Drafting Suspensive Conditions: Pitfalls For The Unwary
Posted On: 06 October 2011
Author: Alan A. Summers QC
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DRAFTING SUSPENSIVE CONDITIONS
PITFALLS FOR THE UNWARY
By Alan Summers QC
1. In 2010/11 two cases were heard by the Inner House where a central issue was the enforceability of obligations which it was alleged were insufficiently specific to be enforceable. In Scottish Coal the First Division decided the obligation was unenforceable whereas in R&D the First Division decided the obligation was enforceable (Scottish Coal Co Ltd v Danish Forestry 2010 S.C. 729 and R&D Construction Group Ltd v Hallam Land Management Ltd 2011 S.L.T. 326). In this paper I examine the obligations in question and seek to ascertain why the Court reached different conclusions. “DFC” refers to Danish Forestry Co and “SCC” refers to Scottish Coal Co and “Hallam” refers to Hallam Land Management
In summary the suspensive conditions were as follows -
- The parties’ contract to sell land was suspensive on them agreeing a Ranking Agreement with SCC’s Bank which would “reasonably regulate” the rights of the secured debtors and which would give DFC first ranking (Scottish Coal v Danish Forestry).
- The parties’ contract was suspensive on Hallam agreeing a price for the land in question with a third party in terms “wholly acceptable” to Hallam, Hallam being required to use “all reasonable endeavours” (R&D v Hallam Land Management).
2. The argument in both cases was that where a party agrees to enter into a contract with a third party as a condition of the fulfilment of the primary agreement, the obligation on him to do so is unenforceable unless the terms agreed are clear and specific or where a matter is left undecided, there is a means by which the terms can be ascertained (see Scottish Coal p 733 para. 8 et seq. and R&D p 332G-L).
The broad principles are as follows -
- A concluded contract is one which settles everything that is necessary to be settled and leaves nothing to be settled by agreement between the parties.
- The court will not make a bargain for the parties or substitute what it thinks is reasonable.
- Id certum est quoad certum redid potest – what can be made certain is certain. If there is a means of making something uncertain, certain; the contract will be enforceable. Thus an agreement that the price would be the market price or a reasonable price could be determined by the Court having regard to objective criteria.
- Likewise where a contract is suspensive on e.g. the grant of planning permission, the contract is enforceable but suspended pending resolution of the administrative process.
- “The object of our law of contract is to facilitate the transactions of commercial men and not to create obstacles in the way of solving practical problems”.
SCOTTISH COAL V DANISH FORESTRY
3. In Scottish Coal the parties’ contract could not take effect unless a third party, the Bank which supported Scottish Coal (hereafter SCC), was willing to alter an existing Ranking Agreement so as to enable DFC’s new standard security to rank in the way the parties had agreed it should. The Standard Security was to protect DFC against the failure of SCC to pay the royalties they were due under a coal extraction agreement.
4. DFC agreed to enter a Ranking Agreement (to paraphrase) that “reasonably regulated” the relationship between the sums it was due to be paid under its contract with Scottish Coal and sums due to other creditors of Scottish Coal under their separate contractual arrangements. Given that the parties had agreed that DFC would rank first and SCC had apparently been advised by the Bank (the floating charge holder) that this was acceptable to them no one at SCC foresaw that there could be any room for further disagreement.
(Continued.....To read the full paper please click on the link at the top of the page)