Bank of Scotland v Dunedin Property Investment Company Ltd
| Jurisdiction | Scotland |
| Judgment Date | 01 May 1998 |
| Date | 01 May 1998 |
| Docket Number | No 62 |
| Court | Court of Session (Inner House - First Division) |
FIRST DIVISION
Lord Coulsfield
Contract—Commercial contract—Construction—Defenders obliged to pay “costs” incurred “in connection with” loan stock—Pursuers entering interest swap agreement with foreign bank to hedge against interest rate fluctuations prejudicing them in their loan agreement with the defenders—Defenders terminating loan agreement prematurely thereby making the pursuers liable for breakage charge under interest swap agreement—Whether breakage charge recoverable
A bank and a company entered into a loan stock deed, a clause of which provided that the defenders had a right, on giving six months notice, to purchase the stock but “subject to the bank being fully reimbursed for all costs, charges and expenses incurred by it in connection with the stock”. The loan was for the duration of ten years at a fixed rate of interest. In order to protect itself against interest fluctuations, the bank entered into a swap contract with a foreign bank. The defenders gave to the bank notice pursuant to the contract that they wished to purchase the debenture stock, which terminated the fixed term loan. The bank thereafter sought payment of the breakage charge which it was obliged to pay to the foreign bank for prematurely terminating the swap agreement and argued that that payment was a cost incurred “in connection with” the stock in terms of the contract. The Lord Ordinary granted decree in favour of the defenders. The bank thereafter reclaimed.
Held (1) that the words “in connection with” had to be given their ordinary meaning and the Lord Ordinary had erred in interpreting the phrase too narrowly in concluding that costs had to be “directly” connected with the stock, since, if a cost could properly be described as having been incurred in connection with the loan stock, it fell within the scope of the contract irrespective of whether the connection was direct or indirect; (2) that any costs which had a substantial relation with the loan stock were a cost which the bank incurred in connection with the loan stock and the impetus for the loan stock agreement came from the defenders who wished to obtain the advantage of a fixed rate of interest on their borrowings over a ten year period so that the bank would not have entered into the loan stock agreement without taking steps to protect their position; (3) that as the defenders could not have enjoyed the benefit of the loan stock agreement with the bank unless the bank took steps which they did take or similar steps, there would have been no loan stock agreement without the swap agreement so that the swap contract had a substantial relation in a practical business sense with the stock; and (4) that it was appropriate to take into account evidence of what was said at a meeting between the parties before the contract was signed in order to determine the parties' knowledge of the circumstances in which the words were used and, in looking at that evidence, it was clear that the defenders were aware that the bank would borrow funds to subscribe for the loan stock, that the bank intended to hedge the transaction and that if the defenders redeemed their loan stock prematurely, there would be a cost of an uncertain amount associated with the hedge; and (5) that the background facts reinforced the conclusion that the “commercially sensible construction” of the condition was that it covered the costs incurred by the bank when they terminated the swap contract following early redemption of the loan stock; and reclaiming motionallowed.
Opinion (per Lord Kirkwood) that if the condition had been construed in isolation, without reference to any of the surrounding circumstances established by the evidence, it would have been difficult to find the bank entitled to recover the cost of breaking the swap agreement as a cost, charge or expense incurred by the bank “in connection with the stock”.
The Governor And Company Of The Bank Of Scotland brought an action against Dunedin Property Investment Company.
The cause called for proof before answer before the Lord Ordinary.
At advising, the Lord Ordinary assoilzied the defenders.
The bank reclaimed.
