Scottish Court of Session Decisions

The National House Property Investment Company, Limited, and James Mills Franklin, its liquidator, brought an action against John Watson, architect, Edinburgh, in which they claimed payment of £87, 10s., “being the amount of the call due by him as at 28th June 1906 on fifty preference shares of one pound each, and fifty ordinary shares of one pound each, held by him in the said The National House Property Investment Company, Limited.”

The pursuers averred, inter alia—“(Cond. 1) At an extraordinary general meeting held at the company's offices on the 25th day of April 1906, a resolution was duly passed that the pursuers' company, The National House Property Investment Company, Limited, should be wound up voluntarily, and that the pursuer James Mills Franklin, a director of the company, should be appointed the liquidator for the purpose of such winding up.… (Cond. 2) On 16th February 1903 the defender made an application to the company for an allotment to him of fifty preference shares of £1 each and fifty ordinary shares of £1 each in the said company, conform to application of that date duly signed by him, herewith produced, and on that date he paid to the company the sum of 2s. 6d. per share due on such application, being £12, 10s. in all. The said fifty preference shares and fifty ordinary shares were thereafter duly allotted to the defender. Thereafter the defender was entered in the company's register as proprietor of the said shares. No payment beyond the said sum of £12, 10s. has been made by the defender in respect of the said shares. (Cond. 3) The pursuer James Mills Franklin, as liquidator of the said company, sent a notice to the defender intimating that a meeting would be held on 18th June 1906 to settle the list of contributories, and that his name had been included in the proposed list in respect of his said shares. No reply was made to the said notice, and the defender did not attend the said meeting. Accordingly, on said 18th June 1906, the defender's name was finally entered in the list of contributories in respect of the said fifty preference and fifty ordinary shares, with a liability thereon amounting to £87, 10s., being the unpaid call on the said shares.”

The defender in a statement of facts stated, inter alia—“(Stat. 1) The pursuers' company was incorporated on 29th December 1902. Early in 1903 the defender's partner, Mr M'Arthy, received a call from W. M. Brooks, the managing director of the company, in connection with the formation of a Scottish board. Mr Brooks then pressed Mr M'Arthy to take shares in the company, but Mr M'Arthy refused to do so. Mr Brooks again called in February 1903, when he represented that business was to be pushed by the company in Scotland, and promised that the defender's firm would receive certain appointments in connection therewith, including the appointment of advisory surveyors to the advisory board for Scotland. On the footing that his firm received these appointments and that he was allowed to pay the balance of his shares by the fees to be earned, the defender agreed to apply for shares and sent to Mr Brooks the application referred to in the condescendence. (Stat. 2) The application contained in gremio the following conditions:—‘This application is made on the distinct understanding, as arranged with Mr Brooks, that my firm is appointed surveyors to this company over an average radius of thirty miles from Edinburgh, the fees to be not less than those adopted by the English surveyors for the company, and that my firm is also appointed advisory surveyors to the advisory board for Scotland, at fees to be adjusted; also that I am to be at liberty, if I so desire it, to pay up the balance of my shares by allowing the fees to be earned by my firm to accumulate for this purpose.’ In terms of these conditions the directors and officials of the company were not entitled to allot shares to the defender or to enter him as a member of the company unless and until ( a) they appointed the defender's firm surveyors for the company in the Edinburgh district; ( b) they formed an advisory board for Scotland; and ( c) they appointed the defender's firm advisory surveyors to the said board, and then only on the footing that the defender should be allowed to pay up the whole balance due on his shares, including the amount due on allotment, from fees to be earned by his firm. Of these conditions the most important, as the defender explained to Mr Brooks on his visit, were those relating to the formation of an advisory board in Scotland, because until that was done there was no guarantee that the company would do any business in Scotland, and the defender's sole object in applying for shares was with a view to

