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OUTER HOUSE, COURT OF SESSION

[2017] CSOH 63

CA117/16

OPINION OF LADY WOLFFE

In the cause

MOOR ROW LIMITED

Pursuer

against

DWF LLP

Defender

Pursuer:  Sandison QC;  Pinsent Masons LLP

Defender:  Fairley QC;  DWF LLP

7 April 2017

Introduction
[1]        The pursuer and the defender were formerly landlord and tenant, respectively, under a sublease of certain commercial office premises comprising four floors of Dalmore House in Glasgow (“the Premises”), and which came to an end on 27 June 2016 (“the Lease”).  Both parties are assignees of the original parties to the Lease, but nothing turns on this.  The pursuer was, in turn, the tenant under a head-lease of the Premises (“the Head Lease”) and which came to an end on the same date as the Lease. A company known as Tarn Crag Limited (“Tarn”) were the successors to the landlord’s interest under the Head Lease.  Tarn is averred to be an associate company of the pursuer, but the precise nature of that association is not disclosed in the pleadings.

[2]        On 20 January 2016 the defender gave notice to terminate the Lease.  By letter dated 10 February 2016 the pursuer served a schedule of dilapidations on the defender.  A terminal schedule of dilapidations (including a corrected one) was subsequently served on the defender in August 2016.  It is a matter of agreement that the defender carried out none of the dilapidation works identified.  In this commercial action the pursuer seeks payment of (1) the sum of £906,294.35, which is said to be the cost of the dilapidation works, together with interest at the judicial rate; and (2) the sum of £4,600 representing the costs incurred in preparation of the schedule, together with “pactional” interest at the rate of 4% over the base rate of the Royal Bank of Scotland.  The pleadings relative to this second conclusion referred to clause Seven of Part IV of the Schedule to the Lease. The original basis of the pursuer’s action was one of damages for breach of certain obligations said to be owed by the defender under the Lease.  In adjustments added shortly before the debate, the pursuer added a case for indemnity by the defender of the obligations the pursuer owed to Tarn, as head landlord under the Head Lease.

[3]        The defender resists the pursuer’s claims, essentially on the basis that it doubts whether there is any intention to carry out the repairs identified in the schedule of dilapidations.  It avers that the Premises are being marketed for sale.  At the debate before me, the defender challenged the relevancy of the pursuer’s pleadings and moved for dismissal either on the basis that the pursuer’s action was premature and incompetent (in terms of its first plea‑in‑law) or that it was irrelevant (the second plea‑in‑law). The pursuer did not move its preliminary plea.

[4]        I begin by setting out the relevant terms of the Lease and Head Lease and certain passages of the pleadings.

 

The Head Lease

[5]        In terms of clause Fourth the tenants of the Head Lease bound themselves to observe and perform the obligations set out in Part IV of the Schedule to the Head Lease, which includes clauses Eight and Nine of part IV of the schedule. For ease of reference later in this opinion, I have inserted roman numbering into clause Nine. These clauses are in the following terms:

EIGHT         TO LEAVE IN GOOD REPAIR

 

At the expiry or sooner termination of the foregoing Lease and subject to the Tenants carrying out, to the reasonable satisfaction of the Landlords, all restoration works properly called for by the Landlords in terms of Clause TWELVE of this  Part of this Schedule quietly and without any warning away or other process of law notwithstanding any law or practice to the contrary to surrender to the Landlords the Leased Subjects together with subject to the foregoing all additions and improvements made thereto and all fixtures (other than trade or tenant’s fixtures affixed by the Tenants or any sub-tenant or other authorised occupier) in or upon the Leased Subjects or which during the currency of the foregoing Lease may have been affixed or fastened to or upon the same and that in such state and condition as shall in all respects be consistent with full and due performance by the Tenants of the obligations herein contained.  Without prejudice to the foregoing generality, at their own cost and expense to repair and make good to the reasonable satisfaction of the Landlords all damage including damage to paint work caused by the removal of trade or tenant’s fixtures affixed to the Leased Subjects by the Tenants or any sub-tenant. (emphasis in italics added.)

 

NINE           TO PERMIT LANDLORDS TO ENTER AND TO REPAIR ON NOTICE

 

[i] To permit the Landlords or their surveyors or agents or in accordance with his provision such workmen as may be authorised by them respectively, with all necessary appliances, at all reasonably convenient hours in the daytime on reasonable prior notice to the Tenants except in case of emergency to enter the Leased Subjects and take a plan of and examine the state of repair and condition of the same and subject to the remaining provisions of this Lease to carry out insurance valuations and for all other necessary and proper purposes and to make inventories of the fixtures and fittings to be surrendered subject always to the provisions of Clause TWELVE of this part of the Schedule [ii] at the expiry of the foregoing Lease and within three calendar months or such longer or shorter period as shall be reasonable in the circumstances after notice in writing to the Tenants of all defects and wants of reparation or breaches by the Tenants of their obligations under the terms of the Lease properly found on such examination shall have been given to the Tenants or left at the Leased Subjects, to repair reinstate and make good the same according to such notice and the provisions in that behalf hereinbefore contained and [iii] in case the Tenants shall make default in so doing it shall be lawful for workmen or others to be employed by the Landlords to enter upon the Leased Subjects, with all necessary appliances, and repair, reinstate, make good and restore the same in like manner as had been properly required in accordance with the terms of this Lease of the Tenants and [iv] all expenses including Surveyors’ fees properly incurred thereby shall within fourteen days of demand be paid by the Tenants to the Landlords with interest thereon at the rate and on the basis chargeable on unpaid rent by virtue of Part III of this Schedule from the date of demand until paid and [v] in the event of the Tenants not paying such expenses within three months from the date of demand, this shall constitute a material breach of the foregoing Lease.” (emphasis added,  in italics and bold font.)

 

[6]        For completeness, I note that the Head Lease precluded reference inter alia to the headings used in the Head Lease as they were “inserted for convenience of reference and are deemed not to form part of these presents nor shall they affect the construction thereof”:  clause Seventeenth.  Neither party drew attention to a like provision in the Lease.

 

The Lease
[7]        The Lease made express reference to the Head Lease (in Definitions (a)) and it followed a similar format to the Head Lease, in that by clause Fifth the tenant bound itself to observe and perform the obligations set out in Part IV of the Schedule to the Lease. In this action, the pursuer founds on clauses Six (repair obligation) and Thirty‑one (indemnity).  A repair obligation is also set out in clause Six of Part IV of the Schedule, and to which the defender made reference.  Again, for ease of reference later in this opinion, I have inserted roman numbering in clause Seven. These clauses are in the following terms:

SIX             TO LEAVE IN GOOD REPAIR

At the expiry or sooner termination of the foregoing Sub-Lease and subject to the Sub-Tenants carrying out, to the reasonable satisfaction of the Mid-Landlords in terms of Clause TEN of this Part of this Schedule quietly and without any warning away or other process of law notwithstanding any law or practice to the contrary to surrender to the Mid‑Landlords the Premises together with subject to the foregoing all additions and improvements made thereto and all fixtures (other than trade or tenant’s fixtures affixed by the Sub-Tenants or any sub-undertenant or other authorised occupier) in or upon the Premises or which during the currency of the foregoing Sub-Lease may have been affixed or fastened to or upon the same and that in such state and condition as shall in all respects be consistent with full and due performance by the Sub-Tenants of the obligations herein contained.  Without prejudice to the foregoing generality, at their own cost and expense to repair and make good to the reasonable satisfaction of the Mid-Landlords all damage including damage to paint work caused by the removal of trade or tenant’s fixtures affixed to the Premises by the Sub-Tenants or any sub-undertenant. [Emphasis added.]

 

SEVEN         TO PERMIT LANDLORDS TO ENTER AND TO REPAIR ON NOTICE

[i] To permit the Landlords and the Mid-Landlords or their respective surveyors or agents or in accordance with this provision such workmen as may be authorised by them respectively, with all necessary appliances, at all reasonably convenient hours in the daytime on reasonable prior notice to the Sub-Tenants except in case of emergency to enter the Premises and take a plan of and examine the state of repair and condition of the same and, subject to the provisions of this Sub-Lease, to carry out insurance valuations and for all other necessary and proper purposes and to take inventories of the fixtures and fittings to be surrendered, subject always to the provisions of Clause TEN of this Part of the Schedule, [ii] at the expiry of the foregoing Sub-Lease and within three calendar months or such longer or shorter period as shall be reasonable in the circumstances after notice in writing to the Sub-Tenants of all defects and wants of reparation or breaches by the Sub-Tenants of their obligations under the terms of the Sub-Lease properly found on such examination shall have been given to the Sub-Tenants or left at the Premises, to repair reinstate and make good the same according to such notice and the provisions in that behalf hereinbefore contained and [iii] in case the Sub-Tenants shall make default in so doing it shall be lawful for workmen or others to be employed by the Landlords or the Mid-Landlords to enter upon the Premises, with all necessary appliances, and repair, reinstate, make good and restore the same in like manner as had been properly required of the Sub-Tenants in accordance with the terms of this Sub-Lease and [iv] all expenses including Surveyors’ fees properly incurred thereby shall within fourteen days of demand be paid by the Sub-Tenants to the Landlords or the Mid-Landlords as the case may be with interest thereon at the rate and on the basis chargeable on unpaid rent by virtue of Clause FOUR of Part III of this Schedule from the date of demand until paid and [v] in the event of the Sub-Tenants not paying such expenses within three months from the date of demand, this shall constitute a material breach of the foregoing Sub‑Lease. [vi] In the exercise of the said rights the Mid-Landlords shall take all reasonably practicable steps to avoid damage or to or destruction of any part of the Premises or of tenants fittings or fixtures or any movable property therein and shall make good any such damage as is thereby caused. [emphasis added,  in italics and bold fonts]

 

THIRTY       TO FULFIL OBLIGATIONS OF LEASE RELATIVE TO PREMISES

ONE

Without prejudice to the other provisions of this Sub-Lease to fulfil all the obligations of a non-monetary nature undertaken by the Mid-Landlords in terms of the Lease in so far as they relate to the Premises and to free and relieve and indemnify the Mid-Landlords of and against all claims against the Mid-Landlords and all costs and expenses suffered by the Mid‑Landlords and all costs and expenses suffered by the Mid-Landlords arising out of the non‑performance by the Sub-Tenants of any such obligations. “

 

For the sake of brevity, I will refer to the clauses of the Lease and Head Lease (as the case may be), without narrating each time that these clauses are in fact found in part IV of the schedule, respectively, to the Lease or Head Lease.

