Scottish Court of Session Decisions

The pursuers are a company incorporated in Italy. They manufacture football and sports boots. On 27 January 1997 they entered into a Distribution Agreement with the defenders relative to the distribution of the pursuers' products in the British Isles. In pursuance of that Agreement the defenders, early in 1997, placed orders with the pursuers for certain goods. These were supplied in June and July of that year. They were then marketed by the defenders in their retail outlets. Further orders were placed by the defenders on 2 June 1997. On 11 August the pursuers confirmed by fax that the goods ordered on 2 June would be despatched from their factory in Italy on 18 August. By fax dated 11 August the defenders intimated as follows -

That fax was followed by a further fax of the same date in which the defenders gave notice under reference to Clause 22.2 of the Distribution Agreement of rejection of goods already supplied on the ground that they were disconform to quality as warranted under the Agreement.

The Distribution Agreement provides by Clause 27 as follows -

In August 1997 judicial proceedings were instituted in this court by the pursuers against the defenders, the summons in a commercial action being signetted on 14 August. In that summons the pursuers claimed payment for goods already supplied but not paid for. They also sought damages in respect of the defenders' refusal to accept delivery of the goods ordered on 2 June. Defences were lodged in which the defenders denied liability, maintaining that the goods supplied had been in certain respects defective. These defects, they claimed, had resulted in a markedly higher return than normal of goods purchased by retail customers.

A preliminary hearing in the action was held before Lord Macfadyen on 29 September 1997 at which both parties sought leave to adjust their pleadings. Leave to adjust having been granted, the preliminary hearing was continued to 21 November. Prior to that date the pursuers enrolled a motion for summary decree. That motion was heard by me on 12 November when counsel for the pursuers restricted his motion to the amount of £207,370.80 (being part of the claim for payment of goods already supplied). The primary basis for that application was that the pursuers had, they maintained, grounds for believing that, notwithstanding the defenders' claim that the goods supplied were defective, they were continuing to market them in their retail outlets. That contention was supported by an affidavit sworn by the pursuers' local solicitor who deponed that he had, on 22 October, attended a retail outlet of the defenders in Glasgow and there observed football boots of various models manufactured by the pursuers exposed for sale there. After a lengthy hearing, in the course of which I was provided by the defenders with material suggesting that any exposure for sale as may have been observed was contrary to express instructions earlier issued by the defenders' senior management, I refused the motion for summary decree in hoc statu. It appeared to me that, on the information and pleadings then available, it could not be said that there was a near certainty that the defenders had no defence to the action (in whole or in part). Further time was then allowed to both parties to adjust their pleadings, the date for the continued preliminary hearing being varied to 1 December. Both parties adjusted. Prior to 1 December the pursuers had enrolled a further motion for summary decree but at the hearing on that day their counsel intimated that he was not insisting on it. Further time was allowed for adjustment which again both parties availed themselves of. Parties were appointed to lodge in process not later than 31 December all documents on which they intended to rely. The pursuers, who had earlier lodged certain documents, on 31 December lodged further documents including reports by certain Italian testing and research houses for footwear (RICOTEST and CIMAC). These reports ex facie tended to support the pursuers' contention that goods of the types supplied to the defenders were free from material defect. The defenders had earlier (in September 1997) lodged test results from a British testing house (Intertek Testing Services) which ex facie tended to support the defenders' contention that the goods were defective.

At the next continued preliminary hearing (on 7 January 1998) counsel for the pursuers stated that the pleadings and productions for the pursuers were complete. He sought an order for proof with a direction that witness lists and witness statements be provided in advance. He estimated that a proof would last between 4 and 6 days. Counsel for the defenders in response stated that it was impossible at that stage to make any confident estimate of the length of the proof; he suggested that witness lists and statements be provided before proof was allowed and its date fixed.

