Scottish Court of Session Decisions

Semple Cochrane Plc V. Clark [2000] ScotCS 19 (28 January 2003)

OUTER HOUSE, COURT OF SESSION
A3143/01	OPINION OF M G THOMSON, Q.C., SITTING AS A TEMPORARY JUDGE in the cause SEMPLE COCHRANE PLC Pursuers; against DR THOMAS ANDREW CLARK Defender:   ________________

 

 

Pursuers: Keen, Q.C., Harper Macleod

Defender: Cullen, Q.C., McGrigor Donald

 

28 January 2003

Introduction

1. The pursuers have been a public limited company since 1996. Between 1980 and 24 March 2000 the defender was an executive director and chairman of the pursuers. He was a substantial shareholder in the pursuers. Between June 1997 and November 1999 the defender was also chief executive of the pursuers. The pursuers carried on business mainly providing electrical and other engineering support services for industrial and marine projects. They executed and to some extent designed works under engineering and building contracts. In this action the pursuers claim that they have suffered loss and damage through the fraud et separatim negligence et separatim breach of contract of the defender and they conclude for damages in the sum of £1,127,095.40.
2. The case was appointed to debate on the defender's plea to the relevancy and specification of the pursuers' averments and on the pursuers' plea to the relevancy and specification of the defender's averments. At the diet of debate the defender also sought absolvitor in respect of any claim against him based on negligence by reason of the terms of a previous Compromise Agreement. The pursuers did not insist on their preliminary plea, and offered a proof before answer.

The pursuers' pleadings

3. The pursuers' pleadings had expanded partly to take account of the defender's averments in Answer and partly because of the incorporation brevitatis causa into their pleadings of some fourteen documents including various sets of accounts relating to the pursuers.
4. The essence of the pursuers' complaint against the defender is to be found in Articles 2, 3 and 4 of Condescendence. After incorporating the defender's contract of employment into the pleadings, the pursuers aver that the pursuers' accounts for the financial year 1998/99 were to be prepared in accordance with their stated accounting policy which was set out in the accounts themselves. In particular, the stated accounting policy, SSAP9, provided that, "Profit on long term contracts is taken as the work is carried out if the final outcome can be assessed with reasonable certainty. The profit included is calculated on a prudent basis to reflect the proportion of the work carried out at the year end by recording turnover and related costs as contract activity progresses".
5. In Article 3 the pursuers aver:

"From at least 1998 until in or around March 2000, the executive directors of the pursuers, including the defender, adopted a policy of deliberately not applying these accounting standards, as more particularly hereinafter condescended upon. The executive directors of the pursuers, including the defender, recorded profits on long term contracts at an earlier stage in the contracts than the stated accounting policies would permit. They knowingly over-valued the pursuers' work in progress on such contracts. They recorded profits in the accounts which it was not reasonably foreseeable could be recovered from customers. The effect of this was to artificially increase the profit and earnings per share disclosed in the pursuers' accounts. As a result, the value of the defender's shares in the pursuers was artificially inflated, and the pursuers made certain payments to the defender and others which they would not otherwise have made as more particularly hereinafter condescended upon".

6. In Article 4 the pursuers aver:

"The defender was an active participant in the said scheme. The defender instructed staff and fellow executive directors of the pursuers to ensure that the pursuers' reported profits matched the pursuers' budget, regardless of the true position. The defender directed that profits on contracts should be falsely recorded in the pursuers' account so as to meet market expectations. The defender instructed other directors and employees that they could not write off losses from the pursuers' account unless additional profits were available elsewhere to offset the loss. The defender thereby procured that the levels of profit in the pursuers' accounts were false and artificially increased ..... Explained and averred that the defender was heavily involved in the profit forecasts, interim results and other financial information presented to the City on a regular basis. The defender took responsibility for these presentations. He spent considerable time and effort working with and reworking these figures. The profits plans were revised frequently by the defender. The figures were based on profit forecasts received from Mr Stephen Avery, the Operations Director. The defender worked closely with Mr Avery. The defender told Mr Avery the profit figures which he had to achieve in order to meet the City's expectations. The defender was committed to and interested in the company's growth. The defender revised Mr Avery's figures. In the early profit forecasts for 1999 Mr Avery had predicted profit of £5.5 million. The defender declared a figure of £4.4 million to the City. In fact the pursuers made a loss of £12 million. The valuation of certain large value contracts was the subject of frequent and open discussion among the management team including the defender. The defender took part in these discussions. Discouraging the writing off of work in progress was the subject of frequent and open discussions amongst the management team including the defender. The defender took part in these discussions. The defender was well aware of the issues involved. The defender was a member of the internal audit team until September 1998. In particular the defender was aware of valuation issues in the rail division, on the Acton contract, on the Sir Bedivere contract and in relation to Edinburgh, all as hereinafter condescended upon. Mr Avery raised a number of valuation issues with the defender. No provision was made for any of these issues in the accounts. The defender continued to predict good results to the City despite these issues. The defender was aware that the finance team did not analyse or question the valuations given to them by the operations team. The finance team was not asked to do so. The terms of reference for the audit committee precluded them from looking at the operations management. The defender was aware that costs were not properly accounted for by operations when making their profit forecasts. The defender knew that there were material overstatements in the published accounts for the year to 30 June 1999 and for prior periods. The defender and Mr Avery knew that the predicted profit figures going forward from 30 June 1999 were not achievable. Neither the defender nor Mr Avery brought this to the attention of the Board prior to the interim results to December 1999 being published on 24 March 2000".

On 18 April 2000 Ernst & Young were instructed by the pursuers to investigate suspected errors in their accounts. The resultant report by Ernst & Young dated 28 June 2000 is incorporated into the pursuers' pleadings. That report extends to some forty nine pages with five appendices.

7. In Articles 5 to 9 of Condescendence the pursuers give specific examples of the defender's conduct complained of. In Article 5 they refer to a memorandum dated 15 June 1998 from the defender to Mr Avery and to the minutes of a monthly management meeting of Division "C". Both these documents are incorporated into the pleadings and are said to support the proposition that the defender was aware that the profits that were reported in the pursuers' accounts were false.
8. In Article 6 the pursuers refer to a draft profit forecast known as "Revision 72". The pursuers aver that on several occasions the defender was advised by other directors or employees of the pursuers that the profits stated in the pursuers' accounts were false, and that he refused or at least failed to act on such advice. They refer to a memo from the defender dated 26 May 1999 which concludes that "it is essential that Revision 72 be suppressed and be confined to the bucket". That memorandum is incorporated into the pleadings.
9. In Article 7 the pursuers aver:

"Further, the defender refused to accept the advice of his fellow executive directors that the pursuers' rail division had failed to achieve its forecast budget for the accounting year 1 July 1998 to 31 June 1999 (sic). The rail division had been forecast to achieve a profit of £2 million in that year. Even on the pursuers' internal figures at that time, it had achieved only a profit of £750,000.00. The defender and his fellow executive directors were aware that approximately £300,000.00 of that supposed profit represented an unsustainable overvaluation of work in progress. The defender's fellow executive directors advised him that sums should be written off from the accounts of the rail division, and that the pursuers should issue a profit warning. The defender refused to accept this advice. The defender refused to allow a profit warning to be issued. The defender refused to allow his fellow directors to write off sums from the accounts of the rail division to reflect the profits that he knew to be false".

