Pursuers: Young, Q.C.; Lindsays

Defenders: Martin, Q.C., McIlvride; Gillespie Macandrew LLP

9 September 2011

[1] The parties are both house builders. Three aspects of the commercial practice of house builders are of relevance to the present action; these were a matter of agreement between the parties. First, it is of commercial importance to house builders that, when they have completed the development of a site, they have available to them further sites on which their capital and workforce can be productively employed. Consequently they typically seek to acquire sites, or options to acquire sites, some time in advance of the date on which they will be in a position to begin any development. This permits them to programme the sequential development of sites, so that they can use their resources effectively. Secondly, when a house builder acquires a site for development, it is generally recognized that there is a limit to the number of houses that can be realistically developed on any one site; at the time of the events that gave rise to the present action that was thought to be 50 units. Consequently, if a house builder acquired a site that had a capacity significantly in excess of that figure, it was common practice to sell the surplus to another house builder or, if appropriate, to more than one. Thirdly, house builders frequently enter into arrangements whereby one sells part of a site to the other and the second sells to the first another site of comparable size and development value. This assists each house builder to secure a regular supply of development sites of the requisite size. The exact legal machinery that is used to achieve such an exchange of sites varies according to the individual case, and the transfers of the two sites may be dealt with by missives that are independent of each other. The present action relates to an arrangement of broadly that nature.

[2] In May 2006 the parties concluded missives for the transfer by the pursuers to the defenders of an area of land at Wester Cowden, Dalkeith, which formed part of a larger site that the pursuers had acquired. Those missives were in due course implemented, and the defenders proceeded to develop the subjects sold. Prior to the conclusion of the Wester Cowden missives, discussions had taken place between representatives of the parties with a view to the transfer of a broadly similar area of land by the defenders to the pursuers. The defenders ultimately proposed that they should transfer an area of land at Broomhouse, Glasgow. On 18 April 2006 Messrs Haig-Scott & Co, the solicitors acting on behalf of the defenders, made a formal offer to sell 6.6 acres of ground at Broomhouse to the pursuers, and on 26 May 2006 Messrs Macdonalds, the solicitors acting on behalf of the pursuers, accepted the offer, holding the bargain as concluded. Although the two sets of missives were concluded almost simultaneously, they were independent of each other.

[3] The present action is concerned with the Broomhouse missives. These related to an area of ground extending to 6.6 acres or thereby situated in the north east of Glasgow. Those subjects were sold at a price of £4,160,000, but that was subject to a deduction of what were known as Abnormal Costs. Abnormal Costs were the subject of an elaborate definition (in condition 1.1); the material part of the definition was as follows:

"any costs incurred or to be incurred by the Purchaser [the pursuers] in respect of... all necessary work required to remedy any abnormal ground conditions to allow the Purchaser to construct houses, garages and other structures on the Purchaser's normal unreinforced strip foundations and requiring no further specialised treatment and to install roads and footpaths without specialist treatment for protection (excluding normal capping layers)".

Thus the risk of abnormal ground conditions fell on the defenders rather than the pursuers. Further provision was made (in condition 2) for an increase in price of £80,000 per unit in the event that the pursuers secured planning consent for in excess of 52 residential units. The price was payable at the Date of Entry, defined as the date 28 days after the later of completion of the Seller's Works and implementation in full of the Seller's Obligations. The Seller's Works were defined as the installation of roads, footpaths and other services and the upgrading and realignment of a nearby road, Boghall Road, and the construction of a roundabout at the junction of Boghall Road and Baillieston Road; the upgrading of Boghall Road and the construction of the roundabout were necessary to obtain road access to the subjects that was acceptable to the local authority. The Seller's Obligations comprised obtaining and exhibiting written confirmation from the relevant authorities that there were no constraints or limitations as to the number of houses that could be occupied on the subjects in relation to drainage, planning or roads.

[4] Condition 10 of the missives made specific provision for the Seller's Works. So far as material, it provided as follows:

"The Seller shall be obliged to Complete the Seller's Works... by the Long Stop Date, and that generally in accordance with the Consents for the Seller's Works and to such standard as will allow the Purchasers to develop the Subjects with the view to completing and selling residential units thereon..."

The Long Stop Date is defined as 15 December 2007. Provision was made for an extension in certain circumstances. Condition 12 of the missive letter of 18 April 2006 is also important. It relates to the Long Stop Date, and is in the following terms:

"In the event that the Seller has failed to Complete all of the Seller's Works or the Seller has not fully implemented the Seller's Obligations by the Long Stop Date as such date may be extended in terms of Condition 10(a) hereof then the Seller will be obliged to offer to sell to the Purchaser another residential development site within Central Scotland of comparable size and value to the Subjects. Upon settlement of the transaction contemplated by the missives in respect of the said other residential development site the missives to follow hereon (of which this offer forms part) shall be terminated".

I will return to the construction of this clause and its relationship to condition 10 at a later stage. The reason for the provision was explained by Mr Gordon Calvert, who at the time was Land Director of the defenders in Scotland: it was known that there were substantial and potentially costly constraints that might inhibit development of the Broomhouse site, and condition 12 was included to give the pursuers an opportunity to develop an alternative site within a reasonable timescale.

[5] The defenders did in fact encounter difficulty in the completion of the Seller's Works. Roads construction consent was required for the upgrading of Boghall Road and the completion of the roundabout at the junction of Boghall Road and Baillieston Road. The cost of the necessary works turned out to be very substantial, and the defenders accordingly attempted to reach agreement with the local authority that would allow redesign of the works to reduce costs. Nevertheless no agreement was reached in time to enable completion of the Seller's Works by the Long Stop Date, 15 December 2007. The likelihood that agreement would not be reached with the local authority had been apparent well before that, however, and from June or July 2007 onwards the parties' representatives had discussions about the possibility of an alternative site. A number of alternatives were mentioned, but serious discussions focused on a site at Airdrie within land that had recently been acquired by the defenders. On 14 September 2007 the defenders' solicitors wrote to the pursuers' solicitors confirming that it would not be possible to complete the Seller's Works by the Long Stop Date and asking them to take formal instructions on an offer of the alternative site in Airdrie. A further letter was sent on sending December 2007 renewing the offer of the Airdrie site in implementation of clause 12 of the missives. Neither of those offers was accepted, and on 12 June 2009 the pursuers' agents wrote to the defenders' agents presenting the Broomhouse missives on the ground of the defenders' material breach of contract.

[6] The pursuers subsequently raised the present action in which they claim damages of £1,789,948 on account of the defenders' breach of contract. Following sundry procedure a proof before answer was allowed on the question of liability, reserving all questions of the quantum of any loss sustained by the pursuers. At the proof evidence was led relating to the general background to the contract, which established the general history narrated above. Apart from that I will consider the evidence at the point where it becomes material to the arguments advanced by the parties.

[7] The initial contention for the pursuers founded on the admission by the defenders that they did not complete the Seller's Works by the Long Stop Date as required by condition 10. That gave rise to the inference that the defenders were in breach of contract. If the defenders were to avoid that, they required to establish a number of matters: first, that on a proper construction of the missives condition 12 provided the sole remedy for the pursuers in the event that condition 10 were not satisfied; secondly, that the defenders made an offer to sell an alternative site for residential development; thirdly, that the alternative offered was of comparable value to Broomhouse; and fourthly, that the alternative offered was of comparable size to Broomhouse. The pursuers submitted that the defenders had failed in all of these matters, and that the defenders were accordingly in breach of contract.

