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You are here: BAILII >> Databases >> Scottish High Court of Justiciary Decisons >> THE HOWGATE SHOPPING CENTRE LIMITED v. PINWISE LIMITED [2001] ScotHC 100 (5th September, 2001) URL: http://www.bailii.org/scot/cases/ScotHC/2001/100.html Cite as: [2001] ScotHC 100

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THE HOWGATE SHOPPING CENTRE LIMITED v. PINWISE LIMITED [2001] ScotHC 100 (5th September, 2001)

[1] The pursuers in this action are the landlords of shop premises forming Unit Three, The Howgate Centre, Falkirk ("the subjects"). They sue the first defenders, GLS 164 Limited, as tenants, and the second defenders, Pinwise Limited, as guarantors, in respect of rent and other charges. The first defenders have not entered the process. The second defenders, however, dispute that they are bound as guarantors of the tenants' obligations under the lease. The case was appointed to debate on the second defenders' plea to the relevancy of the pursuers' averments.

[2] No formal lease of the subjects was executed. The rights and obligations of the parties fall to be determined by reference to missives of let entered into between Messrs Cole & Co ("C&C"), solicitors, and Messrs Henderson Boyd Jackson ("HBJ"), solicitors, in August 1998.

[3] C&C, by letter dated 7 August 1998 (No. 5/1 of process) addressed to HBJ, offered on behalf of the pursuers to lease the subjects to Optchannel Limited ("Optchannel") on certain terms and conditions. The lease was to be for a period of twenty five years from 9 April 1998. The rent was to be £95,000 per annum subject to upwards only review at specified intervals.

[4] Clause 5.1 of the offer was in inter alia the following terms:

Clause 5.2 provided:

[5] In the draft lease (No. 5/23 of process) the term "guarantor" was defined as meaning the second defenders. Clause 12 of the draft lease provided inter alia that:

[6] HBJ responded to the offer by qualified acceptance dated 14 August 1998 (No. 5/2 of process) in inter alia the following terms:

Apart from the introduction of the reference to Optchannel's nominee, the acceptance was unqualified.

[7] By letter dated 17 August 1998 (No. 5/4 of process), which was expressly stated not to be intended to form, and not to form, part of any contract, HBJ stated:

[8] By letter dated 19 August 1998 (No. 5/3 of process) C&C responded to the qualified acceptance of 14 August in the following terms:

[9] The pursuers' case is that the effect of the missives was to bind the second defenders as guarantors of the tenants' obligations under the lease. After narrating the exchange of the missives and the other documents mentioned in paragraphs [2] to [8] above, and after making reference to clause 5.1 of the offer, they aver:

[10] The pursuers then go on to make averments about circumstances prior to the exchange of missives. They aver:

[11] Finally the pursuers add the following averment about events subsequent to the conclusion of the missives:

[12] The primary submission advanced by Mr Johnston on the second defenders' behalf was that the pursuers' averments were irrelevant, and that the second defenders' first plea-in-law should therefore be sustained and the action dismissed. Alternatively, he submitted that if a proof before answer were allowed, there should be excluded from probation (a) the averments of prior communings between C&C and HBJ, and (b) the averment about the letter of 27 July 2000 written by McGrigor Donald.

[13] In the first place, Mr Johnston submitted that a contract which was concluded by offer and acceptance between two parties could not be held to bind a third party. In that connection he cited Gloag on Contract at 257:

There was no sign in HBJ's qualified acceptance that it was intended to be executed on behalf of the second defenders. What the pursuers sought to say was that acceptance on behalf of Optchannel was, by virtue of clause 5.1 of the offer, deemed to include acceptance for the second defenders. That was not an acceptable construction of the clause. There was no reason why the second defenders should be affected by the terms of an offer not addressed to them. For the second defenders to have become bound as guarantors, there would have had to be an acceptance expressed as having been made on their behalf as well as on behalf of Optchannel. Clause 5.1 was not a provision which had the effect that any acceptance would fall to be construed as an acceptance made on behalf of the second defenders, whether it bore to be made on their behalf or not; all it did was call the offeree's attention to the need for an acceptance on behalf of the second defenders as well as on behalf of Optchannel if a bargain was to be concluded. The response required by clause 5.1 was an acceptance that bore to be on behalf of the second defenders as well as on behalf of Optchannel.

[14] Secondly, Mr Johnston advanced an argument to the effect that the missives could not bind the second defenders because there was no compliance with the applicable provisions of the Requirements of Writing (Scotland) Act 1995 ("the 1995 Act"). Section 1(2) provides inter alia as follows:

In terms of section 1(7) a lease for more than a year is an interest in land. Section 2 provides:

In this case the guarantee obligation said to have been undertaken by the second defenders fell within the scope of section 1(2)(a)(i), because the guarantor undertook liability in certain circumstances to fulfil the obligations of the tenant. There was nothing in the qualified acceptance in the present case to suggest that it had been subscribed by or on behalf of the second defenders. There was therefore a failure of compliance with the provisions of the 1995 Act. As I understood him, however, Mr Johnston accepted that if HBJ were in fact the agents of the second defenders and the qualified acceptance could be construed as written on their behalf as well as on behalf of Optchannel, HBJ's subscription of the qualified acceptance would be sufficient to satisfy the requirements of the 1995 Act.

