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Cite as: [2003] ScotCS 216

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Hamilton & Ors v. Allied Domecq Plc [2003] ScotCS 216 (01 August 2003)

OUTER HOUSE, COURT OF SESSION
A283/01	OPINION OF LORD ABERNETHY in the cause JOHN STEWART HAMILTON AND OTHERS Pursuers; against ALLIED DOMECQ PLC Defenders:   ________________

 

Pursuers: Hodge, Q.C.; Clark; Simpson & Marwick, W.S.

Defenders: Mrs E Swanson, Solicitor Advocate; Maclay Murray & Spens

 

1 August 2003

Introduction and Background

[1]     In this action the pursuers seek damages for loss sustained as a result of their having been induced by negligent misrepresentation to enter into a contract with the defenders' subsidiary company J. Lyons & Co Ltd.

[2]     The first pursuer ("Mr Hamilton") has had long experience in the mineral (or spring) water industry both in this country and abroad. He has built up a considerable expertise. In the course of time he met Mr Marwan Kalo who had founded a water company known as Gulfa Mineral Water in Sharjah, which operated in conjunction with Evian, one of the major French mineral water producers. Mr Kalo (a two-thirds share) and Mr Hamilton (a one-third share) are the owners of the second pursuers, a company incorporated in Panama.

[3]     From 1979 to 1986 Mr Hamilton was actively involved with Highland Spring Ltd, the company which produces Highland Spring mineral water. It has premises at the village of Blackford in Perthshire. Mr Hamilton had a substantial shareholding in the company (as did Mr Kalo). For a time he was a non-executive director and then from early 1980 to May 1986 he was managing director.

[4]     During Mr Hamilton's time with Highland Spring Ltd a survey of the area in and around Blackford was carried out, the results of which led him to believe that a further mineral water plant could be established there. At that time the UK market in bottled water was dominated by French producers. UK producers had only a small share of the market. The market, however, was growing and Mr Hamilton was of the view that it would continue to grow, as indeed it did. By the time Mr Hamilton left Highland Spring Ltd in 1986 it was a successful company, was growing at 20% per annum and had taken 25% of the then UK market.

[5]     After leaving Highland Spring Ltd in 1986 Mr Hamilton left the mineral water business for a time but in 1989 he was introduced to a company called Gleneagles Maltings Ltd which later became Gleneagles Spring Waters Co Ltd ("Gleneagles"). This company had been incorporated on 9 September 1985. It owned a spring in some disused maltings, also in Blackford, and had obtained registration for the water as a natural mineral water under the relevant EEC directive. However, it had no financial resources. Following a brief review Mr Hamilton concluded that its water sources were inadequate for development. From his time with Highland Spring Ltd, however, when the survey had been made of the Blackford area, Mr Hamilton knew of two springs on the Gleneagles estate, which marched with the Blackford estate. There was a substantial volume of water available from these springs. Mr Hamilton had a meeting with Mr Martin Haldane, a trustee of the estate, with a view to the possibility of developing these. At about this time Mr Hamilton also went to Netherton Farm, near Blackford, where there was another spring with a good supply of water, and made contact with the owner there.

[6]     As a result of all this Mr Hamilton and Mr Kalo felt that a mineral water project was worth pursuing. They therefore made an investment in Gleneagles. Mr Hamilton bought 1,166,670 20p shares and the second pursuers bought 2,333,340 20p shares. These were all the shares in Gleneagles which had been issued at par credited as fully paid. The authorised share capital of the company was £2 million divided into 10 million ordinary shares of 20p each. After lengthy discussions and negotiations the necessary agreements to embark upon the project were obtained. These included a water supply agreement with Gleneagles estate, the necessary consents for the demolition of the existing malting buildings and for replacement buildings and a pilot factory on the Gleneagles estate bottling a limited supply of the product for test marketing. Applications were also made with the Trade Mark Registry for the name Gleneagles in the soft drinks category. As yet, no steps were taken with regard to Netherton Farm, although later, in 1992, an option was taken to purchase the field where the spring was.

[7]     By about 1990, therefore, Gleneagles had valuable rights and was producing a small quantity of water under the Gleneagles brand name. But the quantity was small and there was no prospect of expansion as the company stood.

[8]     There were two aspects of the market in soft drinks such as mineral water. One was what is called the on-trade, the licensed trade in hotels, restaurants and public houses, sometimes known as the horeca trade. The other was what is called the off-trade, which covers supermarkets and other grocery and off-licence outlets. The on-trade and off-trade markets were very different. The on-trade was concerned with small units, small bottles, prestigious packing and a high price. The off-trade was concerned with larger units, larger bottles, high volume and very competitive prices. The on-trade was dominated by public houses. The off-trade was dominated by supermarkets. The two markets were complementary.

[9]     From his experience Mr Hamilton knew that in order to break into the market with a new brand it was essential to have appropriate arrangements for distribution of the product. Three options were identified. The first was that the company would sell out completely to another company such as Evian. Evian had earlier made a number of approaches to Highland Spring Ltd with a view to buying that company. Now Mr Kalo entered into negotiations with Evian to buy Gleneagles. Mr Hamilton was also involved. The priced mentioned was £2.2 million. The second option was that Gleneagles would strike a distribution deal with another party who could provide the necessary coverage through the UK grocery and licensed trade. And the third option was to join with another company which would invest in Gleneagles but which could also provide the distribution network sought by Gleneagles and, in particular, into the on-trade.

[10]     In 1990/1991 Mr Hamilton's favoured option was the first one. However, Mr Kalo's negotiations with Evian did not progress and eventually came to an end. During this period Mr Hamilton had discussions with other companies with a view to a complete buy out of Gleneagles. One of these companies was Vittel, another of the major French producers of mineral water. Although not wholly owned, Vittel was a subsidiary of Nestlé. Mr Hamilton was in discussion with Dominic Duval who held a post equivalent to managing director of Vittel. By this time it was known to both men that a substantial supply of high quality mineral water was available at Gleneagles and a price of £3.5 million for the company was discussed. In November 1991, however, M. Duval telephoned Mr Hamilton to say that a problem had occurred concerning the shareholders of Vittel and as a result he could not proceed at that time. This was a major disappointment to Mr Hamilton. He estimated that it would take some eight or nine months before he would be able to resume any negotiations with M. Duval. But matters had to be progressed. So in December 1991 a Business Plan for Gleneagles was put together by Fraser & Partners (Business Managers) Ltd. The individual concerned was Derek Douglas, who is the principal of that company. Although Mr Douglas wrote it, most of the input came from Mr Hamilton. Mr Douglas had first been instructed by Mr Hamilton in about July 1991 to assist him in trying to find a buyer for Gleneagles but when Vittel withdrew the Business Plan was put together. Until then, as I have indicated, Mr Hamilton's preference had been for his first option, namely, to sell Gleneagles. This was because he knew that it would be difficult for him to develop the company unless strong distribution arrangements were in place. But he now pursued his third option, namely, to join with another company which would invest in Gleneagles but which could also provide the distribution network sought by Gleneagles and, in particular, into the on-trade.

[11]     At Mr Hamilton's suggestion Mr Douglas contacted Mr Michael Jackaman, the then chairman of the defenders who at that time were called Allied-Lyons. The defenders were (and are) a large international company, describing themselves as world leaders in food, drink and hospitality. At that time they were divided into three divisions: beer and retailing; wines and spirits; and food. At the start of their financial year beginning in March 1992 the defenders' business was restructured into four sectors: spirits and wine, which was operated by the Hiram Walker Group Ltd; retailing, which was operated by Allied-Lyons Retailing Ltd; brewing and wholesaling, which was operated by Allied Breweries Ltd; and food manufacturing, which was operated by J. Lyons & Co Ltd ("J. Lyons").

[12]     Mr Douglas had discussions with Mr Jackaman and sent him a copy of the Business Plan. It identified, inter alia, that distribution and marketing were essential to the success of the company. Having reviewed the Gleneagles product the Plan stated:

"this product package has got every ingredient required for successful market penetration provided.... distribution and marketing support is equal to the challenge.... Distribution on a National basis will be critical.... In order to actually make a dent in the UK market place then significant sums will need to be spent in promoting the brand and creating consumer awareness through advertising, PR and other media activity."

[13]     Mr Jackaman responded positively to Mr Douglas's approach. He asked Mr David Beatty to take the discussions forward on behalf of the defenders. At that time Mr Beatty was a director of the defenders. He was also corporate development director of their subsidiary The Hiram Walker Group Ltd which ran the defenders' wines and spirits division. In March 1992 he became Deputy Chairman of J. Lyons, which ran the defenders' food manufacturing sector. As was admitted by the defenders in their pleadings, Mr Beatty was given authority to bind them and to make representations on their behalf in the discussions with Mr Hamilton. Mr Hamilton had the authority of the second pursuers to enter into an agreement on their behalf.

[14]     The witnesses who gave evidence on these matters were principally Mr Hamilton but also Mr Douglas and Mr Beatty. There was no material dispute about it and I accepted it.

[15]     It is convenient at this stage to make some general observations on the credibility and reliability of the witnesses who gave evidence in the proof. That they were trying recall events at least five years ago and in perhaps the most important respects more than ten years ago did not make it any easier to evaluate their evidence. From seeing and hearing them give their evidence I was satisfied that their credibility was not in issue. The question was as to their reliability. I comment on this at various stages in this Opinion. The connecting thread, as it were, throughout most of the evidence was Mr Hamilton. It is convenient, therefore, to make some general observations on his evidence at this stage. He was at the centre of events throughout almost the entire period with which this case is concerned. He was the first witness for the pursuers and by far the longest witness in the proof. His evidence lasted three and a half days. It was obviously critical to the pursuers' case. He gave his evidence in a clear and straightforward way. I did not get the impression that he was prone to exaggeration or that due to his obviously deep involvement in these matters he had deluded himself as to what had taken place. He had recently had major surgery and there were times when he was obviously tired. There were passages in his evidence which were not entirely consistent. He was also plainly mistaken in one important matter, namely whether Mr Beatty was a director of Britvic. But on the whole I accepted his evidence as reliable. Where on particular matters I have not accepted his evidence or have some further observations to make about it I have said so. It was a considerable advantage that he had had his diary and other contemporaneous records as aides-memoire. He was also fully conversant with the documents which had been lodged in process.

 

The Discussions Leading to the Agreement of 24 November 1992

[16]     The initial discussions between Mr Hamilton and the defenders were not in fact with Mr Beatty but with Mr Stan Walter who had been instructed by Mr Beatty. Mr Walter was asked by Mr Beatty to evaluate the commercial and financial prospects of Gleneagles in the then UK water market, which was growing very rapidly. He had three meetings with Mr Hamilton and Mr Douglas. At this distance in time it was not exactly clear when these meetings were but it appears that they took place in or about March 1992. The first meeting was in London and was in the nature of an introductory meeting when Mr Walter explained the task he had been given and the information he would need. The second meeting was at Blackford to enable Mr Walter to see the site. And the third meeting was in London. The purpose of that meeting was to discuss the issues raised by Mr Walter in his report. At all three meetings the question of distribution of the Gleneagles product was discussed, both to the on-trade and to the off-trade. This was because distribution was so important. It was the key to penetration of the market.

[17]     At that time distribution to the soft drinks market was dominated by two companies. The first and by a good margin the largest was Coca-Cola and Schweppes Beverages Ltd, which was frequently referred to in the evidence as CCSB. I shall refer to them in that way. This company was a joint venture between The Coca-Cola Company and Cadbury Schweppes plc. The second company was Britvic Soft Drinks Ltd, whose shares were held by Britvic Holdings Ltd. 90% of the shares in Britvic Holdings Ltd were held by Britannia Soft Drinks Ltd. The remaining 10% were held by PepsiCo Inc. Of the shares in Britannia Soft Drinks Ltd Bass plc held just over 50% while Allied-Breweries Ltd (a subsidiary of the defenders) and Whitbread plc each held just under 25%. Each of these companies had representation on the board of Britannia Soft Drinks Ltd. Mr Beatty was not at any time the defenders' representative. The Britvic companies and Britannia Soft Drinks Ltd were mentioned often interchangeably, it seemed, in the evidence. I shall refer to them all as Britvic except where the context necessarily dictates otherwise.

[18]     Between them CCSB and Britvic controlled over two-thirds by value of the carbonated soft drinks off-trade market and 90% by value of the on-trade. From the size of their holding in Britannia Soft Drinks Ltd Bass plc dominated Britvic. In terms of an agreement with Britvic, the defenders' carbonated soft drinks were distributed through Britvic, although they had their own distribution network for food, spirits and cider. In turn the defenders had an obligation to use their best endeavours to sell Britvic products to their tenanted estate, free houses and managed off-licence outlets. Mr Hamilton considered access to Britvic to be of great importance in relation to the on-trade.

[19]     As his evaluation exercise proceeded and following his first two meetings with Mr Hamilton and Mr Douglas Mr Walter reported back to Mr Beatty. On 25 March 1992 Mr Beatty wrote to Mr Douglas in the following terms, inter alia:

"Subject to Allied-Lyons Board approval, sight of an acceptable financial plan, the completion of necessary due diligence and finalisation of a mutually satisfactory agreement with your clients, we are interested in making an investment over a number of years in the proposed Gleneagles Spring/Mineral Water Company. The basis for this investment would be:

A 75% share holding in the company based on pro rata investment in the initial and development stages.

Allied-Lyons to have overall management control and to appoint a majority of the directors, including both Finance and Marketing.

Allied-Lyons through its various business sectors to have responsibility for domestic UK and international distribution of the product for so long as we retain at least at 50% shareholding."

