Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION

[2016] CSOH 110

 

CA231/15

OPINION OF LORD TYRE

In the cause

ALBYN HOUSING SOCIETY LIMITED

Pursuer;

against

ACTIVE AIR CONDITIONING LIMITED, trading as
ACTIVE SUSTAINABLE ENERGY SYSTEMS

Defender:

Pursuer:  D Thomson;  Balfour + Manson LLP

Defender:  P Reid;  Clyde & Co

26 July 2016

Introduction

[1]        In 2009 the pursuer entered into a contract with a company called Rok Building Ltd (“Rok”) for the construction of 23 houses and flats at Simpson Park, Beauly.  Rok engaged a sub-contractor for installation of heat pumps and associated works.  A Sub-Contractor Collateral Warranty Agreement was entered into in favour of the pursuer.  The somewhat unusual issue that arises in this case is the identification of the company which granted that collateral warranty.  The collateral warranty agreement bears to have been entered into between the pursuer and a company called Active Sustainable Energy Solutions Limited.  In this action the pursuer seeks rectification, in terms of section 8 of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985, of the collateral warranty agreement by substituting the defender’s name as the granter of the warranty.  At debate, the defender sought dismissal of the action and the pursuer sought decree in terms of the conclusion for rectification. 

 

The companies

[2]        The defender is a company with registered number SC198646 which has its registered office at Forth House, Pirnhall Business Park, Stirling.  It trades under the name “Active Sustainable Energy Systems”.  Its managing director is Mr Ian Nicol.  The defender has a subsidiary with registered number SC323476 whose name is Active Sustainable Energy Systems Limited (“ASESL”).  At the time of the events with which this opinion is concerned, ASESL was dormant and had never traded.  It had the same registered office as the defender.  Mr Nicol was a director.  In the circumstances narrated below, ASESL has since been placed in liquidation.  There is no company in the group with the name Active Sustainable Energy Solutions Limited. 

 

The available contemporaneous documentation
[3]        The contemporaneous documentation made available to the court was sparse.  I was informed that this was because Rok was in liquidation and both parties had experienced difficulty in recovering documents.  The respective positions of the parties were based upon the following material.

[4]        On 16 January 2009, the Torrance Partnership, chartered surveyors acting on behalf of the pursuer, wrote to Rok accepting its tender for construction of the housing development.  The letter stated inter alia: 

“Please note that the tender amount stated above includes a prime cost sum for the supply and installation of air source heat pumps and associated works by Active Sustainable Energy Systems Ltd.  An Architects Instruction will be issued early in the project to incorporate this work into the Contract.”

 

[5]        On 11 May 2009, a quantity surveyor acting on behalf of Rok sent a letter to “Active Sustainable Energy Systems” at an address in Inverness stating: 

“We are pleased to advise you that your tender for the Heat Pump Installations has been successful and now enclose two copies each of the Subcontract Agreement Forms for signature.”

 

The sub-contract agreement was not produced.  A schedule of sub-contract terms and conditions “referred to in the foregoing Subcontract Agreement between Rok Building and [blank]” was produced.  Clause 14 thereof obliged the sub-contractor to carry employer’s liability insurance, public liability insurance, contractor’s all risks insurance for the full value of the sub-contract works, and, in respect of any design responsibility, professional indemnity insurance.  Otherwise it was not suggested that the terms and conditions contained anything of relevance to the present action. 

[6]        A health and safety assessment questionnaire had previously been completed and provided to Rok.  It was signed by Mr Nicol as managing director on 17 September 2008 and is stamped as having been received by Rok on the following day.  The company name was stated as being “Active Air Conditioning Ltd t/a Active Sustainable Energy Systems”, with an address in Aberdeen.  The questionnaire was accompanied by a Health Safety and Environmental Policy Manual bearing to be that of “Active Sustainable Energy Systems”. 

[7]        On 20 August 2009 an interim application for payment was submitted to Rok.  It was submitted by Mr Nicol as managing director of “Active Air Conditioning Limited”.  Four subsequent applications dated 29 September 2009, 26 November 2009, 26 February 2010 and 30 March 2010 were submitted on the same basis. 

[8]        On 12 and 14 October 2009, the collateral warranty agreement whose rectification is sought in this action was executed.  It contains the following heading: 

“SUB-CONTRACTOR COLLATERAL WARRANTY AGREEMENT

 

- among -

 

ALBYN HOUSING SOCIETY LIMITED, registered under the Industrial and Provident Societies Acts (A Scottish Charity No SC 027123) and having its principal place of business at 98-102 High Street, Invergordon, Ross-shire, IV18 0DL (hereinafter referred to as ‘the Company’)

 

- and –

 

ACTIVE SUSTAINABLE ENERGY SOLUTIONS LIMITED a company incorporated under the Companies Acts (Registered Number SC323476) and having its Registered office at Commercial House, 2 Rubislaw Terrace, Aberdeen, AB10 1XE (hereinafter referred to as ‘the Sub-Contractor’).”

