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SHERIFF APPEAL COURT
2018 SAC (Civ) 27 [FAL-A101-17] Sheriff Principal M M Stephen, QC Sheriff Principal M W Lewis Appeal Sheriff P J Braid OPINION OF THE COURT in the appeal SHAHZAD WASEEM ANWAR AND AISHA ANWAR Pursuers and Respondents against
DAVID BRITTON AND LINDA BARCLAY Defenders and Appellants Respondents: Howie QC; Manson, advocate, Dentons UKMEA LLP^ Appellants: Clancy QC; Burness Paul LLP
8 October 2018 Introduction [1] The primary question of law raised in this appeal, from the sheriff at Falkirk, is the correct construction to be placed on two clauses which appear in the Scottish Standard Clauses (Edition 2) issued by the Convenor of the Law Society of Scotland Property Law Committee on 14 March 2016 and registered in the Books of Council and Session on 15 March 2016 (“the standard clauses”).
[2] The standard clauses are frequently, if not invariably, incorporated into missives for the sale and purchase of heritable property in Scotland and, as such, their meaning is we assume a matter of no little importance to the legal profession in Scotland, as well as to the parties in this action, not least as the purpose of having standard clauses is, presumably, so that the terms on which heritable property is bought and sold are clear and unambiguous, in order that litigation as to their meaning is avoided. As this case shows, in that regard, at least, the exercise has not been entirely successful. [3] The clauses the meaning of which is the subject of controversy are clauses 27.1 and 2.1.3. [4] Clause 27.1, a so called entire agreement clause, is in the following terms: “ 27 ENTIRE AGREEMENT 27.1 The Missives will constitute the entire agreement and understanding between the Purchaser and the Seller with respect to all matters to which they refer and supersede and invalidate all other undertakings, representations, andwarranties relating to the subject matter thereof which may have been made by the Seller or the Purchaser either orally or in writing prior to the date of conclusion of the Missives”. [5] As the numbering suggests, clause 2.1.3 forms part of clause 2, that clause being in the following terms: “ 2 AWARENESS OF CIRCUMSTANCES AFFECTING THE PROPERTY 2.1 So far as the Seller is aware (but declaring that the Seller has made no enquiry or investigation into such matters) theProperty (including in respect of Clauses 2.1.3 and 2.1.4 the Building, if appropriate) is not affected by: 2.1.1 any Notice of Potential Liability for Costs registered in terms of the Tenements (Scotland) Act 2004 or the Title Conditions (Scotland) Act 2003; 2.1.2 any Notices of Payment of Improvement/Repairs Grants;
[8] The alleged misrepresentation concerns whether or not the subjects were affected by flooding. A formal written offer to purchase was submitted on behalf of the pursuers on 24 May 2016. That offer incorporated the standard clauses (some of which, but not the critical clauses in this appeal, were modified in terms of the missives). The offer to purchase was conditional upon, among other things, a flood risk report in satisfactory terms being obtained. The pursuers aver that the issue of flooding was important to them and that they made the defenders aware of their intentions regarding development of the property. They further aver that a flood risk report was exhibited which classified the flood risk as low but that it recommended that the pursuers speak to the sellers to confirm whether the property or surrounding area had flooded before. [9] By email dated 14 July 2016 the defenders’ solicitors confirmed that the defenders had no experience of flooding at the subjects and the missives were concluded on 3 August
[10] The pursuers then aver, to state it briefly, that they subsequently discovered that in November 2015 the stream which passed through the subjects had overflowed and that the first defender, at least, was aware of flooding in the garden “from time to time”. [11] Following a debate on the parties’ preliminary pleas, the sheriff decided the first two issues which we have identified in paragraph [6] in favour of the pursuers. He determined, first, that clause 27, properly construed, did not exclude reliance on a misrepresentation which pre-dated the contract and, accordingly, that the pursuers’ averments regarding the email of 14 July 2016 were relevant and, second, that clause 2.1.3 should be read as warranting that the property “has not been affected by flooding from any river or water course which has taken place within the last five years”. He therefore allowed a proof
before answer on the whole of the pursuers’ averments and excluded certain of the defenders’ averments from probation. [12] As regards the third issue – whether, esto clause 2.1.3 had the meaning contended for by the pursuers, it amounted to a misrepresentation upon which the pursuers could found an action of reduction – the defenders’ position before the sheriff was that if he found against them on the construction of clause 27, as he did, the point became academic and was not insisted upon. As the sheriff did find against the defenders on the meaning of that clause, he therefore did not require to reach any decision on the third issue. However, he did express the view that, if he was wrong as to the meaning of the clause, reduction was not necessarily barred simply because the representation was embodied in a term of the contract, in circumstances where the clause was introduced at a stage prior to the conclusion of the missives. [13] The defenders have appealed against all three aspects of the sheriff’s decision. Their first ground of appeal relates to the correct construction of clause 27; their third to the correct construction of clause 2.1.3 and their second to the question of remedy in the event that the representation contained in that clause turns out to be false. Those grounds of appeal were dealt with by counsel in that order, and we do likewise in this judgment.
