Scottish Court of Session Decisions

This action raised by the permanent trustee on the sequestrated estates of Ronald William Watt, seeks count, reckoning and payment, which failing, damages. Mr Watt was sequestrated on 17 December 1992. The present action was raised on 9 April 1997 and concerns a dispute about the alleged non-payment of royalties due to Mr Watt in terms of an agreement in relation to certain intellectual property rights in various products. The intellectual property rights and products relate to a system designed to secure empty premises. The matter was argued in Procedure Roll in respect of the defenders' first, second and seventh pleas-in-law. The pursuers did not seek to argue their plea to the relevancy and sought a proof before answer on the whole pleadings.

I note first of all that the pursuer's pleadings are somewhat unusual in two respects. In the first place, they narrate, or purport to narrate, statements made by Mr

Duffus, the defenders' managing director, at what was described as a "commission and diligence" on 7 March 1997, i.e. prior to the raising of the action. It is apparent from that date that this could not have been a commission and diligence, but was a commission under section 1 of the Administration of Justice (Scotland) Act 1972. It is not apparent to me that, under that draconian procedure, which involves the element of surprise, a commissioner is empowered or entitled to obtain or report evidence other than narrating what is relevant to the recovery of the matters specified in the Petition under the Act. It may be otherwise in the conduct of a commission and diligence for recovery of documents in an action, where the parties are represented and havers give evidence to a commissioner, are examined on oath and may be cross-examined, but in my opinion the sole and only purpose of said section 1 is for the inspection, preservation, custody and detention of specified matters which may be documents. The commissioner has no locus to hear and has nothing to do with receiving or recording statements made in relation to the constitution, management or staffing of companies or such like which may be an issue in some prospective litigation. I accordingly have the gravest reservation about the entire averments between letters D on page 11 and C on page 12 of the Closed Record. It appears to me that the only way of establishing such averments would be to put the commissioner into the witness box to give an account of what was said to him at the commission. I have serious doubts about the competence, propriety or value of such a course and on the face of it would consider that the commissioner has acted beyond his remit. His function is limited. He is not there to investigate the merits or otherwise of some case or the potential parties thereto. He is not there to "inspect" documents. Such a commission should not have been used in an attempt to obtain evidence about the internal workings of the respondents. There is considerable doubt about whether any such statement is competent evidence in the light of the way it appears to have been obtained. In the present litigation the matter would appear to have been given importance in relation to a suggestion that this is an appropriate litigation in which to "lift the corporate veil" about which argument which was addressed to me.

The second peculiarity in relation to the pleadings is the incorporation said to be brevitatis causa of an affidavit by a person who can and might be a witness. This matter was raised in the course of the debate and challenged. The pursuer maintained that this was a convenient shorthand method of dealing with averment, the defenders that this was an improper reference to extrinsic matter which should be the subject of specific averment citing Eadie Cairns v Programmed Maintenance Painting Limited 1987 S.L.T. 777, a case clearly binding upon the Outer House. Apart from the general stricture against pleading evidence, which could be said to be a matter more of elegance than substance, it appears to me to be wholly pointless to introduce as a matter of pleading an affidavit about matters which are and have to be the subject of oral evidence. The proper course, in my view, is to plead the facts upon which proof is sought to be led and not to give, what is in essence a precognition, some spurious authenticity by incorporating it in pleadings as an affidavit brevitatis causa.

Each of these matters must, in my view, cause considerable difficulty if any enquiry were allowed and for the purposes of the debate I have approached the matter on the basis that neither the averments about the commission, nor those about the affidavit have been properly made.

The royalty agreement at the core of the dispute is substantially incorporated in the pleadings and the relevant portions thereof are narrated below.

Clause 6.1:

The terms "know-how", "technical information", "the patent rights" and "the improvements" were also defined in Clause 1. Clause 7.1 provided inter alia:-

Clause 6.2 dealt with the position of "the products" incorporated into other product.

