Scottish Court of Session Decisions

(a) FACTS

[1] The pursuers each sue the defenders for the loss of the value of their respective shareholdings in Gleneagle Spring Water Company Limited ("Gleneagles"). This

company was incorporated on 9 September 1985. The shares were initially acquired by the second pursuers, who provided some £1,000,400 in loan finance to Gleneagles. Gleneagles commenced setting up a business of extracting, bottling and selling mineral water. They acquired certain water exploitation rights, wayleaves and planning permissions. They established a pilot bottling plant.

[2] In November 1991 the company Vittel (part of the Nestle group) entered into negotiations for the purchase of Gleneagles for £3,500,000, which the pursuers say was a reasonable estimate of its value at that time. However, this deal was not progressed as Nestle decided to bid for Perrier instead. Gleneagles decided to advance their development plans. This necessitated securing access to an effective distribution network. The general idea was to find someone with an existing network to become a trade partner with and to invest in Gleneagles. The two major distributors, apart from Vittel, were controlled by either Cadbury Schweppes plc or Britvic Soft Drinks Limited. Britvic were owned by a consortium of drinks manufacturers including the defenders.

[3] In March 1992 the defenders expressed an interest in becoming trade partners of Gleneagles and appointed Mr David Beatty to deal with the matter. He was a director of both the defenders and of Britannia Soft Drinks Limited, Britvic's holding company. He was also deputy chairman of J. Lyons & Co. Limited, a subsidiary of the defenders. By letter dated 25 March 1992, Mr Beatty proposed an arrangement which included :

The pursuers' agent responded that, as the second pursuer owned the shares in Gleneagles, the plan ought to be that once the defenders had invested in Gleneagles, the pursuers would each retain 25% of the shareholding.

[5] What then happened was that the pursuers and the defenders reached "The Shareholders' Agreement" in about November 1992. Curiously, the actual terms of this Agreement were not averred or even incorporated into the record but it seems that deal was that the subsidiary, J. Lyons and Co. would, as they did, invest £6,000,000 in Gleneagles, paying £1 each for 6,000,000 shares. The pursuers again say that the purchase price represented a reasonable estimate of the shares' value at the time. These shares were allotted to the subsidiary, which thereby gained a majority shareholding. Put another way, Gleneagles became, effectively, a subsidiary of the defenders.

[6] Thereafter, the Britvic distribution network was not made available to Gleneagles, partly because the defenders decided to market a product of another subsidiary (acquired after the Shareholders Agreement), namely the Ballygowan Spring Water Company Limited, instead of Gleneagles' water. Ballygowan were given access to the Britvic network. Gleneagles ability to trade was seriously damaged by the lack of such a network and its profitability was impaired. In February 1998 it was placed in administration. In effect the lack of a network resulted in the "destruction of the value" of the pursuers' shareholdings in Gleneagles since, as distinct from Ballygowan, it could not trade profitably.

(b) THE LEGAL BASIS OF THE CLAIM

[7] The pleas-in-law as initially framed gave little clue as to the legal basis for the pursuers' respective claims. All that was said was that they were each entitled to reparation because their loss and damage had arisen as a result of "fault for which the defenders are responsible". However, in the course of the debate, counsel for the pursuers sought to amend these vaguest of pleas by re-framing them so as to read that the loss was caused by "the fault and negligence of David Beatty in inducing the pursuers to enter into a contract." The amendment, which also tinkered with the articles of condescendence, was not opposed by the defenders. The case was then one of negligent misrepresentation inducing contract. In support of this, the pursuers averred, again after a proposed amendment, that:

2. Submissions

(a) DEFENDERS

[8] The motion by the solicitor for the defenders was that her first and fourth (preliminary) pleas-in-law should be sustained and the action dismissed. She submitted first that there was no relevant case in law made out in the pleadings (the first plea) and secondly that the averments of loss were irrelevant (the fourth plea).

