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EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
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Lord Osborne
Lord Nimmo Smith
Lord Kingarth
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[2007] CSIH 12
CA77/04
OPINION OF THE COURT
delivered by LORD OSBORNE
in
RECLAIMING MOTION
by
ARTHUR WILLIAM SIMMERS
Pursuer and Reclaimer;
against
JAMES GRIGOR INNES
Defender and Respondent:
_______
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Act: J.J. Mitchell, Q.C., M.A.
Stuart; Maclay Murray & Spens
(Pursuer and Reclaimer)
Alt: Haddow, Q.C.,
Gardiner; Brodies (Defender and Respondent)
2 February 2007
The background
circumstances
[1] In this
action the pursuer and reclaimer seeks several remedies, concerned essentially
with the implementation of certain provisions of a Shareholders' Agreement
between the parties, dated 18 December 1998.
The conclusions in the action, so far as material to this reclaiming motion,
are in the following terms:
"1. For
decree ordaining the defender forthwith to implement and fulfil his part of the
Shareholders' Agreement entered into between the Pursuer and the Defender,
Mrs. Simmers, Charles Simmers, Brian Simmers and Scotpigs Limited dated
18 December 1998 whereby pursuant to clause 10 thereof the defender agreed
to sell and the pursuer agreed to purchase the Buy-out shares and the Buy-out
properties defined therein at the Buy-out price being £400,000 for the Buy-out
shares and £2,100,000 for the Buy-out properties and in particular to execute
and deliver a valid disposition, a stock transfer form, warranty and discharges
of the Buy-out properties securities in exchange for payment of said price.
2. Alternatively
(in the event the Buy-out Valuation is invalid which is denied) for decree
ordaining the Defender to implement and fulfil his part of the Shareholders'
Agreement entered into between the Pursuer and the Defender, Mrs. Simmers,
Charles Simmers, Brian Simmers and Scotpigs Limited dated 18 December 1998
whereby pursuant to clause 10 thereof the defender agreed to sell and the
pursuer agreed to purchase the Buy-out shares and the Buy-out properties
defined therein at the Buy-out price, being in respect of the Buy-out shares
price £400,000 and in respect of the Buy-out properties price such figure as [is]
validly determined, all within such time as the court may appoint from the date
of decree, and in particular to join in instructing the valuer to determine the
Buy-out Valuation, execute and deliver a valid disposition, a stock transfer
form, warranty and discharges of the Buy-out properties securities in exchange
for payment of the price.
3. For
an order pursuant to section 47(2) of the Court of Session Act 1988 ordaining
the Defender to execute and deliver (i) the disposition, stock transfer form
and warranty provided to the Defender on 31 March 2004 under cover of the Pursuer's
solicitor's letter of 31 March 2004 addressed to the Defenders'
solicitors; (ii) the discharge of the
securities over the Buy-out properties;
all in exchange for payment by the pursuer of the Buy-out price being
£400,000 for the Buy-out shares and £2,100,000 for the Buy-out properties. ... ".
[2] The present
action was appointed to proceed as a commercial cause. On 7 September
2004, of
consent, a proof before answer was allowed.
However, on 31 January 2005, the Lord Ordinary, of new, allowed
a proof before answer, restricted to those issues contained in the Agreed Joint
Note of Issues, No. 36 of process. Proof
was heard between 15 and 31 March 2005, on which latter date avizandum was
made. On 11 July 2005 the Lord Ordinary
pronounced an interlocutor by which he repelled the pursuer's second and third
pleas-in-law, sustained the defender's second and third pleas-in-law and
assoilzied the defender from the conclusions of the summons, reducing ope exceptionis the Report dated 22
March 2004 by John Rhind, and reserving questions of expenses. Against that interlocutor, the pursuer has
now reclaimed.
[3] The
background to the Shareholders' Agreement, entered into between the pursuer and
the defender, Mrs. Simmers, Charles Simmers, Brian Simmers and Scotpigs
Limited, dated 18 December 1998, which is at the heart of the dispute between
the parties, is to be found in the pig farming industry. The pursuer had been engaged in pig farming
since 1959. His business was to supply
pigs to, among others, the family business of the defender. The pig farming industry, in general, suffered
a recession in the years 1997 to 1998, as a result of which the pursuer's
business was put into receivership. The
pursuer then took advice from Messrs. Price Waterhouse Coopers and the Trustee
Savings Bank about the possibility of buying back from the receivers the lands
on which the business had been conducted, and the assets of the business. Such a proposal required the obtaining of
finance. At that time the defender, who
was anxious to secure a continuing supply of pigs for his business, proposed to
the pursuer that he would assist in providing finance for the re-establishment
of the pursuer's business. A new company
would be set up, to be known as Scotpigs Limited. The shareholding in that company was to be
split equally between the parties. The
defender informed the pursuer that he would be obtaining the funding which he
was to provide from his own bank. In the
event, the defender invested £2,500,000.
This sum was designed to pay for the purchase of the lands, on which the
pursuer's business had been carried on, at £2,100,000 and at £400,000 for
shares in the new company.
[4] In due
course, on 18 December 1998, the Shareholders' Agreement was
entered into between the pursuer, the defender, the pursuer's wife, Mrs. Myra
Isobel Simmers, his two sons, Charles Alexander Simmers and Brian Arthur
Simmers and Scotpigs Limited. It is No.
44/1 of process. In that agreement,
Scotpigs Limited is referred to as "the company".
[5] Since the
interpretation of certain parts of the Shareholders' Agreement is in
controversy between the parties, it is necessary to examine the relevant terms
in some detail. The preamble narrates:
"Whereas: (A) The
Company has been formed by the parties for the purpose, inter alia of acquiring the Properties and the Business of the
Simmers Companies, disposing of certain of the Properties and carrying on business
in its own right. (B) The parties have agreed to subscribe for
shares in the Company and wish to enter into this Agreement for the purpose of
recording the terms and conditions of their Joint Venture and of regulating
their relationship with each other and certain aspects of the affairs of, and
their dealings with, the Company and the Company has agreed with the parties that
it will comply with the terms and conditions of this Agreement in so far as
they relate to the Company. Now
therefore it is contracted upon and agreed between the parties as follows: ... ".
Clause 1 of the Shareholders' Agreement provides definitions
of expressions used in it. For present
purposes, it is necessary to notice the following:
"'the Base Properties Price' means
two million one hundred thousand pounds (£2,100,000) sterling;
'the Business' means the business and
undertaking of the Simmers Companies relating to pig, cattle and general
farming, ownership and turning to account of properties and equipment for
farming purposes and all related activities all as more particularly set out in
the missives;
'the Buy-Out' means the simultaneous
purchase by or on behalf [sic]
Mr. Simmers of the Buy-Out Shares and of the Buy-Out Properties from
Mr. Innes on the Buy-Out Date;
'the Buy-Out Date' means 31
March 2004;
'the Buy-Out Price' means the
aggregate of the Buy-Out Shares Price and the Buy-Out Properties Price;
'the Buy-Out Properties' means the
heritable subjects more particularly described in Part 2 of the Schedule less
those or parts thereof that have been subject of a Part Sale;
'the Buy-Out Properties Price; means
(a) the price payable by Mr. Simmers or his nominees to Mr. Innes on the
Buy-Out Date being the higher of (i) the Base Properties Price; or (ii) the aggregate of the Base Properties
Price and an amount equal to the figure brought out by the following formula: 1/2 x (Buy-Out Valuation - £2.1m) or (b) in the
event that there has been a Part Sale, the Base Properties Price shall be
adjusted as ascertained in clause 9 hereof;
'the Buy-Out Shares' means the
400,000 'A' Shares held by Mr. Innes and/or his permitted transferees in terms
of the Articles;
'the Buy-Out Shares Price' means the
price payable for the Buy-Out Shares being the higher of (i) four hundred
thousand pounds (£400,000) sterling or (ii) four hundred thousand pounds
(£400,000) sterling plus half [of] any [gain] in the net asset value of the
Company as disclosed by the balance sheet produced to 31 March 2004 up to a
maximum half share gain of four hundred thousand pounds (£400,000) sterling;
'the Buy-Out Valuation' means the
valuation carried out by a valuer to be agreed between the 'A' Director [Mr
Innes] and the 'B' Director [Mr Simmers] on or within one month prior to
the Buy-Out Date; ...
'Joint Venture' means the joint venture
created by this Agreement and as may be varied by any Agreement(s) supplemental
to it executed by the parties; ...
'Joint Venture Objective's; means the
objects set out at Part 1 of the Schedule;
'the Lease' means the lease to be
entered into between Mr. Innes and the Limited Partnership a copy of which is
reproduced at Part 4 of the Schedule;
'the Limited Partnership; means the
Limited Partnership to be entered into between the Company and Mr. Innes at
Completion, a copy of the Limited Partnership Agreement being reproduced in
Part 5 of the Schedule; ...
'Valuation; means the valuation of
the Properties carried out by Aberdeen & Northern Estates Limited on 2
December 1998 a copy of which is reproduced at Part 10 of the Schedule."
[6] The "Joint
Venture Objectives" are set out in Part 1 of the Schedule to the agreement in
the following terms:
"The objects of the Joint Venture
are:
1. The
acquisition of the Properties and the Business.
2. The
sale by the Company of the Buy-Out Properties to Mr. Innes and the sale of
other properties or parts thereof remaining in the ownership of the Company
that the Directors of the Company agree from time to time.
3. Forming
the Limited Partnership.
4. Leasing
the Buy-Out Properties from the Limited Partnership.
5. Conducting
the Business in a profitable manner.
6. Completing
the Buy-Out.
7. The
doing of such acts, matters and things as the Directors may consider incidental
to the attainment of any of the foregoing objects."
[7] It is
necessary to notice certain clauses of the Shareholders' Agreement, which are
relevant to the resolution of the present dispute. These are:
"2(1) The
parties hereby agree with one another to enter into the Joint Venture for the
purposes of the Joint Venture Objectives and for no other purpose; no party shall hold out that the Joint
Venture extends to any other property or business. None of the provisions of this Agreement
shall be deemed to constitute a partnership between the parties hereto and no
party hereto shall hold himself out as an agent or partner of any other party
hereto. ...
4. Completion
...
(2) At
Completion the parties shall do or procure the doing of the following:
(a) the
parties shall subscribe at par for a total of 800,000 shares in the
following proportions:
|
Shareholder
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Number and class of shares
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Subscription price
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James G Innes
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400,000 'A' ordinary shares
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£400,000
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Arthur W. Simmers
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21,000 'B' ordinary shares
|
£21,000
|
|
Mrs. Myra I Simmers
|
199,000 'B' ordinary shares
|
£199,000
|
|
Charles A Simmers
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90,000 'B' ordinary shares
|
£90,000
|
|
Brian A Simmers
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90,000 'B' ordinary shares
|
£90,000
|
|
Total
|
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£800,000
|
...
5. Onward
Purchase by Innes
On
the Completion Date immediately following the acquisition by the Company of the
Properties and the Business the parties shall procure that the Company shall
sell the Buy-Out Properties to Mr. Innes or his nominees for the Base
Properties Price and on the further terms and conditions set out in the Innes Missives
...
6. Limited
Partnership
On
the Completion Date, the parties shall procure that the Company and Mr. Innes
shall enter into the Limited Partnership with the Company being the general
partner and Mr Innes being the limited partner.
...
8 Part
Sales
Mr.
Innes or his nominees shall be entitled to effect a Part Sale at any time
during this Agreement without requiring the consent of the Company provided he
shall first offer the Part Sale Subjects to Mr. Simmers on the same terms and
conditions as could be achieved on the open market ...
9. Part
Sales Price Reduction
In
the event that a Part Sale is effected prior to the Buy-Out Date then the Base
Properties Price shall be reduced by (i) in the event of a Part Sale Profit,
the Part Sale Price less half the Part Sale Profit and (ii) in the event of a
Part Sale Loss, the Part Sale Price plus half the Part Sale Loss.
10. Buy-Out
by Mr. Simmers
On
the Buy-Out Date, Mr. Simmers shall be entitled to effect the Buy-Out and
acquire the Buy-Out Shares and the Buy-Out Properties in exchange for payment
by way of telegraphic transfer of the Buy-Out Price, and the Buy-Out Expenses
to Mr. Innes or his nominees. In
exchange Mr. Innes shall execute all transfers, conveyances, deeds, and
documents as shall be reasonably required to constitute Mr. Simmers as owner of
the 'A' Shares and the Properties. Mr.
Simmers shall however amend at his own expense any defects in the title that
exist at the date of conclusion of the Innes Missives and continue to exist as
at the Buy-Out Date.
...
14. Auditors,
Bankers, Registered Office etc
Unless otherwise agreed in writing
between the Shareholders:-
(1) the
Auditors of the Company shall be Ernst & Young,
Chartered Accountants, ...
(4) the
Accounting Reference Date of the Company shall be 31st
March in each year, the first such
date being 31st March 2000
...
21. Duration
and Winding-up
The
terms of this Agreement shall remain in full force and effect for a period of
five years expiring on 31st March 2004.
If Mr. Simmers has not served on Mr. Innes a notice intimating his
intention to effect the Buy-Out prior to the Buy-Out Date, then this Agreement
shall terminate automatically without the requirement of any party to serve
notice. Termination of this Agreement
with respect to any or all of the parties shall be without prejudice to the
rights of any party accrued prior to such termination or under any provision
which is expressly stated not to be affected by such termination.
...
24. Good
Faith
Each
of the parties agree with each other that: (a) during the continuance of this
Agreement, all transactions entered into between any of them on the one hand
and the Company on the other shall be conducted in good faith and on the basis
set out or referred to in this Agreement or, if not provided for in this
Agreement as may be on an arms length basis; (b) each of them shall at all
times act in good faith towards the others and shall use all reasonable
endeavours to ensure the observance of this Agreement; (c) no party will seek
to increase its profit or reduce its loss at the expense of another; and (d)
each of them will do all things necessary or desirable to give effect to the
spirit and intention of this Agreement. ... "
[8] Following the
conclusion of the Shareholders' Agreement, the relationship between the parties
soon broke down, becoming the subject of disputes between them. The company, Scotpigs Limited, ran into
financial difficulties. Prior to 2003,
the defender suggested, on more than one occasion, that the Buy-Out Properties
should be bought back from him by the pursuer, but no agreement was reached
about that. In late 2003, the pursuer
began to explore the possibility of obtaining finance, in the region of
£6,500,000, to enable a re-financing and reconstruction of the Company to take
place, and also to provide consideration for purchasing the Buy-Out Properties.
[9] The
contemplated contract of limited partnership between Scotpigs Limited and the
defender was executed on 18 December 1998 and is No. 44/3 of process. The limited partnership was designed as
Scotpigs & Company. A lease between
the defender and the firm of Scotpigs & Company was executed on 18
December 1998
and was registered on 25 November 2003.
On 26 March 2003 the defender served a notice of
dissolution on the partnership. It is
No. 44/4 of process. On 16 June 2003 a
notice was served on the defender, on behalf of Scotpigs Limited, in which Scotpigs
Limited, as general partner of the Limited Partnership, gave notice in terms of
section 76(3) and (6) of the Agricultural Holdings (Scotland) Act 2003, that
the company intended to become the tenant under the tenancy in its own
right. That notice is No. 44/7 of
process. Those notices now form the
subject of proceedings under the 2003 Act which are pending before the Scottish Land Court.
Certain other legal proceedings were brought, arising out of the
relationship between the parties, details of which are set out in paragraphs
[8] and [9] of the Opinion of the Lord Ordinary, which do not require to
concern us now.
The events leading up
to the present proceedings
[10] It is against
the foregoing background that the present proceedings have been brought, which
arise out of an attempt by the pursuer to exercise the Buy-Out option conferred
upon the pursuer by clause 10 of the Shareholders' Agreement. That attempt commenced with a letter, dated 11
February 2004,
to the defender from Messrs. Maclay Murray & Spens, solicitors acting for
the pursuer. The terms of that letter,
No. 44/12 of process, are these:
"On behalf of and as instructed by
Arthur Simmers, we hereby give notice that in terms of clause 10 of the
Shareholders' Agreement in respect of Scotpigs Limited dated 18 December 1998,
Arthur Simmers intends to effect the buyout of the buyout Shares and buyout properties
as at the buyout date being 31 March 2004 all in accordance with the terms
of the Shareholders' Agreement.
Mr. Simmers proposes that James
Galbraith of Messrs. C.K.D. Galbraith, Chartered Surveyors, be appointed Valuer
to carry out the buyout valuation in terms of the Agreement. You are called upon to confirm your agreement
to the said proposal as soon as possible."
The pursuer's solicitors also sent a copy of the formal
intimation to the defender's solicitors, Messrs. Brodies, under cover of a
letter, dated 10 February 2004, which is No. 44/11 of
process. It is in the following terms:
"We attach a copy Notice served by us
on behalf of Arthur Simmers on your client, James Innes in terms of the
Shareholders' Agreement in respect of Scotpigs Limited dated 18 December 1998.
A Valuer requires to be appointed in
terms of the Shareholders' Agreement to carry out the buyout valuation and a
proposal is made on behalf of Mr. Simmers for agreement by Mr. Innes. It is further proposed that the company's
auditors be instructed to prepare a balance sheet as at 31
March 2004
for calculation of the buyout shares price.
If the buyout is to be effected on 31
March 2004,
in accordance with clause 10 of the Agreement, steps will require to be taken
without delay to agree the terms of missives and prepare the necessary
conveyancing documentation. Accordingly
we would ask you to provide us with title deeds in respect of the buyout properties
to enable work to get started."
[11] On the
evidence adduced at the proof, the Lord Ordinary was satisfied that the pursuer
had begun, in late 2003, seriously to set out to acquire finance, not only in
respect of the sum required to be paid for exercising the Buy-Out option, but
also in respect of re-financing the company.
