Scottish Court of Session Decisions

 

OUTER HOUSE, COURT OF SESSION   [2008] CSOH 26
CA55/07	OPINION OF LORD DRUMMOND YOUNG   in the cause   INVERESK PLC   Pursuers;   against   TULLIS RUSSELL PAPERMAKERS LIMITED   Defenders:     ­­­­­­­­­­­­­­­­­________________

 

 

Pursuers: Lake; McGrigors LLP

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

 

15 February 2008

 

[1] On 9 June 2005 the pursuers and the defenders entered into an agreement, known as the Asset Purchase Agreement, in terms of which the pursuers sold to the defenders business assets, including intellectual property rights and customer information; these assets related to the manufacture of certain brands of paper. On the same date the parties entered into a second agreement, known as the Services Agreement, under which the pursuers undertook to continue to manufacture, sell and distribute specified products for the period from 9 June 2005 to 8 November 2005 or until that agreement was terminated. The present action is concerned with the construction of the Asset Purchase Agreement.

 

The parties' contract

[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 3of 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 five 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 to 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 five 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.

 

Pleadings

[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. 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. 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.

[7] The pursuers contend that they have dropped their objection to the defenders' draft Consideration Accounts. The result is that the Consideration Accounts are agreed; a Tonnage Audit is not required, and the figure stated in the defenders' draft Accounts is binding on the parties. Consequently the pursuers are entitled to payment of the Additional Consideration brought out in the adjusted 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 in which decree de plano is sought. 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, and I will consider it separately from the conclusion for payment.

 

[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, the defenders' Accountant, determines the Tonnage, it is said that the pursuers had no relevant claim for Additional Consideration.

 

Arguments

[9] The action was appointed to debate on the parties' preliminary pleas. At the debate counsel for the defenders submitted in the first place that the action was premature because the Tonnage Audit had not been carried out. The Additional Consideration must be determined by the procedures agreed in the contract. In the present case the pursuers' solicitors had on 31 January 2007 invoked the Tonnage Audit procedure, and until that procedure had been carried out no proceedings could be raised. Consequently the action should be dismissed. Reference was made to Caledonian Insurance Company v Gilmour, 1892, 20 R (HL) 13, and to Caledonian Railway Company v Glasgow Corporation, 1905, 7 F 1020; these cases, it was said, vouched the proposition that, if parties had agreed as to the way in which a liability to pay was to be determined, that was binding, and if the contractual method of determining liability was not followed the pursuers would be trying to enforce a contract of a different nature. Although the point was not made expressly, it seemed to be implicit in counsel's argument that once the Tonnage Audit procedure had been invoked it was impossible for one party to concede that the other was correct and thus render the whole procedure redundant. If that is a correct understanding of the argument, it would appear to be based on the view that the Tonnage Audit procedure was essential to the determination of the defenders' liability. In the second place, counsel for the defenders submitted that the parties had contracted to proceed to an expert determination by the defenders' Accountants. That determination was not merely a method of dispute resolution but was an essential means of fixing the price payable by the defenders. Thus it could not be said that the Tonnage Audit procedure was non-essential, as it was the method agreed upon by the parties to determine the Additional Consideration. Reference was made to Hamlyn & Co v Talisker Distillery, 1894, 21 R (HL) 21, and to a series of English cases: Jones v Sherwood Computer Services PLC, [1992] 1 WLR 277; Norwich Union Life Insurance Society v P&O Property Holdings Ltd, [1993] 1EGLR 164; Gillatt v Sky Television Ltd, [2000] 2 BCLC 103; Infiniteland Ltd v Artisan Contracting Ltd, [2006] 1 BCLC 632; and Fiona Trust & Holding Corporation v Privalov, [2007] 4 All ER 951. It was submitted that the court should either dismiss the action or sist the action pending the outcome of the expert determination. Counsel further submitted in relation to the pursuers' conclusion for declarator that the court should not direct the defenders' Accountants how to carry out the Tonnage Audit; that would involve interference with the contractually agreed procedure. In his reply to the submission for the pursuers, counsel for the defenders adopted a different line of argument; he submitted that the procedures in paragraphs 4 and 5 of Part 3 of the Schedule had

the effect that the parties were bound into the Tonnage Audit procedure, without the possibility of withdrawal.

