Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2010] CSOH 13
CA64/09	OPINION OF LORD GLENNIE in the cause SJD GROUP LIMITED Pursuer; against (KJM (SCOTLAND) LIMITED Defender: ­­­­­­­­­­­­­­­­­________________

Act: McBrearty; MBM Commercial LLP

Alt: Carruthers; Andersons LLP

4 February 2010

Introduction

[1] In this action, the pursuer seeks declarator that with effect from 1 August 2003 it entered into a franchise agreement with the defender, then known as SJD (Scotland) Limited, in terms of which the defender agreed to act as franchisee for a period of five years; that that agreement was extended beyond that five year period for an indeterminate period terminable on reasonable notice (of 6 months); and that in breach thereof the defender has failed to pay certain sums due to the pursuer and has wrongly purported to terminate the agreement without having given reasonable or any notice. All of this is disputed by the defender. A proof before answer was heard on the questions relating to the existence and terms of any contract between the parties, it being agreed that it was convenient to determine these matters before considering questions of breach and damages or other remedies.

The facts

(i) The pursuer and its business

[2] There was no dispute about the background facts. The pursuer is a company engaged in the business of providing specialist accountancy and tax advice to clients working (principally) in the information technology (IT) industry who carry on their own businesses as IT contractors through the medium of what might loosely be called "one-man limited companies". In the UK there is, or was, a demand from large companies for software engineers to be available at short notice for specific projects. For tax reasons, an IT contractor providing such services will often trade through a limited company. The consequence of that, however, is that he has to comply with company law, file annual returns, pay corporation tax and account for VAT. Such clients typically have neither the time nor the inclination to see to their accounts and tax affairs. The pursuer offers a simple package. The client provides the pursuer with the information in a simple preset format, and the pursuer does the rest, preparing and filing statutory accounts and dealing with corporation tax and VAT. In return, the pursuer charges the client a fixed monthly fee, rather than charging by the hour or by the job as his more usual in the provision of accountancy services. The key to the pursuer's success lies in the simplicity for the client. The system was pioneered, though perhaps not exclusively, by the pursuer. It is clearly a successful business model.

[3] The principal of the pursuer is Mr Simon Dolan. He is a member of the Institute of Chartered Tax Advisers. He started in 1992 in general accountancy practice but, late in 1996, he decided to concentrate on the "niche area" (as he called it) of IT contractors. This proved to be successful. Having started out working by himself from an office in Manchester, he moved south and, after working from home for a while, took on office staff and premises as the business expanded. In 2001 he decided to expand the business further. He did this in two different ways. In one case, the pursuer entered into a franchise agreement with a Peter Morris, in terms of which, in return for a lump sum payment and thereafter a small percentage (121/2%) of turnover, Mr Morris was allowed to use the SJD name and operate in the south west of England providing the services which the pursuer had pioneered. In other cases the pursuer entered into joint venture agreements in terms of which the pursuer and certain individuals who were interested in joining the business would set up joint venture companies. Typically, as in the case of Graeme Bennett, who carried on business through two companies, SJD (North West) Limited and SJD (North East) Limited, the shareholding in the joint venture company would be split 51% to the pursuer and 49% to the other party. The arrangement with Mr Bennett was that the joint venture partners would receive their percentage of the profit (i.e. split 51/49) in dividends. With some other joint venture partners the arrangements were different. In one case the split was 75/25, while in the south of England the pursuer took a percentage (40%) of turnover rather than of profit.

[4] The benefits of carrying on business in this way were explained in evidence by Mr Bennett. He is a qualified accountant and, before November 2001, had traded under his own name. Entering into a joint venture arrangement with the pursuer, which he did from that time, enabled him to use the system and the IRIS software provided by the pursuer. More importantly, it meant that he became part of a nationwide operation. Using the SJD name, he was, and was seen to be, part of a nationwide operation. The pursuer undertook extensive advertising nationally, and that advertising benefited the joint venture companies (and the single franchisee). Potential clients attracted by the advertising were passed onto the Joint Venture Company (or franchisee) which operated in their part of the country. In this way each of the joint venture companies was able to build up the business. Business was carried out in a similar way by each of the joint venture companies, in accordance with a method of doing business set out in a Manual prepared by the pursuer. There was, in addition, as Mr Bennett described it, a "synergy" arising out of being part of a larger organisation, and having contact with others both formally at group meetings and informally at other times.

