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Forrester & Anor v. Forrester [2003] ScotCS 177 (20 June 2003)

OUTER HOUSE, COURT OF SESSION

CA77/02

OPINION OF LORD CLARKE

in the cause

ANDREW FORRESTER AND MRS IVY SHEILA FORRESTER

Pursuers;

against

ANDREW FORRESTER LIMITED

Defenders:

________________

Pursuers: Robertson; Lindsays, W.S.

Defenders: Ellis, Q.C.; Morisons

20 June 2003

[1] In this commercial action the pursuers sue the defenders for various sums of money which they claim are due to them, as assignees of rights, arising from an agreement, among a company known as Andrew Forrester Limited, a company known Castlelaw (No. 222) Limited and the pursuers, whereby Andrew Forrester Limited sold to Castlelaw its business of motor vehicle dealers. The agreement was dated 22 May 1998 and was subsequently amended, by a Minute of Amendment dated 2 September 1998. The company, Andrew Forrester Limited, changed its name, on or about 29 May 1998, to Balgonie Motors Limited. The company Castlelaw changed its name to Andrew Forrester Limited on or about 23 September 1998 and are the present defenders. Balgonie assigned its rights under the agreement, to the pursuers, by assignation dated 30 March 1999. In the pleadings Balgonie Motors Limited is referred to as "the vendor".

[2] In their pleadings the pursuers aver that, in terms of the agreement, the defenders issued to the vendor 250,000 9.25% Gross Cumulative Redeemable Preference Shares of £1 each. They then aver that, under certain provisions of the agreement, what is described as Earnout Consideration, required to be paid by the defenders to the vendor, in accordance with Part 10 of the schedule to the agreement. The pursuers then proceed to refer to the Articles of Association of the defenders, which, they contend, make provision for the redemption of the Cumulative Redeemable Preference Shares on certain terms and conditions. They, furthermore, refer to other provisions of the Articles of Association of the defenders, which deal with the entitlement of the holders of Preference Shares to a cumulative gross preferential dividend. The pursuers claim that the defenders were obliged to redeem numbers of the Cumulative Redeemable Preference Shares on 30 September 2000 and 30 September 2001 and have not done so. They also allege that the defenders were obliged to pay, on 30 September 2000, and on 30 September 2001, dividends in respect of the Cumulative Redeemable Preference Shares and that these dividends have not been paid.

[3] In Article 13 of Condescendence, it is averred by the pursuers as follows:

"Part 10 of the Schedule to the Agreement provides for the payment of Earnout Consideration by the defender to the pursuers. Paragraph 2 provides that where the profits of the business being sold are in the range from £200,000 to £300,800 in the accounting year to 31 May 1999, a payment of £55,000 is due by the defender to the Vendor. Paragraph 2 further provides that where the payment in respect of the accounting year to 31 May 1999 is under £110,000 and the profits of the business being sold were in the range from £150,000 to £300,800 in the accounting year to 31 May 2000, then a further payment of £60,000 is due by the defender to the Vendor. Part 10 of the Schedule continues as follows:-

'3 For the purposes of calculating the payments in Clause 2 above, profits of the Business will be the audited accounting profits before any deduction for corporation tax, directors' remuneration (including, but not limited to, salary, bonuses, benefits in kind and pension contributions) and non-recurring non-trading items.

4 For each accounting period above, the sums payable under Clause 2 shall be paid to the Vendors on the sooner of 5 business days after the completion of the audit of the accounts of the Business or 120 days after the year end.

5 The Purchaser will ensure that, in the event of any change in the nature of the Business, proper accounting records are maintained so that the Profits can be established mutatis mutandis in accordance with Clause 3.'"

The pursuers then proceed to make averments, under reference to the defenders' accounts, whereby they claim that the payments of £55,000 and £60,000 referred to in Part 10 of the schedule to the agreement, became payable to them as assignees no later than 28 September 1999 and 28 September 2000, respectively. They aver that the defenders have not made payment of these sums. These are the sums which are concluded for, with interest, in the fifth and sixth conclusions of the summons.