[10] For the pursuers, counsel submitted that the court should not dismiss or sist the action; the pursuers' plea-in-law to the relevancy of the defences should be sustained and decree de plano should be granted. He submitted that the matters in dispute turned on the interpretation of the parties' contract. In terms of that contract, the liability of the defenders was to pay Additional Consideration, which was calculated in accordance with the formula found in paragraph 1.1 of Part 3. That exercise did not require any reference to the defenders' Accountants, or any certificate from those Accountants. Thus a decision by the Accountants was not a condition precedent to the defenders' liability; indeed it was not inevitable under the terms of the parties' contract. The critical input into the Additional Consideration was the Tonnage. Tonnage was defined (in paragraph 1.1) as the amount in terms of the Product "as provided for in the Consideration Accounts". This was significant because it indicated that the Consideration Accounts were the starting point in calculating the Additional Consideration and in carrying out any Tonnage Audit. The Tonnage Audit itself, according to paragraph 5.1, was concerned with "verification" of the Tonnage, which in turn, through the definition of Tonnage, was the figure included in the Consideration Accounts. The mechanisms for finalization of the draft Consideration Accounts were found in paragraph 4; in summary, these involved the preparation of draft Consideration Accounts by the defenders, proposed adjustments or an election for a Tonnage Audit by the pursuers and, if necessary, a reference to a Tonnage Audit in accordance with paragraph 5. It was clear from these provisions, however, that if agreement was reached as to the figures for Tonnage and Additional Consideration, the agreed figure became due immediately and no Tonnage Audit was required. So far as paragraph 5 was concerned, the function of the defenders' Accountants was to look at the figure for Tonnage in the Consideration Accounts and determine whether that figure was correct. That was the plain meaning of the direction "to confirm and verify the Tonnage", and the word "Audit" was to the same effect. Thus the exercise involves consideration of the figures in the draft Consideration Accounts, and the decision as to whether that figure should be changed. The purpose of the Tonnage Audit was not, as the defenders contended, to fix the price; the price was fixed by other provisions of the parties' agreement and the finalization and Tonnage Audit procedures were designed to let the pursuers have some input into the Consideration Accounts and to settle any disputes, by checking the figure for Tonnage in the draft Consideration Accounts. In the present case, the pursuers had withdrawn their objection to the draft Consideration Accounts put forward by the defenders. At that point the dispute was at an end, and the Tonnage Audit was unnecessary.

 

Analysis of contract

[11] The fundamental issue in dispute between the parties is the nature of the Tonnage Audit procedure specified in paragraphs 4.3 and 5 of Part 3 of the Schedule to the Asset Purchase Agreement. The defenders' primary contention, if I understand their argument correctly, is that that procedure is in the circumstances of the case an essential means of determining the Additional Consideration. Consequently, once the procedure has been invoked, neither party may withdraw from it and the court may not enforce payment of the Additional Consideration until the procedure has been completed. The pursuers, by contrast, contend that the Tonnage Audit procedure is not essential to the determination of the Additional Consideration, but is merely a method of resolving a dispute as to the Tonnage if such a dispute should arise. If, however, there is no dispute the procedure is unnecessary and the Additional Consideration is determined by the other provisions of Part 3, notably paragraphs 1.1 and 4.

[12] In my opinion the pursuers' argument is clearly correct, both on the construction of the agreement and as a matter of commercial common sense. As a matter of general law, parties may of course draft a contract in such a way that an obligation does not arise until the happening of a particular event. That may be framed as a suspensive condition, or condition precedent, in such a way that the obligation is contingent upon the event. It is also possible to provide that an obligation does not arise until a determination by an identified party; in that event the determination is an essential condition of the obligation. In other cases, however, an obligation may arise on the happening of an event defined in the contract but an identified party is given power to review the extent of the obligation, acting either as an expert or as an arbiter. In such a case the determination is not essential to the existence of the obligation but merely serves as a method of review. This distinction is referred to in the speech of Lord Watson in Caledonian Insurance Co v Gilmour, 1892, 20 R 13. That case was concerned with the old rule, abolished by the Arbitration Act 1894, whereby a reference to an unnamed arbiter was invalid in Scots law. Lord Watson stated (at 18):

