Scottish Court of Session Decisions

 

OUTER HOUSE, COURT OF SESSION   [2008] CSOH 124
CA55/07	OPINION OF LORD GLENNIE   in the cause   INVERESK PLC Pursuer;   against   TULLIS RUSSELL PAPERMAKERS LIMITED   Defenders:     ­­­­­­­­­­­­­­­­­________________

 

 

Pursuer: Cullen QC; Lake; McGrigors LLP

Defender: Johnston QC; Delibegovic-Broome; Dundas & Wilson CS LLP

 

 

 

29 August 2008

Introduction
[1] On 9 June 2005 the pursuers and the defenders entered into an Agreement for the Acquisition of the Gemini Brand and Related Assets (the "Asset Purchase Agreement"), in terms of which the pursuers sold to the defenders business assets, including intellectual property rights and customer information, relating to the manufacture of certain brands of paper. On the same date and as part of the same overall transaction, the parties entered into a Services Agreement, under which the pursuers undertook to continue to manufacture, sell and distribute specified products for the period of five months from the date of the sale, 9 June 2005, to 8 November 2005 or termination of the Services Agreement if earlier than that. The present action is concerned with a claim by the pursuers for £909,395 by way of Additional Consideration under the Asset Purchase Agreement. Claims by the defenders under the Services Agreement are the subject of a separate action, CA31/07, in which they are the pursuers. It will be necessary to refer to that action in greater detail later. For consistency, however, I shall throughout this Opinion refer to Inveresk and Tullis Russell as "pursuers" and "defenders" respectively (i.e. as they appear in this action), even though their roles are reversed in the other action.

[2] On 15 February 2008, having heard a debate at the instance of both parties, Lord Drummond Young repelled the defenders' pleas-in-law, sustained the pursuers' first and third pleas-in-law and granted decree against the defenders for payment of £909,395.00 with interest thereon, as craved in the first conclusion to the summons. The defenders reclaimed. In the course of reclaiming, they sought and were granted leave to amend. On 20 June 2008, the Inner House, without hearing full argument or issuing an Opinion, recalled the interlocutor of 15 February and remitted the whole matter back to the Commercial Court for a fresh debate on the amended pleadings. That debate took place on 15 and 16 July 2008.

[3] Two quite separate matters were argued before me. The first, which had formed the subject of the earlier debate, related to the proper interpretation of the contractual provisions for ascertaining the Additional Consideration payable by the defenders to the pursuers, and the application of those provisions to the events which had happened. The second related to the relevancy to the defenders' plea of retention added by amendment in the course of the reclaiming motion. I propose to deal with each matter separately.

 

Issue 1
The proper construction of the contractual provisions for ascertaining the Additional Consideration.

[4] In paras. [1]-[6] of his Opinion ([2008] CSOH 26), Lord Drummond Young summarised the contractual and factual background to this part of the dispute. I cannot improve upon that summary. I have incorporated para. [1] of it in my Introduction. I set out paras. [2]-[6] below. In so far as his summary of the contractual provisions involves some analysis of their proper construction - and I refer in particular to the last part of his para. 5] - it is apparent from what follows that I am in full agreement with that analysis.

"[2] The central provision of the Asset Purchase Agreement is clause 2.1, which is in the following terms:

"The Vendor [the pursuers] agrees to sell as beneficial owner and the Purchaser [the defenders] agrees to purchase the Owned Intellectual Property Rights, the Customer Information and the Related Assets free of all Encumbrances as at the close of business on the Completion Date for the Consideration".

The present proceedings relate to the amount of the Consideration that is due by the defenders as Purchaser to the pursuers as Vendor. "Consideration", as defined in the Agreement, is divided into two components, the Initial Consideration and the Additional Consideration. The Initial Consideration is £5,000,000; that sum has been paid. The Additional Consideration is defined (clause 1.1) as "the sum, if any, payable by the Purchaser in terms of Clause 5 and Part [3] of the Schedule up to a maximum of £2,000,000...". Clause 5 provides that, in relation to Additional Consideration, the provisions of Part 3 of the Schedule are to have effect.

[3] In Part 3 of the Schedule Additional Consideration is defined in paragraph 1.1; its amount is calculated according to a formula that depends on the production of certain paper products during the year from 8 November 2005 to 8 November 2006 (known as the "Earnout Period"), provided that such products were invoiced during the period from 8 November 2005 to 22 November 2006 (the "Invoice Period"). So far as relevant, that formula is as follows:

"Additional Consideration means

(a) in the event that the Tonnage is less than 15,000, nil

(b) in the event that the Tonnage is equal to or more than 15,000, but is less than 25,000, a sum equal to

a/1000 x £160,000

where a is the Tonnage in excess of 15,000, subject to a maximum of 10,000

(c) in the event that the Tonnage is equal to or more than 25,000, a sum equal to

(a/1000 x £160,000) plus (b/1000 x £80,000)

where

a is 10,000 and

b is that Tonnage in excess of 25,000, subject to a maximum of 5000".

Production of the relevant products is measured in terms of "Tonnage"; consequently measurement of Tonnage is crucial to determining the amount of Additional Consideration that is payable. Tonnage is defined in paragraph 1.1 as follows:

"Tonnage means the amount in tonnes of the Product for which the Purchaser receives orders during the Earnout Period and thereafter issues invoices in relation to such tonnage in the Invoice Period as provided for in the Consideration Accounts".

"Product" is defined as "Products (as defined in the Services Agreement) incorporating the Trade Marks". The result of the definition is to encompass paper products coated with solid bleached sulphate that incorporate two trade marks sold by the pursuers to the defenders, those relating to their Gemini and inverX brands.

[4] The definition of "Tonnage" is of some significance; it makes clear that the relevant Tonnage is an amount that is provided for in the Consideration Accounts. Paragraph 3 of Part 3 deals with the basis of preparation of the Consideration Accounts; paragraph 3.1 states:

"The Consideration Accounts shall specify the Tonnage and a calculation of the Additional Consideration".

Paragraph 4 of Part 3 then deals with the finalization of the draft Consideration Accounts. Paragraph 4.1 provides:

"The Purchaser shall prepare and serve on the Vendor within 5 Business Days of 1 November 2006 a draft of the Consideration Accounts (draft Consideration Accounts)".

Thus it is the Purchaser (the defenders) who is responsible for providing the initial draft of the Consideration Accounts. That is understandable, because the Purchaser will have control of the books and financial records that will necessarily form the basis for those Accounts. The Vendor, however, is given power to challenge the draft Consideration Accounts in either of two ways. This is dealt with in paragraph 4.2, which provides as follows:

"The Vendor may, within the period 10 Business Days after service of draft Consideration Accounts on the Vendor in accordance with paragraph 4.1 (Review Period):

(a) notify the Purchaser in writing of any adjustments they consider need to be made to the draft Consideration Accounts (together with the reasons for such adjustments); or

(b) elect that the Purchaser's Accountants carry out a Tonnage Audit in accordance with paragraph 5 of this Schedule".

Thus the Vendor, if it decides to challenge the draft Consideration Accounts, may either put forward its own adjustments or elect for a Tonnage Audit. If neither of these procedures is initiated by the Vendor during the Review Period of 10 business days, the result is that the draft Consideration Accounts, including the Tonnage and Additional consideration specified therein, become final and binding. This is provided for in paragraph 4.3, which is in the following terms:

"If:

(a) the Vendor notifies the Purchaser during the Review Period that no adjustment needs to be made to the draft Consideration Accounts; or

(b) the Vendor notifies the Purchaser during the Review Period that it does not wish to elect that a Tonnage Audit be undertaken;

(c) the Vendor does not notify the Purchaser during the Review Period of any proposed adjustment to the draft Consideration Accounts,

the draft Consideration Accounts, Tonnage and Additional Consideration specified in it shall be the Consideration Accounts, Tonnage and Additional Consideration for all purposes of this Agreement".

[5] If the Vendor does notify adjustments during the Review Period, paragraph 4.4 deals with the consequences; either the parties can reach agreement as to the necessary adjustments, in which case that agreement is binding for all purposes, or the parties proceed to a Tonnage Audit under paragraph 5. This is dealt with in paragraph 4.4, which provides as follows:

"If the Vendor notifies the Purchaser during the Review Period that certain adjustments need to be made and:

(a) the Purchaser and the Vendor agree, in writing, on the adjustments to be made to the draft Consideration Accounts and/or Tonnage, and/or Additional Consideration they shall jointly incorporate such adjustments into the draft Consideration Accounts and the draft Consideration Accounts as so adjusted and the Tonnage and Additional Consideration specified in it shall be the Consideration Accounts and the Tonnage for all purposes of this Agreement; or

(b) if the Vendor and the Purchaser are unable to so agree within 5 Business Days then paragraph 5 of this part 3 of the Schedule shall apply".

It is clear from this provision that, if the parties are able to reach agreement, a Tonnage Audit will not be required. If it is required, paragraph 5 specifies how it is to be carried out. Paragraph 5.1 provides as follows:

"Within 14 Business Days from [the] date that the Vendor notifies the Purchaser that it requires a Tonnage Audit, the Purchaser shall procure:

(a) that the Purchaser's Accountants carry out the Tonnage Audit to confirm and verify the Tonnage; and

(b) deliver to the Vendor the Tonnage Audit Statement".

Paragraph 5.2 provides that the Purchaser's Accountants are to act as experts and not as arbitrators, and that any matter referred to them shall, in the absence of manifest error or fraud, be final and binding in all respects on the parties. Paragraph 5.3 provides for the sharing of the fees and expenses of the Purchaser's Accountants and any professional fees incurred by them between the parties. Paragraph 5.4 provides that within 5 Business Days of receipt by the Vendor of the Tonnage Audit Statement the parties shall jointly incorporate the Tonnage determined therein into the draft Consideration Accounts. According to the wording of paragraph 5.1, the function of a Tonnage Audit is to "confirm and verify" the Tonnage. The Tonnage is defined in paragraph 1.1 as the amount of Product in tonnes, subject to certain conditions, "as provided for in the Consideration Accounts"; thus what is intended is that the Purchaser's Accountants should examine the draft Consideration Accounts to discover whether the Tonnage of Product stated there is correct. This point is of some importance because it confirms the essentially limited function of a Tonnage Audit; a Tonnage Audit is not intended to fix the price payable by way of Additional Consideration but to determine whether the calculation of Additional Consideration by the Purchaser in the draft Consideration Accounts is correct. Finally, paragraph 2.1 provides that the Purchaser shall pay to the Vendor the Additional Consideration on the Payment Date. The Payment Date is defined in paragraphs 4.5 and 5.4; it is, in summary, the date when the Consideration Accounts have been finally amended following the review procedures.

