Pursuers: Bowie QC; Anderson Strathern LLP

Defenders: McBrearty QC; Glasgow City Council

12 December 2013

Introduction

[1] In 2010 the pursuers and defenders, along with several other parties, agreed to participate in the Ultra Low Carbon Vehicle Demonstration Programme, a project operated by the Technology Strategy Board for the demonstration and operation within public sector organisations of electrically-propelled vehicles converted from conventional hydro-carbon fuelled road vehicles.

[2] The pursuers and defenders entered into a Master Vehicle Hire Agreement dated 13 and 14 July 2010 ("the master agreement") in terms of which the pursuers agreed to lease to the defenders converted electrically propelled road vehicles in exchange for payment by the defender of a monthly rental for each vehicle leased thereunder. The master agreement covered 40 vehicles, of which 30 were to be Peugeot Partners and 10 Peugeot Experts. The vehicles were to be leased for a period of three years from the date of delivery of each one ("the Contract Period"). The Rental Charge was to be £386.46 per month for the Peugeot Partners and £638.74 per month for the Peugeot Experts. For each vehicle or batch of vehicles, the parties were to enter into a Vehicle Schedule. This case concerns the 10 Peugeot Experts, which were delivered on or about 16 July 2010. I was shown the Vehicle Schedule for those vehicles. It sets out the details of the vehicles and the applicable rates of hire but adds nothing to the contractual terms set out in the master agreement.

[3] The pursuers aver and, although this is not formally admitted, the defenders accept that one of the purposes of the contract was for the defender, in collaboration with the pursuer and Strathclyde University, to trial, monitor and test the use of electrical vehicles in the Glasgow region. This was to happen during the Demonstration Period, which comprised the first 12 months of the three year lease for each vehicle. During that period, in terms of clause 10 of the master agreement, the parties agreed that they would, in collaboration with Strathclyde University, be responsible for the provision and collection of data on the operational use of the vehicle and its CO2 emissions savings. The data to be collected for each vehicle was to include: its service/repair history; speed versus time over each journey; the route gradient; battery details (voltage, current, temperature, state of charge); drive performance (motor speed, motor torque, drive temperature); charger data (to be recorded by each "home" user and at each company charging point); cumulative energy consumption during charging; and the charging profile of the vehicle or battery.

[4] However, although this is not pleaded by either party, it was not in dispute that another important purpose of the agreement was to provide the defenders, as the responsible local authority, with a fleet of vehicles capable of performing substantially in accordance with their ordinary needs. Were this not the case, the vehicles would be of little use to the defenders and the trial would be of little practical benefit. The trial was, after all, to determine the suitability of the vehicles for use by the local authority having regard, amongst other things, to the likely emission savings involved in using electrically powered vehicles.

[5] The trial did not work out as well as both parties had no doubt intended. For one reason or another, and each party blames the other, the vehicles were prone to breakdowns putting them out of service for considerable periods. I do not need to go into any of the details of why this happened. The matter has come before the court for a discussion on the procedure roll at which each party sought to exclude from probation certain specific averments relating to the defenders' contractual right to terminate the lease of a number of vehicles. It is sufficient, therefore, to take at face value the allegations relating to the extent and cause of breakdowns as informing the scope of the dispute relative to the legal point which was debated before me.

[6] I should add that initially the pursuers also challenged the relevancy of the defenders' averments about an implied term. This point was resolved by an amendment moved by the defenders at the bar. There was no objection to this amendment and agreement was reached as to a timetable for answering it. Other amendments were also proposed. I shall set out that timetable in the interlocutor consequent upon this Opinion, but otherwise the point need not be addressed any further.

The issue

[7] The issue between the parties relates to the right given to the defenders under clause 9.4 of the master agreement to terminate the lease for individual vehicles. Both parties argued their pleas to the relevancy of the other's averments. In effect, therefore, I was asked to decide the proper construction of the clause.

[8] To put the argument in context I should set out the terms of clauses 9.3 and 9.4, putting them in the context both of clause 9 as a whole and of other parts of the agreement.

Relevant provisions of the master agreement

[9] Clause 9 is headed "Vehicle Availability, Breakdown and Repairs", though it is noted in clause 1.2.4 that headings are inserted for convenience only and do not affect the construction or interpretation of the agreement. In the agreement, the pursuers are referred to as "the Company" and the defenders as "the Council". So far as material, clause 9 provides as follows:

"9.1 In the event of the breakdown, fault, failure or malfunction of any Vehicle, the Council will notify the Company of the problem forthwith, providing details of the nature of the problem and the location of the Vehicle, and the Company or its appointed agent ... will collect the Vehicle as soon as reasonably practicable following such notification. The Company will then (subject to Clause 9.2) rectify or repair the problem at its own cost.

