of access to residences within the Morrisons development and delegated final approval to the Finance & Property Committee. ...

The paper Management presented to Committee contained additional information to assist this decision. The Committee noted that students from other colleges could have access to this provision, which should reduce any risk and exposure [the College] may have from unfilled rooms. The Committee were confident that the required occupancy rate was achievable given the feedback provided by the College Accommodation Officer and International Manager. ...

The Committee approved the decision and asked Management to proceed with legal negotiations to contract, conduct due diligence and if possible to also achieve an improved break clause. The Committee also approved Management's request to appoint a specialist consultant to supplement the normal legal and due diligence process."

The formal decisions taken were (i) to approve the decision to acquire access to student residences within the Morrisons development, and (ii) to approve Management's request to appoint a specialist consultant to perform due diligence to assist in the due diligence process.

[17] The reference to carrying out due diligence reflected a similar reference in the paper submitted by Mr McLeish. Mr McLeish said that the mention of due diligence in his paper was a reference to the fact that the lawyers were going to go through the legal aspects of any agreement, while Jim Pike, a consultant dealing with room standards and specification, would deal with matters such as building specification and the lettability of the rooms. Mr McLeish himself based his opinion that the rooms would be lettable with minimum exposure to the College on the basis of his own knowledge of the market. Student demand was not evaluated as part of the due diligence exercise. Mr McLeish said that the College had previously carried out exercises to show latent demand in connection with the arrangements with Jewel & Esk College and with UNITE. Historical demand levels were accessible and they were making projections based on those. He would have pulled his information from different sources, such as the College's accommodation service and Jewel & Esk College. He was in dialogue with the Accommodation Officer and with Senior Managers in his team about it. He also spoke to the College's International Manager whose initial concern was overcome when it was explained to her that it was the "only game in town".

[18] According to Mr McLeish, everyone he spoke to was supportive of the project. As he put it: "no one was sucking teeth and saying that they weren't sure about it". It was only later, in the following year, when there was a significant change in the composition of the Board, that the residences got what he called a "rough time". Back in February 2009 everyone was very enthusiastic.

[19] Mr McLeish added that he was also approached by Edinburgh and Herriot Watt Universities about the residences and they indicated that there would be demand from their students for that type of accommodation. It was agreed that the College would revert to them once the residences were available, but because he ceased to be employed by the College he was not sure whether this happened.

[20] The Board of Management met again on 17 March 2009. So far as concerns the topic of the student residences, the Minutes record the following:

"Board noted that the Finance & Property Committee had given approval at their meeting in February for the College to enter into negotiations with the student residences provider who had approached the College. The Chair of the Finance & Property Committee confirmed that they were satisfied that the College could meet the minimum level of rooms required (by letting out to other students in Edinburgh if necessary) and had received the necessary evidence regarding the provider's company structure. The Board noted however that the likelihood of securing agreement for a shorter lease was remote given the current economic situation. The Director of Finance and Governance confirmed that the period of due diligence had commenced. ...

Given that the contract value was above that delegated to the Principal, the Director of Finance and Governance proposed that the Board delegated authority for this particular contract to the Principal and Chief Executive. The Chair of the Finance & Property Committee indicated his support and the Board agreed."

Mr McLeish thought that the threshold level for delegated authority was £150,000 at the time. The Principal and Chief Executive were in fact different names for the same role, so the delegation was to the one person who occupied that role.

[21] On 24 April 2009 Mr McLeish e-mailed Mr Campbell setting out different models for the project. At this time the discussions were still about a 75 room project rather than the 110 room project that it later became. At this time too there was a change in the consortium behind the proposal. One of the companies previously involved dropped out, and it ultimately became a consortium between Alumno and Miller which led to the formation of AMT, the current pursuer in this action.

[22] There was a further meeting of the Finance & Property Committee on 25 August 2009. Once again, Mr McLeish prepared a paper for consideration by the Committee at its meeting. That paper discussed the change in the consortium and went on to deal with the occupancy guarantee. Under this heading, it noted that the recommendation at that stage was that the College would agree a maximum guarantee of 75 bed spaces for 15 years. Since then, however, a number of factors had altered. It had become apparent that the number of rooms would have to be increased. The proposal for 75 rooms had been on the basis that the building could be developed in two phases, with the top floor being left undeveloped at the first stage. However, since the main exterior walls would have to be taken down for redevelopment, and if done in two stages they would have to be taken down twice rather than once, this was seen to be uneconomic. Accordingly, the plan was now for a one stage development of all three floors, which meant that 110 beds, rather than 75, would be available from late Summer 2010. This meant that the College was now being asked either to extend the length of the occupancy agreement to 25 years, with no break, or to provide an occupancy guarantee for more rooms. Without one or other of these commitments by the College, the consortium's financial model did not work and the whole project would be put in jeopardy. Advice had been sought from the Chair and Vice Chair of the Committee in early July as to how they should proceed, and both of them agreed that rather than extend the length of the guarantee they would prefer to "flex" the level of occupancy agreement, which appeared to offer more scope to seeing the project concluded. Accordingly, the College had indicated to the consortium that they would be willing to increase the occupancy agreement to a maximum of 100 rooms (or 90%). The Committee was asked to endorse this proposal.

[23] At its meeting on 25 August 2009, the Finance & Property Committee endorsed the proposal to increase the occupancy guarantee from 75 rooms to 100 rooms, though not before a lengthy discussion prompted by the concern amongst some members of the committee as to whether that level of occupancy was sustainable over a lengthy period, given that the increase in student numbers was a reflection of the current economic climate.

[24] On 3 September 2009, Mr McLeish wrote to David Campbell confirming that the College would provide a 90% occupancy guarantee for the 110 rooms for at least 42 weeks a year for a period of not less than 15 years.

[25] The Board met on 15 September 2009. At item 21 of the Minutes of the meeting, it is noted that the Board had received the Minute of the Finance & Property Committee meeting of 25 August 2009. The Board noted that the "ISG issue was progressing towards closure". This was not a reference to the student residences issue, nor did the Board Minutes contain any other reference to that issue. However, as Mr McLeish noted, six out of the thirteen Board members who attended that Board meeting had been at the Finance & Property Committee meeting of 25 August 2009. He himself had also attended the Board meeting and he could not recall any specific discussion about the residences in particular. Certainly no concern was expressed about the increase in the guarantee from 99% of 75 rooms to 90% of 110 rooms.

[26] The College instructed Brodies, solicitors, to prepare the legal agreement so as to document what had been agreed in principle between the parties. The partner at Brodies dealing with this was Mr Roger Cotton. Mr McLeish said that they were going to use the UNITE agreement as a skeleton draft. They were familiar with it, they knew it worked and, importantly, they knew what type of accommodation was attractive to students. They wanted to get a UNITE type model, i.e. one in which the student dealt directly with the provider, but counted towards the occupancy guaranteed by the College. Mr Cotton had drafted the UNITE agreement for the College. Since there is a claim for rectification, it will be necessary to refer to the detailed drafting of the Nomination Agreement. For present purposes it is sufficient to note that on 15 September 2009 Mr McLeish e-mailed Mr Cotton with what he called in his statement "the headline basis of our agreement". On 17 September, Mr Cotton replied by e-mail attaching Heads of Terms that Brodies had prepared. Mr McLeish thought that these had been prepared by Brodies on the basis of the draft Heads of Terms which had been circulating between himself and David Campbell earlier in the year.

[27] On 1 October 2009 there was an exchange of e-mails between Mr McLeish and David Campbell suggesting that the parties were nearing agreement on the key Heads of Terms. On 2 October 2009 David Campbell e-mailed those Heads of Terms to McGrigors, solicitors acting on behalf of AMT. Heads of Terms in substantially the same terms (apart from an increase in the rent to cover Broadband charges and changes in certain other points of detail) were sent by Mr McLeish to Mr Cotton of Brodies on 4 November 2009.

The Heads of Terms

[28] The agreement was summarised in the Heads of Terms as being one by which the Consortium (as the Alumno Miller partnership, which became the pursuer, was then called)

"makes rooms in the accommodation facility adjacent to the College on West Granton Road (which is to be completed by the Consortium) available to students of the College"

and the College

"provides an occupancy guarantee in respect of certain void rooms".

[29] The "Contract Cycle" was defined in these terms:

"Contract years run from the first date of the of the College's academic year (the AY Date). This is notified annually by the College to the Consortium no later than 6 months in advance.

Period 1: AY Date (start of week 1) to end of week 14

Period 2: weeks 15 to 28

Period 3: weeks 29 to 42

[30] The duration of the proposed agreement was to be 25 years from the first date of the academic year, with a break option at the 15^th anniversary, exercisable by the College only on six months notice.

[31] There was then this provision concerning Nomination:

"Nomination

By 30 April in advance of each AY, the Consortium nominates 99 rooms from the 110 to be eligible for the occupancy guarantee (the Nominee Rooms)."

As already noted, "AY" represents the first date of the College's academic year, the precise date to be notified by the College to the Consortium each year no later than six months in advance of that date.

[32] The obligation on the Consortium to make rooms available was expressed in the following way:

"Availability Period

In the 3 months prior to each AY Date:

·                    all 110 rooms must be available for letting with effect from the AY Date (unless pre-let by that stage to College students from the AY Date); and

·                    The Consortium must not let any Nominee Rooms other than to a College student, without the prior consent of the College (unless that let ends prior to the AY Date such that it remains available for letting with effect from the AY Date).

For the 99 Nominee Rooms the College proposes a two stage availability period.

·                   Stage 1 (3 months to go until 10 weeks to go): College students only

·                   Stage 2 (10 weeks prior to AY Date): any student of any institution.

College students include prospective students with a confirmed place."

[33] The term "Nominee Rooms" is a term used in drawing up the formula for sums payable under the occupancy guarantee. That formula is expressed as follows:

"Occupancy guarantee (paid in advance)

A x B x C

A = Number of Nominee Rooms remaining unlet as at the start of each Period (Unlet Nominee Rooms)

B = rental amount per week (i.e. £125, indexed)

C = 14 (i.e. period length in weeks)"

[34] There are a number of other provisions which do not require to be set out here. I simply note that there was provision for the 42 week tenancies to be offered to all College student applicants at a rate of £125 per week for the first year, subject to an annual increase at RPI + 0.5% (with a maximum increase, or "cap", of 5% per annum, and a minimum increase, or "collar", of 1% per annum).

Further meeting of the Finance & Property Committee

[35] The Finance & Property Committee met on 24 November 2009. It approved the minute of the previous meeting held on 25 August 2009. It also received an update concerning the student residences question, in the form of a paper from Mr McLeish. It noted the progress made since receiving a briefing at the August Committee meeting. It noted also that management had advised the Committee that the Alumno-Miller Consortium was due to "conclude legals" on the purchase of the building by the end of November, that orders had been placed with suppliers and that work was expected to commence on 5 January 2010, for a planned opening in early August 2010.

The Nomination Agreement

[36] The Nomination Agreement was signed in December 2009. It was signed on behalf of the College by the Acting Principal, Greg Irving. The relevant terms require to be set out at some length. First, I note certain definitions in clause 1:

"'Change procedure' - means the change procedures set out in Schedule Part 5;

...

'Guaranteed Payment' means, in relation to each Payment date, the amount (if any) payable by the College to the Company in respect of that Payment Date, calculated as follows:

N x W x Rent

Where N is the number of Nominee Rooms that are Unlet as at that Payment Date, W is the number of weeks in that Payment Period and Rent is as defined in this Agreement.

...

'Nominee Rooms' - means the 99 Rooms in the Property designated by the Company in the Specification as the Rooms in respect of which the provisions of this Agreement relating to Guaranteed Payments shall apply;

...

'Specification' - means the outline specification set out in Schedule Part 3 as may be amended from time to time in accordance with this Agreement."

[37] Clause 3 deals with "the Company's Construction Obligations". Within that Clause, Clause 3.2 provides as follows:

"3.2 Any variation to the Specification shall be subject to the Change Procedure."

Accordingly, in terms of the Nomination Agreement, the Nominee Rooms are those designated by the pursuer in the Specification (Schedule Part 3), which Schedule may be varied in accordance with the Change Procedure in Schedule Part 5.

[38] Clause 9 deals with "Letting Procedure". Clauses 9.1 and 9.2 provide as follows:

"9.1 The College shall nominate students for Tenancies in respect of all Rooms for each Operation Year during the term of this Agreement (subject always to there being sufficient demand for Rooms from Students) and the Company shall, subject to the provisions of this Clause 9, grant tenancies (or procure that a third party does) to such Students at the Rent.

9.2 Except as provided for in Clauses 9.5, 11.2 and 15.1 of this Agreement, the Company may not without the consent of the College grant or agree to grant any rights of occupation in respect of any Nominee Room for any period forming part of an Operating Year."

The following further provisions under clause 9 show the extent to which the Letting Procedure is linked in with the concept of Nominee Rooms.

"9.2A The Company may not without the consent of the College grant or agree to grant any rights of occupation in respect of any Room (not being a Nominee Room) for any period forming part of a Tenancy Period to any person who is not a Student or Economically Active.

9.3 Any variation to the Tenancy shall be subject to the Change Procedure.

9.4 The Company shall promptly (and in any event within 5 Working Days) notify the College of any Student that applies directly to the Company ... for a Tenancy. The College shall within 5 Working Days of receipt of such notification notify the College (sic) as to whether it consents to that Student being granted a Tenancy, such consent not to be unreasonably withheld or delayed.

...

9.6 The Company shall offer such Tenancies:

9.6.1 within three (3) Working Days of:

...

9.6.2 in respect of Nominee Rooms (and not Rooms which are not Nominee Rooms) to the extent that any Nominee Rooms remain available.

...

9.11 The allocation of Nominee Rooms will be determined by the Company acting reasonably, having regard to any allocation policy notified by the College to the Company from time to time."

[39] Clause 11 deals with "Guaranteed Payments and Rebates". So far as material, it provides as follows:

"11.1 Within 5 Working Days of each Payment Date the Company shall provide the College with occupancy information in relation to Nominee Rooms and calculation of the Guaranteed Payment (if any) due at that Payment Date together with an invoice. The College shall pay to the Company the Guaranteed Payment within 30 days of receipt of such invoice.

11.2 In relation to any Tenancy Period, the Company shall use reasonable endeavours to maximise income in relation to the occupation or use during such Tenancy Period of ... any Nominee Rooms in respect of which the College becomes liable to make any Guaranteed payment pursuant to clause 11.1 (provided that no occupation or use of any Nominee Rooms shall be permitted during the Tenancy Period by any person who is not a Student or Economically Active, without the consent of the College) ..."

[40] Clause 15 is headed "Void Rooms". It is concerned with what happens if a Nominee Room becomes vacant during the course of a tenancy. It provides, so far as material, as follows:

"15.1 In the event that a Nominee Room becomes vacant during a Tenancy Period, the Company shall use reasonable endeavours to find an alternative Student or a person who is Economically Active, or (with the consent of the College not to be unreasonably withheld or delayed) any other person to become a tenant for that Nominee Room during the remainder of that Tenancy Period and the Company shall use the same degree of endeavour to promote and seek to let or licence or grant rights of occupation in respect of any such Nominee Room as it does in relation to any other Rooms which are Unlet ...

15.2 If as at any Payment Date, a Student has failed to pay the rent to the Company due as at that date then the relevant Room shall be classified as Unlet for the purposes of this Agreement (provided it is and remains Available for Letting).

15.3 If Clause 15.2 applies to any Room, the Company shall notify the College no later than 3 Working Days after the relevant Payment Date, and unless the Company and the College agree otherwise within a further 2 Working Days, the Company shall promptly thereafter bring the Tenancy in respect of that Room to an end on the basis of non-payment (so creating a vacancy for the purpose of Clause 15.1)."

[41] Clause 20 is a "Dispute Resolution" clause. It provides, in Clause 20.1 as follows:

"20.1 In the event of a dispute relating to any payments due (or alleged to be due) or occupancy information in respect of Nominee Rooms arising in respect of this Agreement that has not been resolved by the respective Senior Managers within each party then the Managing Director (or person of a similar status or his/her successor) of the Company will meet with the Director of Commercial Services (or his/her successor) of the College upon either giving notice to the other of a request to meet which meeting must take place within 10 Working Days of the request and at which meeting each will use their reasonable endeavours to reach an agreement in relation to the dispute."

[42] Clause 24 deals with "variation". It provides as follows:

"24. Other than in respect of changes to the Specification, the Service Level Agreement, the Collateral Warranty, the Step-in Agreement or the Tenancy pursuant to Schedule Part 5, no variation to this Agreement shall be effective unless in writing signed by a Director or other duly authorised officer of each of the Parties."

[43] It is not necessary for present purposes to look at any of the other terms in the main body of the Nomination Agreement. It is, however, necessary to look at some parts of the Schedule thereto. There is a single Schedule, divided into a number of Parts.

[44] Schedule Part 3 is headed "Specification". It covers such matters as: Internal spatial requirements; Storage; Fixtures & fittings; M & E; Miscellaneous; Studio bedrooms; Cluster flats; and Conditions. Although, as set out above, the definition of "Nominee Rooms" refers to the 99 Rooms designated by the Company in the Specification, there is in fact nothing in the Specification touching upon the identification or designation of Nominee Rooms.

[45] Schedule Part 4, entitled "Service Level Agreement", is of little direct relevance to the current dispute. It sets out the responsibilities of the tenant and the landlord and deals with questions of management and administration. It contains nothing to do with the identification or designation of Nominee Rooms.

[46] Finally, for present purposes at least, Schedule Part 5 deals with "Change Procedure". It provides, so far as material, as follows:

"1. Introduction

1.1 In this Change Procedure, 'Proposal' means any amendment or variation proposed by the Company to the Specification, the Service Level Agreement, the Collateral Warranty, the Step-in Agreement or the Tenancy other than where such amendment or variation:

(a) is required in order to comply with any change in law that was not reasonably foreseeable at the date of this Agreement; or

(b) either by itself or when taken in conjunction with any related amendments or variations, is considered by the Company (acting reasonably) to be minor in nature; or

(c) is made by the Company to adapt the form of Tenancy ... [for certain purposes].