However, on or about 10 February 2004, the defender presented a petition
for the winding-up of the company. He
did so in terms of section 122(i)(b) and (g) and section 123(i)(e) of the
Insolvency Act 1986. A hearing for the appointment
of provisional liquidators to the company took place on 12 and 13 February
2004, but it was not until 16 March 2004 that a Lord Ordinary appointed
provisional liquidators to the company, having been satisfied in terms of
section 122(i)(g) and section 123(e) that the company was unable to pay its
debts as they fell due. Messrs. Maclay
Murray & Spens acted for the pursuer and members of his family in relation
to those proceedings as well as in relation to the matters already noted. However, at the same time, Aberdeen solicitors, Messrs. Stronachs, were also
acting for the pursuer in relation to certain business affairs. As will be seen subsequently, at a critical
period for the possible exercise of the Buy-Out option, the pursuer had no
fewer than three different sets of solicitors acting in relation to that, a
situation which did not facilitate matters and indeed caused confusion in the
minds of some of his advisers as to who was responsible for what. A feature of the situation, to which the Lord
Ordinary has adverted, was that, in the early months of 2004, both parties
understood that clause 10 of the Shareholders' Agreement provided for the right
to acquire the Buy-Out Shares and the Buy-Out Properties to be exercised on one
day, and one day only, namely 31 March 2004, and that the transaction had to be
completed on that day by the payment of the Buy-Out Price and the Buy-Out Expenses
in exchange for the transfer of title to the pursuer of the Buy-Out Properties
and the shares. It was considered that
the timescale allowed for in the preparation for the exercise of the Buy-Out
option was restricted by virtue of the provisions of the Shareholders'
Agreement regarding the ascertainment of the price to be paid for the
properties. The definition of "the
Buy-Out Valuation" in clause 1 of the Shareholders' Agreement involved a
valuation being carried out by an agreed valuer "on or within one month prior
to the Buy-Out Date". Thus the Buy-Out
Properties Price could only be ascertained, at the earliest, one month prior to
31 March 2004, affording the pursuer a relatively short period of
time to discover, with any precision, what his funding requirements would be.
[12] Following the
pursuer's intimation of his intention to exercise the Buy-Out option of 11
February 2004,
a counter-proposal as regards an appropriate valuer came from the
defender. He proposed Mr. Rhind of Aberdeen and Northern Marts. This counter-proposal was, in the event,
accepted by the pursuer. Mr. James
Galbraith had, however, in the meantime, been approached by the pursuer in
respect of the proposed valuation. He
had prepared a document headed "Instructions for the Valuations Known as Innes
Farms, Aberdeenshire [sic]". It forms part of the bundle of documents
No. 44/20 of process. The Lord
Ordinary has found that, on or about 23 February 2004, the pursuer contacted Messrs.
Stronachas. He spoke to Miss Carol
Crowther, who dealt with conveyancing business in that firm. He informed her that it would be necessary to
ask for the titles of the Buy-Out Properties from the defender's agents, in
preparation for the execution of the Buy-Out option. It appears that this was the first intimation
made by the pursuer to his Aberdeen solicitors that (a) he had, through Maclay
Murray & Spens, intimated his wish to exercise the option, and (b) that the
title deeds should be sought from the defender's solicitors. It should be noted that Messrs. Maclay Murray
& Spens, in their letter of 11 February 2004 to Messrs. Brodies, had asked Messrs.
Brodies to provide them with the title deeds.
The Lord Ordinary records that there was no evidence that any request
had been made directly by the pursuer, or on his behalf, to Messrs. Clark &
Wallace, who acted for the defender, before the pursuer had his telephone
conversation with Miss Carol Crowther on or about 23
February 2004. After having heard from the pursuer about
this matter, Miss Crowther telephoned Messrs. Clark & Wallace. On 24 February 2004, a fax message from Mr. Neil Allan
of Clark & Wallace was sent to Miss Crowther. This is No. 44/14 of process. It is in the following terms:
"We refer to your telephone call on
Friday. The title numbers so far as can
be made out at this stage are as undernoted. ... A copy of the lease identifying the
subjects by their previous Sasine descriptions follows with the hard copy
version of this letter.
Please note however that if the
petition for winding up of Scotpigs Ltd. which is presently at avizandum
following the hearing on 12 and 13 February is successful then the buyback
option to your client falls as it is in a Shareholders' Agreement focused round
the shares. If the company to which the
Shareholders' Agreement relates has gone into liquidation then the option flies
off.
The option is for a floor of £400,000
on the shares and £2.1 million plus half the gain on the valuation from that
figure to now. If the valuation were say
£4 million then the entitlement to our client would be £3.05 million for
the properties, £400,000 for the shares and a retention of Pollswells Mill to
which the option does not extend. The
speculative development value of the rest of Ormiston would have to be valued.
Before we set about contingent
implementation, the Shareholders' Agreement states that the parties must agree
a valuer by 28 February 2004.
Mr. Simmers has already proposed Cluttons through Maclay Murray &
Spens. We propose Aberdeen and Northern Estates. A copy of their 1998 valuation is attached
with the hard copy showing that they are familiar with the subjects, and of course
they are familiar more so than any other valuers, with the north east
market. Wording of a joint remit would
require to be agreed.
In view of the difficulties that have
attended the relationship between our respective clients up till now we are not
prepared to enter into contractual and conveyancing details without sight of a
clear and unequivocal letter of intent from Mr. Simmers' lenders referring to
the winding-up petition and stating their awareness of the actions for debt
against Scotpigs Ltd. and the inhibition or inhibitions lodged, but saying that
they are nevertheless prepared in principle to lend."
The Lord Ordinary observes that, notwithstanding what was
said in the first paragraph of the foregoing letter, the remainder of it
advances a more conditional approach and, indeed, a view as to whether the
Buy-Out option fell to operate, if the company went into liquidation. Whatever may have been the reason for the
remainder of that letter being written in that way, it was departed from in a
faxed letter of the following day, 25 February 2004,
sent from Messrs. Clark & Wallace to Mr. Tim Edward, a partner in Messrs.
Maclay Murray & Spens, acting for the pursuer, which is No. 44/16 of
process. It states:
"I refer to a fax dated 24
February 2004
addressed to Carol Crowther at Stronachs, which my colleague wrote. Unfortunately, certain parts of that letter
are inaccurate and do not represent our client's position. I would therefore ask you to completely disregard
that letter save in so far as it identifies the Title which relates to the buyout
properties. For the sake of
completeness, we would confirm that agreement has been reached in relation to
Aberdeen & Northern Marts subject to a remit and level of fee being
agreed. We understand that you have been
asked for a copy of any Valuation or Fee Quote from the surveyor that Mr.
Simmers had intended to appoint. I look
forward to hearing from you in early course.
In the meantime, as indicated above, the letter of 24
February 2004
was written in error and should not be founded upon in any Court or other legal
proceedings."
[13] Notwithstanding
the last sentence of the letter just quoted, the letter of 24
February 2004,
the Lord Ordinary informs us, formed part of a joint bundle of documents
produced for the proof and was referred to by both parties at the proof,
without objection. The position,
therefore, as at 25 February 2004, was that there had been agreement
between the parties as to who the valuer should be. The nature and basis of his remit remained to
be agreed. The Lord Ordinary records
that he considered it to be of some considerable importance that the pursuer,
in his evidence in chief, said that the terms of a remit were never agreed
between the parties.
[14] On 1
March 2004
Mr. Edward of Messrs. Maclay Murray & Spens sent a fax to Messrs. Brodies,
which is No. 44/17 of process, in these terms:
"We attach a draft Remit for the
agreed Valuer appointed in terms of the Shareholders' Agreement. Please confirm as soon as possible that the
terms are agreed. You should have copies
of all the Appendices. We would suggest
that the Valuer makes a start on the Valuation as soon as possible and he is
welcome to make contact directly with Mr. Simmers regarding access."
The draft remit referred to in that fax was the document
already referred to prepared by Mr. Galbraith, part of No. 44/20 of
process. Paragraph 4 of that draft
remit, headed "The Interest to be Valued" stated:
"The interest to be valued is the
freehold of the Buy-Out Properties subject to a lease in favour of the firm of
Scotpigs and Company. The terms of the
lease are incorporated into Appendix II attached to this instruction.
The firm of Scotpigs & Co. is a
Limited Partnership between Mr. Innes and Scotpigs Ltd., a copy of which is attached
at Appendix III to this instruction.
Notice to terminate the Partnership has been served by the Limited Partner
(Mr. Innes), a copy of which is attached at Appendix IV.
The General Partner has contested the
Notice to Terminate the Partnership and the matter has been referred to the Land Court.
A copy of the Proceedings is attached at Appendix V."
Paragraph 5 of the draft remit headed "Basis of Valuation",
states:
"The basis of valuation is the Market
Value as defined by the RICS Appraisal and Valuation standards (fifth edition)
as follows: 'The estimated amount for
which a property should exchange on the date of valuation between a willing
buyer and a willing seller in an arm's-length transaction after proper
marketing wherein the parties have acted knowledgably, prudently and without
compulsion'."
Paragraph 6 of the same document provided that the date of
valuation was to be within one month prior to 31 March
2004.
[15] On 4
March 2004,
Mr. Edward of Messrs. Maclay Murray & Spens again sent a fax to Messrs.
Brodies, No. 44/19 of process, in the following terms:
"We refer to our fax of 1
March 2004. In the absence of any response, we have sent
the draft remit to John Rhind as agreed Valuer.
Please let him have any comments as soon as possible. We attach Adjustments to the Land Court Defences
which we shall be seeking to have incorporated in the Pleadings. We shall request a four week adjustment
period to enable you to respond. We have
provided these Adjustments with the remit to the Valuer."
On the same day, Mr. Edward sent a fax to Mr. John Rhind, the
agreed valuer, No. 44/20 of process, in the following terms:
"We attach a draft Remit for Valuation. The terms have yet to be agreed by
Mr. Innes' solicitors."
Accompanying that fax was Mr. Galbraith's document "Instructions
for the Valuations Known as Innes Farms" and various appendices. Mr. Rhind himself sent a fax to the pursuer
on 4 March 2004, No. 44/21 of process, in the following terms:
"Further to receipt of the valuation
instructions this morning, I write to enclose summary I have prepared showing
all the properties and land we are to inspect.
Can you confirm that we have identified the subjects correctly? I assume that we will be valuing the land
together with the subsidy entitlement.
Have you worked out a rough figure for this? I look forward to receiving written
instructions as to how we are to carry out the valuations. Do we value Mains of Cairnbrogle has [sic] a working pig farm? What is the planning position with regard
to: (a) Mill of Cavil Steading? (b) Mineral extraction/reinstatement at
Greendams?"
[16] Thereafter,
Mr. Neil Allan of Messrs. Clark & Wallace, on behalf of the defender,
telephoned Mr. Rhind on 5 March to say that the terms of the draft remit, the
document prepared by Mr. Galbraith, were not agreed by his client and would
require to be amended. Mr. Allan
followed up this telephone conversation with a letter to Mr. Rhind, No.
44/25 of process, a copy of which he sent to Messrs. Maclay Murray &
Spens. A copy was also sent to Messrs.
Stronachas. This letter was in the
following terms:
"I confirm my telephone call today
that fax instructions you have had from Maclay Murray and Spens acting for
Arthur Simmers, originally intended to be on a joint remit basis, for the
valuation of the subjects at the above address, require to be augmented.
I confirm that their draft
instructions were not assented to by us as a result of which the fax is
unilateral from Arthur Simmers' side. I
therefore confirm that so far as Jim Innes is concerned, the words 'the value
is nevertheless the open market vacant possession value', should be added at
the end of paragraph 4 ('The Interest to be Valued') of the instructions. At the end of paragraph 5 ('Basis of
Valuation') again the words should be added 'For the avoidance of doubt, the
valuation will be on a vacant possession basis.'
A valuation allowing any discount for
tenants rights is incorrect in law so far as Mr. Innes is concerned. It is not our view in any case that Mr.
Simmers has any authority to give instructions on behalf of Scotpigs Ltd., far
less the limited partnership of Scotpigs and Co. which is the tenant, being a
partnership of Mr. Innes (the limited partner) and of the company Scotpigs
Limited."
[17] On 8
March 2004,
Mr. Edward sent a fax to Mr. Allan, No. 44/26 of process, in the following
terms:
"I acknowledge receipt of your fax of
5 March copying to me your letter of that date to John Rhind.
We have consulted with Senior Counsel
on the issue of Valuation and although the Shareholders' Agreement does not
clearly specify the basis of Valuation, it is our view that the proper
interpretation of the buy-out Valuation in terms of the Agreement is a Valuation
of your client's interest in the land as it exists at 31 March
2004.
Although clearly the issue is a
matter of dispute before the Land Court, it remains the position of our
client that there is an ongoing tenancy and that the buy-out Valuation must
take account of this.
In any event, the priority is at this
stage to move matters forward and the only sensible way to do so would seem to
be to have the Valuation carried out on alternative bases as instructed by us
and by you. If necessary, the issue of
basis of Valuation can then be referred to the court for resolution. I attach a copy of a further letter I have
sent to John Rhind providing this instruction and should be grateful if you
would confirm your agreement with this course of action to him."
The copy fax sent by Mr. Edward to Mr. Rhind, No. 44/27 of
process, was in the following terms:
"I refer to letter dated 5
March 2004
from Neil Allan of Clark & Wallace to you.
For the avoidance of doubt it is the position of Mr. Simmers that the
interest to be valued is Mr. Innes' interests in the property as it exists at 31 March
2004 or in
other words, the interests subject to the existing tenancy. There is nothing in the Shareholders'
Agreement which provides that the valuation will be on a vacant possession
basis.
Clearly this issue is a legal issue
which will require to be resolved in due course. With a view to progressing matters we would
suggest that you should carry out the Valuation for the moment both on the basis
set out in the remit which we provided and on a vacant possession basis. I am copying this letter to Clark &
Wallace and I am going to ask them to confirm this to you."
[18] Following this
correspondence, no further written instructions were given to Mr. Rhind on
behalf of the defender regarding the basis of valuation, even though Messrs.
Maclay Murray & Spens had initially considered that, standing the scheme of
the Shareholders' Agreement, agreement would require to be reached between the
parties as to the basis of the remit to the valuer and, in particular, the
basis of the valuation to be employed by him.
However, following Mr. Edward's faxes of 8 March
2004, Messrs.
Maclay Murray & Spens changed their approach in correspondence with Mr.
Rhind. In a fax dated 12
March 2004,
No. 44/28 of process, to Mr. Rhind, Mr. Edward wrote as follows:
"I have discussed the issue of
Valuation with Senior Counsel and he has confirmed that rather than providing
alternative Valuations, you should proceed to provide one Valuation as
stipulated in the Shareholders' Agreement, taking into account all
factors. Clearly, the view expressed by
Clark & Wallace that the Valuation must be on the basis of vacant
possession would have to be taken into account, but equally the reality of the
existing Tenancy (subject to the uncertainty of the Land Court proceedings), would have to be taken
into account. I trust that this
clarifies the situation. I look forward
to receiving your Valuation as soon as possible."
The subject-matter of that fax was referred to in a file note
of Mr. Edward, No. 44/29 of process, of a telephone conversation that he
had had with Mr. Rhind on 12 March 2004.
That note states:
"Telephone discussion with John Rhind
of Aberdeen & Northern. I explained
that rather than produce alternative Valuations what is required of him is to
produce a single Valuation taking into account the contentions put forward by
both parties. He would have to look at
the position as it exists now with regard to the tenancy and the proceedings
challenging the tenancy in the Land Court.
He said that this would be a difficult task and I acknowledged that but
indicated that nonetheless this is what he had to do. I said that if it would help he could speak
to James Galbraith who had considered the matter and would provide his views on
the remit."
[19] On 16
March 2004
provisional liquidators were appointed to Scotpigs Limited in the Court of
Session. On 17 March
2004 Mr.
Edward sent another fax message to Mr. Rhind, No. 44/31 of process. He stated that provisional liquidators had
been appointed to Scotpigs Limited on the petition of the defender. He continued:
"Notwithstanding this, it is Mr.
Simmers' instruction that you proceed with the valuation of the buy-out land as
previously advised. His position is that
the appointment of Provisional Liquidators does not affect the tenancy and this
should be taken into account in the valuation."
That was, of course, a unilateral instruction given by Mr.
Edward on behalf of the pursuer, which was never communicated to the defender,
or to those acting on his behalf.
[20] On 19
March 2004,
Mr. Rennie of Stronachs wrote to Messrs. Clark & Wallace, No. 44/32 of
process, and, after having referred to the Shareholders' Agreement and the
notice of 11 February 2004, sent by Messrs. Maclay Murray &
Spens on behalf of the pursuer, indicating his intention to exercise the By-Out
option, continued as follows:
"Our purpose in writing to you is to
re-affirm Mr. Simmers' intention to effect the Buy-Out and to seek your
confirmation that in exchange for the Buy-Out Price and the Buy-Out Expenses
Mr. Innes will be in a position to deliver the following:
(i) executed
Conveyances in favour of Mr. Simmers or his nominees of
the Buy-Out Properties;
(ii) executed
Discharges of all securities affecting the Buy-Out Properties;
(iii) executed
Transfers in favour of Mr. Simmers or his nominees of the
Buy-Out Shares;
(iv) the
Share Certificate(s) representing the Buy-Out Shares (failing which
a Lost Share Certificate Indemnity in
a form satisfactory to Mr. Simmers);
and
(v) such
other deeds and documents as Mr. Simmers shall reasonably
require to constitute him or his
nominees as owners of the Buy-Out Properties and the Buy-Out Shares
respectively.
We look forward to hearing from you."
[21] Mr. Allan of Messrs.
Clark & Wallace responded to that letter by a letter dated 23 March
2004, No.
44/36 of process, raising several points:
"1. Buy-out
Date
This
is defined in the Shareholders' Agreement as being 31 March
2004.
We do not consider that any other date is provided for. Do you agree?
2. Valuation
of Buy-out Properties
(a) Please
let us have a copy of the instruction by Maclay Murray & Spens
to John Rhind. This was referred to in Court last week, but
we have not, as yet, received a copy.
(b) We
submit that Mr. Rhind should finalise his report on the basis of an
open market value on a vacant
possession basis.
(c) Mr.
Rhind's Report will require to be paid by Mr. Simmers. We
understand that Mr. Rhind will not
release the Report until he has been paid by Mr. Simmers. Do you have a note of his costs?
...
5. Funding
of Buy-out Price
(a) We
assume that Mr. Simmers has procured the requisite funding?
Please confirm the identity of the
lender(s).
