Glenfiddich Wind LTD against Dorenell Windfarm LTD (Court of Session)

Factual and Procedural Background

The pursuer, registered proprietor of the property known as Scaut Hill, Glenfiddich, entered into a lease with the defender in November 2015, permitting the defender to construct and operate a windfarm on the property. The windfarm has been operational since March 2019. The dispute concerns the pursuer's claim that the defender owes substantial payments under the lease, arising from periods when the defender did not generate electricity or did not fully utilise the windfarm's generation capacity despite the capability to do so. The pursuer asserts that the defender obtained certain benefits due to this lack of generation, which should be accounted for in calculating the rent due under the lease. The defender denies that these benefits give rise to additional payment obligations under the lease. The matter proceeded to a diet of proof before answer to resolve the dispute.

Legal Issues Presented

1. Whether the defender received "constraint benefits" as defined in the lease, arising from accepted bids to reduce electricity generation, that must be included in the calculation of gross income and thus rent payable to the pursuer.
2. Whether payments received by the defender under warranty claims qualify as "Loss of Revenue Claims" under the lease and how such claims are to be accounted for in the relevant rent years.
3. How the valuation of any such constraint benefits or loss of revenue claims should be determined for the purposes of calculating rent.
4. Whether the defender's diversion of credited energy to a related company via a Metered Volume Reallocation Notice (MVRN) affects the inclusion of such benefits in gross income under the lease.

Arguments of the Parties

Pursuer's Arguments

• The defender received valuable benefits from the Transmission System Operator (TSO) during periods of constraint, including reliefs and payments defined as "Constraint Benefits" under the lease, which should be included in gross income for rent calculations.
• Alternatively, such benefits fall within the definition of "Loss of Revenue Claims" under the lease, as payments received due to loss or reduction in revenue caused by non-generation.
• The defender's use of an MVRN to divert credited energy to a related company (the offtaker) does not exclude the defender from accounting for the value of those benefits in rent calculations.
• Valuation of constraint benefits should be based on the actual payments received by the defender from the related company under the Power Purchase Agreement (PPA), without deduction for management fees unknown to the pursuer at the time of contracting.
• Warranty payments received by the defender qualify as loss of revenue claims and should be accounted for in the rent year in which they were received.
• The defender underpaid rent for the disputed years by failing to include these benefits in gross income, resulting in substantial sums due plus interest.

Defender's Arguments

• The lease must be interpreted by reference to its natural and ordinary meaning and the parties' intentions as expressed in the contract, without rewriting the bargain due to a bad outcome for the pursuer.
• The only "constraint benefit" received by the defender was the Period BM Unit Cashflow, which has been properly declared and accounted for; other elements such as Period BM Unit Balancing Services Volume are merely accounting tools and were not received by the defender or given by the TSO.
• Energy credited under the BSC as a result of constraint was credited to the related company (offtaker) due to the MVRN, not the defender; thus, the defender did not receive a relief or benefit from the TSO as required by the lease definition.
• The payments received by the defender from the related company under the PPA do not constitute constraint benefits or loss of revenue claims under the lease, as they are not payments from the TSO nor payments received pursuant to a claim against a person responsible for loss of revenue.
• The pursuer's claim to include payments under the PPA without deducting the management fee is unfounded, as the management fee is a standard commercial charge and reduces the actual income received by the defender.
• Warranty payments should be allocated to the rent year in which the revenue loss occurred, not the year of receipt, consistent with standard accrual accounting practice and avoiding absurd consequences.
• The pursuer is effectively seeking to rewrite the lease to include income streams it did not bargain for, amounting to a complaint about a bad bargain rather than a legitimate contractual claim.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Lagan Construction Group Ltd v Scot Roads Partnership Project Ltd [2023] CSIH 28	Principles of contractual construction emphasizing commercial common sense and contextual interpretation.	The court applied these principles to interpret the lease terms in light of the commercial purpose and background.
Ashtead Plant Hire Co Ltd v Granton Central Developments Limited [2020] CSIH 2	Contextual and purposive approach to contract construction in commercial settings.	Guided the court’s purposive interpretation of the lease to give effect to the parties' commercial intentions.
HOE International Limited v Andersen [2017] CSIH 9	Contractual construction principles emphasizing objective determination of parties’ intentions.	Supported the court’s approach to interpreting ambiguous lease provisions.
Aberdeen City Council v Stewart Milne Group Ltd [2011] UKSC 56	Use of context to ascertain parties’ intentions even where language is silent or ambiguous; limits of implied terms.	The court considered this authority in assessing whether the lease language prevented a commercially sensible outcome.
Network Rail Infrastructure Ltd v Fern Trustee 1 Ltd [2022] CSIH 32	Contract interpretation requires understanding what a reasonable person with background knowledge would understand.	Supported the textual analysis of the lease language in light of the parties’ background knowledge.
Wood v Capita Insurance Services Limited [2017] UKSC 2	Importance of natural and ordinary meaning of contract language, balanced with contextual factors.	Informed the court’s balanced approach to interpretation, avoiding overly literal or purposive extremes.
Scanmudring A/S v James Fisher MFE Ltd [2019] CSIH 10	Limits on rewriting contracts to avoid bad bargains.	Supported the defender’s argument against rewriting lease terms to redress a bad bargain.
National Commercial Bank Jamaica Ltd v NCB Staff Association [2024] UKPC 2	Reinforces that courts must apply contract language as written, even if it results in an unfavorable bargain.	Used to emphasize the court’s duty to enforce the lease terms as agreed.
Taylor (HM Inspector of Taxes) v MEPC Holdings Ltd [2003] UKHL 70	Meaning of "relief" in a legal context, distinguishing primary liability and secondary right of relief.	Guided the court’s understanding of the term "relief" in the lease’s definition of constraint benefit.
Advocate General for Scotland v Murray Group Holdings Ltd [2017] UKSC 45	Analogy regarding redirection of earnings and taxation principles.	Used to illustrate the pursuer’s argument on diversion of benefits and its relevance.
Marks & Spencer Plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72	Distinction and relationship between contract construction and implication of terms.	Clarified that both construction and implied terms aim to ascertain contract meaning; court preferred construction approach here.
Rainy Sky SA v Kookmin Bank [2011] UKSC 50	Preferring commercially sensible interpretation where language is ambiguous.	Supported the court’s purposive approach favoring a commercially sensible construction of the lease.
Society of Lloyds v Robinson [1999] WLR 756	Loyalty to contract text with recognition of language flexibility and commercial context.	Used to emphasize that reasonable commercial interpretation may override niceties of language.
Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896	Contextual approach to contract interpretation, allowing correction of linguistic mistakes to reflect parties' true intentions.	Informed the court’s approach to resolving ambiguities and interpreting lease language in context.
Mannai Investments Co. Ltd. v. Eagle Star Life Assurance Co Ltd [1997] AC 749	Permitting adjustment of linguistic mistakes to ascertain true meaning in context.	Supported the court’s flexible approach to interpreting the lease language in light of the factual matrix.