1.2 Subject to 1.3, the Company shall not be required to notify the College of any proposed amendment or variation to the Specification, the Service Level Agreement, the Collateral Warranty, the Step-in Agreement or the Tenancy that is not a Proposal and may implement any such amendment or variation without reference to the College or consent pursuant to Clause 24.

...

2. Instigation:

2.1 Any proposal must be notified to the College at least 10 working days prior to the date on which the Company wishes to implement the Proposal.

2.2 The College shall have the right to object to any Proposal if (and only if), acting reasonably, it considers that the Proposal, if implemented, would increase to a material extent the likelihood of the College being required to make Guaranteed Payments to the Company, all would be likely to increase to a material extent the amount of any such Guaranteed Payments.

In considering the Proposal, the Parties agree and acknowledge that the College shall be entitled to take into account the likely effect of the implementation of the Proposal on the attractiveness of the Property and/or the Nominee Rooms to occupiers or potential occupiers of the Property and/or Nominee Rooms.

2.3 The College shall notify the Company within 8 working days of receipt of the Proposal as to whether it accepts, or objects in accordance with paragraph 2.2 above, to the Proposal. If the College fails to give such accommodation; it will be deemed to have accepted the "proposal".

2.4 If the College notifies the Company of any objections in accordance with paragraph 2.3, the Company shall be entitled to implement any elements of the proposal to which the College has not objected, and shall within a further 5 Working Days notify the College as to whether it wishes to amend the Proposal such as to remove any elements to which the College as objected.

2.5 If the Company does not notify the College that it wishes to amend the Proposals such as to remove any elements to which the College has objected, the Parties shall within a further 5 Working Days meet to discuss and attempt to resolve the College's remaining objections.

2.6 If the Parties have not reached agreement as to the resolution of the College's objections within a further 5 Working Days of such meeting, the Company shall either withdraw the elements of the proposal to which the College has objected and agreement has not been reached, or refer the outstanding issues for resolution in accordance with the Dispute Resolution Procedure.

2.7 The Company shall not implement any elements of the Proposal to which the College has objected and agreement has not been reached unless and until such elements have either been accepted by the College or determined in accordance with the Dispute Resolution Procedure."

Detailed drafting of the Nomination Agreement

[47] Since there is in this case a claim for rectification of the Nomination Agreement, it is necessary to set out the evidence relating to the drafting of the document which came to be executed on 21 and 22 December 2009. Both sides instructed solicitors to draft and reach agreement upon the terms of the formal agreements to be entered into between the parties, including the Nomination Agreement. The pursuer, AMT, instructed McGrigors LLP. The solicitor principally involved was Natalie Todd, a member of the Infrastructure Projects Team at McGrigors. She was supervised by Sophie Black, a Senior Associate in the Infrastructure Projects Team and Iain Strachan, a Senior Associate in the Real Estate Team, who was coordinating the overall transaction. Certain other solicitors at McGrigors may have had an involvement, but as I understood the evidence the detailed consideration of the drafts of the Nomination Agreement was left to Natalie Todd and Sophie Black.

[48] The College instructed Brodies LLP. Roger Cotton, a partner in Brodies and a member of the Projects Team, was the solicitor principally involved on the College's side of the detailed negotiations. An assistant solicitor, Paul Moseley, was also involved to a limited extent.

[49] Evidence was led from Natalie Todd and Sophie Black of McGrigors, who were acting for AMT, and from Roger Cotton of Brodies, who acted for the College. The evidence of Natalie Todd and Sophie Black was given by witness statements without the witnesses themselves requiring to be called to give evidence. In a joint minute the parties agreed that the contents of their witness statements "should be treated as [their] evidence, subject to the defender reserving its position as to the relevancy and admissibility of that evidence". No points were in fact raised as to relevancy and admissibility. In those circumstances, I should treat the contents of their witness statements as though they had appeared at the proof and given oral evidence in chief to the like effect and not been challenged on that evidence in cross examination. Mr Cotton also gave evidence. He did so orally, under reference to his witness statement exchanged and lodged in process well in advance of the proof. Although he was cross examined on some aspects of his statement, there was not in fact a great deal of dispute between these three witnesses as to what had occurred.

[50] It does not appear that Natalie Todd or Sophie Black had any involvement in the drafting of the Heads of Terms. Mr Cotton however did. He gave evidence that on 15 September 2009 he received an e-mail from Ben McLeish, the then Director of Finance & Governance of Telford College, from whom Mr Cotton received all his instructions, setting out the basic terms of the proposed agreement. That e-mail described the proposed agreement in the following terms:

"The essence of our agreement will be that we will underwrite via an Occupancy Agreement:

90% of 110 rooms

For 42 weeks @ £125 per week

For 25 years with a break clause at year 15

The RPI is capped at 3% per annum, and the conditions we have in the Unite agreement re voids should be included in the first draft of the HoT."

Mr Cotton was familiar with the agreements with UNITE in relation to student residences in central Edinburgh. He obtained clarification from Mr McLeish that the "90% of 110 Rooms" meant that the Occupancy Guarantee applied in respect of 99 rooms. On this basis, he prepared the first draft of the Heads of Terms and sent it to Mr McLeish on 17 September 2009 by e-mail. That first draft of the Heads of Terms was generally in a form which remained the same through to the final draft referred to earlier in this Opinion, albeit that some of the detailed drafting of the provisions changed between that first draft and the final draft.

[51] The provision concerning Nomination in this first draft of the Heads of Terms was in the following terms:

"Nomination

[##] months prior to each AY Date the Consortium nominates 99 rooms as to be available for College Students and so eligible for the occupancy guarantee (the Nominee Rooms)".

[52] Thereafter the Heads of Terms were negotiated directly between principals, with Mr McLeish from time to time asking Mr Cotton to review any amendments and to incorporate comments and agreed changes.

[53] By 1 October 2009 some changes had already been agreed between the parties. In a draft of that date the provision concerning Nomination had been altered so that it read as follows:

"Nomination

By 30 April in advance of each AY, the Consortium nominates 99 rooms from the 110 to be eligible for the occupancy guarantee (the Nominee Rooms)".

That provision remained in that form up until and including the final draft.

[54] In Mr Cotton's first draft, consistent with the terms of the e-mail which he received from Mr McLeish on 15 September 2009, the rent increase per annum was to be capped at 3%. By the time of the draft circulating on 1 October 2009, the cap and collar had been agreed at 5% and 1% respectively. These figures remained in all subsequent versions of the Heads of Terms, although in the e-mail correspondence the collar of 1% was the subject of some discussion.

[55] McGrigors were instructed only when the basic shape of the deal was already in place and was reflected in the Heads of Terms between the parties. Natalie Todd e-mailed Mr Cotton on 3 November 2009 enclosing a first draft of the Nomination Agreement for his comment, emphasising that the draft which she was sending was subject to any comments or further instructions that McGrigors might receive from their clients. That draft did not bear a very close resemblance to the Heads of Terms. It did not, for example, include any reference to "Nominee Rooms", using instead the concept of "Guaranteed Bed Spaces", that being defined to mean "99 Bed Spaces in the Property". It appears that the first draft was not in fact prepared by McGrigors but by their client, AMT. Sophie Black explained that on receipt from AMT of a draft of the Nomination Agreement in late October 2009, McGrigors did not try to tailor it to fit exactly with the Heads of Terms, since their instructions were to stick closely to their clients' other agreements which, she explained, already reflected the principles of the Heads of Terms, albeit not in the same words.

[56] Mr Cotton responded on 9 November 2009 with a number of detailed comments on the draft. One of the points made was that the guaranteed payment should be calculated not by reference to the total number of rooms but by reference to voids. McGrigors' response to this in their e-mail of 10 November was that they believed that this point was already covered in the calculation of the guaranteed payments in the draft Nomination Agreement prepared by them.

[57] Some further discussions took place. Natalie Todd sent a second draft of the Nomination Agreement to Mr Cotton by e-mail of 16 November 2009 reflecting a number of the points made by Brodies. This was followed by further e-mail exchanges. On 23 November 2009 Paul Moseley of Brodies e-mailed Natalie Todd a "mark-up" of the Nomination Agreement. He explained in the covering e-mail that there were "quite a few changes", the intention being to align the agreement more closely with the Heads of Terms. He explained, in particular, that in the revised draft the process for nominations, tenancies, guaranteed payments and rebates was now set out in Clauses 9-11 and in the relevant definitions. In her witness statement, Natalie Todd described this as "a complete re-draft". Brodies had "essentially rewritten the contract". That was not an unfair description of the changes.

[58] For present purposes, however, I need only concentrate on the definition of "Nominee Rooms", a term taken from the Heads of Terms and inserted into the draft Nomination Agreement for the first time in the Brodies' draft of 23 November 2009. In that draft that term was defined as follows:

"Nominee Rooms

Means the 99 Rooms in the Property designated [by the Company [in the Specification]] as the Rooms in respect of which the Guarantee Payments shall apply".

Neither Natalie Todd nor Sophie Black recalled any discussion between themselves and Brodies about this new formula. Nor was there any express mention by Brodies that they were introducing this formula or what its purpose was.

[59] Mr Cotton explained the matter in this way:

"Our revisions were made with the intention of bringing the agreement in line with the HoT. This was achieved by removing references to amongst others 'Bedspaces', clarifying the risk allocation in relation to bad debt and adding the definition of 'Nominee Rooms'. 'Nominee Rooms' was inserted to identify the 99 rooms out of the 110 rooms in the development to which the Occupancy Guarantee related. The HoT contemplated that the 99 rooms would be nominated by the developer. The draft as revised on 23 November contemplated a different option, namely that the 99 rooms could be identified in the Specification - which was to form part of the Schedule to the Agreement. In the drafting of that definition of 'Nominee Rooms' we used square brackets to identify to McGrigors that the precise detail of how the Nominee Rooms would be identified was a matter which was still to be finally agreed. In the previous UNITE agreement entered into by [the College] with another supplier the Nominee Rooms were specifically identified in the Schedule to the agreement".

AMT had, of course, no knowledge of the terms of the UNITE agreement entered into by the College.

[60] Mr Cotton did not say whether this change, i.e. the change which meant that the 99 rooms would be identified in the Specification, was the subject of discussion or agreement between the parties or their lawyers. It must be taken from the unchallenged evidence of Natalie Todd and Sophie Black on this point that there was no such discussion or agreement.

[61] Ms Black responded on 27 November 2009, expressing her disappointment at the scale of the "mark-up" carried out by Brodies. She asked for a commentary identifying why the amendments were needed since her clients wished to stick to the style of nomination agreement used on other projects; many of the amendments appeared to be stylistic or drafting issues rather than ones which affected the substance, the mark-up appeared to go beyond the position which the parties thought they had reached over the previous few weeks as reflected in the Heads of Terms, and they did not want to waste their clients' money reviewing non-commercial points, i.e. points that did not matter.

[62] On 2 December 2009 Mr Cotton sent Brodies a further mark-up of the proposed Nomination Agreement. His e-mail was addressed, on this occasion, to Ian Strachan and Victoria Miller but it is clear that it also came to the attention of Natalie Todd and Sophie Black. There were a number of changes. So far as is relevant to the present case, the definition of "Nominee Rooms" had been amended to read as follows:

"Nominee Rooms

Means the 99 Rooms in the Property designated by the Company in the Specification as the Rooms in respect of which the provisions of this Agreement relating to Guaranteed Payments shall apply".

The main change from the previous draft was, in effect, the removal of the two sets of square brackets around the words "[by the Company [in the Specification]]".

[63] In his e-mail, Mr Cotton floated a suggestion that it might be easier simply to have a provision that the College guarantee 90% of the Rent from all of the Rooms, rather than the whole of the rent from 90% of the Rooms, the latter requiring a detailed nomination procedure. This suggestion came to nothing.

[64] As I have said, there appears not to have been any discussion between the parties or their solicitors concerning the draft definition of "Nominee Rooms" put forward in the mark-ups proposed by Brodies on 23 November 2009 and refined in their draft of 2 December 2009. Sophie Black explained it (in relation to the 23 November mark-up) in this way:

"I think this is partly because we still expected to review the Specification so assumed we would have the opportunity to check the definition at a later date. If Brodies were telling us that the rooms were to be specified in the Specification, there was an assumption it would be put in the Specification. I think that the document it was designated in was up for debate at this point and that is why there are square brackets in the definition. My understanding was that the Specification (which we had not yet been instructed to review) was with Brodies and their client for review at that stage, so I assumed that Brodies had a better understanding of the contents of the Specification and read it. It would seem reasonable to expect that a technical schedule such as the Specification would contain such a designation where it can also be varied at the instance of Alumno Miller Telford Limited in accordance with the Change Procedure".

She commented that in terms of the 23 November 2009 mark-up (and the same would surely apply to the 2 December 2009 mark-up) the "overarching basis of the agreement" remained:

"the College was still to nominate students for all 110 rooms (it's in their favour to have first call on all the 110 rooms) but only guarantee payment for 99 of them".

[65] Ms Black understood that AMT were going to designate the rooms, as had been envisaged in the Heads of Terms and the drafts of the Nomination Agreement. She said that towards the end of the transaction she was told by Iain Strachan that their clients had instructed them not to review the Specification, so they did not have the opportunity to check that the definition of Nominee Rooms proposed by Brodies tied in with the Specification.

[66] In his evidence Mr Cotton said that the final definition of "Nominee Rooms" had been discussed in a conference call with McGrigors on 30 November 2009. He said that although the definition of "Nominee Rooms" was not on the agenda, the nominations procedures were on the agenda and were discussed. Based on that call, Paul Moseley of Brodies prepared the redraft of the Nomination Agreement which became the version sent to McGrigors on 2 December 2009. In a note to Mr Cotton, a copy of which was not available in court, Mr Moseley linked the changes which he had made to the draft with the content of the conference call with McGrigors. That note apparently recorded that the identification of Nominee Rooms was discussed. Mr Cotton said that the draft of 2 December 2009 which was sent to McGrigors "was consistent with what we understood had been agreed during the conference call on 30 November".

[67] On 7 December 2009 Natalie Todd sent back a copy of the Nomination Agreement marked up to reflect a few points of detail. None of those relate to the nominations procedures or the definition of "Nominee Rooms".

[68] In his Witness Statement, Mr Cotton went on to make a number of points about how the Nomination Agreement was intended to work with this agreed definition of "Nominee Rooms" and the requirement that the Nominee Rooms be identified in the Specification. I do not propose to set out any part of that evidence which, so it seems to me, amounted to argument rather than evidence. I deal with those arguments made when discussing the submissions presented by Counsel.

Events after execution of the Nomination Agreement

[69] Mr McLeish ceased to be employed by the College in April or May 2010. A number of other people with knowledge of the project left at about the same time. His role as Head of Estates was taken over by Anthony Kopsch, who was already at the College as Head of Facilities. He had for some time been aware of the existence of the Nomination Agreement, but first reviewed it in June 2010. His view was that the College had a direct interest in selecting the rooms which were to be the subject of the guarantee. There were, as he put it, a number of variables that would make the letting prospects of individual rooms more or less attractive. I refer to this below. For the present I note that he dealt with the administration of the Nomination Agreement on behalf of the College, and liaised for that purpose with Mr Baxter of AMT, who was at all material times a director at the Public Private Partnership Unit at Miller Construction UK Ltd ("the PPP Unit") and was a director of AMT.

[70] After the Nomination Agreement was concluded, it was administered by three different entities on the part of AMT: Corporate Residential Management Ltd ("CRM"), who managed the day to day running of the establishment, collected rents and dealt with the College; Alumno Developments Ltd, whose role was to oversee various operational aspects of the agreement; and Miller Construction UK Ltd., who operated the accounts and finances for AMT in relation to the agreement. Mr Baxter said that AMT started the procedure for invoicing the College under the Nomination Agreement on 13 August 2010, before he himself had ever looked at the agreement. (There was, and remains, a dispute as to whether AMT sent out their invoice too early, when sums were not yet due; but originally there was no dispute about the efficacy of the provisions relating to Guaranteed Payments, but I put this to one side for the present.)

[71] On 27 August 2010 Mr Baxter e-mailed Mr Kopsch with the invoice for the first guaranteed payment. AMT had sourced 5 tenants, while the College had sourced 43. According to AMT, the guaranteed payment was, therefore, for 56 Rooms (99 less 43). Mr Kopsch responded, not challenging the principle of liability, but pointing out what he perceived to be a discrepancy in the calculation. His evidence was that he thought that the invoice was a bit strange, because he was expecting it to identify the rooms in respect of which payment was due. He also thought that the College had nominated more students for accommodation than the invoice suggested, but the College was dependent in this regard on information from CRM. There was some discussion about the status (in terms of the provision for Guaranteed Payments) of students occupying rooms on short term lets. Meanwhile a number of other tenants had signed up, and AMT issued a credit note against the amount of their invoice. On 14 September 2010 Mr Kopsch e-mailed Mr Baxter in terms which envisaged payment of the invoice by 21 September. Mr Kopsch candidly accepted that at that time, he not having taken legal advice, he believed the Nomination Agreement to be legally binding. No payment was made. On 27 September 2010 Mr Baxter chased Mr Kopsch by e-mail. Mr Kopsch responded in a telephone call on 7 October 2010, and subsequently by e-mail that day, saying that the College Principal was reluctant to pay. Mr Baxter was concerned, since AMT had borrowed money on the back of the College's undertaking. Mr Baxter said that Mr Kopsch was apologetic, but could only point out that the Principal was "uncomfortable" about the deal, in particular College's exposure to future risk and was "not willing to sign off yet", or words to that effect. Mr Kopsch said in evidence that the Principal was not prepared to authorise payment until he understood the circumstances leading to the College entering into the Nomination Agreement. Mr Baxter then went on holiday until 27 October.