Mr Douglas replied the following day. He explained the present structure of Gleneagles and envisaged that if the parties negotiated a deal a total of £10 million would go into the company. He continued:

"My understanding of the deal is that John's (Mr Hamilton's) present investment is worth £3.5 million. Allied's £6 million injection would result in approximately 65% ownership of the business by the new funds going into the company."

[20]     It was shortly after these letters were exchanged that Mr Hamilton and Mr Douglas met Mr Walter in London at the third of their meetings. As I have said, the purpose of that meeting was so that Mr Walter could discuss the issues raised in his report with them. The evidence was not totally clear as to who attended that meeting. Mr Hamilton and Mr Douglas were certainly there for the pursuers. Mr Walter was certainly there for the defenders. The doubt is as to whether Mr Beatty was there. Mr Hamilton thought that he was not there to start with but came in later. Mr Douglas thought Mr Beatty was there but he did not have any real recollection of the meeting. Mr Walter thought that Mr Beatty was not there but he may have been present for part of the first, introductory meeting. Mr Beatty did not recollect being there. I am inclined to accept Mr Hamilton's evidence and to hold that Mr Walter is confusing the first meeting with this one on this point. But the significance of the point is limited because in any event Mr Walter was Mr Beatty's conduit to and from Mr Hamilton in this part of their dealings and kept Mr Beatty informed as to what was said. At that meeting, as at the two previous meetings, the question of distribution of the Gleneagles product was discussed. As to the details, however, the evidence was not wholly at one. Mr Beatty, as I have said, did not recollect being at the meeting. Mr Douglas was there but had no recollection of it. That leaves Mr Hamilton and Mr Walter. Mr Hamilton's recollection was that he had made it clear that the defenders had to bring what he called their distribution clout to the deal. Otherwise Gleneagles could not go forward to full trading. The necessities of distribution were discussed and he left the meeting with the clear thought that the defenders would provide appropriate distribution which would include access to Britvic and the horeca trade, the on-trade. He also reserved the right of the company to distribute its products itself in areas that Britvic did not enter.

[21]     Mr Walter was not able to recall what had been said at that meeting. Indeed, he had little positive recollection of what had been discussed at any of these meetings and many of his answers were couched in terms of what he would have done by reference to his practice in an exercise of this kind. He agreed, however, that one of the issues that would have been discussed in his evaluation was distribution. It would have been discussed at all three of his meetings with Mr Hamilton and Mr Douglas. This was because distribution was one of the keys to the success of the company. He knew that the on-trade and off-trade markets were very different but his knowledge of the on-trade outside the defenders' Hiram Walker Group, for whom he was now working, was limited. He knew quite a lot about Britvic, however, because he had previously been employed by Whitbread plc. In particular, he knew that Bass plc, who were the controlling shareholders in Britvic, were very protective of their own products and that it would be difficult for the defenders to persuade Britvic to distribute new products through that route. There were other routes available but compared with Britvic they were limited. Distribution to the on-trade was one of the critical factors if the brand was to be developed successfully. The on-trade and the off-trade were complementary but he would have agreed with Mr Hamilton that distribution into the on-trade was particularly important and one route to that was by means of Britvic. He did not, however, remember Mr Hamilton expressing any views about Britvic. He did not know who the defenders' representative was in Britvic but he knew it was not Mr Beatty. In his position he could not and would not have promised access to Britvic. He was in no position to do that. It would have to be discussed by the defenders' main board. Mr Beatty was on that board and would therefore have had considerable influence in the approach that the defenders would take but he could not go further than that. He would, however, have raised the possibility of distribution through Britvic with Mr Beatty, who was aware of how important distribution was and would be aware of the difficulties of achieving it through Britvic. Because of its strong position in the soft drinks market Britvic was one of the more attractive routes for distribution of Gleneagles's products so far as the defenders were concerned. In his evaluation exercise Mr Walter said he would have considered three scenarios. The first would be what he called the optimistic route of distribution. This would have been through Britvic. Then there would have been his most likely route. This would not have included Britvic because he thought that route unlikely. Distribution here would have been through the defenders' cider division which included what he called near soft drinks such as babycham and also soft drinks, although not carbonated ones. He did not describe the third scenario, which he called the downside scenario, but said that all three scenarios would have envisaged some penetration of the on-trade market. The absence of some such penetration would have a considerable adverse effect on Gleneagles. Indeed, without it it was almost certainly doomed to failure. But if that market could be penetrated in the way that cider, and also babycham, had done, then there was still a good chance of launching the Gleneagles product successfully, albeit it would have taken longer.

[22]     I have already said that I am inclined to accept Mr Hamilton's earlier evidence that Mr Beatty was present for part of the time at that meeting. And I have no doubt that the question of distribution of the Gleneagles product was discussed. I also have no doubt that as part of that discussion the question of distribution to the on-trade and, in particular, through Britvic was discussed. It was not suggested, however, that Mr Walter said anything at the meeting which indicated that the defenders would provide access to Britvic. Mr Hamilton knew that he was in no position to do that and Mr Walter said that he would almost certainly have said that he could give no such indication. Nevertheless I am prepared to accept that Mr Hamilton was optimistic that the defenders would provide distribution which would include access to the on-trade and to Britvic in particular. I think I am entitled to infer that he would know that Mr Walter agreed with him that distribution to the on-trade was important and that each of his (Mr Walter's) three scenarios envisaged that. Mr Hamilton also knew of the importance of Britvic in that regard and he knew that the defenders part-owned Britvic. He also knew by this time that the defenders were interested in making an investment in Gleneagles on the basis that they would, inter alia, have responsibility for distribution of the product. He was mistaken when he said that Mr Walter led him to believe that Mr Beatty was a director of Britvic (and also when he took it from what Mr Beatty later told him that that was the case) and since he put considerable weight on that fact, it no doubt fuelled his optimism unduly but he knew that Mr Beatty was on the defenders' main board and was charged by the defenders with concluding a deal if it could be achieved. He could therefore influence the board's approach in relation to Britvic, as Mr Walter confirmed. It is also to be remembered that it was likely that Mr Beatty was present for part of the last of these three meetings. It is not known what he or anyone else said when he was there but it is reasonable to infer that it was nothing which would undermine Mr Hamilton's optimism. There were therefore grounds for his optimism. But it did not go further than that at this stage and neither the pursuers' pleadings nor their counsel suggested otherwise.

[23]     After presenting the results of his evaluation to Mr Beatty, or at least shortly thereafter, Mr Walter had no further direct involvement with Gleneagles.

[24]     Mr Walter's evaluation report, which he had not seen since he left the defenders' employment in 1993, was not available as a production but it is plain that it was in generally positive terms, which Mr Beatty accepted, because the negotiations between Mr Hamilton and the defenders proceeded. By 24 April it was Mr Douglas's understanding, as he explained in a letter of that date to Mr Beatty, that the project was being brought by Mr Beatty before the defenders' main board for approval and that the decision had already been taken that if the deal was done, Gleneagles would be in the defenders' food division, which was operated by J. Lyons, of which company Mr Beatty had just become Deputy Chairman. On the same date Mr Hamilton wrote to Mr Douglas that "it would appear that subject to fine print the deal is done - and on the assumption that we have a general assurance I can delay the Schweppes distribution deal route." This is a reference to the fact that Mr Hamilton had been having discussions with CCSB with regard to possible distribution through them. There is a reference to the same matter in Mr Douglas's letter to Mr Beatty of 24 April 1992. In his evidence Mr Hamilton said he had informed Mr Beatty about this when he and Mr Alan Wallwork, company secretary of J. Lyons, came up to Blackford for a site visit in April, but it later seemed to be common ground between the parties that this visit was in May. In any event Mr Beatty was informed at or about this time. As I have said, the reason Mr Hamilton had been having discussions with CCSB was to explore the possibility of distribution through them but he told Mr Beatty that he was not pursuing that and that the defenders would have exclusivity of distribution as had been envisaged in Mr Beatty's letter of 25 March. Shortly thereafter Heads of Terms were drafted by Mr Douglas and these were faxed to the defenders' solicitors, Messrs Maclay Murray & Spens. There was then a meeting to discuss them. This was held on 4 May at Maclay Murray & Spens's Edinburgh office. Present were Mr Hamilton, Mr Douglas and Mr Murray, the partner in Maclay Murray & Spens acting for the defenders in this matter. The purpose of the meeting, as Mr Murray's minutes record, was to discuss the potential J. Lyons subscription, in other words the defenders' investment in Gleneagles, and to outline to Mr Murray the background to the deal. Mr Murray recorded that there was discussion at the meeting of the Britannia Soft Drinks Consortium (i.e. Britvic) and what restrictions, if any, this would impose on the defenders but he himself knew nothing about that at the time. The minutes did not record any other discussion in connection with distribution and it may be, therefore, that there was none. Distribution was mentioned in the Heads of Terms, however. There was a further meeting on 19 May in Maclay Murray & Spens's Edinburgh office, attended by another of their partners and the solicitor for the trustees of the Gleneagles' estate to discuss certain matters in relation to the terms of the agreements which the trustees would enter into to enable the project to proceed, but I need not discuss that. What I have narrated so far is the background to the meeting on 27 May at Blackford attended by Mr Hamilton, Mr Douglas, Mr Beatty

and Mr Wallwork. This was an important meeting. Mr Hodge, Q.C., senior counsel for the pursuers, described it as central to the issue in this case.

[25]     Mr Beatty and Mr Wallwork had come to Scotland to visit the Blackford site. They saw the springs there and the maltings buildings. They visited the site at Netherton Farm and met the owner, Mr McLaren. And they visited the Gleneagles estate where they met Mr Haldane, the senior trustee, and Mr Chalmers, the factor. There is no written record of what was said between Mr Hamilton and Mr Beatty at this time. I am therefore reliant on the recollections of those who were there. Of these only Mr Hamilton, Mr Douglas and Mr Beatty gave evidence. Mr Hamilton's recollection was that he explained what he was looking for and why he wanted to do a deal with the defenders. The pursuers would bring their knowledge of the water industry but what he wanted from the defenders was their powerful distribution network. Mr Hamilton was adamant that what was being discussed in this context was access to the on-trade. He said that that was made crystal clear to Mr Beatty. Later in his evidence he made it clear that in this context he was talking about access to Britvic. Mr Hamilton said that Mr Beatty understood that this was necessary in order to get Gleneagles off the ground and he gave him (Mr Hamilton) the impression from his response that he could achieve it. His response was that this was in the defenders' best interests and that they would do it. Mr Hamilton also said that in the car returning from Blackford he and Mr Beatty discussed the possible opportunities for Gleneagles's products further into the future and that Mr Beatty was excited by these. Mr Douglas had no recollection of what had been discussed by Mr Hamilton and Mr Beatty at this meeting. In particular, he did not recollect Mr Hamilton saying to Mr Beatty that it was important for Gleneagles to gain access to Britvic. Surprisingly perhaps, Mr Beatty was not asked about this meeting in his examination-in-chief. In cross-examination, however, he was. His recollection was that he and Mr Wallwork looked at a semi-derelict building (presumably the maltings) which could have been converted into a production building. He also remembered going to Netherton Farm and meeting Mr McLaren. Mr Hamilton had pointed out a field which he said he had an option to purchase. Mr Beatty said that he was not in a position to proceed to exercise the option at that stage; it was beyond his remit. Mr Beatty also remembered meeting Mr Haldane. They had discussed the quality of the springs which were to supply the water. He did not, however, remember Mr Hamilton saying that he needed a shareholder who could arrange for distribution through such as Britvic or CCSB. His position throughout - and he said his recollection was clear on this - was that they would start with the off-trade and only thereafter move into the on-trade. The on-trade had a lesser volume, it was the more difficult market to penetrate and it was less advantageous. He knew, however, that under the agreements with Britvic, Britvic could prohibit the defenders from purchasing Gleneagles and if the defenders did purchase Gleneagles, Britvic could pre-empt and buy Gleneagles themselves. The defenders therefore needed Britvic's consent if they were to purchase Gleneagles. Mr Beatty thought that that could be achieved much sooner than in fact it was. He said, however, that he did not remember discussing Britvic with Mr Hamilton at this meeting or suggesting that Britvic might acquire the defenders' shares in the company in order for it to obtain access to the Britvic distribution network. At no time did he countenance that. As far as he was concerned, Britvic was only one of three possible means of distribution which the defenders could have used. He said that Britvic was not paramount in his considerations during these discussions.

[26]     I shall return to consider this meeting later because in my opinion it is important to consider not only what went before it but what came after it before deciding what was said, or at least understood as a result of what was said, at the meeting.

[27]     At this time it appeared that a deal between the parties would soon be completed. There was, however, a delay. On 29 June 1992 Mr Beatty faxed Mr Douglas asking him to be patient because the defenders still had a number of internal issues to resolve before they could give final approval to the deal but preparation of the documentation should proceed "for completion by the end of this week". On 9 July Mr Hamilton wrote to Mr Beatty asking what the timetable now was, because Mr Kalo was pressing him to pursue an alternative option. On 10 July Mr Wallwork faxed Mr Douglas confirming conversations he had had with him that day and the previous day informing him that the J. Lyons board had re-affirmed its commitment, in principle, to proceed

"subject to clearance of:-

(a) all outstanding due diligence and legal problems

(b) the Britannia problem

and

(c) final endorsement by the Allied-Lyons Board."

After suggesting a meeting in early August in Edinburgh to discuss progress Mr Wallwork went on to say:

"The timetable, as I now see it, is driven by the fact that the August meeting of the Allied-Lyons Board has been cancelled and the next meeting is not scheduled to take place until 8 September. However, once that meeting has taken place, on the assumption that the Allied-Lyons Board endorse the proposal and on the assumption that the Britannia problem has been cleared, you have asked me to reserve in our diaries the date of Wednesday, 9^th September to sign the documentation."

