Scottish Court of Session Decisions

At advising on 6th February 1969,—

LORD MILLIGAN .—In this action the pursuer and respondent, who trades under the name of L. W. Lothian and Company, concludes for damages against the defenders and reclaimers on the ground that the defenders wrongfully terminated a contract which he had entered into with them, in virtue of which he was granted a commission in respect of sales by him in Scotland of certain chemicals marketed by the defenders. The defenders, while admitting the existence of the contract, maintain, inter alia, that, as the pursuer was in breach of certain material conditions of the contract and in any event had been guilty of gross misconduct, they were entitled to terminate the contract and that accordingly no damages are due. They also maintain that in any event the pursuer's claim is excessive, and they have a counter-claim against the pursuer. The pursuer has tabled two preliminary pleas, the first of which is directed to the relevancy of the defences except in regard to quantum of damages, and the second to the relevancy of the defenders' averments that the pursuer had been in breach of certain material conditions of the contract and in any event had been guilty of gross misconduct. The defenders also had two preliminary pleas, but, as parties were agreed that these pleas should be repelled, I do not need to refer to them further.

After a hearing in Procedure Roll the Lord Ordinary sustained the first plea in law for the pursuer and allowed a proof restricted to quantum of damages and of consent allowed a proof on the counter-claim for the defenders. The defenders have now challenged this interlocutor in so far as it sustains the first plea in law for the pursuer.

The contract between the pursuer and the defenders was entered into by exchange of letters dated respectively 22nd May, 25th May, 11th June and 16th June 1964, and provided for the sale by the pursuer in Scotland of industrial chemicals marketed by the defenders. The pursuer was to receive a flat contribution and a commission, which in the case of sales to existing customers of the defenders was to vary according to the total value of such sales and in the case of sales to new customers was to be at a flat rate which was higher than any scale applicable to sales to existing customers. As finally adjusted the contract was to run "for a term of four years from 1st July 1964 to 30th June 1968, with a break of contract if required after the first twelve months, which would be as at 30th June 1965." Neither party took advantage of the break as at 30th June 1965, but on 24th November 1965 the defenders wrote a letter to the pursuer stating that it had come to their notice that he was "actively selling a competitor's material and products." They went on to say in said letter that this was "contrary to our arrangement whereby you were appointed sole distributor for Jenolite products in Scotland" and that they had no alternative but to ask him to cease every activity in connection with the Jenolite Group of companies forthwith.

The only question which was raised in the present reclaiming motion was whether the Lord Ordinary was right in holding that the defences, except in regard to the quantum of damages, were irrelevant and lacking in specification, and it is accordingly only necessary to refer to the averments in so far as they bear on this issue.

[His Lordship summarised the averments quoted supra from Answers 2 and 3, and continued]—

The pursuer denies that he was in breach of any implied condition in the contract and avers, inter alia, that, esto he was in breach of any such condition, the breach was not in the circumstances so material as to justify the defenders in rescinding the contract.

In the early stages of the debate before us a number of issues were raised, some of which, it later appeared (as a result of concessions or otherwise), did not fall to be decided, at least at this stage of the case. It will be convenient before coming to consider the principal submissions of the parties to refer briefly to these issues.

The defenders aver that the contract between the pursuer and themselves was a contract of agency; this is denied by the pursuer. It was not maintained by the pursuer that the defenders had failed to make relevant averments that the contract was a contract of agency, and counsel for the pursuer conceded that if, contrary to his primary submission, the question whether or not the contract was a contract of agency was material, a proof would be necessary. In the initial stages of the debate the defenders attached importance to the fact that, as they had averred, the pursuer had been appointed sole agent for the sale of their products in Scotland. They later, however, conceded that this was not in any way a material consideration. Finally, parties were agreed that, esto there were relevant averments of a breach of any implied condition, the materiality of the breach could be decided only after inquiry.

I now turn to consider the issue which was finally presented to us. It was submitted on behalf of the defenders that the contract between the pursuer and themselves was a contract of agency, and that in every contract of agency in which the sale of goods was involved there fell to be included the implied conditions upon which the defenders were founding. There were, it was conceded, no special features in this contract. In any event, even if certain of the actings of the pursuer of which the defenders complain were permissible, his action in giving instructions to his sales staff to sell his own products, where possible, in place of those of the defenders could not on any view be justified. Counsel conceded that there was no reported case in which it was decided that there was in every contract of agency an implied condition that the agent would not compete with his principal even when acting outside the sphere of his contract with his principal.

