Scottish Court of Session Decisions

Hoult & Anor v. Turpie [2003] ScotCS 124 (29 April 2003)

OUTER HOUSE, COURT OF SESSION
CA59/02	OPINION OF LORD DRUMMOND YOUNG in the cause (FIRST) DR CRISPIN HOULT and (SECOND) ALAN DOUGLAS Pursuers; against WILLIAM ALAN TURPIE Defender:   ________________

 

 

 

Act: M. O'Carroll; Morisons

Alt: G. MacColl; Morton Fraser

29 April 2003

1. On 17 November 1999 the pursuers and the defender entered into an agreement relating to a company known as Informed Management Environment UK Limited, to which I will refer as "IME". The agreement is headed "Draft Shareholders Agreement", but it was executed by all three parties, and they were agreed that the document in question represented a binding legal contract among them. In the agreement, the pursuers were referred to as "CH" and "AD", and the defender was referred to as "AT". The agreement began by narrating that all of the parties were shareholders in IME, and that certain arrangements had been made with the Inland Revenue relating to a purchase of shares in IME from the defender. It continued

"IME will purchase 900 of the 926 shares currently held by AT for a consideration of £142,000.

AT will resign from his post as director. AT will be appointed as non-executive chairman at a salary of £10,000 per annum (plus the benefit of a company car and membership of the company's medical scheme). AT will serve as chairman for a defined period to allow a smooth handover of the goodwill of IME to CH and AD to maintain client contact and continuity.

The parties have agreed that the share purchase by IME should be made on 23 September 1999 when the director of the company is satisfied that the company has sufficient reserves to make the permissible capital payments under the Companies Act and purchase the 900 shares".

Thus, with effect from 23 September 1999, the defender sold all but 26 of his shares to the company, and resigned as a director. Prior to the sale the pursuers held respectively 44 and 30 shares in the company; thus the result of the sale was to leave them in control of the company, albeit with less than 75 per cent of its shares, which prevented them from passing a special resolution. Following the sale, the defender continued as non-executive chairman of the company, at a salary of £10,000 per annum. After specifying how the consideration for the shares was to be paid, the agreement continued

"Alan Turpie (Package and Commitment)

In return for a new salary of £10,000.00 pa (plus authorised outlays) Alan T will continue to work, as Chairman, for IME for 4 months per year until 1 September 2002. The company recognises that AT will have other commitments and all parties agree that AT will serve an average of 4 months per annum on IME business and AT will use all reasonable endeavours to make himself available in accordance with IME requirements. After 1 September 2002, work carried out for IME by AT will be paid at a consultancy rate of £500.00 per day at current prices plus RPI increase with business expenses being charged separately to IME".

2. The agreement made provision for transfer of IME's shares as follows:

"Shares

Rights to sell will be as per company law and the company's Articles. In addition, the transfer rights for all shareholders up to 31 August 2002 are as follows:

• any shareholder who ceases to be an employee of IME must immediately offer his shares to the remaining shareholders pro-rata to their existing holding
• the transfer value of each ordinary share is set at £250 per share
• to assist in planning the spread of assets amongst family members, each shareholder is permitted to make transfers of shares to members of his immediate family. The transferee is subject to the same pre-emption and transfer value rights set out above and each transferee will be deemed to give a transfer notice if the transferor ceases to be an employee of IME

After 31 August 2002, any shareholder wishing to sell his shares must still offer them to existing shareholders pro-rata. The price to be paid for the shares will be agreed between the vendor and the purchasers. If no agreement is reached on the transfer value, the shares shall be valued by a professional share valuer using normal valuation methods to value the company as a whole. The price per share will then be calculated pro-rata to the value of the whole company with no discount for minority".

The parties were agreed that the foregoing clause created an obligation on any person who ceased to be an employee of the company before or on 31 August 2002 to offer his shares to the remaining shareholders at a price of £250 per share.

3. On 5 October 2000 the pursuers, acting on behalf of IME, wrote to the defender to state that the position of chairman envisaged in the parties' agreement had not been fulfilled and was no longer required by the company. Consequently the employment of the defender as chairman was to be terminated with effect from 6 October 2000. The parties are in dispute as to whether such termination of the defender's employment was justified; that is an issue that has been raised in the present action, but it is accepted by the parties that it can only be decided after proof. Subsequently, on 29 May 2001, agents acting on behalf of both IME and the pursuers wrote to the defender to intimate that the pursuers wished to invoke the right, set out in paragraph [2] above, to acquire the defender's shares on his ceasing to be an employee of IME. The letter stated:

"[A]s Mr Turpie's employment has ceased with the Company and [he] is required to offer his shares to the remaining shareholders at £250 per share, I confirm, on behalf of Dr Hoult and Mr Douglas, that they would wish to acquire your client's 26 shares for the total sum of £6,500".

On 11 June 2001 the defender's agent replied that the defender did not want to sell his shares, and was justified in refusing to sell them because his contract of employment had been terminated in breach of contract; because of their breach of contract the pursuers could not invoke the provisions of the contract in their favour.

