Scottish Court of Session Decisions

[1] In this action the pursuers make two claims arising out of the sale of the business which they formerly carried on to the defenders. This opinion is concerned only with the claim expressed in the first conclusion of the summons, which is for payment of the sum of £20,113.80, with certain interest thereon.

[2] The sale of the business was effected by an Agreement dated 3 October 1997 (No. 6/1 of process). The parties to that Agreement were (1) the pursuers, contracting under their former name, Inverness Precast Concrete Company Limited, as Vendor, (2) the defenders, as Purchaser, (3) J.M.C. Holdings Limited, the pursuers' holding company, as Guarantor, and (4) James Malcolm Campbell, who was described in the Agreement as beneficially interested in 50% of the equity share capital of the Guarantor.

[3] Clause 15 of the Agreement set out various provisions dealing with the employees of the business. The provisions that are material for present purposes were as follows:

Part VIII of the Schedule to the Agreement contains the names of ten employees. Clause 1.2 provides that:

The amount of the Redundancy Compensation Fund was set by Clause 1.1 at £28,000. The pursuers aver that they established a Redundancy Compensation Fund of that amount.

[4] The other provision of the Agreement of which it is necessary to take notice is Clause 23.2 which provides that:

[5] The pursuers aver that on or about 30 June 1999 they were informed by the defenders that of the Specified Employees mentioned in Part VIII of the Schedule only two had been made redundant; that the redundancy payments made to those two employees totalled £7,866.20; and that in terms of Clause 15.5 the balance of the Redundancy Compensation Fund should have been repaid within six months of the date of redundancy of the last of the Specified Employees to be made redundant. The pursuers therefore aver that the sum first sued for should have been repaid by 3 July at the latest.

[6] The defenders respond by averring that the balance of the Redundancy Compensation Fund was expended by way of payments to substitute employees. They aver that Mr Campbell on the pursuers' behalf advised two named representatives of the defenders during numerous meetings prior to the conclusion of the Agreement that he understood and agreed that a different list of employees was likely, and that his primary concern was that his liability be "capped" at the amount of the Redundancy Compensation Fund. They aver further that following completion representatives of the defenders were in regular communication with Mr Campbell, and that he was advised both that other employees were being substituted for those listed in Part VIII of the Schedule and of the identity of the substitute employees. They aver that Mr Campbell indicated that he had no objections. The substitute employees were dismissed and received redundancy payments. In these circumstances, it is averred, Mr Campbell agreed on the pursuers' behalf to the substitutions.

[7] The pursuers in turn respond to the defenders' averments by contending that although Clause 15.4 provided for changes by agreement between the Vendor and the Purchaser to the persons included in the Specified Employees, no such agreement was made between the parties. Such an agreement would have involved variation of Part VIII of the Schedule, and such variation was ineffective unless made in accordance with the requirements of Clause 23.2. The defenders do not aver that the changes to the list of Specified Employees were made by written agreement complying with Clause 23.2. The pursuers on that basis plead that the defences are irrelevant.

[8] Mr Weir for the pursuers argued that it was clear on the face of the pleadings read with the Agreement that the purported agreement to change the identity of Specified Employees on which the defenders sought to found in defence to the pursuers' claim was ineffective because it did not comply with the requirements of Clause 23.2. In terms of Clause 15.3.2 the Specified Employees were those listed in Part VIII of the Schedule. Clause 15.4 provided for the persons included in the Specified Employees being changed by agreement, provided the total number did not exceed ten. That clause thus made provision, in principle, for the list of employees to be changed by agreement, but such a change involved a "variation" of the Agreement, because it involved changing the content of Part VIII of the Schedule, and the Schedule was part of the Agreement (Clause 1.2(a)). Clause 23.2 declared ineffective any variation of the agreement not (a) made in writing, and (b) executed by all four parties to the Agreement. An oral agreement to which the Guarantor was not a party, which was all that the defenders alleged, could not effectively vary the Agreement, and therefore could not change the Specified Employees. The defenders' averments about alteration of the list of Specified Employees were therefore irrelevant, and did not constitute a defence to the pursuers' claim for repayment of the Redundancy Compensation Fund so far as not expended on redundancy payments to employees listed in Part VIII of the Schedule.

