Scottish Court of Session Decisions

 

OUTER HOUSE, COURT OF SESSION

[2015] CSOH 4

 

CA181/13

OPINION OF LORD DOHERTY

In the cause

AXON WELL INTERVENTION PRODUCTS HOLDINGS AS

Pursuer;

against

MICHAEL CRAIG

Defender:

Pursuer:  Howie, QC;  Burness Paull LLP

Defender:  Lindsay, QC;  Ledingham Chalmers

16 January 2015

Introduction
[1]        The pursuer is a limited liability company incorporated under Norwegian law.  The defender is the former owner of 100% of the equity interests of Mechserv ME FZE (“JAFZE”), a company with limited liability established in the Jebel Ali Free Zone, Dubai, United Arab Emirates.  His son, Daryl Craig, is the former owner of 100% of the equity interests of Mechserv MEH FZE (“HAFZE”), a company with limited liability established in the Hamriyah Free Zone, Sharjah, United Arab Emirates.  In terms of the (Arabian) Equity Purchase Agreement (“the AEPA”) dated 19 January 2011 the defender and his son sold their equity interests in JAFZE and HAFZE to the pursuer.  By an Equity Purchase Agreement (“the EPA”) of the same date the defender and Scott McGinigal, his fellow shareholder in Mechserv Ltd, a UK company, sold their shares in that company to the pursuer.  All of the said companies traded in the oil and gas sector.  JAFZE and HAFZE traded in the Middle East.  In terms of the AEPA and the EPA, in return for the sale of his shares the defender received shares in the pursuer and payments in cash.  A Shareholders’ Agreement between the Axon Energy Products AS (“AEP”), the defender and Mr McGinigal was entered into at the same time as the other Agreements.  The Shareholders’ Agreement contained terms and conditions governing the shareholdings in the pursuer of AEP, the defender and Mr McGinigal. 

[2]        The EPA provided that after the sale the defender should remain as managing director of Mechserv Ltd (which would become Axon Well Intervention Products UK Ltd).  Both the AEPA and the EPA contained restrictive covenants (s7.2).  In the case of the AEPA the covenants bound the defender and his son, for a period of three years until 24 January 2014, from competing with the business of HAFZE and JAFZE as it was carried out on 24 January 2011, or from dealing with or seeking the custom of any person who was on that date or during the previous twelve months a client or customer of HAFZE or JAFZE. 

[3]        The first conclusion in the present action is for interdict of the defender from breaching certain of the obligations in s7.2 of the EPA and s7.2 of the AEPA.  On 12 November 2013 interim interdict was pronounced.  Since the restrictive covenants ceased to restrain the defender’s activities after 24 January 2014 interdict is no longer a live issue. 

[4]        The pursuer’s second conclusion is for payment by the defender to it of US $700,000 damages.  The pursuer avers that the defender has acted in breach of s7.2 of the AEPA by carrying on, being engaged in or being interested in a business in competition with the business of HAFZE and JAFZE, and that as a result Axon FZE (“FZE”) (an affiliate of the pursuer) has suffered loss and damage. 

[5]        The pursuer avers that the defender’s employment as managing director of Axon Well Intervention Products UK Ltd was terminated on 1 November 2013 following a disciplinary hearing on 7 October 2013 which the defender did not attend.

[6]        The case came before me for a debate on the commercial roll.  Two issues were debated.  First, whether the pursuer is entitled to seek to recover losses said to have been sustained by FZE.  Second, if the pursuer is so entitled, whether in assessing damages it requires to deduct the “bad leaver” discount of $450,000 which clause 15.4 of the Shareholders’ Agreement makes provision for.

[7]        There is an outstanding minute of amendment for the pursuer (no. 21 of process) and answers for the defender (no. 27 of process).  In terms of the minute the pursuer proposes to increase the damages sued for and to provide further specification of that claim.  Both parties considered that the issues to be debated could be determined on the basis of the current pleadings (record no. 26 of Process) and that no regard need be had at this stage to the proposed amendment.

 

The Panatown claim - recovery of FZE’s losses
Breach of the AEPA

[8]        Section 7.2 of the AEPA provided:

“7.2      Non-Competition;  Non-Solicitation

 

(a)        Seller shall not, during the period of three (3) years beginning with the Closing Date in any geographic areas in which the Business was carried out on (sic) at the Closing Date, carry on or be employed, engaged or interested in any business which would be in competition with any part of the Business as the Business was carried on at the Closing Date, other than with the Company or Buyer or one of their Affiliates.