This was the first mention in the correspondence of what is referred to as the Britannia problem, although there is an entry in notes in Mr Hamilton's handwriting for a meeting with Mr Wallwork on 5 June which says:

"Britannia.

Park 14%." 

It was not clear to what this refers. There was some suggestion in Mr Hamilton's evidence that it was a possible means of solving the Britannia problem by reducing the defenders' 63% shareholding, as it ultimately became, in Gleneagles to below 50%, but that came as news to Mr  Beatty. Mr Hamilton may have got it from Mr Wallwork but he did not give evidence. In these circumstances the point must remain a mystery. In any event, as explained in Mr Wallwork's fax of 10 July to Mr Douglas, the Britannia problem, whatever it was, was the principal matter which was holding up completion of the deal. Until that problem was solved the defenders' main board would not approve the deal and without that approval it could not be completed. On 13 July Mr Beatty replied to Mr Hamilton's letter of 9 July in the following terms:

"Thank you for your letter of 9 July 1992. I appreciate that we have delayed significantly in obtaining the go ahead to invest in Gleneagles and I appreciate that your partner is becoming agitated. At this time I can report that the J Lyons Board confirmed its wish to invest in Gleneagles but that due to other business pressures we have not so far been able to obtain the final agreement of the Allied-Lyons PLC Board.

Our lawyers meanwhile are continuing their investigation and there are a number of issues on which we still require their input.

We still wish to make an investment in Gleneagles for the reasons we have already discussed, but if the delay in getting agreement necessitates you re-opening other discussions then we could not feel aggrieved if you pursue alternative methods of finance. It remains our hope that we will still be able to join with you in the venture and we continue to move in that direction. I appreciate that the continuing delay is causing you problems but I remain optimistic that the final outcome will be positive, meanwhile we cannot expect you to feel bound to us in view of the delays which are caused by reasons of which you are aware."

Mr Hamilton's response was positive. On 20 July he wrote to Mr Beatty as follows:

"Your confirmation of J. Lyons Board activities in relation to the Gleneagles investment, together with the timetable agreed between Derek Douglas and Alan Wallwork was most helpful.

Meanwhile I have asked our lawyers to complete the paperwork so that we are all aware of the final negotiated position - subject only to your resolution of the outstanding problem."

[28]     The progress meeting took place as envisaged in Mr Wallwork's fax of 10 July, but on 23 July in London rather than in early August in Edinburgh and with only Mr Hamilton and Mr Wallwork present. On Mr Hamilton's draft agenda for the meeting is an entry "Distribution - Integration Allied". Mr Hamilton explained that that was a reference to proceeding through various pieces of the defenders' organisation and to Britvic but he said there was not much discussion about this at the meeting. The attitude was that "it would be all right on the night". There is a further entry in the document:

"Timetable and Probability

David's Attitude

Britannia/Schweppes view."

Mr Hamilton said that the words "David's Attitude" meant, was Mr Beatty's attitude the same as before? The reference to Britannia was a reference to how Gleneagles would get through to Britvic. Mr  Beatty was not at this meeting of course, and Mr Wallwork did not give evidence, but Mr Beatty said that he did not recall Mr Wallwork telling him about the discussions at this meeting. The only account of it that there is in the evidence, therefore, is Mr Hamilton's, which was not disputed.

[29]     Not much happened, it seems, in August but early in September there was a meeting between the parties' lawyers in Edinburgh to discuss matters which still had to be dealt with prior to completion. Mr Hamilton also attended. One item on the agenda was "distribution rights" and against it Mr Hamilton wrote: "In default". This referred to a provision to be inserted into the parties' agreement to allow Gleneagles to distribute to and service any sections of the trade which were not serviced by the defenders. It is the same point as is made in paragraph 17 of the draft Heads of Terms drafted by Mr Douglas early in May and was in Mr Hamilton's mind at his third meeting with Mr Walter (paragraph [20] above). A fortnight or so later, on 17 September, Mr Beatty wrote to Mr Hamilton. Inter alia, he wrote:

"As I told you when we met recently, we hope to be in a position shortly to be able to proceed without the constraints of Britannia, but until this matter is resolved, we will not be in a position to progress the deal. As you know, the J. Lyons Board recently re-endorsed the acquisition in principle and we are keen to add Gleneagles Spring Water to our portfolio once all obstacles have been removed.

I am, however, conscious that you and your partner are keen to do a deal as quickly as possible and I must therefore reiterate my previous comments to you that if the delay in getting agreement necessitates you re-opening other discussions then we could not feel aggrieved if you pursue alternative methods of finance."

This letter, therefore, was in similar terms to the one Mr Beatty had written on 13 July. Mr Hamilton's reaction to it was to be patient. Between these two letters he had met with Mr Wallwork and he was not keen to seek another partner when he was so near to doing a deal with the defenders. This was in spite of pressure being exerted on him by Mr Kalo. As he put it, a bird somewhere near the hand with the defenders was preferable to one in the bush. When Mr Hamilton received this letter he telephoned Mr Beatty. His handwritten notes are on the letter and indicate that he said he was not going to pursue alternative methods of finance and that distribution was also discussed. He still thought there would be a deal. If he had thought otherwise he would have reverted to his first option, a complete sell-out.

[30]     As matters turned out, he did revert to, or at least considered, his first option shortly after this. On 23 September Mr Beatty had written in rather more explicit terms than he had done before. He said:

"We have made no further progress on the proposed shareholding in Gleneagles Spring Water Company since we last met for reasons of which you are well aware - namely our shareholding in BritVic Britannia which to all intents and purposes precludes Allied-Lyons engaging in the bottled water market.

We have now reached the point where we cannot take matters any further until the BritVic Britannia issue has been resolved and we therefore propose to break off discussions with you until such time as we are clear to bring them to a proper commercial conclusion. If, in the meantime, you find another partner all we would ask is that you at least give us the right of first refusal so that this project on which we have both worked with considerable effort does not slip from our grasp without us having the opportunity to re-open the issue.

As soon as we are clear of our BritVic Britannia constraints we will seek further meetings with you, should the opportunity to invest in Gleneagles Spring Water Company still be available to us. I regret that we have reached this position after such long and amicable discussions, but it seems to me pointless to keep you waiting for a further undetermined period of time whilst we sort out our own problems in this matter."

At about this time coincidentally Mr Hamilton received a telephone call from M. Duval of Vittel. He asked him if Gleneagles had done a deal with anyone else. Mr Hamilton told him what the position was with the defenders. M. Duval then asked to meet with Mr Hamilton. Mr Hamilton reported all this to Mr Beatty. The meeting with M. Duval took place in about mid-October. Mr Kalo attended with Mr Hamilton. At the end of the meeting M. Duval said that he would go back to Vittel and prepare a plan for the acquisition of Gleneagles. This was expected within two weeks. A price of £3.5 million was discussed. Mr Kalo was firm on that price and M. Duval did not demur.

[31]     Soon after this, also apparently coincidentally, the defenders' Britannia problem was resolved and matters proceeded quickly to completion of an agreement between them and Gleneagles. On 27 October Mr Hamilton telephoned Mr Beatty. He wrote notes for himself in relation to that call. Most but not all of them were written in advance and not all were discussed. But he told Mr Beatty that Vittel's interest was re-awakening and in relation to the Britannia (or Bass as it is put in his notes) problem Mr Beatty assured him that in time the problem would be overcome. Mr Beatty was interested in pressing on with preparations so that when the Britannia problem was resolved, the parties could move quickly to completion of their agreement. In that context there should be a meeting. Later the same day Mr Beatty sent a fax to Mr Hamilton in which he said this:

"Alan Wallwork and I plan to meet with you for a working lunch at Maclay Murray Spens at about 1.00pm on Thursday 29 October.

The purpose of the meeting will be to review the present situation regarding Gleneagles and to determine whether there are any outstanding issues which need to be resolved prior to the submission of a Digest to the Allied-Lyons Board on Tuesday 3 November recommending our investment in the Company as originally conceived."

When he received this fax Mr Hamilton thought that the deal that he had previously discussed with Mr Beatty was back on. So did Mr Beatty. As he put it, after the delay things were getting back on track.

[32]     The meeting on 29 October took place as arranged. Mr Hamilton did not have a detailed recollection of it but the intention of the parties was to take the deal forward. He said Mr Beatty had indicated that he had more or less got the Britannia problem in hand and that it would not be an obstacle to the deal. Mr Beatty said that by this time the Britvic problem, as he put it, must have been overcome and he wanted to proceed with the deal.

[33]     On 3 November 1992 the defenders' main Board gave approval to a deal whereby the defenders would take a 63% shareholding in Gleneagles for a consideration of £6 million and looked forward to completing a deal as soon as possible. Mr Beatty communicated this to Mr Hamilton by telephone and by fax the same day. Also on the same day Mr Hamilton wrote to Mr Beatty confirming that he had put "a further delay factor into Nestlé Vittel, and in so doing cancelled their 5/6 November visit".

[34]     Evidence of this history of events from the meeting on 27 May 1992 at Blackford was given mainly by Mr Hamilton but also, insofar as he was able to, by Mr Beatty. There was no material dispute about it.

[35]     Matters then progressed quickly to completion of the deal between the parties. On 24 November a meeting took place in Maclay Murray & Spens's offices. It lasted all day and continued well into the evening. In the course of the day there was a number of subsidiary meetings between some of the parties there. At the meeting an Agreement was signed by or on behalf of all interested parties. Mr Beatty and Mr Wallwork signed on behalf of J. Lyons and the Hiram Walker Group Ltd. Immediately prior to completion of the Agreement 3,500,010 ordinary shares of 20p each in Gleneagles had been issued at par credited as fully paid. Of these Mr Hamilton had 1,166,670 and the second pursuers had 2,333,340. In terms of the Agreement, J. Lyons subscribed for 6 million 20p shares at a price of £3 million payable immediately and a further £2,932,034.27 payable on or about 1 March 1994, the money to be used "in developing the business of" Gleneagles. Gleneagles thus became a subsidiary of the defenders and part of what was called the Allied Group. In Clause 7.6, to which I shall refer again later, J. Lyons were given the right at any time prior to 31 December 1993 to transfer all of the shares it owned in Gleneagles to Britannia Soft Drinks Ltd provided that that company undertook to perform and be bound by the obligations of J. Lyons in terms of the Agreement. Also on 24 November 1992 a number of related steps were taken. By Special Resolution Gleneagles adopted new Articles of Association. As envisaged in the Agreement, Mr Hamilton was appointed Managing Director of Gleneagles. The other directors of Gleneagles resigned and in their place Edward McGrory and Robert Hodges, both of them directors of Lyons Tetley Ltd, another subsidiary of the defenders, were appointed directors and Alan Wallwork was appointed company secretary. The Agreement made no provision in respect of distribution of Gleneagles's products.

[36]     At the meeting Mr Hamilton and Mr Douglas, Mr Beatty and Mr Wallwork were present together with their solicitors, who included Mr Murray of Maclay Murray & Spens. Also present was Mr Jim Kerr, who until he resigned on 24 November was a director and secretary of Gleneagles. A number of those present at the meeting gave evidence as to various things that were said at the meeting. I take them in order. In his evidence in chief Mr Hamilton said that at one stage during the meeting Mr Beatty told him and Mr Douglas that, as far as Britvic was concerned, that was taken care of and they would distribute the product. So far as the independent brewery chains were concerned, the defenders would make the necessary introductions but Mr Hamilton would have to do the actual selling of the product to them. Mr Hamilton said that he was therefore getting the best possible practical approach to the on-trade. So far as own label business in the off-trade was concerned, that was also for Mr Hamilton to develop. Mr Hamilton added that if he had been told at that time that he was not going to get that arrangement - and he elaborated to make it clear that he was referring to the arrangement with Britvic - he would not have gone on with the deal but would have pursued the approach by Vittel instead. In cross-examination he said that he was confident that an arrangement for distribution through Britvic was in place. Later he explained that Mr Beatty did not precisely say that that was so but from what he did say he took it that that was so. Mr Beatty was talking about what Allied-Lyons could bring to the party and he took that to include distribution by Britvic. He said he took Mr Beatty on trust that that was included and added that he still thought that Mr Beatty would have achieved it. The defenders would also give him introductions to the independent brewers but he would do the rest insofar as distribution of the product was concerned. He had never asked for or had written guarantees, but had had discussions with Mr Beatty in which Mr Beatty had said that he was arranging for Gleneagles to gain access to Britvic. Mr Beatty had not said at the meeting on 24 November that there was no guarantee that Britvic would distribute the produce but if he had said that, it would have been a major problem for him and he would have put the deal on hold. In re-examination he confirmed that that was the position. He also said that there was, indeed, no specific discussion about Britvic that he could recall. The main topic was the position in relation to the independent brewers. There was enthusiasm about Gleneagles because it was going to have suitable distribution for its products. Mr Hamilton also said that Mr Beatty explained that Clause 7.6 of the Agreement was there as his device for getting Britannia on board for ultimate product distribution through Britvic. Mr Hamilton said that he understood that to mean that Mr Beatty had had negotiations with Britvic about this and he thought, therefore, that Britvic was going to distribute the product. He added, however, that if there had been a concluded arrangement for that, he thought it would have been declared more formally.

