Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2012] CSOH 131
CA170/11	OPINION OF LORD WOOLMAN in the cause MOUNTWEST 838 LIMITED Pursuer; against BACKMUIR TRADING LIMITED Defender: ________________

Act: Primrose QC, O'Brien; Davidson Chalmers LLP

Alt: Reid QC, Barne; Drummond Miller LLP

15 August 2012

Introduction

[1] Mains of Cairnbrogie and Craigie's Farm ("the Subjects") lies in Aberdeenshire. It is a valuable working farm owned by Backmuir Trading Limited ("Backmuir"). On 30 April 2009 Backmuir entered into a contract with Mountwest 838 Limited ("Mountwest"). It is known as "the Windfarm Agreement". I was informed that it forms part of a wider commercial arrangement between the parties. [2] Under the Windfarm Agreement, Backmuir granted an option to Mountwest to develop a windfarm at the Subjects. The option period is ten years, with a right to extend for a further five years. Its main features can be summarised as follows. Mountwest is authorised to apply for planning permission and other necessary consents. Backmuir has a right to see and make representations about the proposed application before it is submitted to the planning authority.

[3] If Mountwest obtains the necessary permissions, it can choose to exercise the option. In that event Backmuir must grant a twenty five year lease of part of the Subjects for the purpose of erecting a maximum of six wind turbines. A draft lease is annexed to the Windfarm Agreement, in which Mountwest is "the Tenant" and Backmuir "the Landlord".

[4] In June 2011 Mountwest lodged a planning application of the type envisaged. It failed to send a copy to Backmuir in advance. When it learned of matters, Backmuir terminated the Windfarm Agreement. Mountwest maintains that it was not entitled to do so.

[5] Accordingly the issue can be stated shortly - was the Windfarm Agreement validly terminated? The facts are largely agreed. Neither party believes that a proof is necessary to determine matters. They accept that the decision turns on a proper construction of the agreement, together with an analysis of the parties' conduct and communications.

The Key Provisions

[6] The dispute centres on two provisions. Clause 6 regulates planning applications:

"6.1 The Tenant shall provide to the Landlord a copy of any proposed application for planning permission (including for the avoidance of doubt an Environmental Statement or Environmental Impact Assessment) prior to submission of the same to the relevant Planning Authority. The Landlord shall be entitled to comment thereon and the Tenant shall use all reasonable endeavours to take into account the reasonable representations (if any) of the Landlord as to the terms of the said planning application and where appropriate to amend the terms of the said application to meet the Landlord's concerns. In the event that the Landlord has not responded giving reasons within fourteen days of receipt of the relevant proposed application the Landlord shall be deemed to have approved the terms thereof. Both parties shall be obliged to act reasonably and having regard to the purposes of this Agreement. In the event that the parties cannot agree a form of application that is entirely satisfactory to both parties, the Tenant shall have sole discretion as to the terms of the said application and shall be entitled to submit the same."

[7] Clause 6 contains a further five sub‑clauses, which deal with a variety of matters relating to the planning application and other consents. Mountwest has the right "to amend, substitute, vary or withdraw any applications made": clause 6.2. Backmuir is under a duty to cooperate in securing permission: clause 6.3. Once the application is lodged, Mountwest is obliged to provide quarterly planning reports and take "due cognisance of any reasonable representations" made by Backmuir: clause 6.3. Backmuir cannot "object to any Applications made or Appeals taken by" Mountwest: clause 6.4.

[8] Clause 7.1 is the termination provision:

"The Landlord may determine this Agreement by written notice to the Tenant if:-

7.1 the Tenant materially fails to perform or observe any of its obligations in this Agreement and such failure or event is incapable of remedy or it is capable of remedy and the Landlord have [sic] served on the Tenant written notice specifying the failure or event and requiring it to be remedied within a reasonable time (to be specified in the notice and taking into account the nature of the obligation in question) and the Tenant has failed to do so;"

[9] The dispute resolves into three questions. First, was there a material failure by Mountwest? Secondly if so, was it remediable? Thirdly, did Backmuir serve a valid notice of termination?

The Planning History

[10] According to Mountwest, it made a number of unsuccessful applications to develop a windfarm at the Subjects prior to 2011. In December 2008 it applied to erect four (later reduced to three) wind turbines. Applications were also made in early 2010 and again in autumn 2010. They were not sent to Backmuir, but it was aware of them and did not complain that the clause 6.1 procedure had not been followed. Indeed it facilitated the applications. It allowed planning officials to come on to the Subjects. It also permitted windsocks to be erected at the site of the proposed turbines.