Construction of condition 12
[8] The first question is the construction of condition 12, and in particular whether it provided the pursuers with their sole remedy in the event that condition 10 was not satisfied or was merely an alternative to other remedies for breach of contract. Parties were agreed that in considering this issue the ordinary authorities on contractual construction would apply; these are well known and it is unnecessary to repeat them. In construing a contract the primary task is to discover the parties' common intention, objectively ascertained. In doing so it is necessary to have regard to the background knowledge available to the parties at the time of contracting. In the present case, the parties were broadly agreed as to the surrounding circumstances, in particular as to how land swaps operate within the house building industry. For the pursuers it was submitted that that knowledge was not of great assistance in construing the present contract. Counsel for the defenders was in broad agreement with that contention, and I agree. The fundamental point is in my view that the present transaction was not a "land swap" in the strict sense but rather a freestanding contract of sale with its own set of missives. It is obviously possible for house builders to structure a transaction as a true "land swap", or in other words a form of excambion, with the two parts of the transaction dependent on each other. That did not happen in the present case, however; the parties chose to contract using two distinct sets of missives and did not make them dependent upon each other.

[9] Counsel for the pursuers submitted that assistance could be obtained from a letter written on 21 September 2005 by Mr James Preston, the Managing Director of Persimmon Homes East Scotland between 2002 and 2007 to Mr Andrew Wyles, the managing director of Bellway Homes Ltd Scotland. In that letter, written at the time when the Wester Cowden and transaction was being discussed, Mr Preston wrote that entry and vacant possession to the Broomhouse site should be granted no later than two years from the conclusion of missives for Wester Cowden. If that could not be fulfilled a suitable housing alternative would be made available, and acceptance of an alternative and discharge of the obligation would be at the sole discretion of the pursuers. Mr Preston gave evidence that Mr Wyles did not indicate at any stage that such an approach was unacceptable to the defenders, and Mr Wyles agreed in cross-examination that he had not done so. The problem with that letter is that it was sent immediately before the parties embarked on the negotiation of missives, and it is clear law that correspondence forming part of negotiation is not admissible as background evidence. Counsel for the pursuers accepted this point, and did not place great weight on the letter. He accepted, moreover, that matters had moved on in the missives. In these circumstances I do not think that any significant weight can be placed on the letter; it is the missives that must be construed.

[10] In construing condition 12, it is clearly essential to look first at condition 10. This imposes an obligation on the defenders to complete the Seller's Works by 15 December 2007. Provision was made for extension of that date in certain defined circumstances, but it was a matter of agreement that none of those was applicable. Thus the defenders had failed to fulfil the obligation in condition to 10 by the requisite date. The pursuers argued that the defenders were accordingly in breach of contract. In this respect, condition 10 did not provide a right to resile without penalty if the condition could not be satisfied by a particular date. In those circumstances the pursuers contended that they were entitled to sue for damages for the breach of condition 10. The existence of condition 12 was irrelevant to this remedy. The right to damages for breach of contract was a primary contractual right, and could only be taken away by a clear indication to that effect in the contract. In this respect the pursuers founded upon the recent decision of the Court of Appeal in Stocznya Gdynia SA v Gearbulk Holdings Ltd, [2010] QB 27. In that case Moore-Bick LJ, whose opinion was concurred in by the other judges, stated (paragraph [22]):

"[A]ny person approaching negotiations with a view to entering into a legally binding contract (and certainly experienced businessmen such as the parties to these contracts) is to be taken to know that the law gives him a right to recover damages for loss of his bargain if the other party commits a breach which deprives him of substantially the whole benefit that it was intended that he should obtain from it. That, of course, is a valuable right...".

He continued (at paragraph [23]):

"The court is unlikely to be satisfied that a party to a contract has abandoned valuable rights arising by operation of law unless the terms of the contract to make it sufficiently clear that that was intended. The more valuable the right, the clearer the language will need to be".

In the present case, it was said, the wording of the missives did not say anything to exclude the pursuers' right to damages for breach of condition 10.

[11] For the defenders it was submitted that an actionable breach of contract sounding in damages would not result from the mere fact that the pursuers failed to implement the obligation in condition 10 to complete the Seller's Works by 15 December 2007. If the defenders failed to implement the obligation in condition 10 by that date, they became subject to the obligation in condition 12; that was the remedy expressly provided by the contract. An actionable breach of contract would exist only if the defenders failed to fulfil the obligation in condition 12. The defenders' case was that they had made an offer under condition 12, the offer of the Airdrie site, which fulfilled the requirements of condition 12. Consequently there was no actionable breach of contract. In other words, if the defenders failed to complete the Seller's Works timeously, the pursuers did not have a choice of remedies, damages or the implementation of condition 12; the only remedy that was available was that under condition 12, and it was only if the defenders failed to fulfil their obligations under that condition that there was an actionable breach of contract.

[12] In my opinion the defenders' contentions on this matter are correct. I agree entirely with the approach taken by Moore-Bick LJ in Stocznya Gdynia; the right to damages for breach of contract is an important right, and it can only be taken away by a clear provision to the contrary. In that case the application of such an approach seems to me to have been a very obvious inference from the structure of the parties' contract. The parties had entered into three contracts under each of which the seller was to supply a vessel to the purchaser. None was delivered. The purchaser exercised a contractual right to terminate each contract and to recover under a bank guarantee the instalment of the price that it had paid on signing the contract. The question remained as to whether it was also entitled to damages from the seller for the loss of its bargain in addition to recovering that instalment of the price. It was held that the purchaser was entitled to damages of that nature. The argument for the seller was that the only remedy provided in the contract was repayment of the instalment of the price, which excluded any right to damages. This argument was rejected (at paragraphs [40]-[41]):

"I am unable to accept that submission. On discharge of a contract of this kind a buyer who has paid the whole or part of the price in advance is entitled, in the absence of any agreement to the contrary, to recover what he has paid by reason of a total failure of consideration. He therefore has a right to recover in restitution any payments he has made in respect of the price, a right which is quite distinct from any right he may have (if he is the injured party) to recover damages for the loss of his bargain. In the present case the parties made specific provision for the repayment of instalments and [the purchaser] could not, of course, recover both under the contract and in restitution; to do so would result in double recovery....

If this argument is sound, therefore, it can only be because the parties have agreed that the right to recover instalments of the price provided by article 10 is an exclusive alternative to [the purchaser's] right under the general law. In my view that argument must be rejected. I can well see the force of the argument that a right to obtain repayment of instalments under a demand guarantee is of great value to a buyer because it provides certainty and speed, but in the light of the fact that, as is well known, the value of the vessel can rise or fall to a marked degree between the date of the contract and the date of delivery it would be surprising if a buyer entering into a contract for a new vessel were prepared to exchange the whole value of his bargain for the certainty of a speedy recovery of advance payments in the event of the builder's repudiation".

Moore-Bick LJ considered that such an argument did not make good commercial sense; the ability to recover instalments paid quickly and easily did not amount to an adequate counterpart for the loss of the right to damages.