(ii) Relations between the pursuer and the defender

[5] The defender, then called SJD (Scotland) Limited, was set up as a joint venture company on this model in 2001. Kenneth Mactaggart qualified as a Chartered Accountant in 1985. In 1995 he set up his own firm, Sekadec Limited, from which he carried on a general accountancy practice. In 2001 he noticed an advertisement in a trade paper inviting people who were interested in providing a certain type of accountancy service to contact the pursuer. He contacted Mr Dolan and met him at his home in Hemel Hempstead. The parties agreed on a joint venture relationship. SJD (Scotland) Limited was incorporated. Initially the shareholding was split between Mr Mactaggart, the pursuer and Mrs Dolan, but subsequently Mrs Dolan's shares were transferred to the pursuer, giving the pursuer 51% of the shareholding and Mr Mactaggart 49%. Relations between the parties were regulated by a Shareholders ' Agreement between the pursuer and Mr Mactaggart dated 6 August 2001. In addition, Mr Mactaggart entered into a Service Contract with the defender bearing the same date. In both agreements the business of the company was identified as that of "chartered tax advisers and accountants providing specialist tax advice and general accountancy services to clients working in the information technology industry who principally carry on business as information technology contractors". The term of the Service Contract was five years. The territory covered by it was Scotland. It is unnecessary to set out in detail the terms of that contract, but it should be noticed that it contained a "Restraints" clause (clause 8) which provided that Mr Mactaggart would

"8.1 not during the Term or for 12 months after the expiration or prior termination of this Agreement be concerned or interested either directly or indirectly with any other business either on his own account or otherwise which is involved in the supply of services to information technology contractors which are similar to the services as described in the Manual provided by SJD Group Limited or any member of the SJD Group of Companies or by any employee, agent, contractor or franchisee thereof on its behalf either at the Location or elsewhere in the United Kingdom nor damage the goodwill of the business of SJD Group Limited or any member of the SJD Group of Companies."

Both Mr Dolan and Mr Mactaggart gave evidence that there had been discussion about this clause in advance of Mr Mactaggart signing up to the arrangements. Mr Mactaggart was concerned that the clause might prevent him carrying on his general accountancy business through Sekadec, a business which he intended to continue whilst, at the same time, providing the tax and accountancy services to IT contractors through SJD (Scotland) Limited. Mr Dolan reassured him that the clause did not prevent that (as, indeed, it did not, since the restriction was on involvement in the supply of services to IT contractors similar to the services described in the Manual provided by the SJD Group, and those services were not general accountancy services to the public at large).

[6] Throughout the period 2001 to 2003 and beyond, the relationship appears to have worked well. The pursuer received 51% of the profit by way of dividend. From a standing start in 2001, the joint venture company had a turnover of about £38,000 in its first 12 months. By the end of 2003 turnover was in excess of £150,000. And by the end of 2008, it had increased to about £420,000, though there was some dispute as to whether and to what extent this was the result of the defender taking on additional business over and above the provision of services to IT contractors. Profit for the defender was about 70% of turnover. By 2008, the pursuer's own turnover from the business was about £12 million, reflecting some £4 million of net profit. According to Mr Dolan, and I have no reason to doubt his evidence on this, the success of the defender was typical of all the joint venture companies forming part of the SJD group. A significant factor in the increase in turnover was the effort made by the pursuer in advertising.

(iii) The proposed change to a franchise arrangement

[7] In 2003 Mr Dolan decided to change all the joint venture arrangements into franchises. This decision was made purely for tax reasons. The joint venture companies were treated for tax purposes as associated companies of the pursuer. Until 2003 each had been taxed at the lower rate applicable to small companies. In 2003, however, new regulations were brought in which, in effect, treated associated companies as one for the purpose of ascertaining when the threshold for the higher rate of tax was crossed. That had an adverse effect on both the joint venture companies, which would each be taxed at the higher rate, and on the pursuer. Mr Dolan had the idea of selling the pursuer's shareholding in each of the joint venture companies and altering the arrangements so that the companies each worked as a franchisee of the pursuer under a Franchise Agreement.

[8] Mr Dolan explained this in an e-mail dated 8 May 2003, sent to all of the joint venture partners including Mr Mactaggart. After saying that he estimated that the additional tax cost, if nothing was done, would be in the region of £82,000, he said this:

"To get around this I was thinking of perhaps amalgamating the whole thing, but then of course that would lead to issues were I to sell the whole group ‑ your capital element could be diluted.

As an alternative our solicitor has come up with the idea of running the offices as franchises. We would sell you our shares in the Company for £1 each, in return for which you would undertake to operate your Companies as a franchise of SJD. The franchise fee would be an amount equivalent to the dividends payable at the moment (for e.g. the fee would be 51% or 75% of net profits). Things would run in the same way as they do at present - same stationery and Companies etc, but we would not own any of the share capital.