"In my opinion, the distinction between those contracts of submission to arbiters unnamed which have been held to be invalid and those which the law sustains is to be found in the fact that the one class does, whilst the other does not, oust the jurisdiction of the ordinary Courts of the country.... [W]here the object of the reference is to ascertain some fact or term which is made essential to the constitution of contract rights or liabilities, it does not raise a proper lis. As Lord Deas said in Cochrane v Guthrie (Feb. 3, 1859, 21 D 376...), -- 'It has long been settled that such a stipulation is effectual. It is not a submission of disputes and differences. It is an agreement that the occurrence of a certain contingency shall be ascertained in a certain way, and in that way only'".

The distinction between cases where the determination of an identified person (whether named or unnamed) is essential to the existence of the obligation and cases where the identified person is merely given a power of review is a matter that depends upon the intention of the parties as disclosed in the terms of their contract. Consequently it is necessary to examine the terms of the Asset Purchase Agreement to determine the nature of the reference to the defenders' Accountants in a Tonnage Audit.

[13] The purpose of a Tonnage Audit is to determine whether Additional Consideration is payable; consequently the starting point must be the definition of Additional Consideration in paragraph 1.1 of Part 3 of the Schedule. That definition, which is quoted above at paragraph [3], specifies a formula based on Tonnage; once the Tonnage is ascertained the formula is a matter of simple arithmetical calculation. It is significant that there is no reference in the definition of Additional Consideration to the intervention of the defenders' Accountants, or to any form of certification; the formula goes straight to Tonnage, and clearly implies that the Tonnage should be objectively ascertained. Tonnage is also defined in paragraph 1.1. The critical element of the definition is "the amount in tonnes of the Product for which the Purchaser receives orders... as provided for in the Consideration Accounts". Once again, the reference is to a quantity of Product, and the plain implication is that that quantity should be objectively ascertained. There is no reference to any determination by the defenders' Accountants or any other third party, or to any certification by such a person. Instead, the relevant amount, objectively ascertained, is to be found in the Consideration Accounts; that is the obvious meaning of the concluding words of the definition.

[14] The preparation of the Consideration Accounts is dealt with in detail in paragraphs 3-5 of Part 3. Before that, however, paragraph 2.1 states that the Purchaser shall pay to the Vendor the Additional Consideration on the Payment Date. Nothing is said there about any condition suspensive of that obligation to pay. Paragraph 3.1 provides that the Consideration Accounts are to specify the Tonnage and a calculation of the Additional Consideration; that calculation obviously proceeds on the basis of the formula found in the definition of Additional Consideration. Once again, the wording of the clause is entirely consistent with the view that the Tonnage must be objectively ascertained and is not dependent upon any determination by the defenders' Accountants or any other third party. The procedures for preparing the Consideration Accounts are found in paragraph 4. Initially, the Purchaser (the defenders) must prepare and serve on the Vendor a draft of the Consideration Accounts (paragraph 4.1). The Vendor is then given a period of 10 Business Days to consider these; the Vendor may if it wishes notify adjustments to the draft Consideration Accounts or elect that the Purchaser's Accountants carry out a Tonnage Audit (paragraph 4.2). If the Vendor notifies the Purchaser that neither of these procedures is to be invoked, or if the Vendor simply does nothing during the 10-day period, the draft Consideration Accounts and the Tonnage and Additional Consideration specified therein are to be final (paragraph 4.3). If adjustments are proposed by the Vendor, the parties may agree on the adjustments that are appropriate, in which case those are to be final; if that is not achieved within five Business Days the provisions relating to a Tonnage Audit apply (paragraph 4.4). In all of these provisions it is significant that, if parties are able to reach agreement, the version of the Consideration Accounts that is so agreed becomes final and binding for all purposes. That is in my opinion a clear indication that the Tonnage Audit provisions are seen as a procedure of last resort, to be used only if the parties cannot agree. On that basis, it is obvious that a decision of the defenders' Accountants under the Tonnage Audit provisions cannot be an essential condition of liability to pay Additional Consideration, because in any case where the defenders' figures for Tonnage and Additional Consideration are not disputed or where agreement can be reached as to the amounts of Tonnage and Additional Consideration the Accountants simply do not become involved. This point seems to me to be of fundamental importance.