[9] The main thrust of the first submission was that the question of whether a relevant case had been made out depended upon whether there was a "special relationship" between a new investor (the defenders), who was to become a majority shareholder, and two existing shareholders (the pursuers) in relation to statements made by the new investor at the time of the investment. The pursuers were not suing on the basis of any "breach of warranty" but in negligence for pure economic loss. They therefore required to plead a "special relationship" of the type described in Hedley Byrne & Co v Heller & Partners [1964] AC 465, Lord Reid at 482-6, Lord Morris of Borth-y-Gest at 502-3, Lord Devlin at 528-9; Mutual Life and Citizen Assurance Co v Evatt [1971] AC 793, the majority (Lords Hodson, Guest and Diplock) at 803-804, the minority (Lords Reid and Morris at 810-12); Esso Petroleum Co v Mardon [1976] 1 QB 801, Denning MR at 818; Caparo Industries v Dickman [1990] 2 AC 605, Lord Bridge of Harwich at 621-2, Lord Oliver of Aylmerton at 635-7, 641-2, Lord Jauncey of Tullichettle at 654-5; White v Jones [1995] 2 AC 207; see also generally Walker : Delict (2^nd ed.) pp. 896-901; McBryde : Contract para 9-75). In terms of the cases, in determining whether a relevant case had been made out on this basis, six areas required exploration: (1) the nature of the statements made; (2) any special skills relative to the content of the statements professed by the defenders; (3) the nature of the reliance placed on the statements; (4) the particular transaction to which the statements related; (5) the action taken based upon the reliance; and (6) the loss flowing from the action taken relative to that transaction.

[10] So far as the nature of the statements made was concerned, the pursuers' averments were not clear. At one point in their record, the pursuers referred to the representation as being that the defenders' distribution network would be "made available" to the pursuers (13C, 22 B) yet at another it was that the pursuers would be allowed "access" to the network (17D, 22E, 23C). These were different things, the first involving simply an introduction to the network's personnel (i.e. the simple provision of contact details) and the second being a much greater and more positive step. In both cases, the representation related to the future activities of a third party, i.e. Britvic. The nature of the statement made was not, therefore, one upon which the pursuers were entitled to place reliance. It was accepted that, if what was averred as being represented did involve a positive act, then that might found a relevant claim. Secondly, there was no special skill averred in relation to Mr Beatty. He was averred to be in charge of the acquisition of businesses for the defenders (9E) but not that he had any special role in relation to Britvic. Hedley Byrne and its successors indicated that if a duty of care case is to be made out, then the advice tendered must be capable of being fitted somewhere on the spectrum between professional advice (actionable) and casual advice (not actionable). The pleadings here did not show where on the spectrum this advice fell. Thirdly, the reliance placed on the statements is averred as involving the pursuers ceasing to advance negotiations with Schweppes or Vittel yet the pursuers do not say any offer would have come from either of these companies nor do they say what they would have done but for the representation. Fourthly, the particular transaction to which the statements related is averred as being purely the choice of suitable investor. Fifthly, the action taken was purely that choice. The pursuers did not make any further investment based on the representation. Their position was not changed as a result of the representation. Finally, the pursuers require to show that they suffered loss caused by the representation. Here it is said that the loss is the total value of their shares. In relation to the specification of that loss, the averments were insufficient to link the representations made with the loss of the value of the shareholdings. There was no relevant case of any loss flowing from the pursuers entering into the contract with the defenders. In particular, no loss flowed from the pursuers becoming minority shareholders. That did not cause the destruction of the share value. In all these circumstances, the action was irrelevant and ought to be dismissed.

(b) PURSUERS

[11] Having proposed the amendments to his pleas-in-law and articles of condescendence which placed his case firmly on the basis of negligent misrepresentation inducing contract, counsel submitted that there was no need to enter the world of the "special relationship". This was not a case of advice from a third party in the Hedley Bryne, Caparo Industries v Dickman mould. There was nothing new in a case of misrepresentation by a subsequent party to a contract inducing the other party to contract and thereby causing that other party loss (Chitty : Contract (28^th ed.) paras. 6.004, 6.085; McGregor : Damages (16th ed. and first supplement) para. 2006). The case was a simple one whereby the defenders' employee had negligently represented that Gleneagles would get access to the Britvic network and upon that basis the pursuers had entered into the Shareholder Agreement and thereby suffered the loss of their shareholdings. This type of case was identical to one for fraudulent misrepresentation inducing contract but where, as was now permissible, the misrepresentation was purely negligent (Law Reform (Miscellaneous Provisions) (Scotland) Act 1985 (c. 73) s. 10). There ought therefore to be a proof before answer since it could not be said that, if the pursuers prove all of their averments, they are still bound to fail (Jamieson v Jamieson 1952 SC (HL) 44; Reitze v Strathclyde Regional Council 2000 SLT 593 at 596). There was in any event a "special relationship" in the Hedley Byrne sense and a proof before answer was also appropriate here.

