Albert Bartlett & Sons (airdrie) Limited+atlas Ward Structures Limited V. Gilchrist & Lynn Limited+the Kerr Practice
| Jurisdiction | Scotland |
| Judge | Lord Uist |
| Neutral Citation | [2007] CSOH 140 |
| Date | 03 August 2007 |
| Court | Court of Session |
| Published date | 03 August 2007 |
| OUTER HOUSE, COURT OF SESSION [2007] CSOH 140 | |
| OPINION OF LORD UIST in the cause ALBERT BARTLETT & SONS (AIRDRIE) LIMITED Pursuers against GILCHRIST & LYNN LIMITED Defenders and ATLAS WARD STRUCTURES LIMITED First Third Party and THE KERR PRACTICE Second Third Party ________________ |
Parties Participating at this hearing:
Defenders: G J Walker; McGrigors
First Third Party: Miss Higgins; Simpson & Marwick
Non-participating parties:
Pursuers: MacRoberts
Second Third Party: Dundas & Wilson
3 August 2007
Introduction
[1] The pursuers have brought this action against the defenders claiming the sum of £2 million for alleged breach of a contract for the construction of a potato processing and packaging plant. The defenders have brought in two third parties, against whom they claim relief. The first third party, Atlas Ward Structures Limited, was the nominated subcontractor responsible for the design and construction of the building "envelope" comprising a steel frame and composite metal roof and wall cladding.
[2] The first third party has enrolled a motion in the following terms (with appropriate spelling, syntactical and grammatical corrections):
"On behalf of the First Third Party to ordain the defenders to find caution of £120,000 for expenses and to sist the matter until caution is found in terms of section 726(2) of the Companies Act 1985 in respect that credible testimony based on the defenders' latest accounts dated 31 May 2006 reveals that the acid test ratio is 0.41 and a result of less than one means that the defenders cannot pay their current liabilities and their borrowing ratio is 243.23% against an industry median of 14.2%, which means that the defenders have a significant amount of borrowing, and in the event that the First Third Party is successful there is a concern that the defenders will not be able to fund any liability in respect of the First Third Party's expenses."
[3] The defenders have opposed the motion on the grounds that
"(1) caution is not required in the interests of justice; and, separately, (2) if required, the level of caution sought is excessive."
The statutory provision
[4] Section 726(2) of the Companies Act 1985 provides:
"Where in Scotland a limited company is a pursuer in an action or other legal proceedings, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the company will be unable to pay the defender's expenses if successful in his defence, order the company to find caution and sist the proceedings until such caution is found."
Lord Drummond Young sought to explain the meaning and effect of that provision in Monarch Energy Ltd v Powergen Retail Ltd [2006] CSOH 102 at paras 10 and 11, where he stated as follows:
"[10] The purpose of that provision is clear; it is designed to prevent the device of limited liability from being used as a means of litigating without fear of having to meet the other side's expenses if the litigation is unsuccessful. The court's power under the subsection is discretionary. It is dependent on evidence that the pursuer will be unable to pay the defender's expenses if the defender is successful. If such evidence is available, however, caution will normally be ordered: Dean Warwick Ltd v Borthwick 1981 SLT (Notes) 18, at 19, where Lord Maxwell states that the primary question is whether there is a substantial risk that the defender will be unable to recover expenses if successful in the action. In some cases, of course, even if the statutory test is satisfied caution will not be ordered. That might occur because of the relative strengths of the parties' cases. If the pursuer's case appears strong and there is no obvious stateable defence, it would be unusual to order caution; an example of that is where the pursuer sues for the price of goods supplied and the defender does not allege any defects in the goods. Nevertheless, such proceedings are the exception; if both sides have put forward what appear to be clearly arguable cases, it will rarely be possible to refuse caution on this basis.