You would be bound by a franchise agreement which runs for 5 years. At the end of that term you can renew for another 5 years (no cost) and so on.

Let me know what you think, and if you agree I will get copies of the franchise agreements to you to have a look at."

I should say at this stage that all of the contemporaneous e-mails and other documents which featured in the evidence relating to this period were produced by Mr Bennett. Neither the pursuer nor the defender was able to find them on their computer systems, though they must both have had copies at one point since it is clear, and Mr Mactaggart did not dispute this, that the defender was copied in to the e-mails sent by the pursuer. There remain gaps in the documentation, but against the background that neither party has been able to locate any relevant document from this period, the absence of documentation now does not signify that no further documents ever existed.

[9] Mr Bennett must have responded almost immediately to that e-mail. His response was not in process, but at 17.04 on 8 May 2003 Mr Dolan e-mailed him, thanking him for coming back quickly and answering a query which he had raised about what would happen if he wanted to sell his shares in the company. Mr Dolan ended by saying that once he had received comments from the others, he would get a proposed agreement out and they could "kick things off say 1^st August".

[10] It is to be inferred that Mr Dolan thereafter circulated a draft Franchise Agreement. The evidence suggested that he used for this purpose a clean copy of the Franchise Agreement already in force as between the pursuer and Peter Morris in the south-west. It is clear from the e-mail of 15 July 2003 to which I shall refer that a number of revisions to the draft were suggested by one or more of the other parties. In that e-mail, which was again copied to the other individuals concerned in joint venture arrangements, including Mr Mactaggart, Mr Dolan said this:

"I have attached a heavily revised copy of the franchise agreement I would like to get in place with effect from 1st August 2003. If you are happy with the new terms can you complete the name and address info at the top of page 1, and enter the details at 1.5 and 1.9 ... When you've done that if you can print and sign two copies and send back to me I will sign, attach the postcodes and get a copy back to you together with the stock transfer form.

I hope the agreement is now OK - have tried to make it as best a reflection of the actual working practices as I can, but obviously any concerns, queries or amendments to get back to me ASAP.

You'll see in the agreement that we will want monthly P&L together with copies of the Company bank statements each month, hope that is OK."

[11] No other e-mails are now available relating to this passage of evidence. Neither the pursuer nor the defender was able to locate in their records or on their computers any documents, such as the blank draft agreement sent by Mr Dolan with his e-mail of 15 July, or a signed copy of the agreement. Mr Bennett, however, produced the Franchise Agreement signed by him. It is dated 16 July 2003 and is between the pursuer as the Franchisor and Mr Bennett's two companies, SJD (North East) Limited and SJD (North West) Limited, as the Franchisee. It is not necessary for present purposes to set out the terms of that Franchise Agreement - I shall have to return to it later - but it is to be noted that it contained a "No competition" clause (clause 6.3) in terms which were less onerous than the "Restraints" clause in the Service Contract between the pursuer and Mr Mactaggart; and, incidentally, also less onerous than those in the Franchise Agreement entered into in 2001 between the pursuer and SJD (South West) Limited, Mr Morris's company, which agreement had been used as the basis for the first draft circulated by Mr Dolan in May 2003. The importance of this point is that the "No competition" clause in the draft Franchise Agreement circulated in May, June and July 2003 was clearly the subject of discussion between interested parties, leading to it being watered down from that originally proposed.

[12] The Franchise Agreement signed by Mr Bennett was in the form of a Word document. He had downloaded the draft sent out by Mr Dolan on 15 July 2003, and filled in the names and addresses of his companies and the franchise fee payable to the pursuer before signing it and returning it to the pursuer. It seems probable that he also filled in the date of 16 July 2003, though it is not clear whether in the draft sent to him the date had been left blank or whether it had borne a date of 1 August 2003 (the contemplated start date) and Mr Bennett had changed that.

(iv) Did the defender enter into a Franchise Agreement with the pursuer?

[13] The first issue between the parties to this dispute is as to whether or not the defender, by Mr Mactaggart, also signed a Franchise Agreement with the pursuer at about this time and, if so, in what terms. As I have said, neither the original nor a copy of any such document has been found, despite the best endeavours of the pursuer. Nor did Mr Dolan nor Mr Mactaggart have any distinct recollection of any discussions around this time. Indeed, when first presenting its case, the pursuer had asserted that Mr Mactaggart had signed a Franchise Agreement in the same terms as that signed in 2001 by Mr Morris. That cannot be right, since that had been put forward as the basis for the draft circulated in May 2003 and clearly had been heavily amended by the time that Mr Bennett came to sign it on 16 July 2003. The e-mails of 8 May and 15 July 2003 were copied to all of those involved in the joint venture companies, and the version ultimately signed by Mr Bennett was in terms of the draft attached to the e-mail of 15 July 2003. It is inconceivable that Mr Mactaggart would have preferred to sign a Franchise Agreement in its unamended form. If he did sign one, it seems to me highly probable, as Mr Dolan ultimately considered to be the case, that he signed a Franchise Agreement in the form in which it was e-mailed on 15 July 2003 and signed the next day by Mr Bennett.