Cases referred to:
Bank of Scotland v StewartUNK (1891) 18 R 957
Berry v Federal Commissioner of TaxationUNK (1953) 89 CLR 653
Bovis Construction (Scotland) Ltd v Whatlings Construction LtdSC 1994 SC 351
Charter Reinsurance Co Ltd v FaganELR [1997] AC 313
Clarke Chapman-John Thomson Ltd v IRCELR [1976] Ch 91
Gomba Holdings UK Ltd v Minories Finance LtdUNK (No 4) [1994] 2 BCLC 435
Inglis v Buttery & Co (1878) 5 R (HL) 87
Investors Compensation Scheme Ltd v West Bromwich Building SocietyUNK [1997] CLC 1243; [1998] 1 All ER 98
Johnson v JohnsonELR [1952] P 47
Macdonald v LongbottomENR (1860) 1 E & E 977
Mackenzie v LiddellUNK (1883) 10 R 705
Mannai Investment Co Ltd v Eagle Star Life Assurance Co LtdELRUNK [1998] AC 749; [1997] 3 All ER 352
Nanaimo Community Hotel Ltd (Re)UNKUNK [1944] 4 DLR 638; [1945] 3 DLR 225
Prenn v SimmondsWLR [1971] 1 WLR 1381
Reardon Smith Line Ltd v Yngvar Hansen-TangenWLR [1976] 1 WLR 989
Scottish Power plc v Britoil (Exploration) Ltd [1997] TLR 616
The reclaiming motion called before the First Division, comprising the Lord President (Rodger), Lord Kirkwood and Lord Caplan for a hearing on the summar roll.
At advising, on 1 May 1998—
LORD PRESIDENT (Rodger)—In 1989, the defenders and respondents, Dunedin Property Investment Company Limited (“Dunedin”), were clients of the pursuers and reclaimers, the Bank of Scotland (“the Bank”). The Bank had made a number of short-term loans to Dunedin and Dunedin decided that it would be preferable from their point of view to convert these into a long-term arrangement under which Dunedin would pay the Bank a fixed rate of interest. Dunedin therefore approached the Bank and negotiations followed. The subject of those negotiations was the possibility of Dunedin issuing, and the Bank subscribing for, debenture loan stock. After the first meeting the Bank produced a document (No 5/1 of Process) entitled “Outline Terms and Conditions”.
The second meeting took place on 6 June 1989 and the Bank's note of the meeting began by recording that it was held to discuss the Bank's recent offer to provide a £10/15 million Debenture Loan Stock. It went on to say that Mr Forest, Dunedin's Chief Investment Manager, advised that Dunedin had now more or less decided that they wished to proceed with the facility on the basis of a £10,000,000 (£10m) Debenture repayable at the end of ten years. Following the meeting the directors of Dunedin did indeed decide to proceed with the transaction and on 28 July they passed a resolution by which they created £10m debenture loan stock 1999 (“the stock”). The Bank and Dunedin then entered into a Loan Stock Deed (“the Deed”) dated 1 and 3 August 1989 under which the Bank agreed in Clause 3 to subscribe at par for the full amount of the stock on 1 August 1989 “on the terms and subject to the conditions” set out in the Deed. Clause 5 provided that the Certificates for the stock were to have endorsed on them Conditions in the form set out in Schedule 1 to the Deed. It went on to provide that Dunedin: “shall comply with the terms of the Certificates for the Stock and the said Conditions endorsed on such Certificates and the Stock shall be held subject to and with the benefit of such Conditions all of which shall be deemed to have been incorporated in this Deed and shall be binding on [Dunedin] and the holders of the Stock and all persons claiming through or under them respectively.”
The Bank proceeded to subscribe for the stock and Dunedin granted them various securities for the sum involved. In the normal course, in terms of Condition 1, Dunedin were to redeem the stock at par on 30 June 1999 together with interest accrued up to and including that date. Condition 3 provided, however, that: “The Company shall be at liberty at any time on provision of six months prior written notice to the bank, to purchase the Stock, subject to the Bank being fully reimbursed for all costs, charges and expenses incurred by it in connection with the Stock.” In terms of this Condition, on 17 October 1995 Dunedin gave the Bank notice that they intended to purchase the stock and on that basis the redemption date was to be 17 April 1996. In fact the loan stock was not redeemed until 7 March 1997, while the case was at avizandum before the Lord Ordinary. The dispute between the parties arises out of the interpretation and application of Condition 3. In order to understand that dispute it is necessary to appreciate the general nature of the arrangements which the Bank put in place at the time when they entered the Deed with Dunedin.
