Scottish Court of Session Decisions

You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Latta & Anor v. Buns [2004] ScotCS 27 (06 February 2004)
URL: http://www.bailii.org/scot/cases/ScotCS/2004/27.html
Cite as: [2004] ScotCS 27

[New search] [Help]

Latta & Anor v. Buns [2004] ScotCS 27 (06 February 2004)

OUTER HOUSE, COURT OF SESSION

A2710/02

OPINION OF LORD CARLOWAY

in the cause

THOMAS WILLIAM LATTA and ANOTHER

Pursuers;

against

BRIAN EDWARD BURNS

Defender:

________________

Pursuers: Lake; Morton Fraser for John Jackson & Dick, Glasgow

Defender: Dewar QC; Morisons

6 February 2004

1. Pleadings and Documents
[1] The pursuers are husband and wife. They seek payment from the defender of £73,085.52. The pursuers aver that the first pursuer and the defender were shareholders and directors of Technology Leasing Ltd and all three parties were partners in BT Professional Services, a firm with annual net profits well in excess of £100,000. In about October 1997 the parties entered into negotiations for the sale of the pursuers' interests in the company and firm to the defender. At a meeting on 7 November 1997, at the offices of a firm of accountants, further negotiations resulted in an agreement whereby:

"in return for the defender acquiring the whole of the company and the whole of the partnership the overall consideration to be paid by the defender for the shares in [the company] and the partnership interests...was £200,000. This reflected the value of the business. It was agreed that half this sum was to be paid in respect of the shares...and half in respect of the partnership interests...For business reasons, the parties did not wish payment to be made of the whole consideration of £100,000 in respect of the interest in [the partnership] in a lump sum. The parties agreed that part of the sum would be structured as a payment for a consultancy agreement but that no consultancy services would be rendered." (Closed Record pp 5E-6B).

The first pursuer and the defender signed a document (No. 6/2 of process) which, so far as material, is in the following terms:

"BT PROFESSIONAL SERVICES

TECHNOLOGY LEASING LIMITED

HEADS OF AGREEMENT

_______________________________________________________________

1. T Latta to receive one hundred thousand pounds (£100,000) in consideration for his 2,500 ordinary shares in Technology Leasing Limited.

2. T Latta to resign as director and secretary of Technology Leasing Limited with immediate effect.

3. T Latta and H Latta to cease being partners in BT Professional Services on 31^st October, 1997.

4. T Latta and H Latta to receive the sum of one hundred thousand pounds (£100,000) in total being a combination of outstanding capital accounts at 31^st October, 1997 with the difference being paid as a consultancy fee by Technology Leasing Limited.

5. The amount of £100,000 referred to in clause 4 above to be paid by 12 equal monthly instalments.

...

B Burns T Latta R F Kerr

B BURNS T LATTA WITNESS

R F KERR

Date 7/11/97 Date 07.11.97 375 WEST GEORGE ST

GLASGOW"

The witness is an accountant. On 24 November 1997 three formal documents were executed, this time witnessed, and presumably framed, by a solicitor. The first is an Agreement (No. 6/4) which narrates that the pursuers were giving up their shares in the company and retiring from the firm "in consideration of the prestations aftermentioned". These prestations first involved the company and state:

"1.1 [The pursuers] agree to give up their shares...in return for a payment of ...(£100,000) to be paid to them by [the defender]...

1.2 In return for the said payment [the pursuers] will deliver to [the defender] duly executed Transfers of their shares in his favour.

...

1.4 In return for the said payment...[the pursuers] will deliver letters of resignation in respect of any offices held by them in [the company]..."

Secondly, they involved the firm and provide:

"2.1 [The pursuers] agree that they have retired as Partners of [the firm] with effect from Thirty first October, Nineteen hundred and Ninety seven.

2.2 [The defender]...undertakes to pay to [the pursuers] the amounts due to them in respect of their capital accounts,

2.3 The amounts to be repaid in respect of the capital accounts will be paid by equal monthly instalments over a period of twelve months..."

