Scottish Court of Session Decisions

Pursuers: Johnston QC, Hastie; Tods Murray LLP

Defenders: Murphy QC, R. Dunlop; Brodies LLP

29 May 2009

[1] On 29 May 2008 the defenders, who are a limited liability partnership of solicitors, offered in a detailed formal letter to purchase commercial subjects at 227 West George Street, Glasgow, at a price of £8,800,000, on behalf of a purchaser, who was defined in the offer as "the Members of the 227 Syndicate". There was no such syndicate. Tods Murray LLP on behalf of the pursuers accepted the offer on the same day in an unqualified acceptance. The pursuers have raised this action seeking (i) declarator that the defenders are personally liable to implement the contract and damages for breach of contract, and, in the alternative, (ii) damages for loss caused by negligent misrepresentation.

[2] In the debate parties discussed whether the pursuers had pleaded a relevant case that the defenders were personally liable to implement the contract, because they, knowing of the non-existence of the principal, purported to enter into the contract as agents. It was on this basis that the pursuers advanced their primary case that the defenders were liable in damages for breach of contract for the loss caused by their failure to purchase the subjects, which the pursuers later sold for a much smaller sum. The defenders submitted that the case pleaded in contract was irrelevant and that the correct remedy was an action for breach of warranty of authority, which they characterised as a delictual case. The pursuers did not dispute that such a claim, which they saw as a contractual claim, was open to them.

The averred background and the missives of sale

[3] The pursuers assert that the defenders knew or ought to have known that the syndicate had not been formed when they entered into the missives as agents for a principal who did not exist. In support of that assertion they aver that under the Code of Conduct for Solicitors 2002 the defenders had to have their clients' authority for their actions and under the Money Laundering Regulations 2007 they required to identify and verify the identity of their client. They also aver that a member of the defenders, Mr David Thomson, who was in charge of the transaction, was a prospective member of the syndicate and knew or ought to have known that the syndicate did not exist when he signed the missives.

[4] The terms of the missives, so far as material, are all contained in the defenders' letter of offer. The letter of offer began in the following terms:

"On behalf of and as instructed by our clients, the Purchaser, we hereby offer to purchase from your clients, the Seller, the Property and that on the following terms and conditions".

Clause 1.1 contained the definitions of the terms used in the offer. "Property" was defined as "the subjects comprising 227 West George Street, Glasgow registered in the Land Register of Scotland under Title Number GLA 64780". "Purchaser" was defined as "the Members of the 227 Syndicate" and "Seller" was defined as the pursuers. Clause 2 dealt with the date of entry and provided that a failure by the Seller to give entry within a specified time after the completion date would constitute a material breach of contract and would entitle the Purchaser to rescind the missives. Clause 3 addressed the payment of the price. Clause 3.2 provided that if the price had not been paid within seven days after the completion date the Seller could serve written notice upon the Purchaser or on the defenders as agents of the Purchaser calling for payment of the price and that failure by the Purchaser to comply with the notice would constitute a material breach of contract. Clause 4 addressed Value Added Tax and contained undertakings and warranties by the Seller and the Purchaser. Clause 5 addressed the completion of the transaction and set out what the Seller would do in return for payment of the price. In Clause 6 the Purchaser acknowledged that it had examined the Seller's heritable title. There were numerous other clauses which are not material; and clause 16 provided as follows:

"The Missives shall constitute the sole measure of the contract between the Purchaser and the Seller relative to the sale of the Property to the Purchaser and shall supersede any previous agreements, discussions, representations or others between the Purchaser and the Seller relating thereto."

The submissions of the parties

[5] The submission for the defenders, which Mr Murphy and Mr Dunlop presented, was that the defenders were not liable under the contract and that the appropriate remedy for what had occurred was an action for breach of warranty of authority. The defenders could incur personal liability under the contract only if the true intention of both of the contracting parties as revealed in the contract was that the defenders, despite purporting to act on behalf of the syndicate, should be bound as principals. On a proper construction of the missives, there was no question of the defenders' having contracted to incur personal liability under the contract. When one had regard to the terms of the missives and to the surrounding circumstances known to both parties, the proper construction of the contract was that the defenders had acted in the normal way as solicitors for a named client. As the syndicate was never formed, there was no contract. On the pursuers' averments only the defenders knew of the non-existence of the syndicate on the date of the contract. Knowledge which was confined to only one of two contracting parties did not form part of the factual matrix to which the court could have regard in construing the contract. There was no basis for imposing personal liability on the defenders other than on a proper interpretation of the contract. The letter of offer contradicted such liability.