[13] In the present case, by contrast, it is not said by the defenders that the provisions of condition 12 are an alternative to any right to damages for non-performance of the contract. Instead, the contention is that a breach of the defenders' obligation under condition 10 gives rise to a further obligation under condition 12 to offer an alternative site. It is only if an adequate alternative site is not offered that there is a breach of contract that gives rise to a right to damages. For that reason I am of opinion that Stocznya Gdynia can readily be distinguished.

[14] Perhaps more important, however, is the fact that, if the contract is construed in the manner suggested by the pursuers, condition 12 amounts in effect to an option exercisable by them. If the defenders fail to complete the Seller's Works by the Long Stop Date, the pursuers have the choice of treating that as a breach of contract actionable in damages or insisting that the defenders provide an alternative site in terms of condition 12. If an option was intended, it is difficult to understand why it was not expressed as such. Instead, condition 12 is expressed as an obligation incumbent on the defenders in the event that they fail to complete all of the Seller's Works timeously (and only in that event). That obligation is to offer an alternative site conforming to certain specified criteria, which are clearly designed to define a site broadly equivalent to the Broomhouse site. That structure leads in my opinion to a clear inference that, if the defenders fail to meet their obligation in condition 10 timeously, they are obliged to offer an alternative, and it is only if they fail to provide an adequate alternative that there is any right on the pursuers' part to rescind the contract and claim damages. That construction is further supported by the commercial background to the contract. What the pursuers wanted was an alternative site for development, to enable them to deploy their resources efficiently. That could best be satisfied, if Broomhouse were for any reason unavailable, by the provision of an equivalent site somewhere else in central Scotland. Thus the obligation to provide an alternative is in my opinion an essential feature of the structure of the contract, and it is only if that obligation is breached that the right to rescind and claim damages arises.

[15] For the pursuers it was argued that defenders' construction of condition 12 would enable them to take advantage of their own failure to complete the Seller's Works. The pursuers had not sought an extension of time on the basis that the delays were outwith their control. Thus it was possible that the defenders' construction would enable them to avoid settlement of a transaction that was no longer advantageous to them by simply offering a substitute site of their choosing. In that event the pursuers would receive no damages for wasted costs in relation to the Broomhouse site, nor for any reduced profits generated from the new site or the delay in starting its development. I am not persuaded by this argument. It is true that condition 10 permitted the extension of the Long Stop Date for matters beyond the Seller's control, but only in cases where an extension of time was granted under the relevant building or works contract; that would not help if the problem were a failure to obtain appropriate planning consent. In any event there was no suggestion in evidence that the defenders had delayed the Seller's Works in order to back out of a disadvantageous transaction. Moreover, it had been known that there could be difficulty in completing the Seller's Works timeously, and that was why condition 12 was inserted. In these circumstances it does not appear to me to be unfair that the defenders should not be liable for the pursuers' wasted costs or reduced profits resulting from delay. Condition 12 was designed to deal with a risk that the parties knew about, and their obvious intention, objectively considered, was in my opinion that if the risk came to pass the defenders should be obliged to offer an alternative site meeting certain criteria. That was clearly designed to provide an adequate remedy for the pursuers.

[16] I should record that counsel for the defenders argued that the pursuers' case on record was based exclusively on a breach of condition 12, not condition 10. I do not read the pursuers' averments in that way; condescendence 6, dealing with the alleged breach of contract, begins by referring to the defenders' failure to complete the Seller's Works as required by condition 10, and it is clear from the initial part of that article of condescendence that the breach relied on when the pursuers rescinded the contract was a breach of condition 10. Thereafter the pursuers aver that throughout the period from 15 December 2007 to 12 June 2009 (the date of decision) the pursuers did not seek to extend the completion date or make any formal offer in terms of condition 12. Nevertheless, the primary case on record is in my view based on a breach of condition 10. I have rejected that case for the reasons discussed above.

Whether condition 12 has been implemented by the defenders
[17] The foregoing analysis leads on to the question of whether condition 12 has in fact been implemented by the defenders. The first issue is the meaning of condition 12. It obliges the defenders to offer to sell to the pursuers "another residential development site within Central Scotland of comparable size and value to the Subjects". The expression "of comparable size and value" clearly does not require exact equivalence. That would be impossible, as every parcel of land is unique. What is required, however, is that the alternative offered under the condition should be broadly equivalent to the area of land at Broomhouse, both in its size and in its value as land for residential development. No time limit is specified; nor is it said that the offer requires to be in any particular form. Nor is it stated that any price requires to be specified in the offer, and there is no mechanism for determination of the price. Moreover, all that is required is an offer; it is not essential that the offer should be accepted.

[18] The pursuers submitted that there was no offer to sell, as required by condition 12, for two reasons. First, no price was specified in anything that could be construed as an offer. Secondly, the offer was not made formally, but only in the course of discussions and in informal correspondence between the parties (for example the pursuers' letter to the defenders of 6 December 2007: 6/46 of process). I will deal with each of these arguments in turn.

[19] On the question of the lack of a price, the pursuers founded on the lack of any averment by the defenders as to a price, and held to their own position as stated in the pleadings: the defenders did not offer to sell the Airdrie site on any specific terms to the pursuers but merely discussed it in broad terms as they had done with other previous alternatives. Counsel founded on the evidence of Mr Kenneth Haldane, the Land Director of Persimmon House West Scotland, and Mr Gordon Calvert in connection with a letter written by the former to the latter on 25 July 2007 (7/24 of process). The letter referred to a conversation on 24 July, but Mr Calvert had had no recollection of it, and the letter did not indicate that any offer had been made to sell the Airdrie site; it stated that the land in Airdrie "will be offered" on the basis of the pursuers' matching the defenders' purchase price of the land. An offer was also referred to in a letter from the defenders' solicitors to the pursuers' solicitors dated 17 December 2007 (7/3 of process), which stated that the defenders had already offered an alternative site at Airdrie. On the basis of that evidence, counsel submitted that the absence of any offer could be seen from the evidence regarding the price, in particular that of Mr Calvert: in both examination in chief and cross-examination Mr Calvert was unable to say that any specific price had been given, although he had stated that the defenders would not take a profit from the deal. Reference was further made to the evidence of Mr Law, the Managing Director of Persimmon Homes West Scotland and Mr Haldane; neither suggested that a price was agreed. On that basis, counsel submitted that there was never a proper offer to sell in either form or content. It was an essential feature of any offer to sell heritable property that the price for the property should be specified, and that had not happened. Nor have there been any agreement as to a mechanism for ascertaining the price; any such agreement required to be clear and certain: NJ & J MacFarlane v MacSween's Trs 1999 SLT 619. In the absence of any of specifying a price, it could not be said that condition 12 had been implemented.

[20] I think it is clear on the basis of the evidence of Mr Calvert, Mr Law and Mr Haldane that the only indication of price was a statement that the defenders would be willing to sell the land at the price they had paid, not taking any profit. Mr Law gave evidence that that price was £850,000 per acre, but Mr Calvert only regarded that as a negotiating figure. (The pursuers considered that price unacceptable on the basis that it would produce an unacceptably low gross margin). Certainly no agreement was reached as to the price.