 

The Pleadings

The Pursuer’s Pleadings

[8]        The essence of the pursuer’s case is that the defender did not leave the Premises in a state consistent with its performance of the obligations owed as tenant under the Lease.  After referring to the general duty in clause Fifth of the Lease, the pursuer summarised in Article 3 of its adjusted pleadings the different obligations founded upon, namely:

“In terms of Clause FIFTH of the Lease, the Defender undertook to the landlord to perform the obligations set out in Part IV of the Schedule annexed to the Lease.  Without prejudice to that generality, and under reference to the more precise expression of each such obligations contained in the Lease, it obliged itself:

 

(a) To accept the Premises in good and tenantable condition and at all times throughout the period of the lease well and substantially to repair, maintain, renew, reinstate, decorate, cleanse, heat, air, glaze and generally in all respects put and keep the Premises and every part in good and tenantable and substantial repair and condition, and if necessary to renew, replace, restore or rebuild the same; which obligation subsisted irrespective of the cause of damage or destruction and if necessary renewing and rebuilding (Clause Three of the said Part of the Schedule);

 

(b) During the last year of the period of Lease to prepare and paint, treat, wax or polish all the inside wood, metal and other work of the Premises as had previously been painted, to the standard required in terms of the Lease; and to whitewash, colourwash, distemper, grain, varnish, stain, French or wax polish, paper or otherwise decorate all the inside wood and metal work and polished stone, granite and marble, or other work not required to be painted; and to clean all tiles, faience, glazed brick and similar washable surfaces inside the Premises (Clause Four of the said Part of the Schedule);

 

(c) Not to make or permit without the consent in writing of the landlord any internal alterations or additions whatsoever or internal non-structural alterations or additions in the Premises (Clause Ten of the said Part of the Schedule); and

 

(d) Immediately prior to the expiration of the Lease, (a) to remove from the Premises any fixtures and fittings installed by the tenants; (b) to complete all works called for by the landlords (Clause Six of the said Part of the Schedule); and (c) if so requested by the landlord to remove and make good any alterations and additions made to the Premises during the currency of the Lease, and well and substantially to reinstate the Premises in such manner as the landlord might reasonably direct (Clause Ten of the said Part of the Schedule).”

 

It is also averred that the pursuer undertook like obligations to the head landlord under the Head Lease.

[9]        In Article 4 the pursuer referred to clauses Six and Thirty‑one of the Lease, as follows:

“The Defender undertook at the expiration of the Lease to surrender to the Pursuer the Premises and any fixtures in such state and condition as was in all respects consistent with full and due performance of the Lease obligations (Schedule Part IV, Clause Six).  Further, the Defender undertook in terms of Clause Thirty One of Part IV of the Schedule to fulfil all the obligations of a non-monetary nature undertaken by the landlord in so far as they related to the Head Lease; meaning the lease between Ladbroke Group Properties (Scotland) Limited and Whyte & Mackay Group plc dated 22 July and 31 July 1981 and registered in the Books of Council and Session on 29 October 1991 insofar as those obligations related to the Premises, and to free and relieve and indemnify the mid-landlord (i.e. now, the Pursuer) of and against all claims against it and all costs and expenses suffered by it arising out of the non-performance by the Defender of any such obligations.”

 

After referring to Tarn’s acquisition of the Premises and the succeeding to the interests of the head landlords under the Head Lease, the pursuer averred that Tarn “intends to carry out the works”.

[10]      The pursuer avers (in Article 6) that during the currency of the Lease the defender did not perform the obligations identified and it further avers (in Article 7) that at the end of the Lease the Premises “were not in such good and substantial repair and condition as would accord with the performance of the defender” under the Lease.  

[11]      The legal bases of the pursuer’s action, as finally articulated in Article 8 (after adjustment), are as follows:

“By leaving the Premises in the state in which it left them on 27 June 2016, the Defender rendered the Pursuer liable to make reparation to Tarn Crag Limited in the sum reasonably required to put those Premises into the state in which they ought, in terms of the Head Lease, to have been left.  Tarn Crag Limited has since served a claim on the Pursuer in that regard in the principal sum of £906,294.35.  Reference is made to the said claim, set out in a letter dated 21 November 2016 from Woodcocks Haworth & Nuttall, Solicitors, with attached Scott Schedule.  The Pursuer does not consider that it has any reasonable basis to dispute the existence or nature of the various wants of repair described in the said Schedule, nor the estimated costs of repair set of therein.  The Defender is called upon to state any reasonable basis which it contends to exist for dispute of any of the said matters.  Its failure to do so will be founded upon.   In the circumstances condescended upon, the Pursuer, is entitled to, and seeks, decree for payment of the sum which it reasonably estimates will be required in order for it to make adequate reparation to Tarn Crag Limited as a result of the Defender’s breaches of its repairing obligations in terms of the Lease.    Alternatively, it seeks payment in terms of Clause Thirty One of Part IV of the Schedule to the Lease of the sum required to free and relieve and indemnify it of the claim made against it by Tarn Crag Limited arising out of the non-performance by the Defender of its repairing obligations under the Lease. In either event, that is the sums first concluded for.”

 

The Defender’s Pleadings

[12]      In answer 4, the defender responds to the pursuer’s damage claim, as follows:

“Neither the pursuer nor Tarn Crag Limited has carried out any of the works which form the subject matter of this action. The defender has seen no evidence that either the pursuer or Tarn Crag Limited intends ever to do so. If there was such an intention, either the pursuer or Tarn Crag would have (i) sought tenders for the works; (ii) agreed a price with a contractor to effect the works;  (iii) concluded a contract with such a contractor; and (iv) instructed the contractor to commence the works. On the hypotheses of fact averred by the pursuer in Article 8 of condescendence, as at 21 November 2016 Tarn Crag apparently continued to rely solely upon a Scott Schedule prepared by the pursuer’s agents, Malcolm Hollis LLP. As hereinafter condescended upon, the Premises have been marketed for sale as a redevelopment opportunity. In these circumstances, it is reasonably believed and averred that (i) no tenders have been sought for the works; (ii) no contractor has been identified; (iii) no price for the works has been agreed with such a contractor; and (iv) no contract has been concluded for the carrying out of the works. It is further reasonably believed and averred that in these circumstances neither the pursuer nor Tarn Crag truly has any intention to carry out the works, and that neither will incur any costs or expenses in so doing. On a true construction of the sub-lease, the defender assumed no payment obligation to the pursuer as an alternative to its obligations ad factum praestandum under the sub-lease. ”

 

[13]      Further, the defender’s averments in answer to the pursuer’s case based on the indemnity are as follows:

“Explained and averred that it is an express condition of the indemnity within Part IV, Clause Thirty-one of the Sub-Lease that there should have been a “claim” against the pursuer by the Head Landlord. On the hypotheses of fact averred by the pursuer, no such claim had been made when the Summons in this action passed the signet, when service of the Summons was effected, when the induciae expired, or at the date of the Preliminary Hearing. The action, insofar as it purports to be founded upon the said indemnity provision in the Sub-Lease is accordingly premature. Further and in any event, on a proper construction of the indemnity, the expression “all claims against the [pursuer]” was intended by the parties to the Sub-Lease to refer only to those sums due and resting owing to the Head Landlord by virtue of a liability owed to it by the pursuer under the Head Lease. The pursuer has presently incurred no such liability under the Head Lease, and no such sums are presently due and resting owing by it to the Head Landlord. Clause NINE of Schedule IV to the Head Lease sets out the Head Landlord’s agreed remedy in the event of a default by the pursuer in its obligations of maintenance, repair and reinstatement, whether during the Head Lease or at its ish. In particular, the parties to the Head Lease agreed that in the event of such default, the Head Landlord would be entitled to serve written notice calling upon the pursuer to remedy the default within such period as was set out in the notice. If the pursuer failed to do so, the Head Landlord would then be entitled to instruct its own workmen or others employed by it to enter the premises to effect the necessary works, and demand the expenses properly incurred thereby from the pursuer. As hereinbefore condescended upon, since the expiry of the Head Lease in June 2016, the Head Landlord has taken no steps to instruct any works or repair or reinstatement to the Premises. It is reasonably believed and averred that it has no intention of doing so. Reference is made to Answer 4 above. In these circumstances, the pursuer presently has no liability to the Head Landlord and thus no claim against the defender, either under the indemnity or as damages at common law, for the hypothetical cost of such works.”

 

 

The Tarn Letter

[14]      Apart from the Lease and Head Lease, the only other document referred to at the debate before me was the letter sent by agents on behalf of the head landlord, Tarn, to the pursuer dated 21 November 2016 (“the Tarn Letter”). After referring to the Head Lease, (in the first paragraph), the Tarn Letter stated:

“Without prejudice to that generality, and under reference to the more precise expression of the obligations narrated within the [Head Lease], in terms of Clause Fourth of the [Head Lease], [the pursuer] undertook to perform the obligations set out in Part IV of the Schedule annexed to the [Head Lease]. In particular, [the pursuer] undertook, in terms of Paragraph (sic) Eight of the Schedule Part IV, as the expiry of the [Head Lease] to surrender the leased subjects (including all relevant additions, improvements and fixtures) in such state and condition as shall in all respects be consistent with the full and due performance by [the pursuer] of the obligations contained within the [Head Lease].

 

At termination of the [Head Lease], the Property was not in such good and substantial repair and condition as would accord with the performance of the obligations (Paragraphs (sic) Three, Four, Five, Six and Seven of the Schedule Part IV) contained within the [Head Lease]. You are in breach of your repairing obligations.

 

With reference to the enclosed Schedule, the cost to complete the works required to remedy the breach is estimated to be £906,294.35.

 

In addition, you are liable for costs associated with repairing and serving the Schedule in accordance with paragraph Twenty Six of the Schedule Part IV of the Lease. Professional fees of £4,600 have been incurred in connection with the preparation of the Schedule.

 

You are required to make payment of the sum of £910,894.35 immediately, and in any event no later than close of business on 28 November 2016.

 

For the avoidance of doubt please note that Tarn Crag Limited expressly reserves its rights to maintain all other claims competent to it against [the pursuer] in respect of the Property not being in the state required by the [Head Lease].”