By this stage it was clear that the parties were at issue over the quality of the goods supplied by the pursuers to the defenders and that that issue involved technical matters. I raised with parties the possibility of a remit being made to an expert under Rule of Court 47.12(2)(f). Parties undertook to consider that course. I declined at that stage to allow a proof but appointed each party to lodge by 6 February 1998 a list of witnesses together with summaries of the matters to which they would respectively speak, This was duly done. At the next hearing (on 16 February 1998) the matter of a remit to an expert was further explored. Parties were agreed in principle that a remit to an expert should be made and as to the general scope of that remit. The defenders suggested that the remit should be to the Shoe and Allied Trade Association (SATRA). A difficulty, however, arose as the pursuers had meantime instructed for their own purposes an expert report from a Mr Parker of that organisation. The case was appointed to a procedural hearing to be held on 20 March 1998. In advance of that hearing the pursuers lodged a Note of Proposed Further Procedure which, after reference to a remit to SATRA and a report from it, proposed, -

At that hearing it was apparent that, for various reasons, including the fact that Mr Parker had already accepted instructions from the pursuers, SATRA was not prepared to accept a remit (from the court) under Rule of Court 47.12(2)(f). However, arrangements were then made for Mr Parker, as an expert for the pursuers, to visit the defenders' premises in Scotland and there to select and remove for testing a representative sample of each of the types of boots supplied by the pursuers to the defenders. After some delay this procedure was completed and Mr Parker's reports (four in number) were lodged in process. On perusal it was plain that, with minor qualifications, Mr Parker's conclusions supported the defenders' position (and gave little or no support to the pursuers' position) as to the quality of the goods. At a hearing on 6 July 1998 counsel for the pursuers stated that the pursuers accepted Mr Parker's conclusions. It was thus clear that the primary issue on which the parties had hitherto joined (namely, the quality of the goods supplied) had, after consideration of reports by an appropriately skilled person, been effectively resolved, by concession of the pursuers, in the defenders' favour.

At this stage, however, counsel for the pursuers introduced a contention which had not previously been advanced. It related to what rates of return of sports footwear sold retail were, as a matter of the defenders' general practice and also as a matter of custom of trade, acceptable and whether the rates of return experienced with the pursuers' products were within such rates. The pursuers were allowed further time to adjust their pleadings on this aspect with the defenders being given time to respond. After sundry procedure the case was appointed to be heard at a further procedural hearing on 5 October 1998. Immediately prior to that hearing intimation was given to the court by the Edinburgh agents for the pursuers that their correspondents in Glasgow (who had hitherto been acting directly on instructions from the pursuers) had withdrawn from acting. On 5 October 1998 the pursuers' Edinburgh agents and their counsel were given leave to withdraw and an order was made for a notice to be served on the pursuers requiring them to intimate to the court whether they intended to proceed with this action. Thereafter the pursuers endeavoured to instruct other solicitors. Ultimately at a hearing on 19 February 1999 Mr Sandison, who had had no previous involvement with this case and was instructed by solicitors who likewise had had no such involvement, appeared for the pursuers. By this stage steps had been taken in Italy which resulted in the pursuers being put into "judicial administration" - apparently because of financial difficulties experienced by them. The requirements of Italian law and procedure resulted in there being some delay in the formulation by the pursuers, under their new administration, of a definite attitude towards this litigation. At a hearing on 21 June 1999 Mr Sandison intimated that the pursuers would now prefer to proceed by I.C.C. arbitration in Milan as provided for in Clause 27.3 of the Distribution Agreement. Subsequently the pursuers were allowed by amendment of the pleadings to introduce a plea that the action be sisted for arbitration. Mr Sandison on their behalf moved me to sustain that plea and to sist the action. Mr Sellar for the defenders opposed the motion.