Answer 7 consists of a series of calls from the pursuers to provide greater specification of those averments. Those calls had not been answered.

10. Articles 8 and 9 concern the accounting by the pursuers for work done by them on a vessel known as "Sir Bedivere". In May 1998 the pursuers had rendered a final account in the sum of £9,874,586.60. The defenders had paid approximately £5,600,000.00 to account but there was no agreement between the pursuers and their clients as to how much of the balance was due to be paid. The clients had a counterclaim which, although not precisely quantified, was between about £800,000.00 and £1,100,000.00. The clients also disputed some of the items claimed by the pursuers in their final account. The pursuers aver that the defender directed that the pursuers' accounts for the year to 30 June 1999 should record, or at least he acquiesced in the said accounts recording, a receipt of £8,600,000.00 for this contract. They aver that it was not reasonably certain that that sum would be recovered and that in fact settlement was eventually achieved at £7 million. The pursuers had received various technical and legal advice as to the value of this claim. In particular the pursuers had consulted Hunter Consulting, Chartered Surveyors. The pursuers aver that the report from Hunter Consulting which valued the claim at £7.7 million was suppressed by the defender and that the Board of Directors was unaware of its existence until after the Ernst & Young report had been commissioned in April 2000.
11. In Article 9 the pursuers aver that the defender and his fellow executive directors were well aware that it was not reasonably certain that the sum of £8,600,000.00 shown in the pursuers' accounts in respect of the "Sir Bedivere" contract was recoverable. The defender knew in November and December 1998 that a named fellow executive director had sought to delay resolution of the "Sir Bedivere" final account until after the acquisition by the pursuers of two companies had been completed. Since the consideration for these acquisitions consisted partly of shares in the pursuers it was important that the value of the shares in the pursuers should not fall as a result of a substantial write off from the pursuers' accounts which would be necessary if the disputed claim on the "Sir Bedivere" contract was settled. The pursuers also make reference to a discussion paper dated 12 November 1998 for a meeting to be held the following day and to a memorandum dated 7 January 1999 from the defender indicating that although he had not attended that meeting he was aware of what had been discussed. Both of those documents are incorporated into the pursuers' pleadings. The pursuers further aver that in or about September 1999 the defender told the pursuers' auditors, Deloitte & Touche, or at least he was aware that his fellow executive directors had told the auditors, that it was reasonably certain that the outstanding balance of the sum of £8,600,000.00 would be recovered within a short period of time, that this statement was false and the defender knew it to be false, and that he knew that Deloitte & Touche had acted in reliance on that statement in auditing the pursuers' accounts for the period from 1 July 1998 to 30 June 1999. The pursuers refer to a paper prepared by Deloitte & Touche for a meeting of the pursuers' audit committee dated 24 September 1999, which is incorporated into the pleadings.
12. Articles 10 and 11 specify the basis of the pursuers' claim against the defender. In Article 10 the pursuers aver:

"As a director and the chairman of the pursuers, the defender signed the pursuers' accounts for the period to 31 June 1998 (sic), 31 December 1998 and 31 June 1999 (sic), and the pursuers' prospectus for the said placing in March 1999. Copies of the said documents are produced herewith, referred to for their terms, and incorporated herein brevitatis causa. As hereinbefore condescended upon, the defender had procured that the said accounts and the prospectus, falsely recorded the pursuers' profits. Separatim and in any, the defender was aware as hereinbefore condescended upon that the said accounts and prospectus falsely recorded the pursuers' profits. By signing the said accounts and prospectus, the defender represented that the said accounts and prospectus were true and accurate. Such representation by the defender was false, and he knew it to be false. The defender thereby fraudulently misled the pursuers, their non-executive directors and their investors by conspiring to issue false accounts as hereinbefore condescended upon. It was an implied term of the defender's contract of employment with the pursuers that the defender was under an obligation of mutual trust and confidence in relation to the pursuers. It was an implied term of the said contract that the defender would not act in a manner which was contrary to the legitimate interests of the pursuers. By making the fraudulent misrepresentations hereinbefore condescended upon, the defender was in breach of the said implied terms. The defender thereby caused the pursuers to suffer loss and damage as hereinafter condescended upon".

13. In Article 11 the pursuers aver:

"Esto the defender was not aware that the pursuers' profits were falsely recorded in their accounts (which is denied), the defender was negligent in failing to procure that the pursuers' accounts were properly compiled. The defender was the chief executive and chairman of the pursuers. It was an implied term of the defender's contract of employment with the pursuers that the defender was under an obligation of mutual trust and confidence in relation to the pursuers. It was an implied term of the said contract that the defender would not act in a manner which was contrary to the legitimate interests of the pursuers. Accordingly, it was the duty of the defender to ensure that their accounting standards were correctly applied. It was the duty of the defender to ensure that the pursuers' annual accounts accurately reflected the true financial position of the company. It was the duty of the defender to supervise the activities of his fellow executive directors. It was the duty of the defender to investigate and to take appropriate action in respect of any inappropriate conduct on the part of his fellow directors or employees of which he became aware. It was the duty of the defender to alert the auditors of the pursuers to any significant facts that would materially affect the auditor's view of the accounts. It was the duty of the defender to alert the non-executive directors of the pursuers to any significant facts that would materially affect the interests of the pursuers and their shareholders. The defender failed in each and every one of the foregoing duties. The defender thereby breached the said implied terms of his contract of employment. The defender thereby caused the pursuers to suffer loss and damage as hereinafter condescended upon. With reference to the defender's averments in answer, the Compromise Agreement dated 9 February 2000 is referred to for its terms beyond which no admission is made. Quoad ultra the defender's averments in answer are denied except insofar as coinciding herewith. Explained and averred the said Compromise Agreement does not discharge the claim which is the subject matter of this action. At the date when the Compromise Agreement was entered into, the pursuers did not know, nor did they have any reason to suspect, that they might have the present claim, or any similar claim against the defender. Further and in any event, to the extent that the present claim is founded on the fraud and wilful dishonesty of the defender, it is expressly excluded from the scope of the discharge contained in the Compromise Agreement. Reference is made to Clause 3.2 thereof".

The Compromise Agreement is incorporated into the pursuers' pleadings in Article 13. Clause 3.2, which is the subject of specific averment by the defender in Answer 11, provides that the pursuers waived and discharged the defender ".....of, from and against all claims of whatever nature (other than fraud and wilful dishonesty) which may be competent to the (pursuers) against the (defender) arising from his employment and/or from the actings, transactions or omissions of the (defender) as a director of the (pursuers) ....".