[11] The present dispute arises out of an application made in June 2011. Mountwest avers that during the course of a telephone call on 4 June 2011, one of its directors told a director of Backmuir of Mountwest's intention to submit a further planning application. He explained that the only material difference from previous applications was that permission was only sought for two wind turbines. Those averments are denied. Backmuir admits, however, that on the same date it received an email from Mountwest attaching a plan that showed the proposed location of two turbines at the Subjects.

[12] On 7 June 2011 Mountwest submitted the application to Aberdeenshire Council. It explains its failure to send a copy of the planning application to Backmuir in advance as an oversight.

Correspondence following the Planning Application

[13] It is necessary to set out the wording of the ensuing correspondence between the parties in some detail. On 9 August 2011 Backmuir wrote direct to Mountwest in the following terms:

"It has come to our attention that an Application for Planning Permission has been submitted to Aberdeenshire Council for the erection of two wind turbines ...

In terms of the Windfarm Agreement entered into between us at the time we purchased Mains of Cairnbrogie in April 2009, Mountwest is under certain obligations in terms of clause 6.1. Mountwest has failed to perform and observe any of its clause 6.1 obligations. We require you to remedy this failure if it is capable of being remedied. Insofar as clause 6.1 requires Mountwest to provide certain documentation, this documentation should be provided in accordance with the terms of clause 6.1 within a period of 21 days.

This letter is served in accordance with clause 7.1 of the Windfarm Agreement."

The reason why Backmuir apparently changed its attitude to the absence of advance notice in respect of this planning application is not clear. Mr Reid suggested that it had become frustrated with the history of unsuccessful applications and had decided to call a halt to matters.

[14] Stronachs LLP, acting on behalf of Mountwest, replied by first class recorded delivery post on 23 August 2011. Their letter began by referring to the letter of 9 August and continued:

"As you are aware, the planning application relative to the proposed windfarm has been submitted. We understand that you were made aware of the proposed application prior to its submission and were given the opportunity at that point to comment on the same.

Nevertheless, in accordance with the terms of your said letter, we now enclose herewith full copies of the planning application and supporting documentation in accordance with the provisions of Clause 6.1 of the Windfarm Agreement. Although the application has been submitted, that obviously does not preclude Mountwest from using reasonable endeavours to take cognisance of any reasonable representations that may be made by you and amending the application should that be necessary.

We therefore look forward to receiving any comments that you may have on the terms of the documentation within fourteen days of your receipt hereof, all in accordance with the terms of said clause 6.1 of the Windfarm Agreement."

The relevant documents were all enclosed with the letter.

[15] Backmuir's solicitors are R & R Urquhart LLP. They did not respond to Stronachs' letter until 11 October 2011, when they wrote:

"Mountwest failed to perform and observe its Clause 6.1 obligations. Notice to remedy this failure, if it was capable of being so remedied, was served on Mountwest in accordance with Clause 7.1 of the Windfarm Agreement by letter dated 23 August 2011. Despite service of this Notice, Mountwest has failed to remedy the breach of Clause 6.1.

Notice is hereby given that Backmuir, having served a notice on Mountwest seeking it remedy its breach of the Windfarm Agreement and that breach not having been remedied by Mountwest, by this letter determines the Windfarm Agreement and holds it as at an end in accordance with the terms of Clause 7.1."

[16] In their reply of 17 October 2011, Stronachs stated that the notice of termination was ineffective. They pointed out that R & R Urquhart had mistakenly referred to the date of the original notice as being 23 August 2011. Stronachs also commented:

"The wording of the Notice is somewhat difficult to follow but we think that it can only be interpreted in the following way i.e. your clients stated that our clients were in breach of Clause 6.1 insofar as that clause requires Mountwest to provide certain documentation and that our clients were required to remedy that breach by providing that documentation within a period of 21 days."

[17] R & R Urquhart wrote back to Stronachs on 23 November 2011:

"In terms of the Minute of Agreement your clients were to provide our clients with the full copies of the proposed application for planning permission and all relevant documentation prior to the planning application being submitted. This has not been done. The service of the papers after the application was submitted for planning does not remedy that breach ... The service of the papers later was thus ineffective."

Backmuir enclosed a replacement notice of termination dated 23 August 2011 in identical terms to the previous notice, dated 11 October 2011.

[18] Stronachs' replied on 30 November 2011:

"We refer to your letter of 23^rd November 2011 enclosing what you refer to as a replacement Notice. We find it difficult to understand why you would think it appropriate to send a further Notice to our clients backdated to 23^rd August 2011. You did not as a matter of fact send a Notice to our clients on 23^rd August 2011. Your purported Notice appears to have been sent and dated 11^th October 2011. It would be quite improper for your clients to instruct you to send a backdated Notice so that they could argue that the Agreement had been terminated prior to receipt of our letter 23^rd August 2011 and it would be improper for your Firm to act on instructions to that effect.