Mr Sandison referred to Clause 27 of the Distribution Agreement. It was clear, he said, that the dispute between the parties fell within the scope of that clause. The pursuers, he submitted, had prima facie a right to go to arbitration; it was not a matter for the discretion of a court (D. & J. McDougall v Argyll & Bute District Council 1987 SLT 7, per Lord Weir at p. 10F-G; Inverclyde (Mearns) Housing Society Ltd v Lawrence Construction Co Ltd 1989 SLT 815, per Lord McCluskey at p.817J-L). The onus of demonstrating that the pursuers' right had been elided rested squarely on the defenders. No express waiver had been suggested. It was accordingly necessary for the defenders to demonstrate that the right had impliedly been waived. Waiver had been authoritatively discussed in Armia Ltd v Daejan Developments Ltd 1979 SC (HL) 56. To be effective it required (1) abandonment of the right by one party and (2) that the other party had conducted his affairs in reliance on such abandonment. That dual requirement had, in the context of sisting for arbitration, been adopted and applied in Inverclyde (pp.819D-J and 821C) and Presslie v Cochrane McGregor Group Ltd 1996 SC 289. The test for element (1) was a high one. It was not satisfied by the mere raising of the action (McDougall, per Lord Weir at p. 11J; Graeme Borthwick Ltd v Walco Developments (Edinburgh) Ltd 1980 SLT (Sh. Ct.) 93 at p. 94). In this case the pursuers had raised the action in circumstances where they considered that there was no real or substantial dispute in respect of the quality of the goods. This was pointed by their early motions for summary decree. The fact that the pursuers had adjusted their pleadings, even over a lengthy period did not infer waiver (Presslie). Nor did other aspects which involved the ordinary procedures of litigation. The closing of the record was not a critical event (Wylie v Corrigan 1999 SLT 739, at p. 742H). The proposition that an arbitration plea should be take in limine was a matter only of good practice (which might have consequences in expenses). Moreover under the Commercial Actions Rules there was no equivalent to the closing of the record in ordinary actions. Any suggestion that a procedural hearing was such an equivalent was ill-founded. Finalisation of the pleadings might be a factor but was not critical. In the present case, although parties had had a proof in mind, no order for proof had been made. Even after the various expert reports had been lodged, there had been no determination as to substantive procedure. In McDougall (where the motion to sist had been granted) a preliminary proof had already taken place. Here all that had occurred was "the first step down a lengthy road". In Inverclyde (the only recent case where a sist had been refused) there had been an accumulation of factors, the act of the defenders bringing in a third party being of particular significance as pointing to a preference for judicial over arbitral procedure. Delay in taking the plea was not of itself significant. In any event, the effective delay in the present case had not been substantial; at the outset of proceedings there was no obvious dispute as to quality, while from late 1998 there had in effect been a paralysis due to the financial difficulties in which the pursuers had been placed. In any event, it could not be shown that the defenders had conducted themselves on the basis that the right to proceed by arbitration had been abandoned by the pursuers. Reference was made to Morrison v Rendall 1986 SC 69, especially per Lord Justice Clerk Ross at p. 75, McDougall, per Lord Weir at p. 12G-H, James Howden & Co Ltd v Taylor Woodrow Property Co Ltd 1999 SLT 841, especially per Lord Kirkwood at pp. 850-1 and Press

Mr Sellar, in moving that the pursuers' motion be refused, submitted that, if the relevant law was applied to the undisputed facts, the proper conclusion was that the pursuers had long ago given up their right to go to arbitration. It was accepted that the institution of legal proceedings and the occurrence of delay by themselves would not give rise to loss of the contractual right. However, non-assertion of the right prior to the closing of the record in an ordinary action, while not fatal, constituted a very strong indication that the right had been waived (Presslie at pp. 292I-293C). The finalisation of the parties' positions on the pleadings was also important (Wylie v Corrigan at p. 743C-K). All the factors (including the whole history of the litigation) had to be looked at (Inverclyde at p. 821C); it was erroneous to conclude that any special significance had in that case been given to the convening of a third party. There might be some doubt about the treatment in McDougall of the fact that parties had undergone a preliminary proof; but it was clear that Lord Weir would have considered agreement by the pursuers to an inquiry on the general merits as being inconsistent with an assertion of the right to go to arbitration (p. 12E). In commercial actions there was no provision for closing of a record. It was, however, suggested that an equivalent stage had been reached by not later than the initial procedural hearing in this case. It was relevant that it was the pursuers who had brought and insisted in the action. Moreover, the contractual provision related not to a domestic but to a foreign arbitration. In such circumstances the court should be readier to infer that there had been waiver by the pursuers. In the present case, after the motions for summary decree had been dealt with, the pursuers had pressed on with the litigation on the merits of the dispute. By 7 January 1998 the issues on the merits were focused. On 16 February a procedural hearing had been fixed. It had taken place on 20 March. All the active procedure thereafter until the Autumn of 1998 had concerned the merits. The first suggestion that arbitration might be involved had been made on 21 June 1999. By that time the issue of the quality of the goods had long been effectively determined. The arbitration clause had been referred to at the initial preliminary hearing before Lord Macfadyen on 29 September 1997. In the whole circumstances, notwithstanding that the test was a high one, waiver of abandonment of the right to go to arbitration had clearly been made out. As to the second element for effective waiver, the history was entirely consistent with the defenders having conducted their affairs on the basis that the right had been waived Where the first element was made out, it was not difficult to infer the second. Reference was made to Presslie at pp. 291H-292A and Inverclyde at p. 821E-H.