 

 

The Issues

[15]      While the pursuer also has a plea to the relevancy, the debate was confined to the defender’s challenges to the pursuer’s pleadings.  The issues at debate were as follows:

1)   Whether the pursuer has relevant averments for its claim in damages;

2)   Whether the pursuer has relevant averments for its claim based on the indemnity; and

3)   Whether in any event the pursuer’s action on either basis is premature.

In respect of issue (1), the pursuer founds on clauses Three, Four, Six and Ten of the Lease and also referred to clause Eight of the Head Lease.  The defender referred in submissions to clause Nine of the Head Lease (which is in terms similar to clause Seven of the Lease) to argue that properly construed the recoverability of damages under the Lease was conditioned on works falling within the tenant’s obligations being first carried out. [Essentially, the issue is whether, on the proper interpretation of the Lease, the defender is liable in the absence of any loss or expense having been incurred by the pursuer].  In respect of issue (2), both parties referred to clause Thirty‑one and the issue turns on whether the obligation to indemnify has been triggered (or required to be triggered before the commencement of the action), simply by virtue of the Tarn Letter and in the absence of the pursuer having incurred any cost itself or having paid (or been found liable to pay) any sum to Tarn.

 

Submissions for the Defender

Challenge to the Pursuer’s Damages Claim

[16]      Mr Fairley explained that the terms of the Lease and the Head Lease were coterminous.  Both had now come to an end.  Accordingly, neither the defender (as tenant under the Lease) nor the pursuer (as tenant under the Head Lease) could be compelled to carry out any remedial works to the Premises by an order ad factum praestandum.  This was clear from Commercial Leases in Scotland at paragraph 14-06 and was not a controversial proposition.  Any liability of the pursuer arose only if damages became payable to Tarn qua head landlord.  It was important, he said, to distinguish between a breach which leads to no loss and one which does permit a claim for damages.  Mr Fairley stressed that not every breach of an obligation leads to a loss.  It did not follow that because there was a breach of any repairing obligation, that the defender came under any liability to pay damages to the pursuer.  It was for that reason that the pursuer’s averments of a breach of an obligation owed by it to the head landlord did not, of themselves, constitute sufficient averments of liability on the part of the defender. Something more was required to constitute a liability.

[17]      The pursuer’s averment in the first sentence in Article 8 (quoted above, at paragraph [11]), was the only reference to a breach of obligation.  The averments that followed were a legal non sequiter.  The defender accepted it was in breach of the repairing obligations in the Lease.  It also accepted that it had put the pursuer into a like or parallel breach under the Head Lease.  However, until the pursuer actually suffered a loss as a consequence of that breach, there was only a potential liability not an actual one.  Since the pursuer admits (in Article 4) that it has not itself carried out any remedial works to the premises, a relevant case by the pursuer for damages against the defender could only arise  (if at all) from a liability presently due by the pursuer to its head landlord, Tarn.  If the pursuer fails relevantly to aver any such liability owed by it, its claim against the defender for damages must inevitably fail.

[18]      Mr Fairley developed this argument as follows.  In order to ascertain whether there was an actual breach of an obligation resulting in a loss incurred by the pursuer, it was necessary to examine the Head Lease.  All non‑monetary obligations owed by the pursuer under the Head Lease to the head landlord (now Tarn), were transmitted to the defender by virtue of clause Thirty‑one of the Lease.

[19]      Mr Fairley then identified three types of cases that emerged from the case law:

(i)   In some cases the terms of a lease were such that the landlord did not require to show actual loss before it could recover. It did not even have to aver that it would undertake the necessary works.  This was because the lease in question provided a contractual mechanism by means of a payment clause to entitle the landlord to a payment in the event of breach, notwithstanding that there had been no expenditure on remedial works or any intention to carry them out.  The cases of @SIPP Pension Trustees Limited v Insight Travel Services 2016 SLT 131 and Tonsley (Strathclyde) Limited and Another v Scottish Enterprise [2016] CSPH 138 at paragraph [20], were examples of leases containing payment clauses.  The payment clause was an agreed mechanism entitling the landlord to payment without the need to show actual loss or any intention to undertake the remedial works.

(ii)  In the second class of case, the landlord still required to aver a breach and that it had suffered an actual loss. It is enough to raise an action, however, if the landlord averred that it intended to carry out the required remedial works.  The cases of Duke of Portland v Wood’s Trustees Limited 1926 SC 640 and Prudential Assurance v James Grant and Co (West) Limited 1982 SLT 423 were examples of this kind of case. If the landlord were unable to prove the requisite intent, the case failed.  Mr Fairley accepted that in neither of these cases was this argument expressly advanced but, he said, the courts did not balk at this approach.

(iii) The third category of case was that in which the clause in question was such that recoverability of damages was conditioned on the works falling within the tenant’s obligations having first been carried out.  In other words, the landlord must aver that the works had been carried out. In the absence of this, its claim was irrelevant. Lowe v Qualye Munro Limited 1997 SLT 1168 was an illustration of this kind of clause.  Under reference to the passages at pages 1170B to C and 1171J to 1172A, Mr Fairley argued that it was necessary to the pursuer’s claim in that case that the works had first to have been carried out.  While this was not expressly argued, this was implicit in these passages and in the outcome of the case.  It followed from the words “to the reasonable satisfaction of the landlord”, which pointed to the works having had to have been carried out first.

 

[20]      In particular, clause Eight of the Head Lease, provided in effect that recoverability of damages was conditional on the works “having been carried out to the landlord’s satisfaction”.  This phrasing took it out of categories (i) and (ii).  Mr Fairley argued that on a correct construction of the Head Lease, it was intended that recoverability of damages for breach of a repair obligation was conditional on the works having been carried it by the head landlord.  Until that was done, the pursuer could not recover from the defender.  This was clear, in particular, from the language used in clauses Three (obligation to maintain and repair), Four (obligation to paint outside) and Five (obligation to paint inside) of the Head Lease, and which all referred to the works therein specified being undertaken “to the reasonable satisfaction of the landlords”.  Clause 8 of the Head Lease (containing the obligation “to leave in good repair”) referred back to clause Three.  It required the tenant to vacate peaceably and having obtempered the obligations under the Head Lease; it made reference to the various repair obligations.  This was to be construed as conditional on the works having been carried out.  Requiring that the works be done to the landlord’s reasonable satisfaction was akin to certification.  By these terms the parties had agreed that the carrying out of the remedial works was a necessary precondition to the recovery of damages.

[21]      Mr Fairley also referred to clauses Eight and Nine of the Head Lease.  Clause Eight looked at obligations at the end of the Head Lease.  Clause Nine applied during the currency of the Head Lease and at the end.  This permitted the head landlord to enter onto the Premises for certain purposes, and so was a departure from the usual covenant to give peaceful possession.  It regulated rights and obligations during the currency of the Head Lease and at its end.  Contrary to the pursuer’s position, it was not confined to the regulation of matters during the currency of the Head Lease.  Within 14 days of a demand by the head landlord for payment, the amount demanded became a debt due to the head landlord.  Had this clause been operated, it would have brought this case within category (i), identified above.  In other words, Mr Fairley argued, clause Nine was a contractual mechanism to turn an illiquid claim into a liquid one.  If this had been triggered, it would also have entitled the head landlord to interest.  The head landlord did not use this mechanism.  All that was left was for it to do the works and serve a demand.  There was no obvious reason to restrict the clause to the currency of the Head Lease.

[22]      Clause Nine of the Head Lease defined the scope of the head landlord’s rights against the pursuer in the event of a default by the pursuer in its obligations of maintenance, repair and reinstatement, whether during the Head Lease or at its expiry.  In particular, the parties to the Head Lease had agreed that, in the event of such default, the head landlord would be entitled to serve written notice calling upon the pursuer to remedy the default within such (reasonable) period as was set out in the notice.  If the pursuer failed to do so, the head landlord would then be entitled to instruct its own workmen or others employed by it to enter the Premises to effect the necessary works, and thereafter demand the expenses properly incurred thereby from the pursuer.  The clear purpose of clause Nine of the Head Lease was to restrict the pursuer’s liability to its head landlord only to the cost of such works as were actually carried out by the head landlord in effecting remedial works, and thus to exclude liability for hypothetical claims in respect of works not carried out by the head landlord and which might never be carried out.  Mr Fairley observed that the pursuer had no averments that the head landlord had followed the agreed remedial procedures set out in the Head Lease.  On the contrary, in Article 4 of condescendence, the pursuer admitted that neither it nor the head landlord had carried out any of the works to the Premises which are said to form the basis of this action.

[23]      Further, and in any event, as it is an express condition of both the Head Lease and the Lease that works of maintenance, repair, decoration and reinstatement should be carried out “to the reasonable satisfaction of” the head landlord (or, as the case may be, the pursuer qua landlord under the Lease), recoverability of damages was conditional upon the works falling within the tenant’s obligations having actually been carried out, and carried out to that standard.

[24]      This was an available reading of clause Nine of the Head Lease, and which brought clear advantages for both parties.  For the landlord, the operation of clause Nine had the effect of crystalising the claim and securing that interest was payable.  For the tenant, it meant that if it did not comply with the terminal schedule of dilapidations, it required to pay only these works undertaken by the landlord.  Clause Nine provided a mechanism to resolve disputes over terminal schedules, to the mutual advantage of the parties.  It was not confined, in temporal terms, to the currency of the Lease.  It was what Lord Penrose envisaged in Lowe.  It accorded with commercial common sense and the four factors set out in Grove at paragraphs 17 to 19.  In particular, clause Nine functioned to enable the landlord to be compensated for its loss, but no more than that; it permitted the landlord to obtain full recovery of its loss; it precluded windfalls or recovery for arbitrary or unrelated loses; and the interpretation advanced satisfied the objectives of proportionality and predictability.

[25]      Mr Fairley also argued that if the interpretation he advanced was one of several competing interpretations, then it was open to the court to prefer the one that better accorded with commercial common sense (Grove Investments Limited v Cape Building Products Limited [2014] CSIH 43 at paragraphs 9 to 12;  Mutli‑Link Leisure Developments Limited v North Lanarkshire Council 2011 SC (UKSC) 53 at paragraphs  11 and 14), which was the one he advanced on behalf of the defender.

 

Defender’s argument that the pursuer’s case was premature
[26]      Mr Fairley submitted that the pursuer’s case based on the indemnity in clause Thirty‑one of the Lease was premature and irrelevant.  He noted that the first plea‑in‑law in the version of the Summons which passed the signet on 15 September 2016 was for payment under the Lease and at the Preliminary Hearing on 18 November 2016, senior counsel for the pursuer submitted, under reference to the indemnity clause in the Lease, that this remained the primary basis of the pursuer’s case.