(b) The
Titles will require to be passed not only to yourselves, but also to
the lender's agents for consideration. We have the Title Deeds within our Office,
with the exception of the Titles in respect of Mill of Caval [sic].
Please confirm the agents acting on behalf of the lenders, so that we
can, if required, provide them with copies of the requisite Titles.
(c) The
buy-out properties are currently secured to the Clydesdale Bank.
They are separately represented by Messrs.
Dundas & Wilson in Glasgow.
We understand that the Clydesdale Bank will not consent to the discharge
of the properties, without repayment of all sums due in respect of those
Securities. We await confirmation of
exactly what is required to be repaid.
We look forward to hearing from you
as soon as possible in relation to the points raised above, to enable us to
consider matters and how best to progress matters for 31 March 2004."
[22] Subsequently,
Mr. Rhind of Aberdeen & Northern (Estates) Limited furnished a valuation
document, dated 26 March 2004, No. 44/34 of process. That document states, inter alia, as follows:
"Innes
Farms, Mains of Cairnbrogie, Oldmeldrum, Little Woodlands, Mill of
Cavil/Longbog
In accordance with instructions
received from Messrs. Maclay Murray & Spens, Solicitors, Edinburgh dated 5 March, and instructions from
Clark & Wallace, Solicitors, Aberdeen also dated 5 March, we have
inspected the above properties and now write to advise you as to our opinion of
value.
Our instructions
Our instructions are to value (the
Buy-Out properties) as described in Appendix 1 attached to the instructions
received from Messrs. Maclay Murray & Spens and also described in Appendix
1attached to this report.
Our instructions are also to carry
out the valuation on the basis of the instructions set out in Appendix II
attached to this report. This includes
an instruction to value the properties subject to a lease in favour of the firm
of Scotpigs & Co.
The basis of the valuation is to be
the estimated amount for which a property should exchange on the day of
valuation between a willing buyer and a willing seller, in an arms length
transaction after proper marketing wherein the parties have acted
knowledgeably, prudently and without compulsion.
...
Valuation
Our approach to the valuation of the
properties has been to first work out how much each farm would realise if
placed on the open market for sale. From
this we have then deducted the cost of any tenants' improvements and fixtures
and then applied an appropriate discount to the resultant value. Our discount figure is based on current
market evidence. ... We therefore value the three farms as follows:
|
Vacant Possession Value
|
£000
|
|
Mains of Cairnbrogie (Appendix III)
|
3,040
|
|
Little Woodlands (Appendix IV)
|
450
|
|
Longbog
(Appendix V)
|
441
3,931
|
|
Deduct
(1)
tenants' improvements
(2)
tenants' fixtures
(3)
estimated value of single farm payment £80/acre x 1,415 acres x 2
|
Nil
Nil
3,931
226
3,705
|
|
Discount
subject to tenancy
-
45%
|
1,667
|
|
Value subject to a lease in favour of
the firm of Scotpigs & Co.
|
2,038
|
|
Note: Discount takes into account indication that
a tenant right to buy may be introduced in May 2004 under the Agricultural
Holdings (Scotland) Act 2003.
...
|
|
J.E. Rhind F.R.I.C.S.
...
Appendix II
Instructions for the valuations known
as Innes Farms, Aberdeenshire
...
2. Purpose
of Valuation
Whereas
the subjects of valuation (referred to below) are currently owned by Mr. Innes,
Mr. Simmers has an option to require [sic]
the said subject at valuation as at 31 March 2004 (Buy-Out Date). Accordingly, the parties require a valuation
to be carried out by a valuer on or within one month prior to the Buy-Out Date.
...
4. The
interest to be valued
The
interest to be valued is the freehold of the Buy-Out Properties subject to a
lease in favour of The Firm of Scotpigs and Co.
The terms of the lease are incorporated into Appendix II attached to
this instruction.
The
firm of Scotpigs & Co. is a Limited Partnership between Mr. Innes and
Scotpigs Ltd., a copy of which is attached at Appendix III to this instruction. Notice to terminate the Partnership has been
served by the limited partner (Mr. Innes), a copy of which is attached at Appendix
IV.
The
General Partner has contested the Notice to Terminate the Partnership and the
matter has been referred to the Land Court.
A copy of the proceedings is attached at appendix V.
... ".
[23] While the
various communings regarding the valuation exercise to which we have referred
were continuing, the pursuer was involved in sustained efforts to obtain
finance for the Buy-Out transaction.
These are described in detail in paragraphs [27] to [30] of the Lord
Ordinary's Opinion. On the morning of 31
March 2004
Mr. Rennie sent a fax to Messrs. Clark & Wallace, No. 44/45 of process, in
which he wrote, inter alia:
"We confirm Mr. Simmers intends to
proceed with the Buy-Out in accordance with Clause 10 of the Shareholders'
Agreement. We enclose the following
·
a
Disposition of the Buy-Out Properties in favour of Mr. Simmers for execution by
Mr. Innes ('the Disposition')
·
a
Stock Transfer Form in respect of the Buy-Out Shares in favour of Mr. Simmers
for execution by Mr. Innes ('the Stock Transfer Form')
We will forward to you within one
hour the following:
·
a
Warranty by Mr. Innes to Mr. Simmers in respect of the Buy-Out Properties and
the Buy-Out Shares respectively for execution by Mr. Innes ('the Warranty').
As set out in our letter yesterday
the Buy-Out Price is £2,500,000. You
previously indicated you are not yet in possession of executed discharges of
all securities affecting the Buy-Out Properties ('the Buy-Out Properties
Securities'). Please clarify your
position on this point by return fax and in any event no later than 10.45 am this morning. Any failure to do so may be founded
upon. We still await from you a note of
the Buy-Out Expenses - please provide this immediately today.
Mr. Simmers has finance available to
complete the Buy-Out in exchange for delivery to us of the following items:
1. The
Disposition duly executed by Mr. Innes;
2. The
Stock Transfer Form duly executed by Mr. Innes;
3 The
Warranty duly executed by Mr. Innes; and
4. Executed
discharges of the Buy-Out Properties Securities.
As stated above, subject to and in
exchange for delivery to us of the foregoing items 1-4. Mr. Simmers will pay the Buy-Out Price and
the Buy-Out Expenses to Mr. Innes or his nominees. In terms of the Shareholders' Agreement
payment is to be made by way of telegraphic transfer - please provide us with
the bank account details of Mr. Innes or his nominees (as the case may
be)."
[24] At some time
later in the morning of 31 March 2004, Mr. Rennie had delivered to Messrs.
Clark & Wallace a copy of the warranty referred to in the letter just
quoted of that date, No. 44/46 of process.
However, despite efforts to secure that the transaction settled on 30
March 2004,
that did not happen. Funds were not
actually available to the pursuer on that date.
Furthermore, it has to be recorded that a reply to Mr. Rennie's letter
of 31 March 2004, No. 44/45 of process, from Messrs. Clark & Wallace was
delivered to Mr Rennie's office about lunchtime on the same day, No. 44/47 of
process. It was in the following terms:
"We have your letters of 30 and
31 March. We do not propose to
complete the transaction as we dispute the validity of the purported buyout
valuation. We propose to raise legal
proceedings to set it aside."
The decision of the
Lord Ordinary
[25] In
paragraph [55] and [56] of his Opinion, the Lord Ordinary
considered the Rhind valuation and its consequences. He reached the clear conclusion that the
document furnished by Mr Rhind, No. 44/34 of process, did not provide
the prerequisite for a buy-out to be exercised.
Before him, both parties were agreed that the agreed valuer was required
to provide one figure, and one figure only, as the buy-out valuation, for the
machinery for arriving at the Buy-Out Price to work. The Lord Ordinary considered that
Mr Rhind did not provide one such figure.
He never intended to do so and did not do so. Instead he produced two figures based on two
different bases of valuation. The Lord
Ordinary considered that Mr Rhind had not exercised a judgment as to which
was the appropriate basis of valuation, far less express a preference for one
over the other. Summing up this aspect
of the case, the Lord Ordinary observed:
"It was clearly accepted up until
12 March by those acting for the pursuer, and in my judgment correctly,
that the instructions to the valuer had to be on an agreed basis. For all the foregoing reasons it follows, in
my judgement, that one of the essential prerequisites for the buy-out, namely
the production of a single figure valuation by the agreed valuer never
materialised by 31 March, and indeed has not materialised to this
date. For that reason alone, the
pursuer's claim in this action has a baseless foundation and the defender is
entitled to be assoilzied."
[26] The Lord
Ordinary, in paragraph [57] of his Opinion, went on to consider other
matters which were the subject of submission before him. He concluded that:
"If, contrary to my clear view, as
expressed above, 44/34 of process did provide, a single figure valuation,
then I agree with the submissions made on behalf of the defender that it would,
nevertheless, fall to be disregarded."
That conclusion was reached because the Lord Ordinary
considered that Mr Rhind's arrival at a single figure must have involved
his having adjudicated upon a legal dispute between the parties as to the
proper basis of the valuation. In that
situation, the Lord Ordinary was persuaded that the submission made to him on
behalf of the defender was well founded, to the effect that Mr Rhind's
decision could be set aside on what were described as "judicial review grounds". Considering those matters, the Lord Ordinary
concluded that the valuation would fall to be set aside on account of
Mr Rhind's failure to take into account relevant factors and on account of
his taking into account irrelevant factors.
[27] In
paragraph [58] of his Opinion the Lord Ordinary considered the issue of
the pursuer's ability to complete the buy-out transaction on 31 March
2004. He reached the conclusion that, on the
evidence, the pursuer was not in a position to do what he had to do in terms of
Clause 10 of the Shareholders' Agreement to effect the buy-out. That position, he concluded was not created
by any breach of contract on the part of the defender, but because of four
reasons which he expressed thus:
"(1) The shareholders' agreement had placed a
tight timetable upon the pursuer;
(2) The pursuer and his advisers left the
commencement of the process somewhat late in the day;
(3) The process was not helped by
(a) the pursuer having no fewer than three
sets of solicitors,
(b) the fact that there were other issues
between the parties and
(c) the fact that there was confusion and
overlap of roles as between the various solicitors acting for the pursuer;
(4) As a result of the foregoing, the pursuer
did not have a concluded and binding unconditional agreement with lenders to
provide him with the buy out price on 31 March 2004 to enable him to make a telegraphic
transfer to the defender."
[28] The Lord
Ordinary entirely rejects the suggestion that the pursuer found himself in that
position because of the defender's agents allegedly delaying forwarding the
principal title deeds to the property.
Elaborating that aspect of his decision, the Lord Ordinary says:
"On the basis of the evidence the pursuer,
in my judgment, could not have paid the buy out price (as he understood it to
be) on 31 March 2004.
That situation was not caused by any breach of contract by the defender,
in particular in relation to any delay in the production of the principal title
deeds or some more general failure in the duty to co-operate, as was suggested
from time to time in the pursuer's case.
The situation was that the parties' relationship had broken down
completely by the time the buy out option fell to be exercised. The shareholders' agreement provides for
strict requirements to be met for the buy out option to be exercised and I do
not read the agreement as providing any room for any modification of those
requirements due to the provisions which refer to co-operation and good
faith. I am satisfied that the inability
to pay the buy out price on 31 March meant that the right to exercise the
buy out option, as a matter of contract, expired thereafter. I agree with the submissions of senior
counsel for the defender that 31 March was a material date in terms of the
contract and was of its essence. As
senior counsel for the defender correctly observed, there was no submission
made on behalf of the pursuer to the opposite effect. It was clear that all the various representatives
of the pursuer were acting on the basis that 31 March was of the
essence. It was the date on which
Clause 10 required certain things to be carried out. It was a potential date for the termination
of the limited partnership. It was the
date for the termination of the shareholders' agreement if no notice of
exercise of the option had been given (Clause 21 of the agreement). It was the date to which a balance sheet had
to [be] produced to bring about the buy out price for the shares. I am satisfied, therefore, in all the
circumstances of the present case, in particular having regard to the nature of
the contractual provisions just referred to, the stipulation as to when the
option exercise had to be carried out was material and required strict compliance
if the option was to be validly exercised. - (See Visionhire Ltd per Lord President Hope page 888D-I.). The present case, in my judgment, is
distinguishable from the position in Stone
v McDonald. In the present case the agreement
unequivocally, and unconditionally, provided that the option could be exercised
on one day and one day only."
Grounds of Appeal for
the Pursuer and Reclaimer
[29] Grounds of
appeal were lodged for the pursuer and reclaimer in the ordinary way,
No. 50 or process. On 18 August
2006 a
minute of amendment relating to those grounds of appeal was lodged and a motion
enrolled to allow the grounds of appeal to be amended in terms of that minute
of amendment. That motion came before
the court on 24 August 2006 when it was continued to 26 September
2006, the
opening day of the diet for the reclaiming motion. When this case came before us on that day
senior counsel for the pursuer moved us to allow the amendments to the grounds
of appeal. The principal alterations
sought to be made in the grounds of appeal was to introduce a contention that
the Lord Ordinary had erred in holding at paragraph [58] of his Opinion
that it was of the essence of the contract that the buy-out had to be carried
out on 31 March 2004; on a sound
construction of the Shareholders' Agreement, the Buy-Out Date, namely
31 March 2004, was not of the essence of the contract. Time was not of the essence. Senior counsel recalled that there had been a
debate in the action in September 2004.
No concession had been made that time was of the essence of the
Shareholders' Agreement. It was
suggested on behalf of the defender that the proof had been conducted on the
basis that time was of the essence.
However that was not an accurate assessment. The Lord Ordinary's narrative of the
pursuer's submissions following proof, at page 74 of the reclaiming print,
demonstrated a contention on behalf of the pursuer that time was not of the
essence. The position had been
misunderstood by the defender's advisers, as appeared from the defender's
submissions at page 82 of that print.
Senior counsel contended that there would be no prejudice to the
defender in allowing the amendment. The
issue of whether time was of the essence of the contract or not depended on the
interpretation of the Shareholders' Agreement, not on evidence led at the
proof. The court had a discretion to
allow the amendment, as appeared from Rule of Court 38.16(4).
[30] Senior counsel
for the defender contended that the amendment should not be allowed. There was prejudice likely to follow from the
proposed amendment, since the proof had been conducted upon the basis that 31 March
2004 was the
date for performance of the buy-out provisions of the Shareholders'
Agreement. No evidence had been led for
the defender at proof. This matter had
been a factor in that decision. A number
of witnesses could have been led who were not led in evidence.
[31] Having heard
the submissions we decided to allow the amendment of the pursuer's grounds of
appeal. It appeared to us that no
significant prejudice would result from that course. The issue regarding time being of the essence
of the contract or not was essentially a matter of interpretation.
[32] In their
amended form, the grounds of appeal for the pursuer are as follows:
"1. The Lord Ordinary erred in holding at
paragraph 58 that it was of the essence of the contract that the Buy Out
had to be carried out on 31 March 2004.
On a sound construction of the Shareholders' Agreement, the Buy-Out
Date, namely 31 March 2004, was not of the essence of the
contract. Time was not of the essence.
2. The Lord Ordinary erred in holding that the Shareholders'
Agreement provided no basis for a valuation to be carried out unless parties
entered into an agreed remit. A correct
interpretation of Clause 10 and the relative definitions does not provide [that]
such an agreed remit is a prerequisite to a valid valuation.
3. The Lord Ordinary erred in holding at paragraph 56 that
the Rhind valuation did not contain a single valuation figure as stipulated for
in the Shareholders' Agreement and as instructed by the Maclay Murray &
Spens letter of 12 March 2004.
4. The Lord Ordinary erred in holding at paragraph 57 that
a single figure valuation must have involved Mr Rhind adjudicating upon a
legal dispute. Such a view is not
consistent with the basis of his instruction nor the actual content of the
Rhind valuation. Mr Rhind in his
evidence gave no basis for such a conclusion by the Lord Ordinary.
5. The Lord Ordinary erred at paragraph 58 in giving no
apparent weight to the defender's inability to complete the buy-out on 31 March
2004 due to
the presence of securities over the Buy-Out Properties. As a result of the defender's absence of any
attempt to obtain a discharge and the defender's inability to obtain discharge
of the securities over the Buy-Out Properties, the defender was in breach of
his obligations in respect of the Buy-Out.
The defender has declined to operate the contractually provided
mechanism for the Buy-Out.
6. The Lord Ordinary erred at paragraph 60 in holding that
no price was arrived at for the Buy-Out Properties pursuant to the
Shareholders' Agreement and at paragraph 61 that the pursuer ran out of
time on 31 March 2004.
The contractually stipulated price for the Buy-Out Properties was set by
the Rhind valuation and the failure of the completion of the buy-out was
precipitated by the defender.
Accordingly the Lord Ordinary erred in granting absolvitor. Decree in favour of the pursuer should have
been pronounced.
7. The Lord Ordinary, in reducing Mr Rhind's Report (44/32
[sic] of process) ope exceptionis, erred in law by taking
into account evidence, other than the Report itself, relating to (a) the
approach to the valuation exercise, and (b) the findings and reasoning
contained in the Report. In determining
the validity of the Report, he ought, in relation to these matters, to have
confined himself to the terms of the Report.
(Paragraphs 20-26 and 55-57).
The Report fell within the requirements of the Shareholders' Agreement
(44/1 of process). The correct
subjects were valued and a fair and reasonable valuation was produced. Any dispute about the precise terms of
Mr Rhind's instructions was irrelevant.
8. If the valuation was invalid, the consequence was that, in
the absence of agreement between the parties, the sale of the Buy-Out
Properties and the Buy-Out Shares could not be completed on 31 March
2004. The contract machinery for determining the
price of the Buy-Out Properties had broken down. In these circumstances, the court should have
fixed (and still can fix) a fair price by one means or another, and the time
for payment of the price so fixed.
9. If the valuation is valid, the pursuer is entitled to
implement including delivery of the Buy-Out Shares and a valid disposition of
the Buy-Out Properties, containing all the usual and necessary clauses, and all
other necessary documents, all adjusted at the sight of the court, within such
reasonable time as the court specifies, in exchange for payment of the price of
£2.5 m.."