[6] The parties were not in dispute as to the events that occurred after the Earnout Period expired on 8 November 2006; indeed the parties' dealings are evidenced in correspondence which was lodged in process. The pursuers aver that on 8 November 2006 the defenders served draft Consideration Accounts on them. The Tonnage specified in those accounts was 20,688 tonnes. On 5 December 2006 the defenders served further, amended, Consideration Accounts on the pursuers; these were said to contain the defenders' "final Tonnage figure". The Tonnage specified in these accounts was 20,683.72 tonnes. If that Tonnage figure is correct, the Additional Consideration payable by the defenders to the pursuers is £909,935; the calculation of that figure is a matter of agreement. Following the submission of the amended Consideration Accounts representatives of the pursuers attended at the defenders' premises to review their books and records. The result was that on 19 January 2007 the pursuers' solicitors, Addleshaw Goddard, wrote to the defenders' solicitors, Dundas & Wilson, to intimate adjustments that they considered were required to the draft Consideration Accounts. (The letter is in fact dated 11 December 2006, but it was a matter of agreement that this was an error and that it was received, and probably sent, on 19 January 2007). Thereafter the parties agreed to extend the period during which the defenders might respond to the pursuers' adjustments until 30 January 2007. No agreement was reached on the adjustments proposed by the pursuers. ..."

[5] In view of the way in which the argument has been presented to me, I should add here that on 30 January 2007, Dundas & Wilson wrote to Addleshaw Goddard to say that the defenders were unable to agree the adjustments proposed by the pursuers. In addition, they said, the defenders had ascertained that the Tonnage figures used to calculate the draft Consideration Accounts "incorrectly included tonnage that related to non-branded paper", their contention being that such paper did not fall within the relevant definitions in the Asset Purchase Agreement. They noted that they were currently preparing revised draft Consideration Accounts which would correct that error and which would give rise to a Tonnage figure of approximately £16,500 tonnes. They anticipated intimating the revised draft Consideration Accounts during the course of the following day "at which point Inveresk will be invited to agree the revised Draft". It was after receipt of this letter that, as Lord Drummond Young recites, at the end of para [6] of his Opinion:

"On 31 January 2007 Addleshaw Goddard wrote to Dundas & Wilson to state that the pursuers considered that no agreement could be reached and that consequently a Tonnage Audit would be required."

Dundas & Wilson did not in fact intimate a revised draft on 31 January 2007. On 2 February 2007, Addleshaw Goddard pointed this out, but went on to say that in terms of the Asset Purchase Agreement the defenders had no right to revise the draft Consideration Accounts. They sought confirmation that the Tonnage figures to be provided to the defenders' Accountants for the purpose of the Tonnage Audit would be those sent by the defenders under cover of their letter of 5 December 2006. Dundas & Wilson replied on the same day that they did not agree with that contention. Under cover of their letter of that date they sent the defenders' revised Tonnage figures showing a final tonnage of 16,051.71 tonnes. That Tonnage would, I am told, lead to a figure of £168,273.60 as the Additional Consideration payable by the defenders to the pursuers, rather than the £909,935 to which I have referred. On 5 February 2007 the defenders themselves wrote to Pricewaterhouse Coopers, their Accountants for the purpose of the Tonnage Audit, instructing them to carry out such an Audit. I am told that that Tonnage Audit has not in fact proceeded because of the present dispute which, on one view, is a dispute about the terms of reference for such an Audit. Resuming with para [6] of Lord Drummond Young's summary, it is sufficient to note that:

"Subsequently, by letter dated 14 March 2007, Addleshaw Goddard wrote to Dundas & Wilson to state that the pursuers no longer wished to insist on their proposed adjustments to the draft Consideration Accounts and that a Tonnage Audit would not be required."

[6] The pursuers contend that since they no longer insist on their proposed adjustments to the defenders' draft Consideration Accounts, the result is that the Consideration Accounts are to be taken as agreed, a Tonnage Audit is not required, and the figure stated in the defenders' draft Consideration Accounts submitted on 5 December 2006 is binding on the parties. Consequently, they say, they are entitled to payment of the Additional Consideration brought out in the draft Consideration Accounts, namely £909,935. They have raised the present action to recover that sum. They have tabled a plea to the relevancy of the defences and seek decree de plano.

[7] The pursuers have a further conclusion for declarator that, in calculating the Additional Consideration, certain categories of paper should be included in the Tonnage. This conclusion is only relevant in the event that the Tonnage Audit proceeds. On the basis of the pleadings as they then stood, Lord Drummond Young indicated that, had he not granted decree in terms of the first conclusion, he would have pronounced declarator in terms of that conclusion. Since then the pleadings have been developed and it is now agreed that if there were to be a Tonnage Audit the matters referred to in that conclusion would be for the expert to decide as part of that Audit rather than for the court. I need say no more about this issue.

[8] In their defences the defenders have tabled a plea to the relevancy of the pursuers' averments and further pleas to the effect that, because the parties have agreed to refer the subject matter of the action to expert determination, either the action should be dismissed because the court has no jurisdiction or the action should be sisted pending the outcome of that determination. In support of those pleas, it is averred that the expert determination provisions of the Asset Purchase Agreement have become operative because the parties have not agreed the Tonnage and neither party can unilaterally reverse that position. The Tonnage Audit, it is said, has not been completed owing to the pursuers' refusal to comply with their duties and obligations in that respect under the Asset Purchase Agreement. Until such time as the expert determines the Tonnage, the pursuers have no relevant claim for Additional Consideration.

 

Submissions
[9] For the defenders, Mr Johnston, Q.C. submitted that, in the absence of agreement between the parties, the amount of the Additional Consideration required to be determined by the Purchaser's Accountant rather than by the court. Accordingly the cause should be sisted until this had happened. Although Mr Johnston initially moved for dismissal, as his submissions developed it became clear that he was content with a sist. He formulated his submissions under reference to two questions: first, why should it be left to the expert to determine the Additional Consideration? and, second, what was the scope of the determination that the expert was being invited to make? As to the first question, he said that the defenders had advanced a tonnage figure on four occasions, namely on 8 November and 5 December 2006 (the initial and the amended draft Consideration Accounts), on 30 January 2007 (when they intimated in a letter that their earlier figures were erroneous and that they anticipated that the correct figure would be about 16,500 tonnes) and on 2 February 2007 (when they sent their revised draft Consideration Accounts). It was true that the parties had not adhered to the time limits in paragraph 4 of Part 3 of the Schedule but they had been extended by agreement and nothing turned on that. In particular, the parties had agreed to extend the period during which the defenders might respond to the pursuers' proposed adjustments until 30 January 2007, thereby substituting that date for the 5 day period mentioned in para. .4(b). It was a matter of admission on record that the parties had been unable to agree the adjustments by 30 January 2007. The measure of that disagreement, as shown by the correspondence, was between the pursuers' figure, set out in the letter of 19 January 2007, of 21,440 tonnes; and the defenders' figure, indicated provisionally in their letter of 30 January 2007, of about 16,500 tonnes. In those circumstances, paragraph 4.4(b) provided that the Tonnage Audit procedure applied. In any event, on 31 January 2007 the pursuers expressly invoked the Tonnage Audit provisions.

[10] Mr Johnston made it clear that, whatever had been argued before Lord Drummond Young when he had sought dismissal of the action, it was not now the defenders' position that the Tonnage Audit provisions were suspensive of the pursuers' entitlement to be paid the Additional Consideration. Their case was simply that there were two ways in which the amount of the Additional Consideration could be assessed: either the parties could agree it; or, if they did not reach agreement by a certain time, it could be established by the Purchaser's Accountant under the Tonnage Audit procedure. In the present case, the parties had been unable to agree and therefore the Tonnage Audit procedure applied. There remains a dispute between the parties as to the correct Tonnage. In those circumstances, there is no agreement; and the Tonnage Audit should proceed. Mr Johnston referred me to the decision of the Court of Appeal in Infiniteland Ltd v Artisan Contracting Ltd [2006] 1 B.C.L.C. 632 at paragraph [59] in support of the proposition that, where parties had agreed machinery for the ascertainment of the purchase price, they should be held to it. Mr Johnston accepted that if the parties were not now in dispute, it would be senseless to insist on the Tonnage Audit continuing. It was not his case that the Tonnage Audit procedure, once triggered, had to run to its conclusion, even if the parties thereafter reached agreement or one party withdrew its objection. But in this case the parties were not in agreement and never had been. The pursuers had only sought to withdraw their objections to the defenders' figures after they had become aware that the defenders were no longer adhering to those figures.

[11] Mr Johnston submitted that the situation in which the parties found themselves was not covered by the literal wording of the contract. It was necessary to construe the contract in a way which made commercial sense. The key point here was that before any alleged agreement was reached, the defenders had already advised the pursuers of the error in the draft Consideration Accounts which they had submitted and what the likely impact would be on the Additional Consideration. It was in light of this that the pursuers insisted that there should be a Tonnage Audit. The pursuers' argument that there was in fact no dispute to be referred to the expert would be correct if the defenders were bound by the figure which they put forward in the draft Consideration Accounts on 19 January 2007, and were unable to revise those draft Consideration Accounts. But there was no commercially convincing reason why they should not be able to revise them.