[11] Under section 726(2) a pursuer may be required to find caution. Caution involves a secondary obligation on the cautioner that is co-extensive with the primary obligation of the principal debtor. That indicates in my opinion that the subsection envisages a guarantee of the defender's judicial expenses, rather than a level of comfort. That view is supported by the purpose of the subsection, which is to ensure that limited liability is not used as a means of evading the payment of expenses. That purpose can only be properly achieved if those who provide security for the company are liable to the defender in exactly the same manner as the company; otherwise there is a risk that part of the judicial expenses will not be paid. This is confirmed by the terms of Rule of Court 33, which supplements section 726(2). RC 33.6 provides that the bond of caution should oblige the cautioner, his heirs and executors to make payment of the sums for which he has become cautioner to the party to whom he is bound "as validly and in the same manner as the party and his heirs and successors, for whom he is cautioner, are obliged". In my opinion that provision indicates that any caution ordered under section 726(2) should normally amount to a full guarantee of the defender's judicial expenses, in such a way that the cautioner is bound in exactly the same way as the pursuer itself. That seems inconsistent with any form of security that merely provides a level of comfort rather than an outright guarantee. RC 33.4 permits the court to accept other forms of security as an alternative to caution; consignation is specifically mentioned, but others may be approved. In such cases the security is plainly designed to operate as an alternative to caution; consequently, it must fulfil the same essential purpose. It follows in my opinion that any such alternative form of security must provide the defender with a guarantee of its expenses, rather than merely a degree of comfort."
Subject to the reservation that I do not think that the Rules of Court, a form of subordinate legislation, can be used as an aid to construction of a statute (Jackson v Hall [1980] AC 854 per Viscount Dilhorne at p 884, where he said that he "had no hesitation in rejecting the contention that rules made in the exercise of a statutory power can be relied on as an aid to the construction of a statute"), I agree with and adopt the substance of Lord Drummond Young's above comments.
Competency of the motion
[5] Although it was not foreshadowed in the reason for opposition to the motion, a preliminary point about the competency of the motion was taken on behalf of the defenders. The contention was that, as section 726(2) stated that where in Scotland a limited company "is a pursuer in an action or other legal proceedings .........(and) will be unable to pay the defender's expenses", it could not apply to the present case in which a third party was asking that the defenders should find caution for expenses. The situation in the present case was that the defenders were making a claim for relief against the first third party. There was no reported case under the subsection where the court had ordered defenders to find caution at the request of a third party.
[6] In my opinion the question of competency which arises is whether the words "pursuer" and "defender" in the context of the subsection require to be construed literally. This point was considered by Lord Gill in Asssuranceforeningen Skuld v International Oil Pollution Compensation Fund (No 3) 2000 SLT 152, in which a salmon farming company sought compensation under the Merchant Shipping (Oil Pollution) Act 1971 arising out of the grounding of the Braer oil tanker off the coast of Shetland, in respect of a contract which they were allegedly unable to implement as a result. After the ship's insurer's limitation fund was paid into court all parties seeking compensation were required to lodge claims on the fund for determination as part of the process in the limitation action. A preliminary proof was appointed on the question of the claimants' alleged fraud in the submission of their claim. Two objectors to the claim each sought caution for expenses in the sum of £40,000. The claimants were no longer trading and it was accepted that at 30 June 1999 shareholder funds were £142,305 subject to securities and that in 1997 funds had amounted to £1,000,000. The claimants submitted that they should be regarded as claimants in a multiplepoinding rather than pursuers in an action, and that their financial position was a result of the incident giving rise to the claim. Lord Gill ordered that caution be found, restricted to £20,000 in each case. Dealing with the question of interpretation of the subsection, Lord Gill stated at p 1354, paras 8 and 10 to 14:
"[8] In support of the first ground of opposition counsel for the claimant argued that the subsection should be construed literally. The claimant was not a 'pursuer'. On the contrary, the claimant was a defender convened to the multiplepoinding raised by Assuranceforeningen Skuld ('Skuld'), the insurer of the Braer. It had been held that the expression 'pursuer' in one of the forerunners of this provision did not apply to a company that was the respondent in an appeal (Star Fire and Burglary Insurance Co v Davidson (1902) 4F 997).
[10] In my opinion the first point taken on behalf of the claimant is unsound. It is a point that could not be taken if the motioners, as is open to them, were to enrol motions for caution at common law. In my view, the word "pursuer" in the subsection should not be construed literally as counsel for the claimant suggests. The subsection refers to the "pursuer in an action or other legal proceedings". In an ordinary action the party raising it is designed as the 'pursuer', but in other legal...
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