Scottish Government

ENFORCEMENT OF CIVIL OBLIGATIONS IN SCOTLAND

5 TYPES OF ENFORCEMENT

5.1 The various types of diligence are each considered in this Part and proposals for their improvement, clarification and simplification are brought forward.

(A) DILIGENCE ON THE DEPENDENCE

Nature and Purpose of Diligence on the Dependence

5.2 Diligence on the dependence is a provisional or protective measure which is used whilst a court action is ongoing, or just before an action is raised, but has not been finally disposed of. It allows the creditor (pursuer) in the action to take steps to preserve the debtor's (defender's) property so that it will be available to satisfy any claim eventually upheld by the court.

5.3 There are sound economic and public policy reasons for allowing creditors to use diligence on the dependence. Whilst in the great majority of cases people respect and comply with their legal obligations, in a significant number of cases they do not. In such cases compliance with the law may be achieved only after court action. Undoubtedly the effectiveness of using the courts to uphold the law would be undermined if, during the course of a court action, a party was able to dispose of money or other assets in order to avoid making a payment at the conclusion of those proceedings. Thus, diligence on the dependence is a necessary means of protecting those who are forced to use the courts to recover payments lawfully due to them and preventing disposal of assets in an attempt to defeat their legitimate rights.

Types of Diligence on the Dependence

5.4 A warrant to do diligence on the dependence of an action is sought by the pursuer in his summons or writ presented to the court. The court grants a warrant for diligence on the dependence upon commencement of the action. The warrant permits, but does not require, the pursuer to serve diligence on the dependence of the action.

5.5 There are two types of diligence on the dependence, arrestment on the dependence and inhibition on the dependence.

Arrestment on the Dependence

5.6 Arrestment on the dependence is available to pursuers in actions for the payment of money. The effect of an arrestment on the dependence is to 'freeze' either money or goods which are owed to the defender and are held by a third party. The arrestment is served on that third party, who must not make the payment or transfer the goods to the defender. Although the amount of money claimed by the pursuer is stated in the arrestment, the amount of money or the value of the goods frozen is not linked to that amount. The arrestment, therefore, 'freezes' all money or goods due to the defender which are held by the third party, the arrestee.

Inhibition on the Dependence

5.7 By contrast, inhibition on the dependence is used in relation to heritable property, usually land or buildings, rather than money or moveable property. Inhibitions are used against heritable property in the ownership of the defender himself rather than property which is owed to him by a third party. An inhibition on the dependence affects all of the defender's heritable property regardless of the amount of the claim by the pursuer. It prevents the defender from dealing with his property in a way which might prejudice the claim of the pursuer, for example by selling the property and disposing of the proceeds.

Scottish Law Commission Recommendations

5.8 The Scottish Law Commission examined the substantive law and procedural arrangements for diligence on the dependence and made recommendations for reform in its 1998 Report on Diligence on the Dependence and Admiralty Arrestments. ²⁵⁶ The Report was a substantial work which, in addition to making recommendations for reform of diligence on the dependence, also addressed one of the significant types of diligence used on the dependence of a court action, admiralty arrestment.

5.9 The Commission identified a number of difficulties relating to the current operation of the law in this area. In general, these problems concerned a perceived lack of protection for defenders who could find themselves subject to diligence on the dependence. In particular, it considered that warrants for diligence on the dependence may be obtained too easily and that diligence on the dependence too often affects a disproportionate amount of a defender's assets. The ease with which diligence can be used, and the extent of the property which it can tie up pending further determination in the case, can give the pursuer who uses diligence on the dependence a disproportionate bargaining tool in his negotiations with the defender. This can be used to force a settlement which may be to the defender's detriment. Defenders may be further disadvantaged because it is difficult to halt diligence, by way of recall or restriction, after it has been used. The Commission considered that diligence on the dependence should only be available when necessary to protect the pursuer's interests. This is because of the significant effect of paralysing a defender's funds or property before the court has had the opportunity to take a view on the merits of the case.

5.10 The Commission's recommendations have not been implemented. The Executive intends to implement some of the Commission's recommendations and, in addition to making some supplementary reforms, the Executive's intentions are now set out in the paragraphs which follow. In doing so, some of the issues previously raised by the Commission are re-examined.

Availability in the Court of Session

5.11 Diligence on the dependence is currently available to pursuers in 'actions' in the sheriff court or Court of Session. However, there are other types of court proceedings which are not described as 'actions' but which can involve a claim for the payment of a sum of money. One example of this is petition procedure in the Court of Session, for example, where an individual seeks the judicial review of the activities of a public body. In such cases the petitioner may also wish to claim payment of a sum of money, such as damages. At present it is not possible to obtain warrant for diligence on the dependence of such proceedings ²⁵⁷ themselves and a petitioner must use the older procedure of letters of inhibition or arrestment on the dependence.