Submissions of Junior
Counsel for the Pursuer
[33] Junior counsel
for the pursuer indicated that his submissions would fall into six chapters
(1) the history of the action;
(2) the factual background to the action; (3) a summary of the Lord Ordinary's
reasons and of the grounds of appeal;
(4) a summary of the pursuer and reclaimer's propositions
concerning what the Lord Ordinary ought to have done; (5) propositions of law; and (6) the orders sought. His motion was to recall the interlocutor of
the Lord Ordinary of 11 July 2005 and grant decree in terms of
conclusion 1 of the summons.
[34] Junior counsel
went on to elaborate chapters (1) and (2) of his submissions. These matters have already been narrated by
us and so need not be repeated. Junior
counsel emphasised that the court had to be concerned with the particular parts
of the Shareholders' Agreement, which related to the Buy-Out. In particular, the Buy-Out Valuation of the
properties would be important.
Clause 21 of the Shareholders' Agreement required service of a
notice, if a Buy-Out was to occur. Such
a notice had been timeously served. It
was number 44/12 of process. The
intention of the pursuer to effect a buy-out had been affirmed in the letter
dated 19 March 2004 to Messrs. Clark & Wallace,
44/32 of process. Counsel drew
attention to the terms of the Contract of Limited Partnership, 44/3 of
process, and, in particular, clause (ten) which provided for the
termination of the Limited Partnership as at 31 March 2004 or at any
anniversary thereof upon the expiry of the specified notice. The Limited Partnership was the tenant of the
properties, a situation which was capable of continuing even after a buy-out.
[35] Junior counsel
then turned to chapter 3 of his submissions, a summary of the Lord
Ordinary's decision, with which we have already dealt. He made it clear that he was not going to
argue that the Lord Ordinary had been wrong in concluding that the pursuer had
not been in a position to pay the necessary funds to effect the buy-out on 31 March
2004, but it
would be contended that that was not the end of the matter. He referred to grounds of appeal 7, 8
and 9.
[36] Junior counsel
elaborated the position relating to Scotpigs Ltd. Provisional liquidators had been appointed on
16 March 2004. Liquidators
were now in office. The court had
pronounced an interlocutor on 30 March 2004, 44/43 of process finding and
declaring that any transfer of shares in Scotpigs Ltd pursuant to the Buy Out
provisions of the Shareholders' Agreement would not be void under the
provisions of Section 127 of the Insolvency Act 1986 in the event of
the winding up of the company.
Accordingly, the liquidation of the company created no problems for the
pursuer.
[37] Counsel next
proceeded to chapter 4 of his submissions.
It consisted in a submission as to the findings which the pursuer
contended the Lord Ordinary should have made.
These were:
(1) That the defender had withdrawn from the
Shareholders' Agreement and, in doing so, was in material breach of it;
(2) That the pursuer's counter obligations
were "suspended" until the defender indicated that he was prepared to perform
his obligations;
(3) That the Rhind valuation was valid under
the Shareholders' Agreement and hence determined the price to be paid under it;
(4) Accordingly specific implement of the
Shareholders' Agreement should be ordered;
(5) Upon the assumption that the Rhind
valuation was not valid, that the machinery for the fixing of a price provided
for the in the Shareholders' Agreement had broken down, with the consequence
that the court should now provide suitable machinery, following the operation
of which, specific implement should be ordered; and
(6) That time was not of the essence of the
Shareholders' Agreement.
[38] Counsel then
entered upon chapter 5 of his submissions, consisting of certain
propositions of law. In the first place,
the starting point was that, on a proper interpretation of the Shareholders'
Agreement, it had been designed to create binding rights and obligations. It was plainly a document intended to have
contractual effect. The central
proposition of the defender was that there had to have been agreement between
the parties regarding the basis of the valuation. The pursuer contended that that was not
so. In support of the pursuer's position
in this respect counsel relied upon a number of cases. The first of these was Melville Dundas Ltd v Hotel
Corporation of Edinburgh Ltd [2006] CSOH 136. In paragraph 17 of the Opinion of
Lord Drummond Young the general principles of interpretation of a
commercial contract were set out. It had
to be recognised that the Buy-Out was to be seen in context as part of a wider
contractual transaction. Counsel next
relied upon R & J Dempster
Ltd v Motherwell Bridge &
Engineering Ltd 1964 S.C. 308, at pages 327-328. That case demonstrated that, where a
commercial arrangement appeared to create binding rights and obligations, the
court should find a way of carrying it into effect. If there was ambiguity or doubt, the contract
ought to be interpreted so as to give effect to those binding rights and
obligations.
[39] Counsel next
drew attention to G Percy Trentham Ltd v Archital Luxfer Ltd and Others [1993] 1 Lloyd's Rep 25. Where a contract had been performed in whole
or in part, the argument that there was no evidence on which a judge could find
a contract proved was implausible.
[40] In the letter
dated 31 March 2004, No. 44/47 of process, the defender
had stated that he did not propose to perform the contract for the reason
stated. However, in the circumstances of
this case, he was not entitled to withdraw from the transaction as he did. In doing so, he was in material breach of
contract.
[41] Counsel
submitted that the method provided for in the Shareholder's Agreement for the
fixing of the price of the properties to be bought was a non-essential part of
it. In that connection he relied on Erskine, Institute, IV. iii.86 and on Sudbrook Trading Estate Ltd v Eggleton
and Others, [1983] A.C. 444, a case which, although not
binding on the court, was highly persuasive.
It was held there that, on its true construction, the agreement under
consideration was for sale, at a fair and reasonable price, by the application
of objective standards and once the options had been exercised in accordance with
the necessary preconditions, since the price was capable of being ascertained
and was therefore certain, a complete contract for the sale and purchase of the
freehold reversion was constituted.
Counsel contended that where the parties had agreed that a price should
be fixed by a valuer, in the context of this case, they were agreeing a fair
and reasonable price. He drew attention
to what was said at pages 474-475, 482, 483-484.
[42] Counsel went
on to rely on Scottish Wholefoods
Collective Warehouse Ltd v Raye
Investments Ltd 1994 S.C.65 at
pages 66-71. There the court had held
that the parties had intended the rights and obligations should be created by
the clause in contention and that, although the parties had not agreed on a
specific price, they had agreed upon the price being the current open market price,
which would, in the absence of agreement between the parties, be determined by
the court.
[43] At this stage
in his submissions counsel emphasised certain matters of fact. It was important to recognise what was not in
dispute. Clause 21 of the Shareholders'
Agreement provided for the service of a notice by the pursuer on the defender prior
to the Buy-Out Date intimating his intention to effect the Buy-Out. There was no dispute that that step had been
taken. The giving of the necessary
notice was the subject of averment in Condescendence 2 and was admitted in
Answer 2. The Lord Ordinary accepted
that position in paragraph [10] of his Opinion.
Turning to the matter of the price for the Buy-Out and the associated
valuation, counsel pointed out that a mechanism for the ascertainment of the
price had been agreed in the Shareholders' Agreement and there was no dispute
about it now, as appeared from the terms of Condescendence and Answer 3. The only matter in dispute was a component in
the mechanism for ascertainment of the price, namely the Buy-Out
Valuation. Under the mechanism provided,
the valuer had to be agreed and that had been done. The sole difficulty arose from the form and
nature of the valuation. Counsel then
reverted to consideration of further authorities including Money v Ven-Lu-Ree Ltd [1989]
3 N.Z.L.R.129, in which the principle in Sudbrook Trading Estate Ltd v Eggleton
was applied. Counsel went on to rely
on The Queensland Electricity Generating Board v New Hope Collieries Pty Ltd [1989] 1 Lloyds Rep 205.
[44] At this point
in his submission counsel drew attention to what had been said by the Lord
Ordinary in paragraph 58 of his opinion.
In that paragraph he dealt with the decision in the Sudbrook Trading Estate Ltd v Eggleton,
saying that it could not be relied upon in the circumstances of the present
case. That view was unsound. In particular, the Lord Ordinary was wrong in
maintaining that there had been no breach of contract. On a proper view of the present case, the
principle in the Sudbrook Trading Estate
Ltd v Eggleton did apply.
[45] Counsel for
the pursuer next turned to consider the issue of whether time was of the
essence in relation to the Shareholders' Agreement. His starting point was to acknowledge that
time that might be considered to be of the essence of the requirement regarding
intimation of an intention to effect a buy-out in terms of clauses 10 and 21 of
the Agreement. However, if that were so,
the pursuer had obtempered that requirement of the Agreement. That had been averred and admitted.
[46] In connection
with the more general question of whether time was of the essence, counsel
relied upon Rodger (Builders) Ltd v Fawdry and Others 1950 S.C.483, at page
492. In a contract for the sale of
heritage, payment of the price on an appointed date was not, in general, an
essential condition of the contract. It
could of course be made essential by express stipulation. Counsel also relied on Burns v Garscadden (1901)
8 S.L.T. (Notes) 321 at page
322. Reliance was also placed on Visionhire Ltd v Britel Fund Trustees Ltd 1991
S.L.T.883 at page 886. The mere
stipulation of a date for payment did not of itself make time of the essence in
a contract. It was, of course, possible
for a party to a contract in which time was not of the essence to make it so by
the use of the so called ultimatum procedure.
Reliance was also placed on Starmark
Enterprises Ltd v CPL Distribution
Ltd [2001] EWCA Civ 1252.
[47] Counsel
indicated that the cases which he had just cited demonstrated the existence of
a general principle of interpretation, but that that principle would yield to
contra-indications in a particular contract, which might have the effect of
making time of the essence. His
submission was that, in the circumstances of this Shareholders' Agreement,
there were no contra-indications which had that effect. In that connection he pointed out that the
Buy-Out was the final step in the contractual arrangements between the
parties. Further, there was nothing in
clause 21 of the Shareholders' Agreement which bore upon the issue currently
under consideration. However, the Joint
Venture Objectives set out in Part 1 of the Schedule to the Shareholders'
Agreement were relevant, demonstrating that the completion of the Buy-Out was
the last stage of the joint venture.
Counsel went on to maintain that the Land Court proceedings initiated by the
defender for an order under section 72(8) of the Agricultural Holdings (Scotland) Act 2003 were significant in this
context. That action had been sisted to
await developments elsewhere, the precise nature of which were uncertain. However, in the light of those proceedings,
it was not possible to say whether vacant possession of the properties was or
was not available as at 26 March 2004, the date of the valuation. As at that date a tenant was in possession
whom the defender sought to dislodge.
[48] Counsel went
on to deal with circumstances which, contrary to his submission, might be thought
to indicate that time was of the essence of the Shareholders' Agreement, so far
as a Buy-Out was concerned. Clause 21 of
that Agreement might be thought to be of that nature, but, in reality, was
not. It was accepted that the service of
the notice referred to in that clause had to be effected prior to the Buy-Out
Date, otherwise the Agreement would terminate automatically. However, it was
clear from that clause, in the context of the other provisions of the
Shareholders' Agreement, that, if a notice of intention to effect a Buy-Out had
been timeously given, the Buy-Out procedure had been initiated. The overall purpose of the Shareholders'
Agreement was to furnish the pursuer with an opportunity to recover the
property that had been his; that militated against time being of the
essence. Accordingly, the observations
of the Lord Ordinary in paragraph 58 of his opinion on the effect of the
passage of time on the contract were erroneous.
[49] Clause 10 of
the Shareholder's Agreement used the words "On the Buy-Out Date, Mr Simmers
shall be entitled to effect the Buy-Out ... " However, the use of those words did not
indicate that time was of the essence.
They indicated merely that that date was the contemplated date of the
transaction. That language was, in its
nature, no different from that used in Rodger
(Builders) Ltd v Fawdry and Others. There was no language in the contract
inhibiting action after that date.
[50] The definition
of the expression "the Buy-Out Valuation" militated against the idea of time
being of the essence, since it contemplated the valuation being carried out
"On" "the Buy-Out Date"; plainly settlement of the transaction could not be
effected on that date if the valuation itself was only obtained at that
time. Likewise, Clause 21 contemplated
that a notice of intention to effect the Buy-Out could be given as late as 30 March 2004.
Once again, if that were contemplated, settlement of transaction would
be impossible on 31 March 2004 in practical terms. Clause (TEN)(a) of the Contract of Limited
Partnership between Scotpigs Limited and James Grigor Innes also pointed away
from time being of the essence of the contract.
The lease of the buy-out properties, in Clause (SECOND) pointed in the
same direction. Tacit relocation might
continue indefinitely. One of the most
powerful indications that time was not of the essence of the contract was to be
found in the definition of "the Buy-Out Shares Price". That definition required that "the balance
sheet produced to 31 March 2004" should be used in the calculation
of the relevant price. There could not
be a balance sheet to 31 March 2004 until, at the very earliest, 1 April 2004.
Thus the relevant price could not be calculated until after 31 March 2004, a situation incompatible with the notion
that time was of the essence of the contract.
The Lord Ordinary had not made reference to these considerations, or to
the general proposition that time was not of the essence of the contract,
although, to be fair to him, the case had been presented to him in a rather
different way.
[51] Concluding
this chapter of his submissions, counsel for the pursuer submitted that a
contract could be rescinded only in the face of a material breach. However, the reason given by the defender for
his refusal to complete the transaction was not such a breach, but that he
disputed the validity of the purported By-Out Valuation, as appeared from the
letter of 31 March 2004, No. 44/47 of process. In this connection the counsel relied upon The Law of Contract in Scotland, McBryde, Second Edition paragraphs 20.47 and 48; and
Bank of East Asia Ltd. v Scottish
Enterprise 1997 S.L.T. 1213, at
pages 1216 and 1217. Reverting to the
letter of 31 March 2004 from the defender, his position
could be summarised as being that, since the valuation was allegedly bad, he
would proceed no further. The correct
position would have been that, if he was contending that the valuation was bad,
he should have suggested that another one should have been obtained. What he had done was to take an erroneous
view of the law and of the provisions of the Shareholders' Agreement.
[52] Counsel
indicated at this point, following an adjournment, that it was now common
ground between the parties that, under the Shareholders' Agreement, the parties
had not been required to agree upon the remit to the valuer. It followed that, since the pursuer had no
obligation to agree that remit, he was not in breach of the Shareholders'
Agreement in having failed to do so.
Thus the statement by the Lord Ordinary in paragraph 56 of his opinion,
to the effect that "It was clearly accepted up until 12 March by those acting
for the pursuer, and in my judgement correctly, that the instructions to the
valuer had to be on an agreed basis." , was wrong. It was submitted that the basis of valuation
was a matter for decision by the valuer.
[53] In relation to
the determination of value, counsel relied upon Sweeney v Sweeney 2004 S.C.372, a case concerned with the
ascertainment of the net value of matrimonial property under the Family Law (Scotland) Act 1985. At page 380, it was made clear that, as a
matter of ordinary language the "value" of any property which was realisable
for money was the price which a hypothetical willing purchaser would pay, and a
hypothetical willing seller receive from him, for that property on a
hypothetical sale at the date in question.
On that approach, the Buy-Out Properties would require to be valued
subject to tenancy. Reliance was also
placed on McConnell v McConnell [1997] Fam LR 97 at paragraph
19.08.
[54] In considering
whether the valuation in question here was a valid valuation, counsel said that
his submissions would be made in two chapters.
The first would be concerned with the question of whether the valuation
was valid in terms of the Shareholders' Agreement. The second would be concerned with the issue
of the circumstances in which it might be challenged. Turning to the first chapter of these
submissions, counsel pointed out that the Shareholders' Agreement made
reference to "The Buy-Out Valuation". He
submitted that, once the identity of the valuer had been agreed, as it had
here, then the matter of the valuation was one for the valuer. No point was made concerning the terms of the
letter from Messrs. Clark and Wallace, dated 5 March 2004, No. 44/22 of process. It was contended that the valuation was
either valid or invalid as at the date which it bore, 26 March 2004; accordingly, subsequent
correspondence was inadmissible in explanation of it. It was important to note that the valuation, No.
44/34 of process, took into account the circumstances existing at the date it
bore. At page 10 of that document a
value was brought out of £2,038,000; that was the valuation produced by the valuer,
albeit that he had developed that figure in a process involving two
stages. It was apparent that, in
arriving at the figure mentioned as the valuation, the valuer had been aware of
the context, being the existence of a dispute, as described in paragraph 4 of Appendix
II to the valuation, before the Scottish Land Court.
That Appendix disclosed the instructions which the valuer had
received. Looking at the valuation
overall, it was apparent that the valuer had produced one value which was
valid. That figure could then be
utilised in the contractual machinery provided by the Shareholders' Agreement. Approaching the matter in another way, as at 26 March 2004, there was in fact a tenancy in
favour of Scotpigs & Co., although that tenancy was the subject of
challenge.
[55] It was
apparent from page 10 of the valuation, No. 44/34 of process, that the
valuer had made a discount from a vacant possession value, in respect of the
tenancy. That was a correct course,
since the lease had not by then been declared to be at an end. Counsel recognised, however, that another
view might be taken, to the effect that the Shareholders' Agreement
contemplated a valuation on a vacant possession basis. That might be inferred from the machinery
provided in that Agreement in respect of the "Buy-Out Properties Price". It might be thought that that machinery
contemplated a sharing of any augmentation in the value of the properties. Nevertheless, a willing buyer might be in the
position of not being able to terminate the limited partnership that the
Shareholders' Agreement had created, the tenancy of which would have been
continued by tacit relocation after 31 March 2000, the end of the period of the lease
specified in Clause (SECOND). It
was recognised that the view might be taken that the valuation for the purposes
of the Buy-Out should be undertaken on the same basis as the valuation of the
properties at the commencement of the arrangement, when there was no
tenancy. However, the figure for the
cash paid for the properties and the shares at that time was a reflection of
business need rather than the value of the properties then. The circumstances demonstrated that the
defender had lent capital to the pursuer, for which he was being rewarded with
rent. The assumption should not be made
that, because there was no tenancy at the commencement of the arrangement there
was no tenancy at the end of it, because the "Base Properties Price" of
£2.1 million did not represent the value of the land at the time when it
was acquired by the defender. In all
these circumstances, the valuation relied upon was valid.