9.2 Where a Vehicle has broken down or becomes unavailable as a result of accident or operator negligence the Council will inform the Company as soon as possible, and in all cases within two (2) working days, and arrange for repairs; all such incidents must be reported to the Company. In these circumstances the cost of repairs and any replacement vehicles provided will be borne by the Council rather than the Company. Repairs should be carried out as quickly as is reasonably practicable, but no work shall be undertaken until the Company has assessed the damage and approved the proposed repair, such approval not be unreasonably withheld and shall be notified within two (2) working days.

9.3 The working time availability of each Vehicle during the relevant Contract Period will be calculated using an hourly basis, with any part of an hour in which the Vehicle is off the road being rounded up to the next full hour. For the purpose of the calculation, available working time is defined to be 8:30 to 17:00 on any working day. Where a Vehicle has suffered repeated breakdown or loss of availability which is not the result of accident, operator maintenance or routine maintenance, such that the Vehicle has a working time availability of less than 75% in any rolling 3 month period, the Council shall be entitled to suspend payment of the Rental Charge for the Vehicle until the Vehicle is repaired and made fully available for use.

9.4 Where a Vehicle is not available for more than 25% of working time in any rolling 3 month period in the first twelve months of the relevant Contract Period, the Council will have the right to terminate the lease for that Vehicle by giving 7 days notice in writing to the Company.

9.5 Where a vehicle has broken down or becomes not available not as a result of accident or operator mentions, the Company may from time to time withdraw such Vehicle by mutual agreement and substitute for it another Vehicle ...

9.6 For the avoidance of doubt if the vehicle is not able to drive a distance of 50 miles on the maximum battery charge achievable or if the vehicle is not able to drive at speeds in excess of 30 mph the vehicle will [be] deemed to be not available.

9.7 The Company shall use its best endeavours to ensure the Vehicles are available for use throughout the project period, except where a Vehicle has broken down or become unavailable as a result of accident or operator negligence."

[10] I should also mention clause 15 to which reference was made during the course argument. This is headed "Termination". Clause 15.1 provides that the Company (the pursuers) is entitled to terminate "this Agreement or the hire of any or all Vehicles before the end of their respective Contract Periods" if the Council fails to pay any sum payable under the agreement or if there is any breach by the Council of any term or condition of the agreement. Clauses 15.2.1 - 15.2.6 give the Council the option of terminating the agreement in certain circumstances including: the failure by the Company to remedy any material or persistent breach of the agreement; the Company going into liquidation or having an administrative receiver, receiver or manager appointed, or ceasing or threatening to cease to carry on the business; the Company becoming "substantially unable, whether for reasons within or beyond its control, to fulfil its obligations to hire the Vehicles to the Council"; and the Company having been incompetent in its performance of the agreement, or having been guilty of gross misconduct therein, or having been seriously or persistently negligent in relation thereto. Clauses 15.2.7 - 15.2.9 deal with the consequences of termination: the right to claim damages or to recover monies due under the agreement is preserved, and provision is made for the retaking of possession. To a large extent, as was submitted by Mr Bowie QC for the pursuers, these reflect the position at common law in the sense that they give a right of termination for material breach, but clause 15.2.5 goes rather further and gives the Council the right to terminate even when the inability to perform is not within the control of the Company.

Submissions in outline

[11] The issue between the parties concerns the proper interpretation of clause 9.4. The defenders say that it gives them a right to terminate the lease for a vehicle where that vehicle is not available for a period or combination of periods totalling more than 25% of working time in any rolling 3 month period in the first twelve months of the lease. They say that the wording of clause 9.4 is perfectly clear. It ties in with clause 9.3 where the obligation to pay the rental charge is suspended if, in any rolling 3 month period during the whole three year period of the lease, the vehicle suffers repeated breakdowns or loss of availability (which are not the result of accident, operator negligence or routine maintenance) so that its working time availability is less than 75%. The language of clause 9.4 follows on from that. Whereas clause 9.3 provides that that working time availability of less than 75% is the trigger for the suspension of the obligation to pay the rental charge for the vehicle until the vehicle is repaired and returned to full availability, clause 9.4 takes that same measure of unavailability ("not available for more than 25% of working time...") and says that, if that happens within the first twelve months, the defenders have the right to terminate the lease for that vehicle. It is to be noted that the right given by clause 9.4 is a right to terminate the lease for the particular vehicle. It is not a right to terminate the lease for other vehicles or to bring the master agreement as a whole to an end.

