Some commentators have expressed alarm at the recent Inner House decision on expenditure incurred in reliance on representations that a contract existed, but is that justified?

A new client comes to visit. “I’m sure I had a deal”, he moans. “In fact, the other side led me to believe there was one. Now I gather that whatever agreement we had, there wasn’t a legal contract. I spent a fortune. It’s not fair. I want it back.”

He explains that he has been to his “usual solicitors”, who have told him that as there was no legal contract, he has no claim. He understands from gossip at the golf club that you are the person with all the answers. Mentally preening yourself, you start to think of remedies. Misrepresentation might come to mind, or possibly unjust enrichment? Entirely justifying the gossip, you may even start to think of something which has come to be known as “Melville Monument liability”. If so, a recent decision (12 February 2010) of an Extra Division, comprising Lords Osborne, Hardie and Marnoch, might now make you pause before encouraging the hopeful client to commit resource to a litigation which might conceivably end up in the Inner House.

What is Melville Monument liability?

For those who do not claim to “have all the answers”, the name derives from the case of Walker v Milne (1823) 2S 379, where a claim was made for expenditure incurred in preparing a site for the erection of a monument to Viscount Melville which the subscribers to that enterprise subsequently built somewhere else.

The authorities, such as they were, were reviewed by Lord Cullen (then sitting in the Outer House) in Dawson International v Coats Patons 1988 SLT 854. Lord Cullen concluded that there had to be representations by the other party. The party incurring the expenditure had to rely on an implied assurance that there was a binding contract when in fact there was no more than an agreement which in legal terms fell somewhere short of that. There had nevertheless to be an agreement. In that event, while (not being legally binding) the “agreement” could not be enforced, it was “unconscionable” that the party who had spent money in implement of his part of the supposed deal should be denied reimbursement.

This was an “exceptional” branch of the law. It was not necessary as an equitable remedy where there was bad faith or a fraudulent misrepresentation (or indeed a negligent one). It did depend on agreement, because “the law does not favour the recovery of expenditure made merely in the hope or expectation of agreement being entered into or of a stated intention being fulfilled”.

Dawson International was appealed but no challenge was debated in the Inner House to that element of Lord Cullen’s decision.

Apart from Lord Cullen’s review, the only other recent – at least relatively recent – discussion of this form of liability arose in Bank of Scotland v 3i plc 1990 SC 215 where, in the Inner House, Lord Cameron of Lochbroom dealt with the matter briefly. Absent any suggestion that, in Bank of Scotland, there was an implied assurance of a binding contract when in fact there was no more than an “agreement”, no case of Melville Monument liability arose. However, “equally conclusive” for Lord Cameron was that the remedy was an equitable one and “only available in limited circumstances”. He agreed with Lord Cullen that there was no need to resort to it when misrepresentation arose, and in Bank of Scotland there was already a misrepresentation case before the court.

Khaliq: no liability

In Khaliq, briefly, Mr Khaliq, a shopowner, had it in mind to join the Londis Group and trade under their banner. He entered into discussions with representatives. Correspondence ensued. Ultimately, the deal was never finalised. He sued in Glasgow Sheriff Court, alleging (1) breach of contract, and (2) Melville Monument liability. He abandoned his claim for breach of contract, eventually accepting that the intended contract was never completed.

That left Melville Monument liability. Mr Khaliq claimed that he relied on assurances by Londis’s representatives that there was a binding contract and, on the basis of these assurances, incurred expenditure (primarily on shopfitting works for one of his premises). The sheriff upheld his argument that there had been implied assurances that a contract existed, but rejected his claim. He appealed to the Court of Session.

The leading judgment was given by Lord Osborne. In so doing he was prepared to proceed on the assumption that Melville Monument liability was a sound basis for a claim (of which more later). On that assumption, he looked closely at the items of expenditure claimed by Mr Khaliq. As he put it: “The question then must be whether, in laying out that expenditure, [Khaliq] acted in reliance on an implied assurance by [Londis] that there was a binding contract between them, when there was not, and that the expenditure was in implement of [Khaliq’s] supposed obligations under that contract.”

In Lord Osborne’s view, that was not the case. Mr Khaliq had not spent the money in fulfilment of supposed obligations incumbent upon himself, but because of earlier representations which were no part of any potential contract. In addition, by part way through events, Mr Khaliq had had a letter from Londis from which it must have been absolutely plain that there was no contract – so any expenditure after that date could only have been by his own voluntary decision.

Finally, and perhaps significantly given the use of this form of liability as an equitable remedy, Lord Osborne pointed out that the expenditure in question effected improvements to Mr Khaliq’s own properties from which he continued to trade. It could not be said he had received no benefit. How could it ever therefore be said that it was “unconscionable” that he should be denied reimbursement of that expenditure?

“Putting the matter in another way”, he commented, “it is difficult to see why, in a context in which [Khaliq] has in fact benefited from his own expenditure, it should be seen as equitable that he should recover it from [Londis]”.

Lord Hardie agreed with Lord Osborne. Lord Marnoch also did so (while adding some comments of his own). In Lord Marnoch’s view, there was no “imperfect” agreement but merely representations inducing a belief that there was a contract. Accordingly, the claim did not fall within Melville Monument liability at all. So Mr Khaliq’s claim failed again.

Sound foundations?