[27]      In relation to the alternative case based on the indemnity, it was an express condition of the indemnity clause in clause Thirty-one of the Lease that there should have been a “claim” made against the pursuer by its head landlord.  Until such a claim has been made, no liability under the indemnity can arise.  In the absence of such a claim, any proceedings raised purportedly on the basis of the indemnity were premature.  Taking the pursuer’s averments at their highest, no such “claim” was made against it by the head landlord (ie Tarn) until 21 November 2016.  This action was served upon the pursuer approximately two months earlier, on 19 September 2016.  The action, insofar as it purports to be founded upon the said indemnity provision in the Lease was accordingly premature.

[28]      Further, it was no answer to a plea of prematurity for a pursuer to state that the time for payment has arrived since the action was brought; the issue of prematurity is assessed by reference to the date at which the action was raised:  Crear v Morrison (1882) 9 R 890 at 892.  Furthermore, under reference to Crear, it was argued that the pursuer’s action was premature.  Crerar was authority for the proposition that where a party raises an action concluding for instant payment of a debt not yet due, the claim is premature and the action falls to be dismissed.  That applied to this case.

 

Defender’s Challenge to the Pursuer’s Case Based on the Indemnity

[29]      Even on the hypothesis that the claim based on the indemnity was not premature, Mr Fairley argued that, in any event, on a proper construction of the indemnity clause, the expression “all claims against the [pursuer]” was intended by the parties to the Lease to refer only to those sums due and resting owing to the head landlord by virtue of a liability owed to it by the pursuer under the Head Lease.  Clause Thirty‑one was an indemnity clause and the language used had to be construed in that context.  Under reference to paragraphs 718 to 719 of volume 15 the Stair Memorial Encyclopaedia (“Voluntary Obligations”), and to paragraph 12.15 of Lewison’s Interpretation of Contracts (6th edition, 2015), an indemnity clause was a term under a contract by which a party transfers liability either to the other party or to a third party.  In the former case, it was the obverse of an exemption clause.  The essence was the transfer of a liability.  In relation to the language of clause Thirty‑one, Mr Fairley argued that the use of the word “claim” denoted a “liability”.  By contrast, the pursuer’s interpretation of “claim” simply meant a demand for payment without qualitative assessment and without restriction or assessment as to its validity.  In the context of an indemnity, that could not be right.  Mr Fairley supported his interpretation of the word “liability” by reference to North of Scotland Hydro‑Electric Board v Taylor 1956 SC 1, although no particular passage was identified.  The use of the word “claim” in that case was synonymous with “liability”, not something less than that.  It did not connote a blank cheque, which effectively was the logic of the pursuer’s position.  Mr Fairley also referred to the case of Duncan’s Trustees v Steven  (1897) 24 R 880, and which he argued was the mirror image of the present case.  In Duncan’s Trustees, the owner of premises which had been let to tenants (Sandemans), sued the contractor whose negligence had led to flooding of the premises and consequent damage to the tenants’ merchandise.  The basis of the action was relief in respect of the claim against it by Sandemans.  The First Division held that the pursuers’ action in that case was irrelevant, in the absence of any averment that the pursuers were liable for the damage or had been found liable.  It was not sufficient simply to aver, as the pursuers in that case had done, that it had been sued by Sandemans.  They had denied any liability in that action.  Mr Fairley argued that the like failure of the pursuer in this case to aver that it was liable or had been found liable to Tarn undermined the pursuer’s case based on indemnity.

[30]      Accordingly, the Tarn Letter did not suffice.  The pursuer was not entitled to recover all that was asserted in that letter.  The pursuer’s indemnity claim must relate to something for which it has a liability.  The argument was the same as that advanced in respect of the pursuer’s primary claim.  No loss on that part of the head landlord had been incurred or crystallised.  The pursuer had sustained no loss.  There was, as yet, no liability owed by the pursuer to Tarn.  There was, therefore, no liability transferable under the indemnity to the defender. The pursuer’s case based on the indemnity was also irrelevant.

[31]      Again, Mr Fairley argued that if there was more than one interpretation of the indemnity provision, then it was to be construed narrowly and contra proferentem as against the landlord.  The narrower interpretation was to be preferred.  This was, he said, uncontroversial as vouched by the paragraph 719 of the Stair Memorial Encyclopaedia.

[32]      Taking the pursuer’s averments at their highest, the pursuer has presently incurred no such liability under the Head Lease, and no such sums were presently due and resting owing by it to the head landlord.  The indemnity case was premature and irrelevant and it fell to be dismissed.

 

Submissions for the Pursuer

Reply to the Challenge to the Pursuer’s Damages Case

[33]      The pursuer’s senior counsel, Mr Sandison, invited me to reject all of the defender’s challenges as unfounded.  The true question, he said, was whether, on a proper construction of the Head Lease, the pursuer’s liability was contingent upon the works having been carried out by the head landlord.  This was a narrow issue.  The pursuer had averred (at Article 4) that the head landlord intended to carry out the works.  As averred at the beginning of Article 8, the defender had left the Premises in a state such as to put the pursuer in breach of its obligations under the Head Lease.  These were, he said, accurate propositions of fact and law.  

[34]      In relation to the defender’s proposition that one could have a breach of obligation without loss, while Mr Sandison accepted that in principle, that was not the situation in this case.  The defender had breached its obligations under the Lease.  That, in turn, placed the pursuer in breach of its obligations under the Head Lease.  The head landlord, Tarn, stated that it intended to do the work. That sufficed to plead a relevant case.

[35]      In relation to the pursuer’s damages case, Mr Sandison explained that this was founded on clause Six of the Lease, not clause Seven.  The defender maintained that the only clause of the Head Lease capable of rendering the pursuer liable to make reparation to the head landlord was clause Nine of the Head Lease.  Clause Nine envisaged a process whereby the head landlord could complain formally by way of notice about wants of repair in the Premises followed, in the event of no or insufficient remedial action, by it carrying out the remedial works itself and recouping the cost from the pursuer (qua mid-landlord).  However, Mr Sandison argued, even the most cursory examination of clause Nine showed that it had no application to liability arising out of breach of contract constituted by leaving the Premises at the end of the Head Lease in a state inconsistent with the repairing obligations of that lease. 

[36]      The whole structure of clause Nine of the Head Lease was, he argued, to oblige the pursuer (as tenant under the Head Lease) to permit the Head Landlord and various representatives to enter the leased Premises to inspect their state, and to provide that, in default of identified wants of repair being remedied, it shall be lawful for the Head Landlord to enter the Premises and repair them, and then to treat the cost of those repairs as a debt due from the pursuer to the head landlord.  None of that made any sense at all in the context of the situation which pertained upon the ish of the Head Lease, when the head landlord needed no permission to enter the Premises (the tenant’s right to possession of them having ended) and needed no stipulation that it shall be lawful for him to carry out works to property belonging to him and in his possession.  Clause Nine was directed at the situation where the head landlord wished wants of repair to be remedied during the currency of the Head Lease, not at the situation where, at the end of that lease, the Premises were left in a state other than consistent with the pursuer’s repairing obligations.  Likewise, it was misconceived to look at clause Seven of the Lease.

[37]      The clause of the Head Lease which actually gave rise to the liability founded upon as the object of the damages claim in the present action was clause Eight, which at the expiry of the Head Lease required the pursuer to surrender the Premises “in such state and condition as shall in all respects be consistent with full and due performance by the Tenants of the obligations herein contained”.  The obligations referred to include the various repairing obligations under the Head Lease, which were, by virtue of clause Thirty‑one of the Lease between the parties to the present action, also undertaken by the defender to the pursuer.  The date upon which that liability came into existence was the date of the ish of the Head Lease, ie 27 June 2016.  As at that date the pursuer had an obligation to make reparation to the head landlord in respect of the former’s breach of contract.  That obligation was in subsistence as at the date of the raising of the present action.

[38]      The pursuer had averred in Article 8 of Condescendence that, by the defender’s leaving the Premises in the state in which it left them at the ish of the Lease on 27 June 2016 (being the state set out in Article 7 and the updated Schedule of Dilapidations referred to and incorporated therein), the defender rendered the pursuer liable in turn to make reparation to the Head Landlord.  That liability was “liability presently due by the pursuer to the Head Landlord”.  It was a liability which arose on 27 June 2016, it subsisted at the date of the raising of the action, and it continues to subsist.  The pursuer’s damages case was relevantly pled.

[39]      As for the defender’s reliance on the phrase “to the reasonable satisfaction of the landlords”, that did not support its contention that it meant that the works had to be carried out in advance of any claim.  This provides a standard for the work to be undertaken, and perhaps, to avoid gold plating.  However, that phrase had no meaning in the context of works taken after the terms of the Lease had ended.  There was no logical connection between that phrase and the requirement (as the defender would have it) of requiring the works to have been carried out before any claim could arise against the defender for its default.

[40]      The taxonomy suggested by Mr Fairley dividing the case law into three categories was novel.  The cases of the Duke of Portland or Prudential illustrated the normal position, namely that it was not necessary for a landlord to have carried out the works in order to state a relevant claim against a tenant in breach of a repairing obligation.  However, there was no category (iii), as suggested by Mr Fairley.  In relation to the case of Lowe, this was the only case that existed in this purported category (iii).  In Lowe, the court simply did not consider any argument about the completion of the works having been a prerequisite of any claim because, on the facts of the case, the works had been completed.  The issue never arose;  it was never argued.  Any comment in Lowe was obiter in relation to this issue and was of no assistance.  The defender’s argument about the phrase “to the reasonable satisfaction of the landlord” was predicated on Lord Penrose’s Opinion in Lowe but that reliance is unjustified by any of the reasoning in that case and was not an issue considered by the court.

[41]      Turning to Mr Fairley’s analysis of clause Nine of the Head Lease, it was wrong to construe this as imposing an obligation upon the landlords.  This provision appeared in that part of the Head Lease setting out the obligations on the tenant.  If Mr Fairley’s reading were correct, this clause is out of place in the context of the Head Lease.  Mr Sandison also relied on the provision (referred to above, at paragraph [6]) that excluded the headings from consideration for the purposes of construction. 