4. The pursuers subsequently raised the present action, in which they conclude for declarator that the defender is bound to offer to sell to the pursuers his remaining 26 shares in IME, at a price of £250 per share, and for decree ordaining him to implement such obligation. Their averments narrate the facts set out above. The defender, in response, admits those facts, and alleges that the termination of his employment was in breach of contract. He then avers:

"Explained and averred that the pursuers having breached the obligation under the Agreement to employ the defender, the defender is entitled to refuse to perform the reciprocal obligation to offer his shares for sale".

The pursuers have tabled a plea to the relevancy of the defences, and when the case called at debate on 25 February 2003 their counsel sought to have that plea upheld and argued that in consequence the pursuers were entitled to decree de plano. His argument, in summary, was as follows. The defence put forward was based on the proposition that the defender's obligation to offer to sell the shares to the pursuers was reciprocal to IME's obligation to employ the defender as chairman; it was thus based on the principle of mutuality of contractual obligations. The two obligations relied on were not reciprocal, however, and accordingly the principle of mutuality of contractual obligations did not apply. Consequently the defence was irrelevant. At the same time counsel for the pursuer advanced an argument that the defender had waived any right to insist on the principle of mutuality of contractual obligations. I deal with each of these matters in turn.

Mutuality of contractual obligations

5. In developing his argument on the principle of mutuality of contractual obligations, counsel for the pursuers submitted that the principle only operated in respect of obligations that corresponded to each other, and hence could be described as the counterparts of each other. Consequently, if a contract imposed distinct obligations on each party which could not be described as the counterparts of each other, the principle did not operate. In that event one party could demand performance without tendering performance himself. Reference was made to Johnston v Robertson, 1861, 23 D 646, at 652 per Lord Benholme, Gloag on Contract at 594-595, Turnbull v McLean & Co, 1874, 1 R 730, at 738 per LJC Moncreiff, Redpath Dorman Long Ltd v Cummins Engine Company Ltd, 1981 SC 370, at 374-375 per LJC Wheatley; and Bank of East Asia Ltd v Scottish Enterprise, 1997 SLT 1213, at 1216-1217 per Lord Jauncey. In the present case, the contract involved two distinct sets of contractual obligations. One involved the employment of the defender by IME and payment by IME for his services; the other involved the defender's offering his shares for sale, and the pursuers' paying the price of the shares. In Gloag, at page 595, it was stated that there is a general presumption that, where parties have not recorded their agreements in separate documents, the intention is that the terms of those agreements should be dependent on each other. Counsel submitted that at the present day contracts frequently dealt with very diverse matters, and that consequently the presumption was either weaker or did not exist at all. Apart from the passage referred to in Gloag, no other reference had been found to any presumption that all of the obligations contained in a single contract were the counterparts of one another. Support for the pursuers' approach was found in Bank of East Asia Ltd v Scottish Enterprise. Counsel founded especially on the passage in Lord Jauncey's speech at 1217H-J, where it is suggested that in a contract to be performed in stages it is the parties' respective obligations in a single stage that are the counterparts of each other. While the present contract did not involve work to be performed in stages, it contained two separate and distinct parts, which should be treated in the same way. Counsel further referred to Macari v Celtic Football & Athletic Company Ltd, 1999 SC 628, and to Dick v Skene, 1946 SN 64. The latter case, he suggested, was closely analogous to the present, in that a contract for the sale of a business and a contract by the purchaser to employ the seller in the business were held to be two separate contract rather than interdependent parts of one contract.
6. Counsel for the pursuers further submitted that the authorities established that, if one party were to withhold performance of one of his obligations because the other party was in breach of one of his contractual obligations, those two obligations must be contemporaneous, in the sense that the latter obligation must have existed at the time when the former obligation became due for performance. Reliance was placed on Redpath Dorman Long Ltd v Cummins Engine Company Ltd, supra, and the dissenting opinion of Lord Shand in Pegler v Northern Agricultural Implement Company, 1877, 4 R 435, at 442. In the present case, counsel submitted, the obligation of the defender to offer his shares for sale could not be contemporaneous with the obligation to employ him, because it only arose at the point when his employment terminated. That was an additional reason for holding that any breach of the obligation to employ the defender could not justify the defender's refusal to implement his obligation to offer his shares for sale.
7. In reply, counsel for the defender submitted that the provisions of the parties' contract relating to the sale of shares in IME must be looked at as a whole. Until 31 August 2002, which was the day before the defender's employment was expected to terminate, any shareholder who ceased to be an employee was obliged to sell his shares to the remaining shareholders at a fixed price of £250 per share. After 31 August 2002 any shareholder who wished to sell his shares was still obliged to offer them to existing shareholders, but the price was to be market value, with no minority discount. The defender's argument was that he was not obliged to comply with requirement that he sell his shares at a fixed price, because he alleged that there had been a breach of his contract of employment. The obligation in the parties' contract regarding the sale of shares was to be regarded as the counterpart of the obligation to employ the defender. The underlying purpose of the contract was the sale of the company and the transfer of ownership and control from the defender to the pursuers. As part of the arrangements for such transfer, a handover period was specified, which included the continuing employment of the defender. The general approach adopted by the pursuers took a highly restrictive view of what were reciprocal or counterpart obligations; to some extent it was based on the notion that each individual obligation normally had a single counterpart obligation. On the authorities, such an approach was not justified. The presumption was that contractual obligations were interdependent; apart from the passage in Gloag on Contract at 594-596, authority to that effect was found in Macari v Celtic Football & Athletic Company Ltd, supra, at 655 per Lord Marnoch. Reference was also made to Bank of East Asia Ltd v Scottish Enterprise, supra.
8. The submissions made by counsel on either side raise an important issue relating to the principle of mutuality of contractual obligations: the nature and significance of the requirement that, for the principle to operate, the obligations in question must be the counterparts of each other. The existence of such a requirement is clear; indeed, it is inherent in the very notion of mutuality. The dispute between the parties centres rather on the extent to which the individual obligations on one side of a contract are to be regarded as the counterparts of the individual obligations on the other.
9. In considering that matter, it is I think important to have regard to the practical function that the principle of mutuality performs in regulating the rights and obligations of the parties to a contract. Its main practical significance relates to the defence of retention, or the right of one party to withhold performance of its obligations because of the other party's material breach of contract. This defence, which is usually referred to as the right of retention, functions as a form of security for the performance of the contract. Its practical importance is very clear; often it is by far the most useful remedy for ensuring that contractual obligations are properly performed, and that the victim of a breach of contract is protected against further loss. It is of particular importance in systems such as Scots law, where the concept of the equitable interest is unknown and quasi-proprietary rights cannot arise merely by virtue of a contract. For these reasons, I am of opinion that the principle of mutuality should not be interpreted in a way that substantially curtails the availability of the defence of retention. That applies in particular to the requirement that the obligations should be counterparts of each other; that requirement should not be used in an artificial manner which breaks up the essential unity of a contract.
10. In Gloag on Contract, at 594, it is stated that "it is clear that the presumption is that the obligations undertaken by one party are the counterpart and consideration for each other". In other words, there is a presumption that the whole of the obligations on one side of a contract are the counterparts of the whole of the obligations on the other. Counsel for the pursuers argued that that was no longer the law, or that at least any such presumption was weaker today than in former times. In so submitting, he relied on the greater complexity of modern contracts, which frequently contain a much more diverse range of obligations than previously, and on the approach followed in Bank of East Asia v Scottish Enterprise, supra. In my opinion the law remains as stated by Gloag, for the following reasons. First, there is a sound, and indeed obvious, reason for such an approach. This is stated by Gloag as follows (at 595):

