Scottish Court of Session Decisions

In this action the pursuers, an insurance company established in Belgium, have sued the defender for damages on the ground that the defender fraudulently misappropriated their funds.

By a management agreement dated 18 August 1993 the pursuers were appointed the sole and exclusive agent for the Baltic Insurance Group in the procuring, underwriting and subsequent handling of all types of insurance and re-insurance, including retrocession business. Under that agreement the pursuer were to be paid a management fee and, subject to certain conditions, a further percentage of profits. In about March 1994 the defender became the General Manager of the pursuers. He wrote a considerable amount of insurance and re-insurance business for the Baltic Insurance Group. He was in a position of trust as general manager in charge of the day-to-day running of the pursuers' business.

The pursuers aver that certain premiums ought to have been remitted to them, under deduction of brokers' commission and expenses. The pursuers would then be entitled to payment of their management fee and commission before remitting the balance to the Baltic Insurance Group. However, unknown to them, the defender caused funds which were properly payable to them to be diverted to himself or to be reduced by means of a scheme which was designed to enrich him among others. In addition he was guilty of further defalcations causing personal expenditure to be met out of the pursuers' funds without his having authority to do so. He also failed to remit to the pursuers a sum of money which had been repaid after being on loan, and appropriated that sum to his own use. During his work he was not subject to routine supervision. The assets of the pursuers were entrusted to him to safeguard, and to apply only in furtherance of their business.

The defender avers, inter alia, that his operations were approved by the Managing Director of a company which entered into the management agreement on behalf of the Baltic Insurance Group. That director was also aware that the loan was to be paid into the defender's personal account. The pursuers were aware at all times that this had been done, and that he required to account to them for the money in due course. He was also entitled to apply the pursuers' funds in payment of personal expenses.

It is common ground that in about September 1995 the pursuers confronted the defender with allegations that he had misapplied their funds, and that they entered into a formal written agreement with him dated 9 October 1995.

The pursuers aver that in terms of that agreement the defender agreed to a programme of repayments, in return for which they agreed to refrain from initiating criminal or civil proceedings and to treat the defalcations as "reimbursable advances", providing that the repayment programme was met. The defender repaid 2,240,000 Belgian francs to account of his liabilities to the pursuers, but failed to implement the terms of the agreement. Under that agreement he was taken bound to pay £50,000 into the bank account of their Belgian lawyer within eight days of the execution of the agreement. The sum was not paid by 17 October 1995, and when a payment was made, it fell short of the sum stipulated for. The defender also had failed to repay 23,000,000 Belgian francs to the pursuers by 31 December 1997, and to provide a standard security in favour of the pursuers in order to secure the latter payment. Each of those obligations on the part of the defender was declared to be a "condition precedent" of the pursuers' obligations under the agreement. The pursuers accordingly were not under any obligation to the defender under the agreement. Separatim, in any event, esto the pursuers under any such obligation, and the present action was covered by the agreement (which was denied), by reason of his breaches of the said agreement, he was precluded from seeking to enforce any of the conditions of the agreement.

The defender admits that payment of the sum of £50,000 ought to have been made by 17 October 1995, but explains and avers that the pursuers' Belgian lawyer wrote to him on 24 October 1995 thanking him for the down payment and that the pursuers accepted the sum without commenting on any alleged shortfall or lateness. The defender also avers that, esto he was in breach of clause 2 of the agreement, which is denied, any such breach was not material. The defender goes on to aver it was the intention of the parties to the agreement that the pursuers would continue to provide him with the opportunity to generate income for them, from which the sums payable under the agreement would fall to be deducted. He refers to clauses 3 and 7 of the agreement. However, since 9 October 1995 they had not provided him with any business or any account of income received by them, nor had they paid any fees to him pursuant to the agreement. The defender believes and avers that, on the basis of the income generated by him for the period up to 9 October 1995, the pursuers subsequently received more income attributable to him than would be sufficient to satisfy the entire amount of the funds payable by him under the agreement. The draft standard security produced by the solicitor appointed by the pursuers did not accord with the terms of the agreement and accordingly the defender was not prepared to grant it. The pursuers themselves were in material breach of the agreement.

This reclaiming motion arises out of the fact that the defender founds on clause 10 of the agreement dated 9 October 1995 which provides that "any dispute arising from the execution, implementation or interpretation of this agreement shall be brought in the courts of Brussels-Hal-Vilvoorde". The defender avers in answer 1: "The parties accordingly have prorogated the jurisdiction of that court. This court accordingly does not have jurisdiction". The defenders' first plea-in-law is as follows: "Parties having prorogated the jurisdiction of another court, this court does not have jurisdiction". It may be noted that in 1997 the pursuers sued the defender before the First Chamber of the Court of First Instance of Brussels. These proceedings were abandoned and on 9 April 1997 Brussels court dismissed the action. The pursuers explain that this was at their instance, in respect that they wished to raise the present proceedings in the Court of Session.

The Lord Ordinary repelled the defender's first plea-in-law. In his opinion he stated:

He also repelled the defender's second plea-in-law, which was to the relevancy and specification of the pursuers' averments, and, of consent, repelled the pursuers' fifth plea-in-law to the relevancy and specification of the defenders averments in regard to jurisdiction.

