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Cite as: [2003] ScotCS 265

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Ocra (Isle Man) Ltd v. Anite Scotland Ltd & Anor [2003] ScotCS 265 (17 October 2003)

OUTER HOUSE, COURT OF SESSION

CA99/02

OPINION OF LORD EASSIE

in the cause

OCRA (ISLE OF MAN) LTD

Pursuers;

against

(FIRST) ANITE SCOTLAND LTD and

(SECOND) BUSINESS COMPUTER TECHNOLOGY LTD

Defenders:

________________

Pursuers: Swanson, Solicitor Advocate; Maclay Murray & Spens

Defenders: Sandison; Boyds

17 October 2003

[1] The pursuers in this action seek payment jointly and severally by the defenders of sum of damages in respect of losses said to arise by breaches of contract and delictual duty on the part of the second defenders - "BCT" - who are, or at least were, suppliers of computer software and IT consultancy services.

[2] The pursuers aver the existence of a number of earlier contracts with BCT, which were satisfactorily performed, but the contract said to be breached is governed by a Client Service Agreement No. 990301 concluded on 15 March 1999 (No. 6/2 of process). The Client Service Agreement essentially sets out the general terms and conditions upon which BCT may perform services. Thus clause 1.1, headed "Services to be Performed" provides that -

"Subject to the terms and conditions of this agreement BCT shall perform such services and carry out such work ('Services') for the Client as are expressly agreed in writing between BCT and the Client. Each Service performed shall be deemed to be performed or carried out under a separate contract."

It appears that following the conclusion of the Client Service Agreement BCT provided a detailed design report dated 21 April 1999 (No. 6/3 of process) which was then followed by a proposal regarding a Management Information Service ("MIS") dated 24 May 1999, that being in turn succeeded by the Specialisation Letter dated 19 June 1999 (No. 6/6 of process). The services to be performed by BCT are set out in paragraph 2 of the letter which contains eight sub-paragraphs. Sub-paragraphs (1) and (2) of that paragraph are in these terms:

"2.1 BCT will document the functional specification for a new Management Information System (WMIS) to the requirements as agreed by the steering group and broadly in line with the Detailed Design Report.

2.2 BCT will develop the Management Information system to the agreed specifications."

It appears that the steering group ceased to meet in September 1999 without agreement having been reached on the specification or the MIS. The pursuers avers that it ceased to meet at the suggestion of BCT on the basis that its "functions could thereafter be more effectively performed by smaller focus groups and by the second defenders reporting directly to key members of the pursuers' staff". (Article 5 of condescendence in fine). Although it appears that services were provided by BCT and that various modules of a new MIS were furnished, there is, however, currently no averment of any specification agreed by the steering group or those successor groups or individuals.

[3] The pursuers aver breaches of certain alleged express terms of the contract, as well as certain claimed implied terms phrased generally in Article 20 of the condescendence by reference to the preceding articles which set out, with varying degrees of clarity, complaints relating to various modules within the Management Information System. The complaints embrace both complaints of failure to provide a function or functionality (sic) as well as complaints respecting provision of a defective function or functionality though in some instances the distinction is either not drawn or is at least not immediately apparent to the uninstructed reader of the pleadings.

[4] Mr Sandison, who appeared for the defenders, put forward a number of criticisms of the relevancy and specification of the allegations that BCT was in breach of contract. It is however neither necessary for me to detail these nor appropriate to comment upon them since Mrs Swanson, the solicitor for the pursuers who appeared in the exercise of her additional audience rights, accepted that in light of those criticisms, her pleadings could not currently be defended but would require amendment. She sought leave to do so. Mr Sandison did not oppose that request on the view that, given the existence of a contractual relationship, it could not be said at this stage, that on a further attempt, some prima facie relevant case could not possibly be averred.

[5] The pursuers also aver having suffered loss by reason of the fault and negligence of BCT. The particular delictual duties which it is said were incumbent on BCT are expressed as being a duty to adhere to the time limits set by them in respect of completion; to produce a system conforming to the contractual specification; and an apparently unqualified, independent duty to analyse the pursuers' requirements and implement systems to meet the pursuers' requirements.

[6] Counsel for the defenders challenged the existence of any such duties, outwith contract. For her part, Mrs Swanson sought, under reference to Henderson v Merrett Syndicates Ltd [1995] 2 AC 145 to defend the delictual case in principle but conceded that its expression in her pleadings was defective and required amendment. Mr Sandison expressed scepticism as to whether in the circumstances of this case any delictual duty could relevantly be averred, but, pragmatically noted that if the pleadings were to be amended as respect the contractual case there was no great procedural prejudice in Mrs Swanson being able to review and amend, if so advised, the delictual case. I share Mr Sandison's pragmatism. I am currently inclined to share at least some of his scepticism but remain open to eventual persuasion.