[12] The pursuers advance a different construction. They say that clause 9.4 contemplates dividing the period of working time availability into two distinct parts. Either the vehicle is available for more than 25% of working time in any rolling 3 month period in the first twelve months of the lease, or it is not. If it is not available for more than 25% of working time in that period (i.e. if it is only available for 25% or less), then the defenders may cancel. But if it is available for more than 25% of working time in that period, they may not cancel. They say this is clear on the wording of clause 9.4. They also contend that it makes sense in the context of that clause read with clause 9.3. They point out that, on the defenders' construction of the two clauses, each has the same threshold or trigger point. In clause 9.3, that triggers an entitlement to suspend payment; whereas in clause 9.4, that triggers a right to terminate the lease for that vehicle. They say that it does not make sense to have the same trigger for the two very different consequences. Since clause 9.4 has the more serious consequence of termination, it is likely that the parties intended the threshold for the right to terminate under that clause to be higher than the threshold for the right under clause 9.3 simply to suspend payment.

Discussion

[13] There was no dispute between the parties as to the principles of construction of a commercial contract. Under reference to a number of the well-known cases, to which I need not therefore refer, four relevant principles were identified. These were: (i) that the aim of the court in construing a commercial contract was to ascertain objectively the aim of the parties; (ii) that, for this purpose, the court must put itself in the position of a reasonable person in possession of all background information reasonably available to the parties; (iii) that, when unambiguous language had been used, the court will normally give effect to that language; and (iv) that when there are two possible interpretations, the court will prefer that which makes the most commercial sense.

[14] It is convenient to start by looking at the wording used by the parties in clause 9.4, having regard to the surrounding provisions and to the master agreement as a whole. Questions of construction are often matters of impression. My first impression on reading clause 9.4 in its context - and it was a very clear first impression - was that it allowed the defenders, in the first twelve months of the three year period of hire, to terminate the lease for a particular vehicle where that vehicle was unavailable for more than 25% of available working time in any rolling 3 month period. That is the construction advanced by the defenders.

[15] The point is not capable of much elaboration. However, it seemed to me that "not available" as used in clause 9.4 simply meant "unavailable". Parties were agreed that the expressions used in clause 9.4 should be read with clause 9.3 in mind. Thus, "available working time" means the period from 8:30 to 17:00 on any working day. "Working time availability" describes the time when the vehicle is available for work. That is to be contrasted with "loss of availability", or the vehicle being "not available" - I note that the terms "not available" and "unavailable" are used interchangeably in clauses 9.2, 9.5, 9.6 and 9.7. For this purpose, any breakdown or loss of availability which is the result of accident, operator negligence or routine maintenance is discounted. When over a rolling 3 month period the vehicle is available to work ("has a working time availability") for less than 75% of available working time, the obligation to pay the rental for that vehicle is suspended. That is the effect of clause 9.3. If that happens during the first twelve months - and I emphasise that it is only if it happens during the first twelve months - the defenders have the right to terminate the lease for that vehicle. That is the effect of clause 9.4. There is an obvious difference in the way in which each clause is formulated. While in clause 9.3 the trigger for the entitlement to suspend payment of the rental charge is expressed in terms of "working time availability of less than 75%", the trigger for the right to terminate the lease of a particular vehicle in clause 9.4 is expressed in terms of the vehicle being "not available" (or unavailable) "for more than 25% of working time". But in substance there is no difference between the two. They mean the same.

[16] Despite Mr Bowie's able submissions, the argument for the pursuers seems to me to involve a strained and somewhat artificial reading of clause 9.4. He sought, as it were, to insert a pause between the word "not" and "available ..." in the first line. In other words, he understood the concept of the vehicle being "available for more than 25% of working time" as defining a minimum tolerable level of performance; and suggested that the right to terminate the lease for a particular vehicle only accrued where the vehicle was not available even for that relatively small percentage. On his submission, if the vehicle was available for 30% of the time, or even for only 25%, there would be no right to cancel. I do not read the clause in that way.