14. In Articles 12 to 16 of Condescendence, the pursuers aver the loss which they have suffered as a result "of the fraud, which failing the negligence, of the defender". The largest single item of claim is the professional fees paid to Ernst & Young for their investigation into the overstatement of profits and the preparation of restated accounts. The other heads of claim consist of various payments made by the pursuers which they aver they would not have made "had it not been for the fraud, which failing the negligence, of the defender". Two of these sums were payments to the defender, including a profit related bonus. The final item of claim concerns a liability to the Inland Revenue in respect of PAYE income tax which the pursuers incurred as a result of various profit related payments made to employees in 1999 and 2000.
15. The pursuers' first plea-in-law is in the following terms:

"The pursuers having suffered loss and damage through the fraud et separatim negligence et separatim breach of contract of the defender as condescended upon, are entitled to reparation from him therefor".

The defender's pleadings

16. In addition to a plea-in-law seeking dismissal of the action on the basis that the pursuers' averments are irrelevant et separatim lacking in specification, the defender has the following plea-in-law:

"The pursuers having irrevocably compromised, waived and discharged any claim against the defender based on his alleged negligence, the defender should be assoilzied to the extent that the action is founded on his alleged negligence".

The defender's submissions

17. Mr Cullen, Q.C., for the defender, sought absolvitor in respect of the action insofar as it is based on negligence and quoad ultra dismissal. He criticised the pursuers' pleadings in detail. He drew attention to the high standard of pleading to be expected where fraud is alleged and submitted that the pursuers' pleadings failed to meet that standard. He referred to the decisions in Gillespie v Russell, (1857) 18 D 677, Drummond's Trustees v Melville (1861) 23D 450, Royal Bank of Scotland plc v Holmes 1999 S.L.T.563, Wright v Cotias Investments Inc, 2001 S.L.T.353 and an unreported Opinion of Lord Macfadyen in Stewart Buchanan Gauges Limited v BEC (Scotland) Limited 19 January 2001, as authority for this proposition.
18. Mr Cullen argued that the pursuers' pleadings lacked detail, clarity and precision and that they failed to give fair notice of the case against the defender - such notice being all the more necessary in view of the gravity of the allegation. While this criticism applied to almost all of the pursuers' pleadings, it was levelled particularly at Articles 2 to 4 of Condescendence which set out the general case against the defender. Mr Cullen then subjected the various documents referred to, and incorporated into Articles 5 to 9, to detailed analysis and criticism. The thrust of his criticism was that at best for the pursuers, they showed only the defender's knowledge of work in progress being over-valued and were thus "neutral" in the sense of not disclosing fraudulent intent on the part of the defender. Alternatively the documents related to the period between 30 June 1999 and March 2000 or beyond and thus were irrelevant to the accounts and the prospectus founded on at the beginning of Article 10 of Condescendence which all related to the period prior to 30 June 1999.
19. In relation to the pursuers' case in Article 11 based on negligence, Mr Cullen made two separate submissions. First, he attacked these averments as being irrelevant and lacking in specification. In particular the pursuers' pleadings failed to set out the defender's state of knowledge or other circumstances said to give rise to the specific duties averred. There was a fundamental difficulty for the pursuers in that the duties said to have been breached were all predicated upon the proposition, denied in fact, that the defender was not aware that the pursuers' profits were falsely recorded in their accounts.
20. Secondly, it was argued that the Compromise Agreement dated 9 February 2000 had the effect of discharging the pursuers' present claim against the defender insofar as it was based on negligence and accordingly, on this branch of the case, the defender was entitled to be assoilzied. Mr Cullen referred to Bank of Credit and Commerce International SA v Ali and Others [2002] 1 A.C.251, where the effect of discharge agreements signed by former employees of BCCI was considered by the House of Lords. The point had arisen because of the earlier decision of the House of Lords in Malik v Bank of Credit and Commerce International SA [1998] A.C.20, that claims for stigma damages were sustainable in principle, that is damages caused to employees by their association with BCCI, the stigma of which association was said to handicap the employees in obtaining future employment. In BCCI v Ali the discharge agreements signed by former employees of the bank were in wide terms, but not wide enough to cover a head of claim which, as a matter of law, had not existed at the time when the discharge agreements were signed. Mr Cullen pointed out that that was a very different situation from the present, where there was nothing novel about a negligence claim based on the defender's actings while an employee of the pursuers. Prima facie such a claim would be covered by Clause 3.2 of the Compromise Agreement.
21. In relation to both the fraud case in Article 10 and the negligence case in Article 11 Mr Cullen submitted that the breach of contract averments added nothing to the principal delictual averments. He did not make any specific challenge to the pursuers' averments of loss other than to say that they were irrelevant because of the lack of relevancy and specification in the substantive averments in Article 3 to 11 of Condescendence.

The pursuers' submissions

22. Mr Keen, Q.C., for the pursuers sought a proof before answer on all his pleadings. He noted that although Mr Cullen had criticised numerous details of his pleadings, he had not argued that any particular averments should be excluded from probation, but rather that the whole case should be dismissed and that in respect of the pleadings based on negligence and breach of contract, the defender should be assoilzied. He founded on the familiar dictum of Lord Normand in Jamieson v Jamieson 1952 S.C.(H.L.) 44 at 50:

"The true proposition is that an action will not be dismissed as irrelevant unless it must necessarily fail even if all the pursuers' averments are proved. The onus is on the defender who moves to have the action dismissed, and there is no onus on the pursuer to show that if he proves his averments he is bound to succeed".

Lord Normand also noted:

"The test of irrelevancy is the same for all actions; there is not one standard for actions of divorce and another standard for other actions".