"It is clear that two contracts, having no connection with each other except that they are between the same parties and entered into at the same time, may be constituted or recorded in one document. In such a case there is no ground for holding that the right to exact performance of one contract is in any way or in any circumstances conditional on performance of the other. But there is a general presumption that the reason why the parties have not recorded their agreements in separate documents is that they intended them to be dependent on each other".

That statement seems to represent common sense, and emphasises the wide scope that the principle of mutuality has generally been given in Scots law. Secondly, the argument that contracts today are more complex and contain more diverse obligations than those found previously seems to me to be of little significance. No doubt contracts today are often a good deal longer, but usually that merely reflects the fact that obligations that were previously implied are now spelled out, frequently at great length. Today, as in the past, in the great majority of contracts the primary terms can still be analysed into a limited number of simple, nominate obligations. In these circumstances I can see no compelling reason for departing from the presumption of interdependence. Thirdly, the presumption for interdependence of the whole of the obligations contained in a single contract appears very clearly from Turnbull v McLean, supra, which has long been a regarded as one of the leading authorities in this area. The main opinion in that case was delivered by LJC Moncreiff, and in the course of it he made the well-known statement of principle (at 1 R 738):

"I understand the law of Scotland, in regard to mutual contracts, to be quite clear: 1st, that the stipulations on either side are the counterparts and the consideration given for each other; 2nd, that a failure to perform any material or substantial part of the contract on the part of one will prevent him from suing the other for performance; and, 3rd, that where one party has refused or failed to perform his part of the contract in any material respect the other is entitled either to insist for implement, claiming damages for the breach, or to rescind the contract altogether: -- except so far as it has been performed".

In Bank of East Asia Ltd v Scottish Enterprise, supra, Lord Jauncey commented on this passage as follows (at 1997 SLT H-J):

"I do not, however, consider that the Lord Justice Clerk intended [in the first principle] to state that each and every obligation by one party to a mutual contract was necessarily and invariably the counterpart of each and every obligation by the other. It must be a matter of circumstances".

That qualification is clearly correct, because there is ample authority that a contract may be framed in such a way that obligations are not mutually interdependent: see Gloag on Contract at 594-595. Nevertheless, it seems implicit in LJC Moncreiff's formulation of the first principle that the whole of the obligations on one side to a contract are normally regarded as the counterparts of the whole of the obligations on the other side. This point becomes very clear when the two concurring opinions are considered. Lord Benholme stated (at 1 R 739):

"I concur in the clear exposition of principles given by your Lordship. It is very important that we should express our determination to abide by the well-established rule of Scotch law that in mutual contracts there is no ground for separating the parts of the contract into independent obligements, so that one party can refuse to perform his part of the contract, and yet insist upon the other performing his part. The unity of the contract must be respected".