[42]      Furthermore, clause Nine was concerned solely with the position during the currency of the Head Lease.  It did not govern matters after the expiry of the Head Lease at its ish.  This followed from the phrase making it “lawful for the landlord to enter”.  That formulation was necessary only during the currency of the Head Lease, because of the tenant’s entitlement to exclusive possession.  It was nonsensical after the ish, because possession reverted to the landlord.  The provision that non-payment within 14 days constituted a “material breach” also supported the contention that clause Nine was confined to repairing obligations during the currency of the Head Lease.  No contract subsisted after the ish and discussion of a “material breach” made no sense.  Clause Nine was therefore concerned only with any interim dilapidations.

[43]      Even if the defender’s interpretation was an available one, it had to show that this was what parties agreed.  On the defender’s interpretation of clause Nine of the Head Lease, clause Eight became a dead letter.  This could not be right. The defender had to show that clause Nine supplanted clause Eight.  Even if it did, it could not demonstrate that the mechanism in clause Nine was the only mechanism available for the kind of claim the pursuer makes.

[44]      Turning to Grove, Mr Sandison said that the defender was wrong to characterise this as a category (i) case.  Rather, Mr Sandison argued, it was a case within category (ii).  In Grove, the use of the word “value” enabled the court to look at this and say that the claim must be linked to the actual loss.  Looking at the 4 propositions from Grove:  first, recovery was only permitted for the loss that will have been suffered.  If rely on a damages claim, then a claimant landlord will obtain no more and no less than the loss, albeit this will be by process of estimation based on the evidence of surveyors.  So there would be no prospect of over or under compensation.  There would be no windfall and it would be proportionate.

[45]      Unless the court accepted the defender’s contention, the proposition as stated in the first sentence of Article 8 was correct and this was a category (ii) case.  It does not concern a potential liability.  Here, the defender was in breach.  The head landlord stated an intention to do the works.  That sufficed for a relevant claim for damages at common law.

 

Response to the Challenge to the Pursuer’s Case Based on the Indemnity

[46]      The starting point, Mr Sandison argued, was that there were averments of an undoubted liability.  The defender was in breach of the repairing obligation and that had placed the pursuer in breach of the like obligation owed to the head landlord under the Head Lease.  The defender had no basis to resist this.  This was a liability that existed at the date the action was raised.  Mr Sandison accepted that as at the date this action was raised no claim had yet been received from the head landlord.  However, it had since received such a claim, namely in the Tarn Letter.  

 

Response to the Defender’s Prematurity Argument

[47]      Mr Sandison invited me to reject the defender’s prematurity argument.  The pursuer had stated a competent and relevant claim for damages at common law.  It was entirely permissible to add a case based on a different ground of liability, such as an indemnity, if it later emerged.  There is no basis in authority, whether in Crear v Morrison or otherwise, that an action based on a liability which existed as at the date of its being raised (eg such as the damages claim at common law) falls to be dismissed on grounds of prematurity simply because it alludes to other grounds of action which would be prematurely stated as at that date (eg the indemnity claim).

[48]      Furthermore, for obvious reasons of expediency, the courts have permitted the addition to existing cases of causes of action which have become prestable after the action was raised, so long as the action was not, as at the date it was raised, a fundamental nullity.  In the context of prematurity, Duncanson v Anderson (1908) 15 SLT 684 was one such example.  In that case, part only of a claim was exigible at the outset.  The court permitted the case to be restricted to that basis at the outset and then it permitted amendment at a later point.  This was an illustration of judicial reluctance to allow a technical rule to get in the way of expediency.  So long as the pursuer had a valid claim from day 1 of the action, it could competently add an additional ground at a later point.  Mr Sandison noted, in passing, that the defender had not suggested that the pursuer’s indemnity case was premature when the adjustments referring to it in detail were added on 2 December 2016.

[49]      Mr Sandison concluded by arguing that the Summons itself was a demand for payment.  There was no reason to dismiss the action.  The court should reject the defender’s arguments.  Mr Sandison went so far as to suggest that he could move for decree de plano but he was content at this stage to invite the court to repel the defender’s prematurity plea.

 

Defender’s Reply

[50]      Mr Fairley noted that the it was contended on behalf of the pursuer that all rights and obligations under the Lease fell away upon the expiry of the term of the Lease, except for antecedent breaches of damages at common law.  If this were right, then the indemnity claim was irrelevant for this additional reason.

 

Discussion

The Defender’s Challenge to the Pursuer’s Damages Case

[51]      The defender is admittedly in breach of the repair obligation under the Lease.  Much of the debate was taken up with arguments about the availability or otherwise of the pursuer’s remedies in terms of the Lease or at common law.  It may be helpful to recall that the repair obligation of a tenant is a non-pecuniary obligation, the primary remedy for breach of which is an order ad factum praestandum.  It is conventionally understood that, in the absence of a specific provision obliging a tenant to do works at the expiry of the lease, such an order may only competently be imposed against a sitting tenant and is not available once the lease is at an end.  In that event, and subject to an express term of the lease to the contrary, the landlord is left with a common law claim for damages for breach of contract.

[52]      In respect of the measure of loss for such a claim, the Scottish courts have long recognised that there may be more than one means for a landlord to quantify its loss for breach of a tenant’s repairing obligations.  In Duke of Portland v Wood’s Trustees 1926 SC 640, Lord President Clyde confirmed the compensatory principle of damages at common law.  He specifically recognised (at page 649) that the loss incurred may extend to consequential loss, albeit he recognised the “legal difficulty” of restraining this element within “equitable limits” and he concluded this passage in his opinion (at page 650) with the observation that the approach in Scotland to this question was reflected in the subsequent formulation of Hadley v Baxendale (1854) 9 Ex 341.  He also rejected the defender’s contention in that case that the damages recoverable in respect of breach of an obligation to deliver a thing in a specific condition (eg such as let premises after due observance of repair obligations) could not exceed the value of the thing.  In Duke of Portland, which concerned the let of mines, the pursuer claimed that the cost of remedial works (including the pumping of the by then flooded mines) was £70,000.  The defender had contended that the measure of the pursuer’s loss was capped by the value of the lost royalties from the exploitation of the mine, and which it said amounted to £15,000.  In rejecting the defender’s argument, Lord President Clyde also affirmed (at the foot of page 651) that in Scotland the true value of the measure damages flowing from a breach of contract “may only be found after employing more measures than one – in themselves legitimate, but none of them necessarily conclusive by itself - and checking one result with another”.  More recently, in Prudential Assurance Co. Lt v James Grant & Co (West) Ltd 1982 SLT 423, the tenants in default of the repair obligation in the lease advanced a similar argument to that of the tenants in Duke of Portland, namely that the landlord’s claim was restricted to the diminution in the capital value of the premises or the diminution in its revenue-generating capacity.  After referring to the last passage from Duke of Portland just quoted, Lord McDonald rejected this argument, and stated:

“Applying this dictum to the present case I conclude that the pursuers are entitled, in the first instance, to quantify their claim by reference to what it will cost to do the work which the defenders have failed to do. If the defenders can prove that the true loss suffered by the pursuers is materially less than this it is open to them, on suitable averments, to do so. I do not consider that it is incumbent upon the pursuers at this stage to enumerate in their pleadings all the legitimate but not necessarily conclusive measures of damage, to check these against each other and to produce, as matter of averment, a figure reached on this basis. They have produced prima facie a figure based upon the readily ascertainable cost of repair and it is for the defenders, if they can, to aver and prove that this is too high.”

 

Prudential remains good law and it continues to be cited and followed in these courts: see the two Outer House decisions in @SIPP (Pension Trustees Ltd v Insight Travel Services Ltd [2014] CSOH 137 and Tonsley (Strathclyde) Limited and Tonsley (Strathclyde No 2) Limited v Scottish Enterprise [2016] CSOH 138.

[53]      It is not always the case, however, that a landlord’s remedies are confined to those available under the common law.  In some recent cases, the lease under consideration contained a payment clause or a clause for liquidated damages.  Such a clause has the obvious benefit of providing a contractual mechanism for the landlord to obtain payment, often after a simple certification process, and without the need to prove the fact or quantum of any actual loss.  So, for example, in the case of @SIPP (Pension Trustees) Ltd v Insight Travel Services Ltd 2016 SLT 131 the Inner House held that the following clause (or, more accurately, those parts of it highlighted in bold) constituted a payment clause which the landlord could elect in lieu of pursuing a claim for damages at common law:

“(Seven) At the expiry or earlier termination of the foregoing Lease and subject to the Tenant carrying out, to the satisfaction of the Landlord, all restoration works called for by the Landlord in terms of Clause (Twelve) of this part of this Schedule quietly and without any warning away or other process of law notwithstanding any law or practice to the contrary to surrender to the Landlord the leased subjects together with all additions and improvements made thereto and all fixtures (other than trade or tenant's fixtures affixed by the Tenant or any sub-tenant which shall be removed by the Tenant) in or upon the leased subjects or which during the foregoing lease may have been affixed or fastened to or upon the same that in such state and condition as shall in all respects be consistent with a full and due performance by the Tenant of the obligations herein contained. Without prejudice to the foregoing generality at his own cost and expense to repair and make good to the satisfaction of the Landlord all damage including damage to paint work caused by the removal of trade or tenant's fixtures affixed to the leased subjects by the tenant or any sub-tenant; Provided Always that if the Landlord shall so desire at the expiry or sooner termination of the foregoing Lease they may call upon the Tenant, by notice in writing (in which event the Tenant shall be bound), to pay to the Landlord at the determination date (with interest thereon as provided in Clause One (b) hereof), a sum equal to the amount required to put the leased subjects into good and substantial repair and in good decorative condition in accordance with the obligations and conditions on the part of the Tenant herein contained in lieu of requiring the Tenant himself to carry out the work.” (Emphasis added.)

 

In other words, the court gave effect to the contractual mechanism by which the landlord could insist on payment of a sum equal to the cost of bringing the let premises up to a standard consistent with the tenant’s due observation of the repairing obligations.