[12] Tackling each of the six areas raised by the defenders, first there was no material discrepancy between the use of words such as "make available" on the one hand and "provide access" on the other. The averments made it clear that what was represented was that the defenders would take positive steps to secure the use of the network by Gleneagles. The representation made was one about something which the defenders' employee said he was capable of bringing about. This was a representation of fact and not future intention (Chitty : Contract 6.004, 6.010). The defenders did not object to the relevancy of the representation, if it were one to do a positive act, on the ground that it was merely a statement of intention. Secondly, there was no need for the defenders' employee to profess some special skill in the Hedley Byrne sense as this was not an advice case. In any event, the defenders' employee was in a special position such that he was capable of bringing about the availability of or access to the network because he was, amongst other things, a director of Britvic's holding company. This meant that the pursuers could reasonably rely on what he said about what he could secure. Thirdly, so far as the nature of the pursuers' reliance was concerned, the pursuers did not require to aver what they would have done but for that reliance. It was sufficient that they averred that they suffered loss because of their reliance. If the defenders wished to demonstrate that the loss would have occurred in any event then that was something for them to aver and prove. Fourthly, the reliance induced the choice of investor, i.e. the defenders. Fifthly, the action taken was to enter into the Shareholders' Agreement.

[13] Finally, so far as specification of loss is concerned, the losses for which reparation is due will be those flowing naturally and directly from the pursuers' decision to enter into the Agreement (Banque Bruxelles v Eagle Star (sub nom. South Australia Asset Management Corporation v York Montague) [1997] AC 191, Lord Hoffman at 215-6; McGregor : Damages paras. 2006, 2009 and first supplement; Davis & Co. v Afa-Minerva [1974] 2 LlR 27; Bridgegrove v Smith [1997] 2 EGLR 40 Mummery LJ at 42 quoting from Downs v Chappell [1996] 3 All ER 344, Hobhouse LJ at 358-361). Just what these losses will be has to be looked at not by taking a snapshot of events at one point but by viewing events over a period of time. Here, the entering into the Agreement caused the pursuers to lose their majority, or perhaps even exclusive, shareholding in Gleneagles. They permitted the defenders, through a subsidiary, to purchase a majority holding. This was the natural and direct consequence of the misrepresentation. They put themselves into a situation whereby they could not control the activities of the company and, on the contrary, allowed the defenders to take control in the expectation that Gleneagles would trade through the Britvic network and become successful. That transfer of control under, essentially, false pretences had ruined the value of their shares. Although not specifically averred, it is self evident that once the company was under the control of the defenders there was no prospect of any alternative distribution network, such as that of Schweppes, being made available. A broad approach ought to be taken to the question of loss and a proof before answer was appropriate.

(A) THE REPRESENTATION

[14] I do not consider that there is a material difference in the pursuers' use of different words in different parts of their pleadings to describe the representation made. Although it would have been more helpful if the pursuers had used identical language when describing the representation made, the meaning of the language, which they do use, is tolerably clear. I do not perceive any difference in substance in the passages referred to between "making available" and giving "access" to the Britvic network. Both involve Mr Beatty representing that he was, as a matter of present fact, in a position to secure for the pursuers the services of the network. The allegation is that this was untrue, i.e. that it was a misrepresentation of fact. The pursuers aver that it was negligent because Mr Beatty must have been aware of his own powers and capabilities. They aver that they were induced by the misrepresentation to enter into the Shareholder Agreement. The question then is whether any loss thereby sustained is recoverable in damages in an action of reparation based, as the case is, on fault.