[12] This led Mr Johnston into the second part of his argument, namely what was the scope of the determination required of the expert. Paragraph 5.1(a) required the defenders' Accountants, acting as experts, to carry out the Tonnage Audit "to confirm and verify" the Tonnage. This meant what it said. It was incumbent upon the expert to confirm and verify the Tonnage, not simply to confirm and verify the Draft Consideration Accounts in light of the suggested adjustments. In other words, the experts had to form a view as to the actual Tonnage. The definition of Tonnage was:

"The amount in tonnes of the Product for which the Purchaser receives orders during the Earnout Period and thereafter issues invoices in relation to such tonnage in the Invoice Period as provided for in the Consideration Accounts."

It was important to note that this definition did not refer to the draft Consideration Accounts. In other words, the "Tonnage" was the amount in tonnes of the Product ordered and invoiced during the relevant periods which was to feature in the final Consideration Accounts and form the basis of the calculation of the Additional Consideration. The expert's role in carrying out the Tonnage Audit to "confirm and verify the Tonnage" is to confirm and verify the figure for tonnage which is to go into the final Consideration Accounts. There was no warrant for saying that the expert was limited to a consideration of the Draft Consideration Accounts put forward by the defenders and the adjustments notified by the pursuers. There are other references in the Schedule to the expert's role being to determine the Tonnage, which references were inconsistent with the more limited role suggested by the pursuers: see, for example, paragraphs 5.4 and 6. Addleshaw Goddard in their letter of 14 March 2007 had suggested that the mechanism of the Tonnage Audit was clearly intended for the benefit of the pursuers and on this basis had claimed to be entitled to withdraw their request for such an Audit; but this was wrong. Under reference to Manheath Ltd v H J Banks & Co Ltd 1996 S.C. 42, Mr Johnston submitted that the provision for a Tonnage Audit was not conceived solely in the interests of the petitioners, and in any event, since it was the only means of determining the price in the absence of agreement, it was not capable of being severed from the contract as a whole. The pursuers were not entitled simply to withdraw their requirement to a Tonnage Audit. The pursuers were seeking to rely on a technicality to require the defenders to pay an amount of Additional Consideration based upon tonnage figures which the defenders say are incorrect. On a sensible construction of the agreement, the defenders agreed to pay a sum calculated by reference to the actual tonnage agreed or determined by the expert.

[13] For the pursuers, Mr Lake submitted that there was little dispute as to the legal principles applicable to the task before the court. The parties were entitled to draft a contract which required disputes to be resolved in a particular manner. They had done so in this case. The question was whether there was any dispute capable of being referred to the expert under the Tonnage Audit provisions; and whether that dispute is a relevant defence to the claim for the Additional Consideration. The question was one of interpretation of the contract. There were no averments of any relevant factual matrix, with the exception that it was obviously relevant to have in mind that the Service Agreement was entered into at the same time as the Asset Purchase Agreement. He accepted that the court should attempt to reach a commercially sensible construction, but the agreement had to be construed in its context at the time it was made and not by reference to any subsequent events.

[14] Mr Lake advanced his submissions on the proper construction of Part 3 of the Schedule to the Asset Purchase Agreement under reference to two general questions: how was the Additional Consideration to be determined? and what was the scope of the provision for disputes to be referred to a Tonnage Audit? Dealing with the first question, Mr Lake submitted that the Consideration Accounts referred to in para 3.1 of Part 3 of the Schedule meant the final Consideration Accounts. In terms of para. 4.1, the purchaser was required to serve a draft of the Consideration Accounts. That draft had to contain all the items which were proposed to be in the final Consideration Accounts. The only variable was the Tonnage. The Additional Consideration was simply a multiple of that Tonnage (less 15,000 tonnes) and a price per tonne depending upon the amount of the Tonnage. Tonnage was a defined term, being the amount in tonnes ordered and invoiced within certain periods "as provided for in the Consideration Accounts". The parties had not simply agreed that the Additional Consideration should be calculated by reference to the actual tonnes received and invoiced during the relevant period. They had adopted a procedure whereby figures were put forward by the purchasers. Those figures formed the backbone of all that followed thereafter. The calculation was by reference to product ordered and invoiced after the Asset Purchase Agreement had been completed. All the information was therefore in the hands of the purchasers but the vendors needed to have a say in it. That was why the provisions of Part 3 provided for the Vendors to check on the figures put forward by the purchasers. In other words, the Tonnage was to be assessed by reference to the figures put forward by the defenders subject to a check by the pursuers. This was a workable method of determining how much should be paid by way of Additional Consideration. It was the method that the parties had chosen.

[15] Turning to the issue of what disputes were to be referred to the expert, Mr Lake pointed out that para. .4(a) of Part 3 of the Schedule showed that the question of the Tonnage Audit arose in the context of the parties trying to reach agreement on the Vendor's proposed adjustments to the draft Consideration Accounts. If they could not reach agreement, then, in terms of para. 4.4(b), the Tonnage Audit procedure set out in para. 5 applied. The Tonnage Audit was to take over when no agreement could be reached on that question ("if the Vendor and the Purchaser are unable to so agree within 5 Business Days ...). This defined the scope of the Tonnage Audit. The experts were to consider the draft Consideration Accounts put forward by the Purchasers and the adjustments thereto suggested by the Vendors and to look at those in the light of all relevant material to determine whether the proposed adjustments needed to be made. That was all that they were required to determine. Support for this was to be found in the terms of para. 5.2, which provided that decision of the Purchaser's Accountants, acting as experts, was binding "as to any matter referred to them for determination". Since their only role as experts was to carry out the Tonnage Audit, this provision pointed clearly to the intention that they were to determine specific matters of difference between the parties arising out of the draft Consideration Accounts and the proposed adjustments thereto. This was a dispute resolution procedure and the scope of the dispute was identified by the disagreement of the parties on these two documents. Under reference to cases such as Jones v Sherwood Computer Services Plc [1992] 1 W.L.R. 277, 287 and Norwich Union Life Insurance Society v P&O Property Holdings Ltd [1993] 1 E.G.L.R. 164 at 166C-E, Mr Lake submitted that the relevant question was: what had the parties agreed to remit to the expert? His answer was that they had agreed to remit only the question of whether the proposed adjustments should be made to the draft Consideration Accounts served in accordance with para. 4.1.

[16] Mr Lake referred me to the reasoning in paragraphs [15]-[20] of Lord Drummond Young's Opinion in this case. He submitted that that reasoning, although partly concerned with arguments that have not been insisted upon before me, applied to the defenders' present submissions and was sound. He emphasised that the pursuers sought to apply the terms agreed between the parties in para. 4. There had been no waiver or relaxation of the provisions governing the Tonnage Audit procedure. There was no dispute that the draft Consideration Accounts were served by the defenders on 19 January 2007. Although they were served later than the date provided for in para. 4.1, this was the subject of specific agreement between the parties to extend the time for that step to be taken. It was not indicative of any departure from the strict application of the provisions. The dispute which the defenders now sought to raise did not fall within the class of dispute to which the Tonnage Audit provisions applied. The defenders were in error in that they sought to conflate the careful provisions of para. 4 into a simple question of what was the actual tonnage, thereby ignoring the detailed contractual mechanisms agreed by the parties. Further, they were in error in seeking to treat the Tonnage Audit provisions as though they were some general arbitration clause or other dispute resolution procedure which, once invoked, entitled both parties to adjust or amend their claims and responses. That was not the function of the Tonnage Audit. There was no warrant for the submission that the defenders were entitled to submit revised draft Consideration Accounts in February 2007. There was no express term to that effect; nor was there in the defenders' pleadings any articulation of an implied term. An implied term was not sought to be justified on grounds of business efficacy or necessity or on the ground that the parties would unhesitatingly have agreed to it ("it goes without saying"). Further, any implied term to that effect would be contrary to the express mechanisms set out in para. 4 for finalising the draft Consideration Accounts. Para. 4 was concerned to set up a mechanism for the rapid determination of the Additional Consideration. There were very tight timescales. That was entirely inconsistent with the defenders' suggested interpretation. It was wrong to categorise the pursuers as seeking to rely upon a technicality. They were simply concerned to enforce the agreed contractual mechanism.

[17] In a short second speech for the defenders, Mr Johnston,  QC urged me to be cautious about placing too much emphasis upon the opinion given previously by Lord Drummond Young, given that the argument before me had been fuller and refocused. The whole question should be looked at afresh. He noted that the pursuers, in arguing that the scope of the dispute which could be placed for determination before the expert was limited to determining whether the proposed adjustments should be made to the draft Consideration Accounts, had relied upon the words "if [the parties] are unable to so agree...". This, he submitted, was placing upon a very small misplaced word ("so") more weight than it could properly bear. But if that word was the key, then it referred back not simply to the failure to agree adjustments to the draft Consideration Accounts but to the failure to agree in writing not only the adjustments but also the whole Tonnage and/or Additional Consideration. Further, in basing their submissions on the scope of the reference to the expert upon the provisions of para. 4.4(b), the pursuers did not give sufficient attention to the terms of para. 4.2(b), which was the other way in which a Tonnage Audit could be required. That applied where the Vendor had not intimated any proposed adjustments to the draft Consideration Accounts. What was the Tonnage Audit to involve in such a case? The expert could not determine whether proposed adjustments should be made since, ex hypothesi, there were none. In those circumstances, he would have to consider the draft Consideration Accounts served by the Purchaser and determine, in the light of all the relevant material, whether or not the Tonnage put forward therein was correct and what changes, if any, fell to be made. In other words, although the draft Consideration Accounts were the starting point, the expert would simply have to determine for himself the correct figure for Tonnage. This was quite inconsistent with the process being one whereby the expert simply determined whether the proposed adjustments to the draft Consideration Accounts were correct. Looking at the matter more broadly, Mr Johnston submitted that here, as a matter of fact, there was a dispute about something which went to the heart of the issues of liability, namely whether or not certain goods fell to be regarded as "Product" so as to form part of the relevant Tonnage. Ultimately the question was not, as the pursuers contended, whether the defenders had made out a defence to the claim but rather: had the pursuers made out their entitlement to the sum claimed by way of Additional Consideration? The defenders simply sought to enforce the agreed machinery for working out what was due. Either the Additional Consideration, via the draft Consideration Accounts, was agreed within a fixed time or it was to be fixed by the Tonnage Audit. By 30 January 2007, the extended date for the parties to agree, no agreement had been reached and the parties were in dispute. The Tonnage Audit was the only remaining way of resolving that dispute.