Lord Neaves stated (at 1 R 739):

"I am of the same opinion. It is a general principle that all the material stipulations in a contract forming an unum quid are mutual causes. To say that, where a contract is to be implemented by instalments, the furnishings for one month are totally independent of the next, is an egregious fallacy, and contrary to the dealings of ordinary life. In a contract of labour, in which monthly payments are stipulated, could it be said that if the servant has not received payment for the last month, that has nothing to do with his obligation to work during the next month? Indeed, if one month's pay can be refused every successive month's pay can be refused. In most of these cases payment for each month is the means of enabling the party to fulfil his contract for the next month".

The short opinion of Lord Benholme is of particular interest, because his opinion in the earlier case of Johnston v Robertson, supra, was the main authority founded on in Redpath Dorman Long Ltd v Cummins Engine Company Ltd, supra (see LJC Wheatley at 1981 SC 375), and Bank of East Asia v Scottish Enterprise, supra (see Lord Jauncey at 1215L-1216D and 1217F). When the opinions in Turnbull v McLean are considered together, it is very obvious in my opinion that they provide strong support for the view that the whole of the obligations on one side of a contract are presumed to be the counterparts of the whole of the obligations on the other side. The same point is made by Lord Marnoch in Macari v Celtic Football and Athletic Company Ltd, supra, where he states (at 1999 SC 655):

"I do not, myself, find anything in [Bank of East Asia Ltd v Scottish Enterprise] which bears on the more normal situation, such as the present, where all the parties' obligations and counter-obligations are, as it were, exigible contemporaneously. In that situation the clear presumption, in my opinion, is that all fall to be construed as inter-dependent and conditional upon each other -- Gloag on Contract (2nd edn) at 592-595. This is, of course, only a presumption and, as the author points out towards the end of the passage referred to, it can be overcome by parties making clear their intention that certain obligations and counter-obligations can be looked at independently".

The other members of the court did not comment on this matter.

11. Counsel for the pursuers sought to draw support for his argument from an analogy with contracts to be performed in stages. He drew attention to a dictum in Bank of East Asia Ltd v Scottish Enterprise, supra, at 1997 SLT 1217I-J, where, after referring to Turnbull v McLean and making the comments on that case quoted in the last paragraph, Lord Jauncey states:

"Thus in a contract to be performed by both sides in stages, the counter obligation and consideration for payment of stage one is the completion of the work for that stage conform to contract".

Counsel's argument, as I understood it, was that the meaning of this passage was that the obligations relative to one stage of a contract are regarded as the counterparts of each other, but not as counterparts of the obligations relative to other stages. If that were so, where a contract contained two distinct parts those were analogous to stages, and there was no mutuality between one part and the other. In my opinion this argument is not correct. The suggestion that the obligations relative to one stage of a contract are not the counterpart of the obligations relative to other stages is contradicted by the decision in Turnbull v McLean, supra. That case, which is binding on me, is clear authority that, in contracts where obligations are performed in stages, the obligations in respect of one stage are not to be regarded as independent of the obligations in respect of another stage. Turnbull concerned a contract for the sale of coal. The coal was to be delivered in instalments, and each instalment paid for following delivery. The purchaser refused to make payment for two instalments, and the seller withheld further deliveries, and ultimately rescinded the contract. It was held that the seller was justified in the actions that he took. This clearly indicates that the seller's obligation to deliver the instalment presently due was the counterpart of the purchaser's obligation to pay for previous instalments. The point is made succinctly by Lord Neaves in the passage quoted in paragraph [10] above, but it is also the ratio of the decision.

12. Counsel further sought to draw support for his argument from Macari v Celtic Football and Athletic Company Ltd, supra. In my opinion this attempt was largely misplaced. The critical legal proposition established in Macari was this: that the principle of mutuality of contractual obligations is not an excuse for misperformance or partial performance of a contract. When a material breach of contract has been committed by one party, the principle of mutuality merely entitles the other to withhold performance of his obligations under the contract. It does not entitle him to pick and choose among those obligations, implementing some of them and failing to implement others. Nor is it an excuse for the defective performance of any of those obligations. The facts of the case, so far as material, were that the managing director of the defenders, the pursuer's employers, had largely excluded the pursuer from playing his proper part in the defenders' management. This was held to amount to a breach of an implied term of the contract of employment that the employer should not conduct itself in a manner calculated to destroy or seriously damage the relationship of confidence and trust between employer and employee. The pursuer continued to perform his duties, but he refused to comply with a requirement of his contract that he live in the Glasgow area and refused to obey instructions given to him by the managing director; these were held to amount to material breaches of contract. As a result the pursuer was dismissed. He argued that, because of the defenders' breach of contract, they were not entitled to insist that the pursuer perform his corresponding duties; thus the defenders could not insist on the pursuer's obeying instructions given to him, although he continued to draw his salary under the contract. The pursuer's contention was rejected. LP Rodger stated (at 1999 SC 641H- 642C):

"The true position seems to me to be that, if an employee is faced with a breach of the trust and confidence term by his employer but chooses to continue to work and draw his salary, he must do the work in accordance with the terms of his contract. That in turn means that, as regards his work, he must obey any lawful and legitimate instructions which his employer gives him. It is in return for such work in conformity with the contract that the employer is obliged to pay the employee his salary under the contract. On the other hand, in no relevant sense could it be said that an employee's obligation to do his work in accordance with the lawful and legitimate instructions of his employers is, in the words of Lord Jauncey, 'the counterpart of' his employer's obligation under the implied term.... So, where the employee chooses to continued to work under the contract, his employer's breach of the implied term does not entitle the employee to disregard the employer's lawful and legitimate instructions as to his work".