[72] There was a meeting on 2 November 2010 attended by Mr Baxter, Mr Kopsch and, amongst others, Jim Godfrey, the new finance director at the College, he having taken over from Mr McLeish in about January 2010. At the meeting, as confirmed by Mr Baxter in his e-mail the following day, it was agreed "that there was no contractual dispute as regards the current invoice". Mr Kopsch accepted in evidence that something was said to this effect. He did not dispute this e-mail. Mr Godfrey said that he did not recall any such remark, and even insisted, in response to the e-mail being put to him in cross-examination) that that was not said. I am persuaded on the evidence that some such remark was made. On this point I considered Mr Godfrey's evidence to be somewhat defensive. At all events, it was left that Mr Godfrey was to discuss with the College Principal "progressing the payment". There was also discussion about "the locally agreed protocol" enabling AMT to identify students, and for these to count towards their 11 rooms even before the 99 Rooms were filled up. There is, or may be, a dispute about this locally agreed protocol.

[73] Shortly after receipt of the e-mail on 3 November 2010, Mr Kopsch discussed the matter with Mr Godfrey. They decided to take legal advice on the Nomination Agreement. On 18 November 2010, in response to further pressure from Mr Baxter, Mr Kopsch indicated that the Principal was not paying and did not feel comfortable. He said that the College was taking legal advice. That led, in due course, to the present action being brought by AMT.

[74] James Godfrey is a chartered accountant and is currently the Head of Financial Services at the College. He initially joined the College on secondment from the Further Education Development Directorate in May 2010 and was appointed to his current role some five months later, in October 2010. He first became aware of the Nomination Agreement in July 2010. He explained that the College was required to have both internal and external auditors. The external auditor performs the typical statutory audit at each year end. The internal auditor (who may be employed by the College or may be appointed on a sub-contract basis) reviews systems of governance and finance controls. The current internal auditors are the firm of Scott-Moncrieff, an accountancy and consulting practice. The particular individual involved in this matter was Christopher Brown, a partner in their audit department.

[75] Mr Godfrey reviewed the Nomination Agreement in October 2010. He said in evidence that he realised straightaway that there were significant implications within that agreement for the College, particularly "management and governance issues". He was of the view that the agreement posed "a significant long term financial risk" to the College. Accordingly, he made a proposal to the Audit Committee of the College that the internal auditors should review and report on the circumstances leading up to the agreement and the authorisation for it. This proposal was accepted by the Audit Committee.

[76] Mr Godfrey spoke to Mr Cotton of Brodies about his concerns, telling him of his concerns that the contract was not beneficial to the College. Mr Cotton told him that he had understood that the agreement was in accordance with the wishes of the College and that, as they understood it, the deal which the College wanted to achieve had been achieved. At about this time Mr Godfrey came to understand that AMT were pressing for payment of their invoice and were threatening to bring court proceedings if it was not paid. The present action was raised when AMT was told that the College was reluctant to pay. A decision was taken to take legal advice from Harper Macleod LLP on the matter, since Brodies had been involved in advising on and drafting the agreement.

[77] The final draft of the internal audit report compiled by Scott Moncrieff was available in mid-March 2011. Mr Godfrey said that in the course of his career he had seen many such internal reports and this was the worst, in terms of failures reported and commented on, that he had ever seen. I do not propose to go into the details of that, since they might impact on the issue of authority, which is not presently before me for decision. Mr Godfrey said that earlier in March 2011 he received an e-mail informing him that the Audit Committee of the Scottish Funding Council ("SFC") was considering the matter. I refer in more detail to this in the context of considering the Ultra Vires issue below. For present purposes I should note that Mr Godfrey did not raise the issue of consent from SFC with Mr Cotton, Mr Baxter, Mr Brown or anyone else when he was first making enquiries about the matter in October and November 2010.

Other evidence

[78] I should refer briefly to certain other evidence given in relation to the Heads of Terms, the Nomination Agreement and the intentions and actings of the parties. Much of it is of doubtful relevance, at least to the question of construction, but in view of the fact that the issues include questions of rectification I should set it out in summary in this Opinion.

[79] In addition to the evidence which I have already summarised, Mr McLeish gave some evidence of how he understood that the designation of the Nominee Rooms would work in practice. He said this:

"My understanding is that the present Nomination Agreement gives Alumno Miller a period to nominate and if the College isn't happy with this it has the ability to say so by using the change procedure mechanism provided for in the Nomination Agreement."

In cross-examination, he said that he envisaged the room designation as being a matter for negotiation, because some rooms (those with Castle or Forth views) were more attractive, but those negotiations never took place.

[80] Mr Campbell of AMT gave evidence on commission. His evidence was that the Heads of Terms agreed at the beginning of October 2009 were intended to be implemented into the Nomination Agreement. The main provisions were agreed then and remained the same. Any changes in detail did not affect the issue of Nominee Rooms or the Occupancy Guarantee. In the Heads of Terms, the parties adopted the solution of having a set of Nominee Rooms nominated by AMT, which were allowed to be changed over time, and it was their common intention to give effect to that solution in the Nomination Agreement.

[81] Mr McLeish also thought that the Heads of Terms had shaped the final agreement, albeit that there had been some changes in the details. The fundamentals regarding the Occupancy Guarantee remained in accordance with the Heads of Terms. He emphasised in re-examination that the principles of the Heads of Terms were that the Consortium would nominate the 99 rooms, which might change over time, and that there was no intention to depart from those principles in the negotiations.

[82] That the designation of particular rooms might be of importance was made clear by a number of witnesses. Mr McLeish, for example, thought that the rooms with the views over the Castle and over Fife would be easier to let than some of the others. He would have preferred AMT to have the burden of securing occupants for those other rooms. Mr Kopsch was clear that the rooms were not identical and that there were a number of variables - such as which floor they were on (and related security considerations), their outlook (busy road or views of the Forth or the Pentlands), or whether a Nominee Room was grouped with non-Nominee Rooms - which would make them easier or more difficult to fill.

[83] I should also mention that Mark Baxter and Maurice Bourne, acting as directors of Millers and/or AMT in the negotiations, both gave evidence that, as far as they were concerned, they regarded the details of any nomination procedure as unimportant. Mr Baxter saw no reason for there to be any nomination of rooms, since all were priced at the same level and there was no differentiation between them. Mr Bourne was not concerned with the nomination procedure either. He recalled a discussion (between people in AMT and McGrigors) as to whether the definition of Nominee Rooms was required at all. There was no discussion on their side as to whether the nomination should be set out in the Specification or in some other way. If that was the mechanism which the College wanted, they would "just roll with it".

[84] In addition I also heard evidence from witnesses from Alan Baxter and Maurice Bourne concerning AMT's role in the transaction and the way in which the agreement operated in its first year.

[85] Maurice Bourne is, and was at the material times, also a director in the PPP Unit. He has a legal training and was concerned in managing the legal process through to completion, looking at and commenting on the draft documentation received by him from McGrigors, AMT's solicitors.

[86] Mr Baxter said that the occupancy guarantee was part of the deal from Day 1. AMT would not have got the deal "banked" without it. Mr Bourne expressed the same opinion. The occupancy guarantee was a fundamental part of the transaction; without it AMT would not have been able to raise project finance funding, and it would not have been possible to proceed with the deal at all. He said, and I do not think that this was disputed, that the College was aware that the project was being funded by the Bank. This was obvious from, amongst other things, the fact that the College was a party to the Step-in Agreement with AMT and A&L.

CONSTRUCTION AND RECTIFICATION

Parties' submissions concerning construction of the contract and rectification

A. Construction

Outline

[87] The argument for the College, in summary, was that in the absence of any rooms being designated as "Nominee Rooms" in the Specification (Schedule Part 3), the Nomination Agreement was insufficiently certain to be enforceable. There was no contractual mechanism for nomination.

[88] AMT's response in its pleadings was threefold. It argued: (a) that the absence of designation of nominated rooms in the Specification could be put right by means of the Change Procedure; (b) alternatively, the contract should be construed as if the words "in the Specification", where they occur in the definition of Nominee Rooms, were omitted; and (c), "meantime", for so long as the Specification does not contain an express designation of the Nominee Rooms by AMT, then, for the purposes of the application of Clause 11, the Nominee Rooms are simply up to 99 Rooms in the Property which are un-let. This third argument, which was referred to in submissions as the "meantime" argument, meant that any Rooms which were let to students who were either (i) nominated by the College or (ii) the subject of consent by the College pursuant to clause 9.4, fell to be deducted from the 99 Rooms guaranteed by the College for the purposes of identifying the figure for "Unlet" Rooms in the calculation of the Guarantee Payment.

[89] These three arguments by AMT were challenged by Mr Moynihan QC, who, though acting for the defender, went first, in recognition of the fact that, at the very least, the onus of persuasion lay on his clients to show why a duly executed agreement should be held to be unenforceable.

Submissions for the College

[90] Mr Moynihan submitted that the commercial significance of the definition of "Nominee Rooms" had to be properly understood. The Nomination Agreement was clearly written on the basis that the designation of "Nominee Rooms" was material to the contract. It was those rooms that were reserved for students to be nominated by the defender under clause 9.2. It was those rooms that were relevant to the "Guaranteed Payment" under clause 11.1, the term "Guaranteed Payment" (as defined in clause 1.1) using a formula in which "N" was the number of "Nominee Rooms" Unlet. To keep the Guaranteed Payment to a minimum, the pursuer was under an obligation to fill those rooms first under clause 9.6.2. The contract plainly depended on the Nominee Rooms being identifiable. The Nomination Agreement was equally unambiguous about the process by which those rooms were to be designated. The definition of "Nominee Rooms" stated that the designation was to be done by means of the "Specification". Two particular points emerged from that. First, despite the fact that the definition of Nominee Rooms referred to such Rooms being designated by AMT, the College also had a say in relation to agreement of the list of Nominee Rooms, because the Specification in which they were to be designated formed part of the contract with the result that if the College did not agree the list in AMT's draft, it could refuse to sign the contract. The initial designation was therefore truly a bilateral agreement. Second, designation through the "Specification" was necessary in order to link the designation of Nominee Rooms to the Change Procedure in Schedule Part 5, there otherwise being a prohibition against unilateral variation in Clause 24.

[91] How then was it, Mr Moynihan asked rhetorically, that the contract was allowed to be concluded with the Specification blank on that point? Ms Black explained how the omission slipped through the net on AMT's side: the client instructed McGrigors not to review the Specification, with the result that she did not have the opportunity to check that the definition of Nominee Rooms tied in with the Specification. Mr Cotton's expectation was that that designation of the rooms would come as part of the contract itself. When it was put to him in cross-examination that, if it was so important to include the Nominee Rooms in the Specification, then he would have checked the Specification to make sure they were included, he frankly acknowledged his error: "With the benefit of hindsight, yes". The omission slipped through due to oversight on the part of Brodies and as a result of McGrigors not being instructed by AMT to review the Specification.

[92] Mr Moynihan pointed out, correctly, that there was evidence from both sides that the parties may have envisaged that the identification of the Nominee Rooms would be picked up later as construction progressed. Mr Campbell, for AMT, was one who envisaged that there would be a process of discussion. Mr McLeish had said, at one point in his evidence, that the Nomination Agreement gave AMT a period to nominate, while giving the College the ability to express any unhappiness by using the Change Procedure; though in cross-examination he altered his position, saying that he envisaged it as a matter for negotiation (which never in fact took place), because some rooms (such as those with Castle or Forth views) were more attractive. Mr Moynihan submitted that all of these views reflected a misunderstanding of the Nomination Agreement. The Nomination Agreement did not give the pursuer time, after its execution, to make the initial designation. On the contrary, the initial designation of the Nominee Rooms was to be done via the Specification in the Nomination Agreement, and would, therefore, form part of the contract when executed. And, in any case, if the Change Procedure had any relevance, it was a process that was initiated by a "proposal" from AMT, rather than by an objection from the College.

[93] The parties had never agreed the designation of the Nominee Rooms. The question was: what was the consequence of that omission?

[94] Mr Moynihan addressed the three arguments advanced by AMT in reverse order. The third of those was the "meantime" argument. This, he argued, was impermissible, since a contract must have a fixed meaning, capable of being determined at the date of the contract, and applying throughout its duration: Westbury Estates Ltd v Royal Bank of Scotland 2006 SLT 1143. There was no warrant for applying one interpretation temporarily, or "meantime", pending resolution of the difficulty.

[95] AMT's second argument involved construing the contract as though the words "in the Specification" did not appear in the definition of Nominee Rooms in the Nomination Agreement. However, in matters of contractual construction, he submitted, an appropriate starting point for analysis, and often also its end, was to look at the words used by the parties see Charter Reinsurance Co Ltd v Fagan, [1997] AC 313, per Lord Mustill at p 384B-C; and Bank of Scotland v Dunedin Property Investment Co. Ltd, 1998 SC 657, per the Lord President (Rodger) at p 661F-H. The court should, if at all possible, seek to give content and effect to the natural and ordinary meaning of the words used in the contract. There was no proper basis for construing the definition of "Nominee Rooms" as if the words "in the Specification" were not there. That would fundamentally and illegitimately alter the nature of the parties' bargain. The words "in the Specification" were part of the definition of "Nominee Rooms". They had substantive significance. They stipulated the process by which designation was to be achieved. That process was a bilateral process to be effected by means of the agreement itself. Designation of the Nominee Rooms via the Specification also linked in to the Change Procedure in the contract, a procedure that was available only in respect of the content of the Specification and not in respect of a designation achieved by some other nomination process.

[96] As to AMT's first argument, that the deficiency could be made good by using the Change Procedure, Mr Moynihan accepted that a designation of the Nominee Rooms in the Specification could in some situations be altered by this mechanism, but it could not competently be used to introduce a designation of those rooms for the first time. It was critical that, in terms of clause 2.2 of Schedule Part 5, the College was given the right to "object" to any "Proposal" if and only if, acting reasonably, it considered that the Proposal, if implemented, "would increase to a material extent the likelihood of the College being required to make Guaranteed Payments to the Company", or "would be likely to increase to a material extent the amount of any such Guaranteed Payments". The College could take into account the likely effect of the implementation of the Proposal "on the attractiveness of the Property and/or the Nominee Rooms to occupiers or potential occupiers of the Property and/or Nominee Rooms." The relative attractiveness of the rooms was of the essence of the process of designation, and would have been at the heart of any negotiation. The provisions relating to the Change Procedure laid down a procedure to resolve any objections by the College (i.e. the objections referred to in clause 2.2 set out above). The issue to be resolved would be whether or not the Proposal was likely materially to affect the College's likely liability to make Guaranteed Payments under the Nomination Agreement. Any unresolved dispute would be dealt with under the Dispute Resolution Procedure. The only issue which could in practice be remitted to that dispute resolution process in respect of the Nominee Rooms would be whether the element in the Proposal to which the College objected would or would not be likely materially to affect the College's likely liability to make Guaranteed Payments under the Nomination Agreement. That involved a comparison between the existing designated Nominee Rooms and those sought to be put forward in the Proposal, and required a Yes or No answer. But if, when the contract was concluded, there was no designation of any Nominee Rooms, then there was no starting point for any comparison, no basis upon which the expert to whom the dispute was referred could decide whether or not the College's likely liability was likely to be materially affected. Where there were designated Nominee Rooms in the Schedule, the Change Procedure could operate because it set the benchmark; but absent such designation, there was no benchmark, and the expert could not impose one. The Change Procedure therefore failed to fill the vacuum, simply because there was no initial designation of Nominee Rooms and, therefore, no basis for any comparison.

[97] Mr Moynihan referred to East Anglian Electronics v OIS plc 1996 SLT 808. At p.811F-H, the Lord President (Hope) said this:

"But the undertaking has to be construed in order to discover the extent to which the defenders intended to be bound by it. While some latitude may be given where this is needed to make a commercial bargain enforceable, it is essential first to identify the bargain which was entered into. The function of the court is to give effect to the bargain made by the parties, not to substitute a different bargain from that which they made for themselves. So it is in the case of an undertaking such as that which the pursuers seek to enforce in this case. The extent of the undertaking is to be found in the words used by the party who gave it, since it is from these words only that the intention of the party who gave the undertaking can be discovered. The question in this case is not what the defenders might be expected to have undertaken in the light of the surrounding circumstances, but what meaning is to be attributed to the undertaking which they in fact gave in terms of this clause."

The designation of the Nominee Rooms in the Specification was something which required the agreement of both parties, in the Nomination Agreement itself (according to its terms) or subsequently in some other way (if the views of Mr McLeish, Mr Campbell and others as to this being a matter of subsequent negotiation and agreement were accepted as correct). The designation of particular rooms was of importance, perhaps in different ways, to each party. The parties had potentially conflicting interests on this matter. It was a fundamental matter which required to be resolved, but had been left unresolved. The Guaranteed Payments provisions of the contract were, therefore, unenforceable. The Change Procedure was not a legitimate means of imposing the designation of Nominee Rooms on the defender without its agreement.

[98] Mr Moynihan referred to the recent decisions of the Inner House in The Scottish Coal Company Ltd v Danish Forestry Company Ltd, 2010 SC 729, at paras 17, 19 and 23 and R&D Construction Group Ltd v Hallam Land Management Ltd, 2011 SLT 326, particularly in the opinion of Lord Drummond Young at paras [62]-[75]. Five propositions could be taken from those cases:

(1) A dispute resolution or arbitration clause (and the Change Procedure ends in such a clause) presupposes an otherwise valid contract;

(2) If a contract term is too uncertain to be enforceable by a court it cannot be made certain by an arbiter or expert;

(3) Not every detail of a contract requires to be finalised for a contract to be valid (or sufficiently certain to be enforceable);

(4) Detail can be provided to be resolved later, including by implication of a term by the court, provided that there is at least some objective criterion by which the matter may be resolved;

(5) One means by which the court can, in appropriate circumstances, supply any omission is through the implication of a "reasonable" term - but again that assumes that there is some objective criterion by which to assess "reasonableness" because the court cannot simply impose on the parties what it deems to be a "reasonable" bargain.

