Wright, Johnston & Mackenzie Solicitors

Gratuitous Alienations: When can a property transfer be challenged?

As a result of the harsh recession, many people have found themselves in debt to the extent they are absolutely insolvent; their liabilities exceed their assets. Once insolvent, the debtor has to administer their assets and funds for the benefit of their creditors to whom they owe money and a gift or transfer may be challenged. However the timing of any gifts or transfer of assets is all-important as certain time limits before the debtor is insolvent will be considered carefully to determine whether the gift or transfer can be challenged.

Any voluntary gift of property by a debtor for no money or an inadequate amount of money (for example less than the market value for a house), to the prejudice of their creditors is a “gratuitous alienation”. A transfer of that nature is fraudulent and may be challenged at common law. The challenger will need to prove that the transaction was a gift and the debtor was insolvent at the time he or she gifted the goods, money or property. However there is a presumption of fraud if the good or property was bought at a significantly reduced amount.

The common law right to challenge transactions is not subject to strict time limits and remains available for 20 years from the date the transfer took place. If a common law claim is successful, any deed or contract will be terminated as though they never took place, ownership returning to the debtor so the creditors can proceed to sell the assets to pay the debts.

What are the debtors’ common law defences? The debtor has to persuade the Court that the deed in question was granted for some true, just and necessary cause.

Gratuitous alienations are also challengeable, within certain time limits, under the Bankruptcy (Scotland) Act 1985. The statutory right of challenge is available to any creditor by a virtue of a debt incurred on or before the date of sequestration.

If you transfer property, goods or money to someone who is neither family nor a business associate, perhaps a good friend,  within the period of 2 years counting back from the day you are made bankrupt, these transfers can be challenged. If the transfer is to a close family member or business associate within the period of 5 years counting back from the day you are made bankrupt, these transfers can be challenged.

The burden of proof rests with the debtor that (1) either immediately or at any other time after the transfer of the property, the debtor’s assets were greater than their liabilities (2) that the transfer was for adequate consideration; for market value (3) or that it was a birthday, Christmas, or other conventional gift or it was a reasonable charitable gift to someone the debtor doesn’t know.

The advantage for creditors of using the statutory rights instead of their common law rights is that they only have to show there has been a gift within the relevant time limit and then it is up to the debtor to show the transaction falls within one of the specified defences. If the debtor is unable to prove one of the defences then the Court can grant the remedy of reduction of the deed/contract or restoration to the debtor’s estate or any other remedy deemed appropriate.

The third party’s purchase of the debtor’s property will be protected if the judge feels from the evidence heard that the purchaser acted in good faith (did not know the debtor was insolvent) and for value (didn’t get it below value market price).

For more information, contact Neil Morrison: .(JavaScript must be enabled to view this email address)

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Ask WJM!

QUESTION

Dear WJM

I live in a tenement.  One of my neighbours regularly (i.e. once a week at least) has bonfires in his back garden (his back garden backs on to ‘my’ tenement’s communal garden).  The smoke from these bonfires blows over the wall into our garden and into the gardens of several neighbouring tenements.

He does this every Sunday and it’s driving me potty.  He isn’t just burning garden waste and he lights it with a can of petrol.  The fumes are really toxic and have three effects:

· Any washing hanging out stinks of toxic smells and has to be rewashed.
· We can’t go out in the garden while the bonfire blazes away
· The smoke comes in through out not very well insulated single pane windows and isn’t very nice

What can I do?  My neighbour approached him last year and he was just abusive.  He lit weekly fires all last year and I can’t stand another summer of toxic petrol fumes.

Thanks

WJM ANSWER

Dear Sir,

We’d all rather get along with our neighbours to avoid the stress and anxiety that a neighbourhood dispute can cause.

If an informal chat about the garden bonfires doesn’t come to anything then you could suggest mediation to the neighbour to solve the dispute.

Mediation is a flexible and confidential process in which an independent individual, the mediator, helps people to work together to find practical solutions to their disputes or differences. The parties themselves decide the outcome, the terms of any agreement between them and how to take matters forward.