[9] In making those submissions, Mr Weir accepted that they involved the proposition that Clause 23.2 imposed not only a requirement that the variation agreement be in writing, but also the further requirement that it be executed by the Guarantor and by Mr Campbell as well as by the pursuers and the defenders. He submitted, however, that that was not surprising, because an alteration to Part VIII of the Schedule could have implications for the Guarantor, since if the pursuers recovered less under Clause 15.5 their ability to implement the warranties which the Guarantor guaranteed might be affected. The need for writing to vary the list of Specified Employees was consistent with the fact that the parties had, in the first place, committed the list to writing in Part VIII of the Schedule.

[10] Mr Smith's submission for the defenders was that the substitution of different employees in the list of Specified Employees in Part VIII of the Schedule to the Agreement was carried out in implement of a power conferred on the pursuers and the defenders by Clause 15.4, and did not constitute a variation of the Agreement that required for its validity to comply with the requirements of Clause 23.2. He accepted that Part VIII of the Schedule was part of the Agreement. He accepted that, if the Agreement had not included Clause 15.4, the pursuers' argument would have been correct. But Clause 15.4 necessarily effected an exception to the requirements of Clause 23.2. If the pursuers' argument were correct, Clause 15.4 was redundant. Its presence in the Agreement was inexplicable. Clause 23.2 contemplated that the Agreement might be varied by written agreement executed by all the parties to it. Alteration to the list in Part VIII of the Schedule by such written agreement among all four parties could therefore be effected without the need for a provision such as was contained in Clause 15.4. But the matter went further than that. On the pursuers' argument, Clause 15.4 was not only redundant, it was also contradictory of and irreconcilable with Clause 23.2. The former contemplated agreement between two parties. The latter contemplated agreement among four parties. Reconciliation of the two provisions was, however, possible if Clause 15.4 was seen as an exception to Clause 23.2, effecting a delegation of the power to change the list of Specified Employees, which would otherwise have required the agreement in writing of all four parties, to the Vendor and the Purchaser. A change to the list of Specified Employees was thus not a "variation" of the Agreement within the meaning of Clause 23.2, but rather a matter for which different specific provision was made in Clause 15.4. All that was required to effect such a change was agreement between the Vendor and the Purchaser. Not only was there no need for the involvement of the Guarantor and Mr Campbell, but also agreement between the Vendor and the Purchaser in any form, not necessarily in writing, was sufficient to be effective. Accordingly, the defenders' averments about oral agreement on the changes made to the list of Specified Employees were relevant to support their case that the Redundancy Compensation Fund had been exhausted by payments to substituted employees.

[11] The point at issue in the debate is a very short one, and I can express my decision briefly. In short I am of opinion that Mr Smith's analysis of the Agreement is correct. It is in my opinion impossible to read Clauses 15.4 and 23.2 together, with the latter supplementing the former, adding to it the requirement that any agreement to change the list of Specified Employees be expressed in writing executed by the Vendor, the Purchaser, the Guarantor and Mr Campbell. I agree that the two clauses are irreconcilable, if they are both to be regarded as bearing on an agreement to change the Specified Employees, because one contemplates that the change can be affected by the agreement of two parties, while the other requires the agreement of four. I agree too, that if the pursuers' argument is right, Clause 15.4 is redundant and serves no practical purpose. It seems to me that the obvious way in which the two provisions can be reconciled and content can be given to Clause 15.4 is to recognise that it makes specific provision for the machinery for changing the list of Specified Employees. Despite the fact that that list is set out in the Schedule, which is part of the Agreement, changing the list does not amount to "variation" of the Agreement, because it is simply the carrying through of an expressly contemplated procedure for which specific provision is made in the Agreement. Clause 23.2 is therefore of no application to an agreement to change the list of Specified Employees. Such a change is effective if made by agreement between the Vendor and the Purchaser in accordance with Clause 15.4. Clause 15.4 contains no requirement that such agreement be in writing. The defenders' averments about the oral agreement between their representatives on the one hand and Mr Campbell as the representative of the pursuers on the other hand are therefore in my view relevant to set up the defence that the Redundancy Compensation Fund was wholly exhausted by payments to employees on the amended list.

[12] Mr Smith's motion was that I should allow a proof before answer. In light of the view I have taken on the issue which was debated, the remaining issue in the case, so far as the first conclusion is concerned, is whether the defenders' averments about oral agreement on changes to the list of Specified Employees are well founded in fact. Before proceeding to the allowance of proof, however, it seems to me to be appropriate to put the case out By Order, for further discussion of future procedure. I shall therefore adopt that course. I shall in the meantime reserve the question of the expenses of the debate.