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such business. (Stat. 3) Thereafter the defender received from Mr Brooks a letter dated 18th February, containing the following paragraph:—‘I have pleasure in sending herewith copy of resolution passed at the board meeting to-day. “It was proposed by Mr E. J. White and seconded by Mr N. A. Jones, that Messrs M'Arthy & Watson be appointed valuers for this company in the Edinburgh district and that their application for shares be accepted upon the terms contained on the back of said application.”’ (Stat. 4) Thereafter, on 8th April 1903, the defender received from the secretary of the company a request for payment of the 2s. 6d. per share due on allotment, to which the defender replied on 22nd April that in accordance with the conditions in his application he elected that any balance payable on the shares should be paid out of fees, but the demand being subsequently repeated on 3rd July 1903 the defender replied on 15th July 1903 in the following terms:—‘We would point out that we decided to apply for shares in your company after certain representations made to us by Mr Brooks and on specific conditions as stated in our application. As you are now unable to comply with these conditions we shall feel obliged by your returning our applications along with your cheque for the amount of our deposits plus the interest for the time you have had the money. In the event of your forming a Scottish board later on we are quite prepared to again consider the matter.’ (Stat. 5) The directors of the company never formed an advisory board for Scotland and never appointed the defender's firm as advisory surveyors thereto. The defender from time to time made representations to the company with regard thereto, and was put off with promises that such a board would be speedily formed, which promises were never fulfilled. In respect of the company's failure to comply with the conditions of the defender's application, the defender repeatedly demanded the return of his deposit. In particular, he did so by letters dated 15th July 1903, 5th November 1904, 1st March 1905, and 3rd November 1905. With reference to the statement in answer, it is explained that the offer made by the defender was conditional on the company forming an advisory board for Scotland. If the company did not bind themselves to form such a board they entered into no contract with the defender at all. (Stat. 6) No notice of allotment was ever sent to the defender. No certificates for shares were ever sent to him; nor was any dividend ever paid to him although a dividend of five per cent. was declared at the annual general meeting held in December 1904.” The defender pleaded, inter alia—“(2) The defender never became a member of the pursuers' company and is not liable to pay calls—in respect ( a) that no intimation of allotment was ever given to him; ( b) that his application for shares was subject to conditions-precedent which have never been purified; and ( c) that the alleged agreement to take shares was ultra vires of the company and is not binding on the defender.”

On 26th August 1907 the Lord Ordinary ( Guthrie) assoilzied the defender from the conclusions of the action, and decerned.

Opinion.—“The pursuing company and its liquidator seek to have the defender made liable as a member of the company now in liquidation.

The defender denies the alleged membership on two grounds. He says, first, that in gremio of his application for shares was a condition-precedent which has not been fulfilled, and, second, that the alleged contract between him and the company contained a condition which was ultra vires of the company, and therefore that the condition was not enforceable by them.

The pursuers reply to the first line of defence that the condition in question was collateral or subsequent, not precedent, and to the second line of defence that none of the conditions were ultra vires. I think that the defence is well founded on both points.

(1) Was there a condition-precedent in the contract to take shares which was not fulfilled?

It is admitted (1) that the conditions printed in statement two of the defender's statement of facts, whether precedent or not, were duly made part of the contract; (2) that the first of these conditions, providing for the appointment of the defender's firm of M'Arthy & Watson as Edinburgh and District surveyors or valuers, was duly fulfilled; and (3) that the third condition as to the method of paying up the balance of the shares was not a condition-precedent.

The question then of condition-precedent arises only in regard to the second condition, which runs as follows:—‘That my firm is also appointed advisory surveyors to the advisory board for Scotland, at fees to be adjusted.’ Was that a condition-precedent or a condition subsequent? The nature of this question is precisely defined by Lord Cairns in Elkington's case, L.R., 2 Ch. 511, 522 (1867). ‘The real point for determination in this case might be said to be this, Did Messrs Elkington intend and agree to become members and shareholders in presenti with a collateral agreement as to what should be the effect of their so becoming shareholders? or, on the other hand, Did Messrs Elkington agree that if and when a certain preliminary condition should be performed, and not otherwise, they would become members and shareholders?’ There are no Scotch cases directly applicable; summing up the English cases the question may be expressed thus, does the second of the above conditions fall under the rule of condition-precedent given effect to in Wood's case, 3 De Gex & Jones 85 (1858); Pellatt's case, L.R., 2 Ch. 527 (1867); Simpson's case, L.R., 4 Ch. 184 (1869); and Roger's case, L.R., 3 Ch. 633 (1868), or under the rule of condition subsequent or collateral, that is, an agreement, apart from and collateral to a concluded agreement to become a member,

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given effect to in Elkington's case, L.R., 2 Ch. 511 (1867); Bridger's case (1870), L.R., 5 Ch. 305; Wheatcroft's case (1873), 29 Law Times 324; and Fisher's case (1885), L.R., 31 Ch. Div. 120.