[15] The provisions of the agreement dealing with a Tonnage Audit are found in paragraph 5. Paragraph 5.1(a) states that the Purchaser is to procure "that the Purchaser's Accountants carry out the Tonnage Audit to confirm and verify the Tonnage". The words "confirm and verify" are significant; they are in my opinion a clear indication that the function of the Accountants is to consider the figure stated in the Consideration Accounts for Tonnage and decide whether it needs to be changed to reflect the objectively measured Tonnage. What is involved is a review of the Tonnage figure that appears in the Consideration Accounts, in order to resolve the dispute that ex hypothesi exists between the parties in the event of a Tonnage Audit. Thus the Accountants' determination cannot be said to be an essential condition of the existence of a liability to pay Additional Consideration; that liability exists independently and objectively and is not conditional on any actings of the Accountants.

[16] I accordingly conclude on the basis of the terms of Part 3 of the Schedule that the determination of the defenders' Accountants is not, as the defenders contend, an essential means of fixing the price that is payable; it is merely a means of dispute resolution, and in cases where the parties are not in dispute it is redundant. In particular, a determination by the defenders' Accountants is not a condition suspensive of liability to pay the Additional Consideration; indeed, as mentioned above, in a range of situations a final and conclusive obligation to pay Additional Consideration can come into existence without any intervention by the Accountants. In Addleshaw Goddard's letter of 14 March 2007 it was indicated on behalf of the pursuers that no adjustment required to be made to the defenders' draft Consideration Accounts dated 5 December 2006 and that the pursuers withdrew their request that a Tonnage Audit be undertaken. The letter went on to state that the draft Consideration Accounts, and the Tonnage and Additional Consideration specified in those Accounts, should accordingly be the Consideration Accounts, Tonnage and Additional Consideration for all purposes of the Asset Purchase Agreement. The result of that letter was in my opinion that there was no dispute between the parties; the figure put forward by the defenders in the draft Consideration Accounts for Tonnage was accepted as correct, as were the consequential calculations.

[17] If the purpose of the Tonnage Audit procedures is to resolve disputes, not to serve as a precondition of liability, I am of opinion that the intention of the parties must have been that those procedures should only operate if there is a dispute between them; in the absence of any dispute they serve no useful purpose. Any other construction would make no commercial sense. It follows that, when the pursuers withdrew their objections to the defenders' draft Consideration Accounts, the Tonnage Audit procedures were no longer operative; those draft Consideration Accounts became final for all the purposes of the Asset Purchase Agreement and the amount of Additional Consideration brought out in them became conclusive as between the parties. It was accordingly immediately payable, and is now due and payable.

[18] The secondary position advanced on behalf of the defenders was that, as a matter of construction of Part 3 of the Schedule, once the Tonnage Audit procedure had been invoked the parties were conclusively bound into it, without the possibility of withdrawal. That would mean that, if the pursuers put forward adjustments and the defenders then decided to depart from their position in the draft Consideration Accounts by adopting a lower Tonnage figure, the Accountants would require to consider the defenders' new Tonnage figure. In my opinion that is not a correct construction of Part 3. Two features are of importance in this connection: the general structure of paragraphs 3-5 and the function of a Tonnage Audit. The general structure of paragraph 3-5 is that the defenders prepare draft Consideration Accounts which include an amount for Tonnage. The pursuers may, if they wish, challenge those Accounts by proposing adjustments or electing for a Tonnage Audit. In either event, provision is made in paragraphs 4.3 and 4.4 for a possible agreement between the parties or acquiescence by the pursuers in the defenders' draft Consideration Accounts; paragraph 4.3 deals with such agreement or acquiescence during the 10 business days after service of the draft Consideration Accounts and paragraph 4.4 deals with the possibility of agreement within five business days following the notification of adjustments. Nothing is said about the possibility of agreement thereafter. Nevertheless, the clear intention underlying these provisions is that if the parties are in agreement that is an end of the matter. That approach is plainly commercially sensible in that an expert determination is avoided if at all possible. Nothing is said Part 3 about agreement as to the correct form of the Consideration Accounts following the end of the periods specified in paragraphs 4.3 and 4.4. Nevertheless, it seems to me to be obvious that, if such agreement were to be reached, the parties' intention as disclosed in their agreement was that the Tonnage Audit procedures would not be necessary. Counsel for the defenders also mentioned the provisions for finalizing the Consideration Accounts found in paragraphs 4.3, 4.4 and 5.4. Nothing is said expressly to deal with the possibility that the parties reach agreement at a stage after the Tonnage Audit procedures have been invoked. As a matter of common sense, however, if the draft Consideration Accounts are agreed at that stage they must immediately become the final Consideration Accounts, and payment will be due thereafter. Any other view would be commercially unrealistic.

