Springing the offside trap
The decision of Lord Emslie last week in Gibson v Royal Bank of Scotland [2009] CSOH 14 is the latest in a line of cases relating to the so-called "offside goals rule" (more accurately the rule penalising private knowledge of a prior right).
In Gibson the Gibsons sought reduction of a standard security granted by their predecessor in title Mr McAllister (first husband of Mrs Gibson) in favour of the Royal Bank of Scotland. McAllister had earlier agreed to grant the Gibsons an option to purchase the property, and had in the interim granted them a lease. The security was granted in January 2006, the option had been exercised on 2nd March 2005 with a date of entry of 8th February 2006. The Gibsons argued the bank was in bad faith and the security could be struck down. The bank in supporting their case that the action of reduction was irrelevant argued that mere personal rights could not found an action under the offside goals rule – instead the personal right had to be capable of being converted into a real right. The bank argued that the option was a mere personal right, and an option was not a personal right capable of immediate conversion into a real right (but rather a right to enter a contract of sale – or a personal right to a personal right to a real right). To this end the bank relied on Wallace v Simmers 1960 SC 255.
The Gibsons argued that the case should go to proof before answer, stressing that it was not necessarily irrelevant. They had argued that the option had been exercised prior to the grant of the standard security thereby equating the Gibsons' position to that of the holder of concluded missives to acquire the property (a personal right capable of being made real) and thus within the limitations apparently set by Wallace v Simmers. On that basis alone the Gibsons could be thought to have sufficient for the case to go to a proof before answer and the matter could potentially have been disposed of at that point.
However, they argued further points. They suggested that the limitation in Wallace v Simmers was not consistent with prior and subsequent authorities. The argument was summarised by Lord Emslie as follows,
"The argument here rested on three broad propositions, namely (i) that a property right granted in breach of any pre-existing contract or other obligation was voidable at the instance of the creditor in that obligation if the grantee knew or ought to have known of the obligation (or if the subsequent grant was not for value); (ii) that the rationale for this rule was that no-one was entitled to grant a subsequent right in breach of a pre-existing obligation: the granter would be acting "fraudulently" in that regard, and if the grantee knew or should have known of this he must be deemed an accomplice to the fraud and to have acted in bad faith; and (iii) that there was no requirement in law for the pre-existing right or obligation to be real or capable of being made real. " (para [26])
Lord Emslie decided that the case should go to proof before answer and deals shortly with the suggestion that the Gibsons case is irrelevant. He points out that if the Gibsons prove all they aver,
"In terms of contractual significance it is in my view hard to differentiate an exercised, although unrecorded, option to purchase heritable subjects, or an asserted right of pre-emption for that matter, from completed missives of sale, and I am unable to accept that the holder of any such rights should in law be held powerless to challenge bad faith encroachment. " (para [36])
And that the second grant is a right in security rather than a sale does not matter: Trade Development Bank v David W Haig (Bellshill) Ltd; and Trade Development Bank v Crittall Windows Ltd 1983 SLT 510.
For property lawyers more interesting are Lord Emslie's general comments on the offside goals rule. He suggests at para [43] that a universal rule to cover the instances where the offside goals rule applies would be difficult to formulate and notes that he would favour an approach midway between the two extremes suggested by the parties,
"With these considerations in mind I would not, if pressed, have been inclined to support either party's submissions to their fullest extent. In particular, I would have declined to accept the pursuers' contention that the Wallace limitation had no place in our law, and that mala fide knowledge should be a valid ground of reduction in any case where a prior right (of whatever nature) was compromised by a subsequent transaction. Conversely, I would not have been inclined to uphold the Bank's contention that the Wallace limitation should be construed and applied so narrowly as to deny any possibility of protection to prior rights unless these could immediately be "… made real" by the granting and recording of a disposition. In my view the authorities tend to support an intermediate position whereby, consonant with the established general rule, the bad faith exception may be applied in a wide range of different circumstances. It would be unusual (and undesirable) for an equitable exception to be more rigidly confined, and it is perhaps only where prior rights are not the subject of any supervening breach of contract, or concern a different granter or different property, or are of a kind which could never relevantly affect the public records, that serious continuing problems in this area may be expected. " (para [49])
No doubt to the dismay of some Lord Emslie suggests that there is no great unifying theory, that the parameters of the offside goals rule cannot be readily and neatly identified. This may be down to the historical development of the rule, and the doctrinal shift (particularly during the Trade Development Bank cases) when the roots of the rule were to some degree forgotten and the courts were seeking a conceptual justification for the doctrine. It may be down to the transplantation of an apparent general contractual principle of fair dealing in good faith into a property context when property law had long recognised – not an overriding principle of good faith – a principle penalising bad faith. It may simply be that the courts like to hold in reserve a flexible and equitable doctrine that can be used in property cases to penalise rogues and others through the application of what could be called interstitial justice.
It is perhaps surprising though that as the Scottish cases in this area become more fluid, and less predictable, English law which has long had a similar principle, the doctrine of notice, restricts the application of that principle in order to prevent the circumvention of their system of land registration.
(a fuller version of this post appears on the Edinburgh centre for commercial law blog)