[7] In the event, in light of her recognition that her pleadings as respects the breach of contract or delictual duties - and also the averments of loss which were readily accepted by Mrs Swanson as being materially defective - there is essentially only one issue upon which I am asked to adjudicate at this stage. That issue is whether there are relevant averments of joint and several liability shared by the alleged contract breaker or delinquent second defender (BCT) and the first defender (Anite).

[8] The averments underlying the pursuers' contention that Anite are jointly and severally liable with the BCT for the latter's breach of contract are contained within Article 2 of Condescendence and are in these terms:

"Since on or around 18 April 2001, the Second Defenders have been a wholly owned subsidiary of the First Defenders. By an asset purchase agreement dated 19 April 2001, the Second Defenders sold their entire business to the First Defenders. The First Defenders have subsequently continued to operate the First Defenders' (sic) business and have held themselves out as the First Defenders' (sic) successors. Since 19 April 2002 (sic), all correspondence regarding the matters hereinafter condescended upon has been between the Pursuers and the First Defenders rather than the Second Defenders. In particular, by letter to the Pursuers dated 6 June 2001, the First Defenders stated inter alia that they were the successors of the Second Defenders in relation to the Client Service Agreement No. 990301, the Specialisation Letter SP9055 dated 19 June 1999, and the Web enabled Management Information System, all as more particularly hereinafter condescended upon. In all the foregoing circumstances, the First Defenders have assumed joint and several liability to the Pursuers for the liabilities of the Second Defenders as hereinafter condescended upon."

[9] The Asset Purchase Agreement (No. 5/1 of process) is in relatively ordinary terms for an agreement of that type. The price payable by the purchaser (Anite) for the business is £1,350,000. As respects the contracts to which the seller (BCT) was party, clause 5 of the Agreement provides as follows:

"5. Contracts

5.1 With effect from the Effective Date, the Purchaser will take over and assume the benefit of the Vendor under the Contracts and the Purchaser shall indemnify the Vendor against all claims, costs, expenses or liabilities whatsoever or howsoever arising incurred by it in respect of the Contracts.

5.2 Insofar as any of the Contracts cannot effectively be transferred to the Purchaser without the consent of a third party or except by an assignment or novation:

5.2.1 the Vendor and the Purchaser shall use all reasonable endeavours to obtain such consent or to procure such assignment or novation as soon as reasonably practicable; and

5.2.2 unless and until such consent is obtained or the Contracts are novated or assigned to the Purchaser, the Purchaser shall perform all the obligations of the Vendor under such Contracts as the sub-contractor of the Vendor and the Purchaser shall indemnify the Vendor against all claims, costs, expenses or liabilities whatsoever or howsoever incurred by the Vendor as a result of the performance, purported performance or non-performance of the Contracts by the Purchaser.

5.3 In any case where the Vendor and the Purchaser are unable to obtain the consent of any third party or are unable to procure the assignment or novation referred to in clause 5.2, the Vendor shall continue to perform all its obligations pursuant to such Contract in accordance with the instructions of the Purchaser and shall hold the benefit of such Contract in trust for the benefit of the Purchaser.,

5.4 The Vendor shall account to the Purchaser for any moneys received after the Effective Date on account of contracts, engagements, or arrangements which are being taken over by the Purchaser under this Agreement."

[10] The letter of 6 June 2001 from Anite to the pursuers to which the pleadings refer and incorporate is No. 6/18(4) of process. It is in these terms:

"Dear Sirs,

Business Computer Technology Ltd ("BCT")

Client Service Agreement No. 990301 (The Agreement)

Specialisation Letter SP9055 dated 19 June 1999 ("The Letter")

Web enabled Management Information System ("The System")

We hereby give notice that Overseas Company Registration Agents Ltd ('OCRA') is in default of the Agreement as outlined in the accompanying letter.

OCRA (1) fails to pursue diligently, if at all, the completion obligations undertaken by OCRA in the Letter and the Agreement and, in particular, fails to carry out those acts or things on OCRA's part necessary or convenient for completing the implementation of the System, and (2) neglects and delays to allow BCT to complete the Services in accordance with the Agreement.

Anite Scotland Ltd, as successor to BCT, stands ready to continue, and to complete, the Services, and calls upon OCRA to continue, and to complete, those reciprocal services, duties and responsibilities, upon OCRA's part to be observed and performed."

It is not suggested that the offer by Anite to complete the services was accepted; nor is it suggested that Anite performed any services, defective or otherwise.