[6] Counsel for the defenders analysed the cases in which a person who purported to be acting on behalf of another had been held liable personally to perform the contract. While in Kelner v Baxter (1866) LR 2 CP 174 and McMeekin v Easton (1889) 16 R 363 there were dicta which might support a general rule that an agent who purports to act on behalf of a non-existent principal incurs personal liability in order to prevent the contract from failing, later cases had qualified this approach and had made it clear that the court had to ascertain the intention of the parties by construing the particular contract. The correct approach, where the contract revealed no intention that the purported agent should be the principal, was to sue him for breach of warranty of authority: Scott v J B Livingston & Nicol 1990 SLT 305. Senior counsel for the defenders further submitted that there was no legal principle to support the assertion that a supposed agent incurred personal liability under a contract when he knew or ought to have known when entering into the contract that the alleged principal did not exist. If, as the defenders submitted, it was a question of construing the contract in the light of the relevant background facts, that factual matrix did not include information known only to one of the contracting parties: The Howgate Shopping Centre Limited v Catercraft Services Limited 2004 SLT 231.

[7] In the course of his submissions junior counsel for the defenders referred to Kelner v Baxter (1866) LR 2 CP 174, McMeekin v Easton (1889) 16 R 363, Hollman v Pullin (1884) C & E 254, Newborne v Sensolid (Great Britain) Limited [1954] 1 QB 45, Black v Smallwood (1965-1966) 117 CLR 52, Phonogram Limited v Lane [1982] 1 QB 938, Cotronic (UK) Limited v Dezonie [1991] BCC 200, Badgerhill Properties Limited v Cottrell [1991] BCC 463, Coral (UK) Limited v Rechtman and Altro Mozart Food Handels GmbH [1996] 1 Lloyd's Rep 235, Irving v Burns 1915 SC 250, Scott v J B Livingston & Nicol 1990 SLT 305, Tinnevelley Sugar Refining Co Limited v Mirrlees Watson & Yaryan Co Limited (1894) 21 R 1009, Lord Advocate v Chung 1995 SC 32 and Bowstead and Reynolds on Agency (18th ed. 2006) Article 107. Senior counsel for the defenders referred in addition to Gloag on Contract (2^nd ed.) p.154, Digby Brown v Lyall 1995 SLT 932, Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251 and The Howgate Shopping Centre Limited v Catercraft Services Limited 2004 SLT 231.

[8] The submission on behalf of the pursuers was that Kelner v Baxter established a principle that a person who contracted as an agent could be personally liable under a contract if there was no principal and thus no-one else responsible to implement the contract. In applying that principle the court had regard to the terms of the contract, which fell to be construed in the light of the surrounding circumstances. Included within those circumstances was the knowledge of the purported agent that the principal did not exist. Where a person with that knowledge spoke of acting "on behalf of" another person who did not exist, the use of that language was not indicative of agency. Where there was no principal, there was no agent: Tinnevelley Sugar Refining Co Limited. Both parties had intended to bring about a contractual relationship; looking at the facts objectively, the defenders should be taken to have intended a effective juristic act and thus be a party to the contract. As well as commenting on the cases which the defenders' counsel cited, counsel for the pursuers also referred to Anderson v Croall (1903) 6 F 153, Christian Salvesen & Co v Rederi Aktiebolaget Nordstjernan (1905) 7 F (HL) 101 and Braymist Limited v The Wise Finance Co Limited [2002] Ch 273.

Discussion

[9] Counsel for the pursuers did not argue that the personal liability in contract of the soi disant agent for the non-existent principal arose as a result of personal bar. They asserted that the approach of the courts, as illustrated by Kelner v Baxter, was to give meaning to the obligations undertaken in the contract and to prevent what the parties intended to be a binding contract from being a nullity. It was, they submitted, a question of construing the contract having regard to the surrounding circumstances, including the self styled agent's knowledge of the non-existence of his principal. This argument meant that when the other party to the contract did not know that the principal did not exist, the self styled agent's knowledge was still part of the factual matrix to which the court could have regard in ascertaining the intention of the parties. As such, it was an exception to the general rule that the relevant background facts were known to both of the contracting parties.