[14] I have come to the clear view that Mr Mactaggart did indeed sign a Franchise Agreement in the same terms as that signed by Mr Bennett on 16 July 2003. Mr Mactaggart denied that he would have done so. In particular, he sought to emphasise that he would not willingly have signed up to a "No competition" agreement in the terms to be found in that document. He said that he raised this with Mr Dolan. I find this evidence hard to accept. He might or might not have raised the question with Mr Dolan on this occasion as well as in 2001. But I cannot conceive of any reason why, having accepted a more onerous restriction in the Service Contract of August 2001, he should baulk at signing an agreement in 2003 which contained a restriction in less onerous terms. He was not able to offer any sensible explanation. Nor can I see any reason why he would still be copied in on the e-mail exchanges about the new franchise agreement as late as mid-July 2003 if he had made it clear that he was not going to sign an agreement containing such a restriction. However, I do not rest my finding that he did sign a Franchise Agreement in those terms merely upon his inability to say why he should not have done so. That would not be sufficient, since the burden of proof lies upon the pursuer to prove its case. But there are a number of compelling adminicles of evidence which point to the conclusion which I have reached at this point. They are as follows:

(1) Part of the scheme proposed by Mr Dolan was that the pursuer should give up its shareholding in each of the joint venture companies and their relations thereafter should be governed by a Franchise Agreement. To give up its shareholding without any such agreement coming into force at the same time would result in the pursuer losing any control over the business of the (former) joint venture company, with a consequent loss of revenue for no benefit. The proposed sale price of the shareholding was nominal (£1). A transfer of the shareholding for that nominal price would mean the pursuer giving up its equity in the joint venture company which, by then, might be thought to have a significant value. Whilst it might make sense, in order to reap the tax advantages of the change, to give up that shareholding for a nominal value in return for a five year franchise agreement, it would have made no sense for the pursuer to give up that shareholding without such an agreement. The linkage between the giving up of the shareholding and the entering into of a franchise agreement was made clear in the e-mail of 8 May 2003 ("in return for which") as well as in that of 15 July 2003 in which Mr Dolan said that once the would-be franchisee had signed and sent back to him the Franchise Agreement he would sign the agreement and sent it back "together with the stock transfer form".

(2) The documents lodged in process showed that with effect from 1 August 2003 the pursuer's shares in SJD (Scotland) Limited were transferred to Mr Mactaggart. The share transfer was noted in the annual return lodged by Mr Mactaggart with Companies House in June 2004. Mr Mactaggart originally sought to explain that he had instructed this change without having received from Mr Dolan a stock transfer form. In cross-examination he departed from this position, saying that he could not recall whether there was one or not and then, later, as I understood it, accepting that he must have received a stock transfer form. Whatever his evidence on this point, and it could not be regarded as satisfactory, it seems perfectly clear that Mr Dolan must have sent a stock transfer form dated 1 August 2003. He would not have done so, in my opinion, unless Mr Mactaggart had returned to him a signed Franchise Agreement.

(3) After August 2003 the pursuer changed its method of invoicing the defender. It started invoicing for franchise fees payable under the Franchise Agreement. Such fees were subject to VAT and the invoice claimed the amount of the fee plus VAT. Mr Mactaggart said that he was not concerned with this change - he was happy for the pursuer to invoice him in this way if it suited his purposes. I did not find this response convincing. This new way of invoicing for a fee which attracted VAT required changes in the defender's books. The defender would have sought to reclaim the VAT, or set it against VAT which it owed to HM Customs and Excise. Further, it was not only the pursuer that referred to the payments in this way. In an e-mail to Mr Dolan dated 30 May 2006, Mr Mactaggart gave the figures for March of that year. In those figures he referred to the "franchise fee" payable to the pursuer, and it is clear from the calculations that that fee for that month (£4,117.68) included VAT. It is be highly improbable that both parties would have adopted this new approach had there been no Franchise Agreement in place at that time.

(4) In September 2005 Mr Dolan wanted to obtain copies of the Franchise Agreements to give to the pursuer's bank. On 7 September 2005 he e‑mailed Mr Mactaggart in the following terms:

"Hoping you might be able to help me.