5.12 It is not clear why a warrant for diligence on the dependence should be available in actions but not so in petition procedure. The Executive agrees with the Commission that "the court's power to grant a remedy should not depend on the accident of the form of the proceedings". ²⁵⁸

5.13 It is likely that the number of petitions affected is very small and it is not clear that many petitioners are prejudiced by the more complex procedural rules for obtaining diligence on the dependence in a petition for judicial review. This is because almost all petitions for judicial review involve a challenge to a public authority. Such authorities are unlikely to attempt to dispose of their assets as a way of evading their eventual obligation to make payment and therefore the practical need for diligence on the dependence is reduced. Furthermore, the range of public authorities against which diligence could be used is limited by the longstanding rule that diligence cannot be used against the Crown. ²⁵⁹ However, it is possible that, at least in the short term, the number of petitions which include a claim for payment of damages may increase as a result of the implementation of the Human Rights Act 1998. ²⁶⁰ Many challenges brought under the Human Rights Act are likely to proceed by way of a petition for judicial review and section 8 of that Act empowers the court to make payment of damages where such a challenge is successful.

5.14 The Commission recommended that warrant for diligence on the dependence should be available in petition proceedings where the petition contains a claim for payment of a sum of money other than expenses. The Executive considers that this recommendation would simplify the system in a situation where there seems to be no compelling reason for preventing petitioners obtaining a warrant. It would make the procedure more accessible and efficient for pursuers seeking this remedy without significant resource implications. This applies irrespective of whether the actual numbers involved may be small although the prospect of numbers increasing makes the proposal more compelling. It is possible that petitioners would begin to apply for a warrant as a matter of course, increasing the numbers involved, however this would be in place of the court having to deal with the more involved arrangements for bills and letters of arrestment or inhibition on the dependence. The simplification of the clerk's task would be likely to balance any increased numbers of petitioners seeking warrant. The Executive intends to implement the recommended reform.

Availability in the Sheriff Court

5.15 Currently, the sheriff court has the power to grant a warrant for arrestment on the dependence but not to grant a warrant for inhibition on the dependence. A pursuer who wishes to inhibit on the dependence of a sheriff court action must obtain the warrant to do so from the Court of Session using an old procedure which involves preparation and presentation of a Bill and Letters of Inhibition. The Commission estimated that around 80% of all inhibitions on the dependence registered annually relate to actions in the sheriff court. ²⁶¹

5.16 The procedure for obtaining warrants to inhibit on the dependence of an action or in execution of a decree of the sheriff court is the same. Therefore, the procedures relating to use of inhibitions during and after sheriff court actions are currently consistent. It is possible, although unverifiable, that the more complicated procedure leads pursuers to consider more carefully whether warrant to inhibit on the dependence is absolutely necessary. The current rules may, then, lead pursuers in sheriff court actions to regard inhibition on the dependence as an extraordinary remedy.

5.17 However, the present procedure is inconsistent with that for obtaining warrant for inhibition on the dependence of Court of Session actions. In the Court of Session, warrant for inhibition on the dependence is granted simply as a matter of course, usually by incorporating a request for the warrant within the body of the summons. Further, the procedure for obtaining warrant for arrestment on the dependence of a sheriff court action is much more straightforward, warrant being granted almost automatically. There appear to be no good reasons of principle for these differences. The more complex procedure may disadvantage pursuers who suffer delays in obtaining their remedy and are put to additional expense.

5.18 The Commission recommended that sheriffs should be given the power to grant inhibitions on the dependence. The Commission reported that this proposal enjoyed the widespread support of those who attended its seminar on reform of diligence on the dependence in 1995. ²⁶² The present system has been criticised by the McKecknie Report, ²⁶³ the Grant Report ²⁶⁴ and the SLC's Report. ²⁶⁵ The Executive considers that this recommendation would simplify the current system by enabling a pursuer in a sheriff court action to obtain warrant for all competent forms of diligence on the dependence from the same court. It would make the procedure more accessible and efficient for pursuers seeking this remedy without significant resource implications. The Executive intends to implement the recommended reform.

5.19 Summary cause and small claims actions make up around 80% of all actions for payment in the Sheriff Court. ²⁶⁶ Currently, arrestments on the dependence are competent in all actions for payment of money, regardless of how small the sum. As regards inhibitions on the dependence, it seems that the law is not clear as to whether inhibitions on the dependence are competent in summary cause actions (claims for a sum of up to 1 500) and small claims (up to 750). ²⁶⁷

5.20 As a matter of consistency and fairness it is appropriate that the remedies afforded to pursuers by diligence on the dependence should be available equally to all, regardless of the sum sued for.

5.21 Under current arrangements the grant of a warrant could affect extremely large sums of money or valuable heritable property where the debt concerned was relatively small. A question about the ECHR requirement that any deprivation of property must be proportionate to the good to be achieved by that deprivation might then also arise. Accordingly, upon clarification, some further reform should be made to address these matters. Since it is intended to implement proposals to restrict the amount secured by diligence on the dependence to that sued for plus an amount in respect of interest and expenses, ²⁶⁸ this will also serve to address the foregoing issues.

5.22 Alternatively, the complete prohibition of diligence on the dependence, including arrestment currently available, in actions for less than 1 500 could be an option for reform. This would, however, discriminate against creditors who are owed smaller amounts of money and might fail to protect their legitimate property rights. It might also lead to claims being made at inflated values in order to pass the minimum threshold for a warrant for diligence on the dependence.