[56] The next issue
to be considered was whether, in applying the discount of 45 per cent in
respect of the tenancy, the valuer had determined a legal dispute. If that were the case, the valuation might be
open to criticism. However, the valuer
had done no such thing; he had merely assumed the existence of factors that
affected market value. Relevant to this
area of consideration was the decision in Jones
and Others v Sherwood Computer
Services plc [1992] 1 W.L.R. 277, in which it was held that,
where parties had agreed to be bound by the report of an expert, the report,
whether or not it contained reasons for the conclusion in it, could not be
challenged in the courts on the ground that mistakes had been made in its
preparation, unless it could be shown that the expert had departed from the
instructions given to him in a material respect. Reliance was place particularly on what was
said at pages 281-287. In the
present case the valuer had not failed in any way, or materially departed from
his instructions. It was agreed that, if
he had produced two valuations, that would be a material departure from
his instructions. The "judicial review
grounds", referred to in paragraph [57] of the Lord Ordinary's Opinion,
had no part to play in the assessment of the valuation. For reasons already explained, the valuer had
not adjudicated upon a legal dispute. In
the face of instructions from the parties which were not reconcilable, he had
performed a valuation.
[57] In the event
of the pursuer being found to be in error concerning the appropriateness of the
tenanted value of the properties, as a basis for valuation, his position was
that he continued to desire to effect the Buy-Out. It might be that there would require to be an
adjustment of the conclusions in the action, depending upon the conclusion
reached by the court. Referring to the
skeleton argument for the pursuer, counsel invited the court to conclude that
the first issue should be answered in the affirmative. The second issue should be answered in the
negative. If that were done, the issues
raised in the succeeding parts of that document fell away. If it were to be concluded that the valuation
obtained was invalid, then the court should determine an appropriate valuation
on the basis of evidence, or, alternatively remit to a valuer to undertake that
task. If there were any practical
difficulties associated with the course to be taken, following upon the court
reaching its conclusions, the case could be discussed in the By Order Roll.
Submissions by junior
counsel for the defender
[58] Counsel moved
the court to refuse the reclaiming motion and to adhere to the interlocutor of
the Lord Ordinary, dated 11 July 2005.
He said that his submissions would fall into six chapters: (1) the proper approach of an appeal
court to findings in fact made by the judge of first instance; (2) the
issue of whether the Buy-Out option was exercisable only on 31 March 2004;
in other words whether time was of the essence; (3) whether the Rhind
valuation report was "the Buy-Out Valuation" in terms of the Shareholders'
Agreement; the submission would be that it was not; (4) whether the Lord
Ordinary was plainly wrong to hold that the reason that the pursuer was unable
to complete the Buy-Out was his own delay in attempting to obtain the necessary
finance; (5) the issue of whether the Rhind valuation report could be
challenged as the decision of an arbiter; and (6) the matter of remedies.
[59] Turning to
chapter (1), counsel posed the question of what were the important
findings of fact. His answer was that
there were five (i) that Mr Rhind did not see the Shareholders'
Agreement before making his valuation report, as found in paragraph [55] of
the Lord Ordinary's Opinion at page 84 of the Reclaiming Print;
(ii) that Mr Rhind disregarded the final instruction received from Messrs. Maclay
Murray & Spens, dated 12 March 2004, No. 44/28 of process, but
embarked upon an exercise to provide two such values on two different
bases, as found by the Lord Ordinary in paragraph [56]; (iii) that
the pursuer did not have finance available on 31 March 2004 to effect the
Buy-Out, as found in paragraph [58] of the Lord Ordinary's Opinion;
(iv) that the reason why the pursuer did not have finance in place on 31 March
2004 was because he had delayed in seeking the finance necessary to effect the Buy-Out,
as found by the Lord Ordinary in paragraph [61]; and (v) that
Mr Rhind did not take into account the question of rent payable on the
Buy-Out Properties, or the existence, or potential existence of an agricultural
tenancy, or the fact that Scotpigs Ltd was in provisional liquidation at the
time of his valuation report, as found by the Lord Ordinary in
paragraph [57]. At this point in
the debate, senior counsel for the pursuer helpfully indicated his position on
the foregoing findings in fact. He said
that (i) was not disputed; (ii) might be disputed; (iii) was not
now disputed; (iv) the description by the Lord Ordinary at
paragraph [58] of his Opinion of the situation was not disputed; and
(v) this finding might be disputed.
[60] Counsel for
the defender thereafter went on to deal with the proper approach of an appeal
court to findings of fact. Such findings
should not be disturbed unless they could be shown to be plainly wrong. It was agreed that inferences made from
primary findings of fact were in a different situation. In connection with this submission counsel
relied upon Thomson v Kvaerner Govan Ltd 2004
S.C.(H.L.) 1, particularly the observations of Lord Hope of Craighead in
paragraphs 16-19. the approach set
forth there ought to be applied to the matter of why the pursuer was unable to
complete the Buy-Out and also the matter of whether the Rhind valuation report
was "the Buy-Out Valuation" for the purposes of the Shareholders' Agreement, in
particular.
[61] Moving on to
the second chapter of his submissions, counsel submitted that the Buy-Out
option was exercisable only on 31 March 2004, since time was of the
essence of the contract, so far as it related to the obligations of the
pursuer. That submission was based upon
the provisions of the Shareholders' Agreement as understood in the context in
which that agreement was made. In
general, it was accepted that one of the reasons why the defender entered into
the agreement was as an investor making an investment. Having regard to the definition of "the
Buy-Out Properties Price" the defender would share in any augmentation in the
price of those properties and of the shares.
Looking at the terms of the Shareholders' Agreement, the date of 31 March
2004 was
mentioned again and again. Those
references indicated that, after that date, a line could be drawn. The terms of the Shareholders' Agreement
suggested that the defender's involvement ended on that date. The same implication could be taken from Clause (TEN)(a)
of the Contract of Limited Partnership.
Perhaps the clearest contractual indication of the significance of the
date was to be found in Clause 10 of the Shareholders' Agreement, which
provided that "On the Buy-Out Date, Mr Simmers shall be entitled to
effect the Buy-Out ...". Also of
importance were the words in that clause "... in exchange for payment by way of
telegraphic transfer of the Buy-Out Price ...".
That phraseology indicated that the intention was that the transaction
was to take place in its entirety on 31 March 2004.
Reverting to the contention based upon the appearance of the reference
to the balance sheet produced to 31 March 2004, in the definition of "the Buy-Out
Shares Price", counsel submitted that a balance sheet could be produced prior
to the date to which it related on a "projected" basis. In this connection reference was made to the
evidence of Mr M J M Reid on day 4 of the proof, at page 555 of
the transcript. Counsel also relied on
what he called the "factual matrix", in particular, the evidence of the pursuer
on day 1 of the proof at page 21.
It showed that time was of the essence of the contract. The words of Clause 10 of the
Shareholders' Agreement indicated clearly that the exercise of the option had
to occur on 31 March 2004, when payment of the price was
due. That had not happened. It was appropriate to look at the
Shareholders' Agreement as involving a conditional sale, a vital condition of
which had not been satisfied. The service
of the notice required by Clause 21 of the Shareholders' Agreement was
not, of itself, the exercise of the option.
It was a feature of the Shareholders' Agreement that, while the pursuer
required to have paid the Buy-Out Price on 31 March 2004, it did not follow that all of the
consequential documentation required to be completed on or before that date.
[62] Counsel went
on to review a number of cases, which, he contended, supported his position in
relation to the exercise of the option.
The first of these was Stone v
Macdonald 1979 S.C. 363, in
which the court, on the interpretation of the documentation involved in that
case, held that the notice of intention to exercise the option was not a
condition precedent for the exercise of it, but that intimation of an intention
to exercise the option was the method for the exercise of the option
itself. That case had been before the
Lord Ordinary, who appeared to have accepted the defender's contention that it
did not govern the present case. In the
end, much depended on the construction of the documentation of any particular
contract.
[63] Counsel then
submitted that, when a conditional contract of sale fixed the date by which the
condition was to be fulfilled, then the date so fixed had to be strictly
adhered to; the time provided for could not be extended by reference to
equitable principles. For that
proposition counsel relied upon Aberfoyle
Plantations Ltd v Khaw Bian Cheng
[1960] A.C. 115, particularly at pages 124-125. He also relied on T. Boland & Co Ltd v Dundas's
Trustees 1975 S.L.T.(Notes) 80;
Ford Sellar Morris Properties plc
v E. W. Hutchison Ltd 1990
S.C. 34, particularly at page 37.
Counsel next contended that Ahmed
v Akhtar 1997 S.L.T. 218
supported his submissions. That was also
true of Visionhire Ltd v Britel Fund Trustees Ltd 1991
S.L.T. 883 and Charisma Properties
Ltd v Grayling (1994) Ltd. 1997
S.L.T. 449.
[64] Counsel then moved
on to chapter (3) of his submissions, concerned with the issue of whether
the Rhind Report could be accepted as "the Buy-Out Valuation". A subsidiary issue also arose, which was
whether the court should take into account evidence other than the terms of the
report itself, in interpreting it, in particular, the instructions given to the
valuer. The rationale of Jones and Others v Sherwood Computer Services plc was that parties were only bound by
a valuation that they had contracted to be bound by. Accordingly the court was entitled to look at
what the valuer had been asked to do. The
defender's proposition was that the parties to a contract could not be bound by
a valuation that had not been carried out in the way provided for by the
contract. That proposition was supported
by Veba Oil Supply & Trading GmbH
v Petrotrade Inc [2002] 1 All E.R.
703; that case demonstrated that a
departure from instructions was material unless it could truly be characterised
as trivial or de minimis, in the
sense of it being obvious that it could make no possible difference to either
party. In these circumstances it was
necessary to consider what the instructions were here for the valuation. That involved looking at material outwith the
report itself. A question also rose as
to whether any instructions given coincided with the requirements of the
contract. In this context the important
finding in fact was that Mr Rhind did not have the Shareholders' Agreement
available to him and was thus not aware of its terms when he produced his
valuation report, a situation characterised as "remarkable" by the Lord Ordinary
in paragraph [55] of his Opinion.
It was essential that Mr Rhind should have seen the contract prior
to formulating his valuation, because (1) he had to understand that he was
being asked for a single figure; and (2) if it were possible, he required
to know the basis upon which he had to prepare his valuation. In the circumstances existing prior to 31 March
2004, the
parties had tried to plug a perceived gap in the Shareholders' Agreement by
issuing instructions. It was the
contention of the defender that the Shareholders' Agreement would have shown
that the appropriate basis for valuation was an open market valuation of the
property in an untenanted condition.
Counsel submitted that (1) the Buy-Out Valuation was born flawed,
because it did not produce what the contract required, since there were
two alternative values stated; and (2) standing the conflicting
instructions of the parties, it could never have been Buy-Out Valuation. The position was that Mr Rhind should have
declined to produce a valuation, in the face of the inability of the parties to
agree upon instructions to him. That was
the effect of the evidence of Mr James Galbraith. He considered that no valuer could resolve a
dispute between parties as to the proper basis for valuation. Reference was made to pages 113-137 of
his evidence. The problem was that
Mr Rhind had produced a report containing two valuations, which was
not what was envisaged in the contract.
In all the circumstances the court should uphold the analysis of the
Lord Ordinary at paragraphs [55]-[57] of his Opinion.
[65] Counsel next
dealt with chapter (4) of his submissions by saying that there was now no
dispute about the matter concerned; the Lord Ordinary was not plainly wrong to
have held as he did regarding this topic.
[66] Counsel for
the defender then turned to deal with chapter (5) of his submissions, concerned
with the issue of whether the Rhind Report could be challenged as being the
decision of an arbiter. He submitted
that if the court was satisfied that the valuation was a contractual valuation,
Mr Rhind must have adjudicated on a legal dispute. If he had done that, his decision was open to
challenge on what might be called "judicial review grounds". In that connection reliance was placed on A. G .E. Ltd v Kwik Save Stores Ltd 2001 S.C. 144, particularly at
pages 148-149. The case contained a
helpful discussion as to when an expert might become an arbiter. It was contended that if Mr Rhind had
produced "the Buy-Out Valuation", he must have adjudicated upon matters which
were before the Land Court.
In other words, he must have moved into an area in which only lawyers
were competent to make a decision. If
that was what he had done, then his decision was open to criticism in a number
of respects. In particular, he had
ignored relevant material, for example: (1) the duration of the lease of the
properties; (2) the payments made under it; and (3) the implications
of the provisional liquidation of Scotpigs Ltd and its effect on the tenancy of
the limited partnership. These
complicated matters had been ignored.
Mr Galbraith gave evidence to the effect that Mr Rhind should
have looked at those matters, but the latter agreed that he had not done
so. Accordingly, for that reason alone,
the Rhind Report fell to be reduced. It
was accepted that, if Mr Rhind had produced a single valuation on what
might be called a mixed basis, the foregoing submission would not possess
force. In any event, to the extent that
the Rhind Report contained a valuation of the properties on a tenanted basis,
it was defective since it had ignored certain matters pertinent to such a
valuation.
[67] Counsel finally
passed on to deal with chapter (6) of his submissions, the matter of
remedies. These were inevitably related
to the two main issues in the case, which were (1) whether time was
of the essence of the contract; and (2) whether the Rhind report was the
Buy-Out Valuation. If time was of the
essence of the contract, the Buy-Out option had had to be exercised by payment
on 31 March 2004. Since no
payment had been made on that date, the option had not been exercised and the
reclaiming motion had to fail. There was
no longer any contention regarding the cause of the lack of funds to effect the
buy-out on 31 March 2004.
If the Rhind report was not the Buy-Out Valuation, then the defender
could not be required to surrender his title to the properties for payment,
since there was no valuation. If the
court was not persuaded that time was of the essence of the contract, then it
followed that it had to consider the question of valuation and whether it was
possible now to provide a valuation.
There were two possibilities.
The first was that it was not possible to operate the machinery provided
in the contract. As regards that, the
case of Gillatt v Sky Television Ltd &c [2000]
2 B.C.L.C. 103 was of assistance.
The ratio of that case could be applied here, because, on one view, the
machinery provided by the Shareholders' Agreement had not been operated. While the parties had agreed upon a valuer,
they had not instructed him to do what was required by the Shareholders'
Agreement. The parties could not now be
ordained to agree upon a new valuer. A
practical difficulty was that there was no plea in law to support
conclusion 2 of the summons. The
second possibility was that the court might interpret the contract in such a
way as to enable it to fill the gap in the basis on which "the Buy-Out
Valuation" should have been carried out.
[68] At this point
in the hearing an overnight adjournment took place. When the hearing recommenced, counsel put
before the court a document containing a list of possible disposals, which he
explained. He then went on to make
certain further points. Within the
Shareholders' Agreement, there was a valuation of "the Buy-Out Properties" as
at the time of the signature of that agreement which was to be found in
Part 10 of the Schedule. It was
plain from the second paragraph of that valuation that it had been made on the
basis of an open market value of the holdings with vacant possession. It was submitted that that was a powerful
factor pointing to the appropriate basis for the "Buy-Out Valuation" being also
a valuation on an open market basis with vacant possession. In this connection reference was made to No. 44/48
of process, a letter sent on 31 March 2004, in which the defender suggested
that the appropriate valuation figure was £3.931 million, arrived at on a
vacant possession basis. At the time of
writing of that letter the defender had been prepared to enter into a
transaction with that consideration. A
similar view as regards consideration had been expressed in a letter dated 21 April
2004 from Messrs.
Maclay Murray & Spens to Messrs. Brodies, which accompanied a copy of the
summons in the present action. So, in
that context, there had been a substantial level of agreement.
[69] Counsel went
on at this stage to revert to the document setting out possible remedies, which
he had produced. He drew attention to
the fact that, in his pleadings, the pursuer had perilled his case upon the
contention that he had not been able to obtain finance as at 31 March
2004 to
effect the Buy-Out because of an alleged breach of contract on the part of the
defender in relation to the discharge of certain securities. He also averred that a Buy-Out Valuation could
still be made, if the Rhind report was invalid.
These averments made clear the nature of the case which had been put
before the Lord Ordinary. That
contention had been answered by the Lord Ordinary's findings in fact to the
effect that the pursuer had not in fact started early enough in obtaining
finance to effect the buy-out. The
arguments now being presented to the court on behalf of the pursuer had
substantially changed the focus of the pursuer's case. It had to be borne in mind that there were
now two main issues in controversy (1) whether time was of the
essence of the contract; and (2) whether the Rhind report was the Buy-Out
Valuation.
[70] If time was of
the essence of the contract, it was submitted that the option was not exercised
on 31 March 2004, in consequence of which bilateral obligations had not
been created. If the Rhind report was
not the Buy-Out Valuation, then the Buy-Out Properties Price had not been
produced by the contractual mechanism.
The result of this situation was that decree of absolvitor should be pronounced.
If the Rhind report was the Buy-Out Valuation, it was necessary to
consider the significance of the first fax sent by Messrs. Clark & Wallace
at 12.28pm on 31 March 2004, in which fax was said that the
defender was not prepared to complete the transaction, No. 44/47 of
process. The defender's contention was
that that fax did not amount to repudiation of the contract, following the
rationale of Vaswani v Italian Motors (Sales & Services) Ltd [1996]
1 W.L.R. 270. If that position were
correct, decree of absolvitor should
be pronounced. Alternatively, if that
fax were an anticipatory breach of the Shareholders' Agreement in relation to
the properties, that gave the pursuer the option of (1) accepting the
breach and suing for damages, or (2) seeking to proceed with the contract
and enforcing performance of it by exercising the option. The pursuer did not follow either of those
courses. Accordingly he was not entitled
to specific implement and decree of absolvitor
should be pronounced. In this connection
counsel relied upon Gloag on Contract, 2nd
Ed. pages 598-599 and McBride op. cit. at pages 485-489.
[71] Counsel
proceeded next to consider the situation where it was held that time was not of
the essence of the contract, and the option was exercised by the sending of the
notice on 11 February 2004, in consequence of which bilateral obligations
were created. Once again there were
two possibilities. If the Rhind report
was the Buy-Out Valuation, then it was submitted that the defender was no
longer bound by the contract on account of the inordinate delay which had
ensued. The pursuer had urged reliance
on Rodger (Builders) Ltd. v Fawdry and Others, but the defender had
not operated the ultimatum procedure. In
connection with this submission, it was pointed out to counsel that there was
no reflection of this contention in the defender's pleadings. There was no plea of personal bar, nor was
there a plea of prescription.