[15] Mr Johnston then turned to deal with the pursuers' contention that the fact that the qualified acceptance expressed no qualification or rejection of clause 5.1 meant that it had to be construed as an acceptance on behalf of the second defenders as well as Optchannel. He accepted that nothing was said in the qualified acceptance about the second defenders. He submitted, however, that it was wrong to start from a presumption that an acceptance met the offer in all respect in which there was no express qualification. The question was what the offer and acceptance, read together, meant. In this case the missives took precedence over the draft lease, where there was any discrepancy between them (see the first sentence of clause 5.1). Although the draft lease bore to impose obligations on the second defenders, the missives did not do so, because of the application of the ordinary rules about offer and acceptance. The letter of 14 August (No. 5/2 of process) was a qualified acceptance, albeit there was only one brief qualification. It therefore fell to be construed as a rejection of the original offer and a counter-offer. That counter-offer was then accepted on the pursuers' behalf. In that connection Mr Johnston referred to Rutterford Ltd v Allied Breweries Ltd 1990 SLT 249 per Lord Caplan at 252E-I:

On that analysis, the contract in the present case was therefore constituted by the qualified acceptance as counter-offer and C&C's acceptance thereof. Those documents were silent as to the second defenders.

[16] Mr Johnston submitted that the averments of prior communings between the solicitors were themselves irrelevant, and therefore added nothing to the relevancy of the pursuers' case. He referred to McBryde on Contract, § 19-11:

The cases concerning the admission of evidence about surrounding circumstances or the background matrix of fact were not in point, because they were concerned with the construction of a contract admitted or held to have been concluded. Here the issue was whether any contract binding the second defenders had been constituted. No amount of resort to extrinsic circumstances could overcome the fact that the qualified acceptance was not executed by or on behalf of the second defenders. The averments of prior communings were therefore irrelevant and, if a proof was to be allowed in other respects, should be excluded from probation.

[17] Finally, Mr Johnston submitted that the averment about the letter of 27 July 2000 in which McGrigor Donald stated that the second defenders were guarantors of the lease was irrelevant, and should be excluded from probation if a proof was otherwise to be allowed. Except perhaps as part of the foundation for a case of personal bar (and no such case was made here), an averment about a statement made after the date on which the contract was said to have been concluded was not relevant to the issue of whether the contract had indeed been concluded. In support of the proposition that subsequent conduct was irrelevant, Mr Johnston cited McBryde on Contract § 19-13.

[18] Mr Haddow for the pursuers accepted that in order to create a contractual relationship it was necessary for an offer to be accepted. He referred to Wylie and Lochhead v McElroy and Sons (1873) 1 R 41 per Lord Neaves at 44. He submitted that the test of whether or not a contract had been concluded was an objective one. The interpretation of an offer or an acceptance could be assisted by reference to the matrix of fact known to the parties at the time. That was as relevant when interpreting an offer or acceptance to see whether consensus in idem had been achieved as it was in interpreting a contract where it was admitted or held that a contract had been concluded. Mr Haddow referred to Bank of Scotland v Dunedin Property Investment Co Ltd 1998 SC 657. He cited in particular two passages in the opinion of Lord President Rodger, first at 661E-H, where his Lordship expressed approval of the guidance given by Lord Steyn in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1998] AC 749 at 771A that in interpreting a commercial document the court should apply the commercially sensible construction, and began the process of construction by asking himself what the ordinary meaning of the words in question was, and secondly at 665F where, after acknowledging the need to consider surrounding circumstances, his Lordship said:

Mr Haddow also referred to the opinion of Lord Caplan at 676F-677A, and in particular to his Lordship's quotation from the speech of Lord Wilberforce in Prenn v Simmonds at 1385:

In the present case the pursuers' contention was that the parties' commercial aim was the creation of a lease supported by a guarantee. The averments of prior communings were relevant to support that.

[19] Mr Haddow also cited a passage from the judgment of Bowen LJ in Carlill v Carbolic Smoke Ball Co Ltd [1893] 1 QB 256 at 269:

The language of that dictum, he submitted, was applicable in the circumstances of the present case.