Clause 5.2 provided:-

The pursuer further pleads that the defenders have been manufacturing the product or selling them, or otherwise supplying them for money or money's worth, including renting the products since the effective date of the agreement. They have also averred that since 27 April 1992 the defenders have licensed or sub-contracted to an associated company, which has the same offices, SPS (Doorguard) Limited, the manufacture and selling or otherwise supplying the products for money or money's worth, including rental of the products. They go on to aver that the shareholders and directors of the defenders and SPS (Doorguard) Limited are all the same. They aver that they have had no accounting for sales since March 1995 and make averments about loss and falsification invoices. They aver that the defenders have not since 1 March 1991 accounted for royalties due on any dealings in respect of the products for SPS (Doorguard) Limited. I note that this date cannot stand consistently with that of 27 April 1992 averred. They proceed to aver that the defenders have not accounted for "any royalties due on the products to which they have licensed or sub-contracted the right to sell or deal with to SPS (Doorguard) Limited". In Condescendence 4 the pursuer estimates that the turnover of sales and rentals of products is about £3.5m per annum. Further, in relation to the alternative case for damages, the matter is referred thus:

The varying descriptions and incorporation of the varying descriptive words in relation to transactions will be noted. I also note that the words "dealing with" do not appear in the royalties agreement and specifically do not appear in clause 5.2."

Junior counsel for the defenders submitted that under the royalty agreement there was provided two types of right. The first, to royalties under clause 6 which arose in defined circumstances and the second, to compensation which arose under clause 5(2), again in particular circumstances. His contention was that the pursuer's claims were irrelevant in that they failed to make a distinction between the two types of right and the consequences which followed therefrom. His general propositions included (one) that the pursuer's averments about the entitlement to royalties in respect of transactions by the defenders themselves, were so vague and unspecific as to be irrelevant; (two) that on a proper construction the royalty agreement does not give any entitlement to the pursuer to royalties in respect of transactions by the company SPS (Doorguard) Limited with third parties; (three) that of the type of transaction which is averred by the pursuers i.e. the rental of product, does not give rise to royalties,; (four) that certain averments in Article 4 between 17A-D and in Article 5 between 19C-20C should be deleted; (five) that the incorporation of an affidavit was not appropriate or relevant pleading; (six) that there were no relevant or specific averments of fraud; (seven) that certain claims, on the basis that they were otherwise relevant, had prescribed and finally an eighth point was made in anticipation of some criticism by the pursuer of the defenders' averments.

Junior counsel for the pursuers sought a proof before answer on a question of liability to account. His propositions were that the matter under discussion could only be dealt with at this stage by considering the appropriate procedure for an action of count, reckoning and payment. Since there was no dispute that there was some liability to account, all that was required was to go to proof before answer at this stage leaving the accounts themselves for consideration later. Secondly, he contended that the parties had provided for payment of royalties other than by transfer of ownership and that "net sales value" was a phrase which was habile to cover the events which had happened, i.e. hiring by an associated company to third parties. He maintained with regard to transactions by Doorguard, that Doorguard was to be treated as one with the defenders for the purposes of the debate, and that there were sufficient averments in any event to indicate that Doorguard were acting on behalf of the defenders as agents. The averments of fraud were contended to be sufficient for enquiry. So far as prescription was concerned, there was, in any event, a relevant action raised in April 1997 prior to five years having elapsed from the licensing of or sub-contracting to Doorguard.

Both senior counsel adopted their junior's arguments. Senior counsel for the defenders contended that the matter or relevancy at this stage was properly raised because it was appropriate to determine the relevance and extent of the accounting which was sought and to determine the scope of what was required. The matter of whether hiring by Doorguard fell within the ambit of the agreement could be determined at this stage so curtailing the ambit of proof.

Senior counsel for the pursuer re-visited the argument that the procedure was central to the case, the question being one of liability to account. At the stage of liability to account there were only three defences available as set out in McLaren, Court of Session Procedure, p.654ff, firstly a denial of liability to account, secondly, settled accounts and thirdly, a willingness to account. The existence of Doorguard and the transactions therewith was a device and where a device was employed, the court was entitled to look behind the corporate veil. Salomon v Salomon (1897) A.C. 2 was an exceptional case and the courts were ready to look behind the corporate structure to the realities of the situation. In that regard I was referred in the course of the debate to Palmer, Company Law para.2.1519 and following; Gilford Motor Co v Home [1933] Ch. 935; Jones v Lipman [1962] 1 W.L.R. 832; Woolfson v S.R.C. 1978 SC (HL) 90; City of Glasgow D.C. v Hamlet Textiles Ltd 1986 S.L.T. 415 and Drew v H.M.A. 1996 S.L.T. 1062. Senior counsel maintained that royalties were payable on any and all disposals of assets in terms of the agreement. Sales are synonymous with turnover and the notion of "sales value" fits into the concept of the consideration which is obtained for a supply. Contrary to the position adopted by junior counsel, he maintained that a royalty was due every time that the product was hired and not merely on the first occasion. The use of the commissioner's report and the affidavit was designed to provide adminicles of evidence to support the averment of a fraudulent scheme and it was competent to utilise an affidavit in pleadings. Fraud was only relevant however to the plea of prescription and prescription could, on the averments, only begin to run in December 1992. The latter submission, if I have correctly noted it, would mean that none of the averments about fraud had any relevance to the issue in the case and accordingly could only be there as a matter of prejudice.