 

The recitals narrate that the Company and the Contractor (defined in the sub-contract as Rok) have entered into a building contract for the construction of 23 houses and flats (“the Works”);  that the Contractor has entered into a sub-contract with the Sub-Contractor for the provision of design and construction services in respect of the heating installation for the Works;  and that it is a term of the sub-contract that the Sub-Contractor enters into the collateral warranty agreement.  There is nothing remarkable for present purposes about the terms of the warranty agreement.  It was subscribed for and on behalf of the Sub-Contractor by Mr Nicol. 

 

The basis of the present action
[9]        According to the pursuer’s averments, the heating and domestic hot water systems designed and installed by the sub-contractor do not conform to the pursuer’s specification of required temperature.  The pursuer avers that the sub-contractor breached its obligations in terms of the sub-contract and is accordingly in breach of the collateral warranty.  Remedial works have been undertaken by other contractors instructed by the pursuer. 

[10]      In 2013, the pursuer raised an action for damages in this court against ASESL.  Service of the summons was met by a letter from a company called FES Limited, acting on behalf of ASESL, in which it was stated that ASESL was and always had been a dormant company with no profits, income or assets, no accounting transactions and no paid employees, and that the insurers of ASESL’s parent company (ie the present defender) had confirmed that that company had the benefit of professional indemnity insurance whereas ASESL did not.  It was asserted that the action had been incorrectly raised and required to be amended “to allow us to pass this matter to the insurers and their solicitors to become involved”.  Draft defences were intimated in which it was asserted that ASESL had always been a dormant company and had no capacity to enter into the sub-contract with Rok or the collateral warranty agreement with the pursuer.  Those defences were never lodged;  instead, new agents for ASESL lodged defences which were entirely skeletal and made no reference to ASESL having been incorrectly sued.  Those agents subsequently withdrew from acting and, shortly thereafter, Mr Nicol intimated to the pursuer’s agents that an application was to be made to strike ASESL off the Register of Companies.  This letter again confirmed that ASESL had never traded.  In the light of that intimation, the pursuer sought decree against ASESL which was granted without opposition on 7 February 2014.  ASESL thereafter went into liquidation.  The pursuer has made no recovery from ASESL.

[11]      The present action was raised in late 2015.  The pursuer concludes for rectification of the collateral warranty agreement “by deleting the designation of the “Sub-Contractor” on the first page and by substituting therefor “Active Air Conditioning Limited, trading as ‘Active Sustainable Energy Systems’, a company incorporated under the Companies Acts (Registered Number SC198646) and having its registered office at Commercial House, 2 Rubislaw Terrace, Aberdeen, Scotland AB10 1XE (hereinafter referred to as ‘the Sub-Contractor’)”.  The pursuer also concludes for payment of the sum of £200,000. 

[12]      The defender’s position on record in this action is that Rok did not contract with it but contracted with ASESL.  Express reference is made to the terms of the letter dated 16 January 2009 from the Torrance Partnership to Rok (above).  It is averred that “the parties to the Warranty are clear from the face of the document.  They are the pursuer and ASESL.  The registered number and registered address of ASESL are stated in the definition of ‘the Sub-Contractor’.  Given the use of the registered number and registered address of ASESL, the reference to Active Sustainable Energy Solutions Limited is clearly intended to refer to ASESL”.  The defender further avers that ASESL contracted with Space Air Solutions Limited (“SASL”), a company with a registered office in Guildford, Surrey, to design the works and meet the pursuer’s specification.  On the hypothesis that the system design was defective, it is averred that rectification of the collateral warranty agreement would leave the defender with a liability to the pursuer but with no contractual remedy against SASL. 