(B) GENERAL DUTY BETWEEN CONTRACTING PARTIES

[15] The pursuers have chosen to follow a difficult route in the attempt to recover the lost value of their shareholdings. They do not base their case on any breach of a collateral undertaking by Mr Beatty on behalf of the defenders to secure the Britvic network for Gleneagles but upon his representations being negligent and inducing them to contract. However difficult this attempt may be, I do not regard it, on the pursuers' pleadings, as impossible.

[16] As ultimately pled, this case is one in which it is alleged that one party to an eventual contract induced the other to contract by reason of a misrepresentation which was allegedly negligently made. In this regard, the defenders, quite reasonably, did not wish to argue that they were not the other contracting party albeit that it was their subsidiary that eventually contracted. I was referred to a number of English cases and textbooks which illustrated the way in which misrepresentation developed under that legal system. I noted that it was said to be:

[17] I doubt whether in the field of damages for misrepresentation inducing contract Scots law recognised a distinction between a remedy "in contract" and one "in tort". Strangely, and perhaps unfortunately, I was not referred to any of the Scots cases on the subject. However, I suspect that so far as damages are concerned, as distinct from remedies such as reduction and restitution, Scots law would always regard a misrepresentation preceding a contract from the viewpoint of reparation for culpa. Of course, the Scottish courts at the end of the nineteenth century determined that there was no culpa sounding in damages for a misrepresentation inducing contract short of one which was fraudulently made. This view prevailed even after the developments of the law in England, Scotland and elsewhere in third party advice cases such as Hedley Byrne. Furthermore, in England, soon after Hedley Byrne the Misrepresentation Act 1967 (c 7) provided :

In general terms, this made it clear in England that a party who induced another to contract by means of a negligent misrepresentation was liable in damages. There was no need to enter into enquiries about special relationships or other materials pointing to the existence of a duty of care in the Hedley Byrne sense. This did not, however, apply in Scotland and the need to prove fraud in cases involving both parties to the eventual contract remained until the Law Reform (Miscellaneous Provisions)(Scotland) Act 1985 (c. 73). This provided :

I have always understood that this provision meant that if a misrepresentation were made by one party inducing the other party to contract then, if the statement were made negligently, the party making the statement would be liable in damages just as if the statement had been made fraudulently. The provision was designed to bring Scots law into line with English law to the extent that in each jurisdiction the party induced would have a remedy for a negligent misrepresentation just as in the case of one made fraudulently. If that is so, and I am of the view that it is, there is no need to enter into the field of Hedley Byrne type "special relationships" and whether a duty of care is owed, albeit that the pursuers in this case have chosen to aver specifically the existence of such a relationship. The statute provides the remedy just as in the case of fraud and the practical effect of that is that one contracting party has a duty to the other not to make negligent misrepresentations which induce the other to contract. If that duty is breached then damages may follow.

[18] The submission for the defenders seemed ultimately to mean that in Scotland the law is in the same position as the English common law was in during the period after Hedley Byrne but before the 1967 Act; that is to say in the era of Esso Petroleum Co v Mardon [1976] 1 QB 801, the facts of which predated that Act. I cannot accede to that submission. On the contrary, I consider that in the context of this case, where the two parties eventually contracted, the defenders will be liable to the pursuers if an inducing misrepresentation by the defenders' employee is made out and is proved to have been negligently made.

(C) THE DUTY OF CARE

[19] Even if I were wrong in the above analysis and the pursuers required to aver a Hedley Byrne type of special relationship, I would have held that such a relationship did exist in this case. In Hedley Byrne, Lord Reid spoke of liability occurring where a special relationship existed in which :

Lord Morris agreed broadly with this but thought that the party proffering the advice ought to have a "special skill" relative to that advice (p. 502-503). Both perhaps refined their thoughts in Mutual Life and Citizens' Assurance Co. v Evatt so as to hold that a special relationship could normally only exist where the profferer of the information or advice was a man of business acting in a business context ( [1971] AC p. 811). I am not convinced that the majority in that case were saying anything radically different from the minority although they reached a different conclusion on the facts.