5.23 Whilst the Commission made no recommendation regarding clarification about the use of inhibition on the dependence in summary cause actions and small claims, the Executive considers that the law should be clarified to make its competence explicit.

Use of Diligence on the Dependence

5.24 It is difficult to provide accurate information about the actual numbers of warrants for diligence on the dependence which are obtained. This is partly because of the distinction between the numbers of warrants granted and those actually used and partly because the same warrant may be used more than once. The Scottish Law Commission estimated that in 1996 around 100 000 actions for payment were begun in sheriff courts in Scotland. ²⁶⁹ Virtually all the pursuers in these actions would be able to obtain warrants for diligence on the dependence. Using statistics from the early to mid 1990s, the Commission in 1997 ²⁷⁰estimated the total number of arrestments and inhibitions used on the dependence of Sheriff Court and Court of Session actions at around 10 000 per annum. Using the same approach on the recorded statistics for 2000, ²⁷¹ the estimated figure would be 10 300. No statistics are available for recall or restriction of diligence on the dependence.

Procedure Prior to Commencement of the Principal Action

5.25 As the law stands, it is permissible for a pursuer to serve an arrestment on the dependence before he has formally served notice of his action on the defender, provided that the summons or initial writ is within a specified period. That period is between 20 and 42 days depending on the type of action. ²⁷² In Court of Session actions there is also a requirement that the summons must call within a prescribed period. ²⁷³ Furthermore, in sheriff court actions, but not in the Court of Session, a pursuer must report to the court 'forthwith' the service of an arrestment on the dependence prior to the service of the action. ²⁷⁴

5.26 The Commission took the view that, in principle, it should remain competent to use diligence on the dependence before the commencement of an action. Nonetheless, it considered that the current rules were somewhat confused and that there were unnecessary differences between Court of Session and sheriff court procedures. The Commission recommended that the period within which an action must be served on a defender after service of an arrestment on the dependence should be made 21 days in all types of actions. In communication with the Executive, it has also been argued that, because arrestment on the dependence is served prior to the service of the action on the defender, there can be excessive delay before the defender is able to apply for recall or restriction of the arrestment. This can be due to delays on the pursuer's part both in returning the execution of arrestment to the sheriff court and in serving notice of the action on the defender.

5.27 The Executive considers that a uniform period for service of the action in all cases would be a desirable simplification of the current system but that a shorter period, of within 5 days after service of an arrestment on the dependence, would benefit the defender. There is no reason why a pursuer who obtains a warrant and arrests on the dependence of an action should delay in serving that action on the defender. The Commission also recommended abolition of the requirement that service of an arrestment on the dependence prior to service of the action must be reported to the sheriff clerk. The Commission reported that, "applications for recall of arrestments are not prejudiced by the absence of a requirement to report the arrestment". ²⁷⁵ The Executive agrees that there appears to be no compelling reason to continue this practice. Indeed, the rule does not apply in Court of Session cases and it does not apply in cases of diligence in execution rather than on the dependence.

5.28 The Executive intends to implement the Commission's recommendations, subject to reduction of the uniform period for service of an arrestment on the dependence to 5 days.

Automatic Grant of Warrant for Diligence on the Dependence

5.29 Currently, warrants for diligence on the dependence are granted virtually automatically. In almost all cases a pursuer need only ensure that his application follows the appropriate form or style. The main requirement is the inclusion of a claim for payment of a sum of money other than expenses. The application is then checked by a clerk of court who grants the warrant. There is no examination or discussion of the merits of the pursuer's case or his overall chances of success, except in certain unusual circumstances in the Court of Session.

5.30 The current system is a speedy and effective means of preserving assets where a defender may be tempted to dispose of them before an action concludes. An element of surprise is achieved by the pursuer serving an arrestment or inhibition even before an action has been intimated. The automatic grant of a warrant without prior notice to the defender enables a pursuer to retain this element of surprise and makes diligence on the dependence effective.

5.31 However, the Commission considered that the consequences of this were disproportionate. In the case of a business, for example, the use of an arrestment, which freezes money which is otherwise due to the defender, can seriously affect cash-flow. Other indirect consequences may arise, such as the service of an arrestment potentially affecting the goodwill of a business or the confidence of the arrestee, who is often a customer of the business, in the defender. A defender whose business is badly affected by diligence may be more willing to settle an action to escape its effects even though he may have a strong defence to the action.

5.32 The Commission compared the availability of diligence on the dependence in North America, England and other European countries where different arrangements were in place. ²⁷⁶ The Commission also compared it with other protective remedies in Scots law, such as interim interdict and diligence in security of future debts which are not available unless a pursuer can show special circumstances justifying their use. ²⁷⁷

5.33 In order to ensure observance of the principles of fairness and due process of law, the Commission recommended reform. Having considered different options for reform, the Commission recommended a move to judicial consideration of the merits in all cases where warrants to do diligence on the dependence were sought instead of such warrants being granted automatically by a clerk of court. This would involve more detailed scrutiny of applications for warrants, generally by a Court of Session judge or sheriff and probably involving a hearing at which either or both parties to the action were represented.