[17] Although I cannot say that the pursuers' construction is impossible as a matter of syntax, I would require to be persuaded that it was clearly more commercially sensible before I would let it prevail over what I regard as the more natural meaning. I am not so persuaded. The agreement between the parties is to be set against the background facts, known to both of them, that this was intended as a trial of electric vehicles in Glasgow. That had two aspects to it: first, the technical aspect of assessing performance, reliability and, in particular, emissions; and, second, the practical aspect of assessing the suitability of electrically powered vehicles for use by the defenders in their day to day business as a local authority. I am not confident that those background facts shed much light on the proper construction of clause 9.4, but in so far as they shed any light it seems to me that they favour the defenders' construction. Looking at the matter objectively, for the period of the trial, and for the whole three year period of the lease of each vehicle, the defenders needed to be able to rely upon the vehicles to perform their ordinary regular functions, though it can be assumed that they might be prepared, recognising that it was a trial, to tolerate a higher degree of non-performance or non-availability than they would have tolerated had this been an ordinary commercial lease of vehicles. To that end, according to clause 9.3 they were obliged to continue to pay hire for the vehicle even when it was available for only 75% of the time. By the same token, they could not terminate the lease of that particular vehicle if it was available for only 75% of the time (or unavailable for up to 25% of the time). According to the pursuers' argument, however, their right to terminate the lease of any particular vehicle only arose if it was unavailable for more than 75% of the time. It does not seem to me very probable that a council would have agreed to put up with vehicles which were only working for 25% of the time they were meant work. That would, I suspect, cause massive disruption.

[18] Mr Bowie argued that the remedy of terminating under clause 9.4 was draconian by comparison with the right to suspend payment of hire under clause 9.3. He went on to suggest that it would therefore be surprising if the right to terminate had the same trigger as the right merely to suspend payment. He contrasted this with what he described as the "common law" rights of termination set out in clause 15 of the master agreement. It was to be expected, he argued, that a right to terminate should arise only in the case of material breach. His construction of clause 9.4, where the right to terminate the lease arose only if the vehicle was out of action for more than 75% of the time, fitted with that common law approach.

[19] I am not persuaded that that is the correct way to look at it. With the exception of the right given to the Company in clause 15.1, the rights to terminate given in clause 15 are rights to terminate the agreement. It is to be expected that the right to terminate the agreement would arise only on a serious or material breach by the other party. Clause 15 goes on to reserve the right to claim damages. The right in clause 9.4 is much more limited. It is a right to terminate the lease for the particular vehicle that is not performing well. That is all. It does not give a right to terminate the agreement as a whole, nor does it give a right to terminate the lease of any other vehicles of the 40 intended to be provided under the master agreement. Further, that right to terminate the lease of any particular vehicle only applies to the first twelve months of its three year lease. If the vehicle performs adequately during the first twelve months, there is no continuing possibility of terminating under clause 9.4 if it underperforms thereafter. For both these reasons, the comparison with the common law or clause 15 right to rescind for material breach is unjustified. Indeed it is not necessary to read clause 9.4 as implying that the unavailability triggering the right to terminate the lease of any particular vehicle amounts to a breach of contract soundly in damages. Many contracts contain contractual rights to cancel separate and distinct from rights to rescind for material breach. A cancelling clause in a charter party is one such example: see e.g. Marbienes Compania Naviera v Ferrostaal AG (the Democritos) [1976] 2 Lloyd's Rep. 149. So it is wrong, in my opinion, to approach clause 9.4 as though it should be expected to set a threshold equivalent to that which at common law would give rise to a right to rescind.

[20] Finally, Mr Bowie sought to rely upon the contra proferentem principle, or at least the version of it which suggests that a term in a contract should be construed against the party seeking to rely on it to get out of his obligations thereunder: see McBryde, The Law of Contract in Scotland, third ed., at paragraph 8-40. I do not think that that helps here. It applies only when the clause relied upon is ambiguous. Although I have recognised that the pursuers' construction is a possible one, I do not consider that there is any real ambiguity. So the principle does not apply here. Even if it did, I am not wholly persuaded that it would be right to regard the defenders as the proferens even in the sense to which I have referred. While it is true that the defenders seek to rely upon the clause to justify terminating the lease of a particular vehicle which, on their case, does not work, it is equally true that the pursuers seek to interpret the clause in such a way that the defenders are stuck with what they allege is a seriously underperforming vehicle. In those circumstances it is difficult to say who is seeking to rely upon the clause to get out of their obligations under the contract.

[21] I am unpersuaded by the arguments for the pursuers on the construction of clause 9.4. My first impression is also my last. I consider that clause 9.4 gives the defenders the right to terminate the lease for a particular vehicle where that vehicle is unavailable for more than 25% of working time in any rolling 3 month period in the first twelve months of the Contract Period. In those circumstances I conclude that the defenders' averments concerning clause 9.4 are relevant and the pursuers' averments on the same point are irrelevant.

Disposal

[22] As indicated earlier, I propose to put the case out by order to give parties an opportunity of agreeing which averments, if any, require to be deleted in light of my decision on the question of construction. If they would find it more convenient to have the by order hearing after they have carried out whatever amendments were already contemplated, and wish to take my decision into account in making further amendments, I am happy that they should delay bringing the case back before me until that is done.

[23] I am grateful to counsel for their helpful and concise arguments.