[21] For the defenders it was submitted that the lack of a price or any method for fixing the price did not prevent the existence of an enforceable contractual obligation. Reference was made to R & J Dempster Ltd v Motherwell Bridge and Engineering Co Ltd, 1964 SC 308. In the present case, the purpose of condition 12 was to provide the pursuers with an equivalent alternative site. The issue of price was not critical; the parties, and other house builders, had a history of land swaps, in which the value of land was readily assessed. Moreover, it was significant that condition 12 referred to comparable "value", rather than the determination of a price. Nor was anything said in condition 12 or elsewhere in the parties' agreement that a price should be proposed. Thus it was immaterial that nothing was agreed as to the price of the Airdrie site or how such price should be fixed; when the site was offered, that gave an opportunity for the pursuers to consider whether to take the site, if they wished to do so. At that point it was open to the pursuers to specify a price. If the price they offered was not acceptable to the defenders, it is possible that the bargain might not go through. At that point there might be an argument as to the reasonableness of the parties' conduct. Nevertheless condition 12 did not oblige the defenders to offer the site at a price acceptable to the pursuers.

[22] I accept that no price was agreed and that condition 12 does not provide any price-fixing mechanism. I am nevertheless of opinion that this does not mean that no valid offer was ever made by the defenders. The correct approach to this issue is in my view that found in R & J Dempster Ltd v Motherwell Bridge and Engineering Co Ltd, supra. In that case the defenders, who carried on business manufacturing tanks, principally for oil storage companies, found themselves faced with very heavy demand at the same time as a steel shortage, which meant that supplies from steel mills were placed on a quota system. In the circumstances price was a relatively minor consideration. The parties agreed that during each of three years the pursuers would set aside 1000 tons of their steel quota to manufacture tankage for the defenders, with the price being settled at a later date. It was held that that constituted a valid and binding commercial contract, capable of enforcement by the pursuers. The absence of agreed prices was held immaterial. Lord Clyde dealt with this issue as follows (at the 328-329):

"[T]he real fallacy of [the defenders'] construction of the arrangement is that it assumes that the fixing of the price for a fabricated tank was of the essence of the bargain and that no contractual obligation was undertaken until the prices had been adjusted. It overlooks the fact that it was the usual practice of the oil storage companies at this time to place orders and only adjust prices after delivery of a fabricated tank, owing to the fact that tanks and not prices were the material consideration in the then conditions of the market. Moreover, it overlooks the fact that in [earlier years] the pursuers and defenders operated on this open order basis and had without difficulty adjusted prices for fabrication after delivery by the pursuers had taken place".

Lord Guthrie expressed views to similar effect (at 331-232); see also R & D Developments Ltd v Hallam Land Management Ltd, 2011 SC 286.

[23] In the present case, condition 12 requires the alternative site to be of "comparable value" to the Broomhouse site. That of itself indicates that some sort of commercial valuation is to be used, whether using comparable properties or the residual method of valuation; I discuss the choice between those below. Moreover, the commercial background to the parties' agreement is important. The parties were both house builders, operating within broadly the same market, and it was accepted that both of them engaged regularly in land swap transactions. It was clear on the evidence that land swap transactions are arranged on the basis of commercial valuations. In addition, the evidence established that the valuation of sites for development is a task that is readily carried out within the industry, using either the residual or the comparative method of valuation. That is very clear from the evidence of those engaged within the industry (for example Mr Preston, Mr Haldane, Mr Law and Mr Calvert). In those circumstances I consider that the determination of a valuation would be a relatively straightforward exercise, and certainly one that was readily capable of being carried out. I am accordingly of opinion that the meaning of condition 12 is that the offer of an alternative site will be at a commercial valuation, and the offer made by the defenders of the Airdrie site must therefore be construed in that way. It is no doubt possible that the parties would fail to agree of what was a proper commercial valuation; in that event, the matter could be subject to the determination of an expert or arbitration, or if necessary litigation. That is essentially the same position as was reached in R & J Dempster Ltd v Motherwell Bridge and Engineering Co Ltd, supra. If the defenders, after making the offer of an alternative site, held out for an unreasonable price, that might mean that the offer was ineffective, but that is not the present situation; there was no evidence that the defenders' price for the Airdrie site was unreasonable (and indeed it appeared that they were willing to accept the price that they had paid for the site).

[24] The second argument for the pursuers was that the pursuers had not implemented condition 12 because no formal written offer had been made; the wording of the condition indicated that a formal document was required. The defenders submitted in reply that condition 12 did not require a formal offer or an offer in any particular form to be made to the pursuers. In my opinion that is correct. Any offer made under condition 12 does not form part of a freestanding contract for the sale of land; it is rather an act designed to implement an obligation contained in such a contract. As such the provisions of section 1 of the Requirements of Writing (Scotland) Act 1973 as to obligations relating to land do not apply. Thus an informal offer would suffice, provided that it was made in good faith.

[25] I thought it quite clear on the evidence that an offer of the Airdrie site had been made, however informally, prior to 15 December 2007. It was clear from the evidence that the site had been discussed between the parties well before that date, and in the course of those discussions it was apparent that it was being offered as an alternative to the Broomhouse site. The offer was confirmed in writing by a letter from the defenders' solicitors to the pursuers' solicitors dated 17 December 2007. In that letter the writer stated that the Seller's Works had not been completed in accordance with condition 10, and were understood not to be capable of completion for some considerable time. Consequently the offer of the Airdrie site was repeated in implementation of condition 12 of the missives. The writer repeated the defenders' "strongly held" view that the Airdrie site complied with the terms of condition 12, being a site of comparable size and value. Evidence was further led (from Mr Law, Mr Preston and Mr Haldane) that the pursuers were able to assess the site, to prepare their own site layout and to consider the value of the site according to their own version of the residual method. That indicates that they regarded an offer of the Airdrie site as having been made, and acted on that understanding.

The nature of the Airdrie site
[26] The next issue is whether the Airdrie site satisfied the requirements of condition 12. Condition 12 required that any alternative site offered by the defenders should be a residential development site within central Scotland of comparable size and value to the Broomhouse site. It was not disputed that the site offered in Airdrie was a residential development site; indeed it had the grant of planning permission to that effect, and it was assessed by the pursuers as such. Nor was it disputed that the site was in central Scotland. The dispute between the parties related to whether the alternative site was of comparable size and value to Broomhouse. So far as size is concerned, the Broomhouse site was of 6.42 acres, whereas the Airdrie site was of 6.03 acres, of which 5.56 acres represented the net developable area (the area on which profitable residential development could be carried out). At Broomhouse, the gross and net developable areas were the same; Mr Haldane commented that that was unusual. If the gross areas are compared, the difference amounted to 6.07%; if the net developable areas are compared, the difference was 13.4%. For the defenders it was submitted that condition 12 did not require equivalence of net developable areas, and that the comparison of the gross areas was accordingly appropriate. I do not think that it is necessary to go that far; condition 12 refers to "comparable size", and in assessing that I think that it is permissible to look at both the gross area of the site and the net developable area, taking a fairly broad view. It is also relevant to look at the number of units that could be constructed on the site. On that subject, Mr Kenneth Haldane, under reference to a letter that he have written to Mr Calvert on 25 July 2007, accepted that it was possible to construct 81 units on the Airdrie site with a coverage of approximately 74,000 square feet. The comparable figure for Broomhouse was 71,000 square feet. He accepted that those figures were comparable. When the gross and net developable areas and the possible coverage are taken into account, I am of opinion that the two sites can be considered of comparable size. That involves taking a fairly broad view, but I think that that is necessary given the subject matter.