The downside to mediation is that if one party to the dispute digs their heels in and does not participate fully in the process then no agreement may be reached and further dispute resolution options will need to be considered. The mediation process would then be an unnecessary waste of time and money.

Alternatively you could complain to your local authority, they are under a duty to protect public health. They may send an Environmental Health Officer to your neighbour’s property to investigate the matter. If the Officer takes the view that the garden bonfires are prejudicial to health or a nuisance then he can serve a statutory notice on your neighbour prohibiting further garden bonfires. 

If the local authority is unable to assist you then you may have a legal remedy against your inconsiderate neighbour under common law nuisance. Your neighbour may be infringing upon your natural rights of enjoyment of your garden and your flat by burning garden waste on a weekly basis and this is undoubtedly causing you serious disturbance or substantial inconvenience satisfying the requirements for a nuisance action.

To be actionable by way of interdict (this is a court order preventing your neighbour from causing the nuisance), the nuisance must be repeated or continuing, and not an isolated act. The nuisance must also cause you inconvenience, harm or discomfort.

To decide whether the act complained of amounts to a nuisance, a Sheriff will take into account all the surrounding circumstances and the nature of the neigbourhood where the nuisance occurs. So for example, the bonfires might not be a problem in the countryside where there is some distance between neighbouring proprietors but in a crowded urban environment the bonfires are far likelier to be deemed a nuisance. The bonfire smoke is allowing impurities to escape into the atmosphere and drift in to your home. The smoke is clearly causing you inconvenience as it is prompting you to rewash your washed clothes that have been hanging in the garden.

The person complaining of nuisance must not be fastidious and must use all means to minimise his or her inconvenience. That said, it seems in your case there is little you can do short of building a very high wall.

You may lose your right to object if you have allowed the nuisance to go on for over 20 years but in your case it sounds like the onset of the nuisance was relatively recent. You may also lose your right to raise a nuisance claim if you have waived your right by your actions. For example, you have done something to expressly or impliedly accept the nuisance, such as agreeing with the neighbour that he could burn the fire or verbally consenting to the burning of the bonfires.

Ultimately the Sheriff’s decision will come down to deciding if the balance between the freedom of a property owner to use his property as he pleases and the property owner’s duty not to inflict material loss or inconvenience on his neighbours is tipped in your favour. In every case, the answer depends on the facts and the degree of discomfort caused to the complainer.

It does seem as though your neighbour’s burning of garden waste next to your tenement garden in an urban environment is an unreasonable, injurious and unnecessary use of an urban property, constituting a nuisance. 

You could perhaps send your neighbour a letter advising him to cease burning the garden waste and if he continues you will be forced to raise court proceedings. If that fails to work then you will need to instruct a solicitor to raise court action on your behalf.

Ask WJM

If you have a question for WJM, we may publish the answer to your question in our “Ask WJM” section of our Lawsuit! E-zine; you can email your questions to .(JavaScript must be enabled to view this email address)

 

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Agree first, start work later!

It happens all the time in business, companies are frantically trying to get their project off the ground and important matters such as formally signing the contract can be forgotten about. The recent UK Supreme Court decision in RTS Flexible Systems Ltd v Muller GMBH ([2010] UKSC 14 is a warning that if you do, then even stating “subject to contract” might not save you from a finding that a contract has been agreed.

The case concerned a supplier of automated packaging systems, RTS, who provided Muller with a system to package their yoghurt pots. The parties entered into a Letter of Intent (“LOI”) so that works could begin but by May 2005, the LOI had elapsed and parties continued negotiating the terms of the formal contract. Throughout the negotiations, payments were made by RTS but not in accordance with the formal contract not yet signed. There was a “subject to contract” clause in the unexecuted formal contract but the essential terms of the contract such as price were agreed.

The project began to unravel around July/August 2005, with the consequence that RTS were unable to meet their delivery deadlines. This issue prompted a meeting in August between the parties whereby they agreed to vary the unexecuted formal contract so the delivery dates could be altered. Following on from the August meeting, relations between the two parties broke down fundamentally and RTS brought a claim against Muller for the outstanding balance of the contract price.