We also note that your purported replacement Notice wrongly refers to a Notice being served on our clients in terms of Clause 7.1 by letter dated 23^rd August 2011. This letter was dated 9^th August 2011."

Was the Failure Material?

[19] Mountwest is in breach of contract. It did not comply with clause 6.1. But that does not of itself entitle Backmuir to terminate the Windfarm Agreement. Before clause 7.1 is engaged, it must first be established that Mountwest materially failed to perform or observe its obligations.

[20] Whether or not this failure was material involves interpreting the contract. Lord Clarke of Stone‑cum‑Ebony has recently restated the proper approach as follows:

"the ultimate aim of interpreting a provision in a contract, especially a commercial contract, is to determine what the parties meant by the language used, which involves ascertaining what a reasonable person would have understood the parties to have meant. ... the relevant reasonable person is one who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract." Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900, at para. 14

[21] The siting of wind turbines at any farm is likely to be a matter of great importance. Their placement may affect many agricultural operations: the amenity of livestock, the movement of farm traffic and the development of arable land. No doubt any farmer would have a keen wish to be involved in a decision as to their location.

[22] In this case the Windfarm Agreement imposes further restrictions on Backmuir. It is prohibited from cultivating land or erecting structures within a minimum distance of the turbines: clause 12.1 and Schedule Part 9 para. 1 of the draft lease. It is also prevented from pursuing its own development proposals on land in the vicinity of the windfarm without Mountwest's consent: clause 6.4.

[23] Clause 6.1 is therefore a provision of some significance to Backmuir. It provides it with a measure of protection. Backmuir has the right to see the proposed application and to make representations about it. Nor can they be ignored. Mountwest must use all reasonable endeavours to take them into account. It cannot act arbitrarily or capriciously. Both parties are enjoined to act reasonably and to have "regard to the purposes of this Agreement".

[24] The protection afforded by clause 6.1 can be contrasted with the position after an application is lodged. At that stage Backmuir has significantly less influence. Mountwest is obliged to provide quarterly reports about the progress of the planning application. It is only required, however, to take "due cognisance of any reasonable representations" made by Backmuir.

[25] Mr Primrose submitted that Mountwest's omission to provide the documentation in advance was not a material failure. He advanced three arguments in support of this approach. First, clause 7.1 should not encompass a material breach of an immaterial obligation. To do so would allow Backmuir to take advantage of the time and expense Mountwest had invested in the planning application.

[26] Secondly, Backmuir had not taken exception to at least two prior applications where its prior approval had not been sought. Accordingly, it could be inferred that it did not attach importance to the provision. Thirdly, it is important to look at the consequences of any alleged breach to determine if it was material: EDI Central Ltd v National Car Parks Ltd 2011 SLT 75, stated at para. [111] per Lord Glennie. As Backmuir does not offer to prove that it intended to comment on the planning application, it suffered no prejudice.

[27] In my view, however, the parties' clear intention was to make clause 6.1 a material obligation. By omitting to follow the consultation procedure, Mountwest deprived Backmuir of an important right: Gloag on Contract 2^nd ed. pp 602-613. Mr Primrose relied on EDI Central Ltd v National Car Parks Ltd 2011 SLT 75, where Lord Glennie stated at para. [111]: "In most cases, the materiality of a breach cannot be assessed without looking at the consequences of it." In my view, however, EDI can be distinguished. It concerned the different question of materiality in relation to retention and rescission.

[28] My starting point is to look at the whole contract. Its purpose is to facilitate Mountwest's wish to develop a windfarm at the Subjects. But there are built in checks drawn in Backmuir's favour, of which clause 6.1 is the most important. It is a carefully drawn provision which clearly delineates the procedure to be followed by Mountwest in making a planning application.

[29] On a commercial construction, the parties did not intend that right to be illusory. Rather, they provided a mechanism which allowed Backmuir to influence the planning at a critical stage in the procedure. Any request for an alteration by Backmuir is much more likely to be sympathetically received by Mountwest before rather than after any application is lodged.

[30] Interpreting the clause in that way, in my view it is not ambiguous. The parties intended that it should be a material obligation. As Mountwest completely failed to comply with its terms, I hold that it materially failed to perform its duty in terms of clause 6.1. It deprived Backmuir of an important right which went to the root of the agreement: Gloag on Contract 2^nd ed. pp 602-613. There is no plea of waiver or personal bar which would suggest that the planning history should be examined. Any doubt about Backmuir's attitude was dispelled by the letter of 9 August 2011.