The application of those propositions was fact specific. In the instant case, by failing to designate the Nominee Rooms, the parties had failed to complete the setting of the proper limits of the potential liability under the Nomination Agreement and, as with the failure to set the criteria for a ranking agreement in Scottish Coal, the court had no basis for a "reasonable" implication.

[99] The Nomination Agreement appeared to be an unusual contract. Its terms were significant not only to AMT and the College, but also to A&L. There was no basis on which the court could infer what a reasonable level of liability might be because (a) the three parties would have conflicting interests in that regard and (b) they failed to reach agreement on the point.

Submissions for AMT

[100] Mr Cormack began by making a number of general observations. Evidence of what the parties had said or done was irrelevant, unless it formed part of the factual matrix against which the contract fell to be construed. Evidence of what individuals such as Mr McLeish and Mr Campbell thought the contract meant, or how they though it was to operate, was also irrelevant to its construction. It was not contended on behalf of the College that the Change Procedure was unavailable in principle to deal with the problem of designation of the Nominee Rooms. Its argument was based simply on the absence of a pre-agreed benchmark or comparator on which the judgment of the parties, and if necessary the expert under the dispute resolution procedure, could be brought to bear. The submissions of the College on this aspect were too restrictive. The operation of the Change Procedure, with or without the involvement of the expert under the dispute resolution procedure, allowed of a more nuanced answer than simply Yes or No. More fundamentally, the argument for the College proceeded from the starting position that the words "in the Specification", where they appeared in the definition of Nominee Rooms, were fundamental to the bargain which the parties had made. All of the arguments advanced by Mr Moynihan flowed from that premise. That premise was flawed. Leaving aside for present purposes the question of how those words got into the contract, they could not on any view be regarded as fundamental to the parties' agreement. The fact that the Specification said nothing about the designation of the Nominee Rooms simply reinforced the submission for AMT that the words "in the Specification" in the definition of Nominee Rooms added nothing, and cannot have been regarded by the parties as essential to the working of the Nomination Agreement.

[101] Mr Cormack suggested that the contentions for the College lacked fair perspective. Fundamentally, the Nomination Agreement was about making rooms available to students of the College in a campus location. The College was to nominate students for all the rooms, albeit only 90% of those rooms were, in effect, reserved to students of the College. The focus was on the provision of accommodation for the benefit of the College, rather than on any concern that 11 rooms might be let to tenants other than students nominated by the College. The whole project was about creating College student accommodation on the campus. As Mr Campbell, a director of AMT, put it, "the College has its name on the door of the residences". It would not be in the interests of AMT to make it difficult for the College to achieve the required occupancy level - success by the College in filling rooms in excess of the guaranteed occupancy level, and a fortiori all the rooms, would be to the advantage of AMT. In commercial terms, the relationship was in the nature of a long-term partnership between AMT and the College. Further, the parties explicitly undertook in the Nomination Agreement to co-operate in good faith with each other to facilitate the proper performance of the Agreement. And there were more particular obligations (e.g. in clauses 9.11 and 9.13) to make things work at a practical level. The idea that the precise designation of the Nominee Rooms might have an impact on the Guarantee Payments which the College might have to make, was unlikely to have been of any real concern. After all, the rooms were all to be let at the same rent. The lack of differential pricing suggested that there was no significant difference in quality or attractiveness to students. The reasonable and informed reader of the Nomination Agreement would not think that the designation of the Nominee Rooms was of great significance, or likely to be a matter of any real controversy. The reasonable and informed reader would also recognise the existence of the break option in favour of the College at year 15, and would assume that AMT would not want the College to exercise this option, and would behave accordingly.

[102] That commercial reality was reflected in the fact that the Heads of Terms provided that it would be for AMT to nominate the Nominee Rooms from time to time. No doubt the reasonable and informed observer would expect there to be discussions and agreement as to which rooms would be nominated, but ultimately what was contemplated involved a unilateral act by AMT. The Nomination Agreement also provided for the Nominee Rooms to be designated essentially by a unilateral act of AMT. The definition spoke of the Nominee Rooms being "designated by the Company in the Specification". The submissions for the College focused on the reference to the Specification, but appeared to overlook the fact that the rooms were to be designated by AMT.

[103] Mr Cormack characterised the submission for the College in relation to the Change Procedure as being that a fundamental part of what the parties had to agree upon (i.e. the initial designation of the Nominee Rooms) was missing, and that the independent expert could not impose on parties an agreement which they themselves had failed to reach because, without there having been any initial designation of the Nominee Rooms in the Specification, there was no objective basis for the independent expert to evaluate any increased risk to the College in respect of Guarantee Payments. That submission did not address the construction of the relevant provisions of the Nomination Agreement but focused instead on whether certain essential matters had been agreed. It did not, therefore, appear to be in dispute that, as a matter of construction, the Change Procedure was capable of being used not only to alter the designation of Nominee Rooms in the Specification (if they had been so designated there) but also, in effect, to insert a designation of Nominee Rooms into the Specification (if they had not already been so designated).

[104] Mr Cormack argued that the submissions for the College were wrong for a number of reasons.

(1) First, the parties did reach agreement about how the Nominee Rooms were to be identified. They were to be designated by AMT .

(2) Second, the designation of the particular 99 Rooms which were to be to be the Nominee Rooms was not of fundamental importance for the reasons given above.

(3) Third, the application of the Change Procedure to the issue of Nominee Rooms did not require there to have already been a designation of such rooms in the Specification. There was no difficulty in the parties, or an expert to whom the matter was referred under the dispute resolution procedure, evaluating whether a particular set of Nominee Rooms involved, "to a material extent", more risk to the College in regard to the likelihood of it being required to make Guaranteed Payments than another set of Nominee Rooms. Differences between rooms or combinations of rooms were likely to be marginal, and para.2.2 of the Change Procedure only allowed the College to object to a change Proposal if, acting reasonably, it considered that the Proposal would increase to a material extent the likelihood of the College being required to make Guaranteed Payments etc. This limit on the right to object necessarily defined the nature of the issues to be determined by the expert. The Change Procedure therefore provided a mechanism for the Pursuer to designate Nominee Rooms from time to time in the Specification, identified the limited grounds upon which the College might object, and provided the parameters within which any dispute was to be determined by an expert in accordance with the dispute resolution procedure.

[105] AMT's alternative position was that, if the Change Procedure was ineffective to allow a designation of the Nominee Rooms to be put in the Specification after the contract was concluded, because of the lack of objective criteria as argued on behalf of the College, then the Nomination Agreement should be construed as if the words "in the Specification" in the definition of Nominee Rooms were not there. Such an approach would not amount to the court re-making the parties' bargain for them. The clear intent in the definition of Nominee Rooms was that they were to be designated by AMT. Although it goes on to say that the designation by AMT is to be in the Specification, the Specification here contained no such designation, was silent on the question, and, on the case advanced by the College (which must for this purpose be assumed to be correct), contained no mechanism (with or without the Change Procedure) by which the designation might later be made in it. Something had to give in order to give effect to the clear intention of the parties that there should be Nominee Rooms. One could not sensibly read the definition as though the requirement that they be designated by AMT was not there; that would be to omit what the parties clearly intended, while leaving the underlying problem still in existence, since there would still not be a mechanism for introducing the designation into the Specification after conclusion of the contract. It was the words "in the Specification" which were inept and, on the construction put forward by the College, stood in the way of giving effect to the intentions of the parties. Once that was recognised, there was no basis for asserting that the Specification was intended to be an essential component of the provisions defining the scope of the liability to make the Guaranteed Payments, because such an assertion depended on placing undue weight on the inclusion of the very words which were inept. There was also no basis for asserting that the process of designating the Nominee Rooms was intended to be a bilateral process rather than a unilateral one. Accordingly, no real issue of re-writing the bargain arose.

[106] AMT's final position (the "meanwhile" submission) was that the Nominee Rooms were any 99 rooms out of the total of 110. This submission did not involve an attempt to construe the contract by reference to post-contractual actings rather than as at the date upon which it was entered into. The question was how a reasonable and informed observer would understand the contract to operate in a situation where, for whatever reason, no specific list of Nominee Rooms had yet been intimated to the College. In such circumstances, the contract would reasonably be understood as meaning that the Nominee Rooms were any 99 rooms, because AMT must be taken as accepting the position which was the most favourable to the College.

[107] Mr Cormack pointed out that, on the evidence, AMT informally indicated that the Nominee Rooms would be any 99 rooms in the property and the College accepted this position. There was no real problem. Further, the College accepted that it was under an obligation to pay the first invoice and agreed to pay it.

B. Rectification

Outline

[108] As I have already noted, AMT concludes in the alternative for rectification of the Nomination Agreement by the deletion of the words "in the Specification" from the definition of Nominee Rooms.

Submissions for AMT

[109] Mr Cormack submitted that rectification was competent in such a case. He submitted that there was no good reason why the same principles should not apply equally to rectification in Scots law under s.8(1) of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985 ("the 1985 Act"). He referred to the analysis of the Act by Lord Macfadyen in Renyana-Stahl Ansalt v MacGregor 2002 SLT 1247, to my own comments in Brown v Rysaffe Trustee Company (CI) Limited [2011] CSOH 26, and to Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101.

[110] Mr Cormack submitted that the clear intention of the parties was for the College to provide a binding revenue commitment to AMT in respect of 99 of the 110 rooms in the new development. The parties agreed that 99 rooms would be nominated by AMT from time to time, and the College would make good any shortfall in the rent for those 99 rooms during term time. If the Nomination Agreement did not enable that intention to be given effect, it should be rectified.

Submissions for the College

[111] Mr Moynihan accepted that in Scotland the modern source of the power to rectify a contract was to be found in s.8(1)(a) of the 1985 Act. Under reference to Renyana-Stahl Anstalt v MacGregor at para.[35], he submitted that on a proper construction of that section, rectification will be available only where: (i) there is a document which the relevant party seeks to have rectified; (ii) there is an agreement; (iii) that agreement discloses that, at the date it was made, the parties to it possessed a common intention in a particular respect or respects; and (iv) the document was intended to express or give effect to that agreement. In those circumstances, rectification will be available if the document fails accurately to express the common intention mentioned at (iii) above.

[112] Those tests, he submitted, were not satisfied in the present case, for three reasons: (a) because the Heads of Terms on which AMT relied did not represent the final pre-contract "agreement" between the parties; (b) because the terms of the Nomination Agreement were deliberately intended by the parties; and (c) because to delete reference to the Specification would frustrate other essential terms of the Nomination Agreement.

Discussion - construction and rectification

[113] While evidence of the background circumstances known to both parties is admissible as an aid to construction, evidence of the subjective intention of one or both parties in entering into the Nomination Agreement is not. Neither is evidence as to how they understood the agreement would work in practice.

[114] It is clear that the concept of Nominee Rooms is central to the workings of the Nomination Agreement, in particular to the provisions in Clause 9 concerning Letting Procedure and to those in Clause 11 dealing with Guaranteed Payments. Unless, therefore, there is some means by which Nominee Rooms can be identified at any particular time, then the agreement cannot be made to work. To that extent I accept Mr Moynihan's submissions on behalf of the College. It is therefore necessary to look at the provisions of the Nomination Agreement to see whether there is any such means.

[115] The agreement of the parties as to the means of identifying the Nominee Rooms is to be found in the definition of Nominee Rooms itself in clause 1 of the Nomination Agreement. That definition provides that the Nominee Rooms are:

"the 99 Rooms in the Property designated by the Company in the Specification as the Rooms in respect of which the provisions of this Agreement relating to Guaranteed Payments shall apply".

The key words, around which the dispute between the parties has concentrated, are "designated by the Company in the Specification". The problem in this case is that the Specification, which forms part of the contract, is silent on this point. It contains no designation of the Nominee Rooms. Nor, according to Mr Moynihan, does the Nomination Agreement provide any contractual mechanism by which such a designation can later be inserted in the Specification. He submits that the Change Procedure, which is the only candidate contractual mechanism by which this might be achieved, cannot be used to remedy this omission in circumstances where there has not been any original designation of Nominee Rooms in the Specification.

[116] At the core of Mr Moynihan's submission is the proposition that it is an essential part of the definition of Nominee Rooms that the designation of such Rooms be made in the Specification. If he is correct in this submission, then the absence of any designation of Nominee Rooms in the Specification might well raise a question as to the enforceability of the Nomination Agreement. And, if he is correct in his further submission that the Change Procedure does not provide a route by which this omission can be made good, then the absence of any such contractual mechanism for remedying that omission might well render the Nomination Agreement as a whole unenforceable (unless, of course, it was capable of rectification in terms of s.8(1) of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985, a point I consider below). The parties would have failed to reach agreement (or agree a sufficiently certain means of reaching agreement) on a matter which was of such importance that the contract could not work without it.

[117] In support of his argument that the parties regarded it as critical for the designation of the Nominee Rooms to be made in the Specification, Mr Moynihan suggested that that stipulation pointed to the need for agreement between the parties as to the particular rooms to be designated as Nominee Rooms. That was because, if the designation of such rooms was to be in the Specification (i.e. in a Schedule to the Nomination Agreement itself), then it would be there by agreement of the parties as part of their overall agreement. It also required to have been in the Specification in order to allow the Change Procedure to be brought to bear on the question of the Nominee Rooms.

[118] It seems to me that Mr Moynihan's argument, persuasive though it is according to its own terms, does not start at the right place. Any attempt to construe the contract must proceed, initially at least, upon the presumption that the parties, having entered into the Nomination Agreement, must be taken to have intended it to be effective. Mr Moynihan's argument, by contrast, leads inexorably to the conclusion that the parties deliberately entered into the Nomination Agreement in terms which prevented it from ever being effective. That, to my mind, does not accord with commercial or business common sense.

[119] If it can do so without violating any of the relevant principles, the court should strive to adopt a construction which makes a contract work as opposed to one that does not: see R&J Dempster v Motherwell Bridge and Engineering Co. Ltd 1964 SC 308, per Lord President Clyde at p.328 and Lord Guthrie at p.332. Adopting this approach, it is immediately apparent that in the drafting of the detailed agreement which was intended to reflect the bargain which the parties had reached, something has gone seriously wrong. It is not difficult to see what it is that has gone wrong. The definition of Nominee Rooms identifies the Nominee Rooms as

"the 99 Rooms in the Property designated by the Company [in the Specification] as the Rooms in respect of which the provisions of this Agreement relating to Guaranteed Payments shall apply". [my brackets and emphasis]

If one leaves out the words "in the Specification", the designation of the Nominee Rooms is left as a unilateral act by AMT. The word "designated" points clearly to an act of designation or nomination by AMT of the Rooms which are to be the 99 Rooms to which the Guaranteed Payment provisions are to apply. If that was all that the definition said, there would be no difficulty. The provisions as to Letting and Guaranteed Payments would all work. From the standpoint of making those clauses work, it does not matter how the Nominee Rooms are identified; designation by AMT is as good a way as any.

[120] It is only the words "in the Specification" which cause any problems. The problem is caused by the fact that the Specification is agreed as part of the contract, and cannot be altered or amended subsequently except by agreement between the parties or by means of the Change Procedure. The inclusion of the words "in the Specification" in the definition of Nominee Rooms is clearly at odds with the notion that the Nominee Rooms are to be "designated by the Company". Whereas the word "designated" points to a unilateral act, reference to the Specification points to the need for agreement. How is this apparent contradiction to be resolved?

[121] In my opinion the contradiction must be resolved by reading the definition of Nominated Rooms as if it omitted the words "in the Specification", leaving the identity of those Rooms to be designated by AMT in some other way of its choosing.

[122] I am driven to this view in the first place by the logic of Mr Moynihan's own submissions. If he is right in his submission that (a) it was an important or essential element of the agreement that the Nominee Rooms be designated in the Specification, (b) that the Specification contained no such designation, and (c) that the Change Procedure was incapable of being used to remedy that omission, the consequence would be that the Nomination Agreement signed by the parties, with a view to it being implemented, would be too uncertain to be enforceable. That is not a result which I regard with equanimity. It runs counter to the presumed intention of the parties. The problem would not be resolved by removing the reference to designation by AMT, since that would still leave the requirement that the Nominee Rooms be identified in the Specification, and it is that part of the definition which, on Mr Moynihan's analysis, leads to the difficulty.

[123] I accept Mr Moynihan's argument that the Change Procedure does not resolve the problem of there being no designation of the Nominee Rooms in the Specification, and for the reasons which he advanced. I need not repeat them here. In summary, the Change Procedure requires there to be agreement between the parties or the decision of an expert appointed under the dispute resolution procedure. The point to be considered, and, failing agreement between the parties, to be resolved by an expert so appointed, is whether the proposed change would increase to a material extent the likelihood of the College being required to make Guaranteed Payments to the Company, or would be likely to increase to a material extent the amount of any such Guaranteed Payments. The question would be, in each case: increase from what? Without any starting point, the operation of the Change Procedure breaks down. There is nothing with which to make comparison. The parameters within which the parties are entitled to oppose changes are rendered meaningless; and the expert, if called upon to resolve their dispute, would have no basis for his decision. So I consider that Mr Moynihan is correct on this point. But that only strengthens my view that his construction of the contract is incorrect, since it shows that the absence of any designation of the Nominee Rooms in the Specification cannot be remedied by the Change Procedure and, if his submissions were to be accepted, would be fatal to the effectiveness of the agreement which the parties thought they had reached.