The issues before the Supreme Court judges were whether all the essential terms of the contract were agreed and if they were, did the contract fail to become binding due to the “subject to contract” clause and the unsigned formal contract? The judges decided that until the parties agreed to vary or waive the “subject to contract” clause, the formal contract would not become binding or effective.

After careful analysis of the facts, the Supreme Court decided that the only reasonable inference to draw from the parties’ conduct was that at the August meeting both parties had agreed to waive the “subject to contract” clause in the original formal contract by proceeding to vary the original formal contract.

The practical implications from this case are that when the parties Letter of Intent is due to expire, it should be expressly extended where it is still not possible to agree the terms and conditions of the written contract.

Parties should ensure that there is no room for uncertainty by making clear written statements where possible. A failure to do this can result in considerable uncertainty as to whether a contract has been concluded.

The moral of this case is that even if you have an unsigned contract with “subject to contract”; the clause can be waived by conduct, in this case by signing a variation of contract. The final thing to bear in mind is that regardless of the specific clauses in a contract, in certain circumstances, for example where original contract has not been executed, conduct is the trump card.

For more information, contact Neil Morrison: .(JavaScript must be enabled to view this email address)

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Is Melville Monument liability on the verge of demolition?

The recent case of Khaliq v Londis (Holdings) Ltd has further undermined the unique Scottish doctrine of “Melville Monument liability”.

The principle originated in the famous 19th century case of Walker v Milne (1823), where a claim by a landowner was raised for reimbursement of expenditure incurred preparing land for the construction of a monument to Viscount Melville. The monument subscribers agreed to move to another location in Edinburgh as they were frustrated by delays. No contract had been formed but the Court decided that the subscribers were liable for the landowner’s wasted expenditure.

The Court’s decision in Walker v Milne gave rise to a liability for losses before a contract is formed, more commonly known as “Melville Monument liability”. The liability arises where there is a an agreement and one party acts in reliance on another person’s assurances that their agreement is binding but actually the agreement falls short of being binding. The flip side is that where no agreement exists there is plainly no Melville Monument liability; the hope or expectation of an agreement is not enough.

The scope of the Melville Monument principle has been eroded over the years by various decisions to such an extent its use is now very limited as illustrated by the recent case of Khaliq v Londis (Holdings) Ltd.

Briefly, the case concerned a shop owner who had carried out refurbishments with a view to becoming a franchise member of the Londis trading group. However the expected membership never happened and his legal remedies were limited as there was no contract between him and the trading group. He decided to raise a Sheriff Court action against Londis Ltd on the basis of Melville Monument liability. However, the Sheriff Court rejected his claim and so he appealed to the Inner House of the Court of Session.

Mr Khaliq’s appeal to the Inner House also failed as the Court decided firstly that he had not refurbished the shop in reliance on any duty that he believed he was under but instead had relied upon a simple recommendation by Londis Ltd to refurbish his shop. Secondly, the Court held that even if there had been representation by Londis, he had suffered no loss as following the refurbishment; he was still able to continue trading from the premises.

The Court’s decision has been questioned by commentators who have argued that the Melville Monument principle is based on expenses incurred in the belief that a contract exists due to the other party’s implied assurances. The facts of the case seems to suggest that there was sufficient assurances made to Mr Khaliq that his franchising membership was successful although in actual fact it was never formally accepted.

During the case, suggestions were made that Melville Monument liability may no longer exist. It was argued that the law had moved on since Walker v Milne and there are now various remedies available to parties who suffer losses before a contract is formed.

However it should be emphasised that many of those remedies such as negligent misrepresentation are unlikely to be successful and none of them could in any likelihood have helped Mr Khaliq.  The fact that there may be no remedy for someone who incurs costs thinking that he has a deal means that you should be certain you have some way of recovering your cost before you incur it. Otherwise, in your search to recover your outlay, you may find little more than a pile of rubble where the Melville Monument liability once stood.