5.34 The Commission recommended preserving the possibility of surprising a defender, which may be necessary in some cases, by empowering a sheriff or judge to grant an application for diligence on the dependence without the defender being present, perhaps even on the basis of purely written submissions. This would, however, be discouraged and in most cases the defender would be given notice of the application and afforded the opportunity to oppose it at a hearing. A new test would be introduced which a pursuer would have to satisfy before a warrant would be granted. The pursuer would, firstly, have to demonstrate that there was a "real and substantial risk" that the eventual enforcement of any decree granted to him might be made impossible either because the defender was, or was likely to become, insolvent or because he was likely to dispose of, remove or conceal his assets. Secondly, having satisfied the first requirement, the pursuer would also have to show that it was reasonable for a warrant to be granted. In deciding this question of reasonableness, the sheriff or judge could consider the pursuer's prospects of success in the action and all other relevant circumstances. The court would have the power to refuse to grant a warrant for diligence on the dependence but, as a condition of that refusal, could require the defender to give some other form of security to the pursuer. This would be by way of caution (a guarantee) or by lodging an appropriate sum of money with the court.

5.35 These proposals had met with a mixed reaction on consultation. Whilst virtually all respondents agreed that reform of some kind was necessary, views differed widely on the nature and extent of the defects and appropriate reforms required to cure them. Opposition was primarily directed at the loss of efficiency in the current system by replacing simple and quick means with a cumbersome alternative for applicants. There were widespread concerns about it weighing heavily on judicial resources. A number of consultees' felt that there had been some exaggeration of the hardship caused to defenders by the present system. Others felt that the proposed changes would not solve the problems identified by the Commission unless it could be guaranteed that the judges would take a pro-active approach to the consideration of applications.

5.36 Possible ECHR implications were briefly referred to by the Commission although these were not analysed in detail in its Report. The Commission concluded that article 6, the right to a fair trial, was not relevant. Diligence on the dependence is an interim measure and does not involve the determination of civil rights required to engage this right. The Commission wondered whether there might be a risk that article 1 of Protocol 1, the right to property, might be relevant in so far as a warrant for diligence on the dependence amounted to controlling the defender's use of his property. Detailed examination of that article, in the context of inhibition on the dependence, was undertaken in the recent Court of Session case of Karl Construction Ltd v Palisade Properties plc. ²⁷⁸

5.37 Article 1 of the first Protocol to the Convention provides that every person "is entitled to the peaceful enjoyment of his possessions". This right is not absolute and the state may interfere with a person's enjoyment of his possessions if it is in the public interest to do so and provided that the interference is lawful and proportionate to the public good to be achieved. ²⁷⁹ The existence of a system of interim protective measures for litigants is clearly in the public interest. The law of diligence on the dependence is clear and precise, being rooted in common law and developed and clarified over a period of years by the courts. The principal question is whether the current system enables a fair balance to be struck between the public interest in pursuers being able to recover debts and debtors' interests in not being unduly restricted in the use of their property for an excessive period.

5.38 The procedure afforded to defenders for recall, restriction or loosing of the diligence by motion is relatively straightforward and may be used speedily. The period which a defender allows to elapse before seeking recall is a matter of his choosing. The grounds for recall are wide, although the Commission considered that these are in practice construed too narrowly and recommend reform which is discussed later.

5.39 The Executive has noted the divergence of opinion in relation to the Commission's recommendations. It has considered the arguments carefully and at some length. Significant change potentially involving substantial costs to the public purse is not to be undertaken lightly. This is particularly so where improvements may be achieved by other means. Diligence on the dependence is an essential measure although there are sound reasons for its reform. The Executive is concerned that the Commission's recommendation would replace arrangements at one extreme by those at the other. Since the principal aim is to reduce the adverse impact on defenders, the Executive considers that this should be achieved by other significant reforms. Including, in particular, restriction of the property attached to the value of the sum sued for, improvement of the grounds and procedures for recall, availability of compensation for loss suffered as a consequence of unjustified use of diligence on the dependence and prior hearings in appropriate cases. ²⁸⁰ Such reforms would strengthen current procedures and the safeguards available to defenders.

5.40 Accordingly, in so far as proposed that in all cases there should be prior judicial consideration of the merits, the Executive does not intend to implement the Commission's recommended reform, preferring instead other options for reform. These are discussed in following paragraphs.

The Amount Secured by Diligence on the Dependence

5.41 At present, no monetary or other limit of value is placed on a warrant for diligence on the dependence or on an arrestment or inhibition served under such a warrant. This means that where an arrestment is served the whole funds owed to the defender by the arrestee are frozen, not just the amount sued for. Similarly, an inhibition affects all heritable property of the defender even if it is worth far more than the amount sued for. In addition, a pursuer may obtain warrants for either or both an arrestment and an inhibition. The same warrant may be used more than once to serve arrestments on a number of different arrestees and the same pursuer may do both of those things in respect of the same debt.

5.42 Some high profile cases have been cited as examples of the unfairness of this system. The Commission cited an example from 1993, in an action for defamation against the Glasgow Herald, where a pursuer sought 750 000 in damages. By serving two arrestments he was able to arrest 2.4 million due to the Herald. The arrestments were eventually recalled by the court but only after the defender found caution for 400 000. ²⁸¹ In the case of Karl Construction Ltd v Palisade Properties plc the effects of the inhibition on the dependence was considered to be especially serious because the land in question was used as the defender's stock in trade and was indivisible.