[4] The defenders, in their defences, seek to resist all the claims made by the pursuers. Their first plea-in-law is in the following terms:

"The obligations arising from the Agreement being extinguished by the lapse of time, the defenders should be assoilzied from the claims in respect thereof."

The defenders also have a general plea to the relevancy of the pursuers' pleadings and have a fifth plea-in-law which is in the following terms:

"The defenders not being due and resting owing to the pursuers as assignees of the vendor, the sums (sic) fifth and sixth concluded for, the defenders should be assoilzied."

In Answer 13 the defenders aver, inter alia, as follows:

"Part 10 of the Schedule to the Agreement is referred to for its full terms. Quoad ultra denied. Explained and averred that in any event rights under the Agreement cannot now be enforced. They have been extinguished by the lapse of time. Explained and averred that Clause 30 of the Agreement was to the effect that all obligations under the Agreement remained in full force and effect for a period of two years only after Completion which occurred on 31 May 1998. ..."

The defenders have a counterclaim for payment by the pursuers jointly and severally of £92,226 together with interest thereon. The conclusion for payment of that sum begins in the following terms:

"For payment (on the hypothesis of law upon which this counterclaim proceeds)."

The counterclaim relates to an alleged breach of warranty by the vendor of the business in relation to the net asset value of that business. In their Answers to the counterclaim, the pursuers aver that the breach of warranty claim is no longer enforceable being out of time by virtue of the provision of Clause 30 of the agreement. The full terms of Clause 30 of the agreement, which is 7/1 of Process, are as follows:

"Except as otherwise herein provided, and except where a claim under the Warranties has been made within two years of Completion, this Agreement shall remain in full force and effect for a period of two years only after and notwithstanding Completion in respect of all obligations, agreements, covenants, undertakings or conditions contained in or implied by this Agreement which have not been done, observed or performed at or prior to Completion and all Warranties, representations and indemnities contained in or implied by this Agreement shall subject as herein mentioned continue in full force and effect for a period of two years only after and notwithstanding Completion and the parties subject as herein mentioned may take action for any breach of non- fulfilment of any of them either before or after Completion (whether or not such breach or non-fulfilment may have been known to or discoverable by the party taking action prior to Completion). A clause to this effect shall if required by the Purchaser be inserted in the disposition of the Owned Premises."

The "completion" is defined in the agreement, at page 3, as meaning "the completion of the sale and purchase of the Business in accordance with Clause 5". In terms of Clause 1 of the minute of amendment of the agreement, which is 7/2 of Process, it is provided that "completion date means 31 May 1998 or such other date as the parties agree". The parties were at one that no other date than 31 May 1998 had been agreed.

[5] The case came before me for debate in relation to the question as to whether the sums concluded for in the fifth and sixth conclusions were unenforceable by operation of Clause 30 of the agreement. Senior counsel for the defenders' submission was that, as the pursuers' claim in respect of the Earnout Consideration was made after the expiry of two years from 31 May 1998, the claim was not enforceable because of the operation of the provisions of Clause 30 of the agreement. He had to acknowledge, of course, that, standing that the second tranche of the Earnout Consideration, in terms of Part 10 to the Schedule, could only be calculated and become payable when the profits of the business in the accounting year to 31 May 2000 were ascertainable, his argument meant that payment of the second tranche of the Earnout Consideration could never have been enforceable in law within two years of the completion. Senior counsel, while recognising that it was, at least, at first sight, an extraordinary proposition that he was advancing, namely that the vendor had agreed from the very outset that a substantial part of the consideration for the sale of the business, calculated with apparent detail and care in the formal agreement, would, nevertheless, be legally unenforceable. Senior counsel, however, sought to advance an explanation, for this apparently surprising proposition, namely that the vendor was, in turn, being relieved, by virtue of Clause 30, of a number of potentially wide liabilities after the expiry of the two year period from the date of completion. It is to be noted that the minute of amendment to the agreement was entered into just over three months from the original agreement itself. The minute of amendment specifically refers to and deals with the question of Earnout Consideration in Clauses 5, 8 and 10. Senior counsel for the defenders referred to the opening words of Clause 30 which, as has been seen, are to the effect "except as otherwise herein provided". He was unable, he said, to point to any provision in the agreement, or the minute of amendment, which expressly provided for Clause 30 not to apply in respect of any particular obligation. In any event, he contended, that the words in Clause 30 "all obligations, agreements, covenants, undertakings or conditions contained in or implied by this agreement which have not been done, observed or performed at or prior to Completion" were capable of covering the obligation to pay the Earnout Consideration. The provisions relating to the Earnout Consideration did not seek expressly to exclude the provisions of Clause 30 having effect in relation to them. Senior counsel for the defenders said that the construction of the agreement he was advancing made sense in that the vendor would wish certainty in relation to his liability and obligations and particularly as to when they would expire in terms of the agreement and, for that reason, may have been willing to leave the Earnout provisions, in part, at least, on a "binding in honour only" basis. The interpretation of the agreement he advanced was, in any event, he contended, in accordance with the literal meaning of Clause 30 and did not make commercial nonsense for the reason he had given. Senior counsel for the defenders, in support of these submissions, referred me to the Opinion of Lord President Rodger in the case of Bank of Scotland v Dunedin Property Investment Co. Ltd. 1998 SC 657 at 661D-H.