In the absence of any decided case directly supporting his proposition counsel sought to rely on principle, on text-book writers and on what was said in a number of cases which were not directly in point. It was submitted that it was a universal principle that an agent had a fiduciary duty and that he could not enter into any contract in his own interests if, in doing so, he would be acting against the interests of his principal, unless his principal had consented. This was a well-recognised principle in all contracts of agency. An agent was bound to exercise due diligence on behalf of his principal and accordingly he could not boost his own goods and thus injure his principal. An agent must act in good faith and he would not be doing so if he instructed his staff to sell his own goods instead of those of his principal. Reference was made to Story on Agency, (9th ed.) paragraph 210, where it was said that it was a "confidence necessarily reposed in the agent, that he will act with a sole regard to the interests of his principal, as far as he lawfully may," to Bell's Principles, (10th ed.) sections 221–2, and to Bowstead on Agency, (13th ed.) articles 54 and 55. An agent, it was maintained, could not without the consent of his principal act for another principal if by doing so he was prejudicing his principal.

Counsel also referred us to a number of cases in which observations were made about the duties of agents. In Aberdeen Railway Co. v. Blaikie, Brothers the Lord Chancellor (Lord Cranworth) had pointed out (at p. 471) that a corporate body could only act by agents and that such agents have duties of a fiduciary nature towards their principal and that it is "a rule of universal application, that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect." In Parker v. M'Kenna the Lord Chancellor (Lord Cairns) said (at p. 118):

"Now, the rule of this Court, as I understand it, as to agents, is not a technical or arbitrary rule. It is a rule founded upon the highest and truest principles of morality. No man can in this Court, acting as an agent, be allowed to put himself into a position in which his interest and his duty will be in conflict."

Reference was also made to Costa Rica Railway Co. v. Forwood and to Thornton Hall v. Wembley Electrical Appliances . In the latter case Scott L.J. at p. 634 had said that no authority was required to establish or emphasise the strictness with which the Courts insist that a man must not put himself in a position where his interest and his duty conflict.

In inviting us to affirm the interlocutor of the Lord Ordinary counsel for the pursuer, after referring to the fact that the burden of proving that any breach of the contract was material was on the defenders (see Forslind v. Bechely-Crundall, perLord Shaw at p. 190) and to a submission by the defenders relating to sole agency, which it was later conceded was not material, submitted that the defenders had not relevantly averred any breach of contract by the pursuer. There was no authority in the decided cases for the defenders' proposition. The statements made in the text-books referred to were not of universal application. The proposition advanced by the defenders imposed a very severe limitation on every commercial agency. There was a presumption in favour of freedom of contract, and a condition which restricted freedom of trade would not readily be implied. In Gloag on Contract, (2nd ed.) p. 288, the author in referring to implied conditions quotes with approval what was said by Lord M'Laren in William Morton & Co. v. Muir Brothers & Co. (at p. 1224):

"If the condition is such that every reasonable man on the one part would desire for his own protection to stipulate for the condition, and that no reasonable man on the other part would refuse to accede to it, then it is not unnatural that the condition should be taken for granted in all contracts of the class without the necessity of giving it formal expression."

It was further submitted that the implied conditions referred to applied to the performance rather than to the construction of the contract and that, even if they applied, they only did so when the pursuer was actually conducting the defenders' business. The conditions which the defenders sought to imply could have been embodied in the written contract had the parties so desired, but they would have had to be very carefully defined, as it was by no means easy to know, for example, what was meant by "competitors' products."

The proposition which the defenders invite us to affirm is that in all agency cases there is an implied condition that the agent will not without the permission of his principal act, even in an outside matter, in such a way as to bring his interests into conflict with those of his principal. There is admittedly no case in which such a proposition has been affirmed, and the proposition is a sweeping one which, if it is sound, would undoubtedly affect a very large number of cases where an agent acts for two or more principals. There would normally be no objection to such a condition or term being expressly included in a contract of agency—and I am assuming for the purposes of relevancy that the contract in the present case is a contract of agency—but it is a very different matter to imply such a condition when it does not appear expressly in the contract. It is, moreover, more difficult to imply a condition in a written contract than it is in a verbal contract: Gloag on Contract, (2nd ed.) p. 289. The circumstances in which a condition may be implied were referred to by Lord M'Laren in the passage from his judgment in William Morton & Co. v. Muir Brothers & Co. which I have quoted above. This passage was considered in M'Whirter v. Longmuir, and in that case Lord Jamieson said (at p. 589):

"The Court will only hold a term or condition to be implied in a written contract if its nature is such that it must necessarily be implied to give the contract business efficacy …"

In M'Whirter's case the Court held that a time limit could not be implied and in doing so were admittedly to some extent influenced by the fact that the parties had considered the possibility of introducing a time limit but had not done so. I am satisfied, however, that even if there had been no previous discussion about the inclusion of a time limit, the Court would nevertheless have reached the same conclusion.