[18] In a second speech for the pursuers, Mr Cullen, QC adopted the submissions made by Mr Lake and added a few comments of his own in support. The mechanism in para. 4 was clear and precise. It was designed to lead swiftly to the ascertainment of the Additional Consideration payable by the purchaser. The Purchaser's draft of the Consideration Accounts had to be served within five business days of 1 November 2006. That was in fact a day before the end of the Earnout Period. Notwithstanding that, the Purchaser was not entitled to serve a revised draft of the Consideration Accounts. By agreement between the parties in this case a revised draft had been served, but the purchasers did not have to agree to that. The parties then are to be taken as having embarked upon the process of finalising the draft Consideration Accounts. The Vendor had a period of ten business days after service of the draft Consideration Accounts ("the Review Period") to notify the purchaser of any proposed adjustments or to elect for a Tonnage Audit. In the present case the Vendor notified the purchaser of proposed adjustments. Had the Vendor, within the Review Period, neither notified the purchaser of proposed adjustments nor elected for a Tonnage Audit, certain consequences would have happened automatically. In particular, in terms of para. 4.3(c), the draft Consideration Accounts would have become the (final) Consideration Accounts for all purposes. That result would have been binding on both the Vendor and the Purchaser. There would in that situation have been no scope for the Purchaser to put in a revised or corrected draft of the Consideration Accounts. The pursuers' argument amounts, therefore, to saying that once the door has been opened, by the Vendor giving notice of proposed adjustments, the Purchaser is then entitled to revise the draft Consideration Accounts which it has already served and which has started the process. This would be contradictory to the scheme of para. 4 which provides that, in the event that proposed adjustments are intimated, parties move straight into the Review Period in para. 4.4 and the discussions therein set out. Further, if the defenders' argument were correct, it would potentially open up a wholly circular process whereby the Vendor would have a further opportunity of proposing adjustments (to the revised draft Consideration Accounts), the Purchaser could then serve further revised draft Consideration Accounts, thereby giving the Vendor a yet further opportunity of proposing adjustments, and so on. The tight and precise timetable envisaged by para. 4 would therefore be overridden. On the proper construction of the Asset Purchase Agreement, the draft Consideration Accounts to be served within 5 business days of 1 November 2006 were to be the starting point of the process leading to the final Consideration Accounts. Only the Vendor could suggest adjustments or request a Tonnage Audit. There was nothing in the contract to support the implication of a term entitling the pursuers to put forward entirely new draft Consideration Accounts and insist that they be submitted to or considered in a Tonnage Audit. What was to be confirmed and verified in the Tonnage Audit was the figure for Tonnage in the draft Consideration Accounts put forward by the Purchaser in so far as put in issue by the Vendor's proposed adjustments.

 

Discussion
[19] It is plain to me that the arguments presented to me at debate have been substantially refocused from those that were presented before Lord Drummond Young. In particular, the defenders no longer assert that a Tonnage Audit is a pre-condition to liability, with the consequence (if that were correct) that the action is premature. I need not, therefore, revisit that area of the law. Nor do they simply insist that, once the matter has been referred to a Tonnage Audit, there it must remain regardless of whether or not there remains a substantive dispute. In so far as that was part of their case before Lord Drummond Young, it is not so now.

[20] The thrust of the defenders' argument was that, since no agreement was reached between the parties as to the adjustments to be made to the draft Consideration Accounts by 30 January 2007, that being the date which was agreed between the parties to replace the time stipulated in para. 4.4(b), then, in terms of paras. 4.4(b) and 5 of Part 3 of the Schedule, a Tonnage Audit required to be carried out. Mr Johnston did not deny that it would have been open to the pursuers, even after the Tonnage Audit had commenced, to withdraw their proposed adjustments and thereby agree the figures put forward by the defenders. If by so doing they removed any outstanding dispute, then, of course, there was no purpose in proceeding with the Tonnage Audit. His point was that by the time the pursuers purported to do this, the defenders had themselves revised or corrected their own draft Consideration Accounts. It was not open to the pursuers to accept something that was no longer being put forward. The parties were in dispute as to the correct tonnage and that matter required to be determined by a Tonnage Audit.

[21] In my opinion that submission, although attractively put, fails to pay proper regard to the terms of para. 4. In particular, it proceeds on the basis that it is always open, until agreement is reached or a Tonnage Audit has been carried out, to the Purchaser to revise the draft Consideration Accounts which it has served in accordance with para. 4.1; and runs counter to the mechanism set out in para. 4 for determining the Additional Consideration. The Additional Consideration is defined by reference to the Tonnage, i.e. the amount in tonnes for which the Purchaser receives orders and issues invoices within the Earnout and Invoice Periods "as provided for in the Consideration Accounts". Those Periods run from 8 November 2005 to 8 and 22 November 2006 respectively, i.e. for periods of about one year commencing with the date on which the Vendor ceases to supply services under the Service Agreement. Tonnage is the only variable. Once the Tonnage is ascertained, the calculation of the Additional Consideration is carried out according to a formula and gives rise to no difficulty. The vehicle for working this out is the Consideration Accounts. Para. 3 provides that the Consideration Accounts "shall specify the Tonnage and a calculation of the Additional Consideration." Para. 4 sets out the mechanism for arriving at a figure within the Consideration Accounts for the Tonnage. In terms of para. 4, that figure will either be agreed or determined by the Purchaser's Accountants acting as experts. The first stage (para. 4.1) is for the Purchaser to prepare and serve on the Vendor a draft of the Consideration Accounts. The initial burden is placed on the Purchaser because it is the Purchaser who has the relevant information. This is to be done within 5 business days of 1 November 2006, i.e. right at the end of the Earnout Period. The second stage is for the Vendor to respond to the draft Consideration Accounts served on it. It has two choices: either to notify the Purchaser in writing of any adjustments which should be made to the draft Consideration Accounts, together with reasons therefor; or to elect that a Tonnage Audit be carried out. It is important to note that the Vendor only has 10 business days to respond in one or other of these ways. If it fails to respond within that 10 business day period (the Review Period), the draft Consideration Accounts served by the Purchaser become final for all purposes under the Agreement: see para. 4.3(c). This shows how strictly the process is designed to be applied. There is no room, in the absence of agreement, for the Purchaser to submit a revised draft of the Consideration Accounts. Nor is there room, in the absence of agreement, for the Vendor to delay its response beyond the 10 business days since, as soon as that time has expired without a response from the Vendor, the draft served by the Purchaser in terms of para. 4.1 becomes final. Nothing that either party does after that time can alter that, except by agreement. That philosophy is carried through the whole of para. 4. If, before the end of the Review Period, the Vendor proposes adjustments to the draft Consideration Accounts, that starts time running for the purpose of para. 4.4 which deals with the position where the Vendor has, within the requisite period, notified the Purchaser of proposed adjustments to be made to the draft Consideration Accounts. The parties may reach agreement in writing on those adjustments proposed by the Vendor. If they do, then the draft Consideration Accounts as so adjusted will become the final Consideration Accounts for all purposes. But if they do not reach agreement within 5 business days, i.e. 5 business days after the Vendor has notified the Purchaser of the proposed adjustments, then para. 5 applies. That paragraph provides for the Tonnage Audit. Again, it seems to me to be clear that, absent agreement between the parties, there is simply no room for either party to revise the position that it has intimated to the other. The Purchaser cannot revise the draft Consideration Accounts. Nor can the Vendor propose further adjustments. The reason for this is that the mechanism proceeds in stages, so that the commencement of one stage is triggered by service of the relevant document, be it the draft Consideration Accounts or the note of proposed adjustments thereto. If it were open to either party to revise the document which it has served, the orderly, sequential and speedy process envisaged in para. 4 would be disrupted.

[22] The Tonnage Audit is the culmination of this process. That too is subject to a tight timescale laid down in para. 5. Para. 5.1 states that within 14 business days "from the date that the vendor notifies the purchaser that it requires a Tonnage Audit" the Purchaser shall procure that its Accountants carry out the Tonnage Audit. Since a Tonnage Audit can be required in one of two ways, either by the Vendor's election under para. 4.2 (b) or because no agreement is reached on the proposed adjustments under para. 4.4 (b), it seems to me that para. 5.1 must be read as including the inability to agree in terms of para. 4.4(b) as a trigger event. It may be that the inability to agree within the requisite period is to be treated as an implied notification by the vendor that a Tonnage Audit is required. Be that as it may, it is clear that the Tonnage Audit must take place within a defined period triggered by a previous stage having been reached. It is difficult to see how this can sit happily with the notion that is open to either party to revise their positions. It seems to me to be clear that the Tonnage Audit must take place on the basis of the draft Consideration Accounts served by the purchaser and the adjustments, if any, proposed by the vendor. To my mind it is clear also that those documents define the scope of the Tonnage Audit to be carried out. The experts are to "confirm and verify" the Tonnage; but that must mean the Tonnage put forward in the draft Consideration Accounts. If it were not otherwise clear, it seems to me that this construction is reinforced by the terms of para. 5.2, which provides that the Accountants carrying out the Tonnage Audit will act as experts and that "their decision as to any matter referred to them for determination" shall be final and binding with certain limited exceptions. The words, "as to any matter referred to them for determination" point very strongly to an understanding that the Tonnage Audit is not a general assessment of tonnage in the round but is constrained by the positions adopted by the parties in the draft Consideration Accounts and the proposed adjustments (if any).

[23] For these reasons, it seems to me that the defenders' arguments must fail. Having served their draft Consideration Accounts, the Purchasers are stuck with them. Those draft Consideration Accounts are the Consideration Accounts to which the Vendors, if they so wish, are entitled to propose adjustments. If no agreement is reached on those adjustments, then it is those draft Consideration Accounts and the proposed adjustments which are referred to the expert for his determination. If the Purchaser cannot revise its draft Consideration Accounts, it must be open to the Vendor to drop its objections (in the form of its proposed adjustments) and indicate that it is content to accept the position put forward in the draft Consideration Accounts served in accordance with para. 4.1. It is nothing to the point that the defenders themselves have now reconsidered their position. The mechanism agreed by the parties does not allow for that.