[37]     Mr Kerr, who was called by the pursuers, remembered that after the Agreement had been signed and everyone was having a glass of champagne and chatting, Mr Beatty told him that Allied-Lyons had several thousand outlets which would take Gleneagles forward very quickly. Mr Kerr was in no doubt that that was a reference to the defenders' public houses, restaurants and hotels. I have no reason to doubt the tenor of Mr Kerr's evidence but I do not think it adds very much.

[38]     Mr Beatty himself remembered very little about the meeting on 24 November. He did not recall discussing distribution with Mr Hamilton and he was not asked about the conversation Mr Douglas recalled, which I am about to narrate.

[39]     Mr Douglas was called by the defenders, immediately after Mr Beatty. He said that at the meeting on 24 November Mr Beatty had taken Mr Hamilton and him into a separate room and said that he could not guarantee distribution. This was the gist of it. Mr Douglas said he was really surprised at this. It was a real change from what he had hitherto understood. So much so that he asked Mr Hamilton if he wanted to go ahead with the deal. Distribution had always been very important to Mr Hamilton. Mr Douglas said that until then he had thought that the defenders would help with regard to distribution. They had a large number of public houses and other outlets and it was assumed Gleneagles would get distribution to them. This had been discussed on and off throughout the negotiations. It had never been guaranteed but the defenders had never said Gleneagles would not get such distribution.

[40]     I have narrated this evidence in some detail to show how difficult it is to make anything of what was said at the meeting on 24 November 1992. Of course the witnesses were trying to recall what was said, and the context in which it was said, at an event over ten years earlier. It was an event, moreover, that went on for a long time and at which no doubt a great deal was said. Mr Hamilton's evidence, in particular, caused me considerable difficulty. I have already said that at times in the course of his evidence he was obviously tired. That tended to be particularly so towards the end of the day. It may be significant that it was towards the end of his third day in the witness box when he said in cross-examination that if there was no guarantee that Britvic would distribute the produce, he would have put the deal on hold. The following morning, when he was fresher, he said that he took it from what Mr Beatty had said that the arrangements with regard to Britvic were in place but then added that he still thought Mr Beatty would have achieved it. That - and his final comment in re-examination, which I have recorded above - might indicate that he knew that at that stage it was still not certain. That position gains some support, I think, from what is said in the minutes of the meeting of Gleneagles's directors on 3 May 1995: see paragraph [56] below. On the other hand there is support for the view that he thought that the solving of what has been described as the Britannia problem meant that any problem with regard to Gleneagles gaining access to Britvic was also solved.

[41]     One of the difficulties in the case is that it was never clarified precisely what the Britannia problem was. It appears that, at one level at least, it was that, due to the defenders' arrangements with Britvic, Britvic could either prevent altogether or pre-empt the defenders' investment in Gleneagles. That appears to have been the difficulty which caused the hiatus in the parties' negotiations between July and November 1992. But even Mr Beatty did not know the precise nature of the difficulty. He knew there was what he called a logjam which stood in the way of the deal but he said that he did not investigate its nature, he just asked for it to be removed. When it was finally removed, Mr Hamilton appears to have thought that any difficulty in getting access to Britvic had also been removed, or at least would be removed. I am inclined to think that the latter is the true situation. Having regard to all the relevant evidence that seemed to me to be the most likely position. It follows in my view that when Mr Hamilton said that if there was no guarantee of access to Britvic he would have backed away from the deal, he was not using the word guarantee in its legal sense but meaning rather that if he had thought his confidence in gaining access to Britvic was not well-founded, then he would have backed away from the deal. So if Mr Beatty had said to him on 24 November that distribution was not guaranteed, taking that word in its legal sense, as Mr Douglas appeared to do, that would not have worried him unduly.

[42]     I am prepared to accept that at some stage Mr Beatty did say something of the kind that Mr Douglas remembered. It plainly stuck in Mr Douglas's mind, although it was unfortunate that his reaction was not put to Mr Hamilton. What it shows, however, is two things. First, it confirms that Gleneagles were looking for distribution into the on-trade from the outset. (Indeed, earlier in his evidence Mr Douglas had said that that was the case). Moreover, it confirms the impression that Mr Hamilton also had that the negotiations with Mr Beatty had led them to believe that they would with the defenders' help eventually get the distribution they were seeking to the on-trade. Otherwise Mr Douglas would not have thought that what Mr Beatty said on this occasion was a real change from what he and Mr Hamilton had understood until then. Secondly, it shows that whatever was said by Mr Beatty, Mr Hamilton did not regard it as so fundamental as to undermine what he had previously understood to be the situation. He had always known that there was no guarantee in any legal sense of Gleneagles getting the distribution they sought. He knew the way the companies in the defenders' group operated and that each company had to be convinced of the product's merits before it would distribute it. (Mr Douglas knew this also.) So it is understandable that he did not regard what Mr Beatty was saying as anything different from what he had said before. And, indeed, taking Mr Beatty's words as recalled by Mr Douglas at their face value, there was not anything different in them from what Mr Douglas had previously understood to be the case. It rather seemed to me that Mr Douglas inferred that there had been a change not so much from what was actually said but from the circumstances in which it was said. Mr Beatty had taken them into a separate room and apparently made a specific point about there being no guarantee. Moreover, although Mr Beatty could not remember saying anything like this, there was no suggestion that his position on 24 November was in any way different from what it had previously been. That is not surprising given the terms of his fax of 27 October and his expressed view that, as he put it, after the delay things were getting back on track. So I did not accept the interpretation that Mr Douglas put on this exchange.

[43]     Mr Douglas sought support for his evidence on this matter by reference to an Information Memorandum drawn up by him for possible purchasers of part of the second pursuers' shareholding in Gleneagles soon after the deal was completed. Mr Douglas said that Mr Hamilton had wanted the last section - Advantages of Allied Lyons PLC - worded more strongly than it is but Mr Douglas said he refused, reminding him that he had no guarantee of distribution by the defenders, as Mr Beatty had said at the completion meeting. For that reason he had not spelled out in that section that distribution was part of the deal with the defenders. Mr Hamilton was not asked about this exchange but I am not prepared to draw the inference from it that Mr Hamilton thought he had guaranteed distribution through Allied-Lyons. The point was also made that there is no specific mention of Britvic among the list of Allied-Lyons's main distribution outlets. That is, of course, true but it was Britvic who distributed Allied-Lyons's soft drinks to their off-licences and pubs (the on-trade) and so to that extent were included in their "distribution capacity" mentioned in the last sentence of the section.

[44]     Accordingly, in my judgment, nothing that was said by Mr Beatty at the meeting on 24 November changed what had been understood to be the case previously.

[45]     That takes me back to what was understood to be the case previously and to the meeting of 27 May at Blackford. I have already rehearsed the evidence in relation to that meeting. And I have rehearsed the exchanges that took place both before and after it. There is no doubt in my judgment that from the outset Mr Hamilton considered that distribution of the product was essential to the successful development of Gleneagles and the reason why he sought investment from the defenders was that he thought that they could provide the necessary distribution element. That was what they could bring to the party, as he put it. He said that repeatedly in the course of his evidence and there was ample support for it in the other evidence in the case. In the 1991 Business Plan the importance of distribution to the success of developing Gleneagles is stressed. It also makes clear that the aim is that the Gleneagles brand will be supplied to the on- and off-trades and that own label production will also be pursued. Mr Douglas's evidence was to a similar effect, as was that of Mr Brown, the employee in Fraser & Partners who wrote the chapter on marketing in the Business Plan. The evidence of Mr Kerr, the former director and secretary of Gleneagles, was also to a similar effect. Once discussions started with the defenders through Mr Walter it is clear that Mr Walter knew this and was of the same view. He was reporting to Mr Beatty and so Mr Beatty knew this. He confirmed it in his evidence. He said he recognised that distribution was important for the development of any brand. Throughout his discussions with Mr Hamilton and Mr Douglas in 1992 they were anxious to join a company which could help with the distribution of their product, both into the UK market and beyond. In his opening letter of 25 March 1992 to Mr Douglas he had said that one of the bases for the defenders' investment would be that the defenders through their various business sectors were to have responsibility for domestic UK and international distribution of the product for so long as the defenders retained at least 50% shareholding of Gleneagles. Mr Beatty also accepted that Mr Hamilton was equally interested in the on-trade and off-trade markets, as indeed he was. But Mr Beatty said that it was always his view that the first step was to establish a position in the off-trade market. He said that he never had the impression that the on-trade was the most important part of the market. It accounted for only about 30% of the whole market at that time. In March 1992 he became Deputy Chairman of the Food Manufacturing Sector in the defenders' organisation and it had been decided shortly before that that if the defenders entered into the proposed arrangement, Gleneagles would be in that sector. In that situation, said Mr Beatty, the initial drive would be to promote the product into the off-trade by means of the defenders' Tetley Tea distribution outlet. Tetley Tea was part of the defenders' Food Manufacturing Sector. Unfortunately in giving his evidence Mr Beatty was under a considerable disadvantage. He had retired from the defenders' main board in February 1993 and had had no involvement with them since, although he had remained on the board of one of their subsidiary companies until February 1994. He was not precognosced prior to giving evidence. He had seen none of the documents which had been lodged in process until the day before he gave evidence and, of course, he had not had access to any internal documents which the defenders may have bearing on the matters in issue, none of which were produced. Moreover, not unnaturally after the passage of time, he did not have a detailed recollection of the discussions which had taken place. Nevertheless he was quite clear in his view that the initial move was always intended to be into the off-trade. As will be seen, that is the strategy that in fact was later developed. It was not suggested either in his evidence or in submission that Mr Beatty was mistaken that this was the strategy. But it is quite different from what Mr Hamilton and Mr Douglas expected as a result of their discussions with him. That this was the strategy was, perhaps significantly, not put to Mr Hamilton. Nor was it put to Mr Douglas, who gave evidence immediately after Mr Beatty, in his examination in chief. But when he was asked about it in cross-examination he emphatically rejected it. Mr Wallwork, as I have said, did not give evidence and there is nothing in the documents which have been produced that indicates that this strategy was communicated to Mr Hamilton. Having considered the evidence on this critical point I am satisfied that Mr Beatty did not communicate to Mr Hamilton that this was his strategy. On the contrary, I am satisfied that Mr Beatty led Mr Hamilton and Mr Douglas to believe that he agreed with Mr Hamilton that Gleneagles should try to penetrate the on-trade from the beginning as well as the off-trade and that the defenders' distribution arrangements and facilities for both the on- and off-trades would be made available to Gleneagles. Had it been otherwise I am satisfied that Mr Hamilton would not have entered into the Agreement of 24 November 1992.

[46]     Not only was Mr Beatty's strategy not put to Mr Hamilton, it was not focused in the defenders' pleadings. I do not read what is said in answer 4 as averring that this was the strategy. In her closing submissions Mrs Swanson, solicitor-advocate for the defenders, as an alternative argument supported by the defenders' fourth plea-in-law, submitted that Mr  Beatty represented only that distribution would be undertaken by Lyons Tetley in the grocery sector and that this was in fact done. Mrs Swanson submitted that the evidence supported this contention. In my opinion it did not. Mr Beatty's strategy certainly was that initially distribution would be to the grocery sector, the off-trade, and that would be done through the defenders' food manufacturing sector, which in practice was Lyons Tetley, and in the event there was assistance from Lyons Tetley in certain areas, although not distribution on the evidence. However, as I have found, that was not what Mr Beatty represented to Mr Hamilton was the defenders' strategy and, in any event, his own strategy envisaged attempting to penetrate the on-trade at a later stage. (How that was to happen was not explored.)

[47]     What I have found Mr Beatty did represent to Mr Hamilton is essentially the case that the pursuers make in the first sentence of article 4 of the condescendence. In his closing submissions in reply to Mrs Swanson Mr Hodge said that there was a hint in what Mrs Swanson had said that the pursuers' pleadings in that sentence were not sufficient to support such a case. I also understood Mrs Swanson to hint that but she did not develop it. In any event, I agree with Mr Hodge that, if necessary, it would be permissible to read the sentence as if the words "it was the defenders' strategy that" were inserted after the word "representation" in that sentence as being no more than a variation, modification or development of what is already pled and so not requiring formal amendment: see the note to Rule of Court 24.1, Parliament House Book page C192.

[48]     The next question is as to the nature and extent of the distribution facilities and arrangements to the on-trade which it was indicated to Mr Hamilton the defenders would make available. Much of the evidence at the proof concentrated on this point but at the end of the day, while no doubt complementary, it is in my opinion subsidiary to the issue as to the strategy to be adopted.