5.43 Uncertainty surrounds the ultimate disposal of a case and the amount of money which a court might order a defender to pay for the principal sum plus interest and expenses. An unrestricted arrestment will give a pursuer greater security but this may very greatly exceed what may be necessary or reasonable. The effect may be disproportionately detrimental to the defender's interests. In addition to the direct inconvenience and/or economic hardship caused to a defender, he may also suffer indirectly in strengthening a pursuer's bargaining position and forcing a defender into an early settlement of the case.

5.44 The Commission's preferred option for reform was based on the assumption that its recommendation for a new system of discretion for diligence on the dependence would be in place. Its proposal was simply that the judiciary would restrict a warrant for arrestment on the dependence to particular funds or property when examining every case. In the case of actions to enforce an obligation ad factum praestandum (that is, an obligation to do a specific thing, e.g. fulfil a contract of sale) the warrant would be limited expressly to the particular heritable property to which the obligation relates. The Commission acknowledged that a difficulty in this area might arise where a judge was deciding ex parte applications, that is where the defender is not present and cannot dispute the pursuer's claim. ²⁸²

5.45 An alternative proposal, which could be incorporated within the current arrangements, was suggested by the Commission in its Discussion Paper. It would limit the amount which could be caught by arrestments on the dependence, the limit being set by reference to a formula. This formula would take into account the sum sued for plus a proportionate amount for expenses and a sum representing interest. It was noted in the Commission's consultation that a formula based on the sum sued for could lead to pursuers making vastly inflated claims in order to secure arrestments over a larger sum. However, that possibility should be limited by other proposals in following paragraphs for strengthening the arrangements for restriction and recall and for a compensation rule. In cases involving particular heritable property, the warrant could be restricted to that property. This would require additional scrutiny on the part of clerks of court but would be relatively straightforward to administer and could be dealt with by a court official. The following proposals for strengthening the arrangements for restriction and recall and for a compensation rule would also assist in instances where heritable property was indivisible and used as stock in trade although additional provision in that regard may also be required.

5.46 The Executive proposes that the court should have the power, when dealing with an application for warrant for diligence on the dependence or for its subsequent restriction, to limit the warrant to particular funds or property or to exclude certain funds or property from the scope of the warrant. The court should have the power to restrict the amount which any arrestment can secure to an amount which it thinks appropriate having regard to the stated facts and the sum sued for.

Grounds for Recall or Restriction

5.47 After a warrant for diligence on the dependence has been used, it is possible for the defender in the action to obtain absolute recall or partial restriction of the diligence. In order to do so, the defender applies to the court and must prove that one of a number of grounds for recall or restriction exists. These grounds are that the diligence has been exercised incompetently or irregularly; that is ineffective or that it is "nimious (excessive) or oppressive".

5.48 It has been noted by the Commission and by other academic and judicial commentators that it can be extremely difficult to convince a court that one of these grounds exists. Also, that practitioners find it difficult to determine the kinds of circumstances which will persuade a court that the use of diligence has been nimious or oppressive.

5.49 In practice, the strict test applied by courts when considering applications for recall or restriction of diligence on the dependence means that it is almost impossible to obtain recall or restriction. This may have an excessively harsh impact on defenders. Further, the vague test applied by the courts makes it difficult to understand when recall or restriction might be available. It is thought that the numbers of applications for recall or restriction are low, perhaps because of the difficulties in obtaining recall or restriction.

5.50 The Commission recommended that the existing test of nimious and oppressive should be abolished and replaced with a new statutory test for recall or restriction of diligence on the dependence. This should mirror the test applied by a court deciding whether or not to grant the original warrant. That is whether there remains a real risk that the defender is or will become insolvent or will dispose of his assets and that it would be unreasonable in all the circumstances to leave the diligence untouched. The Executive intends to implement the Commission's recommendation.

Liability of the Pursuer

5.51 A pursuer is not normally disadvantaged if he uses diligence on the dependence but eventually loses the action in relation to which the diligence has been used. It is said to be difficult to prove the narrow grounds upon which a court will make an award of damages for wrongful use of diligence.

5.52 The Commission took the view that the lack of liability encourages the excessive use of diligence on the dependence because "a pursuer generally has nothing to lose, and everything to gain". ²⁸³ It argued that this can lead to "innocent" defenders being left in the position where they have successfully defended the action raised by the pursuer but have nonetheless been severely harmed by the use of diligence on the dependence. They will often have no recourse against the pursuer.

5.53 The Commission recommended introduction of a new rule whereby a pursuer who fails in his action against the defender would be required to compensate him for the financial losses he has suffered because diligence on the dependence was used against him. It referred to examples of similar rules in other legal systems, including in England and Wales.

5.54 The Commission had originally suggested the imposition of a strict liability rule, under which principle a pursuer would automatically become liable for the whole of the defender's loss caused by diligence on the dependence if he lost the case against the defender. This option was rejected by many of the respondents to the Commission's Discussion Paper ²⁸⁴ in favour of more limited liability. Some other respondents felt that even where the pursuer is successful he should pay compensation in certain circumstances, for example if he had deliberately misled the court about the need for diligence.