Approach to contractual interpretation [14] Before turning to consider those three grounds of appeal we will first say something about the approach to contractual interpretation, since both the first and third grounds of appeal directly turn on how the clauses in question ought to be interpreted. The parties were not in dispute as to the principles governing the interpretation of contracts in Scotland. It was common ground that those principles are derived from the following authorities:
regard both to the notes of argument and submissions made at the bar. We simply narrate a summary of the submissions made by each party. Counsel for the defenders submitted that the clause had dual effect. The first part of the clause prescribed what constituted the contract. The second part (from the words “supersede and invalidate” to the end) had the effect of excluding reliance by the pursuers on any representations which were not contained within the missives. The key words were “understanding” and “representations”. “Understanding” must signify something other than an agreement; and “representations” were to be distinguished from contractual terms and also from an undertaking and a warranty. The email, which related to flooding, clearly referred to the same matter as clause 2.1.3 and therefore to the subject matter of the contract. It formed part of the understanding of the pursuers but did not form part of the missives. Accordingly, the end product was that the pursuers were unable to rely upon it. The words “supersede” and “invalidate” did not prevent the clause from having that meaning and the sheriff erred in so far as he found otherwise. The word “supersede” was the more apposite of the two. It made perfectly good legal sense to say that the email was superseded by the terms of the contract. It was simply a question of contractual interpretation as to whether or not a clause had the effect of preventing a party from relying on a misrepresentation. There did not have to be an express reference to non-reliance, for a clause to have that effect. While the wording of the clauses in the case law referred to non-reliance, those words did not require to appear. Other wording could equally have the same effect. In support of his submission, counsel referred to Deepak v Imperial Chemical Industries plc [1998] 2 Lloyd’s Rep 139 and [1999] 1 Lloyds rep 387, and to Watford Electronics Ltd v Sanderson CFL Ltd [2002] FSR 19. In Deepak, at first instance, the judge had placed significance on the omission from the clause in that case of the word “representation”. By contrast, that word appeared in clause 27.
Submissions for the pursuers [17] Senior counsel for the pursuers referred to Inntrepreneur Pub Co (GL) v East Crown Ltd [2000] 2 Lloyds Rep 611 at paras [7] to [8] and to Watford Electronics. He submitted that the basic object of clauses such as the present was to obviate collateral warranties – to denude something of the legal effect which it would otherwise have had. Nothing could be taken from use of the phrase “agreement and understanding” since, as the cases illustrated, that was a phrase which was frequently used. While an entire agreement clause could also have the effect of preventing a party from relying on misrepresentations by the other, there were tried and tested means of doing that, which had not been adopted in the present case. One must assume that the Law Society of Scotland drafters were aware of those formulae. Bearing in mind the wide use to which the clause would be put and the different circumstances in which it would apply, the clause could not bear the construction put on it by the defenders. The courts construe this type of entire agreement clause strictly and in a manner which is predictable for the large number of users of the standard conditions. Turning to the wording of the clause, and having regard to the grammar of it, counsel pointed out that it was a single sentence. It led with the thing of most importance and then gave further examples of it. It was significant that the reference to “representations” fell between undertakings and warranties, which suggested that all three should be regarded as matters which were of some contractual significance. The clause had nothing to do with mis representation. It made no sense to speak of a representation being “invalidated”.