[49]     As the case developed, there was no real issue on this point in relation to the off-trade: attempts would be made to penetrate it from the outset. In general that would be by way of the supermarkets. I have already commented on the situation as it was at the time Mr Walter completed his evaluation. As far as he was concerned, and this was reported to Mr Beatty, there were three possible scenarios for distribution. What he called his optimistic scenario for distribution to the on-trade was by way of Britvic. It would have been the best scenario but because of what he knew about the way Britvic worked he thought it an unlikely one. His most likely scenario was by way of the Hiram Walker Group. Mr Hamilton, on the other hand, was optimistic that the Britvic scenario would be achieved. As I said earlier, he had grounds for optimism. There was nothing in his dealings with the defenders during April and May 1992 to dampen it, although there was nothing specific to increase it either. But it is clear that Britvic was still being considered in that period. Mr Murray's minutes of the meeting on 4 May to discuss the Heads of Terms record that. We then come to the meeting on 27 May. I have already narrated the evidence of those witnesses who were there. The only witness who claimed to have any clear recollection of what was said at that meeting was Mr Hamilton. Mr Beatty remembered the meeting, seeing the site and meeting certain people. He also said he was clear in his recollection as to what his position was. In so far as that was to concentrate on the off-trade first and only move into the on-trade after that I have already said that that was not what he communicated to Mr Hamilton and Mr Douglas. He could not remember discussing Britvic with Mr Hamilton on 27 May nor could Mr Douglas remember it being discussed on that day. Mr Hamilton, however, was adamant that it was discussed and I think it highly probable that it was. Indeed, given Mr Hamilton's eagerness from the outset to obtain access to the on-trade, which was why Mr Douglas had approached the defenders in the first place, and given his optimism of obtaining such access at the time of the meetings with Mr Walter and given that it was discussed at the meeting with Mr Murray on 4 May I think it highly unlikely that Britvic was not discussed with Mr Beatty at the meeting on 27 May. Mr Beatty was after all the man who was charged with driving the negotiations on behalf of the defenders and this was the first full meeting Mr Hamilton had had with him. He was on the defenders' main board and to that extent, as Mr Walter had said, could influence matters. Mr Hamilton, mistakenly as it happened, also thought that he was on the board of Britvic. Britvic was the best way for Gleneagles's products to get into the on-trade. So I accept Mr Hamilton's evidence that Britvic was discussed with Mr Beatty at this meeting. Moreover, I accept Mr Hamilton's evidence that the thrust of what Mr Beatty said was that he could achieve access to the on-trade through Britvic. The response attributed to him by Mr Hamilton that it was in the defenders' best interests to do so and that they would do it to my mind rings true. Of course it was not guaranteed because of the way Britvic worked but it was something that was likely to be achieved. Although Mr Douglas did not have any recollection of what was said at this meeting, it is consistent with the impression he gained from his dealings with Mr Beatty. Otherwise he would not have reacted in the way he did to Mr Beatty's remarks at the completion meeting on 24 November. In my judgment, therefore, Mr Beatty gave Mr Hamilton to believe at this meeting on 27 May that, although there were obstacles in the way and it could not be guaranteed, it was likely that with the defenders' help Gleneagles would gain access to the on-trade through Britvic and their distribution network in the same way as applied to other soft drinks which the defenders produced.

[50]     In summary, therefore, Mr Beatty gave Mr Hamilton to believe that the defenders' strategy was to try from the outset to penetrate the on-trade with the Gleneagles product and to do that, if possible, by way of gaining access to Britvic. I am confirmed in this view by events following completion of the Agreement, to which I am about to turn.

[51]     There was, of course, the initial obstacle that Britvic could prevent the defenders taking a majority shareholding in Gleneagles in the first place - the Britannia problem. But the defenders managed to overcome that and that gave Mr Hamilton further confidence that Gleneagles would eventually get access to Britvic. The deal then got back on track, to use Mr Beatty's phrase, and matters moved swiftly to the completion meeting on 24 November. Mr Beatty's fax of 27 October to Mr Hamilton uses the phrase "as originally conceived" but it was plain from the evidence that that meant from where the negotiations broke off so that the defenders could deal with the Britannia problem. In other words, the understandings that obtained immediately before that time remained in place.

From 24 November 1992 to November 1995

[52]     Following completion of the Agreement a number of things happened. The second pursuers were given the opportunity to sell 12% of their share holding in Gleneagles. To this end the Information Memorandum, which I mentioned earlier, was prepared by Mr Douglas. In the event the shares were not sold. At about the same time Gleneagles bought the option to buy the land at Netherton Farm, Blackford, where the spring was. I mentioned this earlier. However, the option was never taken up and expired in November 2002. More importantly for present purposes, on 2 December 1992 there was a meeting on the Blackford site. It was attended by Mr Hamilton, Mr Beatty and Mr Robert Hodges. Mr Hodges was one of the two Lyons Tetley Ltd directors who were appointed directors of Gleneagles on 24 November 1992. The purpose of the meeting was to show Mr Hodges the site and discuss the project and business plan. Mr Hamilton said that Mr Beatty introduced Mr Hodges to him as the person in the defenders' organisation who would put Britvic and other aspects of distribution into place. (Mr Beatty was about to retire and did so in February 1993). This evidence was not challenged in cross-examination and not contradicted by Mr Beatty (Mr Hodges did not give evidence). Mr Beatty remembered that during the visit Mr Hodges grew in his enthusiasm for the project. His view was that he and Mr Hamilton had a good understanding of each other. I accepted Mr Hamilton's evidence on this point.

[53]     Then shortly after the Agreement was completed Graham Neillie was appointed factory manager for Gleneagles. The appointment ran from February 1993 but a few weeks before that he had met Mr Hamilton and someone he called a director of Allied (it is not known who this was) to discuss the appointment. At that meeting he was given to understand by Mr Hamilton that the defenders would provide Gleneagles with access to the on-trade by way of Britvic. Mr Hamilton expected this and continued to expect it after Mr Neillie's appointment took effect. Mr Neillie's evidence on this was not challenged and I accepted it.

[54]     Also in February 1993 the defenders through one of their other subsidiaries bought Ballygowan, the leader in the Irish water market. It had been founded in 1981 and by January 1994, according to a paper entitled Strategy for Allied Lyons in the UK Water Market, it had more than 70% of the Irish market and 3% of the much larger UK market. In that market it was particularly strong in the on-trade where it already had an exclusive distribution arrangement with Britvic. By contrast Gleneagles had still to start commercial production and did not do so until March 1994.

[55]     When Mr Neillie started as factory manager the maltings building at Blackford was in a very poor condition. However, it was renovated. Three bore holes had already been drilled - a fourth one was added later - and a pipeline some 21/2 km in length was laid from the water sources to the factory. Storage tanks and bottling equipment were installed there. The company was gearing up, as Mr Hamilton put it. A considerable amount of assistance was provided by Lyons Tetley Ltd in production get-up, in the creation of advertisements and in promotion. The first product was available by about late August 1993 but was not yet ready to be marketed. It was not until March 1994 that that stage was reached.

[56]     Also in about August 1993 David Potter was seconded to the company from Lyons Tetley as commercial manager. He came with a brief to promote the product mainly in the off-trade initially with the on-trade to wait until volume in the off-trade had been built up. His expertise lay in that area. He had no experience in the on-trade. This confirms that at this time the defenders' strategy was to build up the off-trade first and only move into the on-trade thereafter. Mr Potter said that Mr Hamilton accepted this strategy. I do not accept that. It is in my judgment clear that from the outset until he ceased to be managing director in December 1995 Mr Hamilton wanted to get access to the on-trade through Britvic and expected the defenders to help in achieving it. His own evidence was to that effect and Mr Neillie's was consistent with it. So was the evidence of Lawrence Dall, who succeeded Mr Potter as commercial manager in October 1994 and was there until April 1996. Moreover, the documentary evidence supports that view. The minutes of various meetings of the company covering the period from January to May 1995 were produced. They show that Mr Hamilton repeatedly raised the question of Britvic. At the commercial meeting on 26 January 1995 he is recorded as indicating that "present contractural (sic) arrangements with Ballygowan prevented Gleneagles from being stocked. (He) understood this to be contrary to advice received from David Beatty and would be taking this up direct with SHA." SHA was Stephen Alexander. He was on the board of J. Lyons in 1992 and became managing director after Mr Beatty retired in 1993. It is worth noting that Alan Wallwork was at this meeting. He was company secretary of J. Lyons and as such was very much involved together with Mr Beatty in the discussions with Mr Hamilton in 1992. He was now also company secretary of Gleneagles. There is no suggestion in the minutes that either he or Ken Pringle, who was also from Lyons Tetley Ltd and was in the chair, apparently having succeeded Mr Hodges, took issue with what Mr Hamilton said. The minutes of that meeting were later approved. At about this time Mr Hamilton and Mr Dall met with Britvic. On 3 February 1995 Stephen Kay, Britvic's Director of Marketing, wrote to Mr Hamilton in the following terms:

"Thank you for your information conveyed at our last meeting, and in your subsequent fax.

I have had the opportunity to discuss your proposition with Stephen Davies and the Britvic Executive.

My Colleagues are impressed by the nature and scale of Gleneagles' intent and commitment to address the market opportunity; however, we would request your assistance in two key areas, to facilitate the development of our dialogue.

1. In the light of the highly competitive state of the water market, we require your keenest prices across the packaging range. Is it possible to consider an improvement to the terms tabled in your fax?

2. Given our present contract with Ballygowan, BSD (Britvic) would require Gleneagles to handle the political sensitivities. Again your fax seemed to indicate that you would be addressing this issue.

Can you please let me know your views on the above."

The minutes of a meeting of Gleneagles's directors on 3 May 1995 attended by Mr Pringle, Mr McGrory (one of the two directors of Lyons Tetley Ltd who had become a director of Gleneagles following the Agreement on 24 November 1992) and Mr Wallwork as well as Mr Hamilton record that Mr Hamilton "drew attention to the exclusivity arrangements between Britvic and Ballygowan which prevented Gleneagles from being distributed. He reiterated that David Beatty had assured him that this could be overcome, but the problem persisted. KP (Ken Pringle) undertook to speak again with David Jarvis in an effort to conclude the matter." David Jarvis was Chief Executive of the Hiram Walker Group Ltd and was on the defenders' main board. Again there is no suggestion that any of the others at the meeting took issue with what Mr Hamilton said. Indeed, Mr Pringle's undertaking implies that it is correct. The minutes of a commercial meeting held on the same day - also attended by Mr Pringle, Mr McGrory and Mr Wallwork - record that Mr Dall planned to have a "follow-up" meeting shortly with Bass. Mr Hamilton explained in his evidence that since the defenders were doing nothing with regard to Gleneagles getting access to Britvic, Gleneagles were approaching Bass directly. Bass, it will be remembered, in effect controlled Britvic.

[57]     There was no evidence, however, to suggest that the defenders gave any assistance to Gleneagles to gain access to Britvic or to the on-trade in general during this period. Why this was so was not explained. No one who could have given such evidence was led and no relevant documentation was lodged.

[58]     What is known is that the defenders were undergoing a major re-organisation during this period. It had been Mr Beatty's wish to build up a stake for the defenders in the water market within their Food Manufacturing Sector. As far back as April 1992 the defenders had decided that if the deal with Gleneagles came to fruition, Gleneagles should be placed in that sector. Then in February 1993, just as Mr Beatty was retiring, the defenders acquired Ballygowan. It was not clear from the evidence into which part of the defenders' organisation that company was placed but in any event in 1994 the defenders took the decision to focus on their spirits and retail activities. They subsequently sold all their UK businesses in their Food Manufacturing Sector with the exception of Gleneagles. In the paper entitled Strategy for Allied-Lyons in the UK Water Market (dated January 1994) a proposal is made to effect a combination of Gleneagles and Ballygowan and Highland Spring. But reservation is expressed as to the commitment of J. Lyons to such a proposal. "The (water) project", it said, "was championed very much on his own by Lyons' then Vice Chairman, David Beatty who has since retired. It is unclear that the requisite pioneering enthusiasm has survived Beatty". Mr Beatty was not asked about this in his evidence but the first part accords with my impression that from the defenders' side the Gleneagles project was very much Mr Beatty's. So it may be that the failure on the part of the defenders to assist Gleneagles in getting access to Britvic is explained by a lack of enthusiasm on their part following Mr Beatty's retiral, or following the divestment of the other UK businesses in the defenders' Food Manufacturing Sector. Mr Neillie's view as factory manager was that it seemed almost as if the defenders had lost interest in Gleneagles. In any event, whatever the reason all I can say is that on the evidence the defenders did not assist Gleneagles in getting access to Britvic or to the on-trade in general.

[59]     At this time the defenders' strategy with Gleneagles was still to focus on the off-trade. But it took a long time to put that into effect. It was March 1994 before the product was available for the market. By that time David Potter had been with Gleneagles for more than six months. He explained that his brief had been mainly to promote the product in the off-trade. As explained earlier, this is mainly to the large supermarket chains. There are two aspects of it. The first is what is known as the branded product business, where the product bears the Gleneagles name. One of the aims of that, of course, is to acquaint the buying public with the Gleneagles name and establish the product in the market in that way. The other aspect of the off-trade is private or own label business. This is when one of the large supermarket chains buys the product and sells it with its own name or a name of its choosing on the label. In both cases the aim is to achieve high volume sales through the supermarkets and so establish sufficient cash flow for the company to enable it to carry forward development of the product. Mr Potter found it difficult to persuade the supermarkets to take the product. He put this down to a number of problems with the product, to which I shall return later. He did, however, succeed in obtaining the first major customer. This was Marks & Spencer. They are known to demand a high quality product. They had to be satisfied that the product was suitable for their purposes. There were two initial problems. One was due to a certain inconsistency in the levels to which the bottles were filled and the other to some scuffing on the bottles. A technologist from Marks & Spencer visited the Gleneagles factory at Blackford. The problems were quickly dealt with and Gleneagles then became an approved supplier to Marks & Spencer. This was in about July 1994. Shortly after that Mr Potter left Gleneagles and returned to Lyons Tetley. He was succeeded by Lawrence Dall. Mr Dall was initially seconded from Lyons Tetley but from about February 1995 until April 1996 was an employee of Gleneagles. He was surprised Mr Potter had not had more success. He himself did have rather more success. He managed to obtain listings - that is, agreements to take Gleneagles's product - with Tesco, Sainsbury, Waitrose, Asda, Watson & Philip (a cash and carry outlet), the Co-op, Ind Coope and Victoria Wine. The last named was a subsidiary of the defenders but, as with all other companies owned by them, acted independently and took its own decisions as to which products to list. In March 1995 Mr Dall was joined at Gleneagles by a marketing manager, Miss Sandra Cunningham. She reported to Mr Dall directly. Her remit was to take over and develop the marketing strategy for Gleneagles. For that purpose the marketing resources of Lyons Tetley Ltd were made available to her. In June 1995 there was a test launch of the product in the south of England backed by a TV advertising campaign. The results were disappointing, however. It was going to need long term and consistent marketing of the brand if substantial awareness of it in the market place were to be achieved. While sales did increase during the advertising campaign, they were not at a sufficient level and were not sufficiently maintained after the campaign finished to justify further advertising investment of this kind.