5.55 The Commission's recommendation would require a pursuer to pay compensation if he obtained or executed diligence on the dependence wrongfully or where it was unreasonable for him to apply for the warrant. This rule would apply regardless of the eventual outcome of the case and would allow compensation for third parties, such as an arrestee, affected by wrongful diligence. It considered such a change necessary on the ground that, on principle, such as diligence on the dependence should be used as an extraordinary remedy at the applicant's risk.

5.56 The Executive considers it desirable that individuals should not be deterred from using legal remedies through fear of losing a case, which they in good faith believe to be strong, and becoming liable in damages. Imposing this risk on pursuers may lead to debtors defaulting on their obligations with greater impunity. Nonetheless, since it is intended to retain the current but improved system for granting of warrants, the introduction of a compensation rule might result in greater self-regulation whereby pursuers would, themselves, examine more carefully the propriety of or need for diligence on the dependence. The Executive intends to implement the Commission's recommendation.

Diligence on the Dependence of Corporeal Moveables

5.57 The Scottish Law Commission noted that there was "a gap in the provisional and protective measures available under Scots law in so far as there is no means for attaching articles of the defender's movable property in his possession on the dependence of an action for payment". ²⁸⁵ It sought views on whether the gap should be filled in its Discussion Paper and, having received support on consultation, made recommendations for reform in its Report. It is not necessary to rehearse the detail of these again here.

5.58 However, since the Commission's Report was published in March 1998, the Abolition of Poindings and Warrant Sales Act 2001 has been passed. Commencement of that Act has been delayed to enable legislation for alternative arrangements to be implemented. Proposals for an alternative were recommended by an independent Working Group in its Report Striking the Balance-a new approach to debt management. It was noted that, the Report having received very widespread support on consultation, the Executive advised that it intends to implement the group's recommendations. ²⁸⁶

5.59 Should any such legislation pass into law, it would be appropriate for provisional and protective measures to be applied to it. In that event, the detailed recommendations made by the Commission would require adaptation. Having regard to these developments, the Executive wishes to seek further views on this.

Cross-Border Arrestments on the Dependence (and in Execution)

5.60 Very often, arrestments, whether on the dependence of an action or in execution of a decree, are served on a defender's bank account. This is on the basis that the funds held by the bank are considered to be monies owed by the bank to the account holder. It may be that the bank account is the only asset which the pursuer is able to arrest. Problems arise for a pursuer where he does not have full information about the defender's bank account. This is particularly so where he is aware of the bank but not of the location of the branch at which the defender's account is held. Most UK banks have branches both in Scotland and in the rest of the UK.

5.61 It was held in the sheriff court case of Stewart v The Royal Bank of Scotland plc,²⁸⁷ that where a defender's account is held at an English branch of a bank, but the pursuer serves an arrestment on a Scottish branch of that bank, the arrestment will not 'catch' the defender's account. The reasons for the decision, in part, concerned English banking law and in particular, the doctrine of the localised character of banking contracts, i.e. the idea that a customer makes a contract with only one specific branch of a bank. The sheriff expressed regret at the conclusion to which he felt bound to arrive. He noted that, although the pursuer could register and enforce a decree in England, the procedure for doing so was expensive and cumbersome. He commented that the doctrine concerned might be considered to be out of date given "modern conditions of automated accounting and electronic communication".

5.62 Scots law does not impose any obligation on a bank to disclose at which branch a customer's account is held. The rule in Stewart can cause difficulties for creditors and may fail to take account of modern commercial realities. Businesses and individuals often have multiple bank accounts, at different branches of the same bank and in different jurisdictions. Funds are transferred quickly and easily on a regular basis.

5.63 Reform of this area of the law could be achieved in one of two ways. The first option would be to impose an obligation on banks to disclose to a pursuer holding a warrant for arrestment the details of the defender's bank account, including its location. The second option would be reform of the rules of banking law to allow arrestments served at one branch of a bank to attach funds held at another branch and in another jurisdiction. The latter option might be more attractive to banking interests but would require formulation of suitable cross-border arrangements with banking interests and the UK government. The Executive intends to take this forward as part of the proposals for access to information. ²⁸⁸

Forms

5.64 After a warrant for arrestment on the dependence is obtained, the arrestment does not become effective until a schedule of arrestment is properly served on the arrestee by an officer of court. Similarly, an inhibition on the dependence must be served on the party to be inhibited, again by an officer of court. It has been noted that, "the style of arrestment is archaic, and this sometimes confuses the arrestee as to his position". ²⁸⁹ This style, and that of the schedule of inhibition served on the party inhibited, is not statutory but a matter of accepted legal practice. The problems relating to the language and style used in diligence are not limited to arrestments and inhibitions on the dependence. This is discussed in Part 7.