It is of note that this document makes no mention of the difference between the further £100,000 and the capital account balances referred to in clause 4 of the Heads of Agreement. However, this is, presumably, because the second document (No. 6/3) is an agreement (the Consultancy Agreement) between the company and another limited company ('the Consultant'), which was operated by the pursuers, whereby the company engaged the Consultant:

"1....to provide Consultancy Services...relating to Lease broking and the Consultant agrees to provide such services upon the terms and conditions set out below."

These conditions provide that:

"2....The Consultant is retained on a non-exclusive "when needed" basis to provide the independent Advisory and Consultancy Services required by the client at such times and at such locations as the Client and the Consultant shall agree from time to time...

3....[The company] shall pay to the Consultant a fee of...(£91,000) payable in twelve equal monthly instalments over a twelve month period...".

Finally, there is a third document (No. 6/5), namely a Back Letter between the parties which includes the following clause:

"THREE WHEREAS the sums due in terms of Clause 2 of the Agreement and the sums due in respect of the Consultancy Agreement are intended to total £100,000, in respect that the sum payable in respect of Clause 2 of the Agreement varies from £9,000 the sums due in terms of the Consultancy Agreement will be varied accordingly."

It was agreed that this clause should be read as if there were a comma after "£9,000"; making its meaning that, if the sums eventually calculated in terms of the capital accounts differed from £9,000, the total consultancy fee would be automatically varied so that the fee plus the ultimate capital sums would total the £100,000.

[2] In due course, the amount in the pursuers' capital accounts was fixed at £8,297 and this was paid to the pursuers. In addition, payments totalling £18,617.48 were made under and in terms of the Consultancy Agreement. Then the payments stopped, leaving a balance due of £73,085.52, which is the sum sued for. Initially, the pursuers' Consultant sued the company under the Consultancy Agreement. Although the Consultancy Agreement had been implemented to a substantial degree, that action was met with a defence that it was void from uncertainty. This plea was sustained by the Sheriff, whose interlocutor was adhered to by the Sheriff Principal on 8 December 1999. In so doing, the Sheriff Principal rejected what he described as:

"a certain superficial attraction in the view that the Agreement was simply in the nature of a "retainer" and that the defenders were bound to pay the management fee whether they resorted to the pursuers for consultancy services or not."

In light of the failure of the Consultancy Agreement, the pursuers now seek to revert to the terms of the Heads of Agreement. Despite the vagueness of their first, and ultimately only, plea-in-law ("The sum concluded for being due to the Pursuers in terms of the Agreement condescended upon, decree should be granted therefor."), the action is one for payment of the balance said to be due and unpaid in terms of clause 4 of the Heads of Agreement.

2. Submissions

(a) DEFENDER

[3] At the commencement of the Procedure Roll hearing, the defender departed from certain pleas-in-law (1 and 5, and paragraphs 4 and 5 of the Note of Argument) as did the pursuer (plea 2). In order to focus the argument, the defender also introduced a new third plea that clause 4 of the Heads of Agreement is void from uncertainty. He argued that the new plea should be sustained and absolvitor granted, which failing his general plea to the relevancy (2) should be sustained and the action dismissed.

[4] Under reference to the relevancy plea, the defender submitted first that if the action was founded upon clause 4 of the Heads of Agreement (and this had not been exactly clear from the terms of the pursuers' plea) then it was irrelevant. There were two reasons for this. First the Heads of Agreement were, as a generality, not intended to be legally binding, being only "an agreement to agree". That was illustrated by the various formal agreements which followed it. The Agreement (No. 6/4) did not mention that there would be a sum over and above the amounts in the capital accounts payable as a counterpart for the transfer of the partnership interests. If that had been intended, as distinct from there being a separate agreement for £90,000 worth of consultancy services, then the Agreement would have so stated. Secondly, and in any event, any obligation to pay in terms of clause 4 rested upon the company and not the defender.