[10] I am persuaded that that submission is unsound. The proposition on which the pursuers relied is most clearly stated by Erle CJ in Kelner v Baxter at p.183 where he stated:

"where a contract is signed by one who professes to be signing 'as agent', but who has no principal existing at the time, and the contract would be wholly inoperative unless binding upon the person who signed it, he is bound thereby: and a stranger cannot by a subsequent ratification relieve him of that responsibility".

But that statement must be seen in its context, in which the seller of the wines and spirits knew that the company, on whose behalf the defendants purported to act, was proposed but did not exist on the date of the contract. In the cases which informed Erle CJ's proposition, such as Furnivall v Coombes 5 M & G 736, (1843) 134 ER 756, Doubleday v Muskett 7 Bing 110, (1830) 131 ER 43, and Watson v Murrell 1 C & P 307, (1824) 171 ER 1207, circumstances which would have been apparent to both contracting parties pointed to the defendants' having undertaken personal liability on the contract. In Lewis v Nicholson 18 QB 503 (1852) 21 LJ (QB) 311, to which Erle CJ was also referred and in which he had given one of the judgments, the court treated the question as one of construing the documents.

[11] Similarly, in McMeekin v Easton (1889) 16 R 363, in which a minister, a farmer and a doctor, who were members of a congregation of the Reformed Presbyterian Church, granted the pursuer a promissory note "in the name and on behalf of" the congregation, the court held that the defenders were personally liable on the promissory note. Lord Young and Lord Rutherford Clark decided the case on the basis that, because, as would have been apparent to all parties, the congregation could not be the debtor on a promissory note, the document should be construed as meaning that its signatories undertook personal liability but could seek relief from the congregation.

[12] Some support for the pursuers' position may be found in Gloag on Contract (2^nd ed) at p.154 where it is suggested that the agent is held to be bound by a contract because the non-existent principal cannot be bound and is unable when formed to ratify the contract. Lord Denning MR took a similar view of Kelner v Baxter in an obiter dictum in Phonogram Ltd v Lane at p.943F-G, in which he equated a person signing a contract on behalf of a non-existent company with a person signing a contract for and on behalf of "his horses". But in that case Oliver LJ at p.945D-E presented the issue as a question of the proper construction of the contract:

"The question I think in each case is what is the real intent as revealed by the contract? Does the contract purport to be one which is directly between the supposed principal and the other party, or does it purport to be one between the agent himself - albeit acting for a supposed principal - and the other party? In other words, what you have to look at is whether the agent intended himself to be a party to the contract."

[13] While the last sentence of Oliver LJ's dictum which I have quoted might, if taken out of context, suggest that the knowledge and intention of the self styled agent was relevant rather than the knowledge which the law of contract would attribute to both of the contracting parties, I am satisfied that his meaning is clear when the passage is read as a whole. It is the latter knowledge, derived from the terms of the contract and the factual matrix, so far as material, that is relevant. A similar approach can be seen in Black v Smallwood, a decision of the High Court of Australia. In a joint written judgment (by Barwick CJ, Kitto, Taylor and Owen JJ) the following is stated (at p.56):

"..the fundamental question in every case must be what the parties intended or must be fairly understood to have intended. If they have expressed themselves in writing, the writing must be construed by the court."

[14] A similar approach can be seen in the judgment of Wild CJ in the Supreme Court of New Zealand in Hawkes Bay Milk Corporation Ltd v Watson [1974] 1 NZLR 236 in which, at p.239, he commented on Kelner v Baxter as follows:

"It has often been thought and is sometimes said that that case established a rule of law that where a person contracts for a non-existent principal he is himself liable on the contract, but I respectfully adopt the view of the High Court of Australia in Black v Smallwood (1966) 117 CLR 52 that no such proposition can be extracted from the judgments in that case. The decision there, reached after an examination of the document and the circumstances, was that a binding contract was intended and that the defendants intended to bind themselves personally. That question as to what the parties intended is always the fundamental enquiry ..."