[19] The second important feature of Part 3 is the function of a Tonnage Audit. Paragraph 5.1(a) specifies that the defenders' Accountants are to carry out the Tonnage Audit "to confirm and verify the Tonnage". The Tonnage, as defined in paragraph 1.1, is as provided for in the Consideration Accounts. The task that must be performed by the Accountants is accordingly to check the Tonnage figure put forward by the defenders in the draft Consideration Accounts to determine whether it is correct. The hypothesis that clearly underlies this function is that the Tonnage figure in the draft Consideration Accounts is disputed. If it is not, the defenders' Accountants have nothing to do; in that event the defenders' figure for Tonnage is accepted by the pursuers and checking it would serve no useful purpose. On the basis of the terms of the parties' agreement, therefore, I am of opinion that the parties' intention was that a Tonnage Audit should not proceed if the pursuers accepted the defenders' Tonnage figure; that amounts to agreement as to the appropriate figure, rendering expert determination unnecessary.

[20] Counsel for the defenders, as I understood his argument, suggested that in the present case there was a live dispute between the parties because the defenders had, in a letter dated 30 January 2007 from their solicitors to the pursuers' solicitors, asserted that the Tonnage figure in the draft Consideration Accounts was incorrect (see paragraph [28] below). In my opinion this has no bearing on the question of whether a Tonnage Audit was necessary. A Tonnage Audit, as explained in the last paragraph, involves checking the Tonnage figure put forward in the draft Consideration Accounts. That is of course a figure that is produced by the defenders. The only provision that is made for either party to put forward an alternative figure is the pursuers' power to notify adjustments. There is no equivalent provision permitting the defenders to put forward an alternative figure. Moreover, the exercise that is involved in the Tonnage Audit is the confirmation and verification of the Tonnage figure found in the draft Consideration Accounts, and it is performed by the defenders' Accountants acting as experts; that indicates that the Accountants must examine the books, financial records and other relevant documents of the defenders in order to determine what the correct Tonnage figure is. That does not involve arbitrating between competing positions; consequently there is no scope for consideration of any alternative position put forward by the defenders. Indeed, the function of the adjustments that they be proposed by the pursuers is not to give the expert an alternative position to consider, but rather to permit the parties to negotiate over the draft Consideration Accounts, as envisaged by paragraph 4.4.

 

[21] I should make two further short points in this connection. First, the Tonnage figure in the draft Consideration Accounts is the defenders' figure, calculated by them, presumably, on the basis of their own books and records; consequently it is difficult to see that there will be any prejudice in holding that that Tonnage figure is the basis for all further procedure, and that if the pursuers agree to that figure, at whatever time, a Tonnage Audit is unnecessary. Secondly, as a general point, it seems to me that the interpretation of Part 3 of the Schedule advanced by counsel for the defenders relied too much on a mechanistic construction of the contractual provisions; once a Tonnage Audit had been invoked the parties were locked into that procedure. That argument failed to have regard to the underlying commercial purposes of the parties' agreement.

[22] For the foregoing reasons I am of opinion that the defenders cannot argue that the present proceedings are premature; nor can they claim that the Tonnage Audit procedure was essential to fix their liability. Consequently their pleas to the relevancy of the present proceedings and to the court's jurisdiction are ill founded and must be repelled. Likewise, the pursuers' plea to the relevancy of the defences must be sustained, and they are entitled to decree de plano for the sum claimed in the first conclusion.