For more information: contact Liam Entwistle, .(JavaScript must be enabled to view this email address) or Neil Morrison, .(JavaScript must be enabled to view this email address)

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Recognition and Enforcement of EU Judgements in Scotland

The recession has affected many Scottish individuals and companies who have unfortunately made agreements abroad and are now unable to pay their foreign creditors.

Many foreign creditors are threatening Scottish debtors that if they don’t pay then the foreign judgements will be enforced in Scotland against their assets situated there. This raises the question; how easy is it to register a foreign judgement? Many people are under the false impression that the process is so time-consuming and expensive that many foreign creditors won’t bother to do it. That may have been the case a few decades ago but times have moved on and it is now a relatively simple and quick process.

Under EU Regulation No. 44/2001, a foreign judgement in another EU Member State is immediately enforceable on completion of certain formalities. In addition the Regulation largely prevents EU Member State’s Courts from refusing recognition of foreign judgements. The process of registering a foreign judgement in Scotland is outlined below.

The foreign creditor will need to instruct Scottish solicitors to draft a Petition, which has to be lodged with the Court of Session (Supreme Civil Court in Scotland) together with:

1. An authentic copy of the foreign judgement to be registered.
2. A sworn Affidavit (written in first person) with certified translation if not in English, stating:

· the sum of money being sought
· whether interest is payable under the foreign law and if so the rate and the date on which the interest began to accrue and when it ceased to accrue.
· A document confirming service of the foreign Court Writ that started the initial foreign court proceedings (if action was undefended).
· An address within Scotland where the Petition can be served on the debtor.
· The usual or last known address of the debtor.
· The grounds on which the creditor is entitled to enforce the judgement.
· The part of the judgement that remains unsatisfied.

Once the petition has been lodged, the petitioning creditor may apply by motion to the Court for a warrant for the execution of protective measures (such as arrestment of bank account, inhibition of properties, and interim interdict) to prevent the debtor from disposing of their assets.

If the Court is satisfied that the petition complies with the requirements of the EU Regulation set out above, it shall grant a warrant for the registration of the judgement, and a warrant for the execution of protective measures (if requested). If necessary, a court decree in accordance with Scots law will also be granted.

On granting the warrant(s), the Court will issue an order (interlocutor) specifying the one month period within which an appeal can be made against the Court’s orders and allow the petitioning creditor to register the judgement in the Books of Council and Session for execution. The creditor must serve a copy of the Court’s order granting warrant for registration on the debtor.

The creditor will need to present to the Keeper of the Registers: 

1. A certified copy of the Court’s order.
2. An authentic copy of the judgement and accompanying translation.
3. A certificate of currency conversion.

Once registered by the Keeper in the Books of Council and Session, the foreign judgement becomes a Scottish judgement and an extract of the registered judgement will be issued with a warrant for execution. The judgement may then be enforced by Scottish diligence measures such as arrestment, sequestration (individual debtor) or liquidation (company debtor).

However the petitioning creditor although allowed to register the judgement is not allowed to execute the judgement (i.e. commence diligence such as arrestment of bank accounts) until the period for lodging an appeal has expired.

The reasonable costs and expenses of the registration and petition procedure are recoverable so long as they were stated within the foreign judgement being enforced.

An appeal under Article 37 of the EU Regulation may be made against the granting of a warrant for registration by motion to the Lord Ordinary (of the Outer House of the Court of Session) and must be done within the one month deadline from receiving the Court order.

The debtor may appeal to have the Court’s order sisted (or frozen) if an ordinary appeal against the judgement has been lodged in the original Member State. If successful, the Court order will only become active again once the outcome of the appeal in the original Member State is known. In addition, if successful the Court will lift the warrant granted for protective measures such as arrestment of bank accounts, inhibition of property etc.

Either party may appeal the Lord Ordinary’s decision to the Inner House of the Court of Session if dissatisfied on a point of law against the Lord Ordinary’s decision.