I need to get copies of the franchise agreements over to the bank (am borrowing some cash) and my office file for the period is in archive.

Do you have a copy you could post down please? Either way, can you let me know?"

Mr Dolan explained that when he said that his office file was in archive he was probably just trying to give a pretext for not being able to find it ("probably just saving face", as he put it). Mr Mactaggart's response later that same day is instructive. He did not say that he had never signed a Franchise Agreement. Instead he replied:

"I think I have a blank copy that I can copy and send tomorrow."

The implication is that he could not find the signed version but could lay his hands on a blank copy. Mr Dolan replied early the next morning thanking him and asking him if he could sign it "and date it with the date you started as well please?". Again there was no protest by Mr Mactaggart that he had never entered into a Franchise Agreement. Instead he sent Mr Dolan a document which it was agreed in evidence was probably a copy of the blank draft Franchise Agreement which Mr Dolan has sent out to all interested parties on 15 July 2003. His e-mail attaching that document was sent at 11.25 on 8 September 2005. It read:

"The attached is all I have. It started on 1^st Aug 03".

He was asked in cross-examination where the date 1 August 2003 came from. He thought that he took it from the document itself. That may be true and, if so, would suggest that the draft of the franchise agreement sent out by Mr Dolan on 15 July 2003 bore the date 1 August 2003. But that does not explain why, if he had not entered into a Franchise Agreement with the pursuer at that time, he should say "it started" on that date. The "it" must, in my view, refer to the Franchise Agreement in force as between the pursuer and the defender. Mr Dolan responded by saying

"Am sure you must have had one for Scotland at some stage. Not to worry - will have to do another."

The tentative nature of this reply by Mr Dolan does not, to my mind, cast doubt upon whether there had ever been a Franchise Agreement between the parties. It might raise a question as to whether or not Mr Mactaggart ever signed it - though in light of the other evidence I do not think it does - but it does nothing to suggest that Mr Dolan was in any doubt that the relationship between the parties was that of franchisor and franchisee.

(5) In 2007 the pursuer was entering into any refinancing agreement with its bank. Before confirming its agreement to this, the bank wanted to make sure that all the Franchise Agreements were extended for a further five years from the existing end date in 2008 to one in 2012. Mr Dolan wrote to all the franchisees asking them to sign agreements in identical terms to those signed in 2003 but extending the term until 2012. His e-mail to Mr Mactaggart dated 25 May 2007 was in the following terms:

"I'm getting some housekeeping done for the bank and am trying to get all the signed franchise agreements up to date.

I have attached one with today's date - would you mind please checking, printing out, signing and sending back to me?

I am assuming you want to extend for another 5 years!"

The reference to extending for another 5 years was clearly written on the assumption that there was already in force between the parties a Franchise Agreement. It emerged in evidence that what Mr Dolan attached to that e-mail was not the version of the Finance Agreement sent out in July 2003 but the earlier version concluded with Mr Morris in 2001, which had been used as the basis for discussion in 2003 and was much amended before it was circulated by Mr Dolan in July 2003 and signed (at least by Mr Bennett). Mr Mactaggart's response to the e-mail was not to say that he did not understand about "extending" the Finance Agreement because there was not one in force between them. Rather he made some comments about the document itself. The first comment in his response related to the sale price of the business. The point he was making was clearly that the clause in the version of the agreement wrongly sent by Mr Dolan under cover of his e-mail of 25 May 2007 (i.e. the 2001 version) did not reflect what had been agreed in the version circulated in July 2003, a point which would be irrelevant if he had not signed up to that agreement in July 2003. He raised another point about the "no competition" clause. Mr Dolan replied that he was happy for those changes to made and asked Mr Mactaggart to make the amendments on the Word document. It is common ground that Mr Mactaggart did not sign a further Franchise Agreement at this time, though, as will be seen, this was later overlooked, at least by the pursuer.

[15] These matters, taken together, leave me in no doubt that in July 2003 Mr Mactaggart did agree to change from the existing joint venture relationship to one of franchisor and franchisee. It seems to me to be most probable that he signed and returned the Franchise Agreement which had been sent to him in blank on 15 July 2003 and that the signed copy bore the date 1 August 2003. Indeed, Mr Carruthers candidly accepted that if a Franchise Agreement was signed at this time, it would have been this 2003 version. On that basis, the Franchise Agreement which he entered into on behalf of the defender was on the same terms as that agreed between the pursuer and Mr Bennett's companies, except for the date. His sending back a signed copy of that Franchise Agreement would have been the trigger for Mr Dolan to send him the stock transfer form, enabling the shares to be transferred into Mr Mactaggart's name, which was done. The e-mail correspondence thereafter suggests that both parties were proceeding on the assumption that there was a signed Franchise Agreement in force between them which they could not find at that time. However, even if I am wrong about that, and Mr Mactaggart did not in fact sign the Franchise Agreement in July 2003, I am satisfied that he did agree to its terms, and that the parties' relationship thereafter was that of franchisor and franchisee on the terms of that agreement.