At the outset it is clear that a dispute about the present claim of damages in respect of the alleged fraudulent misappropriation of funds by the defender is not in itself a "dispute arising from the execution, implementation or interpretation of" the agreement dated 9 October 1995, and accordingly that there is no basis for regarding such a dispute as being outwith the jurisdiction of the Court of Session. If as a consequence of clause 10 of that agreement, one or more questions in dispute require to be decided in the first place by the Belgian court, that plainly would not justify the dismissal of the present action, but the sisting of the action to await the outcome of further proceedings in that court. Mr. Marshall who appeared as solicitor advocate for the defender presented the latter as his subordinate submission, on the basis that this was included as the minor proposition within the major proposition that the action should be dismissed, and he developed his main arguments in support of that submission.

The positions taken up by each of the parties can be put shortly as follows. The pursuers seek an award of damages in respect of the alleged fraudulent misappropriation of their funds by the defender. The defender seeks to rely on the terms of the parties' agreement dated 9 October 1995. While he does not say so explicitly in his pleadings, the defender appears to maintain that the parties' rights and obligations inter se are regulated by that agreement, to the exclusion of any delictual claim against him at the instance of the pursuers. The pursuers for their part maintain that the defender was in breach of one or more obligations under the agreement, each of which was a condition precedent of their obligations, and accordingly that he is precluded from enforcing the agreement. The defender denies that he was in breach of the agreement, claiming that it was the pursuers who were in material breach, and maintaining that disputes as to whether either party was in breach or entitled to "repudiate" the agreement fall within the scope of clause 10, and accordingly are to be decided by the Belgian court.

Mr. Marshall submitted that in deciding whether a question of jurisdiction arose in the present case it was necessary to consider the pleadings of both parties, and not simply the pursuers' pleadings, as the Lord Ordinary appeared to have done. There was a dispute as to whether each of the parties had implemented the agreement. This included the question of the interpretation of that agreement. It was for the Belgian court to resolve that dispute with any consequential question of damages in respect of breach of contract. Even if it was said that the pursuers had rescinded the agreement, the dispute still required to be litigated in the court which the parties had chosen.

For the pursuers, Mr. Glennie pointed out that they did not aver that they had rescinded the agreement. They maintained that the defender was disentitled from relying on clause 10, not because they had rescinded the agreement, but because he had failed to carry out one or more obligations which were declared to be a "condition precedent" of their obligations under the agreement. Mr. Glennie then concentrated particular attention on the defender's obligation to make a down payment of £50,000. The defender admitted that this payment ought to have been made by 17 October 1995, but appeared to rely on the letter from the pursuers' Belgian lawyer, saying that the pursuers had accepted payment without complaining that it was too little or too late. The defender did not aver that the payment was in fact made in time, or that the pursuers' actions amounted to a waiver of their right to insist upon timeous payment. He did not suggest that the pursuer were wrong in averring that each of the defender's obligations was a condition precedent. In these circumstances, whatever else was in dispute between the parties, there appeared to be no genuine dispute as to whether the defender was in breach of an obligation under the agreement, with the consequence that the pursuers were no longer bound by that agreement or any of its conditions.

We are satisfied that it is appropriate for us to entertain Mr. Marshall's motion that the action should be sisted, on the footing that, so far as the defender's first plea-in-law is concerned, the greater includes the lesser.

We have no difficulty in accepting the proposition that whether the Court of Session has jurisdiction to decide a particular issue may depend upon a consideration of the pleadings of both parties. In the present case both Mr. Marshall and Mr. Glennie adopted that approach, and in our view rightly did so.

It is plain, as Mr. Glennie submitted, that a dispute which is referred by the parties to the jurisdiction of the Belgian court must be a genuine dispute, in other words a dispute on the resolution of which the rights and obligations of the parties inter se depend. The argument presented by Mr. Glennie that there was no real dispute that the defender was in breach of his obligation to make timeous payment of £50,000 and that his fulfilment of that obligation was a condition precedent of the pursuers being bound to fulfil their part in the agreement has some attraction, but we consider that it goes beyond what can reasonably be inferred from the pleadings. The defender does not admit that this payment was a condition precedent, and moreover avers explicitly that the pursuers and their Belgian lawyer did not raise any question about the timeousness of payment. Furthermore, in considering the specification of the defender's averments, we bear in mind that, as Mr. Marshall pointed out, the pursuers' plea-in-law as to the relevancy and specification of the defenders averments anent jurisdiction was repelled by the Lord Ordinary of consent. In these circumstances we are not persuaded that the defender's averments are to be taken as conceding that the defender was in breach of any of his obligations under the agreement, or that the pursuers were entitled to regard themselves as liberated from any of the obligations incumbent on them.

In these circumstances we are satisfied that the pleadings of the parties disclose that there is a dispute as to whether the defender was in breach of any of his obligations under the agreement dated 9 October 1995, and, if so, whether the pursuers were thereby discharged from any obligation under the agreement; and that this dispute falls within the scope of clause 10 of the agreement. Accordingly we will allow the reclaiming motion, recall the interlocutor of the Lord Ordinary and sist the action pending the outcome of the resolution by the Belgian court of these disputes and any consequent claim by either of the parties against the other.