WJM can offer a recognition and enforcement of foreign rulings service. This will be of interest to individuals, companies or foreign law firms that may require to have their foreign judgement recognised and executed in Scotland.

We can also assist Scottish individuals and companies who anticipate a foreign judgement being executed in Scotland or who have received a Petition from the Court of Session.

For more information, contact Neil Morrison: .(JavaScript must be enabled to view this email address)

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Quantum Meruit Claim: Making Work Pay

Scots law recognised the doctrine of quantum meruit in the case of ERDC Construction Ltd v H M Love & Co. The claim concerned works carried out by a contractor to a tenement building under a common repairs scheme. After the work was finished, the contractors claimed that because of failures by the architect they were entitled to certain sums for work they had carried out in addition to the contract price. The dispute was referred to arbitration, and the contractor put forward a claim based on quantum meruit. The question of whether a quantum meruit claim should proceed was put to the Inner House of the Court of Session.

The contractor’s claim was not successful because the Inner House concluded that the contract had not been rescinded and that where a contract is still in existence then it is not open to put forward a claim on the basis of quantum meruit. It also did not help the contractor’s case that no explicit claim for breach of contract plus damages was put forward in their Court arguments.

Often we enter into contracts with another person or company and unfortunately they don’t perform their side of the bargain. We can then elect to treat their failure as a material breach of contract and claim damages. However in many construction cases for example, a damages claim involves speculation about work, which has never in fact been carried out because the contract has ended prematurely. The contractor in such a case will have the formidable task of quantifying the claim.

However an easier and perhaps more simple way to quantify the claim is payment quantum meruit; payment for the work done at the ordinary or market rates. It may in fact enable the contractor to recover more than he could by way of a breach of contract claim for damages.

How so? A contractor who could not have completed the contract profitably may be able to obtain a profitable award from the Court for work, which he has actually done. The Court does not look at the contract price but instead assesses the value of the partly completed work. This could result in a contractor receiving a great deal more money than if he had actually completed the contract.

There has been concern from some legal commentators that this unique feature of quantum meruit will be used by contractors locked into unprofitable contracts to terminate and use the doctrine to make a profit. However you can only terminate a contract in response to a material breach, so if a contractor attempts to terminate when he has no legal right to do so, he will be held to have repudiated the contract and be liable in damages to the employer.

Whether a breach is material is difficult to determine as it is a question of fact and degree, so a contractor’s solicitor can take little comfort from previous cases as the facts are likely to be quite different. The only way to conclude whether a material breach has occurred is the high risk strategy of testing the issue in Court.

What are the other methods of quantifying a payment obligation? Firstly there is payment by reference to a contractually agreed price and secondly there is payment quantum lucratus, by reference to the value of the advantage that the recipient of the work has obtained.

What happens if a contractor is in material breach but has carried out work? The law is unclear but in contrast to England the guilty party is able to claim recompense for the work carried out. It seems from the case authorities that a guilty party can claim for payment quantum lucratus rather than quantum meruit.

The doctrine of quantum meruit is clearly a useful legal method to determine an award of recompense when a contract has been terminated and may even result in a greater award than the contractor is entitled to receive under the contract.

WJM have experience in contractual disputes and have been involved in quantum meruit claims in the past enabling us to advise you on how best to approach your contractual dispute depending on the circumstances of your own particular case and to raise the necessary court action should settlement negotiations run out of steam. 

More information: contact Fraser Gillies, .(JavaScript must be enabled to view this email address) or Neil Morrison, .(JavaScript must be enabled to view this email address)

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Letter of Intent: Comfort Blanket or Binding Agreement?

A letter of intent (“LOI”) is used commonly in the construction industry as a way to express an employer’s intention to enter into a contract in the future while creating no liability in relation to that contract - the contractor is instructed in the LOI to do work up to a certain point and to a certain limited cost. Often in construction projects, however, there are time constraints and LOIs are sometimes seen as a useful way of getting the work done without having to complete the full contractual documentation. They also offer, at least in theory, protection to contractors in the event that the full project does not proceed by covering their costs to a certain point.