 

Relevancy of the pursuer’s case
[13]      It was submitted on behalf of the defender that the pursuer’s case was irrelevant and should accordingly be dismissed.  In order to fall within the scope of section 8(1)(a) of the 1985 Act, it was necessary for the parties to the document, rectification of which was sought, to be the same as the parties to the alleged prior agreement.  The Scottish Law Commission reports upon which section 8 had been based emphasised the importance of “the parties’” agreement:  the implication was that they had to be the same parties.  The point had arisen for decision in Delikes Ltd v Scottish & Newcastle plc 2000 SLT (Sh Ct) 67, in which Sheriff Principal Nicholson QC had held that section 8(1)(a) did not admit of a case where the parties to the document and the parties to the antecedent agreement were not the same.  In Macdonald Estates plc v Regenesis (2005) Dunfermline Ltd 2007 SLT 791, the Lord Ordinary (Reed) had observed (para 177): 

“The argument in the present case also proceeded on the assumption that, where the document sought to be rectified is a contract, the parties entering into that contract must either be the same as ‘the parties to the agreement’, or at least that it must be possible to attribute the intentions of the parties to the agreement to the parties to the contract.  That appears to me to be correct…  [It] appears to me that the parties must either remain the same at the time when the document is executed as when the agreement was made, or they must be indistinguishable for the purposes of the law of contract (eg by reason of a relationship of agency).”

 

In the present case, it was submitted, that requirement was not met.  The pursuer’s case was that the prior agreement had been between the pursuer and the defender, whereas the written agreement was between the pursuer and ASESL.  As the parties were neither the same nor indistinguishable for the purposes of the law of contract, no relevant case for rectification had been made. 

[14]      In my opinion this contention proceeds upon a misunderstanding of the pursuer’s case.  As was submitted on behalf of the pursuer, its case is not that the parties to the prior agreement and the written agreement were different, but rather that they were the same, namely the pursuer and the defender, and that the error in the document requiring rectification is the insertion in the designation of the Sub-Contractor of the name “Active Sustainable Energy Solutions Limited” and ASESL’s company number, instead of the defender’s name and company number.  To treat the parties to the written agreement as being the pursuer and ASESL would be to pre-judge the issue before the court.  In my opinion no difficulty of the kind identified in Delikes and Macdonald Estates arises in the present case, and the pursuer has pled circumstances falling within the scope of section 8(1)(a). 

 

Relevancy of the defence to rectification

Argument for the pursuer
[15]      On behalf of the pursuer it was submitted that the defender’s averments did not amount to a relevant defence to the pursuer’s claim for rectification of the collateral warranty agreement.  In the alternative it was submitted that certain averments ought to be excluded from probation.  The defender’s averments did not meet the requisite standard of candour.  It was a matter of admission by the defender that “Active Sustainable Energy Systems” was the defender’s trading name;  that ASESL was at all times a dormant company;  that the health and safety information provided to Rok had identified the defender and not ASESL as the sub-contractor;  that applications for payment had been made by the defender and not ASESL;  that the sub-contract had required the sub-contractor to carry insurance;  and that the defender carried insurance but ASESL did not.  It was not averred by the defender that ASESL had ever traded or that it had ever used “Active Sustainable Energy Systems” as a trading name.  There were no averments in support of the bare assertions that Rok contracted with ASESL and not the defender and that the parties to the warranty were the pursuer and ASESL beyond references to the terms of the letter of 11 May 2009 and the warranty agreement itself.  No attempt was made to explain the material indicating that the defender was the contracting party.  In these circumstances, the court was entitled to infer that the defender had no further response to make to the pursuer’s averments, and to proceed on the basis that those averments were well-founded:  cf EFT Finance Ltd v Hawkins 1994 SC 34, Lord Ordinary (Osborne) at page 40.   

[16]      As regards the prior agreement to which the written agreement was intended to give effect, it was not necessary for it to have any outward expression beyond the objective evidence of a continuing common intention at the time when the document was executed:  see Patersons of Greenoakhill Ltd v Biffa Waste Services Ltd 2013 SLT 729, Lord Ordinary (Hodge) at paras 35 – 41.  In the present case it was obvious that the common intention was that the warranty would be granted by the party who had contracted to carry out the sub-contract works.  There was nothing in the defender’s pleadings to indicate any different common intention.  The existence of an antecedent agreement was to be assessed objectively by the court and did not depend upon the uncommunicated subjective understanding of each of the contracting parties:  Patersons of Greenoakhill (above), para 37 – 38.  It was not therefore relevant to inquire into the state of the pursuer’s awareness of the corporate identity of the sub-contractor.

[17]      It was accepted that even where there was no defence based upon any of the subsections of section 9 of the 1985 Act, the court had a discretion whether or not to grant an order for rectification.  That discretion should be exercised in favour of the pursuer.  No weight should be attached to the defender’s averments regarding lack of recourse against SASL:  it was not explained how they could have entered into a contract with a dormant company.  The previous action against ASESL was irrelevant for the purposes of these proceedings, and the granting of decree in that action had no consequences as between the parties to the present action. 