The strongest point in that passage for the present pursuers is the statement that the employee's obligation to perform his work is not the counterpart of the employer's trust and confidence obligation. Obligations relating to trust and confidence, however, are of a somewhat unusual nature, in that they typically survive the termination of the contract, and are thus not confined to the period of its actual performance. For this reason I do not think that it is possible to draw any general conclusions from the decision apart from those set out at the start of this paragraph. Moreover, it seems unlikely that the Lord President intended in this passage to go as far as the pursuers contended. If the trust and confidence obligation were regarded as essentially free standing, and not as the counterpart of the totality of obligations incumbent on the employee, the result would be that the principle of mutuality could never operate in relation to the obligation of trust and confidence. In that event, even a serious breach by the employer of that obligation would not give the employee the right to rescind the contract of employment. That conclusion does not seem to be in accordance with the remainder of the Lord President's discussion of the trust and confidence obligation. In these circumstances I consider that the case is of little assistance to the pursuers.

13. The last part of counsel's submissions on the mutuality issue related to the proposition that the right of retention can only be exercised if the two obligations concerned are contemporaneous. The starting point for discussion of this requirement is the opinion of Lord Benholme in Johnston v Robertson, supra. Lord Benholme stated (at 23 D 652):

"The plea of the defender is based mainly on the rule of the law of Scotland, that one party to a mutual contract, in which there are mutual stipulations, cannot insist on having his claim under the contract satisfied, unless he is prepared to satisfy the corresponding and contemporaneous claims of the other party to the contract".

It is not entirely clear what Lord Benholme meant by "contemporaneous"; the meaning of the expression does not seem to have been argued in Johnston. The simplest meaning of the word is perhaps that the two obligations must both be due and enforceable at the time when the right of retention is invoked. Nevertheless, in Redpath Dorman Long Ltd v Cummins Engine Company Ltd, supra, it was held that the word "contemporaneous" signified that the breach of contract giving rise to the right to withhold performance must predate the date for performance of the obligation whose performance is withheld. That approach was followed in Bank of East Asia v Scottish Enterprise, supra. Counsel relied on both of those cases and on the opinion of Lord Shand in Pegler v Northern Agricultural Implement Company, supra. In relation to the latter opinion, although it was apparently relied upon by Lord Jauncey in Bank of East Asia v Scottish Enterprise, it is a dissenting opinion, and it does not appear that the significance of the word "contemporaneous" was a live issue before the court. The other two cases, however, establish a clear rule about the timing of obligations if they are to be contemporaneous for the purposes of retention.

14. Before I turn to the facts of the present case, I should make one further observation about the principle of mutuality and the right of retention. In recent cases there is perhaps a tendency to use the rule that the relevant obligations must be the counterparts of each other as a means of controlling the scope of the right of retention, to ensure that it does not swamp the principle that contracts should be duly performed. It is easy to see that the right of retention must be kept under control. Nevertheless, it seems to me that the most satisfactory means of such control is the rule that, before a party is entitled to withhold performance, the other party must be in material breach of contract. The requirement that the breach should be material is important. In this connection, the function of the right of retention as a security for contractual performance is crucial. In my opinion a breach will be material for the purposes of the right of retention if it can be said to threaten the future performance of the contract. If the breach consists of non-performance of a significant obligation under the contract, it may be relatively easy to draw this inference. Thus, if a purchaser of goods by instalments fails to pay for an instalment, it will usually be reasonable to assume that there is a significant risk that future instalments will not be paid. If the breach consists of misperformance, however, it will be necessary to look precisely at its likely future consequences. Thus, if in a building contract work is performed defectively, it may be reasonable to suppose that that will be put right as part of the snagging process. In that event there is no threat to the future performance of the contract, and the breach would not be sufficiently material to justify the right of retention. If, on the other hand, the misperformance is very substantial, and threatens to deprive the employer of the practical benefits of the contract, that can be regarded as a threat to future performance, and would amount to a material breach for these purposes. In my opinion the use of the notion of materiality as a control mechanism has obvious benefits. In particular, it means that the availability of the remedy of retention is dependent on the nature of the precise breach of contract that has occurred, rather than on the nature of the term that has been broken. This enables a much more flexible approach, directed to the particular circumstances of the breach. Moreover, it enables an approach that is directed specifically towards the practical function of the right of retention, namely the provision of security for future performance of the contract.
15. The contract in the present case contains three main provisions. First, on 23 September 1999 the defender was to sell 900 of his shares in IME to the company for a price of £142,000. The result of that was to give the pursuers control over the company. Secondly, during the period from 23 September 1999 to 1 September 2002 the defender was to be employed as non-executive chairman at a salary of £10,000 per annum. The reason for this was stated in the narrative at the start of the agreement in the following terms:

"AT will serve as chairman for a defined period to allow a smooth handover of the goodwill of IME to CH and AD to maintain client contact and continuity".