 

Conclusion
[24] I have therefore reached the same conclusion as Lord Drummond Young on this part of the debate for similar, though not identical, reasons, the differences simply reflecting the particular arguments which were presented to me. There is no basis for sisting the cause to allow for a Tonnage Audit to take place, because there is no relevant issue to be determined in any such Audit. It follows that the defence based upon those arguments is irrelevant.

 

Issue 2
The defenders' plea of retention
[25] The second part of the debate concerned the relevancy of the defenders' plea of retention added by amendment in the course of the reclaiming motion. For obvious reasons, this was not the subject of any discussion before Lord Drummond Young. The defenders' case is articulated in Answer 8, where they make the following averment:

"Esto any sums are due by the defenders to the pursuers (which is denied), they are entitled to retain them pending payment of their claims against the pursuers in terms of the Commercial Action CA31/07... Reference is made to the pleadings in that action. The transaction in which the defenders bought from the pursuers the Gemini brand of paper products and related business and assets involved two agreements, the Asset Purchase Agreement and the Services Agreement. In the Commercial Action CA31/07, the defenders seek certain sums by way of damages from the pursuers, on the basis of breaches of the Services Agreement and also breaches of certain post-sale obligations of the pursuers under the Acquisition Agreement. Separatim, the pursuers themselves, being in breach of their contractual obligations to the defenders, on the basis of mutuality of contractual obligations are not entitled to the payments sought in this action."

These averments are followed up by appropriate pleas-in-law. The pursuers contend that those averments are irrelevant and submit that the relative pleas-in-law should be repelled.

 

Action CA31/07
[26] Action CA31/07 is an action at the instance of the present defenders as pursuers and the present pursuers as defenders. As indicated earlier, I shall refer to the parties by reference to their position as defenders and pursuers in the present action. Action CA31/07 contains five conclusions for payment totalling in excess of £5 million. I was taken through the relevant Articles of Condescendence. With one exception, the claims all arise from alleged breaches of the Services Agreement rather than of the Asset Purchase Agreement. The exception is Article 12, where it is said that by their behaviour

"in handling the Customer Claims and, in particular, their letters to customers which were couched in confrontational and inflammatory language ..."

the present pursuers were in breach of clause 15.4 of the Asset Purchase Agreement as well as of clause 16.2(d) of the Services Agreement. The term "Customer Claims" is defined in the Services Agreement to mean "all claims, demands or proceedings by any customer relating to any stock, the Licensed Products or any other Product manufactured or supplied by [the pursuers] after the Effective Date but prior to the Completion Date", i.e. during the period of the Services Agreement. Clause 15.4 of the Asset Purchase Agreement falls under the heading "Vendor's Obligations after Completion" (Completion being completion of the sale and purchase of the Owned Intellectual Property Rights under that Agreement, occurring on the Completion Date, i.e. that date of that Agreement) and is in the following terms:

"The Vendor shall promptly notify the Purchaser of any claims against the Vendor brought by any third party in respect of any goods manufactured or provided by the Vendor derived from any of the Assets and the Vendor shall not without the Purchaser's prior written consent take any steps in relation to such claim which might reasonably be expected to damage the commercial interests of the Purchaser."

I was provided with an analysis of the other claims in that action but it is not necessary to go into this in greater detail at this stage.

[27] I have already referred in para. [1] above to the Services Agreement under which the pursuers undertook, in order to assist with the handover, to continue to manufacture, sell and distribute specified products for the defenders for the period of five months from the date of the sale. It is necessary to say a little more about it here. The Services Agreement came into effect on the Effective Date, 9 June 2005. It continued in effect until the Completion Date, defined as either 8 November 2005 or earlier termination. The services to be provided by the pursuers thereunder were set out in clause 2. The opening words of clause 2.1 identify the main purpose:

"2.1 The parties recognise that the purpose of this agreement is to allow [the defenders] time to integrate the manufacture and distribution of the Products into its existing operations without adversely impacting on the manufacture and supply of the Products in the period prior to the Completion Date and to protect the value of [the defenders'] investment in the Owned Intellectual Property Rights in terms of the Asset Purchase Agreement. In consideration of the fee identified in Clause 3 below and at the request of [the defenders], [the pursuers] shall during the Life of this Agreement ..."

Clause 2.1 goes on to set out the various services to be performed by the pursuers under the Services Agreement during this period in a series of lettered sub-paragraphs. Under sub-para. (a), the pursuers were required to provide to the defenders with "such managerial and other administrative support as [the defenders] may reasonably require for the purpose of protecting the value of their investment in the Owned Intellectual Property Rights and integrating the production and distribution of the Products within [the defenders'] existing operations ...". It is sufficient to quote from three other sub-paragraphs to show the type of obligation placed on the pursuers:

"(c) use all reasonable endeavours to protect the Trade Marks, maintain the existing levels of customer service to purchasers and potential purchasers of Products and Licensed Products and promote the successful integration of the Owned Intellectual Property Rights into [the defenders].

(d) use its reasonable endeavours to promote the Trade Marks throughout the Territory.

(e) maintain continuity of manufacturing and conduct its business in the ordinary and usual way so as to maintain that business relating to the Products and the Licensed Products as a going concern."

Clause 3 deals with payment for those services. It provides for the defenders to pay the pursuers a monthly fee of £1,000,000, amounting to £5 million in all over the five months of the Agreement. I am told that that sum has been paid.

[28] Since they were referred to in argument, I should mention two other provisions of the Services Agreement. The first is clause 14.6. Clause 14 is headed "Stock". It provides for the defenders to pay for the Stock handed over to them at the end of the Services Agreement. To this end it set out a mechanism for determining the amount to be paid. That involves the carrying out of a Stock Valuation and the making of a Stock Payment based on the Stock Valuation Statement. It is not necessary to go into the details. Clause 14.6 deals with the possibility of there being Customer Claims, i.e. claims by customers relating to any stock etc. manufactured or supplied by the pursuers under the Services Agreement. To this end it provides as follows:

"14.6 [the defenders] agrees and undertakes to settle on behalf of the Licensee any Customer Claims having an aggregate value of not more than £200,000 inclusive of all related costs and expenses and shall be entitled to retain the sum of £200,000 from the Stock Payment to be applied in settling any Customer Claims ... [The pursuers] shall indemnify and keep [the defenders] indemnified against all Losses and Expenses incurred by [the defenders] and arising from Customer Claims to the extent that the aggregate value of such Customer Claims exceeds £200,000."

The second provision to be mentioned is clause 16.2(d), which is referred to in Article 12 of the Summons in Action CA31/07. Clause 16 is concerned with the pursuers' "undertakings following the Completion Date". Clause 16.1 provides that in consideration of payment of £1 on the Effective Date, the pursuers give certain undertakings to enable the defenders to obtain the full benefit of the Owned Intellectual Property Rights, Customer Information and Related Assets. The undertakings are set out at clause 16.2. So far as relevant they provide that

"16.2 Except with the prior written consent of [the defenders], [the pursuers] shall not, whether on its own behalf, or whether directly or indirectly on behalf of any person or business, or with any Connected Person: ...

(d) Goodwill

at any time after the Completion Date, do or say anything which is likely or intended to damage the goodwill or reputation of the Owned Intellectual Property Rights or which may lead any person to cease to do business with the Purchaser [the defenders] on substantially equivalent terms to those previously offered or lead any person not to engage in business with the Purchaser."

I should also mention that Article 22 of the Services Agreement, headed "Entire Agreement", provides inter alia that the Services Agreement and the Asset Purchase Agreement "contain the whole agreement between the parties in respect of the subject matter of this Agreement" and supersede any prior agreements, representations or understandings. It goes on to disclaim reliance by either party on any representation other than those incorporated into the Agreement and specifically excludes any remedies in respect of untrue statement or representation except in the case of fraud. The Asset Purchase Agreement contains a provision with different wording but to broadly similar effect. It provided, by clause 16, that "This Agreement (together with the documents referred to in it or executed at Completion)", that latter expression being sufficient to include the Services Agreement, "constitutes the entire agreement and understanding between the parties with respect to its subject matter and replaces and supersedes all prior oral and written agreements, understanding, representations and correspondence regarding such subject matter."

[29] In summary, the two Agreements worked together in this way. The Asset Purchase Agreement was completed on 9 June 2005. As at that date, the defenders paid the Initial Consideration and acquired the business and the assets. Nothing remained to be done under the Asset Purchase Agreement save for the calculation, in due course and by reference to subsequent events, of the Additional Consideration. On the same date, the Services Agreement came into effect for a period of five months from 9 June 2005. During this period, in order to help the defenders integrate the business with their existing operations, the pursuers provided services to the defenders in the form of continuing to manufacture, sell and distribute certain products for them. The Services Agreement came to an end on 8 November 2005. Thereafter the pursuers had no further involvement in the business - the defenders conducted it by themselves without ant further assistance from them. All that remained to be done was the calculation of the Additional Consideration payable by the defenders under the Asset Purchase Agreement. To that end, the Schedule to that Agreement identified a further period of just over one year from the end of the Services Agreement (from 8 November 2005 to 22 November 2006, encompassing the Earnout Period and the Invoice Period to which I have already referred). That period was simply the period chosen by the parties for assessing sales by reference to which the Additional Consideration was to be calculated - it involved no further activities by the pursuers apart from their participation in the process of calculating the Additional Consideration.