The rate of interest payable by Dunedin to the Bank under the Deed was fixed at 12.5 per cent per annum. The effect of the Deed was therefore that the Bank had agreed to lend Dunedin £10m for a period of ten years at a fixed rate of interest of 12.5 per cent. It was not the policy of the Bank, when entering into a fixed rate agreement for such a long period, to leave themselves exposed to the vagaries of interest rate movements and they accordingly set about hedging their position. This was done through the Bank's Treasury Division. In 1992 a separate company, Treasury plc, took over the responsibilities of the Treasury Division. Before the Lord Ordinary certain arguments were advanced on the basis of this change in the Bank's arrangements, but the Lord Ordinary decided those arguments in favour of the Bank and Dunedin did not challenge his decision in the reclaiming motion. It is therefore unnecessary to deal with them.
The Bank would obviously be concerned to see that their transaction with Dunedin was profitable to them. In theory the Bank might have secured their position by entering into a loan for an equivalent period at a fixed rate of interest lower...
To continue reading
Request your trial
-
Hockin and Others v Royal Bank of Scotland Plc and another
...of the potential breadth of the phrase depending on the relevant context. The same is true of the Scottish case of Bank of Scotland v Dunedin Property Investment Co Ltd [1998] SC 657 in which the Court of Session, Inner House considered the construction of the phrase "in connection with" in......
-
The Standard Life Assurance Company For Sanction Of A Scheme Under Part Vii Of The Financial Services And Markets Act 2000
...West Bromwich Building Society [1998] 1 WLR 896 at 912H, per Lord Hoffmann; Bank of Scotland v Dunedin Property Investment Company Limited 1998 SC 657. The starting point must always be the language in which an obligation is actually expressed. However, the true meaning of the language used......
-
Chartbrook Ltd v Persimmon Homes Ltd and another
...depart from a long and consistent line of authority, the binding force of which has frequently been acknowledged: see Bank of Scotland v Dunedin Property Investment Co Ltd 1998 SC 657, 665 ("well-established and salutary", per Lord President Rodger; Alexiou v Campbell [2007] UKPC 11 ("vou......
-
Investors Compensation Scheme Ltd v West Bromwich Building Society
... ... the Rules made by the Securities and Investment Board under section 54(6) of the Act as being ... Participant Firm or against any fund or property in the hands of any person other than the ... provide that, on paying compensation, the company managing the Scheme is to take over the ... by the financial adviser: compare Barclays Bank Plc v. O'Brien [1994] 1 A.C. 180 ... This would ... ...
-
THE CASE FOR DEPARTING FROM THE EXCLUSIONARY RULE AGAINST PRIOR NEGOTIATIONS IN THE INTERPRETATION OF CONTRACTS IN SINGAPORE
...10 It has been said that the exclusionary rule is “well established and salutary” (Bank of Scotland v Dunedin Property Investment Co Ltd1998 SC 657 (“Bank of Scotland”) at 665; although see David McLauchlan, “Chartbrook Ltd v Persimmon Homes Ltd: Commonsense Principles of Interpretation and......
-
A New Thing Under the Sun? The Interpretation of Contract and the ICS Decision
...the wary, I would include, at any rate initially, the Scottish courts. In Bank of Scotland v Dunedin Property Investment Company Ltd36361998 SC 657 at 661. the Lord President (Rodger) preferred to express no opinion on Lord Hoffmann's formulation, although noting that Lord Hope of Craighead......
-
INTERPRETATION OF CONTRACTS AND THE ADMISSIBILITY OF PRE-CONTRACTUAL NEGOTIATIONS
...193 v Liang Huat Aluminium Ltd, supra n 4. 93 30 March 2001, Queen’s Bench. See also Bank of Scotland v Dunedin Property Investment Co Ltd1998 SC 657 at 665 where Rodger LP stated that the rationale behind the exclusionary rule “shows … that it has no application when the evidence of the pa......
-
Fraser Davidson, EVIDENCE Edinburgh: W Green & Son Ltd (www.wgreen.co.uk), Scottish Universities Law Institute, 2007. civ + 763 pp. ISBN 9780414014718. £175.
...896, but the author suggests that that approach has been disapproved in Scotland in Bank of Scotland v Dunedin Property Investment Co Ltd 1998 SC 657. I am doubtful about that conclusion. In Investors Compensation Scheme, Lord Hoffmann stated that he was applying the approach set out by Lor......