 

(b)        Seller shall not, during the period of three (3) years beginning with the Closing Date, deal with or seek the custom of any person that is at the Closing date, or that has been at any time during the period of twelve months immediately preceding that date, a client or customer of the Business.

 

…

 

(f)         The undertakings in this Section 7.2 are intended for the benefit of the Buyer and apply to actions carried out by the Seller in any capacity, and whether directly or indirectly, on behalf of the Seller, or on behalf of any other person or jointly with any other person …”

 

The “Closing Date” was 24 January 2011.  The “Business” was the business of HAFZE and JAFZE consisting of designing, building and refurbishing oilfield equipment.  The “Buyer” was the pursuer. 

[9]        Section 10.5 of the AEPA provided:

“10.5    Successors and Assigns.  The provisions of this Agreement will be binding upon and inure to the benefit of the Parties hereto and their respective successors and assigns …  Buyer may assign its rights and obligations under this Agreement to a wholly owned Affiliate of Buyer, it being understood that such assignment will not relieve Buyer from its obligations hereunder …”

 

FZE was at all material times a wholly owned Affiliate of the pursuer. 

[10]      The pursuer avers:

“Condescendence 7

 

Following the takeover of the Mechserv companies by the pursuer, the work of Axon’s companies in the United Kingdom and in the middle east were closely integrated, the defender having oversight, as managing director of Axon Well Intervention Products UK Ltd, of the business conducted in the middle east by Axon as well as its business throughout Europe.  The business formerly carried on by the Arabian companies was transferred into a new company, Axon Well Intervention Products FZE, which thereafter carried on that business on a combined basis.  The defender had a considerable degree of contact with customers and suppliers of Axon Well Intervention Products FZE (“Axon FZE”) in the United Arab Emirates and frequently had to attend to the business of that company in the middle east, sometimes through his physical presence there.  In the course of 2013, during the period of three years following the Closing Date to which the undertakings in clause 7.2 of the AEPA referred, the pursuer discovered that, unbeknown to it, the defender, in collaboration with his said son, his wife, Gail Craig (another former employee of Axon Well Intervention Products UK Ltd) and a manager employed by Axon FZE, Bruce McLaren, had been involved in setting up two companies to trade in direct competition with the pursuer and other companies in the Axon Group (such as Axon FZE), and that one of those competing companies had, through the activities of the defender and his son, sought and obtained business for itself, business which might otherwise have been able to be won by Axon FZE …  The said competing companies are hereinafter compendiously referred to as “the Reliaquip companies”...  [T]he defender was providing working capital for the Reliaquip companies and was engaged in or interested in the business thereof.  By January 2013 the defender was describing himself as investing U.S. $414,000 in the Reliaquip companies.

 

…

 

Condescendence 9

 

The pursuer’s investigations … uncovered an example of the labour and resources of Axon FZE being used, unknowingly, for the benefit of the Reliaquip companies.  A zone 2 Triplex Pump Unit was designed and built by Axon Well Intervention Products FZE and purchased from it by one of the two Reliaquip companies, Reliaquip Oilfield Rentals FZE in January 2013 for U.S. $199,237.00.  For such equipment, that was an unusually low price…The pursuer has further discovered that … [Axon Well Intervention Products FZE] is in the process of constructing three other items of equipment for Reliaquip Oilfield Rentals FZE.  Two of them have the cost of pump frames misallocated to other contracts, and the frame for the third has been found to belong to an Axon company but to have been kept off the company inventories.  Each of these orders seems undervalued by reference to the costs the pursuer would expect to be incurred upon the construction of equivalent equipment …  The pursuer has further discovered that pursuant to an agreement dated 1^st June, 2013 between Reliaquip Oilfield Equipment FZE and Halliburton Energy Services Inc., the former company sold to the latter company the aforesaid Triplex Pump for U.S. $450,000 …  [The defender] was aware, too, of the intention to make use of the resources of Axon and its suppliers and contacts in order to provide assets and other benefits to the Reliaquip companies … and in September 2012, Mr McLaren discussed with the defender the profit which could be derived from “1087” (the Axon FZE shop order number for the said triplex pump), and the ability of Reliaquip to purchase other machinery “if we can dodge paying for the frames”.  Those frames were being made for the triplex pump by Axon FZE.  The defender’s experience of the costs of manufacture and refurbishment of pumps such as the triplex pump under the pricing and costing protocols used by the Axon companies was such that even if he had not known in advance of the intention to ‘dodge’ payment to Axon FZE, he would have been able to spot the undervaluation in Axon FZE’s books of the cost of manufacture of the pump.  Nevertheless, he did nothing to challenge or investigate the low values of the orders from Reliaquip Oilfield Services FZE or the internal costing within Axon FZE of the production of the said pump unit …

