Offside traps – Gibson v Royal Bank of Scotland [2009] CSOH 14

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".  The case law in this area stretches back to the 1580s (Stirling and White v Drummond (1582) Mor 1689) but until relatively recently the cases had not been subject to detailed systematic analysis.

However, in recent years we've had detailed consideration by Professor Reid, The law of property in Scotland (1996) paras 695 – 700; Professor Carey Miller and David Irvine, Corporeal Moveables in Scots law (2nd edn, 2005) para 8.31, Ross Anderson in a valuable article "Offside goals before Rodger Builders" 2005 JR 277 (and an updated version in his Assignation (2008) paras 11-04 – 11-31, as well as my own discussion in 2002 JR 291 and in Professor McDonald's Conveyancing Manual (7th edn, 2004) paras 32-51 – 32-62.  Identifying the historical roots, the current conceptual underpinning, and the parameters of the application of the rule has not proved straightforward.  The work of Ross Anderson has proved particularly helpful for the historical development of the rule – but as that history may have been forgotten during the development of the case law the current conceptual basis and parameters remain nebulous.  At times the description by Professor Lubbe of the South African equivalent – that it is a "doctrine in search of a theory" (1997 Acta Juridica 246) – seems most appropriate.

And, where there is uncertainty as to the conceptual foundations there are risks.  In a famous essay the late WA Wilson wrote, "A legal system which has no doctrinal foundation must drift.  It may be under the delusion that it is proceeding in the light of pure reason."  (in "the importance of analysis" in Comparative and Historical Essays in Scots Law (eds Carey Miller and Meyers, 1992).  The statement is equally applicable to individual rules.

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 people's bank, sorry 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.

 Lord Emslie presented the case as a conflict between the principle of transacting on the faith of the registers in property law, and the principle of fair dealing in contract law.

The bank in supporting their case that the action of reduction was irrelevant argued that for the offside goals rule to apply,

"there should be in existence a pre-existing right in favour of another; that that right would be breached by the transaction in question; and in particular that the right in question must itself be a real right, or at least one capable of being made real. " (para [13]

And accordingly mere personal rights could not found an action under the offside goals rule.  The bank then argued that the option was a mere personal right, and suggested that as 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 and the two recent cases that followed it – Optical Express (Gyle) Limited v Marks & Spencer plc 2000 SLT 644 ; and The Advice Centre for Mortgages v McNicoll 2006 SLT 591.  The latter case may have been thought to particularly support the bank's case being an instance where the court refused to apply the offside goals rule to allow an option to be enforced (albeit an option granted by the then owner's predecessor in title), and where the Lord Ordinary (Drummond Young) disapproved Davidson v Zani 1992 SCLR 1001, the only authority which appeared to suggest that the holder of an option to acquire would benefit from the rule.

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])

And while accepting the decision in Wallace v Simmers (which involved a competition between a licence (a personal right to occupy property) and a sale) suggested that the approval for the decision in Trade Development Bank v Warriner and Mason 1980 SC 74 actually came in a case which did not support the main thrust of Lord President Clyde's decision in Wallace.  This is because on the facts of Warriner and Mason the court applied the offside goals rule to a case where a personal right to prohibit the grant of a lease was upheld.  Hence, the right benefiting from the offside goals rule there was not a personal right capable of being made real.

The problems that Warriner and Mason causes for establishing the parameters of the offside goals rule have been recognised since the decision was reported.  Professor Reid was originally very critical of the decision for that reason in his article "Real conditions in standard securities" 1983 SLT (News) 173 and 189, and in the Conveyancing Manual (at para 32.55) I suggest that it is a case that stands alone and may therefore "not truly be an illustration of the doctrine" – suggesting instead that  it might be an example of a general principle from the law of rights in security.  The roots of the Gibsons argument can be seen in Professor Reid's Law of Property in Scotland para 698, n 13 where it is suggested that Warriner and Mason contradicts the case and consequently Wallace may be limited in scope.

Having stressed that the "Personal right capable of being made real" point from Wallace may not serve as a limitation on the rule the Gibsons then point out that various texts suggest that options are covered by the rule – including Professor Reid's discussion in The Law of Property in Scotland at para 698, n 4.  I have taken a similar view previously in the Conveyancing Manual at para 32.62 (2).

The Gibsons argument was therefore summarised with the following proposition,

"that the bad faith exception could be prayed in aid by any party whose antecedent rights were compromised by a subsequent recorded grant.  Expressions of opinion in "double grant" cases, where prior rights were in fact "… capable of being made real" should not be read as imposing a universal limitation in all cases involving heritable transactions. Up to and including Rodger (Builders) in 1950, neither case law nor academic writings supported any such limitation. "

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.  Such a view is not controversial.  The line of cases providing that the offside goals rule applies where there is a personal right to acquire in favour of A followed by the grant of a subordinate real right in favour of B that would encumber the title of A when B completes his or her real right first can be traced back to Bouack v Croll (1748) Mor 1695 (a competition between a transfer (an assignation of lease) and a sub-lease) and is supported by the more recent decision of Trade Development Bank v David W Haig (Bellshill) Ltd; and Trade Development Bank v Crittall Windows Ltd 1983 SLT 510 (where the competition is between a transfer (an assignation of lease) and the grant of a standard security).  And indeed Lord Emslie notes the similarities between Gibson and Crittall Windows at paras [39] and [40]. 

He suggests at para [43] that a universal rule to cover the instances where the offside goals rule applies would be difficult to formulate (the case does not refer to the instances of competing rights in security in argument – but the formulation of any general rule somehow has to reconcile the cases of Blackwood v Creditors of George Hamilton (1749) Mor 4898 and Leslie v McIndoe's Trustees (1824) 3 S 48 – which suggest (I think correctly) that the offside goals rule does not apply to competing securities with the Scotlife Home Loans cases for example at 1994 SCLR 791).

Lord Emslie then seem to initially support the rationale underlying the approach in Wallace

"Recognising that the settled general rule is designed to protect an acquirer of heritable rights who, in good faith, relies on the face of the public records, it may well be reasonable to require that a competing prior right should itself be of a kind potentially capable, in due course, of affecting these records in some relevant way. According preference to known rights which could never do so might effectively subvert the settled rule, and in my judgment none of the cited authorities can be understood as supporting an approach along such lines. " para [44]

And indeed notes in his final observations 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])

Lord Emslie then 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 (relied on in Crittall Windows and supported by Lord Clyde in the later House of Lords decision of Smith v Bank of Scotland 1997 SC (HL) 111) when property law had long recognised – not an overriding principle of good faith, but a recognised principle penalising bad faith (see for example, Lord Braxfield in Mitchells v Ferguson (1781) Mor 10296 and the notion that "though mala fides [bad faith] may cut down a title, no bona fides [good faith] can, of itself, create a right.").  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 remains to me 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.