23. Mr Keen's approach, broadly speaking, was to identify the true nature of the pursuers' case, consider the true issues of fact upon which the parties differed and to ask not whether on the pleadings the pursuers were likely to succeed, but whether they must necessarily fail.
24. Mr Keen submitted that the pursuers' case was based not on delict but on breach of contract. As he put it, the pursuers founded upon the conscious or unconscious breach of contract by the defender. The averments of fraud in Article 10 and breach of duty in Article 11 were not averments of delict but rather explanations of the manner in which the breaches of contract were alleged to have occurred. Mr Keen conceded that the pursuers' first plea-in-law was not happily worded, but he did not seek to amend it because, he submitted, the third branch of the plea, namely breach of contract, was apt to cover the case. He conceded that the references in the plea to fraud et separatim negligence should have been references to the manner in which the breach of contract was said to have occurred. In this context Mr Keen drew attention to the fact that there was no submission on behalf of the defender that the damages sought were too remote.
25. The pursuers' case was based on the alleged policy adopted by the defender of deliberately not applying the SSAP 9 accounting standards and over-valuing the pursuers' work in progress and profits on long term contracts. That policy was said to have continued until about March 2000, although the particular accounts and prospectus, signed by the defender and referred to at the beginning of Article 10, related to periods up to 30 June 1999. The defender was aware that the accounts for the year to 30 June 1999 had had to be restated - the restated accounts were adopted into the pleadings. While the pursuers were being put to the proof of the terms of the Ernst & Young report, the defender had not averred that it was wrong in any way.
26. Mr Keen explained that because the pursuers could not prove themselves to have been the intended victims of the defender's deliberate policy, their claim was based on the defender's breach of duties arising from his contract of employment with them. In the context of a mis-statement of the company's financial position in its accounts, the defender might have acted consciously and deliberately, in which case his conduct could be described as fraudulent and would constitute a breach of his contract of employment. Alternatively, he might have been unaware of such a mis-statement, although he should have been aware of it, in which case his breach of contract could be regarded as negligent.
27. The relevant implied term of the contract of employment was the duty to serve with good faith and fidelity. In Malik v BICC the novelty was the recognition by the House of Lords of stigma as a head of damage. That case had proceeded on the basis that an employer could be in breach of an implied obligation not to carry on a dishonest or corrupt business. It did not matter at whom the fraud was directed. It was the fact of the fraud that undermined the contract of employment. In the present case there was no plea that the damages sought were too remote, and it did not matter that the breach of contract had not been identified until after the contract of employment had been terminated. Reference was made to two further cases involving breach by employers of the implied term of trust and confidence in employment contracts, namely French v Barclay's Bank plc [1998] IRLR 646, an example of such a breach having occurred without the termination of the contract, and Gogay v Hertfordshire County Council [2000] IRLR 703 which again showed that such a breach did not require to be linked to the termination of the contract.
28. Mr Keen submitted that the pursuers' pleadings gave fair notice of the fraud averred against the defender. A distinction fell to be drawn between the requirement to give fair notice through adequate specification of the fraud alleged, which required to be pled, and evidence which did not. He also distinguished between two aspects of specification. On the one hand, averments might be so lacking in specification that the case could be said to be irrelevant and thus fell to be dismissed. On the other hand, an averment might be lacking in specification and thus would fall to be excluded from probation while leaving an otherwise relevant case. Accordingly, even where averments might lack specification, that did not necessarily lead to dismissal of the action.
29. With regard to the specific documents founded on by the pursuers and incorporated into the pleadings, the pursuers did not need to demonstrate at this stage that they could bear only the construction for which the pursuers contended. It was enough that they were capable of bearing such a construction. They would be spoken to in evidence in due course, when their meaning would become more clear. Much detail was to be found in the incorporated documents. For example, the directors of the pursuers, both executive and non-executive were named in the financial accounts in the pleadings.
30. With regard to the case pled in Article 11 and involving unconscious misrepresentation in the accounts, enough had been averred that one could not be satisfied that the discharge contained in the Compromise Agreement would be effective against such a claim. The critical averment for the pursuers was that at the date when the Compromise Agreement had been entered into, the pursuers had not known, nor had they had any reason to suspect, that they might have the present claim, or any similar claim, against the defender. Furthermore, it was argued that the defender in any event had knowledge of the over-valuation of the work in progress which would preclude him from being able to found on the discharge contained in Clause 3.2. Reference was made to the reasoning of Sir Richard Scott V-C in the Court of Appeal in BCCI v Ali [2000] 3 All.ER 51 and to the speeches of Lord Bingham, Lord Nicholls and Lord Clyde in the House of Lords.
31. Mr Keen addressed the line of authority in relation to the standard of pleading required where fraud is alleged and referred in particular to the Opinions of Lord Macfadyen in The Royal Bank of Scotland plc v Holmes and Stewart Buchanan Gauges Ltd v BEC (Scotland) Ltd. He accepted the need to aver: (i) the identity of the maker of the representation, (ii) the method by which the representation was made, (iii) that the representation was false, and (iv) the knowledge of the maker of the representation that it was false. In the present case, this had all been averred when one looked at the pleadings as a whole and at the various incorporated documents.

The defender's response

32. In response, Mr Cullen submitted that the fact that fraud was being pled as part of a breach of contract case did not alter the degree of specification required or the weight to be given to the authorities on the subject. He also made detailed submissions on the Ernst & Young report which, although incorporated into the pursuers' pleadings, had not been lodged prior to the debate. It was lodged by Mr Keen in the course of his submissions. Its lodging was not opposed by Mr Cullen who already had a copy of it and had been able to make averments in Answer 4 about it. According to Mr Cullen the averments at the beginning of Article 4 of Condescendence were of great width and sweep and went substantially further than the subject matter of the Ernst & Young report. While accepting the modern approach to relevancy and the reluctance to strike out a case as lacking in relevancy and specification, the issue was one of basic fairness and fairness to the defender required that step to be taken in this case.
33. In relation specifically to the Ernst & Young report, its whole terms should not be remitted to probation because it related to matters other than the averments on record and it did not reach a conclusion, nor was it intended to, on the defender's responsibility for the misrepresentations contained in the accounts. Reference was made to the Opinion of Lord Stott in Barton v William Low & Co Ltd 1968 S.L.T.(Notes) 27. In that case it was agreed that a proof before answer should be allowed and the issue was whether some 40 specified paragraphs of the report of the departmental committee of inquiry should be remitted to probation. The relevancy of the incorporated material was challenged on three grounds. First, it was said to contain expressions of opinion, beliefs and judgments on evidence which had been before the departmental committee, and it was conceded that it was irrelevant to lead evidence of the committee's conclusions or deliberations. The opinions involved were not just those of the committee but of other persons. Secondly, passages in the incorporated paragraphs had no intelligible meaning when applied to the facts of that case. Thirdly, passages of the report simply had nothing to do with the case. Lord Stott accepted these submissions and refused to remit the passages of the report to probation. Mr Cullen submitted that the same could be said about the Ernst & Young report. It was not easy to follow. It reviewed various matters including some which were not the subject of the pursuers' present case against the defender. Furthermore, the report discloses that there are two different opinions within the accounting profession as to the precise meaning of SSAP9. The consequence, according to Mr Cullen, was that the pleadings incorporating the Ernst & Young report would lack clarity and would fail to give a reasonable degree of notice of the pursuers' case. For these reasons the report should in any event be excluded from probation.
34. With regard to the implied term of mutual trust and confidence arising from the contract of employment, it was said by Lord Steyn in Malik v BCCI at p.46C-D:

"The major importance of the implied duty of trust and confidence lies in its impact on the obligations of the employer: Douglas Brodie, 'Recent Cases, Commentary, the Heart of the Matter: Mutual Trust and Confidence' (1996) 25 I.L.J.121".

Mr Cullen referred to various passages in that article in support of that proposition.

35. With regard to the Compromise Agreement, it was for the pursuers to aver specifically the facts and circumstances which would entitle them to seek to qualify the plain language of the discharge granted by them in that Agreement. Their only averment on the subject related to their state of knowledge rather than that of the defender and the decision in BCCI v Ali did not assist the pursuers because it related to the specialty of the emergence, as a matter of law, of a new head of damages which had not existed at the time of the original discharge agreement. The pursuers could not make out a case on "sharp practice" as described by Lord Nicholls in BCCI v Ali simply because there are no averments of sharp practice on record.

