Inner House upholds discharge of standard security on basis of prior oral agreement

About this case:

• Citation:
  [2026] CSIH 35
• Judgment:
  External link
• Court:
  Court of Session Inner House
• Judge:
  Lord Malcolm

The parties fell into dispute over the effect of a series of agreements and deeds granted during the planning of a joint venture to develop a plot of land at Peterculter. After being ordered by a sheriff to discharge a standard security for £930,000, the appellant appealed to the Inner House.

The appeal was heard by the Lord President, Lord Malcolm and Lady Wise, with Lord Davidson of Glen Cova KC and David Massaro appearing for the appellant and Giles Reid for the respondent.

Implied agreement to discharge security

The respondent approached the appellant in 2019, proposing a joint venture for the purchase and development of a plot of land known as Caldonia. On account of his having been sequestrated in 2013, ownership of the plot vested at that time in the respondent’s trustee in sequestration. The appellant agreed to fund the acquisition of Caldonia, with each party’s investments in the project to be recorded as directors’ loans to a new, jointly-owned company.

Having agreed with his trustee in sequestration to purchase Caldonia and another property for a combined consideration of £1.15m, the respondent obtained the agreement of the Royal Bank of Scotland to discharge its securities over both plots. Prior to settlement, the parties agreed that, although Caldonia would initially be conveyed to the respondent personally, it would immediately thereafter be transferred to the company. In order to protect the appellant’s investment during the resulting ‘gap’ period, the respondent granted a standard security over Caldonia in favour of the appellant for £930,000, subject to the understanding that it would not be registered and would be destroyed after Caldonia’s conveyance to the company.

After the respondent’s lender delayed the provision of funds for the purchase of the second plot, the appellant agreed to loan £220,000 to the respondent to allow both purchases to go ahead on the planned settlement date. A second standard security over Caldonia was subsequently granted (and, this time, registered), stating that the respondent undertook to pay the appellant £1.15m when called on to do so.

A few months later, the respondent repaid the loan of £220,000 and executed a disposition in favour of the company for the transfer of Caldonia. Yet, having lost interest in the project, the appellant refused to cooperate in registering the disposition, sought to enforce the standard security in respect of the remaining £930,000 and instructed (albeit ultimately unsuccessfully) the dissolution of the company.

Ordering the appellant to discharge the standard security, the sheriff held that the parties had impliedly agreed that the security would be discharged once the appellant had repaid the £220,000 loan. Although that agreement was not in writing, it was nevertheless enforceable by means of the statutory personal bar provisions found in sections 1(3) and 1(4) of the Requirements of Writing (Scotland) Act 1995.

After an unsuccessful appeal to the Sheriff Appeal Court, the appellant submitted to the Inner House that the decision should be reversed.

Security accessory to underlying personal obligation

Noting that the dispute raised “an important legal issue … mentioned but left undecided” in the earlier case of Societe Generale SA v Lloyds TSB Bank plc (1999), Lord Malcolm began his judgment by examining the relationship between formal deeds relating to land and prior agreements. He wrote: “It is generally true that a formal deed relating to land such as a disposition or heritable security, even if it bears to be in implement of a previous contract, supersedes that contract and is the sole embodiment of the parties’ rights and obligations. This is an example of the common law rule, sometimes called the ‘supersession rule’, which renders inadmissible evidence as to communications prior to the formal document.”

Following obiter dicta from that and another earlier case, he continued by recognising an exception to the supersession rule: “[I]t [is] competent to prove ‘that the actual contract between the parties was not embodied or intended to be embodied in the formal document, but that the latter was a mere piece of machinery obtained as subsidiary to and for the purpose of the verbal and only real agreement’ … [A] standard security is accessory to the underlying personal obligation. If the creditor is not entitled to require repayment because of the personal rights and obligations as between him and the debtor, in a question between them where no third parties have an interest, the security does not take precedence.”

Concluding that the standard security “did not replace or overrule all that had gone before” but was rather “subject to [the prior arrangement’s] terms, both express and implied”, Lord Malcolm continued by examining the effect of the 1995 Act on the case: “[O]n its own, an oral agreement that a standard security will be discharged is unenforceable. Either party can withdraw from it. However, this will not apply if (a) one of the parties to the contract has acted in reliance on it with the knowledge and acquiescence of the other party, (b) as a result of so acting that party has been affected to a material extent, and (c) they would be adversely affected if the other party was able to withdraw from the bargain … The sheriff held that these provisions were met on the facts of the case … We agree that in view of the facts established at proof, the agreement did not require to be in writing.”

Rejecting the appellant’s submission that “there was no basis for the implication of an obligation to discharge the security” upon repayment of the loan and conveyance of Caldonia, he added: “[A]s the Sheriff Appeal Court observed, the implied term was obviously necessary to prevent the agreement being legally incoherent. Were it otherwise, the security would cover property no longer held by [the respondent] and for a debt which was never his but that of the company. We agree with the sheriff that an obligation to discharge the security in the current circumstances was an inevitable inference from the parties’ agreement.”

The appeal was accordingly refused.