Payment of Another's Debt, Unjustified Enrichment and ad hoc Agency

Date01 January 2011
Published date01 January 2011

In 1822, discussing the question whether paying another's debt extinguishes it, Baron Hume suggested that “it may be very long before such a question come to trial”.1

Baron David Hume, Lectures 1786–1822 vol III (ed G C H Paton, Stair Society vol 15, 1952) 16.

Come to trial it eventually did in the Outer House case of Whitbread Group Plc v Goldapple Ltd (No 2).2

2005 SLT 281.

This article considers three important questions in Scots law raised directly or indirectly by that case, namely

In what circumstances does Scots private law recognise the power of a third party to extinguish another's debt by making a payment to the creditor?

Where a third party, not being the debtor's agent, has extinguished another's debt by an authorised or unauthorised payment, upon what ground, if any, is the third party entitled to claim reimbursement of his expenditure from the debtor?

What are the implications for the law of agency of a new doctrine of ad hoc agency which has been developed by Lord Drummond Young in Whitbread as a solution to at least the first of the foregoing questions and applied by him in subsequent cases in other contexts?

The <italic>Whitbread</italic> case

Whitbread concerned among other things the question of whether a payment to the landlord, Goldapple Ltd, of the rent of a public house in Edinburgh (the Hogshead, 30 Bread Street) by a person, Fairbar Ltd, other than the tenant, Whitbread Group Plc, was a valid payment of the rent due by the tenant and as such operated to prevent an irritancy of the lease for non-payment of rent. The quarterly payment of rent due on 10 May 2001 was not paid in time, because at the time the pursuers were involved in the transfer of the assets of their pub and bars division to a third party, namely Fairbar Ltd, as part of an internal reorganisation within a group of companies.3

While the accounting and payment functions were being transferred, all payments were temporarily halted.

On 27 May Fairbar sent to Goldapple's bankers, the Royal Bank of Scotland, a cheque in favour of Goldapple, for the amount of rent due, for crediting to Goldapple's account. The cheque was cleared on 3 June and credited to Goldapple's account. On 31 May Goldapple's solicitors telephoned Whitbread's solicitors to inform them that the payment would be returned because it had been received from the third party Fairbar rather than the tenant, Whitbread. The judge found that the result of discussions between the parties' agents was an agreement that the Fairbar cheque should be returned by Goldapple and that thereafter Whitbread should be given an opportunity to make payment of the rent by another means. On Goldapple's instructions, RBS returned the payment to Fairbar, which received it on 11 June. When this cheque was repaid, Whitbread made another attempt to pay the rent, on 12 June, but failed because of a mistake in the account number. On 6 July Whitbread's new attempt to pay the rent (by CHAPS) also failed because by then Goldapple had instructed RBS not to accept it.

Meantime Goldapple began proceedings to irritate the lease by serving a pre-irritancy notice on 11 June and a notice of irritancy on 29 June, and by raising an action of declarator of irritancy on 6 July. Whitbread reacted by raising an action in the Court of Session of reduction of the two notices and declarator that the lease continued to exist. Lord Drummond Young rejected Goldapple's argument that Fairbar's payment of 27 May was not a valid payment of the rent due by Whitbread. He held that Fairbar had paid the money as an ad hoc agent for Whitbread.

Unfortunately, counsel omitted to cite to the court the main Scottish authorities which do and should govern the situation of payment of another's debt,4

Para 10.

so that Lord Drummond Young felt bound (in his words) “to go back to first principles”.5

Para 11.

In his impressive judgment he developed a novel theory of ad hoc agency (which he defined as “an agency relationship that comes into existence for the purpose of a single transaction only”)6

Para 13.

on which he has relied in subsequent cases unrelated to payment of another's debt.7

Laurence McIntosh Ltd v Balfour Beatty Group Ltd and the Trustees of the National Library of Scotland [2006] CSOH 197; John Stirling t/a M & S Contracts v Westminster Properties Scotland Ltd [2007] CSOH 117. These decisions are considered in Part C below.

In Whitbread however he was misled by counsel's omission into thinking that this branch of Scots law was a tabula rasa and a golden opportunity to develop the law by building on these sources was missed
The factual circumstances held to raise an inference of <italic>ad hoc</italic> agency

From the following facts Lord Drummond Young inferred that Fairbar was acting as Whitbread's ad hoc agent.8

Para 19, head 1.