[54]      Similarly, in the case of Tonsley, Lord Doherty held that a particular provision in a lease gave the landlord an option to certify a sum equal to the costs of the works necessary to put the let premises into the condition that they would have been had the tenant discharged its repairing obligation.  The provision in question (with the relevant wording highlighted in bold) was as follows:

“3.38.2 At the expiration or sooner determination of the Period of this Lease without any warning away or process of removal to that effect to remove from and leave void and redd the Premises in such good and substantial repair and condition as shall be in accordance with the obligations on the part of the Tenant contained in These Presents together with all fixtures and fittings (excepting Tenant's fixtures and fittings) and improvements and additions which now are or may at any time hereafter be in or about the Premises save such as the Tenant has been required to remove pursuant to Clause 3.38.1.3; Provided always that (a) if at such expiration or sooner determination the Premises shall not be in such good and substantial repair and condition then at the option of the Landlord either (i) the Tenant shall carry out at its entire cost the works necessary to put the Premises into such repair and condition or (ii) the Tenant shall pay to the Landlord the sum certified by the Landlord as being equal to the cost of carrying out such work and if the Tenant shall pay to the Landlord the sum as certified together with any surveyor's fees incurred by the Landlord in connection with such Certificate within fourteen days of demand the Landlord shall accept the same in full satisfaction of the Tenant's liability under this sub-clause quoad the work referred to in this proviso and (b) if the Landlord elects to require the Tenant to carry out the works foresaid and the Tenant defaults in doing so the Landlord shall be entitled to carry out such works at the entire cost of the Tenant and whether such works are carried out by the Tenant or in default by the Tenant as aforesaid, by the Landlord there shall in addition be paid to the Landlord by the Tenant a sum equivalent to the rent which the Landlord would have received had These Presents subsisted until the date that all such necessary works had been completed to the satisfaction of the Landlord such sum to be paid on a date being seven days from the date of the Landlord informing the Tenant that all such works have been so completed.”

 

[55]      Of course, it is a matter of interpretation as to whether or not a particular provision is a payment clause.  In Grove for example, an Extra Division of the Inner House held that the clause in question was not, as the landlords had contended and the court at first instance had found, a payment clause.  The court accepted that the competing interpretations were each available ones, but it preferred the tenants’ interpretation that the clause obliged them to pay the landlords only for the actual loss they suffered as a consequence of the tenants’ breach.  The court held that this interpretation was more consistent with the nature of the landlords’ claim (being one of damages for breach of contract) and, where the landlords elected for full reinstatement, they would be compensated for the “full recovery of the costs of reinstatement”.  The court opined that “the amount due would usually be calculated after the works had been carried out, for the obvious reason that that is the point where the true financial cost of the tenants’ breaches of contract is known” and it rejected the landlords’ interpretation because “if, as the landlords contend, the sum payable by the tenants were based on the estimated costs in a schedule of dilapidations, it would not be known with any precision what the true costs were, as the schedule must be prepared before the remedial work is carried out”: see paragraph 17 of Grove.

[56]      It should be noted that in Grove, in rejecting the argument that the clause in question was a payment clause, the court affirmed the compensation principle governing the recoverability of damages at common law for breach of contract, as the passage just quoted makes clear.  The court considered, at paragraph 18, the scenario where the tenant was in breach of a repairing obligation but where the actual loss sustained by a landlord was significantly less than the cost of full restoration.  This was because the landlord might demolish the building, or it might reconstruct parts of the building or undertake a total refit (eg if the premises had become technologically obsolete).  The fact that the landlord’s interpretation of the clause in question would lead to recovery of damages at an arbitrary level was one of the reasons the court did not accept the interpretation it advanced.

[57]      Turning to the clauses at issue in the instant case, there is a certain dissonance between the arguments presented by the pursuer and the defender in respect of the clauses in the Head Lease and Lease founded upon or said to be relevant.  The defender’s challenge to the relevancy of the pursuer’s claim for damages for breach of contract is predicated on a certain reading of clause Nine of the Head Lease, to the effect that this clause requires the remedial works first to be undertaken to the reasonable satisfaction of the landlord.  (This may have been, in part, to anticipate his arguments about the indemnity, and for which the scope of the pursuer’s obligations under the Head Lease transferred under the indemnity to the defender is highly relevant.)  The pursuer’s riposte is that this argument is misconceived, as the pursuer avers that it relies on clause Six in the Lease and, in any event, clause Nine of the Head Lease applies only to obligations during the currency of the Head Lease not at its end.

[58]      Strictly speaking, and subject to the indemnity provision, it is clause Seven of the Lease (and not clause Nine of the Head Lease) that governs the parties’ rights and obligations. Clause Seven of the Lease does confer one further right, not remarked on at the debate before me. This is the stipulation (in part (iv)) for interest at 4% above base rate.  On one reading of clause Seven, the contractual rate of interest applies to a demand for “all expenses including surveyors’ fees properly incurred” made pursuant to the procedure in part (iii) of this clause. The reference to this rate in the pursuer’s second conclusion (noted above, at paragraph [2]) for the surveyors’ fees, might have led Mr Fairley to conclude that the pursuer was, in fact, relying on clause Seven more generally, although Mr Sandison demurred from that suggestion. (There is no challenge to the averments in support of the pursuer’s second conclusion.)

[59]      In any event, clause Nine of the Head Lease and clause Seven of the Lease are in materially similar terms. (For present purposes, one may disregard the last sentence of clause Seven of the Lease and which does not feature in clause Nine of the Head Lease.)  Accordingly, for the purpose of addressing the parties’ submissions in relation to the pursuer’s claim for damages, it matters little whether the argument was that clause Nine of the Head Lease required that the head landlord had to undertake the dilapidations, and which was an antecedent liability to any claim the pursuer had against the defender under the Lease, or whether the argument was that clause Seven of the Lease itself required that the pursuer had to undertake the work.  The essential feature of this argument was that, properly construed, under clause Nine of the Head Lease (or clause Seven of the Lease), the completion of the dilapidations works was a condition precedent to any liability on the part of the defender or any competent claim by the pursuer against it.  For completeness, I record that neither party contended that any of the clauses referred to in submissions at debate or in the pleadings were payment clauses or provided for liquidated damages, such as those which featured in @SIPP  or Tonsley.  I turn to consider the several clauses in question.

[60]      I begin with clause Six of the Lease (set out in paragraph [7], above), which the pursuer founded on and which contains a repairing obligation in fairly standard terms. Read short, at the end of Lease (whether on expiry or earlier termination) the defender’s duty qua tenant was to surrender the Premises to the pursuer “in such state and condition as shall in all respects be consistent with full and due performance” by the defender “of the obligations herein contained”.  (The “without prejudice” proviso at the end of this clause put beyond doubt the requirement that the tenant must make good at its own cost all damage caused by removal of its fixtures.)  There is no specific contractual mechanism provided for in clause Six of the Lease for enforcement or quantification of the landlord’s claim in the event of breach of this clause. Accordingly, in the event of breach of the repairing obligation in this clause, the landlord (ie the pursuer) is obliged to pursue a claim for damages at common law.  The usual compensatory principles applicable to recovery of damages for breach of contract will apply, namely it may recover damages for any loss incurred as a consequence of the defender’s breach and which may extend to certain consequential loss (eg such as professional fees incidental upon preparation of a schedule of dilapidations):  Duke of Portland, discussed above, at paragraph [52]. So far, this is unremarkable and, as noted at paragraph [35] above, this is the clause the pursuer founds upon.

[61]      Leaving aside the prematurity argument, Mr Fairley did not particularly engage with or offer an interpretation of clause Six of the Lease.  Rather, he focused his submissions on clause Nine of the Head Lease (and which, as I have noted, is in similar terms to clause Seven of the Lease).  Mr Fairley argued that this clause, taken together with the wording in some of the other provisions, required that the remedial work had to be undertaken before the pursuer could sue for damages.  On this approach, by implication, clause Seven of the Lease restricts the application of clause Six.  I turn to clause Seven of the Lease.  (The analysis that follows applies equally to clause Nine of the Head Lease.)

[62]      In my view, properly analysed, clause Seven of the Lease has six discrete parts, corresponding with the roman numerals I have inserted into the clause: see paragraph [7], above.  (Clause Nine of the Head Lease contains five parts, corresponding to parts (i) to (v) of clause Seven of the Lease: see paragraph [5], above.)  The operative words for each part are indicated by italics. In short, part (i) entitles the Landlord (ie the pursuer) or the Head Landlord (ie Tarn) or their authorised agents or workmen “to enter” the Premises in certain circumstances and for specific purposes.  One of those purposes is to “examine the state of repair and condition of” the Premises.  That purpose is, in my view, habile to include identification of dilapidations during the currency of the Lease as well as at its ish.  Part (ii) is, as the opening words (in bold) indicate, directed to circumstances at the end of the Lease, and it imposes an obligation on the tenant “to repair[,] reinstate and make good” the Premises in accordance with the written notice advising the tenant of “all defects and wants of reparation [sic] or breaches by” the tenant “of their obligations” under the Lease.  In other words, the tenant is obliged to make good defects and wants of repair identified in the notice and caused by its breach of any obligation under the Lease.  This, in my view, undoubtedly seeks to provide a mechanism regulating the parties’ rights and obligations at the end of the Lease.  By part (iii) of this clause, in the event of the default by the tenant of part (ii), it is lawful for the workmen of the landlord or head landlord “to enter upon the Premises” to “repair, reinstate, make good and restore the same in like manner as had been properly required by” the tenant (ie the defender) under the Lease.  Again, in my view, this part of clause Seven is habile to regulate matters at the end of the Lease as well as during its currency.  Indeed, the wording “and in case [the defender] shall make default in doing so” (emphasis added) clearly links the rights set out in part (iii) of the clause to a default of part (ii), and part (ii) is predicated on the “expiry of the foregoing” Lease.  Accordingly, the part (iii) rights are in my view exercisable by the landlord in respect of a default at the end of the Lease.  The fact that the application of part (iii) in these circumstances reflects the position the common law does not, in my view, necessarily point to a different interpretation.

[63]      If exercised during the currency of the Lease, the rights conferred in parts (i) and (iii) of clause Seven innovate on the common law rule that the tenant is entitled to exclusive and peaceful possession.  It should be noted that these parts operate for the benefit of the head landlord (ie Tarn), who, of course, is not a party to the Lease, as well as for the benefit of the landlord (ie the pursuer).  At the expiry of the Lease, parts (i) and (iii) simply reflect the common law position, at least in relation to the immediate landlord (ie the pursuer) in any question with the defender qua tenant.  The fact that in this context, ie at the end of the Lease,  parts (i) and (iii) effectively restate the common law does not mean - as Mr Sandison contended -  that it does not apply in those circumstances.  As the court in Grove observed (at paragraph 20), it is not uncommon for lease provisions to restate a common law rule, for example for the purpose of putting a particular matter beyond doubt.  In my view, the rights set out in parts (i) and (iii), when exercised at the end of the Lease, simply reflect the position at common law.