[15] Further, as Mr Dunlop pointed out, Oliver LJ's dictum, which I have quoted in paragraph [12] above, has been approved in subsequent English cases such as Cotronic (UK) Ltd v Dezonie, Badgerhill Properties Ltd v Cottrell and Coral (UK) Ltd v Rechtmann.

[16] On that approach, the court must construe the terms of the contract in the light of the relevant background circumstances. Such circumstances are those facts which were known or ought reasonably to have been available to both parties. See The Howgate Shopping Centre Ltd v Catercraft Services Ltd, Lord Macfadyen at para [36] and the leading cases to which he referred, namely Bank of Scotland v Dunedin Property Investment Co Ltd 1998 SC 657, Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 and BCCI v Ali. As Lord Macfadyen pointed out in that paragraph, the law is not concerned only or principally with the actual knowledge of the parties. He referred to the judgment of Lord Wilberforce in Reardon Smith Line v Hansen-Tangen [1976] 1WLR 989, at p. 996 in which he stated:

"It is often said that, in order to be admissible in aid of construction, these extrinsic facts must be within the knowledge of both parties to the contract, but this requirement must not be stated in too narrow a sense."

Lord Wilberforce continued:

"When one speaks of the intention of the parties to the contract, one is speaking objectively - the parties cannot themselves give direct evidence of what their intention was - and what must be ascertained is what is to be taken as the intention which reasonable people would have had if placed in the situation of the parties. Similarly when one is speaking of aim, or object, or commercial purpose, one is speaking objectively of what reasonable persons would have in mind in the situation of the parties."

Thus when construing, objectively, the words of a contract the court may have regard to the knowledge which would reasonably have been available to persons in the situation of the parties at the time of the contract.

[17] Adopting that approach, knowledge which was reasonably available only to the soi disant agent would not form part of the factual matrix which could assist the court in the construction of the contract.

[18] In this case the pursuers do not contend that they knew that the syndicate did not exist. On the contrary, they aver that in the months after the conclusion of the missives their solicitors wrote to the defenders asking them to identify the members of the syndicate and that it was only on 13 August 2008 that the defenders confirmed that the syndicate had not been formed. Nothing is averred by either party concerning the factual background which reasonably ought to have informed persons in the situation of the pursuers at the date of the contract that the syndicate did not exist. Accordingly one is left only with the terms of the missives.

[19] I have summarised the relevant contractual terms in paragraph [4] above. There is nothing in those terms to alert the recipient of the letter of offer to the non-existence of the syndicate. Nor is there anything which suggests that the defenders were acting otherwise than in the ordinary course of their business as agents of an identified client. It was not disputed that when a person contracts "on behalf of" another person, those words are capable of supporting the existence of agency, although, as Kelner v Baxter showed, the words of themselves did not necessarily establish the status of agent. In the context of the letter of offer, however, the words are a strong indicator that the defenders were seeking to act as agents. The references in the letter of offer, and in particular in clauses 2, 3 and 4 to the rights and obligations of the defined "Purchaser" also support the view that the defenders were contracting as agents. There is nothing in the letter of offer which suggests that the pursuers intended to contract with any party other than the syndicate. Mr David Thomson's private knowledge does not have a bearing on the construction of the contract.

[20] I am therefore satisfied that the defenders did not incur personal liability under the contract and that the averments in support of the first conclusion, which seeks declarator of personal liability, and the second, third and fourth conclusions, which are for damages based on such liability, are irrelevant.

[21] I have not referred in my discussion to all of the authorities which counsel cited in their careful submissions. By so omitting, I mean no disrespect. The omission is because the other authorities assisted the identification of the issue but not its resolution.

Conclusion

[22] I therefore sustain the first plea in law for the defenders to the extent of excluding from probation the pursuers' averments in so far as they support the first four conclusions of the summons and repel the first to fourth pleas in law for the pursuers. As certain of the averments also support the pursuers' alternative case of misrepresentation and as the pursuers may also wish to plead a case of breach of warranty of authority, I will have the case put out By Order to discuss further procedure.