[11] In arguing that there was no basis for joint and several liability, counsel for the defenders submitted, in short summary, that the coming about of a relationship of parent and subsidiary company could not give rise to joint and several liability. In so far as the pursuers referred in their pleadings to the asset purchase agreement, that was without significance for a creditor of the selling party (unless the tertius creditor could properly claim a jus quaesitum against the purchaser) - see Henderson v Stubbs Ltd (1894) 22R 51. Having regard to the terms of the asset purchase agreement in this case, it was clear that there was no jus quaesitum tertio and that the present case was truly indistinguishable from Henderson. As respects the letter of 6 June 2001, as a matter of construction it was simply an offer by Anite to complete the services which BCT was to provide, all subject to the pursuers performing their obligations to BCT which they were called upon to do. There was accordingly no conceivable basis upon which Anite could be said to be jointly and severally liable along with BCT for breaches of contract or delictual duty on the part of the latter.

[12] For her part, Mrs Swanson maintained that the basis for the pursuers seeking joint and several liability was what she described as the doctrine of liability by holding out, which, she said, while originally arising in the law of partnership applied also to companies. She referred to the passage in the work on the Law of Partnership According to the Law of Scotland by F W Clark (1866) volume 1, at pages 57-60 in which the author describes the principle (explained to similar effect in more modern authoritative works on partnership) that a person who holds himself out, or allows himself to be held out, as being a partner in a co-partnery, although he is not in fact such a partner, may be liable for a partnership debt. Mrs Swanson then referred to Heddle's Executrix v Marwick & Hourston's Trustee (1888) 15R 698 and the presumption to which reference was made in the Opinion of Lord Adam at 708 that "where the whole estate of a company [scilicet partnership] is given over to and taken possession of by a new concern or partnership, the business being continued on the same footing, the estate goes to the new company suo onere". Mrs Swanson next made reference to Stephen's Trustee v Macdougall & Co's Trustee (1889) 16R 779, a case in which it was held that there was no continuity of business between the initial and successor partnership, for the observations of Lord Shand, 786, to the effect that the party claiming liability on the part of the later firm required to aver and prove:

"either an express undertaking by the later firm and its partners of liability for the debt, or facts and circumstances in the course of dealing of the parties which shew that this firm and its partners undertook such liability."

The letter of 6 June 2001 was such a dealing which, said Mrs Swanson, showed an acceptance of liability by the invocation of the words "successor". The pursuers' solicitor completed her review of this tract of Scottish authority by citing Thomson & Balfour v Boag & Son 1936 SC 2 and Britton v Maple & Co Ltd 1986 SLT 70.

[13] Mrs Swanson next drew attention to Gore-Browne on Companies in which, in the course of Section 1.3.2 the author states under reference to Britton:

"... in Scots law if a company sells its undertaking as a going concern to another person, there is a presumption that its liabilities including its contingent liabilities are also transferred, with the result that the transferee may be sued by a creditor of the company."

In Creasey v Breachwood Motors Ltd [1992] BCC 638 that was held not to be the law in England. As I understood her, Mrs Swanson's contention for the pursuers was that it was immaterial whether the business had been sold or transferred gratuitously. The question was whether the business was being carried on "on the same footing" and whether the new owner of the business held himself out as the continuing successor. If the acquirer held himself out as successor, he was liable jointly and severally for the trade debts of the party from whom the business was acquired. In the present case, in their letter of 6 June 2001 the first defenders expressly held themselves out as being the successors to BCT. Having so held themselves out as the successors to BCT, the first defenders assumed liability for the obligations or debts of BCT. They were thus jointly and severally liable.

[14] In my opinion the argument put forward on behalf of the pursuers is not well founded. It is, in my view, evident that any presumption in favour of an assumption of liability for the debts of the "transferred" business (as applied in Heddle's Executrix, and its predecessors) arises only where the original trading entity passes its business to a technically new trading entity gratuitously and without any outward change in the form or way in which the business is carried on. In this context, characterisation as gratuitous is of course not avoided by the existence of some wholly insubstantial or token consideration. In his Opinion in Heddle's Executrix Lord Shand linked the effectively gratuitous transfer to a new partnership, such as would arise on giving to a son or loyal employee an interest in the existing business without the making of any capital contribution, to a universal gratuitous disposition. The universal gratuitous disposition of assets would take place subject to deduction of the outstanding liabilities of the grantor. In the following year in Stephen's Trustee v Macdougall & Co's Trustee (in a passage later quoted by Lord Adam in Henderson v Stubbs Ltd) Lord Shand, 787, noted that the judgment in Heddle's Executrix and its predecessor McKeand

"proceeded on the view that there had been no real change in the copartnery beyond the assumption of a partner who obtained a small share of a going business without putting in new capital, and where the new firm went on to trade with the stock and assets of the old firm, taking these over without any arrangement for the winding-up of the old company's affairs, or for an accounting with the old firm or its partners, but undertaking liability for the all the old company's debts and obligations".