 

Condescendence 13

 

As a result of the breaches of contract already committed by the defender, the pursuer and Axon FZE have already suffered loss, injury and damage.  Axon FZE has suffered the loss of U.S. $250,000 on the sale price of the said Triplex Pump …  It has also suffered losses on the other three orders aforesaid …  The pursuer is the only party entitled to sue on the said breaches of contract.  It seeks to recover the revenue losses caused thereby to its subsidiary, Axon FZE, on the footing that it will account to that company therefor, Axon FZE being unable to sue the defender directly therefor.  The losses for which the pursuer seeks damages it presently estimates, (acknowledging the difficulty of such estimation) at around U.S. $700,000, which is the sum second concluded for …”

 

Submissions for the defender
[11]      The general rule was clear.  Where a party sued for damages for breach of contract it was only entitled to recover its own losses.  Exceptionally, in the circumstances described in Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518 (“Panatown”), a party could sue for losses incurred by another where the contracting parties had intended that that other person should benefit from the obligation undertaken.  However the exception did not apply where the person who had incurred the loss had a remedy enabling him to recover it from the wrongdoer.  That was the position here. 

[12]      First, the pursuer was entitled to assign his rights under the AEPA to FZE.  If the pursuer did that then FZE could seek redress for the alleged breach of section 7.2 and could recover the loss which had been caused by that breach.  While FZE could not compel the pursuer to assign its rights under the AEPA, the reality was that the interests of the pursuer and FZE coincided.  In the normal case one would expect an assignation to have been granted.  The suspicion here was that the pursuer had chosen to bring the claim in its own name so that it could set off any damages awarded to it against the sum of US $450,000 it was due to pay the defender for the purchase of his shareholding in the pursuer.  It was the pursuer, not FZE, who was obliged to pay that purchase price. 

[13]      Second, on the facts averred by the pursuer FZE had direct remedies against the defender to recover its loss.  On those facts (i) the defender had caused FZE loss by unlawful means (Global Resources v Mackay 2009 SLT 104;  McLeod v Rooney 2010 SLT 499);  (ii) FZE’s loss had been caused by an unlawful means conspiracy between the defender, his son, his wife and Mr McLaren (or one or more of them) (Revenue and Customs Commissioners v Total Network SL [2008] 2 WLR 711).

[14]      Third, on the facts averred by the pursuer the defender had been acting as a de facto director of FZE.  (Under reference to Vivendi SA v Richards [2013] BCC 771 a submission was also advanced that on the facts averred the defender would have been a shadow director who owed fiduciary duties to the company, but, ultimately, Mr Lindsay departed from that submission).  De facto directors of a company owed the same fiduciary duties to it as de jure directors.  The losses claimed to have been incurred by FZE had arisen as a result of the defender’s breach of the fiduciary duties he had owed to it as a de facto director.

[15]      For each of these reasons there was no legal “black hole” which justified recovery by the pursuer of FZE’s losses.  The circumstances in which such recovery was permissible were exceptional and were described in Panatown.  It had been accepted in the Outer House that the approach in Panatown ought to be applied in Scotland (McLaren Murdoch & Hamilton Ltd v Abercromby Motor Group Ltd 2003 SCLR 323;  Aberdeen and Temair (Marquess) v Turcan Connell [2009] PNLR 18).  The mischief which the Panatown exception was designed to address was the risk of a loss, caused by a breach of contract, going uncompensated.  Since that was the mischief it ought not to matter whether the remedy available to the third party was contractual or delictual.