Miscellaneous

5.65 The Scottish Law Commission looked at the competition between diligence and floating charges, with particular reference to the meaning of "effectually executed diligence" in the legislation dealing with floating charges. ²⁹⁰ The Commission took the view that it would be preferable if the ranking of diligence were achieved by judicial development rather than legislation. It did however go on to say that legislation would be the better vehicle for the dealing with the meaning of "effectually executed diligence" in the context of the law relating to floating charges. Floating charges are not within the remit of this paper and fall to be considered separately in the context of possible reform in that area of law.

5.66 The Scottish Law Commission made further recommendations for modernisation, simplification or clarity of this area of the law. The Executive intends to implement the following further recommendations without any adjustment. These proposals are not discussed in detail by this paper. ²⁹¹ The following list summarises these, excluding those relating to admiralty arrestments which are dealt with in Part 5B.

The procedure for obtaining a warrant for diligence on the dependence should be reformed and should, as far as possible, be the same in the Court of Session and in the sheriff court. ²⁹²

The general reforms proposed by the Commission should also apply to diligence on the dependence securing future and contingent debts. ²⁹³

The court should have a broad discretion to award or refuse the expenses of obtaining or opposing the grant of a warrant for diligence on the dependence and of executing an arrestment on the dependence. Nonetheless, there would be a general presumption that a pursuer would be entitled to the expenses of diligence on the dependence. ²⁹⁴

It should be made clear that a person applying for restriction or recall of diligence on the dependence of a sheriff court action should apply for that restriction or recall to the sheriff in whose court the action is taking place. ²⁹⁵

Letters of loosing arrestments should be abolished and the Arrestments Act 1617 should be repealed. Loosing as a separate type of order or legal concept should be abolished in relation to arrestments of non-maritime subjects. ²⁹⁶

Warrants for diligence on the dependence should not be available in actions in which the only monetary claim is for expenses. ²⁹⁷

Broadly speaking, arrestments, both on the dependence and in execution, should expire after 3 years. ²⁹⁸

The diligence of adjudication in security of future or contingent debts should be abolished. ²⁹⁹

5.67 The Scottish Law Commission consulted widely before issuing its Report. It is not considered necessary or appropriate to re-consult on these matters. The Executive does not intend to implement the recommendations contained in the Commission's Report in full. Consultees' views on the intended approach would be welcomed and consultees are invited to indicate their support for the reforms proposed.

Q. 5A. 1 Consultees are invited to comment or to indicate their support for the reforms proposed.

Q. 5A. 2 In the event that alternative arrangements for attachment of corporeal movable property pass into law, should provisional and protective measures be applied?

(B) ADMIRALTY ARRESTMENT

5.68 Admiralty arrestment is a significant type of diligence permitted on the dependence of an action. As part of its wider consideration of diligence on the dependence, the Scottish Law Commission examined admiralty arrestment in its Report on Diligence on the Dependence and Admiralty Arrestments. ³⁰⁰ The Executive's intentions regarding the Commission's recommendations are set out in the following paragraphs.

Nature and Purpose of Admiralty Arrestment

5.69 Admiralty arrestment concerns the arrestment of ships and cargo on board ships. The arrestment of ships and cargo on board ships differs from arrestment on the dependence generally in that the ship does not require to be in the hands of a third party in order to be arrested. It can be arrested in the hands of the owner, for a debt due by the owner. Arrestment of a ship prevents it sailing to its next destination until either the arrestment is recalled, or adequate alternative security is provided. The physical act of carrying out the arrestment is performed by officers of court. The court has power, if specific averments are made in the summons seeking warrant to do diligence on the dependence, to grant warrant to dismantle any part of a ship to prevent her sailing, but in modern Court of Session practice this is a remedy that is rarely exercised.

5.70 Ships trade world-wide, and are often now owned by one ship companies registered offshore. Unlike other assets, they are unlikely to be static in one place, or even one country or continent, for much longer than it takes them to load and discharge their cargo. Accordingly, the ability to arrest a ship in an appropriate jurisdiction, in order to secure a legitimate claim, is an important consideration for international trade generally. The Executive does not believe that Scotland should be a less favourable jurisdiction within which to arrest than others.

Background and Current Law

5.71 There are three types of Admiralty arrestment. An arrestment on the dependence may be used to secure a claim directed against the owner of the ship, or shares in the ship, ³⁰¹ with the speciality that the arrestment does not require to be in the hands of a third party. An arrestment in rem is an arrestment carried out to enforce a claim against the ship itself or against some other piece of maritime property. It is enforceable against the ship, irrespective of ownership. Three common examples are claims in respect of salvage of a ship, claims arising out of a collision, and claims which a crew member has for his wages arising out of service on a particular ship. Arrestment in rem also founds jurisdiction against the vessel. ³⁰² An arrestment to found jurisdiction may be used to establish jurisdiction in Scotland, but it does not have the effect of detaining the vessel. ³⁰³ Its sole effect is to establish jurisdiction, and if it is not followed by an arrestment on the dependence, then the vessel will be free to sail.