The tests proposed by Lord M'Laren and Lord Jamieson are formidable tests and it is now necessary to consider whether the defenders can satisfy either of them. The test desiderated by Lord M'Laren and approved by Professor Gloag involves an old friend of the Courts, the "reasonable man," or, to be more accurate, "two reasonable men." It is an objective test. In the present case, while it could no doubt be said that principals in the position of the defenders would desire the condition which the defenders seek to have introduced, it cannot be said that an agent in the position of the pursuer would be prepared, far less desire, to have such a condition. He might, I should imagine, be prepared to agree to such a condition if, for example, he were to get a higher commission. The condition upon which the defenders rely is not, in my opinion, a condition which should, in Lord M'Laren's words, "be taken for granted in all contracts of the class without the necessity of giving it formal expression." It may be that there are certain business transactions in which it is well recognised that a condition such as the one presently under consideration falls to be implied (see, for example, William Morton & Co. v. Muir Brothers & Co. ) but there are no averments in this case to introduce any particular custom of trade.

The test referred to by Lord Jamieson introduces the question of "business efficacy." In The MoorcockBowen L.J. says (at p. 68):

"In business transactions such as this, what the law desires to effect by the implication is to give such business efficacy to the transaction as must have been intended at all events by both parties who are business men; not to impose on one side all the perils of the transaction, or to emancipate one side from all the chances of failure, but to make each party promise in law as much, at all events, as it must have been in the contemplation of both parties that he should be responsible for in respect of those perils or chances."

While the contract in the present case would clearly be more advantageous to the defenders if the condition referred to were to be implied, I cannot say that the absence of such a condition makes the contract unworkable, nor can I say that without the condition the contract would be so one-sided that both parties must have intended that the condition should apply. The introduction of the condition would, as the Lord Ordinary has said, make the contract a different contract altogether, and moreover it was a condition to which the parties could readily have given expression if that were their intention. (See, for example, Graham & Co. v. United Turkey Red Co. )

The many authorities quoted by the defenders establish that, while actually performing his principal's business, an agent is not entitled to take advantage of his position and make a profit for himself, but, as I have said, no authority was quoted for the much wider proposition for which the defenders now contend, namely, that there is in every contract of agency an implied condition that an agent will never without the permission of his principal "even in an outside matter" act in such a way as to bring his interests into conflict with those of his principal.

The circumstances in which a condition may be implied are, particularly where the contract has been reduced to writing, rightly very limited, and I am satisfied that they have not been shown to exist in the present case. If the defenders had wanted to restrict the activities of the pursuer, they could have asked him to agree to their proposed restriction. Not having done so, they cannot now seek to rectify the position by attempting to discover an implied condition.

In my opinion the Lord Ordinary's interlocutor should be affirmed, and the first and second pleas in law for the defenders should of consent be repelled.

LORD WHEATLEY .—The salient facts and the arguments adduced by the respective parties have been set out by Lord Milligan in his opinion and I do not find it necessary to repeat them.

Counsel for the defenders based their argument on the proposition that the conditions and obligations which attach to an agent in his contract with his principal in relation to the subject-matter of their contract apply equally to the agent in all his dealings outside of the contract, in so far as these may affect the principal's interests. It was freely admitted by them that there was no decided case which supported this proposition, but it was argued that it was well founded in principle. It has to be observed that they submitted that their proposition applied even to cases where the agent was not appointed sole agent for the principal, and this submission became inevitable when they admitted that there was no foundation in the terms of the contract for the defenders' averment that the pursuer had been appointed soleagent. It has also to be noted that there is no averment, and no basis for an averment, that the defenders were the pursuer's sole principals. If the contention of defenders' counsel is well founded, then I find it difficult to see how a party could in any circumstances ever undertake agencies for two or more principals whose goods were in competition with each other. Yet the business world must abound in such agencies. The defenders' argument is fundamentally fallacious. Such an extension of an agent's obligation beyond the confines of the subject-matter of the agency contract would constitute a very serious restriction on the freedom of trade or business. In my opinion it could only be justified if it were constituted by an express condition of the contract, as in Graham & Co. v. United Turkey Red Co., or by necessary implication from the facts of the particular case establishing that such a condition had to be imported to give the transaction such efficacy as both parties must have intended it to have—Hamlyn & Co. v. Wood & Co. It would have been simple for the defenders to have circumscribed the pursuer's activities, as they now seek to do, by including an express prohibition in the contract. This they did not do. I can find nowhere in the contract or in the defenders' pleadings any justification for holding that the tests laid down by Lord M'Laren in William Morton & Co. v. Muir Brothers & Co. and Lord Jamieson in M'Whirter v. Longmuir have been satisfied, so as to import into this contract the conditions which the defenders seek to inject.