[20] Mr Haddow disavowed any general proposition that a party might, simply by stipulating in an offer that acceptance was to be treated as made on behalf of a third party, procure that that third party became a party to the contract. His proposition was more narrowly confined to the circumstances of this case. It was that, against the background of negotiations in which the tenants' solicitors had also been acting as agents for the proposed guarantors, in which the contract which had been drafted was a tripartite one involving landlords, tenants and guarantors, and in which the tenants' and guarantors' solicitors had been involved in revisal of the guarantee provisions of the draft lease, the stipulation in the second sentence of clause 5.1 was properly to be construed as more than just a reminder to the tenants' solicitors that an acceptance on behalf of the guarantors as well would be required, and as amounting rather to a stipulation that an acceptance would fall to be treated as an acceptance on behalf of the guarantors as well as on behalf of the tenants. That stipulation left it open to HBJ to respond to the effect that the tenants accepted the offer but either that the guarantors did not accept it or that they [HBJ] had no instructions to accept it on the guarantors' behalf. No such qualification was expressed. The acceptance was (save for the introduction of Optchannel's nominee as tenant) unqualified. Against the background that HBJ had negotiated the draft lease on the basis that it would be tripartite, it was inconceivable that they meant, by accepting the offer without any qualification of clause 5.1, to accept on behalf of the tenant only and not on behalf of the guarantor as well, as that clause contemplated.

[21] Mr Haddow accepted that the ordinary rule of offer and acceptance was that a qualified acceptance constituted a rejection of the offer and a counter-offer which was then open for acceptance by the original offeror. He pointed out, however, that the content of the counter-offer could only be ascertained by looking at the terms of those parts of the original offer that were not rejected in the qualified acceptance (Uniroyal Ltd v Miller & Co Ltd 1985 SLT 101 per Lord Allanbridge at 107). It was therefore wrong to suggest that a contract, constituted by the qualified acceptance (No. 5/2 of process) and the acceptance (No. 5/3 of process), made no reference to the position of the second defenders as guarantors. On the contrary, the content of a contract so concluded incorporated the whole terms of the original offer (No. 5/1 of process) and through it the draft lease (No. 5/23).

[22] The issue before me is whether the pursuers have made a relevant case that the offer (No. 5/1 of process), the qualified acceptance (No. 5/2 of process) and the acceptance (No. 5/3 of process) constitute a contract to which the second defenders are a party and in terms of which they are bound as guarantors of the tenants' obligations under the lease. In approaching that issue it seems to me to be appropriate to recognise at the outset a number of points made on the second defenders' behalf which are unfavourable to the pursuers' case. First, the offer (No. 5/1 of process) bears to have been addressed to HBJ as solicitors for the tenants. More importantly, the qualified acceptance (No. 5/2 of process) is expressed as made on behalf of the tenants. There is nothing on the face of that letter to suggest that it was written on behalf of the second defenders as well. On that issue the final acceptance (No. 5/3 of process) adds nothing. The appearance is therefore of a bi-partite contract between the pursuers and the tenants. Secondly, as Mr Johnston submitted, the law of contract does not allow two parties, by a contract between them, to throw liability onto a third party. If, therefore, the outward appearance of the missives is an accurate reflection of their true substance, there can be no liability on the second defenders' part. The issue comes to be whether, despite the outward appearance of the missives, the qualified acceptance was truly an acceptance on behalf of the second defenders as well as an acceptance on behalf of the tenants. The pursuers say that that issue should be answered in the affirmative. They support that contention by maintaining (i) that HBJ were acting as agents of the second defenders as well as of the tenants, and (ii) that the missives are properly to be construed as containing an acceptance on behalf of the second defenders of the guarantee obligations contemplated in the draft lease. The first of these points cannot be resolved at this stage as a matter of relevancy. The contention for the second defenders, however, is that the second point can be resolved in their favour at this stage, and that if that is done the pursuers' case is irrelevant.