More significantly for future practice – and advice by those renowned in the proverbial golf club – Lord Osborne (in comments already described as “really disturbing”: “Melville Monument liability: some doubtful dicta”, Edinburgh University Scots Law News online, 13 February 2010) questioned whether there was any real basis for the continued existence of this form of liability, effectively deriving from a case dating back to the 19th century. The justification was said to be equitable, but the circumstances under which the court had considered where the equities lay – and why – had changed. The rule requiring corroboration in civil proceedings had gone. The requirements for proof of certain forms of contract had changed and the law relating to negligent misrepresentation had developed. Thus, in Lord Osborne’s view, the whole question of the survival or scope of Melville Monument liability might usefully be revisited.

Lord Marnoch went further. He felt that the 19th century decisions stemmed, for the most part, from restrictive rules of evidence then in force which the court, in equity, sought to mitigate. In addition there could be discerned the making of “early gropings” towards the now familiar doctrine of delictual liability for fraudulent and negligent misrepresentations. Lord Marnoch wished indeed to reserve his view on whether Dawson was correct.

Uncertain rule

It is clear from the judgments in Khaliq that the Inner House did not regard Melville Monument liability as a satisfactory part of the armoury of a claimant. Are their comments indeed “remarkable”, and will they leave Scots law “in a dark alleyway”? A different view may be possible. On any approach Melville Monument liability is exceptional. When Lord Cullen reviewed the authorities in 1988 there had been no case apparently based on that liability for some 60 years. That of itself does not suggest any urgent requirement for Scots law to retain this particular basis of claim. Even Lord Cullen was anxious to ensure that the doctrine be constrained within what he saw as its limit, i.e. one requiring agreement (albeit not a binding contract), and not allowing extension into circumstances where there was no agreement.

Although discussions of legal and equitable principles can become bogged down in analytical debate, it seems plain that the Melville Monument type of liability, as discussed by Lord Cullen, is grounded firmly in what is perceived to be an unfair result. The word “unconscionable” rears its head. Founding, or even expanding, a basis of liability on the notion that one particular set of circumstances gives rise to a result which the courts see as unfair is, at the very least, capable of opening up much wider discussion. Many situations arise where a particular viewer of the situation – whether a judicial decision-maker or otherwise – will look at the result and feel it is “unfair”. The word “unconscionable” may even be appropriate. Nevertheless the law requires to provide an element of certainty, especially in business dealings.

That need for certainty has been often stressed. Any approach which seeks to find exceptions based on individual unfairness risks upsetting that certainty and making the predictability of commercial life that much poorer. Indeed there is an argument that parties who are engaging in contractual discussions must be taken to know that unless and until their contract reaches a conclusion – the requirements for which they are deemed to know – there will be no liability (recognised concepts such as misrepresentation apart).

It is perhaps interesting that in the immediate academic comment in the aftermath of Khaliq, the reference to Scotland being left behind in the dark alleyway is based on the proposition that other European systems have created a liability for “bad faith” breaking off of contractual negotiations. The issue of any imposition of a “good faith” obligation, in pre-contractual negotiations or elsewhere, is an enduring topic of legal and academic debate which is beyond the scope of this article. It does however go to suggest the true underlying nature of the objection to the dismantling of Melville Monument liability.

While individual claimants might lament its passing, it is equally possible that business users generally would find it easier to know where they stand without it.

A sideways glance at England

While the analogy is not precise, in the context of a discussion on the place of “fairness” in contractual matters it may be worth reminding readers of comments in the House of Lords in 2008 (Yeoman’s Row Management Ltd v Cobbe [2008] UKHL 55). In that case parties had reached an oral “agreement in principle” on the sale of land, following which one of the parties pursued an application for planning permission for residential development on that land. Much money was spent and the desired-for planning permission – of considerable value – obtained. That having been done, the landowner declined to proceed with a “formal” contract to follow upon the oral one. The developer, considerably aggrieved with that course of action, sued.

Lord Scott, delivering the leading judgment, examined the possible bases of claim which might be available in English law to the aggrieved party, ranging from proprietary estoppel through constructive trust and unjust enrichment to a quantum meruit and even the tort of deceit. The High Court and Court of Appeal granted relief based on proprietary estoppel. However the analysis in the Lords demonstrated that, in effect, what had been done was that the rules of that particular remedy had simply been bent to meet what those courts saw as the “unconscionability” of the landowner’s conduct (see para 16).

As Lord Scott pointed out, to treat the remedy as simply requiring unconscionable behaviour was a recipe for confusion. That led him – although accepting the description of the landowner’s behaviour as unconscionable – to conclude that if that became the driver of the argument, the law risked becoming “unprincipled and therefore unpredictable” (para 28). The reality in that case was that both parties must have known that the oral agreement was not binding. The “grievance” that it was not subsequently implemented was not a grievance which the law was bound to recognise.

Referring to the way the legal doctrine had been used, Lord Walker was even more scathing. Flexible though the doctrine was, “it is not a sort of joker or wild card to be used whenever the court disapproves of the conduct of a litigant who seems to have the law on his side. Flexible though it is, the doctrine must be formulated and applied in a disciplined and principled way. Certainty is important in property transactions”.

As fair as it seems?

Viewed against that kind of background it may be that the removal of a little used and shakily founded basis of liability, originating from a different era, might be regarded as a positive step rather than a negative.

Of course it may be that there will be a substantial period of time until a suitable case involving Melville Monument liability again reaches the Inner House. In some ways that would be unfortunate. In the meantime aggrieved claimants should exercise caution before relying upon it. In addition, the saga acts as a useful practical reminder that the siren call of “It’s not fair”, even if justified, may have to be resisted – the question will always be whether there is a sound legal remedy for that situation.

  • R Craig Connal QC, Senior Litigation Partner, Head of Advocacy UK, for McGrigors LLP
Share this article
Add To Favorites