Discussion [18] Although parties tended to focus on the principles of contractual interpretation, which we have set out above, in relation to how clause 2.1.3 should be approached, those
This positioning makes it even more unlikely that the intention of the draftsman was that “representations” was intended to include something which had induced the contract or that the clause achieves two different consequences: the deprivation of legal effect from a representation which may otherwise have had that effect, and an exclusion of any entitlement to rely on a representation which turned out to be false. The natural and ordinary meaning of the words, therefore, points towards the construction contended for by the pursuers. However, to the extent that the tautology in the clause, or the other language used, does give rise to ambiguity or rival meanings, we then turn to consider the context. We note that this is a standard form contract designed to be used for many years in a variety of situations in contracts for the purchase and sale of residential property in Scotland. It is unlikely that the drafters intended that a purchaser of heritable property should, in ordinary course, not be entitled to pursue a legal remedy which he would otherwise have had. Had that been the intention, one would have anticipated that it would have been made crystal clear. It is one thing to provide for certainty as to what the contract comprises; quite another to agree not to rely on a pre-contractual misrepresentation. It is also pertinent to have in mind that, as counsel also submitted, the drafter can be taken to be aware of the pre-existing case law and of formulae which were known to work; and had it been the intention that the clause not only be an entire agreement clause but also one which excluded the right to rely on pre-contractual misrepresentations, it is not unreasonable to proceed on the basis that had the intention been as the defenders contend, wording would have had to be used which put the matter beyond doubt and had withstood the scrutiny of the courts rather than leave the matter to chance. [20] This point is reinforced by the further submission made by counsel for the pursuer, with which we also agree, that, in effect, the construction of the clause contended for by the
defenders is to exclude liability which one party would otherwise have together with the corresponding surrender of rights by the other party. As such, we agree with the dictum of Mr Justice Jacob in Thomas Witter Ltd v TBP Industries Ltd (1994) 12 Tr L 145 at 168C, cited with approval by Mr Justice Rix, the first instance judge in Deepak , at page 168 that: “…if a clause is to have the effect of excluding or reducing remedies for damaging untrue statements then the party seeking that protection cannot be mealy-mouthed in his clause. He must bring it home that he is limiting his liability for falsehoods he may have told”. [21] Finally, one of the principles of contractual interpretation is that contracts should be read as a whole. We note that clause 26 of the standard clauses expressly provides for limitation of liability and it is therefore unlikely that clause 27, which immediately follows that clause, is also intended to have that effect, by implication. [22] Accordingly, we consider that the sheriff was correct in interpreting clause 27.1 as he did. Insofar as the first ground of appeal is concerned, we will adhere to the sheriff’s interlocutor.
The third ground of appeal: clause 2.1. [23] The issue over clause 2.1.3 is a narrow one. The difference between the parties is whether the clause amounts to a warranty only as to the current condition of the property and no more, or whether it amounts to a warranty as to the defenders’ knowledge of any history of flooding at the property, within the last five years. The defenders contend for the former. They argue that the plain meaning of the clause is that it is a statement as to a present state of affairs – (“that the property is not affected by”) which has been caused by a past state of affairs – (“flooding from any river or water course which has taken place within the last five years”). The pursuers argue that the sheriff’s interpretation of the clause was
was dealing with a standard form of contract, as here, but submitted that there were rival and competing meanings, which precluded a wholly literalist approach. Was the clause talking about the present physical state of the property or its propensity to flood? Did the words “is not affected by flooding” mean no more than flooding is not to be expected? If a literalist approach reached a result that was absurd, it was unlikely to be correct, particularly in a standard form contract; and the defenders’ proposed construction did verge on the absurd. It would result in a purchaser having a remedy if the house had flooded once, last week and was still wet, but not if it had flooded multiple times in the last five years but was currently dry. What a purchaser was concerned to know was the propensity of a property to flood. The clause also had to be construed so as to give some content to the reference to a five year period.