Thirdly, provision was made for further transfers of shares in IME. In the event that any shareholder ceased to be an employee of the company at any time prior to 31 August 2002 he was obliged to sell his shares to the remaining shareholders pro rata at a price of £250 per share. After 31 August 2002, any shareholder who wished to sell his shares was still obliged to offer them to existing shareholders pro rata, but the price was to be market value without any minority discount.

16. It is clear in my opinion that the three primary provisions of the contract are all interrelated. They provided, in effect, for the sale of the defender's majority shareholding in IME, with a transitional period during which the defender was to remain actively involved with the company. The provisions relating to further transfers of shares are obviously related to that transitional period. The link between the sale of 900 of the defender's shares and his continuing employment as non-executive chairman is apparent from the passage of narrative quoted in the last paragraph. The intention was that the company's goodwill should remain with it despite the change of control from the defender to the pursuers. It was obviously thought that continuing involvement by the defender, for a period of nearly three years, would help to achieve that purpose. It is also apparent that the third of these provisions is related to the other two. The obligations relative to the sale of shares alter significantly on 31 August 2002, the day before the end of the transitional period. Thus it was obviously intended that the compulsory sale of shares at a fixed price on the termination of employment should only apply during that period. Thereafter any sale of shares was voluntary, and the price was to be on an open market basis. Consequently it must have been intended that, if a shareholder ceased to be actively involved with the company during the transitional period, he should cease to own any shares; if, however, he continued his involvement to the end of the transitional period, the kept his shares. Thus the ratio of shareholdings would remain as fixed on 23 September 1999 provided that all three shareholders remained actively involved with the company during the transitional period. The change in the valuation method also indicates that the provisions for the further transfer of shares were related to the transitional period. During the transitional period, a price of £250 was fixed; after the transitional period, on the other hand, market value was to be used, with no minority discount.
17. In the foregoing circumstances, I am of opinion that the provisions of the contract relative to the transfer of shares and the provisions relative to the employment of the defender as non-executive chairman must be regarded as the counterparts of each other. The starting point is the presumption that the whole of the obligations on one side of a contract are the counterparts of the whole of the obligations on the other side. I can find nothing in the contract to displace that presumption. Indeed, the features of the contract described in the last paragraph point strongly to the conclusion that the whole of the main provisions of the contract are mutually interdependent, and are accordingly the counterparts of one other. The employment of the defender for a period of slightly under three years was closely related to the sale of his shares in the company. The provisions for the compulsory sale of shares at a fixed price if his employment terminated during that period were again clearly related to the transitional arrangements consequential upon the sale of the shares. The main element relied upon by the pursuers in arguing that the obligations relative to the transfer of shares were not the counterparts of the obligations relating to the defender's employment was the fact that two distinct sets of contractual obligations were concerned, relating to two distinct commercial relationships. In my opinion the two sets of contractual obligations, relating to the share transfer and the employment, were not distinct. Nor in my view were the two commercial relationships distinct; they formed integral parts of a single transaction relating to the transfer of beneficial ownership of the company from the defender to the pursuers. For this reason, even in the absence of any legal presumption, I would have concluded that the obligations in this contract are the counterparts of one another.
18. The further argument presented for the pursuers was that the obligation to employ the defender and the obligation on the defender to offer his shares for sale on the termination of his employment were not contemporaneous, and indeed could never be contemporaneous, because one necessarily followed the other. In my opinion that argument is incorrect. As indicated in paragraph [13] above, the rule established by Redpath Dorman Long Ltd v Cummins Engine Company Ltd, supra, and followed in Bank of East Asia v Scottish Enterprise, supra, was that the breach of contract giving rise to the right to withhold performance must predate the date for performance of the obligation whose performance is withheld. In the present case, if the defender's averments are correct, the breach of contract giving rise to the right to withhold performance occurred when the defender's employment was terminated. The defender's obligation to offer his shares for sale to the pursuers at a fixed price arose immediately thereafter. It is clear, however, that the latter obligation could only arise after the termination of the contract of employment, because that is what triggered it. In these circumstances the criteria laid down in Redpath Dorman Long Ltd v Cummins Engine Company Ltd, supra, and followed in Bank of East Asia v Scottish Enterprise, supra, are satisfied. Thus the two obligations are "contemporaneous" in the rather specialised sense in which that word appears to be used for the purposes of the right of retention.
19. Counsel for the pursuers founded on the decision of Lord Keith in Dick v Skene, supra, which he submitted was closely analogous to the present case. In that case the defender sold to the pursuers as a going concern the haulage business carried on by him, together with vehicles and certain heritable and other property. That agreement was contained in a minute of agreement. The defender averred that it was an integral condition of the parties' contract that he should be engaged as manager of the business, and that an agreement to that effect was contained in letters passing between the parties' agents. He further averred that the contract of sale and the contract of service were interdependent. The pursuers raised an action for implement of the contract of sale, and by way of defence the defender alleged that the pursuers had failed to employ him as manager and were accordingly in breach of the contract of service. Lord Keith held the defence irrelevant. He stated:

"The contract of sale... is substantially capable of immediate completion, but the contract of service involves continuing obligations, so that there is no identity in time of performance of the two contracts. Breach, if any, of the contract of service might take place after the contract of sale was completed when no real interdependence would be possible. Further, the contract of service cannot begin until the contract of sale is completed".