[23] Counsel for the defenders cited a substantial number of cases in support of his argument. Apart from the passage cited above from the speech of Lord Watson in Caledonian Insurance Co v Gilmour, 1892, 20 R 13, I did not find these of any real assistance. They no doubt vouch the proposition that, if a third party's determination is necessary to establish a contractual obligation, there is no obligation until that determination has been made, but it is scarcely necessary to refer to authority to make that point. Counsel for the pursuers referred to two further Scottish cases, the decisions of Lord Penrose in Franborough Properties Ltd v Scottish Enterprise, 14 June 1996, unreported, and Lord Hamilton in Mars Pension Trustees Ltd v County Properties & Developments Ltd, 1999 SC 10. In those cases the general proposition vouched by the English cases is affirmed. Lord Penrose, after discussing the English cases, stated (at 14-15 of his opinion in Franborough):

"Apart from providing guidance on the general approach to be adopted, none of the authorities to which I was referred assist.... The question is simply one of contract. If the parties have agreed that classification as well as quantification is within the scope of the surveyor's powers of certification, they are bound by his decision given honestly and in good faith, even if he has made a mistake. I do not think that any of the particular decisions is relevant".

A similar approach is adopted by Lord Hamilton in Mars, where he cites Franborough with approval at page 18, and emphasizes (at page 18 and again at page 19) that the question is simply one of contract. I respectfully agree with that approach; it seems to me that the decision in the present case must turn on the construction of the Asset Purchase Agreement, and that the cases cited are of little significance.

[24] Nevertheless, I should comment briefly on each of those cases. Caledonian Insurance Company v Gilmour, supra, supports the view that a distinction falls to be drawn between cases where the determination of a third-party is a condition suspensive of contractual obligation and cases where that determination is a means of resolving disputes, in the manner discussed at paragraph [12] above. Caledonian Railway Company v Glasgow Corporation, supra, was a case where the pursuers' challenge to the Corporation's determination of the width of various streets was held to be premature because it was subject to statutory review by the Sheriff. In that case, however, the statutory procedures that permitted an appeal to the Sheriff were still live; in the present case, by contrast, the dispute was ended by the pursuers' intimation that they accepted the defenders' draft Consideration Accounts. Altogether, I did not find that decision to be of assistance. Hamlyn & Co v Talisker Distillery, supra, is a well-known case dealing with arbitration clauses. It is authority for the proposition that, where there is a valid arbitration clause, any court proceedings should be sisted to permit the arbitration to take place: see Lord Watson at 21 R (HL) 25. Nevertheless, if the matter in dispute ceases to be live, there is no rationale for arbitration or any other form of dispute resolution outwith the courts, and the courts should not be astute to give effect to an arbitration clause or its equivalent in those circumstances. Jones v Sherwood Computer Services PLC, supra, is authority for the proposition that, where a matter has been remitted to an expert, the expert's report is binding provided that it is within the terms of the remit. The importance of examining the parties' agreement in determining the extent of the remit is emphasized. In the present case, of course, the critical question is whether the remit to the defenders' Accountants as experts is still live; that is a different matter. Norwich Union Life Insurance Society v P&O Property Holdings Ltd, supra, makes the same point as Lord Penrose in Franborough and Lord Hamilton in Mars; when a reference is made to an arbiter or an expert, the ambit of the matter entrusted to him is a question of interpretation of the contract: see Sir Donald Nicholls at [1993] 1 EGLR 166. In this respect, "each agreement must depend on its own terms, read in its own context. Comparing one case and one document with another gives, at best, very limited assistance": ibid.

 