Discussion [26] The most recent and authoritative guidance as to the approach to contractual interpretation was that given by the Supreme Court in Wood v Capita Insurance Services. In his judgment, Lord Hodge (with whom the other justices agreed) said the following (from para.13): “13. Textualism and contextualism are not conflicting paradigms in a battle for exclusive occupation of the field of contractual interpretation. Rather, the lawyer and the judge, when interpreting any contract, can use them as tools to ascertain the objective meaning of the language which the parties have chosen to express their agreement. The extent to which each tool will assist the courtin its task will vary according to the circumstances of the particular agreement or agreements. Some agreements may be successfully interpreted principally by textual analysis, for example because of their sophistication and complexity and because they have been negotiated and prepared with the assistance of skilled professionals. The correct interpretation of other contracts may be achieved by a greater emphasis on the factual matrix, for example because oftheir informality, brevity or the absence of skilled professional assistance. But negotiators of complex formal contracts may often not achieve a logical and
coherent text because of, for example, the conflicting aims of the parties,failures of communication, differing drafting practices, or deadlines which require the parties to compromise in order to reach agreement. There may often therefore be provisions in a detailed professionally drawn contract which lack clarity and the lawyer or judge in interpreting such provisions may be particularly helped by considering the factual matrix and the purpose of similar provisions and contracts of the same type. The iterative process, of which Lord Mance JSC spoke in12, assist the lawyer or judge to ascertain the objective meaning of disputed Sigma Finance Corpn [2010] 1 All ER 571, para provisions.
- On the approach to contractual interpretation, the Rainy Sky and Arnold cases were saying the same thing”. [27] Thus, it is clear that the court’s task is to ascertain the objective meaning of the words used, having regard to the language used – textualism – and the consequences of the rival constructions – contextualisim. It is an iterative process, by which the court arrives at the correct meaning. [28] Turning to clause 2.1.3, the first thing to note is the clause heading, “Awareness of Circumstances Affecting the Property”. We observe that “circumstances” is extremely broad, as indeed is the phrase “affecting the property”. Indeed, if one read the heading and turned to see what the circumstances were, the reader would see that one of those circumstances was "flooding from any river or watercourse which has taken place within the last five years”, which is at least a factor pointing towards the pursuers’ interpretation. There then follows the statement that “so far as the seller is aware the property is not affected by “any of the circumstances that follow”. We observe that the phrase “affected by” is also extremely broad. It appears in a number of places in the contract. It does not necessarily mean “adversely affected by” but could mean affected in a less pejorative sense “none of the following applies to the property”, as opposed to “none of the following has had a lasting effect on the property”. This latter meaning is also suggested by the heading.
[32] It was submitted for the defenders that draconian results would arise if the purchaser became entitled to resile due to a minor flood nearly five years ago but we do not consider that to be draconian at all. All the seller has to do to avoid that situation is to disclose flooding of which he is aware. [33] We therefore consider that the draftsman intended that clause 2.1.3 should have the meaning contended for by the pursuers, and that the sheriff was correct in so holding. Insofar as the third ground of appeal is concerned, we also adhere to the sheriff’s interlocutor in this regard.
The second ground of appeal: remedy [34] The remaining (second) ground of appeal relates to the issue of whether, in the event that clause 2.1.3 has the meaning contended for by the pursuers, and the defenders were aware of flooding within the last five years which had not been disclosed, the pursuers are entitled to regard that not only as a breach of contract but also as a misrepresentation which entitles them to the remedies of reduction of the contract and to repetition of the purchase price (and, perhaps, damages). As we have already observed, before the sheriff this became something of a non-issue, since the defenders conceded that if they were unsuccessful on the meaning of clause 27, and the pursuers were entitled to rely on the email as containing a misrepresentation, the point became academic. Before us, however, the defenders’ counsel insisted on this ground of appeal and sought to have certain averments excluded even if the defenders’ first ground of appeal failed (as it has done).