The defender's response

36. Mr Keen accepted that the purpose of the Ernst & Young report was not to examine the defender's responsibility in the matter but rather to set out the factual background of inaccurate financial record keeping between 1998 and 2000. It was not the pursuers' case that the defender was liable for the totality of the mis-statements set out in the Ernst & Young report, but that he had material responsibility for those mis-statements. In other words, the defender materially contributed by his actings complained of to the mis-statement of the figures contained in the three sets of accounts and the prospectus. The method by which he did so was set out specifically in Article 5 to 9. If the defender's contribution was material, it was unnecessary to put a precise figure on it.
37. Mr Keen distinguished the Opinion of Lord Stott in Barton v William Low & Co on the basis that the report in that case was clearly concerned with matters of opinion in a way in which the Ernst & Young report was not. The Ernst & Young report set out facts and figures and it did not matter that the defender was not responsible for all of the mis-statements in the accounts and prospectus. As Mr Keen put it, the pursuers would not fail because responsibility for the last £5 could not be laid at the defender's door. The test would be whether he had made a material contribution to the ultimate mis-statement.

The issues

The standard of pleading of fraud

38. There was substantial agreement between counsel as to the standard of specification required when pleading fraud. There is a distinction between relevancy and specification, which was explained by Lord Macfadyen in Stewart Buchanan Gauges Ltd v BEC (Scotland) Ltd at para.14:

"It seems to me that, in identifying the tests which averments of fraudulent misrepresentation must pass, it is worth making the distinction between relevancy and specification. So far as relevancy is concerned, to make a case that a contract was induced by fraudulent misrepresentations, the pursuer must in my opinion set out in averment (i) the representation that was made, (ii) that the representation was false, (iii) that the maker of the representation knew when he made it that it was false (or acted recklessly, in that he did not know and was indifferent to whether it was true or false), (iv) that the maker of the representation, if not the defender, was one for whose acting the defender was in law answerable, and (v) that the pursuer was induced by the representation to enter into the contract in question. So far as specification is concerned, the authorities in my view justify the conclusion that when fraud is alleged, a high standard of specification is required. It seems to me that it is appropriate to bear in mind that the rule requiring pleadings to be specific is founded in fairness. The party against whom any allegation is made is entitled to have fair notice in the other party's pleadings of the substance of the allegation. Where the allegation is of fraud, the Courts have applied that rule of fairness particularly strictly. But, in my view, even in a case of fraud, a defender is not entitled to complain of lack of specification if the pursuer's pleadings give him what in the circumstances amounts to fair notice of the allegation. He cannot, through reliance on the authorities about the high standard of specification required in cases of fraud, demand that the pursuer's averments go into more detail than is necessary to give fair notice of the case. Subject to that point, however, it must in my view be borne in mind that the strict standard of specification will be applied to each of the essential elements of the case identified above".

I agree. In my opinion the same considerations of fairness, which are related to the gravity of the charge, apply to averments of fraud in the context of an action based on breach of contract as they do in an action based on delict. Mr Keen did not submit any reason why the standard should be different. There is, however, a practical difference in that item (v) of Lord Macfadyen's list does not apply in a breach of contract case, where the questions are first causation and then remoteness of loss. In the present case, remoteness has not been challenged, nor have the averments of causation

Implied contractual term.

39. The pursuers rely in Articles 10 and 11 on the existence of an implied term of the defender's contract of employment with the pursuers that he was under an obligation of mutual trust and confidence in relation to the pursuers. There is ample authority for the existence of such an implied term and such an obligation. This implied term was recognised in the speeches in the House of Lords in Malik v BCCI (per Lord Nicholls at 35A-B and Lord Steyn at 45D-H). Lord Steyn emphasised the reciprocal nature of the duties on the employer and employee (at 45E-F). As Lord Steyn explained (at 46C-D) the major importance of the implied duty of trust and confidence lies in its impact on the obligations of the employer, and that was the principal topic considered by Mr Douglas Brodie in his article referred to by Lord Steyn. The implied obligation is, however, equally applicable to the employee although, as Mr Brodie pointed out, (1996 25 ILJ 121 at 121):

"Insofar as the duty of mutual trust and confidence concerns the employee's duties to his employer it adds little the well established duty of fidelity".

That duty of fidelity would, in my opinion, require the defender not to act in a manner which was contrary to the legitimate interests of the pursuers.

The pursuers' pleadings of conscious misrepresentation

40. The misrepresentation alleged by the pursuers is that the pursuers' profit and earnings per share disclosed in their accounts were artificially increased. That is clearly averred as is the method of overstatement, namely, over-valuing the work in progress on long term contracts and recording profits in the accounts which it was not reasonably foreseeable could be recovered from customers. This information contained in the accounts is averred to be a misrepresentation because the manner of accounting did not accord with the relevant accounting policy, SSAP9, which was stated to be the policy in terms of which the accounts had been prepared. The misrepresentation was made by the defender signing the pursuers' accounts and a prospectus as the accounts of, and the prospectus issued by, a public limited company. These accounts and the prospectus are averred to have been directed to "the City", but it is self-evident that they would be available to mislead actual and prospective investors if they contained misrepresentations of profit and earnings per share.
41. Mr Cullen for the defender argued that the pursuers had failed to aver specifically which figures in the accounts and the prospectus were inaccurate and what the correct figures should have been. Mr Keen submitted that in the context of this type of misrepresentation, the precise figures did not need to be averred but in any event detailed information was contained in the Ernst & Young report. The misrepresentations are averred to have been contained in the pursuers' annual accounts for the years to 30 June 1998 and 30 June 1999 and in the six monthly accounts to 31 December 1998. The prospectus which is said to contain misrepresentations was prepared in about March 1999 and contains figures derived from the accounts to 30 April 1998.
42. It is averred that Ernst & Young were instructed to investigate the state of the pursuers' accounts some time after 3 April 2000. Their subsequent report dated 28 June 2000 discloses that their letter of engagement was dated 18 April 2000. In terms of that engagement they were to review the following matters:
• "The net assets of the Group at 31 March 2000, including a detailed review of the contract balances and contract accounting;
• Financial reporting and controls;
• The accounting for contracts, and in particular the Sir Bedivere contract, at the time of the company's flotation; and
• The arrangements for the acquisition of Garvel Clyde Limited and Acumen Management Limited".

As a result of Ernst & Young's investigation, the pursuers' accounts for the year to 30 June 1999 required to be restated. This was done within the pursuers' accounts for the year to 30 June 2000. The three sets of accounts said to contain the misrepresentations and the accounts for the year to 30 June 2000 are all incorporated into the pursuers' pleadings. Neither counsel made any detailed submissions regarding the contents of any of those accounts nor did Mr Cullen challenge specifically the incorporation of any of them.