 

The law of retention
[30] There was little dispute between the parties as to the main principles of the law of retention applicable to the present case. They are to be taken from the decision of the House of Lords in Bank of East Asia Limited v Scottish Enterprise 1997 SLT 1213 and that of the First Division in Macari v Celtic Football and Athletic Co Limited 1999 SC 628, to both of which I was referred. The leading speech in Bank of East Asia was given by Lord Jauncey of Tullichettle, with whom all of the other members of the House agreed. At page 1215D-F, Lord Jauncey first summarised the law of compensation in Scotland in this way:

"It is the term used to describe the right to set one claim against another whereby if equal both are extinguished and if not equal the larger claim is extinguished pro tanto (Gloag on Contract (2nd ed), p.644). It derives from the Act 1592 c.141 and operates de liquido in liquidum. It must be pleaded and has no application unless the mutual debts are of the same nature and both are liquid in the sense of being presently exigible and of fixed amount (Goudy on Bankruptcy (3rd ed), p.603). The ratio of the principle is to avoid unnecessary litigation and the mutual debts do not require to arise under the same contract or even out of the same course of dealing; it is sufficient that they are both of amounts which are ascertained or immediately ascertainable when the plea is taken. That is the time when present exigibility is tested. An exception to the strict rule that both debts must be liquid arises in cases of bankruptcy or insolvency where a debt due to the bankrupt may be compensated by a future or contingent one or by one that is disputed as to its existence or amount. Once again the plea must be taken and it is at that time that the bankrupt's obligations must be looked at. ..."

It is agreed that compensation cannot apply here since none of the debts are liquid and neither party is insolvent. At p.1215G, Lord Jauncey turned to consider retention, which he described as a further exception to the rule that both debts must be liquid:

"A further exception to the rule arises 'where the illiquid or unascertained claim arises out of the same contract as the debt which is sued for, and where the enforcement of immediate payment would result in enabling the pursuer to obtain satisfaction of his claim under the contract when he has not implemented the obligation of which that claim is the counterpart' (Gloag, op cit, p.627)."

Lord Jauncey explained that "this exception of retention" has a more limited effect than compensation, in that it operates procedurally rather than as a substantive defence; it does not extinguish obligations but has the effect of suspending them until the counter obligation is performed. I am not concerned with that question in this case. The issue before me turns on the circumstances in which retention may be available. As to this, Lord Jauncey referred at p.1216E to the "well known statement of general principle" by Lord Justice Clerk Moncreiff in Turnbull v McLean (1874) 1 R 730 at p.738 to the following effect:

"I understand the law of Scotland, in regard to mutual contracts, to be quite clear - 1st, that the stipulations on either side are the counterparts and the consideration given for each other; 2d, that a failure to perform any material or substantial part of the contract on the part of one will prevent him from suing the other for performance; and, 3d, that where one party has refused or failed to perform his part of the contract in any material respect the other is entitled either to insist for implement, claiming damages for the breach, or to rescind the contract altogether, - except so far as it has been performed."

Lord Jauncey was concerned to stress the limits of this principle. After discussing a number of authorities, he said (at p.1216L):

"I do not consider that the authorities warrant so broad a proposition as that any material breach by one party to a contract necessarily disentitles him from enforcing any and every obligation due by the other party. In applying the general principles enunciated by Lord Justice Clerk Moncreiff in Turnbull v McLean regard must be had to the terms of the contract in question."

At p.1217E he cited with approval the following observation of Lord Shand in Pegler v Northern Agricultural Implement and Foundry Co Ltd (1877) 4 R at p.442: 

"I venture to think the sound principle is rather this, that if the defence be founded on an obligation fairly arising out of the contract, and the performance of which is reciprocal to and contemporaneous (viz. exigible or prestable at the same time) with the obligation which is the foundation of the action, then the defence is good."

In light of his review of the authorities, he analysed the three principles enunciated in Turnbull v McLean in these terms:

"The first [principle] is readily applicable to a case where the obligation by A to pay the price is the counterpart of the obligation by B to complete the works or deliver the goods. I do not, however, consider that the Lord Justice Clerk intended to state that each and every obligation by one party to a mutual contract was necessarily and invariably the counterpart of each and every obligation by the other. It must be a matter of circumstances. Thus in a contract to be performed by both sides in stages, the counter obligation and consideration for payment of stage one is the completion of the work for that stage conform to contract. The second principle must, having regard to the first principle, be construed as referring to performance by the other in relation to the part of the contract which the one party has failed to perform, rather than to the whole contract, although in many cases the part will amount to the whole. The third plainly has in contemplation the material part of a contract which the one party has refused to perform and which may be the subject of specific implement. So analysed it becomes apparent that these principles do not produce the result that any claim under a mutual contract can be set against any other claim thereunder howsoever or whensoever such claim may arise."

He pointed out that Turnbull v McLean arose out of an unsuccessful challenge to a supplier's right to withhold performance of a current obligation on account of non-payment of a prior completed obligation, and continued:

"If a supplier who had made two monthly deliveries conform to contract for which payment was due at the end of each month, had then made a third delivery disconform to contract, the consignee, who had failed to pay, would have no right to retain the payment for the first two deliveries. Breach of contract in relation to the third delivery could not give rise ex post facto to a right of retention in respect of obligations which had been duly performed. The only counter obligation to payment at the end of the month would be delivery conform to contract at that time."

[31] The leading Opinion in Macari was given by the Lord President (Rodger). At 639D-641D he considered the applicable principles in light of the discussion in Bank of East Asia. It is convenient to quote certain passages bearing upon the present case:

"Unquestionably, our law recognises that in certain circumstances a party is entitled to withhold performance of an obligation under a contract when the other party has failed to perform his obligation. ... Although there is therefore no doubt about the existence of the rule, it is considerably harder to define its scope in our law. The starting point for the rule is the idea, hardly novel or controversial in itself, that in a contract containing mutual obligations, the obligations of the one party can be seen as counterbalancing the obligations of the other. It is but a short step to say that the one party undertakes to perform his obligations on condition that the other party does so too. This in turn leads to the conclusion that one party does not need to perform his obligations where the other party is not performing the obligations on him. Some very general statements to this effect are found in our books - for example, in Erskine's Institute IV.iii.86: 'No party in a mutual contract, where the obligations on the parties are the causes of one another, can demand performance from the other, if he himself either cannot or will not perform the counterpart, for the mutual obligations are considered as conditional.' A similar rather sweeping approach is to be found in the opinion of Lord Justice Clerk Moncreiff in Turnbull v McLean at p 738 ...".

I have already cited the relevant passage when quoting from Bank of East Asia Ltd. Lord President Rodger continued:

"This statement is in turn used by Gloag, Contract (2^nd edn, p 592) as authority for his own statement to the effect that the normal construction of a contract containing mutual obligations is that one party 'obliges himself subject to the implied condition that performance cannot be required from him unless it is given or tendered on the other side.'

Such general statements may give rise to few problems in the case of simple contracts involving only a limited number of obligations on either side. They can, however, be difficult to apply in practice to situations arising out of complex contracts containing a wide spread of obligations. This was recognised, in the context of a contract for performance in stages, in Bank of East Asia Ltd v Scottish Enterprise, where the House of Lords re-examined the scope of the rule. General statements, such as those which I have quoted, must now be studied in the light of the qualifications introduced by that decision. An indication of the overall approach adopted by the House is to be found in the comment of Lord Jauncey of Tullychettle ..."

He then quoted the passage from the speech of Lord Jauncey at p. 1216L which I have already set out. Having followed this with a quotation of the passage in Lord Jauncey's speech at p.1217L (also set out above) dealing specifically with the three principles mentioned in Turnbull, he continued:

"This authoritative gloss by Lord Jauncey confirms that the law does not regard each and every obligation by one party as being necessarily and invariably the counterpart of every obligation by the other. One has to have regard to the circumstances. Lord Jauncey deduces from this that a material breach by one party of a particular term of a contract does not of itself mean that he cannot require the other party to perform any of his obligations under the contract. Rather, the party in breach cannot insist on the other party performing his obligations in relation to the part of the contract of which the first party is in breach. ...

Lord Jauncey does not spell out the circumstances in which one obligation will fall to be regarded as the counterpart of another. Sometimes, of course, the express terms of the contract will regulate the matter. In other cases it depends on the intention of the parties as gleaned from the terms of the contract. Lord Maclaren said as much long ago in Sivright v Lightbourne at p 920: 'The question whether the obligations are conditional with respect to one another, so that non-performance by the one party entitles the other party to withhold performance of his obligation, is always a question of intention to be determined by the terms of the contract itself, and the surrounding circumstances, which often point to implied terms.' A somewhat similar approach was laid down by Corbett J, as he then was, in ESE Financial Services (Pty) Ltd v Cramer at 809D-E: ' For reciprocity to exist there must be such a relationship between the obligation by the one party and that due by the other party as to indicate that one was undertaken in exchange for the performance of the other and, in cases where the obligations are not consecutive, vice versa....' The parties had entered into a contract under which the plaintiff company was to manage the defendant's portfolio of shares in return for a fee. The company were also to be entitled to a sum in the event of the value of the portfolio appreciating at a rate of more than ten per cent per annum. In defence to a claim for the sum, the defendant pleaded that the company had breached its obligation to exercise skill and judgment in the management of her portfolio. The Cape Provincial Division held that the defence required to be struck out since the necessary reciprocity did not exist between the obligation of the plaintiffs to exercise skill and judgment in managing the portfolio and the defendant's obligation to pay the sum if the shares appreciated at more than the agreed rate."

Lord Caplan agreed. At page 650D-E he said that

"[the] retention of performance must be directed at a failure on the part of the other party to perform a counterpart obligation. Moreover for retention to be available there must be a continuing failure to perform the counterpart obligation. No retention arises in respect of a past breach of contract by the other party".

Lord Marnoch agreed in the result but appeared to take a narrower view of the decision in Bank of East Asia Limited v Scottish Enterprise. At p.655A-C he said this:

"In Bank of Asia Limited v Scottish Enterprise the House confirmed earlier decisions to the effect that in certain circumstances a contract, and in particular a building contract, could be seen as operating in 'stages' with the result that the principle of mutuality could be applied separately to each stage. However, I do not, myself, find anything in that decision which bears on the more normal situation, such as the present, where all the parties' obligations and counter-obligations are, as it were, exigible contemporaneously. In that situation the clear presumption, in my opinion, is that all fall to be construed as inter-dependent and conditional upon each other - Gloag on Contract (2nd edn) at 592-595. This is, of course, only a presumption and, as the author points out towards the end of the passage referred to, it can be overcome by parties making clear their intention that certain obligations and counter-obligations can be looked at independently."

