Scottish Court of Session Decisions

Pursuers: Sandison; Brodies LLP

Defender: Logan; Campbell Smith WS

17 December 2008

[1] This is a decision following a debate on the Commercial Roll in which the defender challenged the relevancy of the pursuers' averments. I summarise the pursuers' averments, which I must take pro veritate, as follows.

[2] The pursuers and the defenders were shareholders in LAGTA Limited ("LAGTA") and held respectively 31.6 per cent and 27.1 percent of LAGTA's share capital. The defender was until 30 November 2007 the managing director of LAGTA and Douglas Park, a director of the pursuers, was a director of LAGTA.

[3] On 16 August 2007 the defender wrote in his capacity as managing director of LAGTA to the shareholders of that company, including the pursuers, informing them that Valley Forge (UK) Limited ("VFL") wished to acquire the share capital of LAGTA. The defender informed the other shareholders that, subject to the satisfactory outcome of a due diligence exercise, VFL proposed (a) that the Share Purchase Agreement should be conditional upon the defender continuing to act as a consultant for LAGTA for eighteen months after completion of the share purchase and (b) that an indicative price of £21.50 per share be paid to shareholders other than the defender and an enhanced price of £26 per share to the defender "to reflect the 18 months consultancy period". The defender enclosed with the letter a pro forma power of attorney in his favour for the execution of the share purchase agreement.

[4] The pursuers explained their understanding of what was said in the letter of 16 August 2007 as the basis of the differential in share price in the following terms: "The price differential between the defender's shares and the shares held by the other shareholders was acceptable to the pursuers (and, so far as they are aware, to those other shareholders) on the sole basis that it represented the remuneration to be afforded to the defender for his agreeing to act as a consultant for the Company for the post-sale 18-month period which he had mentioned in his letter of 16 August 2007." They also asserted that the defender had earlier made a similar statement at a board meeting of LAGTA, averring: "In addition to the statement in the letter to that effect, the defender had informed a Board meeting of the Company which discussed the offer on 5 July 2007 that that was the position, and that it suited him to take his remuneration for the consultancy period in that form for tax reasons, namely the availability of taper relief on the capital gains tax liability which would arise, and the absence of any similar relief or allowance on income tax liability." In debate Mr Sandison confirmed that these averments did not purport to represent the actual words which the defender used on 5 July 2007 and that he was not asserting that on that occasion the defender had been more explicit in saying that the share price differential was the only remuneration which he would receive for his consultancy services than he had been in the letter of 16 August 2007.

[5] The pursuers averred that the defender did not inform any meeting of LAGTA's board of directors that it was proposed that he would receive remuneration for the consultancy services which he was to provide after the sale of the shares other than the share price differential. They averred that of LAGTA's directors only the defender took part in the negotiation of (a) the Share Purchase Agreement with VFL, (b) a Compromise Agreement between LAGTA, the defender and VFL releasing LAGTA from any claim by the defender in connection with his employment as managing director and (c) a Consultancy Agreement by which the defender provided services to LAGTA after the share purchase. While all three documents were available on 30 November 2007 when they were signed, the pursuers averred that no shareholder other than the defender had had an opportunity to see the Compromise Agreement and the Consultancy Agreement and the defender had not disclosed their terms.

[6] The pursuers averred that they did not discover until after the Share Purchase Agreement was signed that the Consultancy Agreement provided that the defender would receive £87,750 plus VAT and expenses per annum for his services during the period of the consultancy.

[7] The pursuers averred that the defender's failure to disclose to the selling shareholders, including the pursuers, the existence and terms of the remuneration clause in the Consultancy Agreement constituted a fraudulent or at least a negligent misrepresentation. They averred that the defender was aware that those shareholders relied on him to oversee on their behalf the settlement of the precise terms of the Share Purchase Agreement and the ancillary contracts. They averred that the defender was aware of the representation in the letter of 16 August 2007 and that he had explained at a Board meeting on 5 July 2007 his reason for seeking payment for his services as a consultant by means of the enhanced share price for his shares. See paragraph 4 above. The pursuers averred that the defender knew or ought to have known that his remuneration package was material to the shareholders' decision to enter into the Share Purchase Agreement on the terms proposed. He was aware that no other shareholder had had an opportunity to study the Consultancy Agreement when the Share Purchase Agreement was signed. In the circumstances the pursuers averred that the defender was under a duty to disclose to the other shareholders the existence and terms of the remuneration clause in the Consultancy Agreement. His failure to do so amounted to a misrepresentation which was either fraudulent or negligent.