43. The accounts for the year to 30 June 2000 show that Ernst & Young had replaced Deloitte & Touche as the pursuers' auditors. They contain an explanation that the pursuers' accounts for the year to 30 June 1999 required to be restated because the pursuers had not properly applied their stated accounting policy "in relation to long term contracts and [they] had generally treated contracts of a short term nature on the same basis as long term contracts. All of this resulted in profit being recognised on long term and short term contracts before it was appropriate to do so. In particular, profit on contracts had been recognised when the final outcome could not be assessed with reasonable certainty, the profit included had not been calculated on a prudent basis and revenues derived from variations and claims on contracts had been recognised before the outcome could be assessed with reasonable certainty". Those accounts also listed the amounts by which various particular figures in the accounts to 30 June 1999 had been mis-stated and required to be corrected. Armed with that information it is perfectly possible to identify the mis-stated figures in the accounts to 30 June 1999 and to compare them with the corresponding, restated figure contained in the accounts to 30 June 2000. The accounts for the year to 30 June 2000 also refer to the impact of the mis-statements on the years ended 30 June 1998 and earlier and explain that that impact had not been analysed further because there was insufficient information to allocate the errors to the relevant accounting periods with sufficient accuracy. Furthermore, the directors believed that no useful commercial purpose would be served by attempting to adjust the accounts for those earlier years. In these circumstances I consider that the pursuers' pleadings relevantly aver the mis-statements complained of and contain adequate specification to provide the defender with fair notice of the mis-stated figures.
44. Articles 2, 3 and 4 of Condescendence contain averments in general terms of the fraudulent misrepresentations said to be contained in the accounts and of the defender's responsibility for them. As was accepted by Mr Keen, the specification of how the defender was aware of, and actively involved in the making of those mis-statements is contained in Articles 5 to 9.
45. In Article 5 the pursuers refer to a memorandum, dated 15 June 1998, from the defender to Mr Avery, a fellow executive director appointed in January 1998. The memorandum concerns the computation of profit related pay. The inference which the pursuers seek to take from that document is that the defender was aware that work in progress was being over-valued, that profit, which might never accrue, was being taken too early on work in progress and that the defender was concerned that the pursuers' cash flow was being adversely affected by profit related pay being paid (a) too early and (b) which might not be warranted when the actual level of profit was finally determined. At the very least, the memorandum appears to show that the defender was aware that work in progress was being over-valued. In my opinion it is consistent with the inference which the pursuers seek to draw from it. Since the memorandum was dated 15 June 1998, it would also be consistent with the defender being aware that work in progress was over-valued in the pursuers' accounts to 30 June 1998, although the timing is such that it could not be conclusive.
46. The pursuers also refer to, and incorporate into their pleadings, the minutes of a monthly management meeting dated 23 April 1999. Although the defender did not attend that meeting, he was on the distribution list for those minutes and the pursuers aver that they were distributed to him. The relevant averment is that the defender was aware that, as a result of his directions, at least some employees of the pursuers were openly planning to over-value their work in progress. The minutes appear to show that four named employees of the pursuers were reporting to Mr Avery on (a) their best estimates of the profits which various divisions of the company would show in their March 1999 profit and loss accounts, and (b) various anticipated financial figures for the "next year" including figures for "Over-valued WIP" and (c) that Mr Avery would need to know within approximately ten days if those figures, including "over-valued WIP" were believed to be achievable. In my opinion the terms of the minutes are at least consistent with the relevant averment that employees were openly planning to over-value their work in progress. Although the "next year" may well refer to the financial year to 30 June 2000, a year for which the defender did not sign the accounts, the averment is that this was going on at the direction of the defender in the year to 30 June 1999.
47. Article 6 is concerned with a draft profit forecast known as "Revision 72". It is averred that Revision 72 predicted that the profits of the pursuers would fall short of their stated plans for growth and that the defender directed that it should be suppressed and destroyed and replaced by an earlier, inaccurate forecast which showed higher levels of growth. The pursuers refer to, and incorporate into their pleadings, a memorandum from the defender to an employee of the pursuers, W Lang, which is marked "FAO: G. Hughes, S. Avery", two executive directors of the pursuers at the time. In my opinion the terms of that memorandum are consistent with the pursuers' averments, in particular, that the defender stated that although there were corrections which should be made to the accounts during 1999/2000, nonetheless those corrections should not be shown in the accounts because they would disclose to investors that the pursuers had not achieved the core growth which they had led investors to expect. The memorandum concludes:

"In the meantime, it is essential that Revision 72 be suppressed and be consigned to the bucket".

48. In Article 7 the pursuers make averments specifically about their rail division in the financial year to 30 June 1999 and the actual and forecast profits for that period. The pursuers aver that the defender and his fellow executive directors were aware that approximately £300,000.00 of supposed profit represented an unsustainable over-valuation of work in progress, and that his fellow executive directors advised him that sums should be written off and a profit warning issued accordingly. The defender's call for specification of how he was aware of that information and how and when he was advised by his fellow executive directors to make the write off are unanswered by the pursuers. It is perhaps noteworthy that the memorandum relating to Revision 72 was written by the defender during the financial year to which these averments relate.
49. Article 8 concerns the Sir Bedivere contract. The pursuers' prospectus of March 1999 (No.6/13 of process) which is incorporated into the pursuers' pleadings, stated (at page 94):

"In relation to a contract entered into with Babcock Rosyth Defence Limited [the Sir Bedivere contract], the Company on 2 February 1998 gave notice that it proposed to refer to arbitration certain disputes arising under a contract in respect of sums owed to the Company. The total value of work performed under this contract amounted to approximately £9.7 million of which a total of £7 million has been paid or agreed by Babcock Rosyth Defence Limited. No arbitration proceedings have commenced as negotiations between the parties are ongoing and the Directors are confident of a satisfactory outcome to this matter".

The latter is referred to again in Note 14 to the pursuers' accounts for the year to 30 June 1999 which explains the "Debtors" entry in the balance sheet:

"The Directors have not changed their view of the financial outcome of this contract from that taken last year, or at the time of the issue of the Placing Document. They remain confident of a satisfactory outcome to this matter, and that the values finally agreed will not be substantially at variance from those included in the financial statements for each year. Until negotiations are completed, it is not possible to estimate, with any reasonable degree of certainty, whether or not adjustments are required to the figures included in the financial statements for Turnover, Profits before and after taxation, and Amounts Recoverable on contracts".

In Article 8 the pursuers aver that the accounts recorded a receipt of £8.6 million from this contract.