On this question I cannot distinguish between conditions one and two. It seems clear that the intention of parties was that there was to be no contract unless the defender's firm received the local appointment. Shares were applied for not for the ordinary purposes of investment or speculation but in connection with and for the promotion of the business of the defender's firm. But this consideration applies equally to the advisory surveyorship to the advisory board for Scotland. It may be that, if the defender's firm had accepted the local appointment without insisting on the obligation as to the advisory surveyorship being first fulfilled, the defender would be held to have waived his right to treat the latter as a condition-precedent. Equally, if the defender, as in Elkington's case, L.R. 2 Ch. 511 (1867), had accepted allotment and paid the money due on allotment, he could not thereafter have founded on the conditions being precedent. But he refused to pay the allotment money, and he insisted that both conditions must be treated as conditions-precedent. I think he was right in this. The company called itself by the ambiguous title ‘National,’ but its registered office was in England, and all the subscribers to the memorandum and all the original directors were resident in England. It was only if such a company established a regular Scottish business that the defender's firm of architects would have any reasonable interest to take shares.

There was therefore, in my opinion, no such agreement to become a member as is necessary under the twenty-third section of the 1862 Act.

(2) Was the condition ultra vires?

I see no answer to this objection. It seems to me that all the considerations stated by Lord Cairns in Pellatt's case, L.R. 2 Ch. 527 (1867), apply in this case, with the result that the conditions being ultra vires vitiated the contract.”

The pursuers reclaimed, and argued—1. The agreement that the firm was to be appointed advisory surveyors was not a condition-precedent to and suspensive of the contract to take shares. It was a collateral agreement, the breach of which on the part of the pursuers would merely entitle the defender to raise an action of damages. The criterion to be applied was well stated by Lord Cairns in Elkington's case, L.R. 1867, 2 Ch. App. 511, at 522, viz., did the party applying for shares intend to become a member and shareholder in prœsenti with a collateral agreement as to what should be the effect of his so becoming a shareholder, or did he only intend to become a shareholder if and when a certain preliminary condition should be performed— cf. Bridger's case, 1870, L.R. 5 Ch. App. 305. That the former was the case here was clear from the facts that the defender actually applied for and paid the first call on the shares at a time when the advisory board had not been constituted. The cases relied on by the defender were all distinguished from the present by the fact that in them it was apparent (apart from the question of the effect of the particular condition in each) that no contract had ever been completed between the parties ( e.g., no proper allotment; no proper acceptance), and therefore that there had been no proper consensus in idem, e.g., Pellatt's case, 1867, L.R. 2 Ch. App. 527; Rogers' case, 1868, L.R. 3 Ch. App. 633; Wood's case, 1858, 3 De G. and J. 85; Simpson's case, 1869, L.R. 4 Ch. App. 184. There was accordingly only a collateral agreement to appoint him advisory surveyor, should there ever be an advisory board, and of this there had been no breach, but even had there been a breach it was settled that it was not possible to set off a claim for breach of such an agreement against a liquidator's calls— Black & Co.'s case, 1872, L.R. 8 Ch. App. 254. 2. The agreement that the defender was to have the right to set off fees against calls was not ultra vires of the directors. The same or a similar agreement was to be found in almost all the cases cited. If it was an agreement to issue shares for a consideration other than cash, that was no longer illegal, section 25 of the Companies Act 1867 having been superseded by section 7 of the Companies Act 1900. The dicta in Pellatt's case as to ultra vires were obiter.

Argued for the defender (respondent)—The Lord Ordinary was right upon both points. The first point depended wholly upon the construction of the agreement. Truly construed it was an agreement to take shares if and when his firm was appointed advisory surveyors. They had never been appointed— ergo he had never become a shareholder— Pellatt's case, cit. sup.; Rogers' case, cit. sup.; Wood's case, cit. sup.; Simpson's case, cit. sup. The cases in which persons had been held to be shareholders were all cases in which either the conditions were such as could only be fulfilled after the persons had become shareholders— e.g., e.g., Fisher's case, 31 Ch. Div. 120; Bridger's case, cit. sup.—or cases of waiver in which conditions originally conditions-precedent were treated by the parties as conditions-subsequent— e.g., e.g., Elkington's case, cit. sup. 2. In any event, the stipulation that calls should be set off against fees was ultra vires of the directors— Pellatt's case, cit. sup., was a direct authority, there being no difference in principle between setting off calls against goods to be supplied and setting them off against fees for services to be rendered. Pellatt's case passed muster in Black's case, cit. sup., and was regarded as authoritative by Buckley, Companies Acts, p. 78.