In my judgment, the true matter at issue is the proper construction of the royalty agreement. The question is, can the agreement extend to a hire as opposed to a sale? The agreement provides for a payment of 5% of the net sales value sold or otherwise supplied for money or money's worth. Although there is an elaborate attempt at a definition of net sales value, that definition does not assist in determining the content of the phrase "sold or otherwise supplied for money". It may well be that the drafters of the agreement had not anticipated the matter of hire. The emphasis on "invoiced ex-works sales value less discounts in an arms length transaction" in my view clearly anticipates sales. Where there is an "other disposal" it is specifically provided that the fair market price received shall be substituted for the net sales value. There is no room for a hire of goods within that definition. The matter therefore rests on the meaning of "otherwise supplied" but, the context of that must lead to the words being regarded as a transaction equivalent to sale. That could be, for example, a hire purchase transaction; it could be a gift because provision is made for a non-arm's length transaction. Were the goods supplied to a totally disconnected company and that disconnected company proceeded to hire them to its customers, no question could arise as to the entitlement of Mr Watt to anything other than a royalty on the first sale to the hiring or leasing company. It certainly could not be suggested that such a lease was subject to some royalty charge every time it was made. Further the fact that there is no specific mention of lease - a very common transaction in dealing with plant - and, moreover, no clear or specific way in which any royalty due on a lease transaction can reasonably be calculated from the agreement (as the difference of view between senior and junior counsel for the pursuer tended to illustrate) adds force to the view that lease was not even contemplated as giving rise to royalties. In my view, it matters not whether the lease was by an associated company or indeed by the defenders themselves. A lease or hire is not a sale or supply in terms of the agreement.

It follows that there is no need to consider whether or not in some way Doorguard Limited is a device created so that goods can be leased outwith the agreement. In my view, the creation of Doorguard as a separate leasing company did still provided for the only entitlement of Mr Watt, that of a royalty on the first supply of any of the products to any leasing company. The conduct of leasing operations by way of an associated company makes good commercial sense. The leasing company has a different function from the manufacturing and selling company, different liabilities and rights. This is not a case where a consideration of lifting the corporate veil need arise. The supply to Doorguard is what gives rise to the royalty, just as it would to any other leasing company. In the event in my opinion the whole averments of the pursuers in relation to rental; in relation to the matters allegedly spoken to by Mr Duffus at a commission in Condescendence 3; and in relation to the alleged sub-contraction of the right to deal in the products are irrelevant and will not be remitted to probation. As a consequence the references to leasing and to SPS (Doorguard) Ltd in conclusion 1 fall to be deleted. In the light of the fact that the averments of fraud relate only to the matter of prescription which matter is sufficiently answered by the averment of knowledge in the defenders' answer at 18E. That is the defenders' only claim in relation to prescription. I shall accordingly delete the averments in relation to fraud and repel the defenders' seventh plea-in-law. In respect that there are relevant averments entitling the pursuer to an accounting in relation to the sales of the relevant products, that matter will require to be determined by way of a proof which will be allowed leaving the pleas to the relevancy standing.

The averments to be deleted are (1) in Conclusion I and added by amendment from "including" to "Doorguard Limited"; (2) in Condescendence III, from "At the execution" to "annum" on page 11, from "Mr Duffus" to "field" on page 12, from "the defender" to "limited" on page 13D; the words "or deal" on pages 13 and 14; the words from "Reference" to "causa" on page 14; (3) in Condescendence IV from "there is excluded" on page 17 to "date" at page 18B.