50. The Ernst & Young report shows that on the basis of a contract valuation shown in the accounts of £8,674,000, the profit to the pursuers' would have been £549,000. In the event, the total receipt from the clients was £7 million and the resultant loss to the pursuers of £1,667,000. According to the Ernst & Young report, Hunter Consulting, Chartered Quantity Surveyors, provided an opinion to Mr Avery of the pursuers as to the value of this contractual claim to the pursuers. Hunter Consulting concluded that the probable figure lay within a range and opined that the "achievable" figure was £7.7 million. According to Ernst & Young a loss provision should have been made in the accounts to reduce the carrying value of £8,674,000 to £7.7 million in the balance sheets as at 30 June 1998 and 30 June 1999. On record the pursuers aver that the report from Hunter Consulting was suppressed by the defender and that the Board of Directors was unaware of the report from Hunter Consulting until after the Ernst & Young report was commissioned. That averment is not entirely consistent with the reference in the Ernst & Young report to Hunter Consulting having reported to Mr Avery, one of the pursuers' directors. That Mr Avery was aware of the Hunter Consulting report is perhaps borne out by the pursuers' subsequent averment that prior to the involvement of Mr Wilson Evans in contract discussions, Mr Avery had conducted all negotiations with the clients and had reported back to the pursuers' Board. In my opinion the pursuers have given fair notice of the defender's knowledge of and involvement in an over-valuation in the pursuers' accounts for the years to 30 June 1998 and 1999 and in the prospectus of March 1999. It is also significant that it is apparent from the accounts and from the Ernst & Young report that the contract was over-valued as a "debtors" entry in the balance sheet, with the necessary consequence that unearned profit had already been taken by the pursuers to the extent of £549,000 which would have been reflected in the relevant profit and loss account and on the other side of the balance sheet.
51. In Article 9 the pursuers aver that the defender was aware that in late 1998 his fellow executive director, Mr Evans, had sought to delay resolution of the "Sir Bedivere" final account until after the acquisition by the pursuers of two other companies because part of the consideration for these acquisitions consisted of shares in the pursuers and both he and Mr Evans knew that there was a significant likelihood that when the Sir Bedivere contract was finally settled, a substantial write off would be required from the pursuers' account which would result in a fall in the value of the pursuers' shares. The pursuers have incorporated into the pleadings two documents (Nos. 6/8 and 6/9 of process) which appear to show at least that the defender was aware that Mr Evans was concerned about the timing of the settlement of the final account of the Sir Bedivere contract, that that timing was related to the conclusion of the two company acquisitions and that there might be a "possible hole" after that final settlement.
52. The pursuers also aver, under reference to a paper prepared by Deloitte & Touche for a meeting of the pursuers' audit committee dated 24 September 1999, that the defender told Deloitte & Touche, or at least that he was aware that his fellow executive directors had told them, that it was reasonably certain that the sum of £8.6 million would be recovered within a short period of time. They also aver that the defender knew that Deloitte & Touche had acted in reliance on that statement, which he knew to be false, in auditing the pursuers' accounts for the period to 30 June 1999. As the defender signed the accounts for the year to 30 June 1999, which contain the "debtors" note to which I have already referred, at least part of that averment is supported by the terms of those accounts.
53. I am persuaded that the pursuers' averments, when read fairly in light of the incorporated documents, give fair notice of the defender's alleged knowledge of and involvement in the misrepresentations upon which their case of breach of contract based on conscious misrepresentation is based.

The pursuers' pleadings based on unconscious misrepresentation

54. This branch of the pursuers' case assumes that the defender was unaware that the pursuers' profits were falsely recorded in their accounts and alleges that he was negligent in failing to procure that they were properly compiled. In my opinion, these averments in Article 11 are irrelevant. The pursuers fail to aver why the defender, as chief executive and chairman of the pursuers, was under an obligation "to ensure that their accounting standards were correctly applied", when ex hypothesi he was unaware that the pursuers' profits were inaccurately recorded. Similarly no factual basis is averred for a duty on the defender "to ensure that the pursuers' annual accounts accurately reflected the true financial position of the company". Nor is it explained why he was under a duty to supervise the activities of his fellow executive directors. The subsequent averments of duties on the defender necessarily involve him having acquired some knowledge of accounting irregularity. Mr Keen accepted this difficulty and sought to argue that although it was assumed that the defender had no knowledge that the pursuers' profits were falsely recorded in their accounts, he nonetheless had knowledge, as previously averred, of over-valuation of work in progress. I am unable to accept that argument because of the inevitable link between debtors and work in progress on the one hand and profit on the other hand in the pursuers' accounts. According to the pursuers' averments, the company's profits were misstated because profit had been taken on over-valued work in progress. The Sir Bedivere contract is, strictly speaking, an example of over-valued completed and invoiced work rather than work in progress. That is why it comes under the heading of "debtors" in the balance sheet, but the principle of taking unearned profit is the same. If profits are over-stated on one side of the balance sheet, work in progress and/or debtors will be over-stated on the other. Prima facie, therefore, there is a difficulty for the pursuers in seeking to aver that the defender was unaware that the pursuers' profits were falsely recorded while at the same time ascribing knowledge to him of over-valued work in progress. If such a distinction could be drawn, it would require, in my opinion, to be the subject of specific averment as would the precise basis for the duties averred.

The Compromise Agreement

55. The Compromise Agreement relates only to the pursuers' case based on unconscious misrepresentation and is no longer relevant because I am dismissing that branch of the pursuers' case. If the pursuers had a relevant case of breach of contract arising from unconscious misrepresentation, the terms of the Compromise Agreement would have to be considered.
56. The Compromise Agreement was first referred to in the pleadings by the pursuers as a head of damages. They aver that they would not have made certain payments to the defender under that Agreement had it not been for the fraud of the defender. They also aver that esto the defender did not act fraudulently, which they deny, they would not have made these payments to the defender had it not been for his negligence. In answer to the pursuers' case in Article 11 based on unconscious misrepresentation, the defenders plead the discharge contained in Clause 3.2 of the Compromise Agreement. The pursuers then respond by explaining that the Compromise Agreement did not "discharge the claim which [was] the subject matter of this action". They then aver:

"At the date when the Compromise Agreement was entered into the pursuers did not know, nor did they have any reason to suspect, that they might have the present claim, or any similar claim, against the defender".

They then point to the expressed exclusion of claims founded on fraud or wilful dishonesty.

57. Neither party avers the circumstances in which the Compromise Agreement was entered into. The Agreement itself has been incorporated into the pleadings by the pursuers. The pre-amble to the Agreement is brief and uninformative and refers only to the fact of the termination of the defender's employment with the pursuers and that the defender and the pursuers "desire to settle fully and finally any and all differences between them in relation to the defender's contract of employment with the pursuers and the termination thereof". Clause 3 of the Agreement is entitled: "Waiver of Claims" and contains first a renunciation by the defender of any right he may have to take proceedings before an Employment Tribunal or Court seeking "reinstatement, re-engagement, specific implement, declarator, damages, compensation or other statutory or common law remedy in connection with or arising out of his contract of employment or the termination thereof". There then follows Clause 3.2 the relevant terms of which I have already quoted. Prima facie, therefore, the discharge would appear to be sufficiently wide to prevent an action at the instance of the pursuers based on unconscious misrepresentation by the defender, although it would not be a bar to one based on conscious misrepresentation.
58. Both parties referred to the recent guidance on the interpretation of discharge clauses of this nature to be found in BCCI v Ali, both in the Court of Appeal and in the House of Lords. In the Court of Appeal, Sir Richard Scott V-C [2000] 3 All.E.R. 51 at 58 considered whether there was a rule of equitable construction applicable to releases and concluded:

"In my judgment, there are no such things as rules of equitable construction of documents. And there are no rules of construction that are peculiar to releases. There are rules of construction that are applicable to all documents. Under these rules the Court must try and ascertain the intentions of the party in question, if the document is unilateral, or if the parties, if more than one person is party to it, and, in the light of those intentions, objectively ascertained, determine the meaning that should be attributed to the words used in the document. Principles of equity have, in my opinion, nothing to do with the process of construction".