[60]     So off-trade returns were disappointing. In addition, during this period own label sales were virtually non-existent. There were some to Marks & Spencer (sales to them were initially the Gleneagles branded product but later changed to Scottish Spring Water sold under Marks & Spencer's own St Michael label) and Mr Hamilton would have liked more. But the Lyons Tetley directors were not in favour of it. On a number of occasions during 1993 and 1994 Mr Hamilton said that they effectively vetoed it. He particularly referred to Mr Pringle. Precisely what Mr Pringle's status was in Gleneagles was not explained. Mr Hamilton said that in 1993 he was acting as an alternate for Mr Hodges, who had been appointed a director on 24 November 1992, and he is minuted as having been in the chair at the meetings of the company in the first part of 1995. He was on the defenders' witness list but was not led in evidence. Mr Hamilton explained that the Lyons Tetley directors thought that if they went into own label business for Gleneagles's products, it would be the thin end of the wedge and the supermarkets would then demand their own label for Lyons Tetley tea products. This view of own label business coincided with Mr Beatty's. He was not in favour of own label business because in his view it would undermine the brand and give the own label a quality which was not appropriate for it. So if there was to be any own label business, it should be secondary and only to use up any surplus capacity. Mr Hamilton's evidence on this was not disputed and I accepted it.

[61]     The result of all this was that although, as Mr Beatty acknowledged, Lyons Tetley had an obligation to build the Guinness brand in the off-trade and effect its distribution to that side of the market, this was not satisfactorily achieved. I shall consider the reasons for this later in this Opinion. So far as the other aspects of the market were concerned, as I have explained, all attempts by Mr Hamilton to gain access to Britvic and in that way to the on-trade came to nothing. No other penetration of the on-trade was achieved either. Mr Potter contacted Carlsberg-Tetley and Victoria Wine. They were both subsidiaries of the defenders and expressed an interest in working with the product, albeit in smaller bottles than were distributed to the off-trade, but it was not taken any further during his time with Gleneagles. After he left Mr Dall, his successor, made further attempts to penetrate the on-trade. On his own evidence his experience of that trade was very limited. Contact was again made with Carlsberg-Tetley and he contacted Waverley Vintners, the distribution arm of Scottish & Newcastle plc. He also contacted some companies in London which supplied restaurants there. And he and Mr Hamilton themselves tried to gain access to Britvic. All of this was unsuccessful. There was a contract with the Jenks Group of High Wycombe to distribute the product to smaller convenience outlets but sales were not enough to make this a success.

[62]     Mr Hamilton also sought contracts with a number of companies abroad and by the late summer of 1995 was having some success. But all the while sales were not sufficient to prevent Gleneagles continuing to lose money. In the eighteen months to 19 August 1995 trading losses amount to £2.6 million. It was about this time that Mr Hamilton felt that his fellow directors, that is the Lyons Tetley directors, no longer wanted him to be managing director. Shortly thereafter, towards the end of November 1995 Peter Macfarlane asked Mr Hamilton to move from managing director of Gleneagles to a non-executive role. Mr Macfarlane was the defenders' finance director and was a member of their main board. He was also a member of the board of J. Lyons. In June 1995 he had been introduced to Mr Hamilton as the person with whom Mr Hamilton should deal following the defenders' divestment of the other companies in their Food Manufacturing Sector. When they met in November Mr Macfarlane had accepted that the defenders had not played the game with Mr Hamilton and apologised for this but had indicated that he wanted to appoint a person from the defenders' organisation as managing director. I accepted Mr Hamilton's evidence to this effect, which was not disputed. Mr Hamilton went on to explain that if this was the way for the defenders to honour their promise in relation to Britvic, he would agree to it. And he did, notwithstanding that he had been appointed managing director for five years on 24 November 1992. And so at the end of November 1995 Mr Hamilton ceased to be managing director of Gleneagles.

From December 1995 to February 1998

[63]     Mr Hamilton was succeeded as managing director by Christopher Zanetti. Mr Zanetti had joined the defenders in 1984. He remained as managing director of Gleneagles until the end of 1997. His expertise was in marketing. On his appointment he was asked to assess the defenders' investment in Gleneagles and turn the company around. He took drastic action. In particular, he substantially reduced the workforce and completely changed the marketing strategy of the company. In order to achieve critical mass for the product in the off-trade market he sought own label business. That was achieved through Safeway in the summer of 1996. That gave a basis for developing the company's business in other areas. The Marks & Spencer own label contract, however, which was for smaller bottles, was losing money and at the end of 1996 that contract was terminated. The existing overseas contracts were also not viable and they were terminated. In addition to the Safeway contract and the other distribution into the off-trade which Mr Dall achieved (he was with Gleneagles from October 1994 until April 1996) Mr Zanetti attempted to penetrate the on-trade. He was aware that Mr Hamilton had been seriously aggrieved by it but he accepted that he was not going to get access to Britvic or the defenders' estate, which was tied to Britvic. He took it as a given. He acknowledged that this made it difficult for Gleneagles to penetrate the on-trade. The only other way was to do as he did. He managed to achieve distribution through regional wholesalers but he also made changes to the design of Gleneagles's bottles and developed other water products. In this way he managed to increase Gleneagles's on-trade business substantially. In the year ended 18 August 1996 it accounted for over 28% of the company's sales. In the ten months to 30 June 1997 it was up to nearly 44%. On the other side costs were significantly reduced and the trading loss reduced to about £1.1 million for the year to 18 August 1996 and a little under £1 million for the ten months to 30 June 1997. So the company was moving in the right direction. But by this time the defenders had decided to focus on their core business, in spirits and in retailing activities. The UK businesses in the Food Manufacturing Sector with the exception of Gleneagles had already been sold and since Gleneagles was still making losses, albeit much reduced from what they had been, the defenders decided to offer their investment in the company for sale. To that end an Information Memorandum was prepared by KPMG Corporate Finance for those considering investment in the company. It was dated July 1997.

[64]     In the course of his evidence Mr Zanetti was shown the Business Plan which had been put together in 1991. He had not seen this before. He agreed, under reference to what is said at page 32, that it was sensible to move into the on-trade and use that as a springboard to move into the off-trade. Highland Spring had done that. It was much more difficult to develop a high quality product in the off-trade first without also developing the on-trade, although not impossible. Moreover, to penetrate the off-trade it was essential to advertise and market the brand on a considerable scale in order to promote it. Another means of promoting the brand, this time without heavy advertising, would have been by penetrating the on-trade. If it had been possible to have had access to Britvic it would have been a springboard from which to establish Gleneagles's business.

[65]     Mr Zanetti gave evidence on all these matters. He was an impressive witness and his evidence was not seriously challenged. I had no difficulty in accepting it.

[66]     In July 1996 Mr Macfarlane told Mr Hamilton that he wanted him to resign as a director of Gleneagles. At about the same time the defenders attempted to buy out or at least significantly dilute the pursuers' minority share holdings. On 30 July 1996 Mr Macfarlane wrote to Mr Hamilton saying that unless this was achieved, he would find it very hard to recommend that the business continued. A price, however, could not be agreed. Immediately thereafter, in August 1996, Mr Hamilton was removed as a director of Gleneagles by the defenders. He contested the legality of this for a time but ultimately accepted it. Thereafter, in 1997, as I have already said, the defenders offered their investment in Gleneagles for sale. This was not successful and in February 1998 Gleneagles was put into administration. On 30 October 1998 interim liquidators were appointed. All this was covered by Mr Hamilton in his evidence and supported by the documentary evidence to which he spoke. It was not in dispute and I accepted it. It was also not in dispute that the present value of the pursuers' shares in Gleneagles is nil. Gleneagles was eventually sold to Highland Spring Ltd.

The cause(s) of the Company's failure

[67]     In their pleadings the pursuers aver that they lost the value of their shareholding Gleneagles as a result of reliance upon Mr Beatty's misrepresentation. The defenders deny that and aver that Gleneagles were unable to gain brand recognition and to generate sales because of a number of production problems and that it was as a result of those that the product failed. A considerable amount of evidence was devoted to this issue.

[68]     That there were production problems was not in issue. The issue between the parties was to do with the extent of these problems and their effect on the company. There was a number of particular problems which were canvassed in the evidence. I will deal with them in turn and then try to assess the overall situation.

[69]     I have already narrated that Mr Potter obtained a contract to supply Marks & Spencer. Marks & Spencer demand high quality and there were two matters which troubled them. I have already referred to them. The first was an inconsistency of water levels in the bottles. The second was that there was scuffing or scratching of the bottles. Mr Hamilton did not recall any such problems but I accept that there were. Mr Neillie, the factory manager, recollected them. There were just these two problems. A technologist from Marks & Spencer visited the factory at Blackford to discuss them. He visited on only one occasion and asked that when the problems had been remedied sample bottles should be sent to him. This was done about two weeks after he had visited and he then approved Gleneagles as a supplier to Marks & Spencer. Mr Neillie was quite clear in his evidence on this matter. He was the factory manager and therefore the man on the spot, as it were. He was not shaken in cross-examination and I accepted his evidence. The other witness to give evidence on this matter was Mr Potter. He said it took much longer, some eight months, to satisfy Marks & Spencer. He also said that there was a problem with loss of carbonation. I did not accept his evidence on either point, preferring Mr Neillie's evidence to the contrary. Mr Potter agreed that Marks & Spencer were the first commercial customers and started to take the product in about July 1994. This was only some four months after the product was available to the market. It may be, as Mr Potter indicated, that it was about eight months from the time Gleneagles sent the first samples to Marks & Spencer to the time when they took the product but I think he then elided that time with the time it took to solve the particular problems that I am dealing with. Mr Potter also said that he had complaints from Marks & Spencer after Gleneagles had started to supply them and that he had reported that to those concerned with quality control in the company. I do not accept this either. There was no evidence to support it. Both Mr Hamilton and Mr Neillie said that they had looked at the minutes of the quality control meetings - Mr Neillie said this was in the summer of 2002 - and that there was no mention of this (or of the other problems with which I am about to deal) in the minutes. Mr Potter said he had also mentioned these complaints to Mr Pringle, who by this time, it appears, had taken over as chairman of Gleneagles from Mr Hodges or at least was acting, as Mr Hamilton put it, as his alternate. As I have said already, Mr Pringle was on the defenders' list of witnesses but was not called to give evidence. In any event, Mr Potter left Gleneagles's employment in August 1994, just one month after Marks & Spencer had started taking the product. It was not in dispute that Marks & Spencer took the product from about July 1994 and continued to take it thereafter until Mr Zanetti terminated the contract at the end of 1996. So I do not think it can be said that any problems with Marks & Spencer contributed to the failure of Gleneagles.

[70]     One particular product of Gleneagles's in the early days (it was revived in a rather different form later by Mr Zanetti) was a specialist baby water product. It was put into production in May 1994. Heinz had agreed to take an initial quantity of 30,000 bottles and had started to distribute them to the pharmaceutical and grocery trades. Following a routine random test in a laboratory in Southport, Lancashire it was discovered that there were bacteria in the product. Heinz, not unnaturally, immediately withdrew the product from the market. On further investigation, however, it was found that the bacteria in question were from salmon farms in the Irish sea and there had been cross-contamination at the laboratory into the baby water. The evidence on this, which was given by Mr Hamilton and Mr Neillie, was not disputed and I accepted it.

[71]     In the summer of 1995, after Mr Dall had obtained a listing from Tesco, there was an occasion when algae was found to be growing in a bottle supplied to them. A laboratory test arranged by Gleneagles confirmed that this was so. The algae was not pathogenic and was not a health risk but was unsightly and obviously undesirable. Mr Neillie took advice from experts as to how to deal with the matter and acted on it. The customer in question was compensated £15 and Tesco continued to list the product. Mr Hamilton did not recollect this but Mr Neillie and Mr Dall did. It was not in dispute and I accepted their evidence. They gave evidence of this one instance only in relation to algae. Miss Cunningham, however, said that it happened not just on this occasion but from time to time, about every two months during her time with Gleneagles. Most of that time was, it will be remembered, after Mr Zanetti took over as managing director in December 1995 and the company's performance improved dramatically. Miss Cunningham also said that algae was found in the pipeline leading the water from its source to the factory. I have no reason to doubt Miss Cunningham's evidence on these matters but they were not explored with the other witnesses. What is clear, however, in my judgment is that they are not proved to have had any bearing on the company's overall performance. They did not therefore contribute in any material way to Gleneagles's failure.