[27] The critical issue is the final requirement of condition 12, that the alternative site should be of comparable value to Broomhouse. The wording used in the condition is fairly stark: the alternative site must be "of comparable... value" to Broomhouse. The word "value" is used, rather than any alternative such as "price", and it is not qualified by reference to such concepts as market value or value determined in any other particular manner. Nothing is said as to matters that must be regarded or disregarded in assessing the value. Finally, the valuation exercise must be made at a date some time after the date of the missives, probably in about December 2007. That indicates in my opinion that comparative values at that time must be used. When a comparative valuation exercise is carried out, unless provision is made to the contrary values used must normally be current values. In the present case there is nothing to the contrary.

[28] In their submissions the parties disagreed as to the manner in which the valuation exercise should be carried out. Two main areas of dispute emerged: whether the valuation exercise should be carried out on an objective basis or by reference to the value of each site to the pursuers, and whether it was appropriate to use a comparison method of valuation, using market values as disclosed by comparable properties, or to use a measure of valuation based on the profits which could be generated from the two sites, generally referred to as the residual method. The residual method involves a calculation based on expected sales revenue as compared with standard build costs; those costs include site preliminaries, abnormal build costs, sales and marketing costs and any planning gain (costs imposed for planning reasons). Build costs are deducted from the expected sales revenue, and an appropriate percentage gross margin is applied to the resulting amount. That gives a residual land value, and evidence was led that the residual land value represents the price that a house builder will typically be prepared to pay for an area of land. The pursuers argued in favour of the value that they, subjectively, would arrive at using the residual method; the defenders, by contrast, argued in favour of an objective basis of valuation, using market value as disclosed by comparable properties. Although the parties linked the two questions together in this way, I do not think, for reasons discussed at paragraphs [31]-[34] below, that the residual method of valuation is entirely subjective; consequently I do not think that the defenders' contention that objective valuation requires the comparable method holds good.

[29] In addition to the two foregoing matters, a third area of dispute emerged in the course of submissions, and it is one that is in my view of considerable importance. This is the significance of the price that is payable for Broomhouse under the parties' missives. This was £4,160,000, under deduction of Abnormal Costs. That represented the market value of the subjects in the spring of 2006, when missives were concluded. By late 2007, however, the market value of land had increased significantly; that was a matter of agreement between the two surveyors who gave evidence, Mr Colin Whyte for the pursuers and Mr Stephen Robertson for the defenders. Thus the pursuers were entitled to acquire Broomhouse at a price well below current value. If an alternative site is offered, the question obviously arises as to whether its value should be comparable to the current (late 2007) value of Broomhouse or the price placed on Broomhouse in the missives. In my opinion it is clear that condition 12 contemplated that any alternative offered must be assessed at current value and that Broomhouse should likewise be assessed at current value. That is the only sensible way in which the comparative exercise can be carried out. This has significant implications for the residual method of valuation, because land cost is used as one of the elements in the calculation. If the historic price is used (as in the pursuers' appraisal no 6/57 of process, carried out in December 2007), the result is a large increase in the percentage gross margin that is available to the builder. Indeed, in the pursuers' December 2007 appraisal, the gross margin is 35%. By contrast, in the appraisal by the pursuers carried out in March 2006 the gross margin was only 24%. Because current value must be used, the pursuers' appraisal carried out in December 2007 is not in my opinion an appropriate exercise. Instead, current value must be used in the land cost element in the residual calculation.

[30] The primary submission for the pursuers was that the missives envisaged a comparative exercise being carried out in relation to two residential development sites. The offer of an alternative site was to be made to the pursuers, who must determine whether to accept the offer of that site. On that basis, it was submitted, the "value" represented the value to the pursuers rather than the value to the defenders, as the pursuers were the party that had to take the crucial decision as to whether to acquire one or other area of land. For the defenders it was submitted that the standard of valuation was an objective one, which was not personal to the pursuers in the manner for which they contended. Condition 12 did not refer to the value to the pursuers, but rather signified open market value. On that basis, it was said, the residual method of valuation could not be used, because that was personal to each builder; in particular, the residual method was dependent on each builder's individual estimate of profitability.

[31] In my opinion condition 12 must be construed as requiring an objective estimate of value. I reach this view for two reasons. First, the law of contract normally proceeds on an objective basis, and in a case where the value of two sites must be compared at a particular time I can see no reason to depart from the general rule; indeed the very notion of an intelligible process of valuation would easily be subverted if one party were entitled to introduce wholly subjective factors that had little or no bearing on the objective value. Secondly, had either party wished to ensure that the comparison of the two sites should be carried out according to its own particular criteria, it could have specified that in condition 12. It might, for example, have been specified that the pursuers could refuse an alternative site if they at their sole discretion decided that it was not of comparable value. Such a provision is not meaningless; the pursuers would have to act in good faith, but the formulation would permit subjective factors to be taken into account. There is no such provision, however; the condition refers only to "comparable... value", without any reference to any specific method according to which the value is to be ascertained, and certainly without any reference to either party's own method of valuation as the criterion.

[32] Nevertheless, the fact that an objective basis must be adopted leaves open the critical question of the method that should be used to value the two sites. As I have already mentioned, two methods were discussed in evidence, the residual method and the comparison method. The pursuers' witnesses, for example Mr Preston, stated that the residual method is regarded as a fairly accurate indicative figure for the price that should be paid for the land in question. Mr Preston further indicated that standard build costs and sales and marketing costs should be broadly similar for each house builder. I did not understand that statement to be challenged, at least directly. I do not find it surprising, because the cost of labour and materials must clearly be broadly the same for every house builder operating in the same area. It follows that there is a considerable element of objectivity in the residual method.

[33] The defenders criticized the use of the residual method on a number of grounds. First, they referred to a paper issued by the Royal Institute of Chartered Surveyors, Valuation Information Paper No 12, on the Valuation of development land. The two methods are referred to in paragraph 1.5 of that document, which continues by indicating that in practice it is likely that of valuation would utilize both approaches; the degree to which either or both might be relevant depended upon the nature of the development being considered and the complexity of the issues. Paragraph 1.6 states that valuation by comparison is essentially objective, in that it is based on an analysis of the price achieved for sites with broadly similar development characteristics. The residual method, by contrast, relies on an approach that involves a combination of comparison and cost, and it requires the valuer to make a number of assumptions, any of which may affect the outcome in varying degrees. This point is taken further in paragraph 5.2, which states that the residual method requires the input of a large amount of data, which is rarely absolute or precise, coupled with making a large number of assumptions. Small changes in any of the inputs can cumulatively lead to a large change in the land value. In particular, some inputs, notably the profit margin, can present great difficulty. Secondly, the defenders referred to the sensitivity of the residual method to changes in input; this is a matter touched on in the RICS document, and was illustrated by cross-examination on certain of the residual calculations had been made. Thirdly, the defenders submitted that the only way that a residual appraisal can give a final result is when the purchase price is known; Mr Haldane had accepted that in cross-examination.