[16] I should add this. Although I have reached my decision primarily on the basis of the inferences to be drawn from the documents, assisted by the limited recollection of the witnesses, I have also taken into account my impression of the witnesses themselves. Mr Dolan impressed me as an honest witness. It is true that he was at times in error. The obvious example of this was in thinking that the version of the Franchise Agreement signed by Mr Mactaggart in July 2003 was the same as that which had been signed by Mr Morris in 2001. The reason for this was that he did not have until recently the documents which were produced by Mr Bennett and which showed that it was highly likely that the version signed in July 2003 was that which had been sent in draft by Mr Dolan on 15 July 2003 and signed the next day, with appropriate insertions, by Mr Bennett. It was to his credit that Mr Dolan was prepared to admit and explain the basis of his previous mistake. By contrast, I was not satisfied that Mr Mactaggart was always trying his best to assist the court. His manner was at times evasive, and so were some of his answers. His explanation that he did not sign the Franchise Agreement in July 2003 because of the terms of the "no competition" clause did not strike me as credible, having regard to the fact that he had signed more onerous terms in 2001, at a time when he would have been less confident of the likely success of the business which he was tying himself to. So also, his unwillingness to admit that he had received from Mr Dolan a stock transfer form, which he must have done in order to be able to change the shareholdings seemed to me to be an attempt to avoid the obvious inference, in light of the e-mail exchanges, that he must have sent Mr Dolan a signed Franchise Agreement. His refusal to accept the clear inferences to be drawn from what he had said in the e‑mail exchanges of 2005 also struck me as evasive. I was not satisfied that I could rely on his evidence. Where his evidence and that of Mr Dolan were in conflict, I unhesitatingly accepted that of Mr Dolan.

(v) Relations between the parties after July 2008

[17] On the basis that the Franchise Agreement was entered into with effect from 1 August 2003, it expired at the end of the five year term on 31 July 2008. Neither party appears to have appreciated that. In the case of Mr Dolan, it was probably (as he said) because all the other franchise agreements had been extended in 2007 and were not due to expire until 2012. It seems clear that he simply overlooked the fact that the Franchise Agreement with the defender had not been extended and came to an end at the end of July 2008. In the case of Mr Mactaggart, it is not clear what his thinking was. He may simply have forgotten that the agreement was for a five year term. Or he may by that time have come to believe that there was no signed agreement and therefore, to his thinking, no agreement at all with any fixed term. The reasons why the parties behaved as they did may not matter. What is clear is that the parties continued to proceed on the same basis after 31 July 2008 as they had before that date. The defender continued to use the name SJD (Scotland) Limited. It continued to get the benefit of the pursuer's advertising, though Mr Mactaggart suggested that by this stage he was receiving only the occasional new client by this route. The pursuer continued to invoice the defender for a franchise fee, and the defender paid on at least one occasion (though a further invoice has not been paid). The defender carried on servicing its IT clients as before.

[18] This state of affairs continued until November 2008 when the defender purported to terminate its agreement with the pursuer. This proof is not concerned with the rights and wrongs of that purported termination so I say no more about it, save to note that the validity of the termination is challenged by the pursuer on the basis that the defender did not give the pursuer reasonable notice of its intention to bring the agreement to an end.

Analysis of the position from 31 July to November 2008

[19] It is common ground between the parties that there was an implied contract between them during the period after 31 July 2008. But there is a dispute between them as to the terms of that implied contract. The pursuer's case is that from 31 July 2008, when the Franchise Agreement came to an end, there was an implied contract on the same terms as those set out in the Franchise Agreement, with the exception that, instead of it being for a five year term, the implied contract was for an indeterminate period terminable on reasonable notice. The defender's case, as set out in Answer 9, is that from around July 2003, the parties were engaged together in an implied contract whereby the pursuer, in return for certain sums of money to be calculated according to an agreed formula (51% of the defender's income after the deduction of business expenses arising from the businesses referred to it via the website), would provide to the defender certain goods and services (including, originally, though this subsequently changed over time, the IRIS accountancy software, business stationary, a website presence, marketing material and the payment of rent for the defender's premises). The difference between these two positions is, perhaps, somewhat elusive. The principal issue between the parties at this proof is about whether a party wishing to terminate the agreement (otherwise than for breach) was required to give reasonable notice of its intention so to do; and, if so, what length of notice was required. But as the argument developed, it became clear that the question of reasonable notice could not be taken in isolation but had to be seen in the context of the whole agreement between the parties.