[25] Counsel for the defenders placed considerable emphasis on the decision of the Court of Appeal in Gillatt v Sky Television Ltd, supra; nevertheless, the case appears to be to be one that turns on its own particular facts. In an agreement for the sale of the entire shareholding in a company, it was provided that if the purchaser subsequently disposed of the company the seller would be entitled to 55% of the open market value of the shares in the company as determined by an independent chartered accountant. The purchaser disposed of the shares, but no independent accountant was appointed and by the time the case reached a hearing, eight years later, it was agreed that it was too late for any appointment to be made. It was held that the determination of the open market value by an independent chartered accountant was an essential precondition of the seller's entitlement to 55% of that value. The decision turned, however, on the precise wording of the relevant contractual provision. This referred to an obligation to pay "55% of the open market value of such shares... as determined by an independent chartered accountant". It was held by Mummery LJ (at [2000] 2 BCLC 111i-112c) that the reference to the determination of the independent accountant was an integral and essential part of the definition of the payments that were to be made; it was not merely a mechanism or premise of procedure for dispute resolution. In this respect the present case seems to me to be readily distinguishable, in that the decision of the defenders' Accountants on a Tonnage Audit was in no way a condition suspensive of the obligation to pay Additional Consideration. In Gillatt Mummery LJ went on (at [2000] 2 BCLC 112e-i) to suggest that a reference to "open market value" of shares would not provide the court with adequate objective criteria to determine their value; this was prayed in aid as supporting the view that the independent accountant's determination was essential before an obligation to make payment could arise. I am bound to say that the expression "open market value" seems to me to be quite sufficiently definite to be given effect by a court. Obviously expert evidence would be required to determine what that value was, but the expression itself is in my opinion quite capable of interpretation without recourse to the views of a chosen expert.

[26] Infiniteland Ltd v Artisan Contracting Ltd, supra, is also in my opinion readily distinguishable. The case was one where parties had provided a contractual mechanism for adjustment of the purchase price of certain shares. The plaintiffs failed to make use of the contractual mechanism but then asked the court to enforce the contract on the basis that the agreed procedures were non-essential. It was held that, on the construction of the contract, the mechanism was essential if the price was to be adjusted; consequently the action failed. In the present case, by contrast, I am of opinion that the Tonnage Audit procedure is not essential to determine the amount of Additional Consideration, but merely provides a means of resolving a dispute, if a dispute exists. Finally, counsel for the defenders referred to Fiona Trust & Holding Corporation v Privalov, supra, at paragraphs [4]-[8], as authority for the proposition that in construing a contractual provision, in that case an arbitration clause, it was necessary to have regard to the commercial purpose of the provision. That proposition is vouched by a considerable number of Scottish cases, and, if I may respectfully say so, is clearly correct. In the present case, however, commercial considerations appear to me to favour the pursuers' argument.

 

Pursuers' secondary position: declarator as to paper included in Tonnage

[27] In view of the decision that I have reached on the main issue in this action, whether the pursuers are entitled to payment of Additional Consideration amounting to £909,395, the pursuers' secondary position is not relevant, but I must nevertheless express a view on the matter. The second conclusion is in the following terms:

"For declarator that quantities of papers under the 'DualCote Duo', 'Libra' and 'DuoCard' grades for which orders were received by the defenders in the period from 8 November 2005 to 8 November 2006 (inclusive) and invoices issued by them in the period from 8 November 2005 to 22 November 2006 (inclusive) are included in the 'Tonnage' for purposes of calculating the 'Additional Consideration' as those terms are used in the agreement between the pursuers and the defenders dated 9 June 2005 in terms of which the pursuers sold to the defenders of business assets including intellectual property rights, customer information and related assets".

The issue raised in this conclusion is only relevant if a Tonnage Audit proceeds. It is explained in the pursuers' pleadings as follows. The defenders have claimed that in the course of the Tonnage Audit they are entitled to review the figures included by them in their draft Consideration Accounts to exclude sales of papers under the "DualCote Duo", "Libra" and "DuoCard" grades. The pursuers dispute not only that the defenders have any entitlement to review the draft Consideration Accounts prepared by them (one of the issues discussed above) but also the proposition that these grades of paper should be excluded from the Tonnage. It is averred that the three names, "DualCote Duo", "Libra" and "DuoCard", are brand names which certain former customers of the pursuers applied to the pursuers' products for the purpose of onward sale. The product was nevertheless sold by the pursuers as grades of "Gemini", and thus fell within the definition of Product in the Asset Purchase Agreement; it is further averred that the defenders were made aware of that practice in the course of disclosure of documents in the due diligence exercise.