[6] In reply, counsel for the pursuers, also relied on the passage just referred to in the Opinion of Lord President Rodger. He submitted that the plain meaning of the wording of Clause 30 showed the ambit of the limitation imposed by it. He referred, in this respect, in particular, to the words "which have not been done, observed or performed". These words showed, he submitted, that the limitation was intended to cover matters only which could have, or ought to have, been performed, prior to the expiry of the two year period from completion, as opposed to matters which were expressly deferred by the parties in their agreement beyond that time. If an obligation was not due to be performed at all until a point in time after the expiry of the two years from completion, it was strange to include it in the expression "an obligation not done, observed or performed at or prior to completion". Counsel also referred to the opening words of Clause 30, "except as otherwise herein provided". Those words could refer to something both expressly, or impliedly, provided for by the agreement. The provisions relating to the calculation and payment of Earnout Consideration carried with them the necessary implication, if they were to be legally enforceable, that Clause 30 did not apply to them. It was unsurprising, therefore, to find that neither the agreement, nor the amendment, expressly applied Clause 30 to the Earnout provisions or provided for the exclusion of its operation to them. The defenders could gain no support from that fact. The defenders' approach to the construction of the contract flew in the face of commercial sense. It was simply commercial nonsense to suggest that parties had agreed to provide, in their agreement, for a machinery to calculate an important element of the consideration for the sale of the business, which involved an element of deferment, but at the same time were agreeing that part of it was wholly unenforceable as a legal obligation. The parties had revisited their agreement in the amendment and did nothing to alter the basic approach to the Earnout Consideration when they did so. That indicated that they still considered that these provisions had legal effect. For all these reasons, accordingly, the pursuers invited me, relying on the pursuers' fourth plea-in-law, to delete the second, third and fourth sentences of the defenders' Answer 13 as being irrelevant and to repel the first plea-in-law of the defenders. In relation to the counterclaim, counsel for the pursuers explained that it was raised on the basis of a breach of warranty. It had been raised two years after the completion date. It was, accordingly, a claim clearly covered by Clause 30 of the agreement and had therefore expired. The counterclaim should be dismissed.

[7] In reply, senior counsel for the defenders conceded at the outset that, since the pursuers were not contending that Clause 30 was void and unenforceable for some reason, he had to accept, that the counterclaim was irrelevant. It had been brought simply on the hypothesis that the pursuers might be contending that Clause 30 had no effect at all.

[8] For the rest, while it was true that the effect of his submissions, as to how the agreement should be interpreted, meant that the payment of the second tranche of the Earnout Consideration could never have been legally enforceable, his submission did not have that effect with regard to the first tranche.