[8] The pursuers averred that as a result of the misrepresentation they suffered loss, which was the additional consideration which they would have received if all the shares in the company had been sold at the same value. They supported this valuation of their claim by averring (a) that if they had known of the remuneration package in the Consultancy Agreement they would not have been willing to sell their shares except on this basis and (b) that VFL, the other shareholders and the defender would have agreed to a sale on this basis.

[9] The pursuers' alternative care was that the defender acted in breach of his fiduciary duty to LAGTA's shareholders, for whom he acted as agent in the negotiation of the Share Purchase Agreement, by conducting the negotiation of the agreements in a context in which his personal interest and that of the other selling shareholders were in conflict. The defender was bound to account to the shareholders for the benefit which he received from the Consultancy Agreement.

[10] The defender in his pleadings disputed the factual allegations, asserted that the letter of 16 August 2007 was prepared for his signature by LAGTA's solicitors and accountants and made averments explaining his position. Those averments however are not relevant to the determination of the issues which parties raised in the debate, except so far as the pursuers have admitted them.

[11] Mr Logan on behalf of the defender advanced seven submissions in relation to the misrepresentation case. First, he submitted that the pursuers had not relevantly averred that they relied on the terms of the letter of 16 August 2007: H & J M Bennett (Potatoes) Ltd v Secretary of State for Scotland 1990 SC (HL) 27. Secondly, the pursuers' averments about the authorship of that letter lacked candour when correspondence between LAGTA's solicitors and accountants and the defender revealed their role in the preparation of the letter. It was not sufficient for the pursuers to aver that they did not know or admit who drafted the letter. Thirdly, the letter of 16 August 2007 did not bear the construction which the pursuers put upon it; a reasonable construction of the letter was that the additional consideration for the defender's shares was in exchange for his entering into a consultancy agreement for eighteen months, the terms of which were yet to be agreed. Fourthly, even if the letter implied that there would be no further payment for the consultancy services, the pursuers did not aver that as at 16 August 2007 the defender knew that there was to be an additional payment under the consultancy agreement. Fifthly, the pursuers admitted that the Consultancy Agreement was available for examination at the settlement meeting on 30 November 2007 and that half an hour had been set aside in the agenda of the meeting for shareholders to raise issues. The pursuers' representative did not look at the agreement nor did he ask questions about it. Sixthly, the pursuers did not aver that the alleged misrepresentation was material and had induced them to enter into the Share Purchase Agreement.

[12] Seventhly, in relation to the allegation of fraudulent misrepresentation Mr Logan submitted that the pursuers had not given fair notice of why the alleged misrepresentations of 5 July and 16 August 2007 amounted to fraud. He referred to Gillespie v Russell (1857) 18D 677, The Royal Bank of Scotland Ltd v Holmes 1999 SLT 563, McBryde on Contract (3rd ed) para 14-41f and Drummond's Trustees v Melville (1861) 23D 450. Similarly the pursuers had not given fair notice of why the alleged statements were negligently made: Hamilton v Allied Domecq plc 2006 SC 221. There were no relevant averments that the defender had given a warranty or undertaking which would make a failure to disclose a change of circumstances a misrepresentation. Nor were there any averments to support a charge of concealment when the pursuers had had an opportunity at the settlement meeting to look at and ask questions about the Consultancy Agreement.

[13] Finally in relation to both the misrepresentation case and the breach of fiduciary duty case Mr Logan submitted that the pursuers had failed relevantly to aver a causal connection between the alleged wrong and their claimed loss. The pursuers were aware of the differential in share price and were prepared to accept £21.50 per share; the essential terms of the deal so far as the pursuers were concerned never changed. The sums paid to the defender under the Consultancy Agreement were for services which he provided to LAGTA after the share sale and in relation to the pursuers were res inter alios acta. The benefits which the defender received were not gratuitous and should not have to be repaid.

[14] In relation to the case of misrepresentation, I am satisfied that the pursuers have made sufficient averments to entitle them to a proof before answer. It is well established that in averring a fraudulent misrepresentation a pursuer must give fair notice of what the fraud consists: Shedden v Patrick (1852) 14 D 721, Lord Fullarton at p. 727. In The Royal Bank of Scotland plc v Holmes 1999 SLT 563 Lord MacFadyen stated at p. 569 K-L:

"It is in my view essential for the party alleging fraud clearly and specifically to identify the act or representation founded upon, the occasion on which the act was committed or the representation made, and the circumstances relied on as yielding the inference that the act or representation was fraudulent. It is also, in my view, essential that the person who committed the fraudulent act or made the fraudulent misrepresentation be identified."