Court's Reasoning and Analysis

The court began by emphasizing the established principles of contractual construction in Scottish law, notably the contextual and purposive approach endorsed in recent authorities such as Ashtead Plant Hire and Rainy Sky. The court rejected overly literal or narrow readings that would defeat the commercial purpose of the lease.

Applying these principles, the court interpreted the definition of "Constraint Benefit" in the lease as encompassing not only direct payments but also reliefs or other advantages conferred in relation to the cessation, reduction, or constraint of electricity export imposed by the TSO. The court acknowledged that the exact mechanisms under the Balancing and Settlement Code (BSC) and the role of the Metered Volume Reallocation Notice (MVRN) complicated the picture, but held that the parties must have intended to include benefits arising from the TSO’s constraint decisions, whether credited directly to the defender or diverted to the related company via the MVRN.

The court rejected the defender's argument that only payments received directly from the TSO qualified as constraint benefits, reasoning that a narrow interpretation would render the concept meaningless given the operation of the BSC. The word "from" in the definition was construed broadly to include benefits arising as a consequence of the TSO’s decisions, even if administered by other entities.

Regarding the diversion of credited energy to the related company, the court found that the defender still received a substantial benefit through payments under the PPA and that the lease’s purpose was to capture the value of such benefits. The defender’s voluntary choice to use the MVRN did not exclude these benefits from rent calculations.

The court also considered the pursuer’s alternative argument that such benefits constituted "Loss of Revenue Claims" under the lease. It rejected this, finding the definition required actual claims made against a responsible party, which was not the case here. The BSC arrangements meant the defender did not suffer a loss of revenue for which a claim was made.

On valuation, the court held that the amount actually received by the defender from the related company under the PPA, net of the management fee, represented the value of the constraint benefit for rent calculation purposes. The management fee deduction was a standard commercial charge and was properly deducted.

Regarding warranty claims, the court concluded that these should be accounted for in the rent year to which the claims related, consistent with standard accrual accounting principles, rather than the year of receipt.

Overall, the court applied a balanced, commercially sensible interpretation of the lease, giving effect to the parties’ intentions as understood against the factual and contractual background.

Holding and Implications

The court’s decision was to allow in principle the pursuer’s claims that the defender received constraint benefits which were not properly included in gross income and thus underpaid rent for the disputed years. The court held that the value of such benefits includes payments received by the defender under the PPA in respect of energy credited via the MVRN, and that these must be included in rent calculations.

The court rejected the defender’s narrower interpretation that only direct payments from the TSO constitute constraint benefits and also rejected the pursuer’s alternative submission that these benefits fall within loss of revenue claims.

The court further ruled that warranty claims should be accounted for on an accrual basis, in the rent year to which they relate rather than the year of receipt.

Following this ruling, the court invited the parties to consider the implications for the precise terms of orders and to make submissions or agree terms accordingly at a forthcoming hearing.

No new legal precedent was established; the decision applies existing principles of contractual construction to the specific facts and terms of the lease in question, emphasizing commercial common sense and contextual interpretation in complex contractual arrangements involving renewable energy generation and associated market mechanisms.