[9] I have reached the conclusion, without any real difficulty, that the defenders' submissions must be rejected. They involve, as has been seen, concluding that the vendor must have agreed, from the outset, that a significant part of the consideration payable for the sale of the business, was never to be enforceable in law. Such a proposition, in the context of a commercial agreement, of the present sort, relating to an at arms length sale of a company's business is prima facie startling and offends against commercial sense. For it to be accepted that the contract amounted to the vendor agreeing to this, it would be, in my judgment, necessary for the court to see that this was provided for in very clear and unequivocal language in the agreement itself, or that it arose as a matter of necessary implication, from the terms of the agreement read as a whole. Senior counsel for the defenders did not contend that the position he argued for arose as a matter of necessary implication from a reading of the agreement as a whole. He rested his case entirely on the wording of Clause 30 of the agreement.

[10] In approaching the way in which that clause should be construed, I would with respect, adopt, and apply, the approach of Lord President Rodger in Bank of Scotland v Dunedin at page 661 where his Lordship said:

"I am content to follow Lord Steyn's general guidance that in interpreting a commercial document of this kind the court should apply the 'commercially sensible construction' of the condition in question."

Lord Steyn's guidance is to be found in the case of Mannai Investment Co. Ltd. v Eaglestar Life Assurance Co. Ltd (1998) A.C. 749 at page 771A. As I have noted, senior counsel for the defenders valiantly sought to persuade me that his approach to the construction and effect of Clause 30 did make some commercial sense. I am bound, however, to say that I found it wholly unrealistic to suggest, as he did, that the vendor might have been prepared to agree to a substantial part of the consideration for the sale of the business as being binding in honour only, simply as a quid pro quo for getting a definite cut-off period for certain of his own obligations under the agreement. Had the vendor been prepared to abandon a significant part of the consideration that he, otherwise, would have sought for the sale of the business in return for the provisions of Clause 30 then, in my judgment, the commercially sensible approach would have been simply to have reduced the consideration payable for the business, rather than have those drafting the agreement provide, fairly elaborately, for the circumstances in which an amount of consideration, which was not legally enforceable, might be paid. I, accordingly, do not accept that the approach to the construction of Clause 30 advanced by senior counsel for the defenders produces a "commercially sensible" result in the context of this agreement.

[11] The approach to the construction of the clause advanced, on behalf of the pursuers, on the other hand, namely that it was never intended by the parties to apply to the purchasers' obligation to pay the Earnout consideration, does, in my judgment, make complete commercial sense. Moreover, and most importantly, it does not, in my judgment, do any violence to the actual wording of the clause. The wording of the clause, it has to be said, is not, perhaps, as carefully chosen as it might have been. Where, however, the parties had expressly agreed to defer the calculation and, accordingly, the enforcement of part of the Earnout Consideration to a date after two years from completion, it appears to me that they did not intend the obligations arising in relation thereto to fall within the limitation provided for by Clause 30. Reading the clause, as a whole, with an eye to its commercial purpose, I am satisfied that it was intended to cover those obligations which were legally prestable from completion, and within two years of that date, and not obligations which, by definition, the parties had agreed could only become legally prestable thereafter. That there were obligations which arose from the parties' agreement which might not be caught by Clause 30 is clear from the use by the parties of the opening words of the Clause "except as otherwise herein provided". Senior counsel for the defenders, as I have already noted, was unable to point to any provision in the agreement which expressly excluded the effect of Clause 30 in respect of any obligation. The wording, however, in my judgment, is perfectly capable of referring to exceptions which arise by necessary implication on a reading and an understanding of the commercial purpose of the agreement as a whole. I regard the obligation to pay the Earnout Consideration to be an obligation that, by necessary implication, was intended not to be covered by the limitation provided for in Clause 30.

[12] For the foregoing reasons I will accede to the pursuers' motion and refuse to admit the defenders' averments in the second, third and fourth sentences of their Answer 13 to probation and shall repel the defenders' first plea-in-law which, in the light of my decision, is empty of content. I shall, of consent, also dismiss the defenders' counterclaim. Otherwise I shall have the case put out by order so that further procedure in the action can be discussed.