[5] The defender's second main submission was that the terms of clause 4 were not enforceable because they, like the Consultancy Agreement, were void from uncertainty. Reference was made, for ease of reference, to the Sheriff Principal's judgment in the Consultancy Agreement case (TWL Incorporated (formerly Technology Leasing (Scotland) v Technology Leasing, 8 December 1999, unreported) where he reviews the well known authorities, notably McArthur v Lawson (1887) 4 R 1134, per Lord President (Inglis) at 1136; Gloag: Contract (2^nd ed) at 11; Scammell & Nephew v Ouston [1941] AC 251, per Viscount Maughan at 255; RJ Dempster v Motherwell Bridge & Engineering Co 1964 SC 308, per Lord President (Clyde) at 327; Neilson v Stewart 1991 SC (HL) 22, per Lord Jauncey at 39). It was possible to regard clause 4 as a severable part of the contract, the counterpart to the payment being the consultancy services which were not, in the event, provided.

(b) PURSUERS

[6] The pursuers moved that the defender's plea to the relevancy be repelled and a proof allowed. First, the pursuers maintained that, on a proper construction of clause 4, the obligation to pay rested upon the defender and not the company. This construction was the appropriate one once the clause was seen in the context in which the Heads of Agreement were reached. That context could be looked at in reaching a "commercially sensible construction" (Bank of Scotland v Dunedin Property Investment Co 1998 SC 657, per Lord President (Rodger) at 661 following Mannai Investment Co v Eagle Star Life Assurance Co [1997] AC 749 per Lord Steyn at 771 and Charter Reinsurance Co v Fagan [1997] AC 313 per Lord Mustill at 384, and 665, per Lord Kirkwood at 670 and Lord Caplan at 676-7, both following Investors Compensation Scheme v West Bromwich Building Society [1998] 1 All ER 98 per Lord Hoffman at 114 ([1998] 1 WLR 896, at 912-3). The context included the circumstances whereby, at least as averred by the pursuers, the partnership had been a profitable one and the second sum of £100,000 was the counterpart of the obligation to make over the partnership interests to the defender and not the company, which was not a party to the agreement. The primary obligation under clause 4 was that of payment and what followed was merely the means of giving effect to it. If the defender's argument were correct then the pursuers would have been making over a substantial income producing asset to the defender for only £9,000 or thereby. That could not be correct and was certainly not commercially sensible. What was not permissible was to look at subsequent events in construing a contract (James Miller & Partners v Whitworth Street Estates (Manchester) [1970] AC 583, per Lord Reid at 603, Lord Hodson at 606, Lord Dilhorne at 611 and Lord Wilberforce at 614).

[7] The question of whether the parties intended to be bound by the Heads of Agreement was a question of fact to be determined from its terms and the manner of its execution (see McBryde: Contract (2^nd ed) para 5.02). If the Heads of Agreement had not been intended as binding then one might have expected there to be an express clause to that effect. Given that the Heads of Agreement acknowledged the resignations from the firm as having already happened, one might have expected them to have legal effect. All that the defender's argument amounted to was a bare assertion that the parties did not intend the Heads of Agreement to have legal effect. It was not uncommon for a concluded agreement to be followed by specific formal contracts required to implement it, or parts of it. Missives for the sale of heritage were an example of this.

[8] The law on the essentials of contract was as set out by the Lord President (Clyde) in RJ Dempster v Motherwell Bridge & Engineering Co (supra), (see also Lord Guthrie at 332) and Lord Jauncey in Neilson v Stewart (supra) (and see the Lord President (Hope) at 32). The Court should attempt to find a construction which was consistent with the contract having effect. The Heads of Agreement were a contract for the sale of the company and partnership in which the parties, subject matter and price were the essentials. All three had been agreed. There was no argument about the parties or the subject matter and the price was plain enough, namely the two sums of £100,000, with the payment of one of these being the counterpart of the obligation to make over the partnership interests. As with the contract in Neilson v Stewart (supra), the term founded upon was not an essential part of the bargain. There was no need for the means of payment to be spelled out for the contract to be valid, although they had been set out for the convenience of the parties.

[9] The law on void from uncertainty was as set out by the Lord President (Inglis) in McArthur v Lawson (supra). The test there had been passed here since the counterpart of the obligation to pay was that to convey the partnership interests, which could be made the subject of a decree of specific implement. If clause 4 were void, then half of the consideration in the contract would be removed. This would involve rewriting the bargain. If clause 4 were void, the whole must be void.