[20] It is therefore convenient to begin by considering the more general question of whether, in the period after 31 July 2008, the contract to be implied was, as the pursuer contended, one which was, in effect, a continuation of the Franchise Agreement which I have found to have been in force up to that date. I was referred to a number of authorities on the question of what was the proper approach to implication of a contract in circumstances such as these. Under reference to Gloag on Contract, 2^nd ed., at pp.733-4 and some of the cases cited therein, including Lennox v Allen & Son 1880 8 R 38, Houston v Calico Printers Association 1903 10 SLT 532, Stevenson v North British Ry. 1905 7 F 1106 and Stanley Limited v Hanway 1911 2 SLT 2, Mr McBrearty suggested that the proper analysis was something akin to tacit relocation though he recognised that that term was normally restricted in its application to certain specific types of contract. At a more general level, he invited me to apply the business efficacy test, referring me not only to McBryde, the Law of Contract in Scotland, 3rd ed., at paras.9-68 - 9-69, but also to the well-known passage in Morton v Muir Brothers 1907 SC 1211 at 1224 and to the Opinion of Lord Macfadyen in Scottish Power plc v Kvaerner Construction (Regions) Limited 1999 SLT 721. Mr Carruthers submitted that the tacit relocation approach was inapplicable to this type of contract; and he argued that the ordinary tests for implication of terms did not point to the implied agreement being on the same terms as the recently lapsed Franchise Agreement. In particular, he pointed out that there were a number of clauses in the Franchise Agreement which turned on the duration of that agreement being for a period of five years. There were provisions in the Franchise Agreement providing a mechanism by which the five year term could be extended, but only for a further period of five years. There were provisions dealing with termination which assumed that there was an "Expiry Date". And there were provisions relating to the right of the franchisor to purchase the business by giving notice during the last 60 days of the five year term. None of these provisions could readily be imported into an agreement of indeterminate duration terminable upon reasonable notice.

[21] There is undoubtedly some force in the points made by Mr Carruthers. However, I prefer to approach the matter not by reference to these potential difficulties, but by looking at the relations between the parties during this period through the eyes of the parties as reasonable businessmen (c.f. Morton v Muir Brothers) or, as it is sometimes put, through the eyes of a reasonable detached observer. Looking at the matter through the eyes of the parties presents some difficulties. The pursuer, not realising that the Franchise Agreement had come to an end, no doubt simply assumed that it was continuing. The defender may have thought that there never was a Franchise Agreement in force or, perhaps more likely, also overlooked the fact that this had come to an end at the end of July 2008. Since both would probably have assumed that the existing arrangements between them were still in force, neither of them would have addressed their minds to the question of whether there was a new contract and on what terms. It is perhaps more useful, therefore, to look at the matter through the eyes of a reasonable detached observer. He would be aware of the business relationship between the parties since 2001 and (on the basis of the findings of fact which I have made) would be aware that from 1 August 2003 until 31 July 2008 the relationship was one of franchisor/ franchisee under a Franchise Agreement containing particular terms (those terms being the same as were contained in the 2003 Franchise Agreement to which I have referred). Those terms included a "No competition" clause. One of the restrictions in that clause, at 6.3.2, was an agreement that the franchisee (the defender) would not at any time within 12 months after the expiration of the Agreement "solicit the clients or former clients of the Business with the intent of acting for them in the Business". The reasonable detached observer would have noted that after 1 August 2008 both parties carried on as before. The defender continued to provide services to the "clients of the Business". The pursuer was continuing to treat the defender as it treated other franchisees, giving it the benefit of advertising and other backup, and the defender was continuing to provide the services which were described in the Franchise Agreement and to pay a franchise fee to the pursuer. The reasonable detached observer might think it possible that the parties had entered into discussions to achieve an agreement on these terms; but if he was told that they had not discussed the matter, it seems to me that he would almost inevitably have assumed that they were continuing to do business, so far as possible, on the same terms as before. If he was asked about the term of the new agreement, and was told that the parties had not, by operating clause 3.8 of the previous Franchise Agreement, extended the Franchise Agreement for a further five years, he would have assumed that the new relationship on the old terms was to be for a period which was not fixed, but would simply continue until terminated by one party or the other upon some kind of notice.