[124] Further, I am not persuaded by Mr Moynihan's argument that it was an important or essential part of the agreement that the designation of the Nominee Rooms should be made in the Specification. The argument that this is necessary in order to be consistent with the parties having wanted to make the designation of the Rooms a matter of agreement rather than unilateral designation by AMT, seems to me to beg the question. What is there, other than the words "in the Specification" in the definition of Nominee Rooms, to indicate that the parties did wish to make this a matter of agreement rather than designation by AMT? I can find no such indication. Although I heard evidence that some people thought there were differences between the different rooms, so that which rooms were designated as the Nominee Rooms might make a difference to the potential ability of the College to fill them, and although I accept that there are obviously some such differences (corner rooms, outlook, etc.), I was not persuaded that those differences would be regarded as so significant that I should infer from that fact alone that the parties must obviously have intended to make the choice of Rooms a matter requiring agreement between themselves. Nor am I persuaded by the argument that if the designation is not in the Specification it cannot be altered by the Change Procedure. That is, of course, true, but the short answer to that point is that if it is not agreed in the Specification, but is a matter for unilateral designation by AMT, it does not need to be subject to the Change Procedure - the designation can be altered unilaterally by AMT without the need to rely on the Change Procedure.

[125] In those circumstances I consider that the proper construction of the contract is that it should be given effect as if the words "in the Specification" in the definition of Nominee Rooms were simply not there. The definition should be understood in the following way:

"Nominee Rooms - means the 99 Rooms in the Property designated by the Company as the Rooms in respect of which the provisions of this Agreement relating to Guaranteed Payments shall apply."

[126] It is said on behalf of the College that the court should not re-write the agreement made by the parties. I accept that. However, it does not seem to me that that is what the court would be doing by adopting the construction which I favour. The task of the court is to construe the contract. This sometimes involves recognising that the parties may have put something into their contract which does not fit with their intention as manifested by the other terms. In such circumstances, the court will look to see what it is that has gone wrong with the drafting; and it may be appropriate, where something has gone wrong in that way, to read the contract as though the parties had not committed that particular error.

[127] In the result, therefore, I accept the construction put forward on behalf of AMT to the effect that the contract should be construed as if the words "in the Specification" in the definition of Nominee Rooms were omitted. That was its first alternative construction. I would not, for the reasons given above, have been minded to accept its primary case, namely that the absence of designation of the Nominee Rooms could be put right by the Change Procedure. Nor would I have been minded to accept the fallback "meantime" position, namely that for the purpose of the Guaranteed Payments provision the Nominee Rooms were simply up to 99 Rooms remaining un-let, save to this limited extent. The fundamental question here is whether the contract is too uncertain to be enforceable. I have held that it is not unenforceable. Having found that to be the position, how the parties choose to operate it is a matter with which I am not presently concerned. It is not necessary for me to form a concluded view about this point, since the effect of exceeding to AMT's first alternative argument is that the contention by the College that the Nomination Agreement is not binding and enforceable, on the grounds that it was insufficiently certain in its terms, falls to be rejected.

[128] In those circumstances it is not necessary for me to consider the rectification case advanced by in any detail. However, in case this matter should go further I should make it clear that had I not been in favour of AMT's position as a matter of construction of the Nomination Agreement, I would have upheld its claim that the agreement should be rectified by the deletion of the words "in the Specification" in the definition of Nominee Rooms. I give my reasons briefly below.

[129] It is not in dispute that s.8(1) of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985 provides that the court may rectify a document intended to give effect to an agreement where it fails accurately to express the common intention of the parties to the agreement at the date it was made. It provides, inter alia, as follows:

"8. - Rectification of defectively expressed documents.

(1) Subject to section 9 of this Act, where the court is satisfied, on an application made to it, that-

(a) a document intended to express or to give effect to an agreement fails to express accurately the common intention of the parties to the agreement at the date when it was made; or

...

it may order the document to be rectified in any manner that it may specify in order to give effect to that intention.

(2) For the purposes of subsection (1) above, the court shall be entitled to have regard to all relevant evidence, whether written or oral."

[130] In Renyana-Stahl Ansalt v MacGregor, Lord Macfadyen analysed the requirements of section 8(1) of the 1985 Act. He said this at p1256 J-K:

"I would analyse s.8(1)(a) in the following way: (1) there must be a 'document' which the petitioner seeks to have rectified by order of the court; (2) there must be an earlier 'agreement'; (3) that agreement must disclose that 'at the date when it was made' the parties to it possessed a 'common intention'; (4) the document must have been 'intended to express or give effect to' the agreement; and (5) rectification will be available if it is shown that the document fails to express accurately the common intention mentioned in (3) above."

Mr Cormack recognised that this might be taken to suggest that there was a need for two separate and distinct agreements. He submitted, however, that that was not the correct interpretation of Lord Macfadyen's analysis. He relied upon what I had said in Brown v Rysaffe where, having accepted the analysis of Lord Macfadyen in Renyana, I added what I intended to be an element of clarification:

"I do not see why the agreement which the document is intended to express or give effect to cannot be concurrent with, rather than necessarily prior to, the execution of the document".

See para.[33]. I continued at para.[34]:

"I consider that sub-section (1)(a), taken as a whole, is directed to a case where the document executed by the parties fails to achieve what they were both in agreement it was meant to achieve. It is not necessary to look elsewhere for some perfected agreement, prior to the execution of the document, which sets out their common intention. All that is required is that the document does not achieve what they were both agreed it was meant to achieve. There must be agreement - mere knowledge of what the other party wants to achieve will not do. But their agreement as to what it was meant to achieve can be discerned by looking at the document itself and all the surrounding circumstances, including any other contractual or other arrangement to which they may have intended to adhere; and including in the case of rectification (though not in the case of construing the contract) the negotiations, if any, between the parties leading to the drafting and execution of the document and any expression of intent by one party to the other."

[131] I would add this, and this is a point to which I referred in Brown v Rysaffe but it is relevant to make it again here, the fact that the wording in the agreement was the subject of detailed negotiation and agreement is not a bar to rectification if it turns out that the agreed wording is not apt to achieve what it was meant to achieve: see Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101 at paras.46 and 66.

[132] There is no doubt that the Nomination Agreement was the subject of detailed consideration by solicitors acting for both parties. It is not suggested that any error crept into the drafting in the sense that, by mistake, words were used which one party or the other did not intend to be used. The wording which emerged in the executed copy of the Nomination Agreement was agreed and was thought to represent the intention of the parties to the agreement. Whether as much care was given to the provisions about designation of the Nominee Rooms as ought to have been given is, perhaps, more open to doubt. I accept the evidence given by Sophie Black of McGrigors that the new draft proposed by Brodies on 23 November 2009 was not looked at as carefully as it might have been. She was content to see the reference to the Specification in the definition of Nominee Rooms without, as I understand it, having thought through the implications as to how this might change the method of identifying the Nominee Rooms from one of designation by AMT to a requirement for some sort of agreement between the parties. She did so on the basis that the Specification was still being reviewed by clients and she in fact did not look at it, at least in any detail. Nonetheless, I do not find in any of the evidence from McGrigors a realisation that Brodies intended any significant change in the new proposal which they put forward in their mark-up of the draft agreement towards the end of November 2009. Mr Cotton, in his evidence, did speak to there having been discussion of the definition of Nominee Rooms in the context of a discussion about nomination procedures more generally, and it was his evidence, which I accept, that the final draft was consistent with what was discussed between the solicitors in a telephone conference call of 30 November 2009. To that extent it is clear that the wording which found its way into the final version of the Nomination Agreement was the subject of discussion and, however much care was or was not taken about the specific wording, was a matter of specific agreement.

[133] Nonetheless, it is clear that both parties intended to draft up a detailed agreement in line with the Heads of Terms which had been agreed between them on about 1 October 2009. This was made clear by Mr Cotton in the passage quoted from his witness statement above:

"Our revisions were made with the intention of bringing the agreement in line with the HoT."

So also, in the earlier drafts of the Nomination Agreement which were put forward on behalf of AMT by Natalie Todd of McGrigors, the intention was always to put into legal form what had been the subject of agreement in the Heads of Terms, albeit that the early drafts prepared by AMT were based on the terms of other agreements that they had with other parties. Accordingly, it seems to me clear as a matter of fact that however the final terms of the Nomination Agreement were formulated, the whole of the Nomination Agreement, including the provisions concerning designation of the Nominee Rooms, was intended to reflect that agreement which the parties had reached and set out in the Heads of Terms.

[134] The Heads of Terms finally agreed between the parties on 1 October 2009, as recapitulated subject to a small modification concerning Broadband charges in November 2009, provided for the 99 Nominee Rooms eligible for the Occupancy Guarantee to be nominated by AMT by 30 April of each year (some months in advance of the College's academic year). It was not contemplated in the Heads of Terms that the identification of the Nominee Rooms would require discussion or agreement between the parties, though of course they might well have had discussions on it as a matter of good manners and mutual cooperation. The proposal was that they be nominated by AMT. In those circumstances it seems clear that in so far as the Nomination Agreement itself contained detailed provisions which, on a strict reading, innovated on this, those terms did not give effect to the clear intention of the parties. Putting the matter in terms which I used in Brown v Rysaffe, the Nomination Agreement executed by the parties failed in this respect to achieve what both parties were in agreement it was meant to achieve. It introduced an unnecessary complication which, if applied literally, would have the effect not only of altering the mechanism for identification of the Nominee Rooms from one of nomination or designation by AMT to one of agreement between the parties, but also of making the Nomination Agreement no more than an agreement to agree and thereby unenforceable.

[135] I have no doubt, in those circumstances, that had I found against AMT on the question of construction, I would have found in its favour on the question of rectification.

ULTRA VIRES

Relevant background

[136] The defender is constituted as a body corporate (by the name of the Board of Management of the College) under s.11(2) of the Further and Higher Education (Scotland) Act 1992, the college itself being a college of further education for the purposes of s.11(1) of that Act: see Article 2 and Schedule 1 of the Transfer of Colleges of Further Education (Scotland) Order 1992 (SI 1002 No.1597). The duties of a board of management are set out in s.12(1) of the Act (as amended by the Further and Higher Education (Scotland) Act 2005):

"12(1) A board of management shall have the duty of managing and conducting their college."

It has the powers conferred by section 12(2) of the Act, subject to the limitation in section 12(7). As amended, these provide as follows:

"12(2) A board of management shall have the power -

(a) to provide or secure the provision of further education (within the meaning of section 1(5)(b) of the 1980 Act);

(aa) to provide part-time and full-time courses of instruction for persons of school age;

(b) to charge fees for or in connection with the provision by them of any form of further education or any course of instruction provided under sub-paragraph (aa);

(c) to provide to students of the college such assistance of a financial or other nature (including waiving or granting remission of fees) as they may consider appropriate;

(d) for the purpose of the administration and management of the college, to receive any property, rights, liabilities and obligations transferred to the board under or in pursuance of any provision of this Part of this Act;

(e) to provide facilities of any description appearing to the board to be necessary or expedient for the purpose of or in connection with the carrying on of any of the activities mentioned in this subsection or in subsection (1) above (including boarding accommodation and recreational facilities for students and staff and facilities to meet the needs of students who have learning difficulties and disabled staff);

(f) to supply goods and services;

(g) subject to subsection (7)(a) below and section 18 of this Act, to acquire, hold and dispose of land and other property;

(h) to enter into contracts, including in particular-

(i) contracts for the employment of teachers and other staff for the purpose of or in connection with the carrying on of any such activities as are mentioned in this subsection or in subsection (1) above; and

(ii) contracts with respect to the carrying on by the board of any of such activities;

(i) to form or promote, or to join with any other person in forming or promoting, companies under the Companies Act 2006;

(j) subject to subsection (7)(a) below and the said section 18, to borrow such sums as the board think fit for the purpose of carrying on any of the activities they have power to carry on or for meeting any liability or obligation transferred to them under or in pursuance of any provision of this Part of this Act and, in connection with such borrowing, to grant such security or give such guarantee or indemnity as they think fit;

(k) to invest any sums not immediately required by the board for the purpose of their carrying on any of the activities which they have power to carry on or for meeting any liability or obligation transferred to them under or in pursuance of any provision of this Part of this Act;

(l) subject to subsection (7)(a) below and the said section 18, to raise funds, accept gifts of money, land or other property and apply it to, or hold or administer it in trust for, the purpose of carrying on any of the activities which they have power to carry on; and

(m) to do all such other things as are calculated to facilitate or are incidental or conducive to the carrying on of any of the activities which the board have power to carry on.

...

(7) A board of management shall not, without the prior consent, given in writing, of the Secretary of State -

(a) borrow money from any source, give any guarantee or indemnity or create any trust or security over or in respect of any of their property; or

(b) effect any material change in the character of their college.

By the time of the execution of the Nomination Agreement, the role of the Secretary of State under the Act had passed to the Scottish Ministers, who in turn had delegated the consent function under section 12(7) to the Scottish Further and Higher Education Funding Council ("SFC").

[137] The SFC is a body corporate established by s.1 of the Further and Higher Education (Scotland) Act 2005 in succession to other funding bodies which were dissolved pursuant to powers in that Act. It was described by Mr Martin Fairbairn, a Senior Director of Information and Corporate Services at SFC, as a Non-Departmental Public Body funded by the Scottish Government. Funding is dealt with in ss.9 and 10 of the Act. In terms of s.3, its general duty is to exercise its functions for the purposes of securing the coherent provision by the fundable bodies (as a whole) of a high quality of fundable further education and fundable higher education and the undertaking of research among fundable bodies. Edinburgh's Telford College is listed in Schedule 2 among the bodies described as "fundable bodies". Amongst its various powers and duties, it has the power to propose or approve the alteration of the list of fundable bodies (s.7); the responsibility for administering the funds made available to it (s.11); the power to make grants, loans or other payments to fundable bodies for certain specific purposes (s.12); and the responsibility for securing that provision is made for assessing and enhancing the quality of further and higher education provided by fundable bodies (s.13). In terms of s.18 it is to exercise the functions of the Scottish Ministers as respects property used or held for the purposes of a fundable body and in respect of which the Scottish Ministers are entitled to any right or interest (or would be in certain circumstances). S.20 requires the SFC, in exercising its functions, to have regard to various matters set out in that section. And s.24 provides that the Scottish Ministers may by order impose requirements on the SFC as regards the exercise of its functions.

[138] Since its establishment on 3 October 2005, the SFC has carried out the functions of the Scottish Ministers in giving consent under s.12(7) of the 1992 Act. I was not told of the statutory basis for this delegation of these functions. However, Mr Fairbairn explained that the relationship between the Scottish Ministers and the SFC was governed by the Management Statement and Financial Memorandum between the Scottish Government and the SFC dated January 2006 (the "2006 MSFM"). Para.10 of the Financial Memorandum provides that

"The [SFC] will make a financial memorandum with each fundable body it funds for the purposes of regulating their relationship on financial and related matters, setting out the terms and conditions on which payments of grant will be made by the [SFC] to the fundable body and any other terms and conditions which will apply as a consequence of the [SFC] making payments to them."

The memorandum is to be prepared in the light of such consultation as is required by s.22 of the 2005 Act and is to be consistent with the responsibilities of the SFC under the Act and the MSFM. Much of para.10 is concerned with funding to be provided to fundable bodies by the SFC. However, para.10.6 deals with "Monitoring and Control of Borrowing". It provides as follows:

"10.6.1 The [SFC] will make provision for the monitoring and control of borrowing by fundable bodies to protect the public investment in fundable bodies and to maintain accountability for the use of Exchequer funds. The [SFC] will establish effective arrangements for monitoring fundable bodies' borrowing including, where it sees fit, the imposition of a condition to seek prior approval or give notice to the [SFC] of any intention to borrow.

10.6.2 The prior written consent of the [SFC] is required if a fundable body intends to lend or give any guarantee, indemnity or letter of comfort with actual or effective values above amounts to be determined by the [SFC].

10.6.3 The prior written consent of the [SFC] is required if a fundable body intends to offer as security for a loan any land or property which has been provided, improved or maintained with the aid of grant.

10.6.4 The Scottish Ministers hereby direct that, where a fundable body has used funds provided by them, to acquire an interest in or to develop any land, building or other asset, and where those funds were provided subject to a condition which has the effect of requiring the fundable body to obtain their consent before raising capital finance borrowing on the security of those assets, the [SFC] will exercise the functions of the Scottish Ministers in relation to any request for consent. In exercising those functions the [SFC] will give consent only if the requirements of the [SFC's] capital finance monitoring arrangements are satisfied and subject to these conditions continuing to be satisfied."

As I understood the evidence, it was in these provisions of the MSFM that the delegation of the functions of the Scottish Ministers under s.12(7) of the 1992 Act was to be found. It is of some interest to note that the consent functions referred to in para.10.6.4, the only one of these provisions dealing with the exercise by SFC of the functions of the Scottish Ministers, appear to be limited to a case where the fundable body seeks to raise capital finance borrowing on the security of its assets. The concern seems to be to exercise some control over any attempt by a fundable body to raise finance by offering security in the form of security over its assets. This is consistent with s.18 of the 2005 Act in terms of which the SFC is delegated the power to exercise the functions of the Scottish Ministers only as respects property used or held for the purposes of a fundable body and in respect of which the Scottish Ministers are entitled to any right or interest.

[139] The Financial Memorandum between the SFC and Edinburgh's Telford College was referred to in evidence. It appears to be in a form applicable to all fundable bodies. It states in the Preamble that it sets out the formal relationship between the SFC and the institution; and that the foundation of that relationship is the provision of funding by the SFC to the governing body of the institution according to statute. Para.4 provides as follows:

"4. Accordingly, this memorandum sets out the expectations of the institution and the requirements which are a condition of [SFC's] funding. It also sets out the agreed expectations which the institution, in the spirit of constructive partnership, has the right to have of [SFC]."

Under the heading "What the [SFC] can expect of the institution, para.15 and 16 provide as follows:

"15. The governing body will ensure that it has in place and effectively implemented the proper arrangements for governance, leadership and management of the institution as required by statute, its instrument and articles of governance. This includes the appointment of the chief executive officer. As well as being directly accountable to the governing body for the proper conduct of the institution's affairs, the chief executive officer of the institution is also directly responsible to the chief executive officer of the [SFC] for the institution's proper use of funds deriving from Scottish Ministers and its compliance with this memorandum.