[64]      It follows from the foregoing that I do not wholly accept either parties’ interpretation of clause Seven of the Lease (or clause Nine of the Head Lease).  Contrary to the submissions of the pursuer, I do not accept that clause Nine of the Head Lease (or clause Seven of the Lease) is confined to regulating the parties’ rights during the currency of the Head Lease (or Lease).  Mr Sandison argues that the provision permitting the landlord access is otiose in circumstances where the term of the Lease or Head Lease has ended;  that the reference (in part (v)) to non-payment constituting a material breach is equally otiose where the Head Lease (or Lease) has ended, and therefore the clause was confined to regulating circumstances during the currency of the lease in question, when permission would be required for any access and any such breach would permit irritancy.  However, while those provisions relate to defaults during the currency of the Head Lease (or Lease), Mr Sandison did not address himself to the clear language which appears at the beginning of part (ii) of the clause (see the words in bold in this clause, in paragraph [7], above), namely, the phrase “at the expiry of the foregoing” lease.  Mr Sandison’s argument appears to overlook the extension of this clause to both the landlord and the head landlord.  In addition to regulating what would be the position under the common law as between the landlord and the tenant, clause Seven also applies in circumstance where there are wants of repairs during the currency of the Lease, and it permits with the landlord or the head landlord to enter and identify the necessary remedial works.  This confers a benefit or right on the head landlord, and which elides any difficulty that might have arisen from the terms of the Lease precluding Tarn’s access to the Premises.

[65]      In relation to clause Seven of the Lease (or clause Nine of the Head Lease), I accept Mr Fairley’s contention that this clause is not confined to breaches of the repair obligation during the currency of the Lease (or Head Lease) and that it applies to end-of-lease obligations. I also accept that this clause provides a procedure, if followed, by which the landlord (or head landlord) can enter the Premises in order to identify wants of repair, and in the event of a tenant’s further default, may itself (or through its workmen) enter and undertake the work.  However, I do not accept his argument that clause Seven of the Lease (or clause Nine of the Head Lease) required that the remedial works had to be undertaken before a relevant case could be made for damages at common law for breach of the repair obligation. Accordingly, whether clause Seven of the Lease (or Nine of the Head Lease) applies at the ish (as Mr Fairley contends) or does not (as Mr Sandison argues), is of less significance, perhaps, than assumed in the submissions at debate.

[66]      In support of his argument, Mr Fairley relied on the use of the phrase “to the satisfaction of the landlord” and the third class of cases he identified from the case law, and in particular the case of Lowe.  Having considered the terms of the Lease and the case of Lowe, I am not persuaded by Mr Fairley’s arguments.  I do not accept his argument that clause Nine of the Head Lease (or clause Seven of the Lease), either construed on its own terms, or in conjunction with the use of the phrase that works are done “to the satisfaction the” landlord where it appears in other clauses of the Head Lease (or Lease), means that parties have agreed, as a matter of contract, that completion of the dilapidations works is a condition precedent of any liability on the part of the defender.  Had this been the position, I would have expected clearer words to that effect in clause Seven of the Lease (or clause Nine of the Head Lease).  I would also have expected this to be reflected in clause Six, or at least for there to be language regulating the interrelationship of clauses Six and Seven of the Lease (or clauses Eight and Nine of the Head Lease), and restricting the scope of the former to reflect the defender’s reading of the latter clause.  Clause Six is not made subject to clause Seven of the Lease.  In my view, the correct reading of clause Seven of the Lease (or clause Nine of the Head Lease), is that the proper remedy at the end of the Lease for breach of this clause is a claim for damages.

[67]      Nor do I find that Lowe offers the support Mr Fairley suggests.  From Lowe, Mr Fairley seeks to identify a third class of case from the case law, and which is said to illustrate a third type of clause, namely one in which the completion of the works by the landlord is a precondition of its claim for breach. First, this point was not argued in Lowe, which Mr Fairley fairly accepted.  On its facts, the landlord, Miss Lowe, had undertaken the works before she raised her action.  That case concerned the scope of what she could recover under the clause in question (see, eg, Lord Penrose’s exclusion of her claim for carpets and floor coverings), not what were the essential antecedent steps to such a claim.  Second, in relation to the phrase that remedial works required to be done “to the satisfaction of the landlord” –and which was central to Mr Fairley’s argument-, Lord Penrose observed that this was principally concerned with the standard of the works undertaken.  The phrase is, of course, suggestive that works are to be done but, in my view, the use of that phrase is not sufficient to hold that, as a matter of contractual provision, the parties agreed that the remedial work required to be undertaken before a claim for breach of the repairing obligation could be made or relevantly pled.

[68]      Neither party addressed the interrelationship of clauses Six and Seven of the Lease.  If one corollary of the defender’s position was that clause Seven prescribed the procedure by which the pursuer could pursue a claim for breach of the repairing obligation or that it mandated that the dilapidations work required first to be completed, I do not accept this argument.  Clause Six obliges the defender to surrender the Premises in a state consistent with full implementation of the repairing obligations.  Breach of this gives rise to a common law claim for damages.  However, clause Six is not made subject to clause Seven.  Clause Seven is principally concerned with enabling the pursuer (or, indeed Tarn as the head landlord) to enter onto the Premises to put them in such a condition in the event of the tenant’s default during the currency of the Lease or at its end.  It innovates on the common law, in respect of the rights it confers on the landlord (and head landlord) during the currency of the Lease and to enter onto the Premises in certain circumstances for certain purposes.  However, in my view, nothing in the language of clause Seven indicates that the procedure it sets out (eg in parts (ii) and (iii)) is prescriptive, not simply permissive, of the avenue the landlord may pursue to remedy the tenant’s default of the repairing obligations under the Lease, or requires the clause to be construed as the landlord forgoing any other remedies (eg as might be available under the common law) or restricting them in the way suggested.  In the absence of clear language that this is what the parties intended, I do not accept that clause Seven of the Lease precludes a common law claim for damages or first requires that the works be completed before such a claim may be made.

[69]      Insofar as the defender’s relevancy challenge to the pursuer’s damages claim was founded on the clauses within the Lease, it does not succeed.  I turn now to consider the defender’s prematurity argument.  To the extent that this is predicated on the language of the Lease, this was simply a restatement of the argument that the landlords required to complete the works recast in another form.

 

Defender’s Plea of Prematurity

[70]      The defender’s pleas of prematurity was advanced in respect of both the pursuer’s claim for damages and for indemnity.  There was considerable overlap as between the defender’s challenges to the lack relevancy of these legal bases of the pursuer’s claim, which I have already addressed, and some of the defender’s argument in support of its plea of prematurity.  To the extent that there was a discrete technical prematurity argument, it was the defender’s argument based on the case of Crear and directed only at the pursuer’s case of indemnity.

[71]      I did not find the case of Crear to be of much assistance.  While it is a decision of the First Division chaired by Lord President Inglis, the opinions given are quite short and are addressed to the particular facts of that case.  All that the court held in that case was that it was not open to the creditor of a future debt to raise an action demanding immediate payment of that debt before it fell due.  Certainly, the court did not express itself as laying down any rule of more general application.  By a parity of reasoning, it is argued that in the absence of a claim by Tarn against the pursuer (leaving aside the question of what constitutes a “claim”), the pursuer had no ground to state its indemnity claim at the time the action was raised.  

[72]      In reply, the pursuer relies on Duncanson v Anderson as illustrative of a more flexible or expedient approach taken when an action had been raised but, at that time, not all of the sum sued for had yet fallen due.  The court proposed that that circumstance be dealt with by a minute of restriction (in respect of the sum not yet due) and reserving the possibility of subsequent amendment to reintroduce averments in relation to that sum.

[73]      I reject the defender’s prematurity point.  First, the adjustments introducing the pursuer’s case based on indemnity post-dated the Tarn Letter.  That, in my view is a complete answer to this point.  Certainly, it was not suggested that this raised a question of competency or want of title to sue (cf the position of a pursuer who raises an action before assignation of the right that confers its title and interest, and which is regarded not curable by amendment: Symington v Campbell (1894) 21 R 434).  Secondly, the principal ground of action is one for damages for breach of contract.  The technical prematurity point did not extend to the pursuer’s principal case.  In those circumstances, it seems to me that this case corresponds to the facts in Duncanson and the pragmatic approach taken by the court in that case has much to commend it.  It is consistent with the expeditious conduct of a commercial action.  The defender did not explore what would follow if this aspect of the pursuer’s case were deleted.  If it were a truly a question of competency, nothing would preclude the pursuer raising a separate action based on the indemnity.  Given the substantial overlap of the facts underlying the two bases of the pursuer’s claims (which, on this hypothesis, would be the present action but restricted to the damages claim, and the indemnity claim in the newly‑raised separate action), that separate action would be productive of duplication of time, effort and expense.  If that separate action were then conjoined with this case, the proceedings following on would in practical terms be indistinguishable from what otherwise will be the procedure in this case.  If, on the other hand, the prematurity point is not one of competency or want of title to sue, but is one of discretion in terms of the procedure to be followed, I would exercise that discretion to permit the pursuer’s case based on indemnity to proceed in the present action.  Accordingly, the defender’s prematurity plea falls to be repelled.

 

The Defender’s Challenge to Pursuer’s Case Based on the Indemnity

[74]      Subject to what is said below, in respect of the necessity for proof of actual loss, I prefer the pursuer’s position on this issue to that of the defender.

[75]      The phrase in clause Thirty-one of the Lease that falls to be construed is the defender’s obligation:

“to free and relieve and indemnify the [pursuer] of and against (i) all claims against the [pursuer] and (ii) all costs and expenses suffered by the [pursuer] and (iii) all costs and expenses suffered by the [pursuer] arising out of the non‑performance by the [defender] any such obligations.” (Emphasis and roman numerals added.)

 

Mr Fairley argued that “claim” meant “liability” and that an averment of anything less than that was necessarily irrelevant.  Mr Sandison did not particularly contradict this reading, but he contended that a liability existed as at the date the action was raised.  Neither party made any submissions in respect of the other parts of this clause.

