Scottish Court of Session Decisions

On 23rd July 1889 Alfred Henry Beal, estate agent, London, and Robert Menzies, S.S.C., Edinburgh, acting on behalf of M'Lennan & Urquhart, Dalkeith Brewery, entered into an agreement by which the latter as vendors agreed to sell, and the former as purchaser agreed to purchase, the brewery for £35,000. The fifth article of the agreement was as follows—“The purchaser hereby agrees to deposit at the London branch of the Commercial Bank of Scotland the sum of one thousand pounds in the joint names of himself and the vendor, and within seven days of the date hereof to inspect, or cause to be inspected, the property and books, and within two days after the completion of such inspection the purchaser shall give the vendor notice by post whether he finds that the vendor's statements, as set forth in the preceding article, have been substantiated or not. If the purchaser should prove that the vendor has failed to implement the undertaking contained in article fourth hereof (relative to the net profits for four years and the age of the business), then the vendor shall immediately concur in the repayment to the purchaser of the said sum of one thousand pounds, and the purchaser and any agent employed by him to inspect the property shall not divulge any information acquired by them in the course of such inspection. If the vendor implements the aforesaid undertaking the parties shall enter into a more formal agreement, and on the second day of September next the purchaser shall deposit a further sum of four thousand pounds, and in the event of his failure to make the said deposit the first mentioned sum of one thousand pounds shall be forfeited to the vendor, and after the said deposits have been made the purchaser shall be bound to pay the purchase price, and to complete the transaction before the first day of October next, and failing the payment of the said purchase price within the said period, the amount of the said two deposits shall be forfeited to the vendor, provided always that the vendor shall have produced by that time a full and sufficient title and searches of incumbrances showing a clear record to the purchaser.”

In accordance with this agreement Mr Beal, on 23rd July 1889, lodged £1000 in the Commercial Bank of Scotland, the deposit-receipt being taken in the joint names of himself and Mr Menzies.

Thereafter on 22nd August 1889 a further agreement was entered into between M'Lennan & Urquhart and Mr Beal, by which the former as vendors agreed to sell, and the latter as purchaser agreed to purchase, the brewery “at the price of £35,000 (whereof £1000 has already been deposited in the joint names of the said Robert Menzies and the purchaser with the London branch of the Commercial Bank of Scotland). The fifth article of the agreement was as follows:—“On or before the lapse of six days from the date hereof the purchaser shall deposit the further sum of £4000 as part of the purchase price in the joint names of the vendors the purchaser with the said branch of the said bank, after which (but not till then) the purchaser shall be entitled to form a limited liability company if he desires to do so, or to sell the said purchase to a company with or without limited liability, and to advertise the same, and in the event of his failure to make the said deposit of £4000, the deposit of £1000 shall be forfeited to the vendors.” The sixth article provided, inter alia, that “the balance of the said purchase money of £35,000 shall be paid on or before the 31st day of October 1889.” The eighth article was as follows:—“If the purchaser shall fail to pay the balance of the said purchase money on or before the 31st day of October 1889 the said two deposits of £1000 and £4000 shall be forfeited to the vendors in full satisfaction of all causes of action, and the purchaser shall be bound forthwith to endorse the deposit-receipts for said two sums, provided always that the vendors shall be able to produce a full and sufficient title and searches of incumbrances showing a clear record to the purchaser.”

In accordance with the last agreement, Mr Beal, on 24th August 1889, lodged £4000 in the Commercial Bank, and delivered the deposit-receipt, which was taken in the names of himself and M'Lennan & Urquhart, to the latter.

Mr Beal failed to pay the balance of the purchase money on or before 31st October 1889, and on 1st February 1890 M'Lennan & Urquhart raised an action against him and the Commercial Bank for payment of the two deposits of £1000 and £4000.

In these circumstances the Commercial Bank raised an action of multiplepoinding and exoneration against M'Lennan & Urquhart,

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Mr Beal, and Mr Menzies, in order that it might be judicially determined to whom the sums deposited belonged.