 

Argument for the defender
[18]      On behalf of the defender it was submitted that a relevant defence had been pled that ASESL, being the company with the number specified in sub-contractor’s designation, was the correct party to the sub-contract agreement.  References to ASESL had been made in the letter of 16 January 2009 and in the warranty agreement, both of which emanated from agents for the pursuer who must have thought ASESL was the contracting party.  On the basis of the letter, the parties to the sub-contract were Rok and ASESL;  the latter had been specifically named. 

[19]      The court should not exercise its discretion in the pursuer’s favour, especially as the pursuer already had a decree against ASESL.  In any event the court should not grant decree without having heard evidence at least as regards the possibility of recourse against SASL. 

 

Decision
[20]      In my opinion the critical question is:  what entity was a party along with Rok to the sub-contract?  The documentation available to the court provides no direct answer to that question.  Can it be decided in the pursuer’s favour without inquiry into the facts?  In my view it can.  The starting point is the pursuer’s averment that not only was ASESL dormant at the material time, but it had never traded.  That averment is consistent with explicit statements to that effect by agents for ASESL and by its director Mr Nicol in response to the action raised against ASESL.  In the absence of any substantive response to that averment, I am entitled, in accordance with the observations in EFT Finance Ltd v Hawkins, to proceed on the basis that it is well-founded.  On the other hand it is common ground that the defender traded at the material time and, moreover, that it traded under the name Active Sustainable Energy Systems.  The pursuer has averred, with vouching, circumstances strongly indicative of the defender as the contracting party:  these include the provision of the completed health and safety questionnaire in the defender’s name to Rok;  the interim applications for payment in name of the defender;  the carrying of insurance by the defender.  Once again, in the absence of any substantive response, I may, and do, regard these averments as well-founded. 

[21]      Against this formidable body of circumstantial evidence, the defender relies, on record and in oral submission, on nothing more than the terms of a letter from the pursuer’s agents and the very words in the warranty agreement in respect of which rectification is sought.  I attach little weight to the reference in the letter to ASESL.  There is nothing in the documentation to indicate that the sub-contractor was a nominated sub-contractor;  the terms of the letter dated 11 May 2009 from Rok to Active Sustainable Energy Systems suggest otherwise.  There is accordingly no reason to attribute any knowledge regarding company identities to the pursuer’s agents.  Having regard to the pleadings and the documentation as a whole, I find no basis for the defender’s bare averment that ASESL, a company that never traded, was a party to the sub-contract.  In the absence of any such basis, I am entitled to hold that the pursuer’s case that the party to the sub-contract was the defender is well founded, and I so hold.

[22]      From there it is, in my view, a short step to answering the question with which these proceedings are concerned, namely which company was a party to the warranty agreement with the pursuer.   The recitals to the warranty agreement narrate inter alia that it is a term of the sub-contract that the Sub-Contractor enters into the agreement.  The defender was the sub-contractor.  There is nothing produced or averred that might indicate that the sub-contract provided for the granting of a collateral warranty by a company, designed for these purposes only as “the Sub-Contractor”, other than the true sub-contractor, and in particular there is nothing produced or averred to suggest that the sub-contract provided for the granting of a collateral warranty by a dormant company with no assets and no insurance.  In my opinion the only reasonable inference to be drawn from the available and uncontentious material is that at the date when the warranty was granted, it was the parties’ common intention that it would be granted by the company which was a party to the sub-contract, ie the defender.  That being so, I am satisfied that the document entitled Sub-Contractor Collateral Warranty Agreement fails to express accurately that common intention, in respect that the heading contains the name Active Sustainable Energy Solutions Limited and the designation of ASESL instead of the name and designation of the defender.  The requirements of section 8(1)(a) are accordingly fulfilled.

[23]      It is common ground that even in circumstances not falling within any of the subsections of section 9 of the 1985 Act, the court retains a discretion as to whether to order rectification.  In my opinion, the defender has pled no relevant basis for the exercise of that discretion in its favour.  The existence of a decree against ASESL is neither here nor there;  the fact that the pursuer began by suing the wrong company, even to decree, does not preclude it from remedying its error by suing the correct one.  The existence or otherwise of any right of relief against SASL for installation of a defective system is likewise res inter alios so far as the pursuer is concerned.  If the contract with SASL was truly entered into by ASESL (as to which I can express no view because no documentation was produced), then so be it.  If on the other hand the contract with SASL was entered into by Rok’s sub‑contractor, ie the defender, the remedy of rectification may be available to the defender in the same way as it is available to the pursuer. 

 

Disposal
[24]      I shall sustain the pursuer’s second plea in law and grant decree for rectification of the collateral warranty agreement in terms of the first conclusion.  The defender has pled a defence on the merits and also has a plea of prescription.  I shall accordingly put the case out by order to discuss further procedure.  Questions of expenses are reserved.