16. Respecting the primacy of the institutions own statutory and constitutional obligations, the governing body will ensure that:

(i) ...

...

(iii) public funds are used in accordance with the relevant legislation and only for the purposes for which they are given;

...

(x) it and the institution adheres to [SFC's] mandatory requirements (as notified to the institution in circular letters) and ..."

[140] The relevant Mandatory Requirements are set out in a separate document headed "Mandatory Requirements", which provides, so far as material, as follows:

"Mandatory Requirements

1 Paragraph 16(x) of the Financial memorandum between the [SFC] and the colleges and universities it funds ... includes the following requirement:

"Respecting the primacy of the institution's own statutory and constitutional obligations, the governing body will ensure that it and the institution adheres to the [SFC's] mandatory requirements (as notified to the institution in circular letters)."

2 There are various requirements which colleges and universities are expected to comply with. Examples include conditions attached to specific grant streams and provision of statistical data and financial information. However, the documents described below contain the 'mandatory requirements' referred to in the Financial memorandum. These are listed under the following headings:

·       specific financial conditions of grant relating to capital finance, repayment of grant and insurance;

·       estates;

·       audit and accounting arrangements; and

·       mandatory requirements contained in our annual main grant letter.

3 In addition to mandatory requirements, we occasionally publish good practice guidance in specific areas, usually in partnership with one or both sectors. Interpretation and use of good practice guidance needs to take appropriate account of each institution's unique circumstances and as such are not part of our mandatory requirements.

Specific financial conditions of grant relating to capital finance, repayment of grant and insurance

Capital finance

4 As a condition of [SFC's] financial memorandum with the Scottish Government, [SFC] is required to "make provision for the monitoring and control of borrowing by institutions to protect the public investment in institutions and to maintain accountability for the use of exchequer funds". In furtherance of this responsibility, the institution is required to meet all of the conditions on capital finance set out in paragraph 5 below.

Conditions to be met in relation to all capital finance arrangements

5 The conditions which should be met regarding the institution's ability to enter into capital finance arrangements are:

(i) the institution can demonstrate its ability to repay the finance, and to pay interest thereon, without recourse to requesting additional grant from [SFC];

(ii) the institution can demonstrate that its ability to maintain financial and academic viability will not be impaired as a result;

(iii) the institution can demonstrate the value to be generated by the transaction, whether it involves refinancing, or purchase of any new investment or assets, the acquisition of which is to be financed by the borrowing; an

(iv) the institution can demonstrate that any such new investment or asset acquisition is in accordance with the institution's strategic plan and, where appropriate, its estate strategy.

6 For the purposes of this document, 'capital finance' includes borrowing, finance and operating leases, and other schemes, such as private finance initiative projects, where borrowing is the substance of the transaction, in line with the principles of Financial Reporting Standard (FRS) 5 - 'Reporting the Substance of Transactions'.

When [SFC's] formal consent is required in respect of capital finance arrangements

7 The Institution shall obtain prior written consent from [SFC] before it undertakes a level of capital finance where:

·       the annualised costs of all capital finance (being the sum of the servicing and capital repayment costs of each loan or other arrangements spread evenly over the period of the relevant loan or arrangement) would exceed four per cent of: total income as reported in the latest audited financial statements; or of the estimated amount of total income for the current year if that is lower.

8 In assessing total capital finance commitments, the institution shall ignore low-value financial commitments, provided that the combined annualised servicing costs of such financial commitments do not exceed 0.5% of total income.

9 The institution shall also seek consent from [SFC] before raising capital finance on the security of assets in which Scottish Ministers have an interest. For the purposes of this document, such an interest exists where:

·       the institution has used funds provided by Scottish Ministers to acquire an interest in or to develop any land, building or other asset; and

·       where those funds were provided subject to a condition which has the effect of requiring the institution to obtain Scottish Ministers' consent before raising capital finance on the security of those assets.

10 Scottish Ministers have directed that [SFC] will exercise their functions in relation to any such interests.

11 In seeking [SFC's] approval as required under paragraphs 7 and 9, the institution should demonstrate to [SFC], in writing, its compliance with the conditions set out in paragraph 5.

Granting of Security

12 As a result of a condition in [SFC's] financial memorandum with the Scottish Government, the institution is required to seek [SFC's] written consent if it intends to offer as security for a loan any land or property which has been provided, improved or maintained with the aid of grant.

Contingent commitments

13 As a result of a condition in [SFC's] financial memorandum with the Scottish Government, the institution is required to seek [SFC's] written consent if it intends to lend or give a guarantee, indemnity or letter of comfort.

14               However, [SFC's] written consent is not required for such arrangements if:

·       an actual or effective value can be calculated for the arrangement; and

·       that actual or effective value is less than: four per cent of total income as reported in the latest audited financial statements; or of the estimated amount of total income for the current year if that is lower."

The Mandatory Requirements go on for another 25 paragraphs, but I need not set out the remainder of them.

[141] A number of the paragraphs quoted above begin with words to the following effect: "As a condition of [SFC's] financial memorandum with the Scottish Government, [SFC or the institution] is required to ...". The relevant paragraphs of SFC's financial memorandum with the Scottish Government (the MSFM) are as follows: the reference in para.4 of the Mandatory Requirements is to para.10.6.1 of the MSFM; that in para.12 is a reference to para.10.6.3 of the MSFM; and that in para.13 is a reference to para.10.6.2 of the MSFM.

Arguments in outline

[142] The argument for the College was, in short, that, having regard in particular to the provisions concerning Guaranteed Payments, the Nomination Agreement was a "guarantee or indemnity" in terms of s.12(7) of the Act, and therefore required the prior written consent of the SFC to whom the Scottish ministers had delegated their powers in this respect. S.11(2) of the Act specifies that the Board of Management of the College is itself the corporate entity; and s.12 has the effect of defining its powers, and hence its capacity. The College's potential exposure under the Nomination Agreement, over the 15 years before the break option, was in the region of £8m, well in excess of 4% of its annual income. Accordingly, the exemption from the requirement to obtain consent from SFC contained in para.14 of the Mandatory Requirements did not come into play. The College required specific prior written consent and, not having obtained it, the Nomination Agreement was ultra vires the College and was therefore a nullity.

[143] For AMT it was argued that the Nomination Agreement was not a "guarantee or indemnity" within the meaning of s.12(7) of the Act, and therefore did not need any such consent. The requirement of consent was, in any event, a procedural requirement which did not affect the capacity of the College to enter into such an agreement even if it were, properly construed, a guarantee or indemnity. However, even if the Nomination Agreement did require consent, it fell within the dispensation contained within para.14 of the SFC's Mandatory Requirements, since the effective value of the commitment in the Nomination Agreement should be taken to be the annual exposure (rather than the exposure over the life of the agreement), which was at most only about £500,000 and therefore well within 4% of the College's annual total income. It was therefore valid and enforceable.

[144] It will be seen from this brief summary of the arguments that three discrete issues arise: (i) is the Nomination Agreement a "guarantee or indemnity" in terms of the 1992 Act such that it requires consent? (ii) if so, was there deemed consent by virtue of the dispensation in paragraph 14 of the SFC's Mandatory Requirements? and (iii), if consent was required and not obtained, what is the effect of that on the validity of the Nomination Agreement?

Further evidence relative to these issues

[145] I heard evidence from a number of witnesses about the need for consent under s.12(7) of the 1992 Act, about the role and workings of SFC, and the operation of various paragraphs (particularly paras.7 and 13-14) of the Mandatory Requirements. Mr Cormack submitted that such evidence was not admissible to assist in construing a statute. This is plainly correct. While evidence might be admissible to show the circumstances in which the legislation came to be passed and the problem which the legislation sought to address, that rule did not assist in this case, since the SFC only came into existence in October 2005, long after the 1992 Act was passed. Any practices emerging in the lifetime of the SFC therefore by definition post-dated the coming into force of the 1992 Act. Some of the evidence was, however, arguably more relevant to the question identified in the last paragraph as issue (ii). I shall therefore set it out in some detail.

[146] Before taking up his position at the College, Mr McLeish had been one of two Senior Financial Analysts at the SFC, responsible for leading a small team of analysts in the Financial Appraisal and Monitoring Directorate ("FAMD"), now renamed ("G:MAP"). His work there had involved commenting upon institutional (i.e. college and university) compliance with the Financial Memorandum and other conditions of grant.

[147] Mr McLeish accepted in his evidence that he had not addressed his mind to the question whether prior consent from the SFC was required before the College could enter into the Nomination Agreement. However he was prepared to give evidence about the requirement for such consent and the proper interpretation of the "Mandatory Requirements" in the Financial Memorandum. This he did in paras.50-52 of his witness statement. He rejected the suggestion that the Nomination Agreement was effectively borrowing by the back door. The College was not taking on a responsibility for borrowings, but in any event it had borrowing consent from SFC for up to £16m specifically for the development of the Granton campus. Further, he did not think that consent was required in terms of the Financial Memorandum since the College was not giving a guarantee or indemnity - indeed, he did not think that they were in that territory.

[148] Looking to the specific terms of para.14 of the Mandatory Requirements, Mr McLeish pointed out that SFC's consent is not required for an arrangement such as is described in para.13 - e.g. a guarantee or indemnity - where the actual or effective value of the arrangement can be calculated and is less than 4% of total income for that or the previous year. If the arrangement was a guarantee or indemnity, and he did not consider that it was, it would not be sensible to calculate an effective value on the basis that none of the Rooms would be occupied; a high level of occupancy should be assumed (he was confident that the College could achieve a high take up of the Rooms, particularly since marketing the Rooms to students lay within the College's own remit). Further, his understanding was that the 4% threshold should be calculated on an annual basis - i.e. with the potential liability under the Nomination agreement in one year set against the annual income for that or the previous year - and on that basis the Nomination Agreement would not require consent because, in terms of para.14, the actual or effective value of the potential liability for any one year would be less than 4% of annual income. Annual exposure under the Nomination Agreement was in the order of £500,000 whereas turnover for 2008/9 was about £33m. That assumed the worst case of zero occupancy. Nonetheless, if the College's solicitors had expressed any concern about the power of the College to enter into the Nomination Agreement without consent, then he would have approached the SFC. He said that he did have regular meetings with the SFC when he would update them about what was going on at the College.

[149] Mr McLeish was challenged in cross-examination as to the due diligence carried out to assess the robustness of his assumptions about likely occupancy. He was making predictions based on historical levels of demand for student accommodation, the information being drawn from various sources, including records of take up at Jewel & Esk and information from the College's accommodation officer, from senior managers in his team and from the College's International Manager. He accepted, as I understood it, that there had been no independent assessment of the risks, but the assumptions seemed sound and everyone at the time was supportive of the project.

[150] Grant Macrae is a chartered accountant. He is (and has been for some time) an audit Director in KPMG LLP in Edinburgh, specialising in the audit of public and private sector entities, including in the further and higher education sectors. He has, as he put it, significant knowledge of the financial and corporate governance framework in which the further and higher education establishments work in Scotland. He was asked by AMT to consider, from an accountancy point of view, the test in the Mandatory Requirements relating to the requirement on the College to obtain consent from the SFC before entering into the Nomination Agreement and, in particular, the question whether the value of the arrangement entered into in terms of the Nomination Agreement exceeds 4% of the total income of the College.

[151] Mr Macrae's argument was simple and straightforward. The rental level fixed for the first year of the Nomination Agreement was £126.50 per week for each of the 99 Nominee Rooms. The College's commitment related to occupancy of those rooms for 43 weeks. Therefore the maximum potential liability under the Nomination Agreement was £538,510 (£126.50 x 99 x 43). The audited accounts of the College showed annual income in the year ended July 2010 as being £32,267,000. 4% of that was £1.29m. The maximum potential liability under the Nomination Agreement amounted to no more than 1.7% of that annual income. All that assumed zero occupancy, i.e. that none of the Rooms would be taken up and paid for by students at the College, which was clearly unrealistic. The assessment of the value of the commitment over 15 years as being in the region of £8m, also proceeded upon the unrealistic assumption of zero occupancy. If that had been even a remote possibility, the College would clearly not have proceeded with the project. Mr Macrae regarded an approach based on assessing the maximum potential payment over 15 years on the basis of zero occupancy as "flawed and completely removed from reality". On a more realistic basis of, say, only 15 Rooms out of the 99 remaining unoccupied in any year, the annual exposure in the first year would be only £81,500. Even over 15 years at that level, the total exposure would come to £1.22m, less than 4% of the annual income for the year ended July 2010. These figures as figures were not in dispute, though there was some disagreement over how unrealistic it was to assume zero occupancy. Mr Macrae did not accept the criticism of the steps taken by Mr McLeish as regards due diligence to assess the likely take up.

[152] Mr Macrae's fundamental point, however, was that the approach adopted by the College, or by the SFC, was illogical in that it did not compare like with like. Either one should compare the annual potential exposure under the Nomination Agreement with the annual income for a given year, or one should compare the total potential exposure over 15 years with the projected total income over 15 years. His preference was for comparing the potential annual exposure with annual income, particularly since there was no possibility of the maximum potential liability of £8m crystallising at any one time. To compare the total worst case liability over 15 years with one year's income provided a false impression of the materiality of the obligations likely to arise under the Nomination Agreement.

[153] Mr Macrae accepted that the purpose of the Financial Memorandum was to protect public money which might otherwise be at risk. It was put to him in cross-examination that, in circumstances where the variables were uncertain and where public money was involved, a prudent approach to para.14 of the Mandatory Requirements would be to look at the maximum liability over 15 years and leave it to the SFC to scrutinise the proposal. He accepted that some might take that view. He also accepted that if a client asked whether SFC consent was needed, he would pick up the telephone and ask them.

[154] Christopher Brown is an accountant working in the Audit Department of Scott-Moncrieff, the College's internal auditors. He was first made aware of the Nominations Agreement on 16 October 2010, at a meeting at which Mr Godfrey raised concerns about it and suggested that Scott-Moncrieffe might wish to investigate the procedures leading up to in being entered into. Retrospective approval of the instructions to investigate these matters was given by the Audit Committee of the College on 14 February 2010. The review carried out by Scott-Moncrieffe took 10 days, much longer than a typical review carried out by them. According to Mr Brown, this was because there was no clear evidence of an internal process followed within the College leading up to approval of the agreement, nor of a business case presented in support of the proposal. I do not propose to go into any detail on these aspects which may be relevant to the question of authority which is not presently before the court for decision. At all events, a large amount of documentation had to be reviewed.

[155] It was Mr Brown's evidence, taking the matter at a level of generality, that there had been no proper assessment of the demand for student accommodation in Granton and, indeed, in Edinburgh; that there was no commercial justification for the project; that pricing of the Rooms was a key component in assessing the risk to the College; and that, as a result of the level at which rents were fixed in the new accommodation when there were cheaper or equally priced alternatives in the centre of Edinburgh, there appeared to be little incentive for students to take up occupancy of the new residence in Granton.

[156] Mr Brown was familiar with the terms of the Financial Memorandum and the Mandatory Requirements. In his view the terms of para.13 of the Mandatory Requirements, requiring prior written consent before lending or giving a guarantee, indemnity or letter of comfort, were apt to describe any significant commitment that a college might make for the purpose of securing a financing arrangement. It was intended to cover a situation where, rather than taking out a financing arrangement itself, a college allows another party to do so either by granting a loan to that other party or by making some sort of guarantee that allows the other party to secure a loan. His understanding was that, without the commitment from the College, AMT would have been unable to secure finance for the project; and the occupancy guarantee in the Nomination Agreement was given to enable it to do so.

[157] Mr Brown confirmed that the Scott-Moncrieffe report was still in draft form. Its final form might be influenced by the result of this litigation. Further, the SFC was still to take a decision on whether the Mandatory Requirements were breached. As to that, Mr Brown that if an actual or effective value was to be calculated for the arrangement for the purpose of para.14, it was unrealistic to think in terms of zero occupancy over 15 years. He would expect the College to make an assessment of the probabilities. Different people might have different views. If the arrangement here was to be regarded as a guarantee for the purpose of paras.13 and 14, it had certain differences from the sort of guarantee which was called in on one occasion, where the whole liability might crystallise at once. However, he did not accept that there was no possibility of that happening. It might happen if the College were to default on its obligations. Nor did he accept that this made a difference to his assessment of whether the College required prior written consent. To take account of its potential liability, the College would have to make provision in its accounts. He did not accept that a like for like comparison of exposure and income would necessarily tell you about the risk in the arrangement. It would have been perfectly reasonable for the SFC to frame para.14 in those terms, but it had not, perhaps simply because there was a wide range of issues being covered by the Mandatory Requirements and they wanted to keep some control over what could go ahead without their scrutiny. Just because a project did not fall within para.14 did not mean it could not proceed - but it then required to be considered by the SFC.

[158] Mr Fairbairn, who, as I have already said, is a Senior Director of Information and Corporate Services at SFC, explained that SFC funding was generally designed to be for teaching, learning and research purposes at the particular institution, though in some circumstances that funding might be used for associated purposes. A large part (perhaps 70%) of the funding of such institutions came from the SFC, and the percentage of funding provided by the State was even higher if funding from the Scottish Government was taken into account. Further and higher education institutions were also expected to generate revenues of their own, and costs incurred by them for purposes other than teaching, learning and research were generally expected to be met from those "self-generated" revenues. SFC's concern is that further and higher education institutions must not allow financial commitments, particularly those which cannot be quantified when they are taken on, to impinge upon the provision of teaching, learning and research. Whereas a company which suffers adverse consequences from an imprudent transaction can ultimately go into liquidation, there is a political interest in the spread of further and higher education which means that a failure by a further and higher education institution might require further funds to be put in to prevent the institution collapsing. SFC is careful to avoid situations in which it might feel compelled (morally or politically, even if not legally) to provide further funding to bale out an institution in financial difficulties.