Accordingly he was pressed to explain upon what principle the contract
might no longer have effect on account of the passage of time. He then relied upon George Packman & Sons v
Dunbar's Trustees 1977 S.L.T. 140.
However, counsel recognised that the court in that case had not decided
whether a contract might become unenforceable through the passage of time,
leaving aside issues of prescription and personal bar. The alternative view was that the defender
was still bound by the contract and the court would dispose of the case by
granting decree in terms of the first conclusion of the summons.
[72] If it were
held that time was not of the essence of the contract, but that the Rhind report
was not the Buy-Out Valuation, the court could decide that the defender was
obliged to sell the properties at the Buy-Out Properties Price, which had still
to be produced. In that situation the
court might decide that it was not possible to produce such a valuation, on the
basis that the Shareholders' Agreement was so vague and uncertain as to
indicate no basis upon which a valuation was to be completed. In such a case, Sudbrook Trading Estate Ltd v Eggleton
did not provide an answer, because, where parties had not agreed a basis for
valuation, the court could not innovate on the contract. In that connection counsel relied on Lonergan v McCartney [1983] N.I. 129.
The Shareholders' Agreement here was just as much shrouded in ambiguity
as was the contract considered in that case.
If that submission were wrong and if the court could identify a basis
for the development of the Buy-Out Valuation, it was submitted that the
untenanted basis should be used. That
would be consistent with the original valuation having been effected on that
basis and the defender properly being seen as an investor in the
properties. It might be feasible for the
court to use the Rhind report to produce such a figure. However, it had to be recognised that, since
the properties passed into the ownership of the defender, improvements had been
effected to them, which could give rise to an issue regarding the defender's
right to recover the cost of those improvements. Furthermore, an issue might arise regarding
interest on the price, having regard to the fact that the defender had had the
use of the land in the period since 31 March 2004.
An alternative course would be for the court to contemplate that the
proper basis of valuation was that the land should be treated as tenanted, or,
at least, that it should be recognised that there was an issue regarding
tenancy and that a valuation should reflect a compromise on that issue. If that course were favoured, there would have
to be a proof. The Rhind report could
not be used in such a situation, because it did not take into account those
complexities.
Submissions by senior
counsel for the pursuer
[73] By way of
introduction senior counsel said that there were two principal questions to
be addressed: (1) whether Clause 10
of the Shareholders' Agreement gave a right to the pursuer to acquire the
properties; and (2) if so, at what price.
If issues of principle were dealt with, it might be appropriate for the
issue of price to be held over for further consideration. The pursuer's primary position was that he
was entitled to rely on the Rhind report, but it was recognised that other
views could be entertained. If the court
had to provide the Buy-Out Valuation, ultimately it might wish to afford the
parties an opportunity to reach agreement, although it should be appreciated
that there was a "floor" and a "ceiling" price here. The "floor" was £2.1 million, together
with £400,000 for the shares. The
highest figure was £3.705 million for the properties. Adopting a common-sense approach, there was
the possibility that a figure might emerge within this range, as happened in
relation to the furniture in McConnell v McConnell. However, the
primary concern was the need to resolve issues of principle.
[74] Turning then
to the primary issue of whether Clause 10 of the Shareholders' Agreement
conferred an enforceable right to implement, that issue gave rise to the
subsidiary question of whether time was of the essence of the contract. If it were not, it was submitted that there
could inevitably be a Buy-Out Valuation.
Before coming to that issue, it had been submitted that the pursuer
could never have been entitled to implement because the Shareholders' Agreement
was hopelessly uncertain. On that view,
unless the pursuer were to concede a basis for valuation advanced by the
defender, the contract could not be enforced because of the lack of a
valuation. That position came close to
saying that the contract was void from uncertainty. The true position was that the giving of
notice under clause 21 of the Shareholders' Agreement transmuted a
conditional agreement into an unconditional one. The defender's interpretation of the contract
in this regard was ludicrous and had never been advanced before the Lord
Ordinary. If the proper approach indeed
were that, in the absence of agreement, there could be no ascertainable value
for the properties, the defence stated was incomprehensible, as appeared from Answer 2
and Answer 3 of the defences, so it was plainly wrong to say that the
basis of valuation had to be agreed. The
basis of valuation was inherent in the contract. The case that went to proof was not that no
sensible meaning could be given to the expression "the Buy-Out Valuation", or
that there was no binding contract. The
arguments now advanced for the defender were self-contradictory and, in some
respects, inconsistent with his pleadings.
The Lord Ordinary had made no decision on the issue of whether the
contract was incapable of enforcement because of uncertainty. The uncertainty argument was contrary to the
decision in Sudbrook Trading Estate Ltd
v Eggleton and, furthermore, was
contrary to the principle of contractual interpretation that the court should
strive to give commercial efficacy to a contract. The interpretation of the contract apparently
now advanced by the defender was a mirage.
The court should be slow to conclude that that was the position, as
opposed to holding that there was a workable agreement. The position of the pursuer was that it was
for the valuer to adopt and determine a fair and objective valuation. Failing that, the tenanted value was appropriate. If that submission were wrong and the vacant
possession basis were appropriate, the Rhind Report had stated the value on
that basis at £3.705 million. The
submission was that the matter was essentially for the valuer, but, in any
event, the contract contained sufficient guidance as to the proper approach.
[75] Sudbrook Trading Estate Ltd v Eggleton was of assistance, although in
paragraph [58]of his Opinion the Lord Ordinary had distinguished it. The argument against the position ultimately
taken up by the House of Lords was to be seen at pages 472-473. However, the Judicial Committee rejected
those arguments and made the order set forth at page 480. A similar course could properly be followed
here.
[76] Elaborating
his position on the issue of whether time was of the essence, senior counsel
contended that the exercise of the option was analogous to the sale and
purchase of heritage. In such a
situation, the presumption was that time was not of the essence. In Ahmed
v Akhtar that presumption was
displaced by the particular circumstances of the contract, as appeared from
pages 223-224 of the report.
[77] Before looking
at the tenuous factors relied upon by the defender as showing that time was of
the essence, senior counsel pointed to factors which made the contract
unworkable, if that position were adopted.
The first of these was the definition of "the Buy-Out Shares Price" in
the definition clause of the Shareholders' Agreement. It incorporated the necessity for reference
to "the balance sheet produced to 31 March 2004".
It had to be recognised from the terms of Clause 14 of the
Agreement that the balance sheet would require to be audited. Clause 20 of the Agreement had no
bearing on this matter. The evidence of
Mr Michael Reid, heard on day 4 of the proof at pages 548, 557 and
564 of the transcript, was important. He
was a chartered accountant who had been engaged by the pursuer to make
projections for the purposes of obtaining finance. If time were indeed of the essence of the
contract, its provisions would be unworkable, since the pursuer would be unable
to identify "the Buy-Out Shares Price" as at close of business on 31
March 2004. The terms of Clause 10 of the Shareholders'
Agreement could not be operated. The
acquisition of "the Buy-Out Shares" and the "the Buy-Out Properties" was
inseparable having regard to the definition of "the Buy-Out Price".
[78] In the same
context Clause 21 of the Shareholders' Agreement was important. Under its terms, a notice of intention to
effect the Buy-Out could be served upon the defender, at the latest, on 30 March
2004. If time were of the essence, there would be
no time for the completion of the transaction following service of such a
notice on that date. That was an
extraordinary notion, when the giving of that notice was, in fact, the exercise
of the option. The service of such a
notice was the condition that had to be performed to effect the Buy-Out; if a notice were not served timeously, the
Shareholders' Agreement would be terminated and there could be no Buy-Out. Of course, more was required for the full
exercise of the Buy-Out option than service of the notice. Furthermore, no practical difficulty arose
from concluding that time was not of the essence of the contract, since the
defender had available to him the ultimatum procedure.
[79] A third factor
of importance in the context was the language of clause 10 of the shareholders'
Agreement itself. It opened with the
words: "On the Buy-Out Date,
Mr Simmers shall be entitled ...".
Plainly the pursuer was not entitled to effect the buy-out before that
date. The question was whether this
language was consistent with a one-day entitlement, or a continuing entitlement
starting on "the Buy-Out Date". It was
submitted that the latter was what was involved. One could ask the question what was the
entitlement. The answer was "... to effect
the Buy-Out and acquire the Buy-Out Shares and the Buy-Out Properties in
exchange for payment ...". If the
defender had no obligation related to that date, there could be no acquisition
on that basis. The idea of the pursuer
being obliged to make a payment for nothing given in return on that date was
bizarre. The acquisition had to be on
the basis of the ordinary principles of mutuality. There would be no opportunity for the pursuer
to use an ultimatum procedure, in the event of his having paid the requisite
money. That was very strange. He would simply be a personal creditor of the
defender, if the obligations of the latter had not been performed. It was most unlikely that any such
arrangement had been contemplated. On
the matter of the alleged significance of the words "telegraphic transfer", the
pursuer's position was that they had no definite fixed modern meaning.
[80] Finally, while
it would make good sense to impose on a party who had it in his power to do
something, an obligation to do it timeously, it would make much less sense to
do so if the person did not have that power.
In this connection, on the defender's argument, the pursuer would have
been at risk, since he would have been expected to perform his part of the
bargain on 31 March 2004, but the defender would not.
[81] Senior counsel
went on to consider in this context the factors which had been relied upon by
the defender and which were said to stand in the way of the success of the
pursuer's submissions. The first of
these was the language in clause 10 of the Shareholders' Agreement, with which
senior counsel had already dealt. The
second was the expression "telegraphic transfer", which was in the same position. The third factor was the circumstance that
the pursuer had intended to pay the Buy-Out Price on 31 March
2004. On the pursuer's interpretation of the
contract that was incompetent evidence, but was, in any event, unhelpful. Again, it had been argued that the completion
of the contract here was conditional upon payment. However, no case had been cited which
contained conditions such as those present in the Shareholders' Agreement. The defender's position was that no legal
obligation came into being until payment of the price was made, in other words
that performance of the contract by the pursuer created binding
obligations. That was bizarre. In any event, the contact contained no means
whereby payment might be made. No
details of a bank account had been furnished.
That pointed to time not being of the essence of the contract. The condition for the performance of the
contract could not be payment, but was rather the serving of notice in terms of
clause 21 of the Shareholders'
Agreement.
[82] Senior counsel
next embarked upon a review of the authorities which had been relied upon in
the course of argument. In Aberfoyle Plantations Ltd v Khaw Bian Cheng the purchase had been
made conditional on the renewal of certain leases. Accordingly the successful negotiation of
those renewals with a third party had been made a condition of the
contract. The consequences of failure
had been spelt out in detail. As was
pointed out at page 124, everything depended upon the true construction of
the agreement in question. Until the
condition was purified, there was no contract of sale to be completed. In the present case, it could not be correct
to regard payment of the price as a condition upon which the contract was
dependent; the payment of the price amounted
to performance of the contract. In T. Boland & Co Ltd v Dundas's Trustees once again the
contract was conditional upon the actions of a third party, the issuing by the
National Coal Board of clearance. That
was not comparable to the circumstances of the present case. In Ford
Sellar Morris Properties plc v E. W. Hutchison
Ltd, it was common ground that time had been made of the essence of the
contract by express provision. The
requisite date had not been met, in consequence of which the contract was not
binding. The circumstances there were in
no way comparable to those of the present case.
There might be an issue regarding the soundness of the decision in Charisma Properties Ltd v Grayling (1994) Ltd. In any event, in the contract involved there
was a provision spelling out the consequences of breach of the time
provisions. Nothing in that case
provided assistance here.
[83] If time were
not of the essence of the contract, attention then had to be focused on the
Rhind report. Senior counsel submitted
that this was the Buy-Out Valuation. In
consequence, decree ought to be pronounced in terms of conclusion 1. If that submission were not correct, the case
should be considered in the By Order Roll after the court had made its position
clear on the issues of principle.
However, reverting to a consideration of the situation if time was of
the essence, senior counsel submitted that the defender's actions on
31 March 2004, prior to the expiry of the pursuer's entitlement to pay,
had the effect that the defender could not complain that payment was not
made. The defender's position appeared
to be that, because time was of the essence of the contract and it was not
performed on 31 March 2004, all obligations disappeared. It appeared to be his position that it did
not matter how that had happened. It
followed that, if the defender had said earlier what he said on 31 March
2004 in the
first fax timed at 12.28pm, that he was refusing to co-operate,
he would not have been in breach of any obligation. That was so extraordinary a proposition that
the premise upon which it was based must be wrong.
[84] Some
assistance could be got from British
& Benningtons Ltd v North Western
Cachar Tea Co Ltd [1923] A.C. 48.
It was held in it that, the buyers of certain consignments of tea having
wrongfully repudiated the contracts, the sellers were not bound to prove that
they were ready and willing at the date of repudiation to perform their part of
the contract by delivery of the teas in London.
Accordingly an award of damages against the buyers would stand.
[85] Senior counsel
went on to make certain further points.
Significance lay in the definition of "the Buy-Out Valuation" in the
Shareholders' Agreement. It was clear
that that definition contemplated that the valuation had to be carried out on
or within one month prior to "the Buy-Out Date". The purpose was to ensure that what was an
element in the Buy-Out Price was the value of the properties as at
March 2004. Questions did not arise
relating to interest, because the defender was and remained in possession of
the land. Improvements were a quite
separate issue that was no part of the present litigation.
[86] The case of Gillatt v Sky Television Ltd and Another did not assist here. The pursuer in the present case had done all
that he could to operate the agreed mechanism.
Whether that mechanism had in fact operated successfully would be
addressed in connection with the valuation.
It appeared that the underlying problem envisaged by the defender was
the idea that no valuer could assess value when there existed a dispute as to
the basis of valuation; one could not
value a doubt or a chance. It was
submitted that that was wrong. Such
things were done every day. There was no
conceptual problem in making such a valuation, in other words, assessing how a
market might evaluate a doubtful prospect.
There was no artificial exclusion of any particular facts from the
valuation process. Jones and Others v Sherwood
Computer Services plc showed that, where parties had agreed to be bound by
the report of an expert, it could not be challenged on the ground that mistakes
had been made in its preparation, unless it could be shown that the expert had
departed from the instructions given to him in a material respect. A reference was made to
pages 284-288. Reference was also
made to Veba Oil Supply & Trading
GmbH v Petrotrade Inc.
[87] Senior counsel
went on to consider the second main issue in the case, that of the
valuation. In regard to it, the question
arose of what were the instructions that preceded it. The answer to that question was the
Shareholders' Agreement itself. It
constituted the agreement between the parties in relation to "the Buy-Out
Valuation". It was not necessary to look
at the terms of letters of instruction sent to the valuer which
conflicted. Nor did it matter that the
Shareholders' Agreement had not been sent to Mr Rhind. It was accepted that the document constituting
Appendix 2 to the Rhind report, No. 44/34 of process, did not amount to
the relevant instructions. That document
had been drafted by Mr Galbraith and had been sent by Messrs. Maclay
Murray & Spens to Mr Rhind. It
was contended however that Mr Rhind had been instructed to value the
properties in terms of the Shareholders' Agreement. Different approaches might be taken to the
Rhind Report. At pages 9
and 10, different values were brought out, a vacant possession value and a
discounted value on the basis of the properties being subject to a lease in
favour of Scotpigs & Co. The Lord Ordinary
had found, in paragraph [54], that Mr Rhind had intended to provide
in his report two separate values for "the Buy-Out Properties".
[88] If the court were
satisfied that the Rhind report could be looked at on its own and that
instructions had been followed, the pursuer should succeed. However, if the court considered that the
situation was comparable to that in Sudbrook
Trading Estate Ltd v Eggleton,
but that it was possible to develop a vacant possession value which could be
applied, the pursuer could also succeed, but conclusion 2 would require to be
amended.
[89] The pursuer's
primary position was that it was clear from the Rhind Report that the valuer
had carried through his instructions and had reached a value of £2.038 million. If that were wrong, the entitlement of the
pursuer was to purchase at a fair and reasonable price. However, there was no material available to
enable the court to reach a figure for that.
Accordingly the court should so find and hold that the pursuer had a
continuing entitlement to effect the buy-out and to acquire the buy-out shares
and properties in exchange for the buy-out price; while the buy-out price had to be a fair and
reasonable price, what that actually was remained to be determined. However, the court might reach a conclusion
on this aspect of the matter on the basis of its own interpretation of the
contract.
[90] Senior counsel
finally went on to consider the matter of possible disposals. If the court were to conclude that implement
was available, there were a number of options.
First, a remedy could be granted on the basis of the Rhind valuation, if
it considered that a single figure arrived at on an appropriate basis emerged
from it. Second, the court might reach
the conclusion that the pursuer had an entitlement to buy at a fair and
reasonable price. That would mean that
the court was in the position which existed in Sudbrook Trading Estate Ltd v Eggleton. If the court took the view that such a price
could not be other than the vacant possession of value, in the case of the
heritable properties, then the figure of £3.705 million could be used as a
component in the Buy-Out Price. Since
the pursuer was most anxious to avoid further litigation, if the court were not
prepared to accept the pursuer's primary position, then the pursuer was
prepared to accept that that figure was appropriate in respect of the heritable
properties. On that basis, the Buy-Out
Price would be £3.3025 million, being the sum of £2.1 million,
together with half of the uplift in value of the heritable
properties, £802,500, together with the price of the shares. If that approach commended itself to the
court, it would be necessary for the first conclusion of the summons to be
amended to substitute £2.9025 million for the figure of £2.1 million at
present standing in that conclusion.
Alternatively, conclusion 2 of the summons could be appropriately
amended. Decree was not sought in terms
of conclusion 3. Currently there was
standing an interim interdict pronounced in terms of conclusion 4, which would
remain in place at the present time, until the resolution of the issues. Senior counsel concluded his submission by
moving the court to recall the interlocutor of the Lord Ordinary and to grant
decree in appropriate terms. Plea-in-law 3
for the pursuer should be sustained with a substitution of the first conclusion
for the reference to conclusions in that plea.
Submissions of Senior
Counsel for the Defender
[91] Senior counsel
began by accepting the arithmetic contained in the concluding submission of
senior counsel for the pursuer. He said
that there were three important issues involved. First, whether the Rhind valuation was "the
Buy-Out Valuation" as defined in the Shareholders' Agreement. As to that, the defender's position was that
it was not. Second, how the option was
to be exercised, and, in particular, whether it was to be exercised under
clause 10 of that agreement. Third,
if the option was still available, what were the pertinent remedies.