First, though Fairbar was in occupation, the obligation to pay the rent was Whitbread's, not Fairbar's. The tenant's interest had not been assigned, and could not be effectually assigned without Goldapple's consent as landlords. Second, the business transfer agreement between Whitbread and and Fairbar specifically recognised that the obligation to pay the rent remained with Whitbread and obliged Fairbar to reimburse Whitbread for the rent.9

This agreement purported to transfer “the beneficial interest” of Whitbread in the relevant assets to Fairbar and to procure that “the legal interest” (sic) should be transferred in due course. Lord Drummond Young commented at para 18 that: “The distinction between legal and beneficial interest is a fundamental part of the English law of property, but it obviously forms no part of Scots law.” He pointed out that there was no trust which alone in Scots law can create a beneficial interest. “Consequently the tenant's interest under the lease … was not transferred in any way by the business transfer agreement.”

Third, the payment made on 27 May was clearly intended to discharge Whitbread's obligation to pay the rent.

Lord Drummond Young did not think that Fairbar had made the payment of 27 May “in its own right” because the business transfer agreement recognised that the obligation to pay rent remained Whitbread's. The use of a Fairbar cheque was administratively convenient, in that all debts of Whitbread's pubs and bars division payable after 10 May were paid using Fairbar cheques. The payments themselves were effected on Fairbar's behalf by employees of Whitbread. When the arrangements governing such payments were looked at in the light of the business transfer agreement, it was clear that the intention was that Fairbar funds should be used to pay a Whitbread debt. The judge deemed this to be wholly consistent with Fairbar's acting as agent for Whitbread in respect of such payment.

The theory of <italic>ad hoc</italic> agency

Lord Drummond Young summarised his view of the law applicable as follows:10

Whitbread at paras 11 to 15.

[11] Although a number of authorities on the payment of debts were cited by counsel in the course of their arguments, none appeared to govern the present situation. In these circumstances it is necessary to go back to first principles and analyse the requirements of a valid payment …

[12]… I am of opinion that the following principles are relevant to the Fairbar cheque of 27 May. First, it is necessary to keep in mind the elementary point that the purpose of payment is normally to discharge a debt, and nothing more. Consequently, there is generally no need to have regard to the wider context of the contract under which the debt arises; to do so would in my view introduce unnecessary complexity into what should be a very straightforward area of law. One exception exists, however; if the person paying the debt attempts to attach conditions to his payment, it may then be necessary to look at the wider contractual context.

[13] Secondly, it is common for payment to be made by someone other than the debtor in the relevant obligation. This is particularly true of members of a family where, for example, a husband may pay his wife's debt, or a wife her husband's. The same is true of groups of companies, where it is not unusual for one company in the group to pay a debt owed by another company to a person outside the group. The key to the analysis of such cases lies in my opinion in the concept of ad hoc agency, that is to say, an agency relationship that comes into existence for the purpose of a single transaction only. Where, accordingly, one person makes payment of another's debt, he normally does so as the agent of the debtor for the purpose of that particular transaction, namely the payment of the debt. That is in my opinion the natural inference from two facts, (i) the existence of a debt owed by the debtor and (ii) the fact that payment is made in order to discharge that particular debt. There is no reason to suppose from the mere fact of payment that the person making payment does so on his own behalf; he has no obligation to discharge. The obvious inference is accordingly that he makes payment on behalf of the debtor. That creates the relationship of ad hoc agency.

[14] Thirdly, if the correct analysis is ad hoc agency, payment by the agent discharges his principal's debt. That follows from ordinary principles of the law of agency. Fourthly, if the foregoing analysis is correct, there is no reason that the creditor should be entitled to refuse payment by an ad hoc agent, because the agent's act is attributed to his principal; the payment must therefore be treated by the law as made by the principal. The corollary of this proposition is that, if the creditor does in fact refuse payment made by an ad hoc agent, the debtor cannot be prejudiced by such refusal. What that means in practice is that the debtor must be given a further reasonable opportunity to pay the debt. That is of great importance in the present case. It is critical, however, that all that the ad hoc agent should do is pay the debtor; if he attempts to attach...

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