In Stephen's Trustee payment of a capital contribution by the incoming partner was, among other things, material and displaced any presumption that the new firm was liable for the debt of the old. In Thomson & Balfour v Boag & Son, the Lord President (Normand) observed that the principle underlying Heddle's Executrix and its predecessors was that it would be inequitable to allow a trader to injure his trade creditors by assuming a partner and "handing over" his whole trading assets to the new partnership without liability to pay the trade debts. He went on to state however that this presumption must not be extended beyond the circumstances to which it properly applies. In that case, payment by the incoming partner of a real and substantial capital contribution meant that the presumption could not apply even though the affairs of the existing business and the new partnership had become inextricably confused since no new accounting records were opened and the business was carried on in the same manner as had prevailed before the assumption of the new partner.

[15] All these authorities give no support to Mrs Swanson's contention that the fact that the business assets and goodwill are acquired for valuable consideration is immaterial, the simple criterion being whether the business is continued. Moreover, in Henderson v Stubbs Ltd Lord Adam, who delivered the leading opinion in that case and also delivered the leading opinion in the earlier decision in Heddle's Executrix states, 55, -

"I know no authority or principle for saying that, where one firm purchases the business and assets of another firm, they by doing so become liable for the debts of the firm from whom they purchased. The creditors are in no way injured by the transaction, because they can have recourse for payment of their debts to the price, which presumably is in the hands of their debtors."

Lord Adam then goes on to record that Lord Shand, in Stephen's Trustee v Macdougall & Co's Trustee correctly noted the grounds upon which the cases of Heddle's Executrix and its predecessors were cited and quotes the passage to which reference has already been made. The circumstances of the present case are, in essence, indistinguishable from those obtaining in Henderson v Stubbs Ltd, which is of course binding on me as an Inner House authority.

[16] I was left in some unclarity as to the extent of Mrs Swanson's reliance on the Outer House decision in Britton v Maple Ltd and its interpretation in Gore-Brown. It is, I think, clear that the interpretation of that decision by the contributors to Gore-Brown is erroneous and the error is well identified in the careful examination of the Scottish cases carried out by the Deputy High Court Judge (Richard Southwell, QC) in Creasey v Breachwood Motors Ltd. Whatever the proper view of the decision in Britton, it appears plain (cf 71H) that it did not proceed upon the basis that the transfer involved a sale for onerous consideration.

[17] For all the foregoing reasons I reject the suggestion by Mrs Swanson that the fact that the sale of the business of BCT to the first defenders was for a valuable consideration is immaterial. In my view it clearly displaces any presumption arising from the principle described in Heddle's Executrix and its predecessors. Further, and in any event, in so far as Mrs Swanson sought to rely on the letter of 6 June 2001 as supporting the view that the business of the second defenders continued "on the same footing", I find that reliance misplaced. The letter does nothing to suggest that the BCT business continues unchanged, under the same name, with the same personnel, and with the same business entity. It makes clear that the business has a new owner. And there is nothing in the letter capable of construction as an assumption of direct liability for the obligations of the previous owner, BCT.

[18] In these circumstances I am satisfied that no relevant case has been averred for attaching to Anite responsibility for any breach of contract or delictual duty on the part of BCT.

[19] In the course of his submission Mr Sandison for the defenders contended that, since the only conclusion was for joint and several liability, the action fell to be dismissed in its entirety if no basis for joint and several liability were established. No authority was offered for this proposition, with which I disagree. The action alleges various breaches of contract and delictual duty on the part of the second defenders, BCT. Assuming, following amendment, those allegations are relevantly averred there is no reason why the action should not proceed against BCT to the exclusion of Anite. On this branch of the debate Mrs Swanson referred to Fleming v Gemmill 1908 SC 340 and Mackenzie v Macalister 1909 SC 367 but it seems to me to be clear that where an action is brought against two defenders on the basis that they are jointly and severally liable the fact that the case against one of the defending parties is either irrelevant or factually unfounded does not mean that the action in its entirety was misconceived. Plainly, the action can continue against the other party if the case against that party is not irrelevant.

[20] In these circumstances I shall dismiss the action in so far as directed against the first defenders (Anite); and I shall allow the pursuers to amend their pleadings as respects the second defenders within a period of 21 days, allowing the second defenders a period of 21 days to respond thereto. The case will then appear By Order on Tuesday, 9 December 2003 at which hearing any motion for expenses may be discussed.