[159] Mr Fairbairn is in overall charge of the department within SFC tasked with preparing advice to the Board of SFC as to whether or not consent should be given to a further and higher education institution in terms of s.12(7) of the 1992 Act, para.10.6.2 of the 2006 MSFM and para.13 of the Mandatory Requirements. He said that SFC was concerned about such institutions entering into transactions and arrangements of the type specified in those provisions because such transactions or arrangements involve future or contingent obligations which could have a direct effect on the ability of an institution to provide teaching, learning and research and even, in an extreme case, give rise to liabilities which could only be met out of the public purse. It was important, therefore, that the SFC should have the opportunity to determine whether an institution should be permitted to enter into such transactions and arrangements.

[160] In para.9 of his witness statement Mr Fairbairn considered the words "guarantee or indemnity" in s.12(7) of the 1992 Act. He said this:

"SFC interprets the words "guarantee or indemnity" in s.12(7)(a) of the 1992 Act in their widest sense, that being an assurance that if anything goes wrong it will be put right. This is considered consonant with the rest of s.12(7)(a) and clause 10.6.2 of the 2006 MSFM which are designed to encompass all future and contingent obligations that could be entered into by a further or higher education institution."

In his submissions Mr Moynihan placed considerable reliance on this. Although the views of those operating a statutory scheme as to meaning of the relevant provisions and the scope of their powers are always likely to be of interest, they are not, in my opinion, relevant to the issues of construction. In the present case, that is not only because of the general principle to which I have referred. There are a number of other factors. First, the wording of the 2006 MFSM cannot be relevant to the proper construction of the 1992 Act. Secondly, Mr Fairbairn accepted that SFC's interpretation was not one which was written down or formulated in some way, nor was it arrived at on the basis of any consideration of legal definitions of the words "guarantee" and "indemnity" - it was based simply on the way he and others at SFC had approached the matter over a number of years. Accordingly, even if I had thought that evidence of this sort might in principle be relevant to the construction of the 1992 Act, I would have hesitated before accepting that this particular evidence lent any real assistance.

[161] Of rather more relevance was Mr Fairbairn's evidence about SFC's practice in determining whether or not to give consent under s.12(7) of the 1992 Act. In his witness statement he gave the following evidence:

"10 In considering whether to give consent under s.12(7)(a), SFC in practice requires to be satisfied that a further or higher education institution seeking consent has itself properly considered entering into the transaction or arrangement at the appropriate level within the institution. In the case of a 1992 Act Incorporated Further Education College, this would be the Board of Management of the College. We would require express confirmation that the Board and/or relevant committee have considered the proposed transaction, its implications, and have resolved that the College be committed to the transaction. In addition, SFC would have to be satisfied that: good governance principles had been complied with; a full risk analysis had been carried out; full consideration had been given to the financial affordability of the risk; and that the proposed transaction or arrangement had been properly stress tested, based on a wide range of potential eventualities. The aim of SFC is to support and underpin the governing bodies of further and higher education institutions, while ensuring that the potential costs of such transactions do not affect the ability of the institutions to deliver teaching, learning and research.

In paragraph 12 he considered the Nomination Agreement and expressed the view that it constituted an obligation of a type for which the written consent of the Scottish Ministers, acting through SFC, was required under s.12(7) of the 1992 Act. This evidence is, of course, not admissible as an aid to construction of the Nomination Agreement, but it is relevant to an understanding of SFC's approach in a case such as this. He went on as follows:

"13 There are a number of considerations in this case which would have had to be considered if an application had been made by [the College] to SFC to consent to [the College] entering into this agreement. I cannot say definitely whether or not consent would have been granted, but I can identify a number of concerns that SFC would have had."

In the following paragraphs he mentioned those concerns. One concern was as to whether the proposal had been stress tested for occupancy levels, not down to zero but at somewhere around 40 out of the 99 Rooms. He pointed out that the maximum liability of the College under the Nomination Agreement over 25 years was in excess of £13m, or, more relevantly, about £8m if the break option was exercised after 15 years. Those figures were, as I understood it, a worst case based on zero occupancy throughout the period. Another concern was about location, there being no captive market for accommodation there and the College itself, unlike some of the leading universities, not being a magnet for students travelling from far afield, leading to a risk of low occupancy levels. SFC would also want to be sure that proper independent advice had been taken as to the implications of what he called "the Occupancy Guarantee", a term used in the Heads of Terms and used by him as a shorthand for the potential liability to make Guaranteed Payments if Nominee Rooms were left unoccupied.

[162] Mr Fairbairn said that it was not a priority for SFC to fund residences. The level of potential liability undertaken by the College under the Nomination Agreement was such that its ability to deliver teaching, learning and research could be severely affected. The Board of SFC would have been very cautious about granting consent. The SFC took the view that consent was needed but had not been obtained. In those circumstances, the matter was being considered by the SFC's Audit and Financial Compliance Committee. Meanwhile, the College's Internal Auditor was carrying out a review. The College would report to the SFC with his findings when his review was complete. The SFC would decide what further steps to take after reviewing the findings of that Internal Auditor. In his oral evidence, Mr Fairbairn said that the SFC's Audit and Financial Compliance Committee had decided at its last meeting to defer consideration of this matter pending the outcome of this litigation. When it came to make its decision, it would take the court's decision into account. He accepted in cross-examination that it was possible for the SFC to give retrospective consent to the agreement. The SFC had not yet had to consider the extent to which third party interests would be affected if consent was refused.

[163] In his oral evidence, Mr Fairbairn was asked about paras.7 and 13-14 of the Mandatory Requirements in place between the SFC and the institutions. Para.7 deals with raising finance, and requires the institution to obtain prior written consent from SFC before it undertakes a level of capital finance where the annualised costs of all capital finance (being the sum of the servicing and capital repayment costs of each loan or other arrangements spread evenly over the period of the relevant loan or arrangement) would exceed 4% of total annual income; whereas paras.13 and 14 require the institution to seek SFC's written consent whenever it intends to lend or give a guarantee, indemnity or letter of comfort unless (a) it can be calculated (b) that the actual or effective value of the arrangement is less than 4% of such total annual income. In summarising (above) the effects of paras.13 and 14, I have deliberately separated the requirement for it to be capable of calculation from the result of that calculation (if one is possible), since, as Mr Fairbairn explained, the main difference in treatment of the two regimes, i.e. between raising finance and making loans or giving guarantees etc., was that it was generally more difficult to calculate the actual or effective value of a guarantee (and, with loans, it was difficult to give any value to the risk of the loan not being repaid). Therefore the "trigger", which required the institution to apply for consent, "clicked in more quickly" in such cases. Consent was needed wherever it was not possible to calculate the actual or effective value of the arrangement. Contingent commitments were rarer and less predictable, which was why they were dealt with separately in paras.13 and 14. The 4% figure in each of paras.7 and 14 was the result of lengthy consultation. That level was fixed upon because it was thought to reflect a level at which most institutions could cope if things went wrong. But whereas, in the case of raising finance (para.7), the comparison was between the annualised cost of the borrowing and the total annual income, in the case of lending or giving a guarantee (paras.13 and 14), it was the whole calculated actual or effective cost of the arrangement that had to be compared with the annual income. Mr Fairbairn accepted that this was not a like for like comparison, and in effect set the bar higher in the case of an institution being able to make loans or give guarantees without SFC's consent; but he justified it by saying that, whereas the use of annual income was "a proxy for a broad feel as to the capacity of the institution to deal with a problem", and was therefore used as the comparator in both situations (i.e. both in para.7 and in paras.13-14), in the case of loans or guarantees it was difficult to predict the whole range of guarantees which might be granted, and the situations in which problems might occur. It was therefore prudent to require the institution to seek consent in such cases, unless it was clear that the actual or effective value of the transaction fell within the 4% mark. Because of the uncertainty, the test had to be less forgiving. In answer to the point, put to him in cross-examination, that the whole potential liability under the Nomination Agreement of £8m (even on a worst case of zero occupancy) could not fall due in any one year, Mr Fairbairn accepted that this kind of arrangement had not been in the minds of the SFC when they formulated the test in para.14 of the Mandatory Requirements - the SFC was contemplating a case where the total potential liability might fall due in a single year.

[164] Mr Fairbairn said that he had never before seen anything like the Nomination Agreement. On the basis that the annual exposure was potentially £500,000 (assuming zero occupancy) and the agreement ran for a minimum of 15 years, then the total commitment for the purpose of the trigger was about £7.5m (15 x £500,000). When it came to an assessment of the actual or effective value of the arrangement, account would have to be taken of the commercial probabilities, but he thought the annual figure should be nearer to the £500,000 than to nil. It was put to him in cross-examination that, in calculating an actual or effective value of the arrangement, a range of possible outcomes, each of them more or less realistic, would have to be considered; it was not realistic to think that none of the Nominee Rooms would ever be let. Mr Fairbairn did not agree. Though he could understand that view, that was not the way he would look at it. As far as he was concerned, the first question that arose under para.14 of the Mandatory Requirements was: is it possible to calculate an actual or effective value of the arrangment? If there was a range of possibilities, that was tricky. There was a value which could be calculated, and that was the total potential commitment on the basis of zero occupancy. He accepted that the mere fact of uncertainty did not prevent a calculation of the value being possible, and that such a calculation involved an exercise of judgement. But he did not agree that a calculation should be made on the basis of a "realistic outcome". While he accepted that a reasonable finance director of a College might take a different view from his, he did not agree that that would be a reasonable view. It was unusual in his experience to have general residency arrangements. He did not agree with the view expressed by Mr MacRae that there was no question of zero occupancy. It was a "potentially realistic possibility". He would not be confident that any of the rooms would be let. It would not be unfair, he conceded, to say that he took a conservative view about the trigger. But he thought that the general view would be that the whole project was very risky.

[165] In cross-examination, Mr Fairbairn accepted that the Nomination Agreement did not involve any borrowing by the College. He also accepted that if the College had taken a lease of the 99 Rooms, this would not have been affected by the Mandatory Requirements. Operating leases were not covered and no consent from SFC would have been required. Mr McLeish's views expressed in paras.50-52 of his witness statement (see above) were put to him. Mr Fairbairn did not agree with those views, but accepted that there was room for different views. He did not discount the possibility that someone reading para.14 of the Mandatory Requirements might think that he was meant to compare like with like, but he did not consider that such a view would be reasonable. There was, he said, a reasonable understanding about this provision in informed circles. He accepted that in calculating values there might be room (indeed there might be a need) for the exercise of subjective judgement. An example of that might be in estimating likely future interest rates. However, his response was a practical one: it would have been good practice for the College to have got on the phone and asked.

Issue (i) Is the Nomination Agreement a "guarantee or indemnity" requiring prior written consent?

[166] It is important to note that the issue raised as to capacity and ultra vires focuses on the requirement for consent in s.12(7) of the 1992 Act. That is the question which has to be considered. It was not suggested that the Financial Memorandum and the Mandatory Requirements stipulated for prior consent before entering into transactions which were not caught by s.12(7); or, if they did, that a failure to obtain prior consent under the Mandatory Requirements where it was not required under s.12(7) of the 1992 Act could lead to the transaction being held to be ultra vires. The first issue, namely "Is the Nomination Agreement a "guarantee or indemnity" requiring prior written consent?", requires a consideration of the scope of s.12(7) rather than of the Mandatory Requirements. The Mandatory Requirements come into play under reference to the second issue (considered below), where the question is, if consent is required under s.12(7) of the 1992 Act, has it been deemed to have been given by the SFC on behalf of the Scottish Ministers by reason of the terms of paras.13 and 14 thereof?

[167] For the College, Mr Moynihan conceded that what he called "a narrow or legalistic" view could be taken of the meaning of the words "guarantee" and "indemnity" as used in the section, whereby each of those terms could be used to describe a tripartite arrangement in terms of which one party (A) promises to pay a second party (B) in respect of that second party's liability to a third party (C): see the helpful discussion of contracts of guarantee and indemnity by Sir William Blackburne in Vossloh Aktiengesellschaft v Alpha Trains (UK) Limited, [2010] EWHC 2443 (Ch), at paras 19-27. However, he submitted that that was not the proper approach to the construction of the Nomination Agreement in the present case.

[168] Mr Moynihan submitted, correctly in my view, that the meaning to be attributed to a particular word in a statute may vary according to the context in which it is used. The word "guarantee" can, in a particular context, legitimately be understood in the general sense of an assurance, promise or acknowledgment. Such was the case in North British Railway Co. v Wingate 1913 SC 1092, which concerned the interpretation of s.4(1) of the Railway Companies (Accounts and Returns) Act 1911. That section provided that railway companies were generally relieved of any obligation to prepare or submit accounts more often than once a year,

"Provided that nothing in this provision shall relieve a railway company of any obligation to prepare half-yearly accounts in cases where those accounts are required in connection with any guarantee of dividend under any such statutory provisions."

The case concerned the railway company's obligations to pay dividends to its own shareholders. In answer to reliance placed upon the proviso by a deferred shareholder, the railway company argued that "this is not a case of guarantee at all". The Lord President (Lord Dunedin), with whom the other members of the Court agreed, said this (at p.1102):

"If guarantee is read in the strict legal sense of the word, this clearly is not a case of guarantee, because guarantee in strict law always assumes three parties. There is the principal debtor and the creditor and the third person who guarantees to the creditor that portion of the debt which the principal debtor may not be able to pay. Now there is nothing of that sort here, because there is no interposition of a third party at all. On the other hand, in popular language it would not be very far wide of the mark to say that here there was a guarantee by the Railway Company to the deferred shareholder that he would get all that was over after paying a 3 per cent dividend, if possible, upon the half year's profit, the word "guarantee" there being used no longer in its strict sense but in the absolutely general sense of promise or acknowledgment. As I have already said, I do not think it is necessary to decide that question. If it were, I should be inclined to hold that "guarantee" was used in an inaccurate and popular sense rather than a legal sense, because I should always strive to come to the conclusion that this Act, which was passed for public purposes, was not meant to alter private rights, if I could find any interpretation of it which would be consistent with that general idea."

Mr Moynihan pointed out that that approach was entirely consistent with the interpretation applied in practice by the SFC as explained by Mr. Fairbairn. I have already explained why I am reluctant to place too much reliance on that. But, despite that reservation, I fully accept, and I do not think that this was in dispute, that it is necessary to consider the meaning to be given to the words "guarantee or indemnity" in the context in which they are found.

[169] What is that context and what does it show? On this issue the parties were not in agreement. Mr Moynihan submitted that the relevant context was the full list in s.12(7)(a) of transactions which may not be carried out by a board of management without prior written consent. Those were transactions under which they

"borrow money from any source, give any guarantee or indemnity or create any trust or security over or in respect of any of their property."

The "pertinent contextual reference", as he put it, "was the creation of a security", i.e. an indirect or contingent liability. Guarantees and indemnities could likewise be viewed as forms of contingent liability. A security could be given in relation to a bilateral contract, but was nonetheless caught by s.12(7)(a). That suggested that "guarantee or indemnity" as used in that part of the Act could apply equally to a bilateral or tripartite arrangement. He referred to three English Court of Appeal cases (to which I refer below) concerning the grant, ultra vires, of guarantees and indemnities, in which no distinction had been drawn in the judgments between a (tripartite) guarantee and a (bilateral) indemnity. The legislative purpose was that significant financial transactions proposed to be undertaken by further education colleges, particularly those involving speculation or in respect of which the ultimate liability is contingent and therefore may be difficult to quantify, must be subjected to external scrutiny and approval. Therefore a narrow or legalistic interpretation of the words "guarantee" and "indemnity" in s.12(7)(a) of the 1992 Act would be inappropriate. A purposive interpretation should be given to the Act, and on that view the Nomination Agreement was plainly within the scope of s.12(7)(a). The language of the Nomination Agreement itself used the expression "Guaranteed Payment" and adopted the concept of guaranteed occupancy.

[170] Mr Moynihan sought to support his construction by giving an example of the sort of arrangement that, on his construction of the statute, would require prior consent. The example was taken from the evidence of Mr Fairbairn. A college might wish to develop land, and might have to give a guarantee of ground conditions. If the ground conditions turned out to be adverse the college would potentially be exposed to a substantial liability, probably unquantifiable in advance, and the impact on its finances would be the same whether that guarantee was given to a third party funder (a tripartite provision consistent with a guarantee strictly so called) or to the contractor (a bilateral contract), particularly if (as here) the contract with the contractor was assigned to the third party funder as part of its security for the loan. The object of s.12(7)(a) was to secure external scrutiny of potentially risky commitments and that should apply alike to bilateral and tripartite arrangements.

[171] I can readily see that there might be a desire to ensure that the board of management of a college was subject to external scrutiny and required to obtain prior consent before entering into potentially risky commitments. The problem with this argument, however, is that there are many potentially risky commitments identified in s.12(2) of the Act, which the board is entitled to enter into without any prior consent. The supply of goods and services (s.12(2)(f)) potentially gives rise to significant liabilities. So too does the entering into contracts for the provision of management services (s.12(2)(h)(ii) and s.12(1)). The power to invest (s.12(2)(k)) carries huge and well-documented potential risks. Yet none of these require the prior written consent of the Scottish Ministers. Accordingly, I do not consider that the object of s.12(7)(a) can be stated as broadly as that.

[172] Mr Cormack pointed to the broader context of s.12(2) taken as a whole. He pointed in particular to the fact that only three of the paragraphs of s.12(2) were expressly made subject to s.12(7)(a). These were paras.(g), (j) and (l), which provide as follows:

"(g) subject to subsection (7)(a) below and section 18 of this Act, to acquire, hold and dispose of land and other property;

...

(j) subject to subsection (7)(a) below and the said section 18, to borrow such sums as the board think fit for the purpose of carrying on any of the activities they have power to carry on or for meeting any liability or obligation transferred to them under or in pursuance of any provision of this Part of this Act and, in connection with such borrowing, to grant such security or give such guarantee or indemnity as they think fit;

...