That approach was approved in the House of Lords.

59. Lord Bingham [2002] 1 A.C.251 at 259 describes the approach to construction thus:

"I consider first the proper construction of this release. In construing this provision, as any other contractual provision, the object of the Court is to give effect to what the contracting parties intended. To ascertain the intention of the parties the Court reads the terms of the contract as a whole, giving the words used their natural and ordinary meaning in the context of the agreement, the parties' relationship and all the relevant facts surrounding the transaction so far as known to the parties. To ascertain the parties' intentions the Court does not of course inquire into the parties' subjective states of mind but makes an objective judgment based on the materials already identified. The general principles summarised by Lord Hoffman in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 912-913 apply a case such as this". (My emphasis).

In the present case I note that the defender, who founds upon the discharge in Clause 3.2, does not aver the circumstances in which the Compromise Agreement was entered into, save to deny the pursuers' averment that at the date when the Agreement was entered into the pursuers did not know and had no reason to suspect that they might have the present claim against the defender.

60. Lord Bingham went on to consider a number of English authorities on the subject of the construction of contractual discharges. He referred in particular (at 261-262) to the views of Malins, V-C in Ecclesiastical Commissioners for England v North Eastern Railway Co (1878) 4 Ch.D.845 at 853 and in Turner v Turner (1880) 14 Ch.D.829 at 843. In the latter case he stated:

"But it has always been the rule of this Court to construe releases and documents of that kind with regard to the intention of the parties, and to refer in such cases to the state of the property which was known at the time".

Lord Nicholls made the same point (at 265):

"Further, there is no room today for the application of any special 'rules' of interpretation in the case of general releases. There is no room for any special rules because there is now no occasion for them. A general release is a term in a contract. The meaning to be given to the words used in a contract is the meaning which ought reasonably to be ascribed to those words having due regard to the purpose of the contract and the circumstances in which the contract was made. This general principle is as much applicable to the general release as to any other contractual term. Why ever should it not be?". [My emphasis].

It appears to me that beyond these general statements of the approach to construction, much of what is contained in the speeches in the House of Lords in BCCI v Ali has to be approached with some caution because of the particular factual background to that case, namely the emergence, as a matter of law, of a new head of damages which was not known, nor within the reasonable contemplation of the parties at the time of the discharge. The present case is very different because the possibility of a claim by the pursuers against the defender for negligence in the performance of his contractual duties existed, as a matter of law, at the time when the Compromise Agreement was entered into. The question is whether the parties intended the discharge to cover such a possible claim.

61. In BCCI v Ali it was held that the discharge did not prevent a claim for stigma damages which, as a matter of law, had not existed at the time when the discharge was granted. At that time both parties were ignorant as the possibility of such a claim. Lord Bingham distinguished the materially different type of case which he described as "sharp practice" (at 267):

"Thus far I have been considering the case where both parties were unaware of the claim which subsequently came to light. Materially different is the case where the party to whom the release was given knew that the other party had or might have a claim and knew also that the other party was ignorant of this. In some circumstances seeking and taking a general release in such a case, without disclosing the existence of the claim or possible claim, could be unacceptable sharp practice. When this is so, the law would be defective if it did not provide a remedy".

62. Lord Clyde considered whether the discharge had been intended to cover simply claims arising from the termination of the employment contract or whether it was meant to be wider than that. In this context he took account of the amount of the payment that had been made to Mr Ali and considered whether it was likely to have been intended to cover a future claim or whether it related to an existing claim arising from the termination itself, and the circumstances of which were known to both parties.
63. In the present case the almost total absence of averments as to the circumstances in which the Compromise Agreement was entered into is unhelpful. It is also difficult to imagine the defender's state of knowledge at that time because of the hypothesis on which Article 11 of Condescendence proceeds, namely that the defender was not aware that the pursuers' profits were falsely recorded in their accounts. Mr Keen submitted in relation to the Compromise Agreement as he had done in relation to the pleadings of unconscious misrepresentation, that the hypothesis did not suppose that the defender was unaware of the practice of over-valuing work in progress and that that knowledge brought the present case into the territory of "sharp practice" described by Lord Nicholls in BCCI v Ali. I have already explained my difficulty in accepting that such a distinction between knowledge of mis-stated profits and mis-stated valuations of work in progress can be drawn on the basis of these pleadings. If, however, I am wrong on that point then Mr Keen is correct in pointing to his averments elsewhere of the defender's knowledge of over-valuations of work in progress, that could, in my opinion, bring the defender within the category of "sharp practice" in which case a proof before answer on the averments relating to the Compromise Agreement would have been appropriate. Even without averments of sharp practice, I am inclined to the view that it would have been unsafe to have granted absolvitor by reason of Clause 3.2 in the Compromise Agreement in respect of a relevantly pled case of unconscious misrepresentation without the benefit of proof as to the circumstances in which it was entered into. Mr Keen has accepted that a proof before answer is appropriate in respect of the defender's pleadings.

The Ernst & Young report

64. In my opinion the Ernst & Young report is of a different type from that considered by Lord Stott in Barton v William Low & Co Ltd. In that case an Aberdeen housewife sued a firm of grocers from whom she had bought corned beef which, she claimed, was infected and caused her to contract typhoid fever. The report which she sought to incorporate by reference in her pleadings was that of the departmental committee of inquiry which had heard evidence as to the source of the outbreak of typhoid. It contained expressions of opinion, beliefs and judgments formed on the evidence which had been before the departmental committee. In the present case, the Ernst & Young report is a report by the pursuers' auditors and is essentially an expansion of the explanation of the restatement of the pursuers' accounts for the year to 30 June 1999 contained in the pursuers' accounts to 30 June 2000 (No.6/2 of process) to which exception was not taken by Mr Cullen. While it is true that that report contains much detailed information on matters not directly the subject of averment by the pursuers, so do the accounts, which are relevant for the same reason. In order to understand the significance of particular figures in the accounts, such as those for profit, debtors and work in progress, it is necessary to see the whole accounts and their accompanying explanatory notes. The same applies to the Ernst & Young report. Specific figures are considered and explained but their relevance to the figures carried forward to the restated accounts can only be appreciated in light of the other changes that were being made. Mr Keen did not submit that the defender was wholly responsible for the mis-stated figures in the accounts, but rather that his actions materially contributed to those mis-statements. The Ernst & Young report enables the materiality of the alleged mis-statements to be considered. The report also contains further specification of the pursuers' case which the defender seeks.

Result

65. For the reasons which I have discussed, I sustain the defender's first plea-in-law to the extent only of excluding from probation the pursuers' averments in Article 11 of Condescendence. Quoad ultra I allow a proof before answer on the whole pleadings. Since Mr Keen did not seek to argue a case based on the delict of fraud or negligence and he accepted that the pursuers' first plea-in-law was not happily framed, I repel it insofar as it relates to a claim based on the delicts of fraud and negligence.