The main issue with LOIs that keeps cropping up is whether or not they are binding agreements? One view is that the LOI just gives the comfort of showing an intention to enter into a formal contract at a subsequent point in time, while another view is that it creates an enforceable contract between the parties.

Unfortunately, in practice, it is often difficult to determine the status of an LOI and the answer normally will depend on the facts of each individual case. However it is useful to look at some relatively recent cases to help us see how Courts interpret LOIs. 

In Kleinwort Benson Ltd v Malaysia Mining Corporation, the mining company issued a “letter of comfort” to the bank indicating that it was “at all times in a position to meet its liabilities” in relation to loans it had given to its subsidiary companies. After the collapse of the tin market, a subsidiary of the mining company went into liquidation. The bank raised an action against the parent mining company for repayment of the loan based on the letter of comfort. However the Court held that the letter of comfort was only a statement of present fact, and did not show an intention to repay at a future point in time.

In the case of Tesco v Costain, the Court considered whether an LOI between the parties bound them contractually. Costain tendered to design and construct a Tesco store. A formal contract was not signed but Tesco did issue a LOI advising of their intention to enter into a formal contract with Costain.

Costain completed the project without a formal contract having been concluded between the parties. Some years later the Tesco store was damaged by a fire that was made worse by the roof space design. Tesco raised a claim against Costain over the existence and terms of the contract. Costain retorted that there was no formal contract, only an LOI.

The Court decided that a contract had been formed on the basis of the LOI, which Costain had accepted and their conduct was in accordance with the requests made by Tesco in the LOI.

An LOI can be useful to help cover the gap during commercial negotiations before a formal contract has been concluded. The downside is that the parties in a project might forget about the need for a formal contract leaving the contractual position unclear, particularly after the project has been completed. The magical “subject to contract” plastered all over an LOI may not necessarily prevent a contract from coming into existence if parties subsequently proceed to do the things that the LOI had outlined.

It may be helpful to remember of the following key points:

1. Specify the terms of the LOI that you intend to be legally binding, such as a lock-out clause.

2. If financial caps have been specified and it appears that the cap will be exceeded, it is advisable to re-negotiate the cap with the other party at an early stage. If you incur additional costs over the cap contained in the LOI you may not be able to recover these costs.

3. Ensure the extent of the works is covered by the LOI, clearly stating the amount of work the Contractor is authorised to complete prior to the formal contract being concluded. If any additional works are required prior to entering the formal contract, be sure to check the works are not outwith the terms of the LOI.

4. Ensure the LOI has a specific expiry date, which will prevent disputes arising over whether the LOI was impliedly superseded by the conduct of the parties. In addition, it should prompt the parties to enter into a formal contract.

5. Specify a chosen method of dispute resolution such as arbitration to deal with any disputes arising from the terms of the LOI.

If you are entering an LOI or need an LOI drafted to be issued to a contractor then WJM can help to ensure you have the necessary legal protection and provide you with sound commercial advice.

If you have already entered an LOI that is now being disputed then we can advise you about where you stand legally so that you are best placed to resolve the dispute yourself or if necessary, we can represent you in litigation, adjudication or arbitration proceedings.

For more information: contact Steven Docherty, .(JavaScript must be enabled to view this email address) or Neil Morrison, .(JavaScript must be enabled to view this email address)

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You couldn't make it up....

GOLFER WINS DAMAGES FOR CROCODILE ATTACK!

Imagine strolling along the fairway enjoying a game of golf when suddenly you are attacked by a crocodile – well, that’s exactly what happened to a man in Malaysia. The unlucky golfer slipped into a marsh and was attacked by a crocodile but thankfully managed to beat the crocodile about the head with his golf iron.

The golfer won an out of court settlement of £8,500 and claimed that he is still suffering from post-traumatic stress disorder as a result of the crocodile attack. There was no precedent of a crocodile related attack reaching the courts so the injured man was unsure whether he had obtained a good settlement.

The golf club has since taken action to prevent any further attacks by fitting fences and warning signs along its “Crocodile Nine” course.

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