These conditions relate to the manner of performance of the contract and not to the context of the contract. The defenders must satisfy the Court that the context of the contract justifies the inclusion of the conditions by legal implication, and this they have failed to do.

I need only refer to one further matter, namely, the averments that the pursuer instructed his sales representatives to push the sales of his own products at the expense of those of the defenders, and provided a sales representative with lists of competing products in furtherance of this policy. If the defenders had been well founded in their primary submission, these would have been valid averments. When it is admitted by the defenders that there is no direct authority for the proposition that an agent is not entitled, apart from an express prohibition in the contract, to act in competition with his principal, and when their argument that in the circumstances of the present case such a restriction is necessarily inferred by law is ill founded, then I fail to see how in the open market of competition such tactics can be said to constitute a material breach of the pursuer's contract with the defenders.

I am accordingly of opinion that the Lord Ordinary reached the correct conclusion and that, subject to the modification that the defenders' first and second pleas in law of consent fall to be repelled, his interlocutor should be affirmed.

LORD WALKER .—The question on this reclaiming motion is whether the Lord Ordinary was wrong in holding that the defenders had failed relevantly to aver a breach on the part of the pursuer entitling them to rescind the contract. On record the parties are agreed that the contract was entered into by an exchange of letters in May and June 1964, whereby the pursuer was granted a commission in respect of sales by him in Scotland of certain industrial pre-treatment chemicals marketed by the defenders, the contract to run for a term of four years, from 1st July 1964 until 30th June 1968. The defenders aver that under this contract the pursuer was appointed to be their sole agent for the sale of such chemicals in Scotland. On 24th November 1965, however, they wrote to the pursuer stating that it had come to their notice that, contrary to their contract, he was actively selling a competitor's materials and products so that their contract must come to an end as from the date of the letter. The Lord Ordinary disposed of the defenders' case in justification of their repudiation by holding that they had not relevantly averred a breach of (a) any implied condition of the contract or (b) the fiduciary duty which is a legal incident of agency. The defenders do not now found on breach of implied conditions of the contract so far as that may differ from its legal incidents.

The defenders aver that about September or early October 1965 the pursuer, without informing them, entered into an arrangement with another supplier of industrial chemicals for the supply to him of products which were equivalent to, and sold in direct competition in the same market as, the industrial chemicals sold by the defenders; that the products obtained from that other supplier were relabelled by the pursuer and were sold as his own products to, among others, persons who had previously been customers for the defenders' products; and that the pursuer gave instructions to his sales staff to sell his own products, where possible, in place of those of the defenders. I have no doubt that the defenders' averments are relevant to infer that the pursuer in the course of his own business was in competition with the defenders' business in respect of which he was their agent. It must be noticed, however, that the defenders had not stipulated that the pursuer should be their full-time agent, or that he should sell their goods exclusively, or that his freedom to carry on his own business should be restricted in their interests. Mr Bennett, as senior counsel for the defenders, conceded that he could find no case which affirmed the proposition that the existence of the agency was in itself sufficient to impose a restraint on the pursuer's freedom to trade. He maintained, however, that as a pure question of principle applicable in the case of any agency, and as part of the legal relationship of a fiduciary nature, such a restraint was necessarily implied.

Mr Bennett said little, however, about which aspect of the fiduciary relationship he was founding upon. During the argument it occurred to me that some breach of confidence might be suggested by the allegation that the pursuer sold his goods to persons who had previously been customers of the defenders. That suggestion was not followed up by Mr Bennett and on a further perusal of the voluminous averments I am satisfied that no case of breach of confidence is relevantly set forth. What Mr Bennett was founding on, if I followed him correctly, was the rule that the agent must act with a single eye to the interests of his principal. But that rule is, I think, limited to what the agent does in the course of his agency. Here what he did as agent and what he did as an individual were quite separate from one another. I find myself in agreement with what, if I may say so, was a very careful judgment by the Lord Ordinary. In particular I agree with his observation that, if the defenders intended to impose a restriction on the pursuer's freedom to trade, they should have contracted with him to that effect. It follows that I would refuse the reclaiming motion. It was conceded for the defenders that their first and second pleas in law should be repelled. Subject to that being done, I would adhere to the interlocutor under review.