It appears to me that when negligent misrepresentation is alleged, not significantly less specification in written pleadings is required. In Hamilton v Allied Domecq plc 2006 SC 221 the Lord Justice Clerk (Lord Gill) stated (at paragraph 2):

"When a claim for damages is based upon the making of a misrepresentation, it is incumbent on the pursuer, in my view, to provide clear evidence as to the terms of the misrepresentation, the time and place at which it was made and the context in which it was made."

While in that passage the Lord Justice Clerk was speaking of evidence and not written pleadings, I consider that in order to give fair notice of the case of misrepresentation, the matters to which he referred should be stated in the written pleadings.

[15] The requirement to state the terms of the representation does not extend in every case to the statement of the precise words used. To require that degree of specification would in some cases impose an impossible burden on a pursuer. For example, where an alleged misrepresentation consisted of an oral statement which was not recorded in a contemporaneous document or by other contemporary means it would rarely be possible to reproduce the precise words which were used. While the pursuer in Hamilton v Allied Domecq plc failed in his action, it was not principally because he did not recall the precise words said to have been used. Lord Hamilton (at paragraph 89) stated:

[16] In this passage Lord Hamilton was speaking not of written pleadings but of the evidence led at proof. But it is implicit in what he said that there is no need to aver the precise words used in the alleged misrepresentation. That is consistent with Lord MacFadyen's approach to which I referred in paragraph 14 above. I agree in this regard with Sheriff Principal Sir Stephen Young when in McNally v Worrell 5 October 2006 (unreported) he stated (at paragraph 17) in a context of an oral statement of which there was no contemporaneous record:

[17] It is likely that a pursuer who cannot plead and prove the words used in an alleged representation will face greater difficulty in establishing his case of misrepresentation than one who can and that, in the former case, details of the context in which a statement was made and any response to it are likely to be important. Otherwise it may be difficult to identify the substance of a representation as distinct from the subjective understanding of the other party to the conversation. But even where the precise words used are known, details of the context in which they were used will be an important part of the circumstances from which the court may infer that a statement was or was not a misrepresentation and was or was not fraudulent or negligent. In this case identifying the words used is not a major problem as the pursuers found principally on the words of the letter of 16 August 2007 which are quoted in paragraph 3 above. The words used are known. The principal issue is their meaning.

[18] The words used in that letter are, in my view, capable of bearing the interpretation that the enhanced price for the defender's shares was in consideration of the consultancy services which he was to provide. Whether the pursuers can establish that they amounted to a representation that the price enhancement was to be the only remuneration which the defender would receive for the consultancy may depend on the evidence about the surrounding circumstances. The task is not the construction of the specific words which were used in isolation. Rather it is of considering whether, when viewed in the light of the surrounding circumstances, the words themselves, or the document as a whole, created a false impression. In this regard Mr Sandison referred to The King v Lord Kylsant [1932] 1 KB 442, at p. 448 and Curtis v Chemical Cleaning and Dyeing Co [1951] KB 805, Denning LJ at pp. 808-809. That is not an issue of relevancy which the court can determine without inquiry into the facts.

[19] If the defender were able to establish that the letter of 16 August 2007 had been drafted for his signature by professional advisers acting on behalf of LAGTA, that could have a considerable bearing on whether any misrepresentation in that letter involved negligence or fraud on his part at that time. But that is a matter for proof as the pursuers did not aver any knowledge of the contribution made by people other than the defender to the preparation of the letter. In any event, as discussed in paragraphs 22 and 23 below, the pursuers' case as presented by Mr Sandison is concerned not just with the representation in August 2007 but with the defender's alleged failure in November 2007 to correct what by then in any event had become (in their submission) a misrepresentation.

[20] I am also satisfied that Mr Logan's challenge that there were insufficient averments of reliance is not well founded. The pursuers averred in article 4 of condescendence that the interests of the shareholders in the negotiation of the sale were represented by or under the supervision of the defender. They averred in article 6 that they relied on the defender to settle the terms of the deal with VFL on their behalf and to inform them of the terms which were material to their decision whether to sell their shares. In article 7 they averred that they entered into the Share Purchase Agreement on the basis of a false understanding that his remuneration for the consultancy consisted of the enhancement of the price for his shares, which was worth £162,684, and that if he had informed them that he had negotiated a separate remuneration package in the Consultancy Agreement, which was worth up to £131,625, they would have declined to sell their shares except on the basis that all shareholders received the same value per share. It appears, as the defender asserted, that there had been an opportunity for the representatives of the pursuers and other shareholders to examine the finalised Consultancy Agreement and to ask questions about it at the settlement meeting before signing the Share Purchase Agreement. But the existence of such an opportunity does not, as a matter of relevancy, negate any reliance which they placed on the defender's alleged representation.