[72]     There were three other problems discussed in the evidence. The first of these was that labels kept coming off bottles. Initially a polypropylene label was used and there was a difficulty in applying it to the bottle. But that was soon solved. I accepted Mr Hamilton's and Mr Neillie's evidence on this. There was no contrary evidence on this aspect of the problem. But there was a problem in that when the product was on the shelves of the supermarkets, particularly Tesco on the evidence, the labels sometimes came off. Mr Dall, Miss Cunningham and Mr Zanetti all gave evidence of this, which essentially I accepted. But it was accepted that from time to time labels such as these do come off. Indeed manufacturers are known to go into supermarkets and buy up their products themselves where the labels have come off, because it is obviously unsightly and not something the manufacturer would want to have displayed. In early 1996 the labels were changed by Mr Zanetti to paper ones as part of his reorganisation of the company and its products. I was not clear from the evidence whether that completely solved the problem - perhaps not standing the evidence that this sort of thing does happen from time to in ordinary course of events - but, as Mr Dall put it, the problem was alleviated at about that time. He actually thought it was because the glue was changed. Whether that was at the same time as the label was changed is not clear. In any event, I am satisfied from the evidence that there was no real problem with labels coming off from late 1995 or early 1996. As for the period before that, I accept Mr Hamilton's and Mr Neillie's evidence that the initial problem of applying the labels to the bottle was soon solved, probably by April or May 1994. In the period thereafter, up to the end of 1995, there were occasions when labels came off in the supermarkets. The evidence of these occasions all related to Tesco Stores and, as already stated, Tesco did not de-list the product. I find it impossible in these circumstances to conclude that this problem played any material part in Gleneagles's failure.

[73]     There was also a problem with the bottles becoming scuffed or scratched. Mr Hamilton thought that this was an early problem which was soon solved. He may have been referring to the scuffing of the bottles for Marks & Spencer. Those bottles were different in design (they were square) and that scuffing problem was solved by the time Marks & Spencer started to take the product in about July 1994. But the weight of the evidence was to the effect that this was a continuing problem with the bottles Gleneagles supplied to the supermarkets, at least until Mr Zanetti took over from Mr Hamilton at the end of 1995. Evidence to this effect was given by Mr Dall, Mr Zanetti and Miss Cunningham. Mr Neillie thought that this was not a major problem and specifically Mr Dall could not say it was why individual customers did not repeat buy the product. There was no evidence that scuffing was a problem after Mr Zanetti became managing director. In these circumstances I am again unable to conclude that the scuffing of the bottles played any material part in the failure of Gleneagles.

[74]     Then there was a problem with the design efficiency of the seal on the bottles. For marketing reasons it was desirable to have an attractive seal (initially it was covered with a sleeve) but for practical purposes it was necessary to have it tamper-evident and also, of course, easy to open. It proved difficult to achieve a seal which satisfactorily achieved all these aims. A number of design changes were made. Mr Hamilton, however, thought that the problem was solved by May 1994 and said that there was a comment in the quality control minutes in August 1994 that the seal was perfect. Mr Neillie also said that it was not a major problem. He thought it had been solved by 1995. Mr Potter spoke about the problem but of course he left the company in or about August 1994. Mr Dall said the problem continued up to the time Mr Hamilton ceased to be managing director late in 1995. This was mainly to do with it being difficult to open the bottle. Miss Cunningham and Mr Zanetti also said there were problems in 1995 but these were related to the design and attractiveness of the sleeve covering the seal. In the light of this evidence I accept that there were difficulties of one kind or another with the seal on the bottles in the period up to the end of 1995. There was no evidence, however, of any such difficulties after that. In these circumstances I am unable to conclude that these difficulties played any material part in the failure of Gleneagles.

[75]     I have considered these matters individually. It may be, however, that when taken cumulatively they could have caused or materially contributed to the failure of Gleneagles. There was no evidence directed specifically to the point but that is perhaps not surprising given the witnesses who were called. Their evidence was inevitably anecdotal and impressionistic. No witness who was in a position to give more authoritative evidence on this point was called by the defenders and they produced no documentation in support of their position. Doing the best I can with the evidence available to me I would be prepared to accept that the combined effect of these problems probably had some part to play, either directly or indirectly, in the company's under-performance in the years from November 1992 until 1995. That is my impression taking the evidence as a whole. But I am quite unable to conclude that they were the cause of the company's failure or even a material cause. I should add that in coming to these views I have not overlooked the evidence of Tony Johnson. He is managing director of Peckham & Rye Ltd who operate licensed delicatessens and restaurants at the top end of the market. He is also managing director of J W Munro Ltd, a wholesale company which services delicatessens and fine food shops throughout Scotland. He was introduced to the product in about 1994. He liked both the product and its packaging. He had had no problems with either. Through Peckham & Rye he stocked it in all their delicatessens and exported it successfully to the Ukraine until legislation there made that impossible. For J W Munro Gleneagles was their primary source of bottled water. They continued to stock the Gleneagles product until the demise of the company, and indeed have continued to do so throughout the company's changes since then. Mr Johnson's evidence was not seriously challenged and I accepted it.

[76]     Other possible causes of Gleneagles's failure were touched on in the evidence. I have already mentioned the defenders' change of focus which involved selling all the UK companies in their Food Manufacturing Sector except for Gleneagles and the question mark over their continuing commitment to Gleneagles. Miss Cunningham, however, was of the view that the real problem was that initially Lyons Tetley and Gleneagles had gone for the wrong strategy, namely to concentrate on the off-trade before trying to penetrate the on-trade. This was because it was extremely difficult to develop a brand in the off-trade without substantial advertising support. The only period of such support had been the TV advertising campaign in the south of England. That had not proved sufficiently successful for it to be repeated but even Miss Cunningham felt that success for the brand was within reach at that time provided there was advertising support. Mr Zanetti, when he became managing director, had reversed this strategy and thereafter the company performed very much better. It is not without significance that the strategy Mr Zanetti adopted, namely to try to penetrate the on-trade as well as the off-trade and in addition to seek own label business, was essentially the one that Mr Beatty represented to Mr Hamilton would be followed and so induced the pursuers to enter into the Agreement of 24 November 1992.

[77]     Then, of course, there was the inability to gain access to Britvic and that part of the on-trade, distribution to which it controlled. This included the defenders' many on-trade outlets. The company never did get such access. Even so Mr Zanetti managed to improve the company's performance markedly by a combined concentration on own label business and, by a variety of means, other parts of the on-trade. In the ten months to 30 June 1997 these combined to account for 80% of the company's sales. In the year to 31 August 1997 Gleneagles's turnover increased to £508,000 from £305,000 in the eighteen months to August 1995 and the gross profit to £306,000 from £71,000. The operating loss was reduced to £1,493,000 from £3,225,000. The situation continued to improve in the three months to November 1997, the latest date for which figures were available: see the report by Mr G I Bennet, C.A., dated 7 January 1998, to which Mr Zanetti referred.

[78]     This was all without access to Britvic and the defenders' on-trade outlets. On an overall view of the evidence it is impossible in my judgment to avoid the conclusion that if, following the agreement of 24 November 1992, the strategy which Mr Hamilton had been led to believe would be followed had been followed, it would have made a major difference to the company's fortunes. This would have been all the greater if, with the defenders' assistance, Gleneagles had succeeded in gaining access to Britvic but even without that, if the defenders had made available their distribution arrangements and facilities for supply to the on-trade in other ways, it would have been substantial. So while there is no doubt a multiplicity of causes, great and small, which led to the failure of the company, the failure to follow the strategy which Mr Hamilton had been led to believe would be followed was in my opinion at least a major, if not the major, contributing cause.

The Law and its Application

[79]     It was common ground that a negligent misrepresentation which induces a contract may give a remedy in damages, provided that the person making the statement owed a duty of care to the person to whom the statement was made (Hedley Byrne & Co Ltd v Heller & Partners Ltd 1964 AC 465, accepted as applicable in Scots law in cases such as Junior Books Ltd v Veitchi Co Ltd 1982 SC (HL) 244).

[80]     In Hedley Byrne the statement in question was made by A and induced B to contract with C. In this case the statement was made by A and induced B to contract with him (A). It was therefore a bipartite situation rather than a tripartite one. It was common ground, however, that in a bipartite situation such as the present the law was accurately stated by Lord Denning M.R. in Esso Petroleum Co Ltd v Mardon 1976 1 Q.B. 801 at page 820 where he said:

"It seems to me that Hedley Byrne & Co Ltd v Heller & Partners Ltd, properly understood, covers this particular proposition: if a man, who has or professes to have special knowledge or skill, makes a representation by virtue thereof to another - be it advice, information or opinion - with the intention of inducing him to enter into a contract with him, he is under a duty to use reasonable care to see that the representation is correct, and that the advice, information or opinion is reliable. If he negligently gives unsound advice or misleading information or expresses an erroneous opinion, and thereby induces the other side to enter into a contract with him, he is liable in damages."

There was no dispute that Mr Beatty, by reason of the position he held at the time in the defenders' organisation and the admitted authority he had been given to bind the defenders and make representations on their behalf, had the required special knowledge to make representations to Mr Hamilton in relation to the course which the defenders would take should the parties enter into an Agreement such as they eventually did enter into. It may be, however, that some clarification is needed as to what sort of misrepresentation may lead to liability in damages. In the passage just quoted Lord Denning indicated that it could be "advice, information or opinion". Mrs Swanson for the defenders submitted that it had to be a statement of fact. A statement of future intent would not do and if Mr Beatty had made any statement in relation to distribution, that is all it amounted to. Reference was made to Dennistoun v Lillie 1821 3 Bligh 579; Harvey & Co v Seligmann 1883 10 R. 680; Edgington v Fitzmaurice 1885 29 Ch D 459; The Advertising Concessions (Parent) Co Ltd v Paterson, Sons & Co 1908 16 S.L.T. 654; Bell Bros. (H.P.) Ltd v Reynolds 1945 S.C. 213; Gloag on Contract, 2^nd ed. pages 462-4; and also, by Mr Hodge, to Chitty on Contract, 28^th ed. para.6-010. But, as the learned author in Gloag pointed out, a man may misrepresent his intentions. If he does so deliberately, that will amount to fraud. If he does so carelessly, it will amount to negligent misrepresentation. For a statement of his intentions may be a statement of fact: see Edgington v Maurice. As Bowen L.J. memorably put it in that case (at page 483), "there must be a misstatement of an existing fact: but the state of a man's mind is as much a fact as the state of his digestion". No doubt, as Bowen L.J. said, it is very difficult to prove what the state of a man's mind at a particular time is, but if it can be ascertained it is as much a fact as anything else. In this case, of course, the alleged misrepresentation is not what Mr Beatty said about his intention but rather what he said about the defenders' intention. There is, however, no difference in principle. It is also to be noted that a statement using the future tense may be regarded as a statement of fact rather than one of future intent: see Dennistoun v Lillie and Chitty on Contract para.6-010. In the present case I am of opinion that what Mr Beatty represented to Mr Hamilton, namely that if the parties did the proposed deal it was the defenders' intention, or strategy, to make their distribution arrangements and facilities for supply to the on-trade available to Gleneagles, was a representation of fact. It was, however, a misrepresentation, as I have held, and having regard to all the circumstances which I discussed earlier in this Opinion it was in my judgment a negligent misrepresentation. From the outset Mr Hamilton had made it clear that what was in his mind was an attempt from the start to penetrate the on-trade as well as the off-trade. Mr Beatty knew that. If this strategy was not to be followed by the defenders it was in my opinion incumbent on Mr Beatty to make that clear to Mr Hamilton before the Agreement of 24 November 1992 was entered into. He did not, however, do that. On the contrary, he led Mr Hamilton to believe throughout that the defenders' strategy was at one with his own. As I have said, that was in my judgment a negligent misrepresentation and for that the defenders are liable in damages.

[81]     Mrs Swanson also submitted that the defenders could only be liable for such loss by the pursuers which was a natural and direct consequence of the misrepresentation and which was therefore a foreseeable consequence of the misrepresentation. She referred to the well-known passage in Allan v Barclay 1864 2 M. 873 where Lord Kinloch (at page 874) set out what he described as the "grand rule" on the subject of damages in Scots law:

"The grand rule of the subject of damages is, that none can be claimed except such as naturally and directly arise out of the wrong done; and such, therefore, as may reasonably be supposed to have been in the contemplation of the wrongdoer."

Reference was also made to South Australia Asset Management Corporation v York Montague Ltd 1997 AC 191 ("SAAMCO"). In that case three appeals were before the House of Lords. In each of them a valuer was required by a potential lender to value a property on the security of which the latter was considering advancing money on mortgage. In each case the valuer negligently over-valued the property. Following the valuations the loans were made, which would not have been made if the lenders had known the true values of the properties. The borrowers subsequently defaulted. In the meantime the property market had fallen substantially, greatly increasing the losses eventually suffered by the lenders. The question before the House in each appeal was the extent of the liability of the valuer. The answer depended on the scope of his duty to the lender. In his speech, with which the other members of the House agreed, Lord Hoffmann said, at page 211:

"A plaintiff who sues for breach of a duty imposed by the law (whether in contract or tort or under statute) must do more than prove that the defendant has failed to comply. He must show that the duty was owed to him and that it was a duty in respect of the kind of loss which he has suffered."

In that case there was an implied term in the parties' contract that the valuer would exercise reasonable care and skill in his valuation and a concurrent duty of the same scope in tort. In the present case, of course, there was no contract between the parties at the material time. The duty was one in delict, the scope of which was the exercise of reasonable care in any representations which Mr Beatty made to Mr Hamilton in their pre-Agreement discussions. In SAAMCO the Court of Appeal had held that the valuer should be liable for all the loss which would not have occurred if his advice had not been negligent. The lender having embarked upon a transaction in reliance of the valuation, the valuer should bear the whole risks of the transaction, so long as any subsequent loss was within the reasonable contemplation of the parties. In the circumstances of that case it included the increased loss due to the fall in the property market. The House of Lords, however, rejected that approach. Lord Hoffmann said that the principle adopted by the Court of Appeal was not the normal rule. He gave a graphic illustration of the difference between the normal rule, the ordinary principle as he put it, and that adopted by the Court of Appeal when he said (at page 213):

"A mountaineer about to undertake a difficult climb is concerned about the fitness of his knee. He goes to a doctor who negligently makes a superficial examination and pronounces the knee fit. The climber goes on the expedition, which he would not have undertaken if the doctor had told him the true state of his knee. He suffers an injury which is an entirely foreseeable consequence of mountaineering but has nothing to do with his knee.