5.72 The United Kingdom is a signatory to the 1952 Brussels Arrest Convention, ³⁰⁴ which was introduced into Scots law by the Administration of Justice Act 1956. ³⁰⁵ An exhaustive list of claims in respect of which a vessel may be arrested is contained in section 47(2) of the 1956 Act, which is derived from the Brussels Arrest Convention. Unlike arrestments on the dependence generally, arrestments of vessels can only be carried out in relation to a claim which falls within the list contained in section 47(2). ³⁰⁶

5.73 It was considered necessary to update the provisions of the 1952 Brussels Arrest Convention and a new International Convention on Arrest of Ships was adopted following a diplomatic conference in Geneva. ³⁰⁷ Before the UK decides whether to ratify the 1999 Geneva Arrest Convention, it is intended that a joint consultation exercise will be conducted by the Department for Transport, Local Government and the Regions and the Executive. Account has been taken of the Geneva Convention in considering the Scottish Law Commission's recommendations in this area.

²⁵⁶ Scot Law Com No 164.
²⁵⁷Ibid , para 6.9.
²⁵⁸Ibid , para 6.11.
²⁵⁹ The Crown Proceedings Act 1947, c44, s45, Stair Memorial Encyclopaedia Vol 8, para 128.
²⁶⁰ c42.
²⁶¹ Scot Law Com No 164, para 2.90, based on 1996 figures (Source: Registers of Scotland Executive Agency). This equates, numerically, to around 2 700 inhibitions on the dependence each year.
²⁶²Ibid , para 3.93. Attendees included the then Lord Advocate, representatives of the Sheriffs' Association and Sheriffs Principal Association, SMASO and a number of academic experts.
²⁶³ Report of the Departmental Committee on Diligence, Cmnd 456 (1958).
²⁶⁴ Report of the Departmental Committee on the Sheriff Court, Cmnd 3248 (1967).
²⁶⁵ Scot Law Com No 164.
²⁶⁶ Based on Civil Judicial Statistics, Scotland, 2000 (2001). The percentage was similar in 1996 when the Commission considered the matter. (Scot Law Com No 164, para 2.97.)
²⁶⁷ Maher & Cusine, para 4.64.
²⁶⁸ See paras 5.41-5.46.
²⁶⁹ Scot Law Com No 164, p 25.
²⁷⁰ Scot Law Com No 164, para 2.100.
²⁷¹Civil Judicial Statistics , Scotland , 2000, (2001) Table 5.4, this records only arrestments executed on the dependence.
²⁷² A.S 1993/1956, rule 6.2(1).
²⁷³ Debtors (Scotland) Act 1838, c114, s17.
²⁷⁴ A.S.1993/1956, rule 6.2(2).
²⁷⁵ Scot Law Com No 164, para 6.19.
²⁷⁶Ibid , paras 2.47-2.49.
²⁷⁷Ibid , paras 2.50-2.59.
²⁷⁸ Outer House opinion of Lord Drummond Young, dated 14 January although delivered 14 February 2002, unreported.
²⁷⁹Venditelli v Italy 1995 19 EHRR 464; G S & M v Austria No 9614/81, 34 DR 119 1983.
²⁸⁰ At the time of finalisation of this paper for publication, detailed consideration of the recent case of Karl Construction Ltd. V Palisade Properties plc has not been possible.
²⁸¹Henderson v George Outram and Co. Ltd., 1993, SLT (OH) p 824.
²⁸² Scot Law Com DP No 84, para 2.147.
²⁸³ Scot Law Com No 164, para 3.56.
²⁸⁴Ibid , para 3.59.
²⁸⁵Ibid , para 4.1.
²⁸⁶ Para 1.7.
²⁸⁷Stewart v The Royal Bank of Scotland plc, 1994, SLT (Sh Ct) p 27.
²⁸⁸ See Part 3, paras 3.76-3.82 and 3.113.
²⁸⁹Stair Memorial Encyclopaedia , Vol 8, para 258.
²⁹⁰ Scot Law Com No 164, paras 9.10-9.23; see also Squaring the Circle: Revisiting the Receiver and "Effectively Executed Diligence" , Wortley, The Juridical Review, Part 5, 2000.
²⁹¹Ibid , Pt 10: Summary of Recommendations (pp 209-229).
²⁹²Ibid, recommendation 19.
²⁹³Ibid, recommendation 23.
²⁹⁴Ibid, recommendation 24.
²⁹⁵Ibid, recommendation 25.
²⁹⁶Ibid, recommendation 26.
²⁹⁷Ibid, recommendation 27.
²⁹⁸Ibid, recommendation 28.
²⁹⁹Ibid, recommendation 29.
³⁰⁰ Scot Law Com No 164, Pts 7-8, and recommendations 51-77.
³⁰¹ Always provided that the claim is one which falls within s47(2) of the Administration of Justice Act 1956, c46.
³⁰² s47(3) also provides certain other categories of cases in which, by virtue of the statutory provision only, an arrestment in rem may be executed.
³⁰³ An arrestment to found jurisdiction does not create a nexus over the vessel arrested.
³⁰⁴ International Convention for the Unification of Certain Rules relating to the Arrest of Seagoing Ships 1952.
³⁰⁵ c46, Pt V, ss 45-51, and 57.
³⁰⁶ For recent consideration, see decision of Lord Hamilton in Tor Corporate A.S. v China National Star Petroleum Corporation 27 July 2000, (unreported).
³⁰⁷ 12 March 1999.