(l) subject to subsection (7)(a) below and the said section 18, to raise funds, accept gifts of money, land or other property and apply it to, or hold or administer it in trust for, the purpose of carrying on any of the activities which they have power to carry on;"

Of those, para.(g) is concerned with the acquisition, holding and disposal of land, while para.(l) includes a reference to holding land and other property and applying it or administering it in trust for the purpose of carrying on the board's activities. In this context, the requirement of prior consent before the board can create any trust or security over or in respect of any of their property would appear to have a specific purpose, linked to the powers conferred by those paragraphs. Para.(j) is concerned with borrowing money and in terms authorises the board, subject (in that connection) to consent having been obtained under s.12(7)(a), to grant securities or give such guarantees or indemnities as it thinks fit.

[173] I consider that there is force in Mr Cormack's submission on this point. In my opinion he is correct in his submission that s.12(7)(a) must take its meaning from the context of s.12 as a whole, particularly s.12(2), and in particular paras.(g), (j) and (l) thereunder. There are two particular aspects of this which strike me as important. First, there is the point that the powers in s.12(2) are only expressly made subject to prior consent under s.12(7)(a) in three cases. That suggests that the powers under the other paragraphs are not subject to that requirement of prior consent. Secondly, the specific matters identified in s.12(7)(a) as needing consent are a precise reflection of the subject matter of the three paragraphs of s.12(2) under which consent is required. To my mind these factors together point to a construction of s.12(7)(a) which is linked to the three paragraphs of s.12(2) which refer to it, and which is no wider than is necessary to tie in with those paragraphs.

[174] The effect of that, in my opinion, is that the reference in s.12(7)(a) to consent being needed before the board of management may give any guarantee or indemnity or grant security over or in respect of property is limited to the case of the board seeking to exercise their powers under para.(j) to borrow money for the purposes there referred to. It extends no further than that. On that basis, the College did not require the prior consent of the Scottish Ministers before entering into the Nomination Agreement.

[175] Even if the words "guarantee or indemnity" are separated from the borrowing context in which they appear in s.12(2)(j), so that they apply to any guarantee or indemnity, whether or not connected with any borrowing, I see no need to give them an extended meaning as contended for by Mr Moynihan. As he rightly accepts, a guarantee properly so called involves a tripartite relationship. The term "indemnity" is more elastic, but in my opinion it must take its meaning in this case from its juxtaposition with "guarantee". It is not intended to widen the scope of the obligations for which the College requires prior consent before entering into. The maxim noscitur a sociis is in point. Whether that construction of the phrase "guarantee or indemnity" be called a narrow and legalistic construction, it is the construction to which I consider that I am driven by the terms of the statute.

[176] The obligations on the College under the Nomination Agreement are not those of guarantors in that sense. The basic obligation under the Nomination Agreement is to ensure that 99 Rooms out of the 110 are taken up and paid for. In some of the negotiations that was referred to as an occupancy guarantee. No such expression appears in the Nomination Agreement, but that is not determinative of the question. It is the substance that matters. The Nomination Agreement requires the College to pay the full rent for any Nominee Rooms left empty. That payment is called the Guaranteed Payment. But, again, it is not the name which counts, it is the substance of the obligation. Whatever promise is given by the College, that promise is given to AMT, not to any third party. It is not a guarantee in the sense of a promise given to a third party in a tripartite arrangement.

[177] Mr Moynihan argued that even if this was correct at a general level, in Clause 15.2 the College did, in effect, guarantee payment by students occupying the Nominee Rooms. This was because Clause 15.2 provided that if a student failed to pay the rent, his Room was to be classified as Unlet for the purpose of the agreement, and therefore would count towards the calculation of the Guaranteed Payment. In one sense that is true. But it seems to me that this is but part of the fundamental undertaking by the College to AMT that 99 Rooms will be taken up and paid for. Clause 15.2 deals with the particular case of a Room being taken up but not paid for, but it is to be noted that it is contemplated by Clause 15.3 that in such circumstances the tenancy will be terminated. In so far as Clause 15.2 does amount to a guarantee of the rent to be paid by a student who has moved into a Room, it is short-lived and would inevitably be waved through under the terms of paras.13 and 14 of the Mandatory Provisions.

[178] As I indicated earlier, Mr Moynihan referred me to three English Court of Appeal authorities, namely Credit Suisse v Allerdale BC [1997] QB 306, Crédit Suisse v Waltham Forest LBC [1997] QB 362, and Sutton LBC v Morgan Grenfell & Co. Ltd. (1997) 29 HLR 608. Each of them involved the question whether certain arrangements involving the giving of guarantees and indemnities were ultra vires the local authority. Part of the statutory background to these cases is to be found in s.111 of the Local Government Act 1972. By s.111(1) a local authority is given the power

"to do any thing (whether or not involving the expenditure, borrowing or lending of money or the acquisition or disposal of any property or rights) which is calculated to facilitate, or is conducive or incidental to, the discharge of any of their functions."

However, s.111(3) provides that

"A local authority shall not by virtue of this section raise money, whether by means of rates, precepts or borrowing, or lend money except in accordance with the enactments relating to those matters respectively."

The facts of each case differed in detail but not in substance. In Allerdale, the council wished to provide a swimming pool pursuant to powers under s.19 of the Local Government (Miscellaneous Provisions) Act 1976. In purported exercise of its powers under s.111 of the 1972 Act, it set up a company to develop a site by building a leisure pool and time-share units, with a view to selling the time-share units to pay for the cost of building the pool. The council gave a guarantee to help the company to finance the project, and on the strength of this the company obtained a facility from the bank. The sale of the time-share units proved unsatisfactory and the company went into liquidation. The bank sued the council under the guarantee to recover the sums owed to it by the company. In Waltham Forest and in Sutton the council was concerned to provide housing for the homeless in a manner which avoided controls imposed on it by the Housing Act 1957. In one case it formed a company to purchase properties, lease them to the council on a three-year lease and then re-sell them at the end of the lease. In the other it entered into a similar arrangmeent with a housing association. The company/ association arranged loans from the bank for the acquisition of the properties and the provision of accommodation, and the council guaranteed to the bank the payment of all sums due to it by the company/ association. It also agreed to indemnify the company/ association against all losses arising out of the scheme. Due to a collapse in the property market, the company/ association failed and could not repay its borrowings. The bank sued the council in each case under the guarantee and the indemnity. The claims in each of the three cases failed. The council had no express powers to give a guarantee or indemnity. There were statutory controls preventing a local authority discharging its functions by means of a partly owned company, and therefore the council did not have any implied power under s.111 of the 1972 Act to give the guarantee or indemnity. The guarantee and the indemnity were not incidental to the proper performance of the council's duty to house the homeless in terms of the housing legislation.

[179] Mr Moynihan sought to take two points from these cases. First, he pointed out that, whereas in each case the guarantee was, as one would expect, a tripartite arrangement, the indemnity in the Waltham Forest and Sutton cases was a bilateral contract in which the council undertook directly to the provider to indemnify it in respect of any losses that it might suffer as a consequence of the scheme. Yet in neither case did the members of the court differentiate between the guarantee and the indemnity. He referred to the judgments of Neill LJ (373D-E), Peter Gibson LJ (375C) and Hobhouse LJ (379E-H) in Waltham Forest, and to that of Peter Gibson LJ (with whom Hirst and Pill LJJ concurred) in Sutton (p.617). As a matter of fact that is correct - in those cases no distinction was drawn between a guarantee and an indemnity. But I do not see why any such distinction in those cases would have been relevant. The key to the decision in each case was that the scheme as part of which the guarantee and indemnity were given was not a scheme within the lawful exercise of the powers of the council, regulated as those powers were by the provisions of the housing legislation. The only issue was whether the giving of the guarantee and indemnity could be justified under s.111 of the 1972 Act as incidental to the discharge by the council of its functions. It was held that it could not be so justified. Nothing turned on whether any distinction could properly be drawn between the guarantee and the indemnity. So it is not surprising that the members of the court did not address that point.

[180] The second point which, as I understood it, Mr Moynihan sought to take from these cases was that statutory bodies cannot by-pass controls on borrowing or other financial transaction by entering into novel arrangements which indirectly achieve the same result; and to see whether or not the arrangements indirectly achieve a result which, if permitted, would effectively by-pass the controls on borrowing, it is appropriate to look at the arrangements in the context of the background facts and related agreements. I do not have any difficulty with this as a general proposition.

[181] Mr Moynihan argued that the Nomination Agreement was an integral part of the arrangement whereby AMT borrowed money from A&L to fund the development and provided security for that loan in the form of (a) a standard security, (b) an assignation in security of the Nomination Agreement, and (c) the Step-in Agreement, in terms of which A&L could step in to AMT's shoes and exercise AMT's rights against the College under the Nomination Agreement. It was clear, he argued, and I accept this, that both the College (through Mr McLeish) and AMT were in contact with A&L during the negotiations for the Nomination Agreement, and that A&L had a direct influence on its terms. The 25 year term of the agreement (with a 15 year break), the cap and collar, and the level of the undertaking at 99 Rooms, were all fixed with a view to enabling AMT to raise funds, or, to put it another way, with a view to meeting A&L's requirements for granting the facility. As Mr Baxter acknowledged, the ability of AMT, as a new off the shelf company, to raise the finance for the project was dependent on "the strength of covenant of the college". In a practical sense, therefore, in entering into the Nomination Agreement, in terms of which it undertook that 99 of the Rooms would be taken up and paid for, in the knowledge that the bank would be given the right to step-in to AMT's position under that agreement to enforce the undertaking against the College, and in the knowledge that it was only on the strength of this undertaking that AMT would be able to secure the funding to enable it to proceed with the project, the College was providing a guarantee to the bank; and that guarantee required the prior consent of the Scottish Ministers.

[182] I do not accept this argument. Although it was suggested in evidence that the College was not in the business of running residences, and that may be true as a matter of the priorities which the board had set itself, the College certainly had the power to do so. In terms of s.12(2)(e) of the 1992 Act, the board of management has the power

"to provide facilities of any description appearing to the board to be necessary or expedient for the purpose of or in connection with the carrying on of any of the activities mentioned in this subsection or in subsection (1) above (including boarding accommodation and recreational facilities for students and staff and facilities to meet the needs of students who have learning difficulties and disabled staff)" [emphasis added]

In terms of s.12(2)(h)(ii) it may enter into contracts with respect to carrying out such activities. There is also the power in s.12(2)(m) to do all such other things as are calculated to facilitate or are incidental or conducive to the carrying on of such activities. There are no doubt many different ways in which the College could provide boarding accommodation for students, including in the accommodation in Granton in the building proposed to be developed by AMT. Looking to the situation as it stood in 2009, one posibility might have been for the College to agree to enter into a 25 year lease of the building (with a 15 year break clause), or a similar length tenancy of 99 rooms in the building, on the basis that it would then sub-let the rooms to students. On the strength of the College's covenant, AMT might have been able to raise finance from a bank in order to go ahead with the development. And there might have been an assignation in security and a Step-in Agreement as happened here. Whether such an arrangement would have appealed to the various participants and enabled finance to be raised and the project to go ahead, I cannot judge. But such considerations are, in any case, not in point. The point is that such an arrangement (an agreement to lease the building or take a tenancy of a number of rooms in it) would clearly have been permissible in terms of s.12(2)(e), (h)(ii) and (m) of the 1992 Act, without there being any requirement for prior consent from the Scottish Ministers. Yet such arrangements could no doubt be characterised, as Mr Moynihan seeks to characterise the arrangements involving the Nomination Agreement, as being part of an arrangement by which the College, in agreeing to take a lease or a tenancy, was in effect guaranteeing AMT's borrowing. Although for no doubt good reasons the College chose to go down the route of the Nomination Agreement rather than agreeing to take a lease or tenancy, the substance of the undertaking it gave, that 99 of the Rooms would be taken up and paid for, is not significantly different. It would be wrong to characterise the arrangements into which the College entered, and in particular the Nomination Agreement, as being in substance either a guarantee or, alternatively, a device to avoid the requirement for prior consent in s.12(7).

[183] In my opinion, therefore, the Nomination Agreement is not a guarantee or indemnity requiring prior written consent. The ultra vires defence fails at this first hurdle.

[184] In light of this decision, the other two issues relating to the ultra vires defence do not arise. However, in case this matter should go further, I should briefly give my views on them.

Issue (ii) if the Nomination Agreement did require prior consent, was there deemed consent by virtue of the dispensation in paragraph 14 of the SFC's Mandatory Requirements?

[185] This discussion proceeds on the assumption, contrary to my opinion, that the Nomination Agreement is to be regarded as a guarantee or indemnity. It assumes that consent is required from the Scottish Ministers under s.12(7) of the 1992 Act. It proceeds on the basis that the Scottish Ministers have delegated their power to grant consent to the SFC; and that the SFC has published certain criteria in terms of which their consent is to be taken as having been given to certain arrangements falling within them. Although para.14 of the mandatory Arrangements refers to consent not being required in certain circumstances, parties have proceeded on the basis that this, in effect, means that blanket consent is to be taken to have been given to arrangements falling within the criteria, and I propose also to proceed on that basis.

[186] It is important, in my opinion, to observe that, in a case where blanket consent is given in a published document, the dictates of certainty require that the application or otherwise of that blanket consent to any particular arrangement should be capable of being ascertained and understood by the informed reader with an interest in the question. Since the question of consent goes to the vires of entering into agreements with other parties, an institution governed by the Mandatory Requirements as well as any commercial third parties affected by the agreement must be entitled to proceed on an interpretation of the terms of the relevant paragraphs which is objectively sound. It cannot be contemplated with any equanimity that the validity or otherwise of a transaction on which a third party has relied can be governed to any extent by a subjective interpretation of the published criteria within the SFC. It follows that although, as I have said earlier, the evidence of Mr Fairbairn in particular as to the meaning and application of particular paragraphs of the Mandatory Requirements is entitled to great respect, so also is that of others who have to work with that document and who can consider it from the point of view of institutions and others who may be affected by it.

[187] Para.14 provides that prior written consent is not required for the arrangement if (i) an actual or effective value can be calculated for it and if (ii) the actual or effective value is less than 4% of total annual income (I leave out of account the alternative sources from which that annual income can be derived or estimated).

[188] I have no doubt that an actual or effective value can be calculated. The work "effective" appears to me to point to a requirement for some degree of estimation of the potential liabilities. That calculation must therefore, in my opinion, involve some process of estimation, taking account of forecasts which are perceived to be realistic. It must proceed on a reasonable and informed basis. It would not be reasonable, in my opinion, to assume that the rooms will all be filled throughout the period of the arrangement, though that is obviously what the College hopes will be achieved). But nor would it be reasonable, absent compelling evidence, to proceed on the basis that there would be zero occupancy over the whole of the 15 years until the break option could be exercised. No doubt any calculation of the value should err on the side of caution. I am not in a position to make any such calculation, but ultimately that does not matter, since the real issue here turns on a question of principle.

[189] That question of principal is as to whether para.14 of the Mandatory Requirements involves a like for like comparison of the kind clearly envisaged by para.7, which puts the annualised cost of capital finance against the total annual income. The wording of para.14 is not as clear as that. But in my opinion it does not need to be. The meaning must be understood in the context of para.13. Consent must be obtained before lending, or giving a guarantee or indemnity or letter of comfort. In most if not all such cases, the actual or estimated value can be seen as a one-off occurrence. With a loan, the risk is that the loan will not be repaid, and the actual or effective value of the arrangement is the amount of the loan plus any interest. With a guarantee, the potential risk is that the guarantee will be called upon, and the actual or effective value is likely to be the amount of the underlying obligation covered by the guarantee. The typical situation, though probably not the only one, is a one-off occurrence. A proper comparison is between the total potential exposure and the total annual income, on the basis that the total annual exposure is likely to crystallise in one year. The guarantee in the present case, if it is one, is of a maximum value each year of just over £500,000. I can see no practical reason for not comparing the total annual income with this figure rather than with the total potential exposure over 15 years of about £8m. On this aspect I preferred the evidence of Mr Macrae. Although, of course, there is a theoretical risk that the College may default and that, in such circumstances, the Nomination Agreement will be brought to an end giving rise to an immediate liability of a sum in excess of £500,000, I do not consider that the terms of para.14 are directed at this. After all, the purpose of the Mandatory Requirements is to ensure that the institution does not enter into an obligation which will bring it down or will involve the injection of funds in order to preserve it. By contrast, the risk of the Nomination Agreement giving rise to a one-off liability greater than £500,000 only arises in circumstances where the College is already in difficulties.

[190] Accordingly, I would, had the point arisen for decision, have held that the comparison required in para.14 was a comparison on a like for like basis, potential annual exposure against total annual income. The £500,000 potential exposure on this basis is well within the 4% limit. I would therefore have held that the written consent of the SFC was not required, or, to put it another way, that the consent required on this hypothesis in terms of s.12(7) of the 1992 Act was deemed to have been given by the SFC.

Issue (iii) if consent was required and not obtained, what is the effect of that on the validity of the Nomination Agreement?

[191] This question too does not arise. However, my provisional view is that s.12(7) of the 1992 Act goes to the capacity of the institution to enter into an agreement of the sort covered by it. A failure to obtain consent would mean that entering into the agreement was ultra vires the College and therefore invalid; subject to this point, that although the Act appears to require prior written consent, I do not see why any defects in the validity of any agreement entered into without such consent should not be cured retrospectively by the grant of consent. This is the approach which, as I understand it, has been taken by the SFC, and I do not see any reason to challenge it.

DECISION

[192] For the reasons set out above, I consider that the challenges to the Nomination Agreement which have been focused thus far must fail. The question of authority still requires to be decided. Accordingly I shall put the case out By Order to discuss the formal interlocutor which should flow from this decision and to discuss further procedure.