[20] In Esso Petroleum Co v Mardon, Lord Denning MR accurately summarised the position thus :

[21] In Caparo Industries v Dickman, Lord Bridge stressed the need for the defendant to be aware, when making the relevant statement, of the particular transaction which the plaintiff had in mind and that he was likely to rely on the advice given in relation to that transaction ([1990] 2 AC 605).

[22] The present case contains all the necessary features for liability set out in these four cases. First, the parties were acting in the course of business. In this regard, it is of some significance that they were not simply two parties to an arms-length single commercial transaction. On the contrary, they were negotiating a deal whereby they would join together as shareholders to secure, with the assistance of the Britvic network, the long term success of Gleneagles and hence their shareholdings. Mr Beatty was a director of the holding company of Britvic and of the defenders. He had special knowledge and information, stemming from these positions, about whether the Britvic network could and would be made available. Given the importance of the availability of that network, the pursuers maintain that they were reasonably entitled to rely on his statements on that topic. He would, it is said, have known this and that the reliance would be in relation to a particular transaction, namely the one that the two parties were negotiating.

[23] In all these circumstances, I have little difficulty in holding that the requisite special relationship has been relevantly and sufficiently specifically averred. Since it is averred that the misrepresentation induced the pursuers to contract (although no doubt it was not the sole cause), the next question is whether a relevant and specific case of loss has been averred.

(D) LOSSES

[24] The damages available in respect of a negligent misrepresentation inducing a contract are exactly the same as those available under Scots law in respect of a fraudulent misrepresentation, that is to say such amount as places the innocent party in the position which he would have been in had the misrepresentation not been made. In this case, this means that the damages should be designed to put each pursuer back into the position he would have been in if he had not entered into the contract. It is not, of course, to put the pursuers into the position they would have been if the representation had been true. It must be said that there is a more than faint hint of this latter approach on record since the pursuers are averring that the destruction of their shareholding was caused by the failure of the defenders to abide by their representation. But such an averment cannot assist the pursuers since the case is not founded upon any collateral promise, undertaking or contract.

[25] Looking at the pursuers averments as a whole, the position in which the pursuers found themselves in, immediately before entering the contract, was one in which they had a fledgling company with a valuation of at least three and a half million pounds. They owned all the shares. Although counsel for the pursuers attempted to resist the suggestion, this valuation presumably took into account the fact that the company did not at that stage have, but might in the future gain, access to a distribution network, whether that of Cadbury Schweppes, Britvic or Vittel. The effect of entering into the contract was that the pursuers lost majority control. However, that was not a problem so far as they were concerned because their minority shareholding was probably worth at least the pre-contract amount because the company had actually secured the Britvic network and was thereby almost guaranteed success. However, in fact what they entered into was a contract which: (i) reduced their shareholding in the company; (ii) ceded control over the company to the defenders, through their subsidiary; and (iii) effectively ended their prospects of securing a network deal with anyone other than Britvic. In due course, as a result of the defenders' conduct that route too was cut off.

[26] I would find it difficult to conclude on the current averments that the entering into the contract caused, in the sense of being a material contributor to, the complete destruction of the value of the pursuers' shareholdings. Put at its highest, that is the pursuers' position since they are seeking the full value of their pre-contract shareholdings. However, I can well envisage that it must have caused substantial damage to the share value. It is only damage to capital value that is claimed. Such damage must be capable of quantification and I am of the view that the pursuers' averments, bald as they are, are sufficient to permit that exercise. There may be some difficult and fine points on causation to resolve but as a matter of relevancy it is sufficient for the pursuers to aver that they did have an asset of a particular value which was destroyed by the contract. They are not bound to aver all the various possible courses of action which they might have taken but for the contract. The baldness of the averments may, if they remain in that state, mean that the pursuers will have substantial difficulties at a proof in leading evidence of the measure of their loss. However, in a case such as this, the assessment of that measure is very much an exercise that can only be contemplated once all the relevant facts are known.

[27] In all the circumstances, I will allow a proof before answer.