[21] On the contrary, one might expect that if a person reasonably relies on the representation of another to inform his course of action that very reliance would dissuade him from taking an opportunity to investigate the accuracy of the representation. I accept, in that regard, the approach taken by the Court of Appeal in Redgrave v Hurd [1881] 20 ChD 1 that, where a person makes a material representation which is calculated to induce another to enter into a contract and the other enters into the contract , the court may infer that the other acted in reliance on the representation in the absence of evidence either that he was aware of facts which contradicted the representation or from which it can be inferred that he did not rely on the representation. In an attempt to counter this approach Mr Logan referred to Peekay Intermark Ltd v Australia and New Zealand Banking Group Ltd [2006] 2 Lloyd's Law Rep 511. But in that case the Court of Appeal did not depart from the approach in Redgrave v Hurd. Instead the court decided against the claimant principally on two grounds. First, it held that the misrepresentation had not induced the representee to make the contract. The question was analysed as a question of fact: was the misrepresentation corrected so as to ensure that the corrected facts came to the knowledge of the representee or was he induced to make the contract by the original material misrepresentation? See Assicurazioni Generali SpA v Arab Insurance Group [2003] 1 Lloyd's Rep IR 131, Clarke LJ at paragraph 63 and Moore-Bick LJ in Peekay at paragraph 40. Secondly, it found that the terms of the contract which the representee entered into, which clearly described the nature of the investment and which included a statement by the representee that he had read and understood a risk disclosure statement, meant that it was not open to the representee to assert that he had been induced to enter into the contract as a result of the earlier misrepresentation about the nature of the investment. Chadwick LJ at paragraph 70 referred to the representee's signature of the risk disclosure statement as operating a contractual estoppel from asserting that he had not read and understood the statement. The averred facts in the present case are very different.

[22] If as the defender averred, he and VFL negotiated the Consultancy Agreement only after the letter of 16 August 2007 had been sent and they completed that agreement only on the eve of the settlement meeting on 30 November 2007, questions may arise as to when the defender first knew that he was to receive remuneration for acting as a consultant in addition to the enhanced price per share. It may be, for aught yet seen, that in the summer of 2007 the defender had envisaged that his remuneration would be limited to the enhanced share price. But the case which the pursuers advanced, as explained by Mr Sandison and as set out in article 6 of condescendence, involved a continuing representation which was acted on when the pursuers entered into the Share Purchase Agreement on 30 November 2007. In other words the pursuers asserted that in June and August 2007 the defender had made a material communication to them which brought about a false understanding on their part and which by the time of the settlement meeting the defender knew or ought to have known was untrue. The pursuers asserted that, having made the earlier representation, the defender was guilty of misrepresentation through his failure to disclose his remuneration under the Consultancy Agreement at any time before they signed the Share Purchase Agreement.

[23] In With v O'Flanagan [1936] 1 Ch 575 the Court of Appeal held that it was a misrepresentation for the vendor of a medical practice, who had made a representation about the profitability of the business, to fail to disclose to the intending purchaser a subsequent change of circumstances which made the representation untrue at the time the parties signed the contract of sale. Romer LJ at p. 586 summarised the principle in these terms:

[24] In my opinion the defender's challenge to the pursuers' case of either fraudulent or negligent misrepresentation fails. The pursuers have in my opinion given fair notice of the substance of the alleged misrepresentation. The pleadings in this case are very different from those in Drummond's Trustees, on which Mr Logan founded, in which there were very general allegations of fraud but no specification of the acts or statements which constituted the alleged fraud. In that case the action was dismissed on a plea to the relevancy. By contrast, for the reasons set out above, on applying the test of relevancy in Jamieson v Jamieson 1952 SC (HL) 44 I am not satisfied that this action, so far as resting on an alleged misrepresentation, would necessarily fail.

[25] The pursuers' alternative case is that the defender is bound to account to them for a share of the remuneration which he has received or will receive under the Consultancy Agreement because he while acting in a fiduciary capacity allowed a conflict to exist between his personal interest and his duty to the other shareholders, including the pursuers. The share which the pursuers claim is 44% which is the proportion of the pursuers' shareholding to the holdings of the other shareholders, excluding the defender. In other words the pursuers proceed in the basis that the defender has to disgorge his entire earnings under the Consultancy Agreement to the pursuers and the other shareholders and the pursuers claim their proportionate share of that sum.