Claims were lodged for M'Lennan & Urquhart and Mr Beal. The former claimed the whole fund in medio in respect of the agreements founded on, and of Mr Beal's failure to pay the balance of the purchase price. Mr Beal claimed the whole fund in medio in respect that (1) M'Lennan & Urquhart had suffered no loss; or (2) any loss suffered by them was due to their own actings in obstructing Mr Beal in his efforts to float a company; or alternatively, he claimed the balance of the fund in medio after deduction of the actual loss sustained by M'Lennan & Urquhart, in respect that the latter's claim was subject to equitable modification as being exorbitant and unreasonable, and of the nature of a penalty.

On 18th June 1890 the Lord Ordinary ( Trayner) pronounced the following interlocutor:—“Ranks and prefers the claimants M'Lennan & Urquhart to the fund in medio in terms of their claim, and decerns: Finds the claimant Alfred Henry Beal liable in the expenses of the competition, &c.

“ Opinion.—The claimants on the fund in medio in this process entered into an agreement dated 23rd July 1889, whereby Messrs M'Lennan & Urquhart (as vendors) agreed to sell, and Mr Beal (as purchaser) agreed to purchase, the vendors brewery, plant, and appurtenances at the price of £35,000. The vendors undertook to prove that their business had been established for over forty years, and that their net profits for the four years preceding the agreement had amounted on an average to not less than a specified sum. The purchaser agreed to deposit with the Commercial Bank £1000 in the joint names of vendors and purchaser, which was to be repaid to the purchaser in the event of the vendors being unable to establish that their business was of the age and their average profits of the amount represented.

If on these points the vendors satisfied the purchaser, then a more formal agreement was to be entered into, and the purchaser was to deposit a further sum of £4000; in the event of his failure to make this deposit, the first deposit was ‘to be forfeited to the vendor,’ and if after making the second deposit the purchaser failed to complete the transaction and pay the whole price before the 1st October 1889, the amount of the said two deposits shall be forfeited to the vendor.’

The first deposit of £1000 was duly made, and the purchaser having been satisfied by the vendors regarding the matters which they had undertaken to prove, the ‘more formal agreement’ contemplated by the parties was entered into on 22nd August 1889, the principal provisions of which, so far as concerns the present case, are as follows:—By Art. 1 the vendors agree to sell, and the purchaser agrees to purchase, the brewery, its plant, appurtenances, goodwill, &c., ‘at the price of £35,000, whereof £1000 has already been deposited.’ (Art. 5) Within six days from the date of the agreement the purchaser agrees to deposit the further sum of £4000 ‘as part of the purchase price,’ in the joint names of himself and the vendors, and in the event of his failure to make the said deposit of £4000, the deposit of £1000 shall be forfeited to the vendors.’ (Art. 8) If the purchaser fails to pay the balance of the purchase money on or before 31st October 1889, ‘the said two deposits of £1000 and £4000 shall be forfeited to the vendors in full satisfaction of all causes of action, and the purchaser shall be bound forthwith to endorse the deposit-receipt for said two sums,’ &c.

The purchaser made the second deposit, but he has failed to make payment of the balance of the price. He cannot now carry through the transaction. He explains in his condescendence and claim the causes which have in some measure at least prevented him from implementing his agreement, and he throws blame on the vendors, whose conduct he says has contributed to this result. There is no averment, however, that the vendors have failed in the performance of any part of the agreement which imposed obligations upon them. The purchaser's averments amount only to this—that the vendors have not acted as the purchaser expected they would, and that if they acted otherwise the agreement could have been implemented by the purchaser. The question to be determined therefore is this—Seeing that the purchaser has failed to fulfil his part of the agreement, and that there has been no failure therein on the part of the vendors, are the vendors entitled to claim the amount of the foresaid two deposits forfeited to them?

The purchaser maintains that the provision in the agreement as to forfeiture of the £5000 should be read as meaning that failure on his part to fulfil his agreement should involve a penalty of £5000, and that under the clause so read he is only liable in such damage as the vendors can establish to have been sustained by them through his (the purchaser's) failure to implement; or otherwise, that the £5000 should be read as liquidate damage, in which case again the vendors are not entitled to claim the whole stipulated amount if it appears to the Court that the claim is unconscionable and exorbitant. On the other hand, the vendors maintain that on the plain words of the agreement the £5000 was to be forfeited to them in the event which has happened, and that in any view it is neither penalty nor liquidate damage, but part-payment of price by the purchaser, which he cannot claim back on failure to complete his purchase.