[23] In support of their construction of the missives, the pursuers place considerable reliance on the terms of clause 5.1 - "your acceptance of this offer inter alia, will be on [the second defenders'] behalf in respect of such guarantee". If attention is focused exclusively on the words of that provision, it may be open to more than one construction. It might be capable of being construed, as Mr Johnston suggested, as merely indicating that what the pursuers' solicitors contemplated was that the tenants' solicitors would express any acceptance as an acceptance on behalf of the second defenders as well as on behalf of the tenants. The pursuers' contention, however, is that it goes further than that and sets up a situation in which the tenants' solicitors are put on notice that an acceptance will be treated as and held to constitute an acceptance on behalf of the second defenders. The view taken of that issue would colour the view to be taken of the qualified acceptance. Although it is expressed as made on behalf of the tenants, the effect of clause 5.1 might be that it would fall to be construed as made on behalf of the second defenders as well. It is not, in my view, appropriate to attempt to resolve that question of construction without reference to the surrounding circumstances in which the missives were written. There is, in my view, no doubt that it is legitimate, and may often be necessary, to approach the task of construction with the circumstances known to the parties at the time of contracting in mind. That is, in my view, made clear in Bank of Scotland v Dunedin Property Investment Co Ltd and the other authorities discussed in that case. Mr Johnston's attempt to exclude as irrelevant what he characterised as averments of prior communings in my view failed to take proper account of the distinction drawn by the Lord President in the passage from his opinion in Bank of Scotland v Dunedin Property Investment Co Ltd at 665F quoted in paragraph [18] above. In my opinion the averments quoted in paragraph [10] above clearly fall into the category of circumstances to which regard may properly be had as part of the matrix of fact against the background of which the contract was entered into. What the pursuers seek to do by those averments is establish that the missives were written against the background of negotiations in which HBJ had been acting as solicitors for the second defenders as well as for the tenants, and had participated in the adjustment of a draft lease which was clearly intended to be a tripartite contract binding the guarantors as well as the landlords and the tenants. Mr Johnston's attempt to distinguish the line of authority admitting evidence of background circumstances on the ground that it was concerned with cases involving the construction of an admitted or proved contract, whereas here the issue, so far as the second defenders are concerned, is whether they entered any contractual relations with the pursuers at all, was in my view unsound. Although here the issue is whether there was a contract concluded between the pursuers and the second defenders, that issue turns in part on the proper construction of the terms of the offer and the qualified acceptance. It would in my view make no sense to apply different criteria to the construction of contractual documents when considering their meaning in order to see whether a contract has been concluded from those which would be applied to the task of construing the same documents if the conclusion of a contract had been first admitted or established.

[24] In addition to the impact of clause 5.1 (construed in light of the background circumstances) on the construction of the qualified acceptance, the pursuers are also, in my view entitled to place reliance, in support of the relevancy of their case, on the fact that the qualified acceptance, while expressed as made on behalf of the tenants without any reference to the second defenders, contains nothing qualifying clause 5.1 and accepts it in full. If the position had been that HBJ (having previously, as the pursuers aver, acted as the second defenders' solicitors in relation to the proposed transaction) no longer had instructions to act for them, or that the second defenders were actually unwilling to be bound as guarantors, it seems to me to be unlikely that HBJ in their capacity as the tenants' solicitors would have regarded it as satisfactory to accept on the tenants' behalf an offer to enter into a tripartite lease involving guarantors when those guarantors were withholding their consent to be bound. The absence of any qualification of clause 5.1 in the qualified acceptance therefore seems to me to be capable of being prayed in aid of the construction contended for by the pursuers.

[25] There is, in my view, no merit in Mr Johnston's submission that the pursuers' contention is precluded by the rules as to the effect of a qualified acceptance. As cases such as Rutterford Ltd and Wolf and Wolf show, a qualified acceptance constitutes (a) a rejection of the original offer which precludes subsequent acceptance of it, and (b) a counter-offer which is open for acceptance by the original offeror. But it cannot follow, as Mr Johnston appeared to argue, that the original offer falls out of consideration altogether. Reference to it is necessary if the qualified acceptance is to be understood. To the extent that it is accepted in the qualified acceptance the offer is, in effect, incorporated into the counter-offer. In the present case, where the qualification was restricted to the addition of the possibility that the lease might be taken in name of a nominee of the original tenant, the effect is that the entirety of the original offer is incorporated into the qualified acceptance.

[26] Nor in my view is there any merit in the suggestion that the missives fail to comply with the 1995 Act. The issue here is whether HBJ, in accepting, subject to the one qualification, the original offer, did so as agents for the second defenders as well as for the tenants. If they did, their subscription of the qualified acceptance satisfies the requirements of the 1995 Act. If they did not, there is no contract, and no question as to compliance with the 1995 Act arises.

[27] The one remaining point is whether the averment about the letter of 27 July 2000 (see paragraph [11] above) should be excluded from probation. In my view it should not. It seems to me that it is not an averment about subsequent acting of the parties to a contract of the sort that is in some circumstances held to be irrelevant to the construction of the contract. Whether on its own it is a point of any real significance seems to me to be doubtful, but since I propose to allow a proof before answer, I take the view that the determination of the relevancy of that averment, which will make no material contribution to the length or complexity of the proof, is best left until that proof takes place.

[28] For the reasons which I have set out I am of opinion that it cannot be said as a matter of relevancy that the construction of the missives for which the pursuers contend is unsound. Whether HBJ did act at the material time as agents for the second defenders can only be determined by proof, and therefore the task of construing the missives to see whether they will in that case bear the construction that the qualified acceptance was given on the second defenders behalf can likewise only be determined after proof. In my view, the averments of background circumstances are relevant to that task of construction, and therefore ought not to be excluded from probation.

[29] I shall therefore allow a proof before answer on the whole averments in the summons and defences as adjusted and amended, with both parties' preliminary pleas standing. In order to discuss what further procedure will be necessary in preparation for the proof, I shall put the case out By Order.