On the Court of Appeal's principle, the doctor is responsible for the injury suffered by the mountaineer but it is damage which would not have occurred if he had been given correct information about his knee. He would not have gone on the expedition and would have suffered no injury. On what I have suggested is the more usual principle, the doctor is not liable. The injury has not been caused by the doctor's bad advice because it would have occurred even if the advice had been correct."

At page 214 Lord Hoffmann continued as follows:

"Your Lordships might, I would suggest, think that there was something wrong with a principle which, in the example which I have given, produced the result that the doctor was liable. What is the reason for this feeling? I think that the Court of Appeal's principle offends common sense because it makes the doctor responsible for the consequences which, though in general terms foreseeable, do not appear to have a sufficient causal connection with the subject matter of the duty. The doctor was asked for information on only one of the considerations which might affect the safety of the mountaineer on the expedition. There seems no reason of policy which requires that the negligence of the doctor should require the transfer to him of all the foreseeable risks of the expedition.

I think that one can to some extent generalise the principle upon which this response depends. It is that a person under a duty to take reasonable care to provide information on which someone else will decide upon a course of action is, if negligent, not generally regarded as responsible for all the consequences of that course of action. He is responsible only for the consequences of the information being wrong. A duty of care which imposes upon the informant responsibility for losses which would have occurred even if the information which he gave had been correct is not in my view fair and reasonable as between the parties. It is therefore inappropriate either as an implied term of a contract or as a tortious duty arising from the relationship between them.

The principle thus stated distinguishes between a duty to provide information for the purpose of enabling someone else to decide upon a course of action and a duty to advise someone as to what course of action he should take. If the duty is to advise whether or not a cause of action should be taken, the adviser must take reasonable care to consider all the potential consequences of that course of action. If he is negligent, he will therefore be responsible for all the foreseeable loss which is a consequence of that course of action having been taken. If his duty is only to supply information, he must take reasonable care to ensure that the information is correct and, if he is negligent, will be responsible for all the foreseeable consequences of the information being wrong."

Mrs Swanson sought to apply Lord Hoffmann's reasoning to the present case in the following way, as I understood it. Accepting that Mr Beatty owed a duty to take reasonable care in his discussions with Mr Hamilton in the information he provided and not to make any negligent misrepresentation as to the defenders' strategy with regard to the distribution arrangements which they would make available to Gleneagles and assuming that he breached that duty and so induced Mr Hamilton to enter into the Agreement of 24 November 1992 with the defenders, any losses sustained by the pursuers thereafter due to the failure of Gleneagles were caused not by any misrepresentation on the part of Mr Beatty but by the problems with the product, with which I dealt earlier. These problems had nothing to do with Mr Beatty's representation. The defenders therefore could not be liable for the pursuers' losses. Even if Mr Beatty's representation had been correct, the company would still have failed. The product problems, not the misrepresentation, were the cause of its failure and the pursuers' resulting losses.

[82]     Lord Hoffmann's speech in SAAMCO was considered by the House of Lords in the later case of Aneco Reinsurance v Johnson & Higgins 2001 2 All ER 929. Lord Lloyd of Berwick said that the principle in SAAMCO was that a defendant is not liable in damages in respect of losses which fall outside the scope of his duty of care. There was nothing new in that principle. What was new in SAAMCO was the application of the principle to valuers so as to exclude their liability for loss due to a fall in the market. So SAAMCO was an example of a special class of case where the scope of the defendants' duty is confined to the giving of specific information. Lord Hoffmann had contrasted that class of case with cases in which the defendant had undertaken a duty to advise generally. The question in Aneco Reinsurance was on which side of the line did the case fall. The answer depended on the facts of the case.

[83]     In the present case Mr Hodge accepted that the defenders are not liable in damages for loss which falls outwith the scope of their duty of care. But here there was no extraneous factor such as the fall in the property market, which was present in SAAMCO. As he put it, we are not in the realm of the mountaineer's knee. Nor, he submitted, was the dichotomy between the duty to provide specific information and the duty to give general advice a particularly useful tool in the circumstances of this case. It was not always a useful tool. He referred to the opinion of Lord Macfadyen in Keith v Davidson Chalmers, unreported 11 September 2002 (the case is now the subject of a reclaiming motion).

[84]     Against this background I turn to the facts of the present case. The question of distribution was fundamental to Mr Hamilton's decision whether to enter into an agreement with the defenders. Mr Beatty knew that. Moreover, it was clear to him from the outset (either personally or through Mr Walter) that what Mr Hamilton was particularly interested in was the defenders' ability to make their distribution arrangements and facilities to the on-trade available to Gleneagles. In that situation I think it can be said that to draw a distinction between a duty on Mr Beatty to provide information about the defenders' strategy with regard to the distribution arrangements and facilities they would make available to Gleneagles and a duty on him to advise as to what course of action Mr Hamilton should take is artificial, just as a similar distinction was found to be in Aneco Reinsurance. Even if, however, I were to approach the matter on the basis that Mr Beatty's duty was merely one to provide information to Mr Hamilton and that this is in the SAAMCO class of cases, it will not assist the defenders. There would, of course, have been merit in Mrs Swanson's line of reasoning if I had found that the product problems were the cause of Gleneagles's failure. But I have not so found. I have found that its failure was caused or at least materially contributed to by the defenders' failure to make their distribution arrangements and facilities for supply to the on-trade available to the company. Having made those findings, it appears to me that the failure of the company, and therefore the pursuers' loss, are causatively connected with Mr Beatty's misrepresentation. He represented that the defenders' strategy was to make their distribution arrangements and facilities for supply to the on-trade available to Gleneagles. But in fact it was not and they did not implement it. That caused or at least materially contributed to Gleneagles's failure and as a result the pursuers suffered loss. In my opinion their loss was a natural and direct, reasonably foreseeable consequence of Mr Beatty's misrepresentation. There was no dispute that in that event the defenders were vicariously liable for it.

[85]     Before leaving this chapter, I should record that Mrs Swanson had a subsidiary argument to the effect that the pursuers' case, based as it was on negligent misrepresentation, was irrelevant because in terms of Clause 10.5 of the Agreement of 24 November 1992 all prior representations, whether written, oral or implied, between the parties were superseded. In the course of her submissions, however, Mrs Swanson intimated that she was not insisting on this point.

Evaluation of Loss and Damage

[86]     Under reference to the opinion of Lord Denning M.R. in Esso Petroleum Co Ltd v Mardon it was common ground that if I got to this stage, the correct approach to the evaluation of loss and damage is to consider what position the pursuers would have been in had the misrepresentation by Mr Beatty not been made and had the pursuers not entered into the Agreement with the defenders. In that case the defendant, a prospective tenant of a petrol filling station, was induced to enter a tenancy agreement with the plaintiffs as a result of a negligent misrepresentation as to the likely annual throughput of petrol at the station. The actual throughput was very much less than had been represented and the defendant suffered substantial losses. The plaintiffs issued a writ claiming possession of the premises, monies owed to them and mesne profits. By way of counterclaim the defendant claimed damages for, inter alia, negligent misrepresentation by virtue of which he had been induced to enter into the tenancy agreement. He was successful and the plaintiffs were therefore liable to him in damages. In dealing with the measure of damages Lord Denning, at pages 820-1, said this:

"(The defendant) is not to be compensated here for 'loss of a bargain.' He was given no bargain that the throughput would amount to 200,000 gallons a year. He is only to be compensated for having been induced to enter into a contract which turned out to be disastrous for him. Whether it be called a breach of warranty or negligent misrepresentation, its effect was not to warrant the throughput, but only to induce him to enter the contract. So the damages in either case are to be measured by the loss he suffered. Just as in Doyle v Olby (Ironmongers) Ltd 1969 2 QB 158, 167 he can say: '.... I would not have entered into this contract at all but for your representation. Owing to it, I have lost all the capital I put into it. I also incurred a large overdraft. I have spent four years of my life in wasted endeavour without reward: and it will take me some time to re-establish myself.'

For all such loss he is entitled to recover damages. It is to be measured in a similar way as the loss due to a personal injury. You should look into the future so as to forecast what would have been likely to happen if he had never entered into this contract: and contrast it with his position as it is now as a result of entering into it. The future is necessarily problematical and can only be a rough-and-ready estimate. But it must be done in assessing the loss."

In the present case the pursuers were induced by negligent misrepresentation to enter into the Agreement with the defenders. They would not have entered into it but for the misrepresentation. As a result they have lost all the capital that they had in the company. For such loss they are in my opinion entitled to recover damages. They say that but for being induced to enter the Agreement they would have sold the company in which they owned all the shares for £3,500,010. That is the sum they seek as damages, together with interest from the date of citation (20 January 1999). It is therefore a more straightforward situation than was the case in Esso Petroleum Co Ltd v Mardon.

[87]     Mrs Swanson sought to draw a distinction between the facts of that case and those of the present case. In that case the defendant lost capital as a result of the plaintiffs' misrepresentation. In the present case the pursuers did not make any further investment in Gleneagles as a result of the misrepresentation. In my opinion this is a distinction without a difference. What the pursuers in this case did was to invest the value of their shares in Gleneagles as part of the wider arrangments in terms of the Agreement of 24 November 1992. Having been the controlling shareholders, they now became a minority in a company in which the defenders were the majority. It was in my opinion as much an investment in the new Gleneagles as if they had withdrawn capital from the bank to buy their shares.

[88]     In support of the figure of £3,500,010, which is the total sum sued for and was rounded off at £3.5 million, Mr Hodge relied on a number of sources of evidence. In his evidence Mr Hamilton said that in 1990, when Gleneagles was in negotiations with the French producer Evian, a price of £2.2 million for the company was mentioned. Those negotiations did not progress and eventually came to an end. Then there were the discussions between Mr Hamilton and M. Duval of Vittel. This was in 1990/1991. By this time it was known both to Vittel and to Mr Hamilton that a substantial supply of high quality mineral water was available at Gleneagles. A price of £3.5 million for the company was discussed. In November 1991, however, owing to a matter concerning the shareholders of Vittel, M. Duval was unable to proceed further with the discussions. The pursuers then put together their Business Plan and shortly thereafter the negotiations with the defenders started. In about October 1992, however, at the time when the defenders were not able to proceed to completion of the negotiations because of the Britannia problem M. Duval contacted Mr Hamilton once more and a further meeting took place between them, at the end of which M. Duval said he would prepare a plan for Vittel to acquire Gleneagles. A price of £3.5 million was discussed. Mr Kalo was firm on that price and M. Duval did not demur. Before this could go any further the defenders resolved the Britannia problem and matters between the present parties proceeded quickly to completion of the Agreement on 24 November 1992.

[89]     All this was narrated earlier in this Opinion. There was no challenge to Mr Hamilton's evidence on the matter and I accepted it.

[90]     That £3.5 million was the price to be put on Gleneagles received support from other evidence. In his reply dated 26 March 1992 to Mr Beatty's initial letter of 25 March 1992 Mr Douglas had indicated that the pursuers' present investment in the company was worth £3.5 million and the defenders' £6 million injection would result in their owning approximately 65% of the company. That figure of £3.5 million no doubt came from Mr Hamilton himself but it provides some support for his view as to the value of Gleneagles at that time. So does his hand-written note dated 10 November 1992, which I accept he sent to Mr Beatty by fax at that time and which puts a value of £3.5 million on the equity of the company. More importantly, however, when the Agreement was completed on 24 November 1992 the defenders took a 63% share of Gleneagles (6 million shares) in return for a total investment of £5.932 million. On that basis the pursuers' shares would be valued at just under £3.5 million. In my view this is powerful independent support that the value of the pursuers' shares at that time was about £3.5 million. There was no contrary evidence. I accept, of course, that the pursuers might not have been able to sell their shares for that price. The UK mineral water market at that time was certainly buoyant and the French producers were interested in entering it but there were not many potential buyers. Mr Hamilton accepted that he would have had to work to get £3.5 million from Vittel for the company and he thought it would not have been paid as quickly as the defenders paid their £5.932 million. Mr Hodge submitted that it would not matter for present purposes if payment came in stages because the pursuers were not seeking interest from November 1992 but only from the date of citation (5 July 1999). Nevertheless in my opinion there are imponderables to be taken into account. It is not certain that the pursuers would have got £3.5 million from Vittel. There was still some way to go. I do not think I can do other than approach the matter broadly. In my opinion a fair figure to be put on the pursuers' shares at the time of the Agreement is £3 million.

[91]     As a result of the administration order and subsequent liquidation of Gleneagles the present value of the pursuers' shares is nil. The pursuers have therefore lost £3 million. Reflecting the number of shares they respectively held, the first pursuer's loss is £1 million, the second pursuers' £2 million. It was not in dispute that the second pursuers had twice as many shares in the company as the first pursuer, although that is not precisely carried through into the sums sued for: there appears to be a minor typographical error in the sum sued for in the second conclusion (cf, for example, the sums given in article 5 of the condescendence).

Decision

[92]     For the reasons I have given I shall sustain the pursuers' first and second pleas-in-law, repel the defenders' first to fifth pleas-in-law and grant decree for payment by the defenders to the first pursuer of the sum of £1 million in terms of the first conclusion of the summons and for payment by the defenders to the second pursuers of the sum of £2 million in terms of the second conclusion of the summons, together with interest on each sum at the rate of 8% per annum from the date of citation, 5 July 1999, until payment.