Today, I am looking at the Scottish rules of personal bar (English law equivalent being estoppel) as they relate to contracts that relate to land or buildings. These rules can allow a person to rely on a contract being in place, even if no written contract was ever executed.
Scottish rules of personal bar
The statutory rule of personal bar for contracts that should be in writing is set out in Sections 1(3) and 1(4) of the Requirements of Writing (S) Act 1995. These provisions say that for contract that should be, but is not, concluded in writing if:
- one party to the arrangement acted (or refrained from acting) in reliance on a contract being in place and this was known about or acquiesced in by the other party; and
- as a result of the acting or refraining, the position of the first party has been affected to a material extent and would be adversely affected to a material extent by any withdrawal from the (informal) contract by the other party
then the other party cannot withdraw from the contract or argue that it is invalid on the grounds of it not having been properly constituted.
So, essentially, a defect in constitution can effectively be cured, in certain circumstances, by the actions of one or both parties.
There is also a similar (although not identical) common law rule of personal bar - but for contracts relating to land (or buildings) the statutory rule applies.
Personal bar only applies if the events are in the correct order. For it to work, the agreement on the essentials of the deal must have been reached before one of the parties relied, to their material detriment, on a contract being in place.
Example 1 - all essentials not yet agreed
Let's look at an example. An owner is negotiating a contract to sell his property to buyer 1. They have been discussing and have agreed most of the terms of a draft sale contract but are still wrangling about the price. Before they have agreed any price, and unknown to the owner, buyer 1 (rather rashly) enters into a contract to sell the property on to buyer 2 - because buyer 1 feels confident that he will agree a certain price with the owner and that a contract will shortly be concluded at that price.
Unfortunately for buyer 1, buyer 3 comes along to the owner and offers to buy the property from the owner for much more than the price that buyer 1 had offered - and so the owner does a deal with buyer 3. Buyer 2 then sues buyer 1 for breach of contract.
In these circumstances buyer 1 cannot be successful with a personal bar argument against the owner, because two out of the three requirements have not been met. Firstly, there could be no "informal" contract between the owner and buyer 1 on which buyer 1 could be said to rely - because the owner and buyer 1 had not yet agreed a key point ie the price. Secondly, the owner didn't know about buyer 1's intention to conclude a sale on contract with buyer 2.
Example 2 - essentials all agreed
If the owner and buyer 1 had agreed the price and buyer 1 had told the owner that it was about to do a deal to sell the property on to buyer 2 on the basis that the owner and buyer 1 had a binding contract - but still the owner had proceeded to sell to buyer 3 - then the position might be different. In those circumstances buyer 1 might be able to use personal bar to prevent the owner from arguing that there was no contract with buyer 1. This is because, in these circumstances, although no written contact had been signed, all essential terms of it has been agreed, buyer 1 had acted to his detriment in reliance on the contract being in place and the owner had known and acquiesced in that reliance.
Even if buyer 1 could win the personal bar argument, he might not be able to force the owner to sell to him. If buyer 3 had already completed and taken title to the property and was in good faith (ie didn't know about the existing deal between the owner and buyer 1) then it's unlikely that buyer 1 would be able to get buyer 3's's title reduced. Instead buyer 1 would be left with a claim against the owner for the loss suffered by buyer 1 as a result of the owner's breach of the "informal" contract.
Take care not to stumble into a binding contract unintentionally
So you can see that a property owner who has been in negotiations with someone to sell, but has not yet concluded a formal contract, can in some circumstances be treated as if he had concluded the contract. The same could apply to a potential buyer.
Use of disclaiming wording in contract negotiation correspondence can be useful to demonstrate that there was no "informal" contract upon which any reliance could be placed. This might be wording that expressly states that the correspondence or draft contract is not intended to be contractual in effect or that a draft document is not legally binding until it is attached to formal missives. If such wording appears, it is difficult for either of the parties to claim that a contract (albeit informally constituted) had been achieved.
Also, if in the above example, buyer 1 was experienced in property dealings then it would be more difficult for him to succeed with a personal bar argument. Such a person would struggle to satisfy a court that he had thought that a contract was in place before the formal written contract was concluded, because he would be well aware that a written contract was required to bind the parties.
All of that said, the presence of disclaiming wording or the fact that the aggrieved party is an experienced property person might not be an absolute guarantee that personal bar cannot operate. It is still possible that personal bar might apply if there is evidence of:
- agreement (even if only verbal) between the parties on all essential elements of the contract and
- an intention for the agreement to constitute a contract (despite any disclaiming wording on any drafts) e.g direct correspondence between the principals to that effect, followed by the relevant reliance on a contract being in place.