Submissions for the defenders [35] The argument before us was striking inasmuch as each counsel sought to persuade us of the correctness of their respective positions by reference to first principles, there being little authority on the point: certainly, no direct authority. In the defenders’ written note of arguments, it was submitted that the remedy of reduction was available where the consent of a party to the existence or terms of a contract was impaired to an extent recognised in law as properly requiring that party to be afforded the opportunity of having the contract set aside and be restored to his pre-contractual position. It was a fundamentally different remedy from rescission. That latter remedy was a means provided to enable a contract to be brought to an end because it had been breached. Unlike reduction it was a remedy which a party could invoke without recourse to legal authority. The pursuers’ case ignored those basic legal points. The remedy of reduction was not competent for a breach of clause 2.1.3. The pursuers’ consent to enter the contract was in no way impaired by the existence of terms of clause 2.1.3. The fact that the clause contained a statement about a quality or attribute of the subjects of sale did not transform it into a pre-contractual misrepresentation capable of giving rise to a defect in consent on the part of the pursuers. At the hearing before us, counsel also drew a distinction, under reference to McBryde , The Law of Contract in Scotland 3rd^ Edition, para. 5.45, between a term of a contract, and a representation which was part of the negotiation leading up to the contract. A statement could be one or the other but not both. The pursuers’ argument that a pre-contractual representation could acquire an additional status as a contractual term was ingenious, but untenable. The clause in question was first introduced into the contract by the pursuers’ offer and could not amount to a representation by the defenders.
a statement can be both a representation upon which a party relies in deciding to contract and also, subsequently, a term of the contract itself. We see no reason in principle why that should not be the case. Indeed, it would appear to follow from the defenders’ argument in relation to the meaning and effect of "the entire agreement clause" that, as a matter of law, that is possible. If the missives constitute the entire agreement and understanding and supersedes all prior representations (emphases added) it must follow that it is open to a party to insist that a pre-contractual representation upon which he has relied should become a term of the contract. It does not follow from the fact that the contract duly contains that term that the party has ceased to rely upon the representation. (Whether he has in fact relied upon the representation, of course, is a question of fact but we are here dealing with the question of principle as to whether a statement can be both.) To give an example, if A represents to B that his car has done only 5,000 miles, and on that basis B agrees to purchase the car, and the parties subsequently contract for the purchase and sale of a car which has done 5,000 but it transpires that the car has in fact done 50,000 miles, we see no reason why that could not give rise to either a claim for breach of contract or a claim based upon misrepresentation. There are many situations where the same facts give rise to a choice of remedies. We do not see anything in McBryde which suggests that our statement of principle is wrong. It is nothing to the point to say what remedy a party would prefer to pursue. Of course, in relation to many contractual terms, in particular those which give rise to an obligation on a party to do something, the question will simply not arise. But in relation to terms which warrant a particular state of affairs, such as in clause 2.1.3, we can see no reason, in principle, why the pursuers might not have a choice of remedy, if the warranty turns out to be false, as they aver.
[38] The question remains as to whether the pursuers have averred a relevant case, since it would not be enough simply to aver that the clause has been breached. Such an averment would amount to no more than an averment of breach of contract. The pursuers’ position in submissions was that the representation, and therefore misrepresentation, was made as soon as the qualified acceptance was issued. The defenders’ counsel sought to make something of the fact that the standard clauses were first mentioned by the pursuers in their offer, and that the representation was therefore made by them, but we do not consider that to be a correct analysis. To go back to the example of B buying a car from A, if B says to A “I will buy your car but only if you tell me that it has done no more than 5,000 miles” and A says “I agree to sell it to you on that basis” that then becomes a representation by A, and the position is no different here. The pursuers offered to purchase the subjects on the basis (as we have found) that the defenders were unaware of any flooding within the previous five years, and as soon as the qualified acceptance accepting that term was issued, that did become a representation by the defenders to that effect (whether the pursuers themselves were aware of the standard clauses is of course a different matter, but that goes to reliance rather than to the question of whether a representation was made). As far as the pursuers’ averments are concerned, we concede that they might be clearer insofar as the timing of the misrepresentation is concerned. However, on balance we consider that they are sufficiently specific to found a case based upon reliance on the representation constituted by the issuing of the qualified acceptance. In particular the averment that “But for the misrepresentations the pursuers would not have entered into the missives of sale” in article 12 of condescendence makes the pursuers’ position clear. [39] The defenders’ second ground of appeal must therefore also fail.