[34] I accept that there is some force in those criticisms. In particular, the RICS paper indicates that there are significant limitations and uncertainties in the residual method. Nevertheless, when the terms of the RICS paper are looked at as a whole, I am of opinion that both the residual and the comparison methods must be used, and indeed that in the circumstances of the present case primacy must be given to the residual method; I will return to this point when I discuss the evidence of Mr Robertson, the surveyor who favoured the comparison method. The material passages of the RICS paper are as follows. At paragraph 1.5 it is stated that in practice it is likely that evaluation will utilize both approaches, and paragraphs 4.1 and 5.18 indicate that the two methods can be used to cross check each other. Limitations in the comparison method are pointed out at paragraph 4.1, where it is stated that valuation by comparison is only reliable if evidence of sales can be found and analyzed on a common unit basis. At paragraph 4.3 it is indicated that a number of further factors may be relevant; these include the fact that values may differ considerably within a small geographical area and that, in a rapidly changing market, the date of the sale of the comparable is relevant. In relation to the latter point, both of the surveyors who gave evidence accepted that during 2007 land values had risen to a significant degree. These are obvious limitations that may apply to use of the comparison method. In paragraph 4.4 it is stated that, generally, certain types of developments, including urban sites, do not easily lend themselves to valuation by comparison; the differences from site to site may be sufficient to make the analysis of transactions problematical. Moreover, at paragraph 5.1, dealing with valuation by the residual method, it is stated that where the nature of the development is such that there are no (or limited) transactions to use for the comparative method, the residual method provides an alternative valuation approach. In such cases, however, it is pointed out that even limited analysis of comparable sites can provide a useful check as to the reasonableness of a residual valuation. The foregoing statements are in my opinion a clear indication that in a case such as the present, involving an urban site with relatively limited direct comparators in a rising market, the residual method may be preferable to the comparison method. Such an approach is supported by the evidence that it is the method regularly used in the house building sector, and that it is regarded as providing a good indication of price because builders' costs tend to be broadly the same. Mr Preston gave evidence to that effect, as did Mr Kenneth Haldane. I did not understand that evidence to be seriously challenged.

[35] The valuation evidence came from two sources: the parties' own representatives, who spoke to valuations that they had carried out based on the residual method, and two experts, both surveyors, Mr Colin Whyte of Montagu Evans for the pursuers and Mr Stephen Robertson of James Barr for the defenders. Both surveyors had great experience in the valuation of land for residential development, and I consider that both were well qualified to give evidence. Mr Robertson made use of the comparison method of valuation, although he also commented on the residual method. Mr Whyte's initial report was designed principally to comment on Mr Robertson's use of the comparative method, but he also produced his own valuations based on the residual method. I will first consider Mr Robertson's reports and evidence; then the pursuers' criticism of that evidence. Thereafter I will consider Mr Whyte's report and evidence in relation to the method of valuation, and then the evidence relating to valuation by the residual method, both by Mr Whyte and by the parties' employees. Finally I will attempt to reach a conclusion on the question of valuation.

[36] Mr Robertson's initial report (no 7/1) comprised a valuation of the two sites as at 17 December 2007, using the comparison method. It also contained an overview of market conditions at the time. After summarizing the main features of Broomhouse, he described it as "a reasonable mid-market family housing location". The planning consent included design guidance which specified detached houses, minimum plot sizes and other criteria which limited the density of the development. At Airdrie, there were no such limitations, and the housing mix could be substantially varied. Mr Robertson considered a range of comparison evidence in relation to both sites. At Airdrie he referred to five comparison sites, which disclosed land prices of between £456,520 and £666,666 per acre. The dates of valuation range from 1 February 2006 to 20 June 2007. At Broomhouse he expressed the view that there were no directly comparable transactions relevant to the site, but there existed a number of comparisons which could be used to form a judgment as to the value per acre for Broomhouse. In evidence he explained that expertise was necessary to make the necessary adjustments. Mr Robertson accepted evidence that four of the sites mentioned in relation to Broomhouse, for example one at 1316 Gallowgate which was being developed for high-density flats, were not of great assistance. He thought, however, that three sites, at Robroyston, Newton Farm, Cambuslang and Castle Avenue, Uddingston, provided better comparisons. The first and third of these, he thought, were in better locations than Broomhouse, but the second was comparable. The price for the Robroyston site, £1,243,000 per acre, was described as a full price paid at the top of the market (in May 2008). The price at Cambuslang was £719,793 per acre (in July 2006) and at Uddingston £641,025 per acre (in April 2007). On the basis of the various comparisons, Mr Robertson concluded that the market value of each site could be fairly stated at £4.2 million for Broomhouse and £3.85 million for Airdrie. He did not set out detailed reasons for this amount, beyond the indication that judgment was involved. He then considered the application of abnormal costs, which applied at Broomhouse but not at Airdrie. When abnormal costs were taken into account, however, the market value of the Broomhouse site would be adjusted to £3,775,552. Mr Robertson understood that no abnormal costs would be incurred at Airdrie.

[37] By way of comparison of the two sites, Mr Robertson stated that both could be categorized as popular mid-market residential locations which would make attractive purchases to house builders in 2007. Although Broomhouse had a larger acreage, the density was limited by Glasgow City Council; at Airdrie, by contrast, a greater density could be achieved. On that basis he considered that Airdrie had the potential to produce a scheme of comparable size to Broomhouse. On that basis Mr Robertson concluded that as at 17 December 2007 the site at Airdrie was of comparable market value to Broomhouse once adjustments were made for density of development and abnormal costs.

[38] Counsel for the pursuers criticized Mr Robertson's evidence. He submitted that, where there were differences of opinion between Mr Whyte and Mr Robertson, the former's evidence should be preferred; the submission was made on the basis of Mr Whyte's long experience of residential development, which was an area in which very few chartered surveyors specialized. It is true that Mr Whyte specialized to a great extent in residential property, but Mr Robertson also carried out work in that area, and accordingly I think that I must weigh the evidence of each expert on its own merits. Nevertheless, Mr Whyte gave evidence that builders approached the valuation of a potential site using the residual appraisal methods of valuation, and that evidence was supported by the builders' representatives who gave evidence. I have already indicated the approach taken in the RICS Valuation Information Paper to the residual method; it is regarded as an appropriate method of valuation, especially in cases where there are no or few transactions on which the comparative method can be based. At the same time the residual method must be approached with caution owing to its sensitivity to changes in inputs. Mr Robertson relied on a relatively small number of comparators, in each case spread over a considerable period. For that reason I am of opinion that the residual method may be used as the primary method of valuation, although subject to a cross-check using the comparative method. Counsel for the pursuers further submitted that Mr Robertson's lack of experience in the specific residential market was apparent from his use, in carrying out a residual appraisal for Airdrie (no 7/20), of a gross margin percentage to the build and other costs rather than the gross revenue. Mr Whyte stated that such an approach was common in the field of commercial development but was never taken in relation to residential development, and that was confirmed by the witnesses from the parties. I accept that that is correct, but I do not think that it is a particularly important criticism of Mr Robertson; his method is used in other forms of development.

