Contract Law – Review of Retention: consultation

Annex A

Extract from the Scottish Government Consultation on the Scottish Law Commission Report on Review of Contract Law.

Remedies for Breach of Contract

The Scottish Law Commission (SLC) had considered prior to their Report that a comprehensive statutory restatement of the law could be of benefit in respect of remedies for breach of contract but as this proposal was not widely supported and indeed there was some significant opposition, no such recommendation has been made.

In the main there was a lack of support for many of the reforms. For example, a number of technical reforms were considered. There was little support for general reform in this area and it was concluded that the law as it stands is fit for purpose. The SLC consulted on three further possible reforms which were characterised as “self-help remedies^[9].” The first (price reduction) was not supported by the majority. Similarly, most respondents were against a debtor's right to cure defective performance. Finally, there was limited support for the remedy of a creditor's right to have non-conforming performance remedied. As a result, and in the light of stakeholder views, no recommendations were made on these aspects.

Whilst there was some consensus around some potential reforms relating to the enforcement of performance, recommendations were not proposed on the basis that it would create an undesirable divergence between remedies for breach of contract and the general law of remedies.

The SLC consulted again on the topic of damages for non-patrimonial loss as there had previously been support for reform in this area^[10]. Views had changed, however, and the level of support had fallen and with consultees taking the view that the courts were now developing the law on a case-by-case basis. The SLC were content to leave things both to the courts and further academic research and no recommendations were made.

The SLC did however recommend 3 individual reforms all of which are intended by way of default rules. These recommendations are discussed in more detail below and your views on aspects of these are welcome.

Principle of mutuality

The first of these reforms relates to "mutuality." It is intended to clarify that when two parties (A and B) to a contract are each in breach of the contract, A may exercise any right or pursue any remedy arising from B's breach, provided B's breach occurs before B rescinds the contract for A's breach (if it can)^[11]. It is qualified in so far as the party in breach is not entitled to claim performance of any duties which have been retained lawfully.

Closely aligned to the principle of mutuality is the remedy of retention. Retention is a "self-help" remedy which is based on the idea of obligations in a contract being interdependent or reciprocal, so if one party does not perform then the other party need not perform. Before its Report, the SLC considered that the remedy of retention was generally functioning reasonably well and that clarification of certain issues was required more than reform, but the extent of the clarification needed was not clear. In its Report the SLC considered it best to leave further clarification of the law on mutuality and retention to the courts and practitioners.

Since the Report was published there has been further case law which has raised questions about how and when retention can be used. Some of the issues raised by J H & W Lamont of Heathfield Farm v Chattisham Ltd^[12] were highlighted in an article^[13] which noted that while the 3 judges of the Inner House reached the same decision they did so by contradictory routes. For instance, taking as an example the judges' approach to Lord Jauncey's comments in Bank of East Asia^[14], Lord Drummond Young suggested that they should not be construed as suggesting that in instalment contracts the presumption of interdependence is in some way reduced. Lord Malcolm, however, relied on Lord Jauncey's comments in finding that the parties' obligations were not counterparts.

Furthermore, in a novel development, Lord Drummond Young suggested that retention only operates in relation to substantive, as opposed to ancillary obligations in a contract. The Lord President noted that the right to retain is generally only available to secure future performance, not for past breaches that are unlikely to be repeated. Yet this is in conflict with the decision of the Supreme Court in Inveresk v Tullis Russell^[15]. The decision in J H & W Lamont also emphasised the lack of clarity regarding the court's equitable control of the right to retain and the factors that may be taken into account in finding that retention had been used inequitably.

It may therefore be said that the law in relation to retention of performance is less clear than when the SLC issued its Report. Without further clarification it is likely to be difficult for legal professionals to definitively advise their clients about the state of the law in Scotland. This may be especially unsatisfactory given that retention can operate as a self-help remedy, that is, one a party may exercise on its own behalf and without seeking professional advice or obtaining an order from the court.