4. Decision
[10] The pursuers have set out a relevant case for inquiry. The document entitled "Heads of Agreement" bears all the hallmarks of an agreement intended to be legally binding upon its parties. First, it deals with a commercial bargain and not some social or trivial engagement. Secondly, it purports to be "heads of agreement", that is to say an expression of consensus reached by the parties. Thirdly, it is typed, signed, dated and even witnessed. All of these point towards it being, and intended to be, an enforceable contract. Although certain documents were executed subsequent to it, the terms of the Heads of Agreement, with which this action is concerned, make no reference to the necessity of any such documents. There is no hint in the Heads of Agreement that they are an "agreement to agree". Rather, the clauses appear complete in themselves. The contention that it was a pact not intended to have legal force is rejected.

[11] The document "Heads of Agreement" also appears to have all the essentials necessary for the formation of a completed contract. The test is set out by the Lord President (Hope), delivering the Opinion of the Court (at 32-33), and in the speech of Lord Jauncey (at 39) in Neilson v Stewart (supra). Both quote from Viscount Dunedin's celebrated dicta in May and Butcher v The King [1934] 2 KB 17 (note) (at 21), viz.:

"To be a good contract there must be a concluded bargain, and a concluded contract is one which settles everything that is necessary to be settled and leaves nothing to be settled by agreement between the parties...As a matter of the general law of contract all the essentials have to be settled. What are the essentials may vary according to the particular contract under consideration."

The contract here, upon the pursuers' averments, is one involving the sale of the pursuers' interests in the company and partnership to the defender. The essentials were primarily: parties, subject matter and price. The "Heads of Agreement" document deals with all three items in an adequate manner. First, there is no dispute that the parties are, on the one hand, the pursuers (albeit that the second pursuer did not sign this document) and, on the other, the defender. The company is not a party to the agreement and, as such, cannot be, and is not, bound by it. Secondly, the subject matter is expressed in clauses "1" to "4" as the pursuers' shares and offices in the company and their capital and partnership interests in the firm. Thirdly, the price is set out in two parts. There is the first £100,000 in clause 1, expressed as payable for the shares. There is then the second £100,000 in clause 4. The precise counterpart of this second sum may not be spelled out as clearly as it might have been, but the scheme of the Heads of Agreement makes it apparent that it is to be paid in return for the pursuers' interests, including their capital, in the firm. That is at least a, if not the, "commercially sensible" construction which can be placed upon the clause in the context of the Heads of Agreement looked at as a whole (see infra). In that regard, the bargain is complete in all its essentials. It happens to go on to provide that the second £100,000 is to be paid in two forms namely repayment of the capital accounts and as a consultancy fee by the company. However, the means by which the sum was supposed to have been paid does not form an essential part of the bargain. If anything, it would seem that the payment method was designed primarily to be of assistance to the defender in that it purports to allow the defender to pay using the company as a vehicle, no doubt with such fiscal advantages which that might carry, and in instalments (clause 5). It may perhaps be slightly unfortunate that the Heads of Agreement appear to have been drawn up with accounting rather than legal considerations to the fore. However, when clause 4 states that the pursuers are "to receive" £100,000, that is capable of being properly construed as meaning that this sum is to be paid to them by the other party to the bargain, namely the defender. He may be permitted to do that in a particular way, but need not do so. He would not be obliged to use the precise vehicle designed for his benefit nor does the existence of that vehicle transfer the primary obligation of payment from the defender to the company. Failure, for example, of the company or (as occurred) the vehicle devised could not result in that primary obligation being extinguished. In short then, all the essentials of contract appear to be present and, on the construction proferred by the pursuers, the defender is bound to pay to them the second £100,000, one way or another.