[16]      Here, the availability to FZE of the alternative direct remedies meant that the pursuer could not rely on the Panatown exception.  It followed that the pursuer had no title and interest to sue for FZE’s losses, and that the pursuer’s fourth plea-in-law (no title and interest to recover damages in respect of FZE’s losses) should be sustained.  Alternatively, the pursuer’s averments that it was entitled to recover those losses for FZE, and that FZE had no other means of legal redress, were irrelevant;  and the pursuer’s first plea-in-law (a general plea that the pursuer’s averments were irrelevant and lacking in specification) should be upheld.

[17]      Leaving aside the question of the assignation, Mr Lindsay accepted that if FZE failed to make good one or other of the suggested alternative claims its loss could fall into a legal black hole:  but he maintained that that risk could be avoided by the pursuer going down the assignation route. 

 

Submissions for the pursuer
[18]      There was no question but that the pursuer had title and interest to sue the defender for breach of contract.  The pursuer and the defender were the contracting parties, and the pursuer offered to prove that the defender had breached s7.2 of the AEPA.  It followed that the pursuer had title and interest to sue on the contract.  The real issue was whether the pursuer’s averments that it was entitled to recover the losses incurred by FZE were irrelevant.  Reference was made to Scottish Enterprise v Archibald Russel of Denny Ltd 2002 SLT 519 at paragraphs 6, 7 and 9.

[19]      The pursuer’s averments set out a relevant basis for recovery by it of the losses incurred by its subsidiary, FZE, as a result of the defender’s breach of s7.2.  While the general rule was that a party to a contract could only recover damages for breach of contract in respect of his own loss, here the exception explained in Panatown applied so as to permit the pursuer to recover FZE’s losses.  Were that not so the defender would escape liability for substantial damages for his breach of contract - because the pursuer would have title to sue the defender but no substantial loss, and FZE would have substantial loss but no title to sue the defender.  The losses naturally and directly arising from the defender’s breach of contract would fall into a legal black hole and be irrecoverable.

[20]      In his note of argument (no 22 of Process) the defender had argued that the

Panatown exception to the general rule did not apply because

“there are a number of potential grounds of action which Axon FZE could rely upon in any proceedings against the defender”.

 

It was significant that Mr Lindsay did not submit that FZE would succeed in an action based upon the economic delicts of causing loss by unlawful means or unlawful means conspiracy;  nor did he submit that FZE would be bound to succeed in an action founded upon the defender having been a de facto director of FZE who had caused the losses claimed through a breach of his fiduciary duties to that company.  A Panatown claim would not be allowed where the likely result was that a defender would be mulcted twice for the same wrong.  But for that to be the position the court would have to be satisfied on the pleadings that FZE would be bound to succeed on one or more of the alternative grounds suggested by the defender.

[21]      In any case, the better view was that for the pursuer’s Panatown claim to be irrelevant FZE would have to have a contractual remedy against the defender which entitled him to recover the loss which was caused to it by the defender’s breach of s7.2.  Nothing in Panatown was authority for the proposition that where the person who suffered the loss had a potential delictual remedy there could be no Panatown claim.  The observation in Chitty on Contracts (31^st ed), para 18-058, footnote 356, to that effect was not supported by the authority cited (Riyad Bank v Ahli United Bank (UK) Plc [2005] EWHC 279 (Comm), [2005] 2 Lloyd’s Rep 409 at [173]) and was ill-founded.

[22]      In Panatown the remedy had been based on a separate contract (in a duty of care deed) between the site owner and the contractor.  While the contractor’s obligations to the owner under that deed were not quite as extensive as his obligations to the employer under the building contract, both contracts had been entered into at the same time and the parties were taken to have intended that the duty of care deed was the means by which the owner was to have redress for the contractor’s breach of the building contract.  The position was very different where reliance was placed on the suggested existence of non-contractual remedies.  Those remedies were inherently more uncertain than the contractual remedy.  In the present case there was strict liability of the defender for his breach of contract:  but Mr Lindsay suggested that the existence of the other potential direct grounds of action meant that the defender could prevent the pursuer recovering (FZE’s) damages for that breach of contract.  If Mr Lindsay was correct the defender was in the much more advantageous position of requiring FZE to overcome the greater hurdle of establishing one or other of the suggested, and more difficult, claims.  That would be inequitable.  It would make FZE bear the risk of failing to establish liability against the defender on those more difficult grounds of action.  In the event of it failing to do so its loss would go uncompensated. 