In my opinion this decision is readily distinguishable from the present case. In the first place, that case concerned two distinct contracts, a contract of sale and a contract of employment, which were contained in separate documents. Consequently the presumption that all of the parties' obligations are interdependent when their agreement is contained in a single document did not apply. In the second place, that case involved a straightforward sale followed by the employment of the defender as manager. There was nothing equivalent to the transitional period that exists in the present case. That is in my opinion a critical point of distinction.

Waiver

20. The second argument advanced by counsel for the pursuers was that the defender had waved his rights under the shareholders' agreement by signing a compromise agreement dated 2 and 7 July 2001 and by accepting payment of a sum of money under that agreement. In their pleadings, the parties agree on the following factual narrative. Following termination of his employment by IME, the defender raised proceedings in the office of the Employment Tribunals in Edinburgh claiming wrongful dismissal and unfair dismissal. Those proceedings were settled informally by means of a compromise agreement dated 2 and 7 July 2001, concluded between IME and the defender. The compromise agreement began by narrating that the defender's employment with IME had terminated on 6 October 2000, that the defender maintained that he had certain claims against IME in respect of the termination of his employment, and that, without admitting the validity of these claims, IME wanted to settle with the defender. The agreement then provided for the termination of the defender's employment on 6 October 2000, and the payment of £15,000 as compensation for loss of employment. Provision was made for the non-disclosure of confidential information and business secrets. Clause 5 then provided as follows:

"Claims against the Employer

5.1 The Employee accepts the Termination Payment and the terms of this Agreement in full and final settlement of all claims, complaints, costs, expenses or rights of action of any kind, present, future or contingent, which the Employee may have against the Employer, its officers or its employees, or any associated company of the Employer whether under statute, contract or at common law or under legislation of the European Union, arising out of his contract of employment with the Employer or the termination thereof, including, but not limited to: --

...

4. Any claim by the Employee for breach of contract by the Employer.

...

13. Any claim for payment for breach of contract arising from the consultancy arrangement contained in the Shareholders Agreement signed between the Applicant, Dr Crispin Hoult and Alan Douglas dated 17^th November 2001.

...".

The pursuers aver that the defender was paid the sum of money specified in the compromise agreement in full and final settlement of all claims, complaints and rights of action of any kind against the company, its officers or employees. The defender denies that averment, but I do think that anything turns on that denial. The defender makes certain further averments about the negotiation of the compromise agreement and the correspondence that preceded it. It is averred that it had been agreed that the compromise agreement would resolve only the matters that had been in dispute before the Employment Tribunal, that the parties were unable to reach an agreement at the time with regard to the defender's shares in IME, and that it was agreed that that matter would be resolved at a later date. The pursuers deny these averments under reference to the correspondence for its terms. Two letters from that correspondence were referred to in the course of the debate. The first was a letter of 11 June 2001 from the defender's agent to the pursuers' agents, in which the writer stated that he was returning a revised draft of the compromise agreement. He went on to state that the defender did not want to sell his shares at that time, and had been advised that he did not have to do so. The writer then suggested that the compromise agreement should be concluded, and that thereafter the agents should turn their attention to the surviving contractual arrangements between the parties. The second letter referred to was one dated 15 June 2001, in which the pursuers' agents replied to the last letter. In this letter, the writer referred to revisals to the compromise agreement, and to its execution. He then noted the defender's position regarding the sale of the shares and the contention that the shareholders agreement could not be insisted on. The writer stated that that was not his interpretation, and that he considered that the defender was obliged to offer the shares to the remaining shareholders at £250 per share. He then continued:

"I would agree, however, that the Compromise Agreement should be completed and the employment issues resolved. I would have to give notice, however, to you and Mr Turpie that our clients are to pursue their entitlement as stated above to acquire the shares in terms of the Shareholders Agreement and that if your client does not agree, then civil litigation may ensue".