 

Submissions
[32] In opening the debate on this point for the pursuers, Mr Lake said that there were three issues to be considered: (i) were the breaches of the Services Agreement averred in Action CA31/07 relevant to support a plea of retention and/or mutuality in answer to claims for payment under the Asset Purchase Agreement? (ii) were there any relevant averments of breach of the Assets Purchase Agreement in that action? and (iii) were the obligations on which the present defenders found in that action ones which were capable of giving rise to a right of retention against the claims in this action for Additional Consideration under the Asset Purchase Agreement?

The answer to each of these questions, he submitted was: No.

[33] Mr Lake emphasised that not every obligation gives rise to a right to withhold performance. For retention to be available, the obligations of which breach was alleged had to be "reciprocal to and contemporaneous...with the obligation which is the foundation of the action", to use the words of Lord Shand in Pegler v Northern Agricultural Implement Co.; or, to use other language, had to be the counterpart of that obligation. He submitted that the obligations which form the basis of the claims in Action CA31/07 were not the counterparts of the obligation to pay Additional Consideration under the Asset Purchase Agreement. They were neither reciprocal to nor contemporaneous with it. The claims in Action CA31/07 arose out of events during the currency of the Services Agreement. The claim in the present action was simply for the balance of the price payable under the Asset Purchase Agreement. The price fell due on the Completion Date, 9 June 2005, before the Services Agreement commenced. The Initial Consideration was payable on that day. The Additional Consideration was due then but payable later, being calculated on sales invoiced within the period of about a year (November 2005 to November 2006) commencing after the Services Agreement had come to an end. The obligations under the Services Agreement were distinct in time from the obligation to pay the Additional Consideration and also from the period relevant to its calculation. Nor were they reciprocal to each other. Neither the Initial Consideration nor the Additional Consideration payable under the Asset Purchase Agreement was dependent in any way upon what happened during the period covered by the Service Agreement. The counterpart of the obligation to perform the services under the Services Agreement was the obligation to pay the fee for those services under that agreement. The obligation to pay the Additional Consideration was the counterpart of the obligation to transfer the business and the assets. Mr Lake emphasised that the Asset Purchase Agreement and the Services Agreement were two separate agreements. He acknowledged that they were clearly linked but they were also distinct ("linked but distinct"). The parties had chosen to have separate agreements and the recital to each agreement showed them to have a different purpose and subject matter. In addition, in some cases terms used had different definitions in the different agreements. He recognised that there was an "entire agreement" clause in each agreement, which provided that the entire agreement was constituted by both the Asset Purchase Agreement and the Services Agreement. But the purpose of an entire agreement clause was simply to exclude reference to other matters such as prior agreements and representations and did not have the effect of making them one agreement.

[34] Mr Lake then turned to consider clause 15.4 of the Asset Purchase Agreement. This is the clause of that agreement of which breach is alleged in Article 12 of action CA31/07. I have already set out its terms. Mr Lake asked two questions: first, are there any relevant averments of breach of this clause? and, second, is the obligation in clause 15.4 the counterpart of an obligation to pay the Additional Consideration? Each question was to be answered in the negative. He submitted that clause 15.4 was concerned with claims made against the pursuers as Vendor in respect of goods manufactured by them prior to the sale and acquisition under the Asset Purchase Agreement on 9 June 2005. Neither that clause nor, indeed, any part of the Asset Purchase Agreement, had any application to goods manufactured after the sale and acquisition on that date. Dealings in respect of goods manufactured or supplied during the currency of the Services Agreement were the subject of that agreement. The particular complaints here were the subject of clause 14.6 of the Services Agreement. The claim in Article 12 of Condescendence in action CA31/07 related entirely to events occurring during the currency of the Services Agreement and did not raise issues of potential liability under the Asset Purchase Agreement; they were about the pursuers' behaviour in handling the "Customer Claims", which is defined in the Services Agreement as meaning claims relating to stock manufactured or supplied by the pursuers after the sale and acquisition on 9 June 2005 and prior to the expiry of the Services Agreement. Accordingly, there were no relevant averments of breach of clause 15.4 of the Asset Purchase Agreement. But, even if the averments of breach of that clause were relevant, they were not the counterpart of the pursuers' claim for Additional Consideration for the reasons explained earlier. It was difficult to see what adverse effect such a breach, if proved, could possibly have on the Additional Consideration payable under the Asset Purchase Agreement. If the pursuers acted in breach of that clause so as to damage the commercial interests of the defenders, thereby presumably harming sales, this would have the effect (if it had any effect at all) of reducing the amount of Additional Consideration payable by the defenders rather than increasing it.

[35] In responding on behalf of the defenders, Mr Johnston, QC suggested that the pursuers' arguments took too narrow a view of the meaning of "contemporaneous" in the passage which I have quoted from Bank of East Asia Ltd. The claim and cross-claim need not correspond in time. The rule was simply that the damages claim which founds the claim of retention must have existed at the time when the other party's claim arose. He submitted that a party could set off a damages claim against a payment claim as long as the damages claim existed at the time that the payment fell due. That was all that was required by way of contemporaniety. If this was satisfied, then one had to examine whether the "counterpart" test was also satisfied.

[36] Mr Johnston submitted that the fact that the Asset Purchase Agreement and the Services Agreement were separate agreements did not mean that retention was not available. They were both part of the one transaction. The "entire agreement" clauses in the agreements showed this. In Article 2 of the Summons in Action CA31/07 the overall transaction of 9 June 2005 was described as "a transaction, recorded in two written agreements". This was admitted in the Answers in that action. There were averments made by the defenders, albeit not admitted by the pursuers, that the reason for there being two agreements rather than one was because that offered certain tax advantages. That was all. He pointed out that the two agreements made many references to each other. They were meant to be read together and to work together. Reference could be made to one contract when construing the other. It was artificial to treat these two closely related agreements as wholly separate. There was no good commercial sense in saying that retention was available only where both claim and cross-claim were in the same contract. The principle was more flexible than that, and these problems were better dealt with by asking whether one obligation was the counterpart of the other rather than setting up a preliminary hurdle that the obligations must arise out of the one contract. Although Lord Jauncey in Bank of East Asia Ltd v Scottish Enterprise at page 1215 quotes from Gloag, Contract (2nd Ed), referring to illiquid or unascertained claims arising "out of the same contract as the debt which is sued for", this insistence that they arise out of the same contract was not supported by authority. It might at one time have been difficult to see one obligation as the counterpart of another if the obligations in question arose under separate contracts, but it was not uncommon today to find one transaction comprised of several interconnected but separate contracts.

[37] Mr Johnston accepted that it was a requirement for retention that the one obligation be the counterpart of the other. But there was no warrant for reading that test very narrowly. In Bank of East Asia Ltd the obligations were very different and there is no indication in the speech of Lord Jauncey that, but for the question of timing, retention would not have been available. In Redpath Dorman Long Ltd v Cummings Engine Co Ltd 1981 SC 370, the defenders sought to resist a claim for payment under five interim certificates by making averments that the pursuers were in breach of contract in various respects and had thereby caused the defenders loss in excess of the amount of the certificates. The averments of breach are identified at page 373. They consisted of complaints of defective performance and delay, and included averments that claims had been brought against the defenders by sub-contractors as a result of the pursuers' breaches of contract. The issue focused in the Opinion of the court was whether the test of contemporaneity was satisfied. On this question there was held to be sufficient to allow the case to go to a proof before answer. There was nothing in the Opinion, however, to suggest that the various claims of breach of contract were not to be regarded as counterparts of the principal obligation. In the ordinary case obligations arising out of the one contract were usually to be considered as the counterpart to one another. This was a point emphasised by Lord Marnoch in Macari. Here the pursuers' claim is for Additional Consideration for the Owned Intellectual Property Rights, including Goodwill. The damages claims which the defenders put forward in action CA31/07 are founded on allegations that the pursuers were in breach of their obligations in respect of those rights. He referred to clause 2.1 of the Services Agreement and the obligations, in the paragraphs to which I have referred, to protect those rights. The complaint in Action CA31/07 was of action by the pursuers which damaged the goodwill in the business; that goodwill was the basis of the claim for Additional Consideration. He referred me to a number of Articles of Condescendence in the Summons in that action to demonstrate this but I do not need to set them out here.

[38] Mr Johnston went on to submit that Clause 15.4 of the Asset Purchase Agreement was not limited to claims in respect of goods manufactured prior to the date of that Agreement. He submitted that the words "any claims" in the first line of that clause meant what it said. The fact that the Services Agreement dealt with the position of claims arising out of goods manufactured during the currency of that Agreement did not mean that such claims were not also covered by the Asset Purchase Agreement. There was no reason why there should not be any overlap.

[39] In those circumstances, Mr Johnston submitted, the court could not say that the plea of retention in Answer 8 in the current action was irrelevant or misconceived. He noted that the pleadings in Action CA31/07 were still being adjusted, though he did not suggest that any proposed adjustments to those pleadings would make a material difference to the argument presented to me.

[40] In a short reply, for the pursuers, Mr Cullen, QC adopted the submissions made by Mr Lake. He referred to the treatment of retention in Gloag & Henderson, The Law of Scotland, 12^th ed., at paras.10-11 and 10-12. He accepted that it was possible to view the agreements as part of one transaction, but they were separate contracts and that was that. Even if it were relevant to consider cross-claims arising under a separate agreement, the claims in Action CA31/07 could not be regarded as the counterpart of the obligation on the defenders to pay the Additional Consideration under the Asset Purchase Agreement. There was an absence of reciprocity between the obligations, which meant that they could not be counterparts of each other. The obligations of which breaches were alleged in Action CA31/07 - i.e. obligations under the Services Agreement - were the counterparts only of the obligation on the pursuers to pay for the services under the Services Agreement.