[23]      In any event, it was not accepted that on the pursuer’s averments FZE did have the other remedies which the defender suggested.  On the facts averred it could not be said that the defender had been a de facto director of FZE and that the company’s losses had been caused by breach of fiduciary duties which he owed to the company as such a director.  (Similarly on the facts averred it could not be said that he had been a shadow director and that the company’s losses had been caused by breach of fiduciary duties which he owed to the company as such a director.)  As for causing loss by unlawful means, the averments of fact did not disclose wrongful interference by the defender with the actions of a third party in which FZE had an economic interest and an intention thereby to cause loss to FZE (OBG Ltd and Another v Allan and Others [2008] 1 AC 1, per Lord Hoffman at paragraph 47-51).  Nor did they demonstrate an unlawful means conspiracy by the defender and others intended to injure FZE. 

[24]      Critically, the defender had no averments to the effect that FZE had such (or indeed any) direct remedies against the defender.  In relation to each of the points the defender sought to make, it had been for him to raise it on record and for the pursuer to have had the opportunity to respond to it.  The observations to that effect in McBryde, Contract (3^rd ed) at para 22-30 were correct (albeit that the issue ought properly to be characterised as being one of relevancy rather than title and interest). 

[25]      The (entirely new) argument that a Panatown claim was excluded because the pursuer could assign its rights under the AEPA to FZE was unsound.  Unless and until the pursuer elected to assign rights to FZE that company had no right to sue on the contract.  It was for the pursuer to decide whether to assign its rights under the contract.  FZE could not compel an assignation.  Often, as here, a contracting party would have legitimate reasons to wish to retain his contractual rights.  As matters stood the fact was that only the pursuer had title and interest to sue on the contract and recover damages for its breach.  The existence of s10.5 did not result in a scenario where the defender was liable to be mulcted twice for the same wrong.  It gave the pursuer the option of choosing whether to retain and enforce its contractual rights or assign them:  but whichever course was chosen there would only ever be one party with the contractual right to recover substantial damages for the breach of s7.2.

 

Assignatus utitur jure auctoris?
[26]      I raised with counsel whether, if the pursuer granted FZE an assignation, it would entitle FZE to recover its own loss.  Mr Lindsay submitted that it would.  He envisaged that the assignation would not merely be an assignation of the pursuer’s right to claim damages against the defender for his breach of s7.2.  Rather, it would be of the pursuer’s right to enforce s7.2 as well as of the right to claim damages as a consequence of that breach.  That would entitle the assignee to recover its own loss arising from the breach of contract.  Mr Howie drew Offer-Hoar v Larkstore Ltd [2006] WLR 2926 to my attention, and commented that unless the assignee could recover its own loss there would still be a black hole. 

 

Suggested amendment
[27]      In response to Mr Howie’s submissions Mr Lindsay accepted that the assignation point was a new one.  While it was true that the defender had not made any averments about it or about the existence of any of the alternative remedies, he submitted that such averments were unnecessary.  The issue of the existence of alternative remedies had been raised in his note of proposals for further procedure (no 19 of process) and in his notes of argument (nos 20 an 22 of process).  Mr Howie had been able to deal each of the points at Debate and there had been no prejudice to the pursuer in those points not having been made the subject of averment by the defender.  Mr Lindsay submitted that “if it was necessary for him to do so” (he maintained it was not) he would be “happy to propose a very brief one-sentence amendment to insert in answer 13 (at p38D before the sentence beginning ‘Esto …’)

‘Axon FZE have direct rights of action against the defender to recover the damages sought by the pursuer in this action.’ ”

There would be no prejudice to the pursuer if that amendment were to be allowed.

[28]      Mr Howie indicated that if the suggested motion were to be made he would not resist it if the “direct rights of action” referred to were restricted to matters which had previously been raised in the defender’s notes of argument.  However, if it was intended to go beyond that and include the argument anent assignation, he would oppose any motion to amend.  Mr Lindsay confirmed that the aim of any amendment in the suggested terms would be to cover all the arguments he had advanced. 