21. Counsel for the pursuers submitted that the effect of clause 5.1 of the compromise agreement, and in particular paragraphs 4 and 13 of that clause, was that the defender waived any right to insist upon performance of the obligation to employ him. That amounted to a contractual waiver of any right that he might have had to put forward a claim of retention based on that obligation. Paragraphs 4 and 13 referred to a "claim", but that word was habile to cover a right of retention. The pursuers had acted on the faith of the agreement by paying over a sum of money as compensation, and the defender, it was averred, had accepted that sum. Counsel argued that his construction of the compromise agreement was supported by considerations of business efficacy. The defender held 26 of IME's 100 shares, and could thus block a special resolution. Consequently, if he had a legal right not to offer his shares for sale, the company would be in a state of paralysis for as long as he refused to sell his shares, unless he co-operated in passing a special resolution. Counsel further submitted that the right of retention came to an end on the date when the parties' contract would have come to an end in any event. In the present case that meant that it could not be asserted after September 2002. Reference was made to Pacitti v Manganiello, 1995 SCLR 557, as authority for that proposition. What the compromise agreement achieved was the same situation as would have occurred when the right of retention came to an end. If the pursuers' construction of the compromise agreement was correct, the result was a waiver of any right that the defender had to assert a right of retention. The pursuers had altered their position by paying the defender £15,000. Thus they had conducted their affairs on the faith of a waiver of the defender's rights, which satisfied the tests in Armia Ltd v Daejan Developments Ltd, 1979 SC (HL) 56. The result was to extinguish for ever any right that the defender had to assert a right of retention based on an alleged breach of his employment contract.
22. Counsel for the defender's submitted that clause 5.1 of the compromise agreement did not apply to the right of retention founded on by the defender. Defending an action brought against the defender by the pursuers did not amount to asserting any "claims, complaints, costs, expenses or rights of action" within the terms of the compromise agreement. The wording used in clause 5.1 only related to matters that required positive steps on the defender's part if they were to be vindicated. Putting forward a defence was not such a step. Alternatively, counsel submitted that the contractual bar in clause 5.1 only related to IME and its officers or employees acting as such. In the present case, however, the pursuers were not acting as officers or employees of IME, but as shareholders in that company. Thus they did not fall within the terms of the clause. Finally, counsel submitted that, if I did not sustain either of the foregoing arguments, I should allow a proof on the defender's averments as to the scope of the compromise agreement. In these averments the defender offered to prove that the compromise agreement did not extend to any obligation that the defender might have to offer his shares for sale. Reference was made to Bank of Scotland v Dunedin Property Investment Company Ltd, 1998 SC 657.
23. In my opinion clause 5.1 of the compromise agreement does not extend to the defence put forward to the present action. That clause, in its general part, relates to "all claims, complaints, costs, expenses or rights of action" that the defender might have against IME or its officers or employees. Paragraphs 4 and 13 referred specifically to any "claim" by the defender for either breach of contract by IME or for payment or breach of contract arising from the consultancy arrangement contained in the shareholders agreement. The word "claim" is clearly appropriate to describe a positive assertion of a right, as in a claim for payment or a claim for damages. It is not, however, in my opinion a word appropriate to describe a mere defence. The right of retention, although usually described as a "right", is a mere defence. The right is no doubt founded on an allegation of breach of contract, but its effect is only to prevent the other party to the contract from maintaining a positive claim for implement or payment or damages. Indeed, properly characterised, retention is not a "right" at all, but rather a privilege or immunity against the making of a claim or the exercise of a power by the other party to the contract. I recognise that commercial agreements should not be construed by reference to purely academic considerations, but the distinction between a positive claim and a mere defence is fundamental, and should be known to all those who draft commercial contracts. It is, moreover, an extreme step to prevent a party from putting forward a defence that would otherwise be available to him. For these reasons I am of opinion that, if defences as well as positive claims are to be excluded by an agreement, wording should be used that makes the point clear. Such wording is absent from the compromise agreement.
24. Counsel for the pursuers relied on the principle of business efficacy in support of his construction of clause 5.1. In my opinion that principle does not support his argument. He is correct in submitting that the effects of retention come to an end on the expiry of the contract on which the retention is based; the proper analysis is in my opinion that put forward in Pacitti v Manganiello, supra. In the present case, it may be decided following proof that the termination of the defender's employment was justified. In that event the defender's refusal to transfer the shares will be held to have been unjustified, and on that basis decree will be pronounced to compel the transfer of the shares. In that case there will be no paralysis. If, on the other hand, the termination of the defender's employment is found not to have been justified, the result will be that the pursuers never had any right to compel the defender to transfer his shares. In that event, had the terms of the contract been properly observed, the defender's employment would have ceased on 1 September 2002, and he would still have owned 26 shares in the company. Thus the situation that the pursuers' counsel describes as "paralysis" is one that would have occurred had the contract reached its natural termination. In my view it is generally impossible, in support of an argument based on business efficacy, to suggest that it is essential to avoid a situation that the parties themselves contemplated. In any event, the "paralysis" referred to appears to be the risk that the defender might block a special resolution. If that happens in fact, remedies under the Companies Acts or the Insolvency Act may be available to the pursuers.
25. The second argument advanced by counsel for the defender was that clause 5.1 of the compromise agreement related only to officers or employees of IME acting as such, and not acting as shareholders. Counsel's final position was that, if I were against him on his first two arguments, the scope of the compromise agreement should be the subject of a proof. If I had not found for the defender on the basis set out in paragraph [22] above, I would have allowed a proof before answer on this issue. The question of whether clause 5.1 applies only to officers or employees acting as such, and not acting as shareholders, is in my view an aspect of the scope of the compromise agreement. Consequently I would not consider it appropriate to reach any conclusion on that matter until after proof. On the basis of the defender's averments, and in particular his references to the correspondence that passed between the parties' agents, I am satisfied that there is an issue for inquiry as to whether the scope of the compromise agreement was restricted to employment questions, and did not extend to whether the defender was obliged to offer his shares for sale to the pursuers. That question is in my opinion one that relates to the commercial purpose of the compromise agreement, and as such it may be the subject of proof: see Bank of Scotland v Dunedin Property Investment Company Ltd, supra, at 665 per LP Rodger, at 670-671 per Lord Kirkwood, and at 676-677 per Lord Caplan.
26. For the foregoing reasons I will repel the pursuers' third plea in law and sustain the defender's fourth plea in law, both of which deal with waiver; the result is that I will refuse to admit to probation the pursuers' averments relating to the effect of the compromise agreement. Quoad ultra I will allow a proof before answer on the whole of the parties' remaining averments.