[39] Counsel for the pursuers made a number of other specific criticisms of Mr Robertson's approach. First, it is said that Mr Robertson made an error in calculating the costs per acre of the Airdrie site to the pursuers in that he failed to add abnormal costs for calculating the cost per acre; he had done the opposite in relation to Broomhouse. That criticism is correct, but I do not think that it had any effect on the ultimate outcome. Secondly, it was said that Mr Robertson's report did not discuss how comparator sites for Airdrie and Broomhouse should be weighted to arrive at the final valuation figure. In my opinion there is some force of this criticism. Mr Robertson's discussion of comparators does specifically address the question of how relevant they are to the valuation of the two sites that are in issue, but ultimately there is no detailed weighting of the various sites. Mr Robertson was cross-examined on this matter, and it is fair to say that his answers were frank. He conceded that individual comparators might not be relevant, and explained that that was why a "basket" of other sites was used; using a basket of comparisons builds a picture. I am satisfied that he used his judgment in coming to an ultimate valuation. Nevertheless, I think that his opinion does suffer from a lack of comparators, especially contemporaneous comparators in a rising land market, and that the explanation of how those comparators relate to his final figure is not very clear.

[40] Thirdly, it was submitted that Mr Robertson lacked the specific information required to draw useful comparisons between the Airdrie and Broomhouse sites and the comparator sites; this is related in particular to acreage which could not be developed and the precise type of developments carried out. That is correct so far as it goes, but it seems to me that this is an inevitable problem in any comparison exercise. It is one reason for using, as Mr Robertson said, a basket of comparators. Fourthly, it was submitted that the comparator sites for Broomhouse were not directly comparable, and Mr Robertson himself accepted that four of the seven sites listed were in much poorer areas of east Glasgow. Mr Robertson indicated that he did not attach great significance to those sites (for example, the Gallowgate site). Nevertheless, as I indicated, I think that the relative lack of comparators is a significant criticism. Fifthly, it was said that Mr Robertson's treatment of abnormal costs at paragraph 12.0 of his report was flawed, as he accepted in cross-examination. In his report Mr Robertson treated abnormal costs as a straightforward deduction from the purchase price. This ignored the fact that these would be borne by the purchasing house builder, and would not affect the market value. Mr Robertson accepted this point, and stated that his references in paragraph 12.0 to market value should be corrected to "adjusted net price". Counsel for the pursuers submitted that the practice of house builders is to bid on a greenfield basis, because the missives will commonly permit the bid price to be reduced to take account of abnormal costs. The answer to this point, which was made by counsel for the defenders, is that abnormal costs are still an element that must be borne by the purchaser. They do not impact on the market price in the strict sense. Nevertheless, they affect the amount that the purchaser must pay in order to develop the site. For this reason I consider that Mr Robertson was correct in deducting abnormal costs at paragraph 12.0 of his report. The fact that he described what was happening incorrectly does not, I think, vitiate the fundamental accuracy of the point that he makes: the amount that a house builder must pay to have the Broomhouse site ready for construction must be reduced to take account of the abnormal costs.

[41] Sixthly, counsel for the pursuers submitted that Mr Robertson had drafted his original report on the basis that the higher density of housing on the Airdrie site would have a positive effect on market value. Mr Robertson had subsequently, however, taken the view that a lower density might be appropriate, as Mr Whyte had suggested. I think that there is force in this criticism; ultimately it was accepted that a lower density would be appropriate. Seventhly, it was submitted that Mr Robertson had not produced a residual valuation appraisal for Broomhouse. Once again, I think that there is some force in this criticism; the RICS paper mentions the importance of the residual method when the there are limited transactions for use in the comparative method, and also indicates the benefit of cross-checking one method with the other.

[42] Mr Whyte's original report (no 6/53) took the form essentially of a commentary on Mr Robertson's initial report. He commented on the various comparables used by Mr Robertson. It is not necessary to go into that part of his report in detail; as would be expected, he pointed out that some of the comparators were of greater relevance than others. He agreed with Mr Robertson's description of both sites as "popular mid-market residential locations", but indicated that he regarded Broomhouse as a good middle market site and Airdrie as a lower middle/middle market site. Mr Whyte further expressed the view that the Airdrie site was smaller in terms of both gross and developable site area and saleable floor area. He thought that in the state of the market in December 2007 a purchasing house builder would have remixed the development and sought to replace flats by further two-storey housing. This would reduce total saleable floor area further. He also regarded the location of the Airdrie site as inferior to the Broomhouse site. Mr Whyte undertook a residual site valuation of the two sites; he regarded this as a preferable method because of the difficulty of using historic land prices to produce a comparative valuation. He estimated the value of Broomhouse in December 2007 to be £5,200,000, which he reduced to £5,000,000 in his examination in chief. The reduction was based on actual sales figures that he obtained from the defenders in relation to Broomhouse; this caused him to drop his sales rate from £185 per square foot to £180-182.50 per square foot. He estimated the value of the Airdrie site to be £3,900,000. This was based on the construction of 55 detached or semi-detached units with no flats; this reflected his view that the market for flats in December 2007 was poor. His appraisal was less detailed than those carried out by the parties' representatives. That is perhaps unsurprising because house builders have a database with all their costs, which immediately provides detailed figures for most inputs.

[43] In addition to the expert witnesses, both parties led evidence from their present or former employees as to the application of the residual method. The pursuers' evidence of valuation using the residual method is found primarily in three contemporaneous appraisals (Nos 6/54, 6/56 and 6/57 of process). These were based on information available to the pursuers' employees in 2006 and 2007. The first appraisal (No 6/54) was an assessment of Broomhouse in March 2006. Three of those involved in its preparation, Mr Law, Mr Haldane and Mr King, the pursuers' Chief Quantity Surveyor, gave evidence. This appraisal disclosed a gross margin of 24%, which Mr Law indicated was the norm in 2006. The gross margin varies according to the state of the housing market, and tends to increase when times are more difficult. The March 2006 appraisal was updated in December 2007 (No 6/57). At this point the gross margin was 35%. The difference reflected the fact that the price in the 2006 missives, which was carried through into the December 2007 appraisal, was at historic levels. Thus the development of the land was likely to be particularly profitable for the pursuers. As I have indicated at paragraph [29] above, I consider that it is not appropriate to use the historic price in comparing the Broomhouse and Airdrie sites. For that reason I discount the December 2007 appraisal.

[44] The Airdrie site was assessed by the pursuers in November 2007 (No 6/56). The gross margin in this appraisal was 25%, and the land cost was assessed at £3,823,694. This appraisal was based on a layout of 73 units on the site; those consisted of 46 houses and 27 flats. That layout was essentially based on the defenders' original plan for the area, although the latter did not list the number of units or the number of flats in areas shown on the plan as blocks of flats. Mr Calvert gave evidence on the layout of the site, and indicated (under reference to the assessment found at no 7/2 of process) that it should be possible to construct 86 units on the site (using the defenders' house types; I did not understand anything to turn on this matter). Mr Calvert's assessment included 40 flats. Thus the main difference between the two appraisals was that Mr Calvert included an extra 13 flats. As I have mentioned, Mr Whyte thought that the developer would remix the Airdrie development because of the weak market in flats at that time. In addition, evidence indicated that flats are more expensive to build because the build costs for several properties must be incurred before sales can be carried through. Counsel for the defenders submitted that there was no obligation on the purchaser of land to maximize its value, and that accordingly it was appropriate to take the maximum development that the site could accommodate. The problem with this approach is, I think, the evidence that flats were becoming unpopular. I accept Mr Whyte's evidence on this point that a remix would almost certainly occur. I therefore consider that it is appropriate to assess the value of the site, as Mr Whyte and the pursuers did, on the basis of the mix used by the pursuers in their appraisal in November 2007 (no 6/56).