[31] Construing clause 6 in that manner does not ignore the fact that the decisive say on planning matters lies with Mountwest. It can override any representation made by Backmuir. In my view, however, the absence of a right of veto highlights the importance to Backmuir of having a right to be heard at the initial stage of the process. That was what parties intended: cf EDI Central Ltd v National Car Parks Ltd 2011 SLT 75.

[32] For these reasons, I conclude that Mountwest did materially fail to perform its obligations under the Windfarm Agreement. Clause 7.1 is therefore engaged.

Could the Failure be Remedied?

[33] Clause 7.1 distinguishes between material failures that can be remedied and those that cannot. In this case, Mountwest's omission to send the planning application with supporting documents was plainly capable of a remedy. The application was at an early stage. The local planning committee was still to consider it. Mr Reid accepted that the situation was remediable.

Did Backmuir Provide a Valid Notice of Termination?

[34] In the case of a remediable failure, clause 7.1 stipulates that before Backmuir can determine the Windfarm Agreement, it must serve on Mountwest:

"written notice specifying the failure ... and requiring it to be remedied within a reasonable time (to be specified in the notice and taking into account the nature of the obligation in question)"

[35] Mr Reid described clause 7 as "a bespoke irritancy clause". I am inclined to agree. Once a failure occurs, it places a very powerful weapon in the hands of the landlord. But I take a different approach to Mr Reid in reviewing whether it was engaged here. In my view, the potency of the clause suggests that Backmuir must adhere to its precise requirements. Mountwest is entitled to know both the nature of the alleged failure and the period within which it must be cured. In other words, there is an essential equity underlying clause 7.

[36] One would expect Backmuir's written notice of termination to be pellucid. In my view, its letter of 9 August cannot be characterised in that way. It starts by expressing a doubt as to whether or not the failure can be remedied. The use of the term 'insofar' hints that the failure was not remediable. But that is contradicted, or at least queried, by requiring Mountwest to provide the documentation within a period of 21 days "in accordance with the terms of clause 6.1"

[37] What would the reasonable recipient draw from that letter? In my view such a person would read it as intimating that Mountwest needed to send Backmuir the relevant planning documentation within twenty one days. More importantly, if that was done, then that complied with its clause 6.1 obligation.

[38] Mr Reid submitted that the reference to clause 6.1 led to a different construction. He argued that it was implicit in Backmuir's letter that the planning application had to be withdrawn. Sending the relevant documents after the application was lodged did not protect Backmuir. By that stage, clause 6.1 no longer applied. Its scope was confined to the pre-application stage.

[39] In this case Mountwest not only sent the relevant material with its letter of 23 August 2011. It also offered to take Backmuir's representations into account and, if necessary, to amend the application. In my view the omission was remedied in accordance with the express wishes of Backmuir.

[40] The matter can also be approached by asking a slightly different question. Was the mischief created by Mountwest's omission cured? In Savva v Houssein [1996] 2 EGLR 65 a tenant changed the signage at commercial premises without consent. The landlord purported to forfeit the lease on the basis of an irremediable breach. The Court of Appeal held that the breach was capable of remedy. Staughton LJ said:

"In my judgment, except in the case of a breach of covenant not to assign without consent, the question is: whether the remedy referred to is the process of restoring the situation to what it would have been if the covenant had never been broken or whether it is sufficient that the mischief resulting from a breach of the covenant can be removed. When something has been done without consent, it is not possible to restore the matter wholly to the situation which it was in before the breach. The moving finger writes and cannot be recalled. That is not to my mind what is meant by a remedy, it is a remedy if the mischief caused by the breach can be removed."

[41] I hold that the mischief was cured. Backmuir asked for the documents. Mountwest supplied them in return. If Backmuir had wished to insist on Mountwest withdrawing its application and beginning the process again, that was a simple message to convey. It could have been easily and clearly set out in its letter. It should not have been left unsaid. Clause 7.1 requires Backwest to specify both the failure and the period within which it is to be remedied. The letter of 9 August did not indicate any time limit for carrying out any steps, other than the supply of documentation.

[42] I therefore hold that the purported termination of the Windfarm Agreement was invalid. There is also a question mark against the formal validity of the Notice of Termination dated 11 October 2011. In my opinion, in such an important matter, as a termination notice, all dates should be accurate. It is unsatisfactory that Backmuir relies on a notice with an erroneous date (23 August 2011).

Conclusion

[43] As I hold that Mountwest is entitled to succeed, I shall grant orders for declarator and reduction as sought in the first and third conclusions of the principal action and dismiss the counterclaim.