 

[28] In the defences it is averred that the Tonnage Audit requires to be completed by the expert, the defenders' Accountants, and that it is their determination of the Tonnage that will be binding on the parties. Certain correspondence is incorporated into the defences. Counsel for the pursuers referred to three letters from Dundas & Wilson, the defenders' solicitors, to Addleshaw Goddard, the pursuers' solicitors, which form part of that correspondence. First, in a letter dated 30 January 2007 Dundas & Wilson wrote as follows:

"Tullis Russell has advised that the Draft Consideration Accounts and the revised Tonnage figure intimated on 8 November and 5 December 2006 included tonnage that related to paper that was not sold under the Gemini brand, for example Duocard. Such sales should clearly not be taken into account in calculating the Tonnage for the purposes of the Draft Consideration Accounts".

The writer of the letter went on to give an anticipated revised Tonnage figure, and stated that the defenders were currently preparing revised draft Consideration Accounts. In a subsequent letter dated 2 February 2007 Dundas & Wilson submitted a further set of figures which, they stated, were to be submitted to the defenders' Accountants. Finally, in a letter of 20 February 2007 Dundas & Wilson stated that the remit to the defenders' Accountants was not limited to areas in which the parties failed to reach agreement, but was rather to carry out a full Tonnage Audit.

[29] Counsel for the pursuers referred to the foregoing correspondence and submitted that the procedures proposed on behalf of the defenders involved a departure from the terms of the parties' contract. The defenders had provided draft Consideration Accounts, in accordance with the contract, and once the draft Accounts had been provided there was no provision in the contract that permitted the defenders to change their terms. In the draft Consideration Accounts the defenders had stated a particular Tonnage figure for the Product, but they were now trying to assert that that Tonnage figure was wrong. That involved a challenge to the terms of their own draft Consideration Accounts. It was beyond the powers of the expert under paragraph 5 of Part 3 to consider any such amended Accounts. Counsel for the defenders had submitted that the court was not in a position at this stage to say that the expert would exceed his jurisdiction. The pursuers' response to that was that the court could so hold, on the basis of the defences and the correspondence incorporated into the defences; these made it clear that the defenders were trying to impose limitations on the expert that were not specified in the contract. The declarator that was sought was to resolve issues that were presently live between the parties and to inform the defenders of the proper scope of the remit to the expert under the Tonnage Audit.

[30] Counsel for the defenders submitted that a remit to an expert had been made; consequently the court should not interfere with the expert's determination until he had come to a decision. Reliance was placed on Caledonian Railway Company v Glasgow Corporation, supra. Counsel further submitted that the expert's task was to "confirm and verify" the Tonnage, as provided in paragraph 5.1. If the court granted the declarator sought by the pursuers, that would alter the matter remitted to the expert. Counsel further submitted that the defences that had been lodged dealt with the question of the court's jurisdiction. Nothing had been said regarding the specific types of paper mentioned by the pursuers in the pleadings (see paragraph [27] above). The defenders would require to adjust their pleadings further to cover this issue.

 

[31] In my opinion the pursuers would, if there had been a live reference to a Tonnage Audit, have been entitled to declarator in terms of the second conclusion. That declarator does not alter the matter referred to the defenders' Accountants, which remains precisely as specified in paragraph 5.1. What the declarator does is to resolve a dispute that has arisen between the parties as to what is included in the definition of Product for the purpose of determining the Tonnage. The dispute is formulated clearly in the pursuers' pleadings; they aver that the specified names, "DualCote Duo", "Libra" and "DuoCard", were brand names used by customers in respect of paper sold by the pursuers as grades of "Gemini"; the paper thus fell within the definition of Product in the Asset Purchase Agreement. The defenders make a formal denial of the pursuers' averments, but do not provide any explanation of that denial or why they contend that the pursuers' averments are incorrect. The action is at the stage of a debate on pleas to relevancy, not a motion for summary decree; consequently it is to be expected that the parties' pleadings will be in a form sufficient to state a relevant case. In my view the defences on this aspect of the case are irrelevant. Consequently, if I had taken the view that there was an effective reference to a Tonnage Audit, I would have pronounced declarator in terms of the second conclusion of the summons.

 

Conclusion

[32] For the reasons stated I will repel the defenders' pleas-in-law and sustain the pursuers' third plea-in-law, which is to the relevancy of the defences, and their first plea-in-law, which supports the first conclusion of the summons. I will accordingly pronounce decree de plano for £909,395 plus judicial interest from citation in terms of the first conclusion of the summons.