[45] Mr Calvert appraised both the Airdrie and Broomhouse sites using a version of the residual method (no 7/2). To do this, he assumed a mixture of the defenders' house types (86 at Airdrie and 50 at Broomhouse), calculated the revenue that would be obtained from sales, deducted build cost per square foot and calculated the profit. That enabled him to assess the value of each site. He estimated the land value of the Airdrie site at £4,899,288 and the land value of the Broomhouse site at £4,162,471. That assessment of Airdrie assumed that 46 houses and 40 flats were constructed, while the defenders' appraisal assumed 46 houses and 27 flats. As I have indicated, I accept the evidence of Mr Whyte on this matter and consider that a developer would in all probability have remixed the development to produce something along the lines of the pursuers' mix of houses and flats. To some extent Mr Calvert conceded this point. It was suggested to him in cross-examination that having 40 flats among the 86 units was unrealistic, and he replied that builders were still constructing flats; that included the pursuers. He accepted, however, that it might be possible to remix the site in the manner that the defenders had originally intended when they prepared a plan for its development. That would reduce the percentage gross margin but would still produce a higher land value than in the pursuers' appraisal of Airdrie.

[46] Mr Calvert carried out a further comparison of the various appraisals of the sites that had been made by the pursuers (no 7/14). This concentrated on percentage gross margins, and did not expressly address the question of land values. It illustrated very clearly that the assessment of Broomhouse carried out by the pursuers in December 2007 (no 6/57) was plainly out of line with the other assessments; it disclosed a gross margin of 35%, which should be contrasted with a gross margin of 24% for the appraisal of Broomhouse carried out in April 2006 (no 6/54) and with a gross margin of 25% for the pursuers' appraisal of Airdrie carried out in November 2007 (no 6/56). This comparison also dealt with the pursuers' appraisal of Airdrie if the defenders' layout there had been utilized; in that case the gross margin would have been 29.97%. The gross margin is clearly a measure of the profitability of the development, and the evidence established that it is so regarded within the house building industry. The majority of appraisals, as Mr Calvert's comparison makes clear, were in the region of 21% to 25%, and only the two that I have mentioned (Broomhouse in December 2007; Airdrie with defenders' layout) were out of that range. That is perhaps a pointer that these are not realistic, the appraisal of Broomhouse because it relied on historic cost that no longer represented market value and the appraisal of Airdrie because it represented an unrealistic mix of housing. It might be said that the figure for Airdrie using the defenders' layout showed how sensitive the residual method is to changes in inputs; that is no doubt true to some extent, but in my view the somewhat unrealistic nature of the defenders' mix of housing is the main reason for this discrepancy. Indeed, when Mr Whyte's evidence on the mix of housing is taken along with that of the pursuers' witnesses, it seems to me that Mr Calvert was trying to devise a formula that would maximize the possible return. In my opinion the realistic mix is that proposed by the pursuers; this accords with the evidence of Mr Whyte and corresponds in large measure to the housing layout that was originally proposed by the defenders (compare nos 6/55 and 6/59).

[47] There are accordingly a number of different appraisals of the value of the Broomhouse and Airdrie sites. Mr Robertson assessed Broomhouse at £4.2 million, falling to £3.775 million when abnormal costs were deducted. He assessed Airdrie at £3.85 million. Mr Whyte's assessments were £5 million for Broomhouse and £3.9 million for Airdrie. The pursuers' internal appraisals produced figures of £4.16 million for Broomhouse and £3.823 million for Airdrie. The figure of £4.16 million was, of course, the historic cost of the property. Mr Calvert's assessments were £4.16 million for Broomhouse (the historic cost), and £4.9 million for Airdrie. For the reasons discussed above at paragraph [29], I am of opinion that the historic cost of Broomhouse is irrelevant. In a rising market, a price agreed in April 2006 will not be a reliable pointer to the value in December 2007, and it is the latter value that is critical for present purposes. It can be inferred from the price agreed in 2006, however, that the value by the end of 2007 was substantially higher; that is inevitable in a rising market. That tends to suggest that Mr Robertson's figure of £4.2 million, falling to £3.775 million after allowing for abnormals, is too low. In any event, I think that Mr Robertson's appraisal suffered significantly from the lack of direct comparators. That leaves Mr Whyte's appraisal of Broomhouse at £5 million. His appraisal can be criticized on the basis that he lacked the detailed information that house builders would typically have been carrying out a residual valuation. It may be that it is somewhat on the high side. Nevertheless, in a rising market, I am of opinion that that figure, or something slightly below it, is more likely to be the value of Broomhouse than either the historic cost or Mr Robertson's figure. I accordingly assess the value of the Broomhouse site in December 2007 at somewhere between £4.75 million and £5 million; for the purposes of the necessary comparison I am content to take the former figure.

[48] So far as Airdrie is concerned, apart from Mr Calvert's figure of £4.9 million, all of those who gave evidence agreed that the value was in the region of £3.8 million to £3.9 million. For the reasons explained above, I am of opinion that Mr Calvert's figure was based on an unrealistic mix of housing, and in any event I am inclined to think that he was trying to increase the figure so far as he could. I think that a figure of £3.85 million can be taken as realistic.

[49] When these figures are compared, it can be seen that Broomhouse is to be taken at £4.5 million and Airdrie at £3.85 million. That means that the value of Broomhouse is nearly 17% higher than the value of Airdrie. In my opinion that is a significant difference. It is particularly significant in view of the fact that I have taken, I think, particularly conservative figure for the value of Broomhouse. If the value of Broomhouse is taken at £5 million, as Mr Whyte contended, the corresponding figure is 23%. Apart from the percentage figures themselves, I formed the distinct impression during the evidence of Mr Whyte, in particular, that Broomhouse was quite simply a more desirable site than Airdrie. It catered for a higher level of the market, involving detached houses on plots of a larger size than Airdrie; moreover, because of the planning conditions, houses had to conform to a better specification. Moreover, the Broomhouse site was better located. Quite simply, Broomhouse was the better site. To move the value of Airdrie up to anything like the value of Broomhouse it was necessary to assume a mix of housing that was, I thought, unrealistic in market conditions at the end of 2007. I rely on the evidence of Mr Whyte in reaching that conclusion.

[50] I accordingly conclude that the two sites were not of "comparable value" within the meaning of condition 12. The pursuers are accordingly in breach of contract on that account. This is a preliminary proof, however, and I am conscious that my findings are not fully in accordance with the position taken by the pursuers in their submissions. I accordingly propose to have the case put out by order in order that parties may address me on the consequences of my findings.

[51] I should add that I was addressed by both parties on the question of burden of proof. The defenders contended that the burden of proof rested on the pursuers, in accordance with the normal rule; the pursuers, by contrast, contended that the burden of proof rested on the defenders, as they were the party seeking to establish that an offer had been duly made in terms of condition 12. It has frequently been observed that in the end of the day the question of burden of proof is rarely material. In my opinion this is such a case. I have reached the foregoing conclusion without finding it necessary to decide where the burden lies.