[22] All this assumes that I am correct in the conclusion which I have reached earlier in this Opinion, namely that from 1 August 2003 until 31 July 2008 the parties relationship was governed as a matter of agreement by the Franchise Agreement - if I am wrong about that, then the position would, of course, be very different. In short, my conclusion is that the parties as reasonable businessmen and, more relevantly, the reasonable detached observer, would have assumed that they were continuing to do business after 31 July 2008 on the same terms as before, though not for another five year period. Mr Carruthers argued that the "necessity" test for implication of terms did not require the whole of the terms of the Franchise Agreement to be brought into the relationship after 31 July 2008. That may be correct, so far as it goes. But there is, of course, another approach to implication of terms sometimes known as the "of course" test: see Reigate v Union Manufacturing Co (Ramsbottom) Limited [1918] 1 KB 592, 605. I have little doubt that this test is satisfied in this case. That test finds echoes in Morton v Muir Brothers: before any dispute had arisen, both parties as reasonable businessmen, when they realised that they had continued doing business in ignorance of the fact that the formal agreement had come to an end, would have taken it for granted that the same conditions would apply to the business after 31 July 2008 as had applied before. I conclude, therefore, that after 31 July 2008 the parties continued in business together under an implied agreement which was on the same terms as the 2003 Franchise Agreement, with this exception, that the agreement was to last for an indeterminate period and be terminable upon reasonable notice. One consequence of this is that some of the provisions which turn on there being a five year term would have to be adapted to fit a contract for an indeterminate period of terminable upon reasonable notice. There is, in principle, no difficulty in this, though the court is careful to remember that it is not its task to make a contract to the parties. And I see no difficulty here. It may be, however, that at a further stage of this action parties will seek to address me upon the proper construction of these clauses in the context of a contract terminable upon reasonable notice. I do not propose to say more about them at this stage.

[23] I turn them to the question of reasonable notice of. Mr Carruthers accepted that if the implied agreement was on the terms of the Franchise Agreement, there would have to be some provision for reasonable notice prior to termination. As the discussion developed, I did not understand him to demur from the suggestion that that notice should be measured in months rather than days. The reasons are self evident. The question has to be judged by reference to the position of the parties when the contract was entered into (on this analysis, 1 August 2008) and the facts and matters known to them at that time. From the point of view of the pursuer, termination by the defender without notice would deprive it overnight of part of its income stream. More importantly, given the existence of the "no competition" clause to which I have referred, the defender would not be entitled to continue to provide services to existing clients of the franchise. If the defender were suddenly to stop providing such services, the SJD name would be damaged. The pursuer would require time within which to approach all existing clients of the franchise and ensure that they were properly catered for within other parts of the SJD business. Equally, the defender would be liable to suffer in its business if the pursuer was able to terminate overnight. The defender would immediately have to stop using the SJD name. It could not continue to give advice to any of the franchise clients. It might, for example, be in the middle of dealing with one such client and about to send out tax returns or statutory accounts for it; but, if there were no notice provision, it would be unable to complete even such a task. This would make no sense. All these factors suggest that neither party, as reasonable businessmen, would have balked at the suggestion that there should be a requirement for reasonable notice before either of them could terminate the relationship. In answer to an intervention by the (officious) detached observer, both parties would have said: of course we can only terminate upon reasonable notice. They might not have agreed on the length of notice required, but that is for the court. Mr Carruthers accepted, correctly in my opinion, that if the terms of the 2003 Franchise Agreement applied, and particularly if there was a "no competition" clause in force, then he could see the argument for a six month notice period. That is the period which I consider is appropriate and which, in my opinion, amounts to reasonable notice.

[24] I was, as would be expected, referred to a number of cases in which the question of reasonable notice has been considered. In addition to passages from Chitty on Contracts and McBryde, The Law of Contract in Scotland, they included Fifeshire Road Trustees v Cowdenbeath Coal Co 1883 11 R 18, OBC Caspian Ltd. v Thorp 1998 SLT 653, Winter Garden Theatre (London) Ltd v Millenium Productions Ltd. [1948] AC 173, Australian Blue Metal Ltd. v Hughes [1963] AC 74 and Decro‑Wall International SA v Practitioners in Marketing Ltd [1971] 1 WLR 361. I do not propose to analyse them in any detail. I do not consider that they lay down principles which drive me to any particular conclusion in this case. Each case turns on its own facts.

Disposal

[25] For these reasons I find in favour of the pursuer on this part of the dispute. Before pronouncing a final interlocutor, which will be to the effect of granting decree in terms of the first and, I think, a substantial part of the third conclusions, I shall put the case out By Order so that the precise terms of the interlocutor can be discussed as well as the question of further procedure.