[26] In answer to the defender's submission set out in paragraph 13 above, Mr Sandison referred to Huntington Copper Co v Henderson (1877) 4 R 294 and (1877) 5R (HL) 1 and in particular the opinion of the Lord Ordinary, Lord Young, in 4 R at pp. 299-301 in which he stated:

[27] I consider that the facts of that case are not on all fours with the present case as the Huntington case involved payment of the fiduciary out of money provided by the company, which was his principal, to purchase the mines. It may more readily than this case be categorised as a fiduciary obtaining a secret profit through the execution of his trust: see the Lord President (Inglis) in 4R at p. 308. It is well established that judicial statements about fiduciary duties need to be understood in the context of the particular facts of the particular case. Nonetheless, the general principle in relation to conflict of interest which Lord Young stated is not in doubt. The classic statement of that principle by Lord Cranworth LC in Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461 (at pp. 471-472), which concerned the duties of directors of a company, has been applied to agents and other fiduciaries in many contexts. It is as follows:

"The Directors are a body to whom is delegated the duty of managing the general affairs of the Company.

A corporate body can only act by agents, and it is of course the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a fiduciary nature towards their principal. And it is a rule of universal application, that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect.

So strictly is this principle adhered to, that no question is allowed to be raised as to the fairness or unfairness of the contract so entered into.

It obviously is, or may be, impossible to demonstrate how far in any particular case the terms of such a contract have been the best for the interest of the cestui que trust, which it is possible to obtain.

It may sometimes happen that the terms on which a trustee has dealt or attempted to deal with the estate or interests of those for whom he is a trustee, have been as good as could have been obtained from any other person, - they may even at the time have been better.

But so inflexible is the rule that no inquiry on that subject is permitted."

The core principle, what Lord Cranworth described as the rule of universal application, has often been reaffirmed, as for example by Lord Upjohn in Boardman v Phipps [1967] AC 46 at pp. 123-125: a trustee must not place himself in a position where his duty and his interest may conflict.

[28] Certain rules, which appear to me to be relevant to this case, are involved in or stem from that principle. First, a fiduciary may not enter an engagement which involves such a conflict of interest or which the reasonable man would think gives rise to "a real sensible possibility of conflict": Boardman v Phipps, Lord Upjohn at p. 124. Secondly, in that context, a fiduciary may not act for his own benefit or for the benefit of a third party without having obtained the informed consent of his principal: Huntington Copper, Lord Young at p. 301; Bristol & West Building Society v Mothew [1998] Ch 1, Millett LJ at p. 18. Thirdly, the fiduciary's good faith and the absence of loss to the principal do not remove the fiduciary's obligation to account: Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134, Lord Russell of Killowen at pp. 144-145; Aberdeen Railway Co (above). Fourthly, in the absence of the principal's informed consent it is not sufficient for the fiduciary to establish that if he had disclosed the benefit he would have obtained that consent: Murad v Al-Saraj [2005] EWCA Civ 959, Arden LJ at paragraph 71.

[29] In the present case the defender was acting as agent of the shareholders in negotiating the sale of LAGTA. In those negotiations the purchasers wanted (a) to purchase the shares of the company and (b) to obtain the defender's services as a consultant for a transitional period. It may be expected that the purchasers would consider what was the appropriate aggregate price to obtain both (a) and (b). As a result what was paid for the latter would diminish the price of the former. In addition, within the consideration for the shares was the differential of price which related to the defender's services. I am therefore not persuaded that the pursuers' averments are irrelevant to support a conflict of interest or at least a case of a real sensible possibility of such conflict. The Consultancy Agreement was not res inter alios acta in relation to the shareholders other than the defender. While the defender by entering into the Compromise Agreement and the Consultancy Agreement may have surrendered valuable rights under his contract of employment, that is no answer to the pursuers' assertion that he obtained benefits in the context of a conflict of interest without their informed consent.

[30] At the end of the debate Mr Logan implicitly accepted that he had not demonstrated that the breach of fiduciary duty case was irrelevant. He suggested that he needed to consider his pleadings both in relation to the question of disclosure of the contracts at the settlement meeting and in response to the quantification of the pursuer's claim.

[31] I am satisfied that the defender's challenge to the relevancy of the pursuer's pleadings at this stage fails. I therefore accede to the pursuer's motion and allow a proof before answer.