[92] As regards the
first of these matters, senior counsel adopted the submissions made by his
junior. In addition he had certain
further points to make. First, the
parties appear to be agreed that, having regard to the terms of the
Shareholders' Agreement, the definition of "the Buy-Out Valuation" required a
single figure. What was in dispute was
the valuation. The contractual machinery
was quite capable of working with a valuation figure, as appeared from what was
said by the Lord Ordinary in paragraph [55] of his opinion. The justification for that view was simple, a
single figure was needed for the calculation required by the terms of the
contract. It was for that reason that
the valuation report had been produced.
The pursuer appreciated that if he was to exercise his option, there was
a need for that preliminary step to be taken.
To that end, the parties had agreed upon the identity of the
valuer. They had also agreed upon a
figure for the Buy-Out Shares Price.
Unfortunately the report had not been produced by giving to Mr. Rhind
the Shareholders' Agreement and its Schedules, or even instructing him as to
their contents. That surprising
circumstance had been the subject of comment by the Lord Ordinary in
paragraph [55] of his opinion. What
had been sent to the valuer was the document No. 44/20 of process, the instructions
drafted by Mr Galbraith. Although
an agreed basis for the valuation was never achieved, the parties, particularly
the pursuer's advisers had endeavoured to achieve such a basis, as appeared
from Nos. 44/17 and 19 of process, dated 1 and 4 March
2004
respectively. While both parties
anticipated that there would be an agreed remit to the valuer, that was never
achieved. The valuer had had put before
him the documentation already referred to, along with No. 44/22 of
process, and the letter of Messrs. Clark & Wallace, dated 5 March
2004, in which it was claimed that a valuation allowing any discount for
tenants rights was incorrect in law, so far as the defender was concerned.
[93] A
straightforward reading of the Rhind report in the light of the two possible
bases of valuation alluded to indicated that that report in fact contained two
valuations for the heritable properties:
(1) an open market value on the basis of vacant possession; (2) an open market value on the basis of
the tenancy. Thus, without knowledge of
the terms of the Shareholders' Agreement, there was nothing on the face of the
Rhind report to show that it contained a decision to adopt one basis of
valuation, as opposed to the other.
There was no suggestion in the report of any compromise of value, taking
into account the alternative bases of valuation. The only factor that could have enabled the report
to be interpreted as producing one figure was knowledge of the Shareholders'
Agreement which Mr Rhind did not have.
The outcome of the valuation was essentially a consequence of the
conflicting instructions given to him.
However, it might be possible for the court to take a view as to which
basis of valuation was required by the terms of the Shareholders Agreement, but
that did not resolve all difficulties, since the pursuer had contended that the
parties had agreed to be bound by a single valuation. It was evident that what had happened was
that the report had been produced by Mr Rhind on his interpretation of his
instructions, which was in accordance with the terms of the letter from Messrs.
Maclay, Murray and Spens, dated 8 March 2004 to him, No. 44/27 of
process; in other words, Mr Rhind had produced two values in one
valuation. These matter were the subject
of findings by the Lord Ordinary in paragraphs [55] and [56] of his
opinion. If it were relevant, it was
submitted that Mr Rhind had not considered that it was his task or intention to
indicate a preference for one basis of valuation over another. The foregoing points were relevant, since the
Court was entitled to examine the "factual matrix" of a contract. In this connection senior counsel relied upon
Investors Compensation Scheme Limited
v West Bromwich Building Society [1998] 1W.L.R.896, particularly the remarks of
Lord Hoffmann at pages 912-913.
[94] In relation to
the criticism of the Rhind valuation to the effect that the Mr Rhind had
acted as an arbiter, the submissions already made were adopted. In summary, the Rhind valuation was not "the
Buy-Out Valuation" in terms of the Shareholders' Agreement. There had been no breach of the terms of the
Shareholders' Agreement on the part of the defender that had brought that
about.
[95] Senior counsel
then moved on to consider the second main issue arising in the case, concerning
how the option in the Shareholders' Agreement was to be exercised. This issue embraced the question of whether
time was of the essence in relation to that Agreement. It was accepted by both parties that whether
or not time was of the essence could be implied from the facts and
circumstances of this particular contract, from its factual matrix and the
words used in it. It was also accepted
that the language of the contract could have dealt with that question
specifically, but did not. Some
significance might be found in the circumstances of the execution of the
Shareholders' Agreement described by the pursuer at page 9 of the transcript of
his evidence. Senior counsel accepted
that the main purpose of the Agreement had been to involve the defender as an
investor for the medium term.
Accordingly the Agreement contained provisions designed to "lock him in"
for a minimum period of five years and to enable the pursuer to buy out the
defender. It was important that that
latter provision applied to a single occasion.
The pursuer's evidence at pages 21-22 of the transcript showed that he
had desired recurring annual opportunities to effect a buy-out, but the Agreement
had not provided for that.
[96] It was proper
to characterise the position of the defender as that of an investor. One might ask the question what was the
return on his investment. The answer to
that was that rent was to be paid for the use of the land; also there was the
possibility that the defender would benefit from a share in the appreciation of
the value of the land up to the time of the Buy-Out. It was submitted that the intention of the
parties as demonstrated by the Shareholders' Agreement, was that it would
operate until 31 March 2004, on which date the Buy-Out option
could be exercised. The pursuer had
accepted that that date was crucial and that preparations for it had to be made
beforehand. The notice referred to in
Clause 21 of the Agreement was an expression of intention. The pursuer's argument, to the effect that
the Clause 21 notice was the exercise of the option, was erroneous.
[97] Furthermore,
the date of 31 March 2004 had been portrayed in Clause 10 of
the Agreement as a crucial date. The
language of Clause 10 referred to the effecting of the Buy-Out on that date,
not at any other time. Clause 21 itself
referred to the requisite notice being one "intimating his intention to effect
the Buy-Out". It was also of significance that the words of Clause 10 referred
to payment by way of telegraphic transfer of the Buy-Out Price. There was nothing in Clause 10 which
suggested that prior notice of an intention to effect a Buy-Out was necessary
to its exercise. Clause 21, in fact, had
very little part to play, save that it provided for a situation where no notice
had been given. The notice prevented
automatic termination. In this
connection, Stone v MacDonald 1979 S.C.363 was instructive. It
was held there that, on interpretation of the option created by the minute of
agreement in that case, notice of intention to exercise the option was not a
condition precedent for its exercise; the intimation of an intention to
exercise the option was the method selected for its exercise. Senior counsel accepted that, in many cases,
options were indeed exercised by the use of a notice procedure, followed by
completion.
[98] The pursuer's
counsel had founded upon the alleged risk to the pursuer if money were to have
been transferred on the Buy-Out Date, but there were other risks inherent in the
transaction. In particular, the defender
might find himself with shares of no value.
However, the contract ought not to be re-written for the parties. In this connection senior counsel relied on Aberfoyle Plantations Ltd. v Khaw Bian Cheng, particularly in the
opinion of Lord Jenkins at pages 124-127.
[99] It was Clause
10 and nothing else that created obligations in relation to the buy-out. Payment was not made by the pursuer;
accordingly no contract effecting the buy-out was made. In the pleadings and at the proof much
consideration was given to the pursuer's allegation that the Buy-Out was
incapable of being effected by the pursuer because of the defender's alleged
breach of contract. However, the
defender was not in breach of contract because there was no "Buy-Out
Valuation". The reality was that the
pursuer had had insufficient funds available to effect the Buy-Out. Senior counsel relied upon Sudbrook Trading Estate Ltd. v Eggleton
in this connection, particularly on the speech of Lord Diplock at page
476. In that case there was a contract,
the mechanism of which had failed.
However, in the present case there had been no contractual obligation
since the option had not been exercised in the appropriate way.
[100] The pursuer had
relied upon the reference in the definition of "the Buy-Out Shares Price" to
the balance sheet produced to 31 March 2004.
In reality, that definition was not a serious obstacle to the success of
the defender's argument. A balance sheet
could be produced in advance of that date, upon an agreed basis. What was important was not the balance sheet
itself, but the net asset value of the company; there was no need for the production of an
audited balance sheet, which might have taken some time. In all the circumstances, the Court should
conclude that time was of the essence of the contract. Before the Lord Ordinary, that issue had
not been disputed.
[101] Senior counsel
next dealt with the matter of appropriate remedies. Once again, he alluded to the details of the
remedies document to which we have already referred. In particular, he
considered in detail the position if the Rhind report was not to be treated as "the
Buy-Out Valuation", but that time was not of the essence of the contract. The question would then arise whether the ratio of Sudbrook Trading Estate Ltd v Eggleton
would apply. His position was that it
would not; this case was similar to Lonergan
v McCartney in that this contract did
not unambiguously point to an objective standard of valuation devoid of personal
considerations. He also relied on Gillatt v Sky Television Ltd. There
was a distinction between cases where the method of ascertaining the price was
an essential term and cases where the method of ascertainment was subsidiary
and non-essential. While it might be
that in the Shareholders' Agreement there was material to show that the
appropriate basis of valuation was open market value with vacant possession,
the selection of the basis of valuation had been left to the valuer. The position of the defender now was that the
contractual machinery had not been used.
Instead, there had been an unsuccessful attempt to innovate upon it and
give an agreed basis of valuation to the valuer. It had been contended by the counsel for the
pursuer that the parties were bound by a proper expression of "the Buy-Out
Valuation" even if the expert valuer had been left to determine the basis of
the valuation, something plainly beyond his expertise. But a consequence of that approach would be
that the Buy-Out Valuation would have been unpredictable. A perfect expert might select the vacant
possession value, but that was not inevitable.
What was contended for by the pursuer would amount to an innovation upon
the contract. As in Lonergan v McCartney,
insufficient had been agreed between the parties to the Shareholders' Agreement
to enable an appropriate valuation now to be obtained. Senior counsel for the pursuer had accepted
that the higher figure brought in the Rhind report might be selected, but that
would involve an attempt to re-write the contract, which ought to be resisted.
The Decision
[102] In the light of the acknowledged facts
and of the foregoing arguments, it appears to us that there are two crucial
areas of controversy which we must consider.
These are: (1) The proper
interpretation of the Shareholders' Agreement as regards the time of
performance on the exercise by the pursuer of the Buy-Out option created by
Clause 10 of the Agreement; and (2) Whether the Rhind report, dated 26 March 2004, can properly be regarded as "the
Buy-Out Valuation" for the purposes of the Shareholders' Agreement. These questions are crucial because there is
no doubt that the Buy-Out was not effected on the Buy-Out Date, 31 March 2004 by
the pursuer, if for no other reason, because payment to an appropriate extent
was not made by the pursuer on that date to the defender, or his nominees. So, if on a proper interpretation of the
contract the Buy-Out could have been effected only upon that date, the result
must be that the Buy-Out cannot now be effected at all and that no remedies can
be granted to the pursuer in the present proceedings. If, however, on a proper interpretation of
the contract, the Buy-Out can be effected subsequently to 31 March 2004, an appropriate remedy may be
available to the pursuer. Whether it
could, or not, would then depend, in the first instance, upon the issue of
whether the Rhind report can properly be regarded as "the Buy-Out Valuation"
for the purposes of the Shareholders' Agreement. If it can, then an appropriate remedy may be
granted to the pursuer. If it cannot,
there would open up a further question of whether the court could furnish means
whereby the Buy-Out Price could now be ascertained and the Buy-Out could be effected. We now turn then to consider these two
crucial questions.
The proper
interpretation of the Shareholders' Agreement as regards the time for
performance on the exercise of the buy-out option
[103] In Rodger
(Builders) Ltd v Fawdry and Others,
at page 492 the court was concerned with the significance of the failure of a
purchaser of heritable property to pay a balance of the purchase price on the
date of entry. At page 492, the Lord
Ordinary, Lord Sorn, said this:
"The law which governs the question
at issue was not to any material extent in dispute and may be shortly
stated. In a contract for the sale of
heritage, where it is stipulated that the price is to be paid on a particular
date, payment of the price on the appointed date is not, in general, an
essential condition of the contract, and failure to pay on that date does not
entitle the seller to rescind. But
payment of the price by a fixed date may be made an essential condition of such
contract. If there is unnecessary or
unjustifiable delay on the part of the purchaser in paying the price, the
seller may limit a time within which payment must be made, and, provided the
time limited is a reasonable one in the circumstances, failure to pay within
that time will be treated as breach of an essential condition entitling the
seller to rescind."
That part of the Lord Ordinary's judgment was not challenged
on appeal, nor, in the opinion of the Second Division expressed at page 498,
could it have been. The presumption that
time was not of the essence for the performance of contractual obligations was
considered in Visionhire Limited v Britel Fund Trustees Ltd at page 886. That case was concerned with certain rent
review provisions in a lease, in a situation where the landlords had failed to
make application within the timetable set out in the rent review clause for the
appointment of an arbiter. The Court
decided that the general rule of construction in Scots Law, as in English Law,
was that contractual stipulations as to time, including the particular instance
of rent review clauses in commercial long leases, were not intended to be
strictly enforced unless the wording of the contract indicated expressly, or by
necessary implication, that this was intended by the parties. The nature of the rule was described by Lord
President Hope, as he then was, at page 888 in this way;
"It seems to me, therefore, that
there is no essential difference between the positions adopted in the two
countries and that the rules which according to English law are stated as
presumptions are really to be seen as rules of construction which take their
place along with various other rules in order to ascertain what the intention
of the parties truly was in order that the contract which they had made should
be enforced."
Accordingly, in any particular case, such as this, the
question must be whether the particular wording of the contract under
consideration, either expressly or by necessary implication, would displace the
rule of construction just referred to. It is upon that enquiry that we now enter. In doing so, we do, of course, follow the
principles of the modern construction of contractual documents described by
Lord Hoffman in Investors Compensation
Scheme Ltd v West Bromwich Building
Society at pages 912 to 913.
[104] Perhaps the
appropriate starting point for our enquiry is Clause 21 of the Shareholders'
Agreement, which deals with its duration and winding-up. We regard these words as of importance in the
context:
"If Mr Simmers has not served on
Mr Innes a notice intimating his intention to effect the Buy-Out prior to
the Buy-Out Date, then this Agreement shall terminate automatically without the
requirement of any party to serve notice."
Two points seem to us to emerge from this provision. First, the parties contemplated that Mr
Simmers might serve a notice intimating his intention to effect the Buy-Out at
any time prior to the 31 March 2004, that is to say at any time up to and
including 30 March 2004. If that is
what was contemplated by the parties, it seems to us to be inevitable that the Buy-Out
transaction could not be completed on 31 March 2004, the Buy-Out Date. The second point of importance is that, in
the absence of such a notice served by the pursuer, the Agreement was provided
to terminate automatically. If such a
notice had been timeously served, as happened here on 11
February 2004,
we read this clause as providing that the Shareholders' Agreement would not
terminate automatically on 31 March 2004.
The implication is that the Agreement would survive beyond 31 March
2004, as we
would see it, for the purpose of enabling the Buy-Out transaction to be completed. So we regard the terms of Clause 21 as
confirming the operation of the rule of interpretation to which we have
referred in relation to the Agreement.
It appears to us further that the notice to be given by the pursuer in
terms of Clause 21 must be seen as an act having legal consequences, not
merely an indication of intention; the consequence being that, by service of
the notice, the pursuer has exercised the option available to him and thus
prevented the automatic termination of the Agreement. We refer to this last point again at
paragraph [109] below.
[105] Turning to Clause 1(1)
of the Agreement, that part of it which furnishes definitions for use
throughout, we consider that certain provisions are of importance in the
present context as confirming the application of the rule of interpretation to
which we have referred to the Shareholders' Agreement. In particular, the definition of "the Buy-Out
Valuation" is of this nature. It is
defined as the valuation carried out by the agreed valuer "on or within
one month prior to the Buy-Out Date".
Thus the parties to the Agreement, in this provision, have contemplated
that the valuation might be undertaken as late as the Buy-Out Date itself. Plainly, if that were done, it would be quite
impossible in practical terms for the buy-out transaction to be completed on
the same date. Settlement of the transaction
must therefore be supposed to have been contemplated as taking place at some
later date.
[106] A further
definition of importance is that of "the Buy-Out Shares Price". It is contemplated in this quite elaborate
definition that an element in this price will be half of any increase in the
net asset value of the company "as disclosed by the balance sheet produced to 31 March
2004". We cannot accept the contention advanced on
behalf of the defender that such a balance sheet could, in any meaningful way,
be produced prior to 31 March 2004.
Indeed, having regard to the fact that the Shareholders' Agreement
contemplates that the company will have auditors of its accounts, as appears
from Clause 20(2)(e), we consider that it would be quite impracticable for
an audited balance sheet to be produced up to and including 31 March
2004 until
some material time after that date. Yet
the contents of that balance sheet are agreed to form an element in the
calculation of "the Buy-Out Shares Price".
Plainly if that element could not be calculated until after 31 March
2004, "the
Buy-Out Shares Price" could not be paid on that date.
[107] In the context
of this part of our considerations, it is necessary also to consider the
implications of Clause 10 of the Shareholders' Agreement. It opens with the words "On the Buy-Out Date,
Mr Simmers shall be entitled to effect the Buy-Out ...". It was argued that these words demonstrated
that the buy-out option could be exercised only on that date. We do not accept that contention. The words are, we think, reasonably capable
of being read as referring, rather, to an entitlement arising on that day. In any event, in cases such as Rodger (Builders) Ltd v Fawdry and Others and in many contracts
for the purchase of heritable property, it is provided that payment is to be
made on a specified date. Yet that form
of words has not of itself given rise to the inference that time is of the
essence in relation to that matter. We
do not see why any different approach should be taken to the words quoted in Clause 10
here. In the same clause, there is a
reference to "payment by way of telegraphic transfer of the Buy-Out
Price". These words gave rise to an
argument that time was of the essence of the transaction. We cannot accept that contention. It is far from clear to us as to what exactly
is meant by "telegraphic transfer", particularly in a context in which no
indication is given as to the identity of the recipient of such a transfer, or
the means by which it was intended to be effected.