[76]      In relation to the cases referred to by Mr Fairley, neither is in my view particularly in point.  In North of Scotland Hydro‑Electric Board the court held that the pursuers were not entitled to recover under a contractual indemnity granted to them by the defenders in respect of a claim based on their own negligence.  On the facts of that case, the pursuers had been found to be solely liable to a third party in an earlier action by that third party directed against the pursuers and the defenders.  The definition of “liability” therefore was not at issue.  Rather, the ratio of that case is that a party may be indemnified against a claim based on its own negligence only if there were clear words to that effect in the contract.  See per Lord Justice Clerk Thomson at page 7, Lord Patrick at page 9 and Lord Mackintosh at page 12, albeit the latter acknowledged a degree of diffidence in the view he expressed.  

[77]      In Duncan’s Trustees the pursuers were the landlords of premises and they raised an action for relief against contractors whose negligence led to the flooding of the premises of let.  However, the damage had been caused to their tenants’ stock.  The court upheld the defenders’ challenge that, as at the date of the pursuers’ action for relief, they were not liable and had not been found liable to their tenants.  The action was irrelevant and premature.  The nature of the tenants’ claim against its landlords is not disclosed.  While that case might be seen as authority for the unremarkable proposition that a pursuer has to sustain an actual loss or liability before raising an action of relief against the  wrongdoer, in my view that case does not necessarily preclude the pursuer’s reliance (qua mid-landlord) on a clause of indemnity against its tenant (ie the defender) following a claim by the head landlord (ie the Tarn Letter). Otherwise, it offers little guidance on the contractual wording that falls to be construed in this case.  It certainly is not authority for the proposition that “claim” must necessarily be construed as meaning “liability”, regardless of the terms of the contractual provision in question.

[78]      Considering the purpose of clause Thirty-one, it should be borne in mind that the pursuer has retained its obligations to the head landlord under the Head Lease, but has ceded occupation and control of the Premises to the defender.  The position would have been otherwise, if it had assigned its interest under the Head Lease to the defender rather than create a further link in the contractual chain by subletting the Premises to the defender.  In those circumstances, it is commercially sensible for the pursuer to seek relief from the defender so that, in effect, its position is essentially unaffected by any default outwith its control, such as some default on the part of the defender.  The purpose of the clause is to neutralise or lay off any risk created by the Lease, and, in particular, to protect itself against any exposure to it under the Head Lease caused by any breach of the defender under the Lease and which has the effect of putting the pursuer in breach of its obligations under the Head Lease.  The indemnity is a true indemnity, in the sense that it is a transfer of the pursuer’s liability (qua tenant under the Head Lease) owed to Tarn to the defender by virtue of clause Thirty-one of the Lease.

[79]      Turning to clause Thirty-one, in my view there are three distinct circumstances (corresponding to parts (i), (ii) and (iii), as I have identified them in paragraph [75], above) in which the defender is obliged “to free and relieve and indemnify the [pursuer]”.  This entails reading the latter two “ands” in the clause as conjunctive rather than disjunctive, ie the three parts are not just synonyms of each other, and which, it seems to me, is a more natural reading.  On a first reading, it may be thought that there is a certain redundancy in the last two parts referring to (ii) “all costs and expenses suffered by the [pursuer]” and (iii) “all costs and expenses suffered by the [pursuer] arising out of the non‑performance by the [defender] any such obligations”.  While part (iii) requires that there be some causal link between the “costs and expenses” suffered “arising out of” the defender’s non‑performance of a non‑pecuniary obligation, part (ii) would appear to permit the pursuer to recover for the “all costs and expenses” it “suffered” even in the absence of a causal link with any default by the defender.  The scope of the transfer of risk, as it were, is quite wide.  More to the point, however, the use of the word “suffered” in the parts (ii) and (iii) of clause Thirty-one indicates that the defender must “free, relieve and indemnify” the pursuer for such costs and expenses, but they must in my view be costs and expenses actually incurred.  Thus far, this reading is more consistent with the defender’s approach, namely that some loss must be incurred before the indemnity obligation arises.

[80]      However, given the language and presence of these parts of clause Thirty-one, what is the meaning to be given to part (i) and its reference to “claims”?  If it is correct that the indemnity obligation applies in three circumstances, then part (i) must mean something different than what is expressed in parts (ii) and (iii). The common feature of parts (ii) and (iii) is, as I have noted, that the pursuer has “suffered” (ie incurred) “costs and expense”.  “All claims against [the pursuer]” is, it seems to me, a broader formulation.   

[81]      In my view, even construing clause Thirty-one contra proferentem, nothing in the language, structure or purpose of this clause suggests that where the phrase “all claims” is used in part (i), it is restricted to what must be established for the purposes of triggering the indemnity under parts (ii) and (iii). Rather, the phrase “all claims” must concern something other than the circumstances set out in parts (ii) and (iii).  Having regard to the observations in paragraph [78], above, about the purpose of the indemnity clause, it is entirely consistent with that purpose that the pursuer would wish to protect itself against “all claims”, regardless of whether they are well founded.  “Claim” is not a term of art in Scots law.  Neither party referred to the meaning of the word “claim” in the context of the law of liability insurance, where it may have a more fixed meaning.  Nor was it suggested that a technical meaning, derived from the law on leases, was to be attributed to the phrase “all claims”.  In Chambers Dictionary, the principle definition of “claim” is “to call for; to demand as a right; to maintain or assert”.  In this ordinary usage, a “claim” does not mean an established liability in the sense of a liability that is admitted or proved (as discussed in Duncanson) but can include a potential liability.  In other words, not every “call” or “demand as a right” may, at the end of the day, be found to be justified.  It is commercially explicable that a person in the position of the pursuer would wish to be free of the burden of dealing with a claim, even apart from being relieved of the costs of a well‑founded one. In the context of clause Thirty‑one, construed according to its terms and in the context of the Lease, I find that the defender’s reading of “claim” as meaning, in effect, an established liability, is too restrictive and is not consistent with the clear commercial purpose of such a clause.

 

The Compensation Principle Applicable to a Common Law Claim for Damages for Breach of Contract

[82]      However, I should make it clear that I do not accept that there is a “liability” at ish, at least in the sense advanced by Mr Sandison and which assumes that a loss had been sustained due to the defender’s breach.  Neither party offered a definition of “liable” or “liability”.  The primary meaning of “liable” in Chambers Dictionary is “subject to an obligation; exposed to a possibility or risk” and “liability” is defined as “the state of being liable”.  There is an ambiguity, therefore, inherent in the word “liability” as applied to characterise the consequence of the defender’s breach of the repair obligation at the end of the Lease.  The defender is of course liable in the sense that it is admittedly in breach of the contractual repair obligation;  the pursuer has sustained a legal injuria.  It does not necessarily follow, however, that the pursuer has sustained a loss (or damnum) as a consequence of that breach, or that there is automatically, and without more, a liability incumbent upon the defender to make any payment in respect of its breach of obligation.

[83]      It remains the case, in my view, that, as with any common law claim for damages for breach of contract, in the absence of a payment or liquidated damages clause in the contract, it is still incumbent upon the pursuer in such a case to prove the fact and quantum of the actual loss flowing from the defaulting party’s breach of contract.  This compensatory principle lies at the very core of the Scots law on damages, as the following observation of Lord Drummond Young from the case of McLaren Murdoch & Hamilton Ltd v The Abercrombie Motor Group Ltd 2003 SCLR 323 at paragraph 41 makes clear:

“Damages… is a secondary, substitutionary remedy. The purpose of damages is to provide financial redress for the loss caused by a breach of contract. That result is achieved by ordering the party in breach of contract to pay a sum sufficient to place the other party in the same position as he would have been in had the contract been performed. Thus the notions of loss and financial redress are central to the remedy. This indicates that a loss itself must be substantial, capable of being measured in financial terms. The mere existence of a breach of contract does not of itself create a loss of that nature; the loss is rather something flowing from and independent of the breach, and must be substantial in the sense it can be measured in financial terms.” (Emphasis added.)

 

I stress this because, at times, the parties’ submissions did not appear to take full cognisance of this principle.  The observations of the Second Division of the Inner House in Wilkie v Brown 2003 SC 573 at paragraph 21 are to like effect.  In Wilkie, the pursuer sued for breach of contract on the part of the defender in respect of its failure to complete certain building works.  The pursuer maintained that it was entitled to damages, even if only nominal damages, simply by reason of the defender’s breach of contract.  The court rejected this argument, stating:  

“A more accurate expression of the principle, in our view, is that if the pursuer in a case of this kind fails to prove that he has suffered any loss at all, there is an injuria sine damno and no award of damages can be made (cf Aaron & Co v Fraser, Lord Murray at p 143)”.

 

And in the specific context of breach of a repair obligation in a lease, the Inner House in Grove noted that not every breach may result in a loss: see above, at paragraphs [55] and [56].  In other words, for aught yet seen, it may be the case that the pursuer does not prove that any loss flowed from the defender’s admitted breach.  This might be the case, for example, if one of the scenarios postulated in Grove eventuates.  In such a case, there may be, as it was put in Wilkie, an injuria sine damno.  The question of whether the pursuer has sustained, and can prove, an actual loss is a matter best resolved after the evidence has been heard.

[84]      These issues stray into the territory of the measure of damages, and in respect of which Scots law has remained attractively pragmatic and flexible. This is clear from Duke of Portland  (noted above, at paragraph [51]) and the discussion by Lord McCluskey (in the majority) in Kvaerner Construction v Kirkpatrick & Partners Ltd 1999 SC 291 at pp 300B to 301C.  The measure of damages the pursuer adopts in this case is the cost of remedial works. (As is clear from cases like Duke of Portland, the diminution in capital value might have been another measure of loss.)  In the course of his submissions, Mr Sandison appeared to suggest that it would suffice for the pursuer to prove the estimated costs of works still to be undertaken.  However, the defender’s averments as to its doubts regarding the pursuer’s (or Tarn’s) intention raise a live issue, as does the pursuer’s averment in reply.  These averments were not challenged at debate.  In these circumstances, I reserve my opinion on whether proof of estimated costs would itself suffice.  In any event, I would not be prepared to exclude averments on such issues as a matter of relevancy.  Accordingly, it is likely that a proof or proof before answer will be the appropriate means to resolve the matters on record.

[85]      It follows, that, while I have not sustained the two pleas advanced by Mr Fairley, I have not entirely accepted Mr Sandison’s submissions in respect of these matters.  In those circumstances, I shall reserve the question of expenses and put the matter out By Order for consideration of these, as well as for consideration of the terms of any interlocutor to give effect to my decision and to determine further procedure.