[12] The proper construction of clause 4 may be seen as set out above, at least in the context which the pursuers offer to prove. That construction involves no uncertain element. Contracts, under Scots law, are properly construed in the manner succinctly described by the Lord President (Rodger) in Bank of Scotland v Dunedin (supra) (at 661 and 665). Prefacing any attempt by reference to the need to find Lord Steyn's "commercially sensible construction":

"the inquiry will start, and usually finish, by asking what is the ordinary meaning of the words used".(at 661)

If there is such a meaning then there may be little point in commencing a detailed exploration of whatever "matrix of fact" might have surrounded the contract. This is so albeit that, as is well known, the Court may look at the surrounding circumstances in order to assist it in arriving at a proper construction. If it does then, as the Lord President also makes clear, it should do so:

"not in order to provide a gloss on the terms of the contract, but rather to establish the parties' knowledge of the circumstances with reference to which they used the words in the contract."(at 665)

The pursuers do set out a matrix which points towards their favoured construction, given that it may be that, even if the content of prior negotiations is irrelevant, nevertheless:

"the commercial, or business object, of the transaction, objectively ascertained, may be a surrounding fact" (Prenn v Simonise [1971] 1 WLR 1381, per Lord Wilberforce at 1385 quoted by Lord Caplan in Bank of Scotland v Dunedin Property Investment Co (supra) at 677).

Since the pursuers accept that an alternative construction may be possible if the averments of the defender are proved, the appropriate course must be an inquiry into both parties' averments. In that connection, it was not argued that any portion of either parties' averments should be excluded from probation.

[13] Clause 4 is not uncertain if, as it may be, it is construed in the manner contended for by the pursuers. The test is that set out by the Lord President (Inglis) in McArthur v Lawson (supra) (at 1136) (and founded upon by Gloag (supra) at 11), namely whether the clause is sufficiently specific as to be capable of enforcement by a decree for specific implement. As set out above, clause 4 may be read as creating an obligation on the part of the defender to pay £100,000, one way or another, to the pursuers. There is no difficulty with such a provision. The counterpart, at least looking to the ordinary meaning of the words used in the clause and, in any event, certainly having regard to the surrounding circumstances averred by the pursuers, appears to be that the pursuers will make over their interests in the partnership to the defender. There is also no difficulty with that either. Indeed, that part of the bargain has already has been implemented. In these circumstances, at least as a matter of relevancy of the pursuers' case, there is no vague element apparent in the clause which might necessarily render it void.

[14] The defender's contention is, of course, that on a proper construction of the contract and the matrix averred by them, the difference referred to in clause 4 is to be seen as a payment in return for consultancy services. That is not what it says. The words used are that the sum is to be paid "as a consultancy fee". The ordinary meaning of these words may require no interpretation or translation even once that matrix is explored. The words may be seen to be clear in stating that the balance of the £100,000, due after calculation and payment of the capital accounts, is to be paid as a consultancy fee (see also Clause THREE of the Backletter). "Consultancy fee" is the label placed upon the payment. Clause 4 makes no mention of the provision of any consultancy services and there seems to be no reason to read such provision into the bargain. There is no immediately striking "commercially sensible" reason for doing so in a situation where the object of the transaction was to extract the pursuers from the businesses and not to prolong their involvement with the firm. I note, of course, that the Sheriff Principal and the Sheriff have determined that the Consultancy Agreement was void from uncertainty. These decisions have been made and are effective. In reaching their decisions, however, they appear to have been construing the Consultancy Agreement (which was not between the parties here) almost in isolation and certainly without reference to the background of the "Heads of Agreement" and the other documents. Had they been referred to them, then I would have been surprised if the same result could have been reached. Indeed, had the matrix been explored, it would have been surprising if the Sheriff Principal or Sheriff could have regarded the Consultancy Agreement as being anything out of the ordinary, far less that it was void from uncertainty. No doubt the pursuers could have performed some consultancy services but, whatever the terms of the Consultancy Agreement may have been, the bargain which the parties to this action reached did not appear to require them to do so.

[15] I have not expressed a concluded view upon the construction of the Heads of Agreement because of the pursuers' concession that a proof is required before the case can be determined. As a generality, however, what might be said is that the pursuers offer to demonstrate that the object of the transaction expressed in the Heads of Agreement was to transfer their interests in the company and firm to the defender for a price of £200,000, that sum being divided for administrative reasons into two equal sums attributable to each business entity. If they do prove this, and of course the defender may, in terms of his own averments, show otherwise, then the short point in the case is that the defender has not paid the full price for the assets which he in fact acquired from the pursuers.

[16] For these reasons, I will repel the defender's second plea in law and allow parties a proof of their respective averments. The final decision upon the merits will, standing the pursuers' concession, require to be made after such inquiry.