 

Discussion
[41] I consider first the relevancy of the averments in Action CA31/07 anent breach of clause 15.4 of the Asset Purchase Agreement. That action is not before me for any decision, and nothing I say in this Opinion will have any direct effect on the development of that action. Nonetheless, the Summons in that action is incorporated by reference and I have to decide for the purposes of the claim of retention in this action whether a relevant case has been put forward that the present pursuers are in breach of clause 15.4 of the Asset Purchase Agreement as averred. This appears to have been the course adopted in Redpath Dorman Long. In my opinion the averments of breach of that clause are irrelevant. The relevant averments are in Article 12 in that action. The defenders say that in their manner of "handling the Customer Claims" the present pursuers were in breach of clause 15.4 and, as I understand it, thereby caused damage to the goodwill of the business. Because of the definition of "Customer Claims" in the Services Agreement, this means that the criticism is of the pursuers' handling of claims, demands or proceedings by customers relating to stock, Licensed Products and Product manufactured or supplied by them under the Services Agreement. The Services Agreement itself contains, as one would expect, a number of provisions setting out the pursuers' obligations in respect of goods manufactures or supplied by the pursuers under that agreement. That is where one would expect to find the relevant obligations. The handling of Customer Claims is dealt with in clauses 14.6 - 14.8 of the Services Agreement. There are other provisions in the Services Agreement dealing with the pursuers' continuing obligations not to damage the goodwill of the business: see e.g. clause 16.2(d). The Asset Purchase Agreement, on the other hand, is concerned with the sale and purchase of the Assets, i.e. the Owned Intellectual Property Rights, the Customer Information and the Related Assets, all as defined therein. The pursuers' obligations after completion are set out in clause 15. They include the execution of necessary documents, the provision of information, the giving of assistance in connection with any disputes relating to the Assets and the notification of claims brought by third parties in respect of "any goods manufactured or provided by the pursuers derived from any of the Assets". That last matter is part of clause 15.4, which goes on to say that the pursuers "shall not without [the defenders'] prior written consent take any steps in relation to such claim which might reasonably be expected to damage the commercial interests of the Purchaser." Such claim is a claim in respect of goods manufactured or provided by the pursuers derived from any of the Assets. On a proper construction of the Asset Purchase Agreement, the Assets sold to the defenders under that agreement, and the reference to goods manufactured or provided by the pursuers derived from the Assets, must be a reference to goods manufactured or sold by them prior to the sale and purchase of the Assets under that Agreement. The manufacture and sale of goods thereafter is, for a period of 5 months, covered by the Services Agreement. It would be odd, so it seems to me, to find provisions in the Asset Purchase Agreement regulating the position in relation to the services provided by the pursuers under the Services Agreement. Although it is not impossible that provisions of the two agreements might overlap, it seems to me that since they were at pains to separate the two agreements it is unlikely that the parties intended there to be any such overlap. In any event, on the ordinary reading of the two sets of provisions, I do not consider that there is any overlap in this respect.

[42] I was not addressed on the relevancy of the averments in Action CA31/07 concerning breaches of obligations in the Services Agreement. I must therefore proceed on the basis that such breaches are relevantly averred. The question is whether these averments of breach can relevantly form the basis of a plea of retention. The question, put compendiously, is whether the obligations in the Services Agreement of which breach is alleged may properly be regarded as the "counterparts" of the obligation to pay the Additional Consideration under the Asset Purchase Agreement; or, to use the words of Lord Shand in Pegler v Northern Agricultural Implement and Foundry Co Ltd, whether those obligations in the Services Agreement can properly be said to be "reciprocal to and contemporaneous (viz. exigible or prestable at the same time) with the obligation which is the foundation of the action", namely the obligation to pay the Additional Consideration. The quotation from Lord Shand identifies two separate strands of the requirement that the one obligation be the counterpart of the other. I shall consider each in turn

[43] I deal first with the question of contemporaneity or timing. It is established by the cases to which I was referred, and it was not in dispute, that for the breaches of the Services Agreement to be available in support of a plea of retention against the claim for Additional Consideration, they must have arisen, and have become "exigible or prestable" as Lord Shand puts it, by the time that the Additional Consideration fell due. I was not addressed as to the particular times at which the claims which are the subject of Action CA31/07 arose, but I shall assume for present purposes that they arose during the currency of the Services Agreement. On that assumption, the question is: when did the Additional Consideration become exigible or prestable? For the pursuers it was submitted that the whole Consideration, including the Additional Consideration, became due on 9 June, the Completion Date under the Asset Purchase Agreement, albeit that the Additional Consideration part of it was only payable later. It was implicit in Mr Johnston's submissions that he disagreed. The point was argued only briefly. I am not persuaded by the pursuers' submissions on this point. The pursuers' case is couched in terms of when the Additional Consideration became "due", as distinct from payable. It is not clear to me precisely what that submission entails. A payment is "due" when it is due for payment. At that point it is exigible or prestable, and the party entitled to it may sue for it. The distinction sometimes drawn is between, on the one hand, the moment at, or from, which a payment (typically freight, or the price of goods sold) is to be regarded as earned and, on the other, the time when it becomes payable. Whether or not there is such a distinction in any particular case will depend upon the terms of the contract. It may be that the pursuers' submission, properly understood, is that under the terms of the Asset Purchase Agreement, the whole Consideration is to be regarded as having been earned on the Completion Date, albeit that it was not payable until a year or more after the end of the Services Agreement. That submission seems to me to have some force. But it does not assist the pursuers' argument. The relevant question is when the Additional Consideration became payable. Only then did it become "exigible and prestable". I see nothing in the terms of the Asset Purchase Agreement to suggest that the Additional Consideration became due (in the sense indicated) or payable at any time before the end of the Services Agreement. In terms of clause 2.1 of the Asset Purchase Agreement the pursuers agreed to sell and the defenders agreed to purchase the Assets "as at the close of business on the Completion Date for the Consideration". The whole Consideration was earned then. The Consideration comprised two parts, the Initial Consideration and the Additional Consideration. The Initial Consideration was payable on the Completion Date: see clause 4.3.1. The Additional Consideration was to be payable in accordance with Part 3 of the Schedule: see clause 5. In terms of para. 2 of Part 3 of the Schedule, the Additional Consideration was to be paid "in accordance with paragraph 7 ... on the Payment Date". The Payment Date was specified in para. 4.5. That paragraph sets out dates for payment in cases where the Additional Consideration is arrived at by reason of the application of various paragraphs of the schedule, viz. paras. 4.3(a), 4.3(b), 4.3(c) and 4.4(a). There is further definition of the Payment Date in the case where a Tonnage Audit is carried out to completion: see para. 5.4. There is no provision dealing in terms with a case such as the present, where the Additional Consideration is fixed by the Vendor withdrawing its proposed adjustments to the draft Consideration Accounts after the Tonnage Audit procedure has been invoked. But such a situation can be made to fit into the scheme envisaged in those paragraphs. Put broadly, the Payment Date is the date when the Consideration Accounts are finalised in their original or amended form. The Additional Consideration is to be paid within 10 business days of the Payment Date: para. 7.2(a). Interest runs from that date on any late payment: para. 7.3. There is nothing in these provisions to suggest that the Additional Consideration is due at any earlier date. The mere fact that the Initial Consideration is due and payable on the Completion Date tells one nothing about when the Additional Consideration fell due. It certainly does not point to it being exigible or prestable before the termination of the Services Agreement.

[44] I turn next to deal with the question of reciprocality. Here it seems to me that the pursuers are on stronger ground. I do not think it fatal to the defenders' plea of retention that the relevant claims in Action CA31/07 arise out of obligations under a different contract. The passage in Gloag quoted by Lord Jauncey, which refers to debts arising "out of the same contract as the debt which is sued for", should not be read as set in stone. The courts see many instances of a single transaction being made up of a number of separate contractual documents. In the case where the separate contracts are all part of the one transaction, as they are here, I see no reason in principle why the concept of mutuality should not apply to the transaction as a whole; or why obligations in one contract should not be regarded as the counterpart of obligations in another. There can be no sound reason for an artificial cut-off, which dictates that retention may be available if parties put their whole agreement into one contract but not where they put it into a number of distinct but related contracts. I am not concerned that such an approach may open the door to a wave of new pleas of retention. Unless there is the requisite mutuality or reciprocity between the obligations in question, the plea of retention will fail.

[45] In my opinion this is a case where the plea must fail for want of mutuality or reciprocity between the obligations in question. I have described in para.[29] above how the Asset Purchase Agreement and the Services Agreement work together. It seems to me that the Services Agreement is a wholly separate stage of the overall transaction from the initial acquisition of the Assets. I accept Mr Lake's submissions on this point recited in para.[33] above. In this respect the overall transaction, even if considered as a single agreement, can properly be categorised as one which operates in stages. Save in respect of certain post-Completion undertakings and save for the purpose of calculating the Additional Consideration, the Asset Purchase Agreement is to all intents and purposes complete before the Services Agreement cuts in; and the Services Agreement is completed well before the exercise of calculating the Additional Consideration takes place. The counterpart of the sale of the Assets under the Asset Purchase Agreement is the payment of the Consideration, in the two instalments. The counterpart of the provision of services under the Services Agreement is the payment of the fee for such services. Although the two agreements have to be viewed together, it seems to me to be plain that the obligations under the Services Agreement to perform the services in the manner required cannot be regarded as the counterpart of the obligation to pay any part of the price (the Additional Consideration) under the Asset Purchase Agreement.

 

Conclusion
[46] For these reasons I consider that the defenders' plea of retention is irrelevant.

 

Disposal
[47] In light of my decisions on the two points argued before me, the appropriate order would be to repel the various pleas-in-law for the defenders, to sustain the pursuers' third plea-in-law, which is to the relevancy of the defences, to sustain the pursuers' first plea-in-law and to grant decree in terms of the first conclusion of the Summons. However, I was asked to put the case out By Order and I shall do so before pronouncing any interlocutor. That will enable parties to discuss any question of interest and also to make submissions on the form of order appropriate to deal with the pursuers' second conclusion and the relative pleas-in-law.