The questions thus raised appear to me to be attended with difficulty, but I have come to the conclusion that the vendors must prevail. I do not think that the clause of forfeiture can be read as a clause merely importing that on failure to implement the purchaser should be liable in a penalty of £5000. Under such a clause the party failing to implement is liable in the whole damage caused by his failure. That damage may be more or less than the amount of the penalty named, but whatever the amount

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of it may be, that is the measure of his liability, and the measure of the corresponding right. In the present case the vendors could not under their agreement claim more than £5000 in any case, even if they suffered damage to twice the amount, for they have agreed in express terms that the £5000 if forfeited shall be ‘in full satisfaction of all causes of action.’ One of the important elements, therefore, of an ordinary penalty clause is here excluded. Again, the failure on the part of the purchaser to implement his contract might, and most probably would, inflict damage which the vendors would have the greatest difficulty in proving—indeed might not be able to prove at all—as specific damage. How this attempt to sell their business might affect their own customers if they continued the business, or affect the mind of other purchasers if they endeavoured again to sell it, could never be ascertained. This consideration is very material in determining whether the stipulation is to be read as one merely for penalty or one for liquidate damage— Sainter v. Ferguson, 7 C.B. 716. On a consideration of the whole agreement, I should therefore be of opinion that the £5000 was treated by the parties as liquidate damage rather than as penalty.

If treated as liquidate damage, is it exorbitant and unconscionable? I cannot say that it is. The amount claimed is rather more than 14 per cent. of the whole price, which is a large percentage no doubt, but not one which I would characterise as unconscionable, or one which prima facie exorbitantly exceeds what might very well be anticipated as the damage likely to arise from non-implement of the contract, and therefore be agreed on and fixed as the damage due and payable in that event.

But I prefer to put my judgment in favour of the vendors on the grounds set forth as the grounds of judgment in the cases of Hinton v. Sparkes, L.R., 3 C.P. 161, and Wallis v. Smith, L.R., 21 Ch. Div. 243, which resemble the present case in all material respects more closely than any case I can find reported in our own books. In the latter case the Master of the Rolls (Jessell) observed—‘That it is of the utmost importance as regards contracts between adults—persons not under disability and at arm's length—that the courts of law should maintain the performance of the contracts according to the intention of the parties.’ I agree with the observation, and have endeavoured to give effect to it here. The parties to this contract were at arm's length, and each quite capable of protecting his own interests. Their intention as regards the £5000 deposited does not seem to me to admit of any doubt. They intended, and they said (and said it more than once, for it appears on both the agreements I have referred to), that if the purchaser failed to carry out his contract as agreed upon, the deposit money should belong to the vendors. It may have been a bad bargain for the purchaser to make, but it was his bargain, and he cannot complain if he is now held to it.”

The claimant Alfred Henry Beal reclaimed, and argued—This was either a case of penalty where the actual damage suffered should only be awarded, or a case of liquidate damage where the Court should reduce the sum if exorbitant or unconscionable. The damages here were unconscionable. The law of Scotland on this subject was different from that of England. Contrast Robertson v. Driver's Trustees, March 2, 1881, 8 R. 555 (Lord Young's opinion, p. 562), with the case of Wallis quoted by the Lord Ordinary. In itself deposit could not be likened to part-payment. Deposit was intended as security, and did not determine the amount of damage. The actings of the vendors were against the good faith of the contract, and should be inquired into— Craig v. Macbeath, July 3, 1863, 1 Macph. 1020, per Lord Justice-Clerk Inglis, p. 1022; Johnston v. Robertson, March 1. 1861, 23 D. 646; Forrest and Barr v. Henderson, November 24, 1869, 8 Macph. 187; Watson v. Noble, December 16, 1885, 13 R. 347.

Argued for the claimants and respondents M'Lennan and Urquhart—There was really no difference between the law of Scotland and that of England on this matter. The Scotch cases quoted by the reclaimer dealt with penalty, but here there was a deposit, and a specific agreement thereanent— Lord Elvinstone v. Monkland Iron Company, June 29, 1886, 13 R. (H. of L.) 98; Wallis v. Smith, 1882, L.R., 21 Ch. Div. 243; Hinton v. Sparkes, 1868, L.R., 3 C.P. 161.

At advising—