[108] No doubt, in
recognition of the practical difficulties of completion of the buy-out
transaction which we have mentioned, it was argued for the defender that, while
the "Buy-Out Price" had to be paid on 31 March 2004, the requisite
"transfers, conveyances, deeds and documents" referred to in Clause 10 did
not require to be delivered then in exchange for the price. We find such an interpretation of the
Shareholders' Agreement implausible.
Quite apart from the fact that these documents are provided in Clause 10
to be executed by the defender in exchange for the payment of the price, we
consider that it is not to be reasonably supposed that a party to a contract
such as this would hold himself bound to pay the substantial price involved in
the transactions in contemplation other than in exchange for the documentary
material that would constitute him as owner in the full sense of the assets
being acquired. If he were to do so, he
would expose himself to the risk that his payment might be lost without return,
in the event of the defender's sequestration, or other misadventure.
[109] Looking at the
form of the Shareholders' Agreement more generally, it appears to us that the
service of the notice contemplated in Clause 21 amounts, in effect, to the
exercise of the pursuer's option, which act created bilateral obligations, which,
no doubt, were intended to be performed on 31 March 2004, if practicable,
but otherwise might be performed thereafter.
That view of the contract was rejected by counsel for the defender, who
argued that it was the performance of the obligations specified in Clause 10
that amounted to the exercise of the option.
The corollary of that was that counsel appeared to us to be unable to
give a meaningful explanation as to the purpose of the notice to be served in
terms of Clause 21. For our part,
we see a broad similarity between the features of the Shareholders' Agreement here
and the contract under consideration in Stone
v Macdonald, where it was held that
the intimation of an intention to exercise the option in question was in fact
the method selected for the exercise of the option. Even if service of the notice were not to be
understood as the exercise of the option, we would, however, have reached the
same view on the question of whether time was of the essence for its exercise,
having regard to all the other factors previously mentioned.
[110] It is
appropriate that we should comment on the relevance of certain of the
authorities which were the subject of discussion in connection with this part
of the case. Aberfoyle Plantations Ltd v Khaw
Bian Cheng was relied upon by the defender, a case involving a purchase
which was made to be conditional upon the vendor obtaining renewal of certain
leases so as to be in a position to transfer them to the purchaser. It was specifically provided that, if for any
cause whatsoever, the vendor was unable to fulfil this condition, the agreement
should become null and void. Completion
was to take place on a specified date.
The Privy Council held that, on the true construction of the contract,
the condition had to be performed by the specified date. They took the view that until the condition
was fulfilled there was no contract of sale to be completed. We are of the view that that case is not of
assistance in the present context, since it can be distinguished on a number
bases. Perhaps most important in the
present case is that, while Clause 21 of the Shareholders' Agreement
created a condition for the exercise of the Buy-Out, in fact the pursuer
purified that condition timeously by giving notice under that clause to the
defender on 11 February 2004.
Thereafter, there emerged, on our approach, bilateral obligations upon
the parties to undertake the Buy-Out transaction. Likewise we do not consider that T. Boland & Co Ltd v Dundas's Trustees is of assistance. The contract under consideration in that case
was subject to a suspensive condition, which was never purified. There is no such feature in the present
case. Ford Sellar Morris Properties plc v E. W. Hutchison Ltd was also relied upon by the defender. Once again the contract involved there was
conditional upon certain consents being obtained by a stipulated dated, failing
which either party would be entitled to resile without penalty. The consents were not obtained by the stipulated
date. It was held that where a date had
been fixed and made of the essence of the contract that date had to be adhered
to. We do not consider that the factual
circumstances of that case are comparable with those of the present. It was shown that in that case adherence to
the stipulated date was material and that time was of the essence of the
contract. That contrasts with the
position in this case. In Ahmed v Akhtar, a case concerned with the sale of a business and the
goodwill of shop premises, of which the sellers were tenants, the issue was
whether time was of the essence of the contract. For reasons arising from the particular
circumstances of the case, it was held that time was of the essence. Because those circumstances differ from those
of the present case we do not consider that the case is of assistance to
us. Finally, Charisma Properties Ltd v Grayling
(1994) Ltd was relied upon by the defender.
We consider that the decision in that case depended wholly upon the
terms of the particular contract which was before the court for consideration,
the terms of which do not resemble those of the Shareholders' Agreement. Accordingly, we do not consider that that
decision is of assistance to us. Whether
time is, or is not, of the essence of a contract must depend upon the terms of the
particular contract, as interpreted by the court according to the settled rules
of interpretation. Bearing that in mind,
we conclude that time was not of the essence of that part of the Shareholders'
Agreement relating to the performance of the obligations of the parties in the
completion of the buy-out transaction, the pursuer having given timeous notice
to the defender in terms of Clause 21 of his intention to effect the Buy-Out.
Whether the Rhind
Report can properly be regarded as "the Buy-Out Valuation" for the purposes of
the Shareholders' Agreement
[111] In our opinion,
the broad question of whether the Rhind report can properly be regarded as "the
Buy-Out Valuation" for the purposes of the Shareholders' Agreement necessarily
raises three more particular issues.
These are: (i) what was the
correct basis upon which "the Buy-Out Valuation" had to be made;
(ii) whether the Rhind report sets forth a valuation undertaken on that
basis; and (iii) whether, if the Rhind report does contain a valuation undertaken
on a correct basis, it is vitiated by virtue of the fact that it contains a
valuation made upon another basis. These
questions we shall now address.
[112] Having regard
to the fact that "the Buy-Out Valuation" is a concept meaningful only in the
context of the Shareholders' Agreement, and is a creature of it, we consider
that it is necessary to turn to that Agreement in order to obtain elucidation
as to the nature of such a valuation.
That valuation must be a valuation conducted in accordance with the
contractual intention of the parties, as demonstrated by the terms of the
Shareholders' Agreement. It is
immediately evident from the definition of "the Buy-Out Valuation" that that
definition itself does not provide elucidation as to the nature of the
valuation intended. Accordingly, it is
necessary to examine such parts of the Shareholders' Agreement as may bear upon
that issue, with a view to inferring what was in fact intended by the
parties. The starting point of the
examination, in our view, must be the definition of "the Buy-Out Properties
Price". It can be seen from that
definition that that price is to be the higher of:
"(i) the Base Properties Price;
or (ii) the aggregate of the Base Properties Price and an amount equal to
the figure brought out by the following formula:
1/2 x (Buy-Out Valuation - £2.1 million) ...".
The "Base Properties Price" is, of course, specified as being
£2.1 million. That figure is
derived from the valuation that was conducted by Mr Rhind, who was
responsible for the valuation dated 22 December
1998, to be
found in the Appendix to the Shareholders' Agreement. That valuation was conducted on the basis
that it was to be the "current open market value of the above holdings with
vacant possession, as between a willing buyer and willing seller as at today's
date". Having regard to the provisions
particularly of Clauses 5, 6 and 7 of the Shareholders' Agreement, it was
inevitable that the Base Properties Price should be based upon the value of the
properties with vacant possession, since Clauses 5, 6 and 7 contemplated a
sequence of events involving the acquisition of the Buy-Out Properties by the
defender, or his nominees, for the Base Properties Price, then the subsequent
formation of the limited partnership referred to in Clause 6, and
thereafter the leasing by the defender of the Buy-Out Properties to the limited
partnership. Plainly in order to achieve
such an arrangement, vacant possession of the properties must have been
available to the defender.
[113] Reverting now
to the contractual definition of "the Buy-Out Properties Price", and looking at
the purpose enshrined in that definition, that is to say an equal sharing of
any augmentation in value of the Buy-Out Properties, over the period of
operation of the Shareholders' Agreement, in our opinion, that purpose could be
achieved only if the Buy-Out Valuation were to be conducted upon the same basis
as was the ascertainment of the Base Properties Price at the commencement of
the operation of the Agreement. Accordingly
we infer from the contractual provisions to which we have referred that the
contractual intention of the parties, as expressed in the Shareholders'
Agreement, was that the Buy-Out Valuation should be conducted upon the basis of
open market value of the properties with vacant possession. If the Buy-Out Valuation were to be conducted
on the basis of a tenanted value, the purpose enshrined in the definition of
"the Buy-Out Properties Price" would plainly be frustrated. We consider that that cannot have been
intended by the parties.
[114] We now turn to
consider the second particular question posed, of whether the Rhind report sets
forth a valuation undertaken on the basis of what we have held to be one that
reflects the contractual intention of the parties. In considering the Rhind report it is
appropriate to look at the circumstances in which it was prepared. To say the least, it is evident that those
circumstances involved a substantial level of confusion. Following upon the service of the notice by the
pursuer on the defender, in terms of Clause 21 of the Shareholders'
Agreement, dated 11 February 2004, and the agreement of the parties upon a
valuer, Messrs. Maclay Murray & Spens, on behalf of the pursuer,
proposed a remit, to be found in No. 44/17 of process, that the properties
should be valued "subject to a lease in favour of The Firm of Scotpigs &
Co." That remit was in fact sent to
Mr Rhind, as appears from Nos. 44/19 and 20 of process, dated 4 March
2004. However, that position was not accepted by Messrs.
Clark & Wallace, on behalf of the defender, who wrote to Mr Rhind on 5 March
2004
contending that the valuation was to be on a vacant possession basis, any
valuation allowing discount for tenants' rights being incorrect in law. That position was stated to Mr Rhind
himself by letter dated 5 March 2004, No. 44/25 of process. On 8 March 2004, Messrs. Maclay Murray & Spens
for the pursuer wrote to Messrs. Clark & Wallace for the defender
reiterating their position that the valuation had to take account of the
ongoing tenancy. The writer continued:
"In any event, the priority is at
this stage to move matters forward and the only sensible way to do so would
seem to be to have the Valuation carried out on alternative bases as instructed
by us and by you. If necessary, the
issue of basis of Valuation can then be referred to the court for resolution."
That document is No. 44/26 of process. At the same time the same view was
communicated to Mr Rhind in No. 44/27 of process, suggesting a valuation
both on the basis of the pursuer's original remit and also on a vacant
possession basis. However, that position
was modified in the communication from Messrs. Maclay Murray and Spens to
Mr Rhind, dated 12 March 2004, No. 44/28 of process in which the writer said:
"I have discussed the issue of
Valuation with Senior Counsel and he has confirmed that rather than providing
alternative Valuations, you should proceed to provide one Valuation as
stipulated in the Shareholders' Agreement, taking into account all factors. Clearly, the view expressed by Clark &
Wallace that the Valuation must be on the basis of vacant possession would have
to be taken into account, but equally the reality of the existing Tenancy (subject
to the uncertainty of the Land Court proceedings), would have to be taken
into account."
[115] Against that very
confused and unsatisfactory background, Mr Rhind undertook the unenviable
task of proceeding to compile the valuation report No. 44/34 of
process. Understandably, he did not
attempt to follow the impossible request set forth in No. 44/28 of process but,
having considered the characteristics of the properties involved, at
page 9 of his report formulated a valuation on a vacant possession basis,
arriving at the figure of £3.705 million.
Thereafter, as can be seen from page 10 of his report, he applied a
discount of 45% to that figure arriving at a separate figure for value, subject
to the lease in favour of the firm of Scotpigs & Co, of
£2.038 million. Thus, despite the
difficulties which he faced, Mr Rhind did in fact value the properties
involved in such a way that the basis of his valuation coincided with the basis
of valuation which, as we have held, was intended by the parties to the
Shareholders' Agreement.
[116] During the
course of argument before us, it was contended on behalf of the defender that
the Rhind Report would be open to criticism if in fact Mr Rhind had
constituted himself as an arbiter and resolved legal issues. It may well be that that is what he was
invited to do by Messrs. Maclay Murray & Spens in their communication
to him of 12 March 2004, No. 44/28 of process. However, in our opinion, and as the Lord
Ordinary found after hearing evidence, it is quite clear that he declined to
undertake such an impossible exercise. He
did not produce a single valuation taking into account all of the factors
referred to in that document. By
contrast, as we read his valuation, he assessed the value of the properties on
a vacant possession basis and subsequently gave a value upon the assumption
that they were to be valued as subject to the lease in favour of the firm of
Scotpigs & Co. In our opinion,
having taken that approach, there is no question of Mr Rhind having acted
as an arbiter and having resolved legal issues.
Accordingly the criticisms of his report, based upon the assumption that
he had done so, disappear. It is perhaps
appropriate to say at this stage that we do not find that anything in the
decision in Sweeney v Sweeney is helpful in the context of the
present case. It was concerned with the
issue of value of matrimonial property for the purposes of the Family Law (Scotland) Act 1985, sections 8, 9 and
10.
[117] During the
course of argument before us reliance was placed on Jones and Others v Sherwood
Computer Services plc, in which it was held that, where parties had agreed
to be bound by the report of an expert, the report, whether or not it contained
reasons for the conclusions in it, could not be challenged in the courts on the
ground that mistakes had been made in its preparation unless it could be shown
that the expert had departed from the instructions given to him in a material
respect. In considering the significance
of that case, it is necessary to have regard to the circumstances here. Mr Rhind, prior to his completion of his
valuation report, did not receive any agreed instructions from parties. As we have narrated, he was assailed with
conflicting and, indeed, varying instructions.
At no time did he have the benefit of the parties' agreement as to the
basis of valuation which he should adopt.
However, as we have held, in following the course which he did, in the
difficult situation in which he found himself, he did compile a valuation on
the basis which the Shareholders' Agreement required. In these circumstances, no question arises of
his having departed from instructions. In
the Shareholders' Agreement, the parties had agreed to be bound by the Buy-Out
Valuation which, as we have held, required to be undertaken on an open market
vacant possession basis. Mr Rhind
formulated such a valuation. It is a
consequence of that and of the terms of the Shareholders' Agreement that, as we
see it, the parties are bound by the outcome.
Thus we do not consider that the principle enunciated in Jones and Others v Sherwood Computer Services plc has any application to the
circumstances of this case. Against this
background, the fact that Mr Rhind did not see the terms of the
Shareholders' Agreement before preparing his valuation report, though perhaps
surprising, does not appear to us to be of importance, provided that the
valuation which he prepared was in fact in accordance with the requirements of
that agreement, as we have held that it was.
For similar reasons we do not consider that Veba Oil Supply and Trading GmbH v Petrotrade Inc. is of assistance.
There is no question here of Mr Rhind having departed from agreed
instructions. The only agreed criterion
by which his valuation must be tested is that which emerges from consideration
of the terms of the Shareholders' Agreement.
[118] We turn next to
consider the third question that must be addressed, whether the valuation
contained in the Rhind report on an open market vacant possession basis is
vitiated by virtue of the fact that, in the report, it is associated with a
valuation on another basis, that is to say that of value subject to a lease in
favour of the firm of Scotpigs & Co.
In our opinion, the appearance of that valuation on that alternative
basis in the Rhind report does not vitiate in any way the valuation reached on
the former basis. In principle, we can
see no reason why, where the valuer has undertaken a valuation on the correct
contractual basis, the fact that he has proffered an alternative valuation on
another basis, in the face of the conflicting and confused instructions that he
received, should undermine the validity of the former. Plainly, before the Lord Ordinary, and in
argument before us, much was made of the fact that the Shareholders' Agreement
refers to "the Buy-Out Valuation", which necessarily must consist in a
valuation containing a single figure. The
Rhind report, on our view of it, it contains two figures, one appearing at
page 9 being the vacant possession value, the other appearing at
page 10 being the tenanted value.
However, where it can be affirmed that one of these figures is the
valuation made on the correct contractual basis, the fact that the other also appears
in juxtaposition to it seems to us to be of no importance. We consider that the valuation produced on
the erroneous basis can simply be ignored.
If that is done, one is left with a single figure valuation upon the
contractually correct basis. No doubt
the fact that Mr Rhind proffered two valuations on different bases is the
unsurprising consequence of his having been instructed by the parties in the
manner that he was. Plainly he could not
provide a valuation upon the basis suggested in Messrs. Maclay Murray
& Spens's communication of 12 March 2004, which would indeed have
required him to adjudicate upon matters of law, some of which were subject to
the proceedings in the Scottish Land Court and would thus have resulted in his
assuming the role of an arbiter and resolving a legal dispute. Faced with this difficult situation, in which
he might well have taken the view that he could not act, having regard to the
conflicting instructions, he chose the only other possible course of providing
valuations on the basis of the competing contentions. By doing so he has in fact enabled this court
to select the contractually appropriate valuation.
[119] The approach
which we have taken to the matter of Mr Rhind's valuation differs greatly
from that adopted by the Lord Ordinary.
He appears to have been persuaded that the difference of view between
the parties as to the basis of valuation made it impossible for a single figure
valuation to be produced. However, he
appears to have overlooked the possibility that, in the end, the difference of
view as to the basis of the valuation might require to be resolved by the court,
which, if it was provided with appropriate material, could select a single
figure from alternatives provided by the valuer. No doubt that position was reached as a
result of the submissions made to him following the proof. As regards that, we think it right to observe
that the manner in which this case was presented to us differed fundamentally
from that in which it was presented to the Lord Ordinary, not only on this
matter, but also, inter alia, on the
question, as we have already noted, of whether time was of the essence.
[120] For all these
reasons, we have reached the conclusion that the valuation made by
Mr Rhind on the basis of open market value with vacant possession is in no
way vitiated by its association in the same report with the other value formulated
on the alternative tenanted basis. We
therefore conclude that the Shareholders' Agreement can be operated as regards
the Buy-Out upon the appropriate basis of valuation using the appropriate value
identified in the Rhind Report. In other
words, "the Buy-Out Valuation" must be taken to be £3.705 million. It follows that there is no need for us to
consider the possibility of whether, following Sudbrook Trading Estate Ltd v Eggleton,
the Shareholders' Agreement, as regards the buy-out provisions, might be
operated on any other basis.
[121] Since none of
the pursuer's conclusions in this action, as they stand, enable us to pronounce
a decree in conformity with the decisions which we have reached in relation to
the controversial issues in this case, it will be necessary for appropriate
amendments to be made to the pursuer's conclusions. In that connection, we refer to paragraph
[90] hereof. To that end, following the
issue of this Opinion, the case will be put out in the By Order Roll to enable
arrangements for such amendments to be made.