 

The Panatown claim:  decision and reasons
Panatown and Scots law
[29]      In McLaren Murdoch & Hamilton Ltd v The Abercromby Motor Group Ltd, supra, Lord Drummond Young observed:

“[42]    It is clear in my opinion that the existence of legal ‘black holes’ is undesirable;  if a breach of contract has caused loss, it should be possible to obtain redress for that loss from the party in breach …  That has been recognised in a series of cases in the House of Lords, including GUS Property Management Ltd v Littlewoods Mail Order Stores Ltd, Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd;  St Martin's Property Corporation Ltd v Sir Robert McAlpine Ltd, supra, and Alfred McAlpine Construction Ltd v Panatown Ltd, supra.  Although the approach of the majority of the House of Lords in the latter case was based on a series of English authorities (apart from Dunlop v Lambert, which is restricted in its ambit to contracts of carriage by sea), the result is in my opinion wholly consistent with the principles of Scots law.  I am accordingly of opinion that Scots law should adopt the same general rule as that applied by the majority of the House of Lords in that case, as described by Lord Clyde in the passage at … [2001] 1 AC 518 at page 535E-G, H] ...”

 

I respectfully agree with those observations.

 

The suggested availability of alternative remedies
[30]      FZE was not one of the contracting parties to the AEPA.  Nor did the AEPA confer upon FZE a right to sue to enforce any of its provisions.  Nor (unlike the position in Panatown) was there any other contract between FZE and the defender which made provision for any redress being obtained by FZE in the event of it suffering loss as a result of breach by the defender of s7.2 of the AEPA.  Both parties presented their submissions on the basis that the business which subsequently came to be carried on by FZE should have the benefit of that provision.

[31]      Notwithstanding the above facts, Mr Lindsay submits that the pursuer’s claim is so clearly ill-founded that it can be disposed of at debate without further inquiry into the facts.  While he couched matters initially in terms of title to sue, it became clear during the course of the debate that in fact the gravamen of his attack is that the pursuer’s averments are irrelevant.  In any case, I agree with Mr Howie that the pursuer, as a contracting party, clearly has title to sue the defender for breach of the contract.

[32]      What then of Mr Lindsay’s suggestion that the pursuer’s averments are irrelevant?  The essence of the argument is that the pursuer’s averments disclose that it has “potential” alternative direct (non-contractual) remedies against the defender which might enable it to recover its losses from him.  It is the potential availability of those remedies which is said to result in the lack a legal “black hole” - and in the absence therefore of a justification for the pursuer having a Panatown claim. 

[33]      I remind myself that an action will not be dismissed as irrelevant unless it must necessarily fail even if all the pursuer’s averments are proved (Jamieson v Jamieson 1952 SC (HL) 44, per Lord Normand at page 50).  I am not satisfied that the present action falls into that category.

[34]      Mr Lindsay’s starting point is that on the facts averred it can be concluded that FZE has potential claims for damages against the defender for the two economic delicts he founds upon;  and that on the same facts it may be concluded that the defender had been a de facto director of FZE and that its losses have been caused by breach by the defender of fiduciary duties he owed to the FZE as such a director.

[35]      My first difficulty with this approach is that none of these matters were raised as issues in the defences.  In my opinion, they ought to have been.  This is not a sterile pleading point.  Had the proper course been followed it seems likely that the pursuer’s averments of fact may have been supplemented.  All facts having a bearing upon the availability or non-availability of the suggested alternative remedies, and their merits and demerits in comparison with a Panatown claim, would have become material.  In the absence of the issues having been raised in the defences there was no need for the pursuer to make such averments.

[36]      Further, I am not satisfied that it is a necessary inference from the facts averred that the defender was a de facto director of FZE and that the company’s losses were caused by breach of fiduciary duties which he owed to the company as such a director.  (Mr Lindsay departed from his contention that the defender had been a shadow director - rightly in my view, for the reasons advanced by Mr Howie).  Nor am I satisfied that it is a necessary inference from the facts averred that the defender has committed the delict of causing loss by unlawful means.  The pursuer does not aver that the loss it claims was caused by wrongful and unlawful interference by the defender with the actions of a third party in which FZE had an economic interest and that there was an intention thereby to cause loss to FZE (OBG Ltd and Another v Allan and Other, supra, per Lord Hoffman at paragraph 47-51).  Nor am I persuaded that it falls necessarily to be inferred from the pursuer’s averments that the loss it claims was caused by an unlawful means conspiracy between the defender and others which was intended to injure FZE.  In my opinion the pursuer’s averments fall some way short of asserting that the defender conspired with Mr McLaren to injure FZE by cheating it of the full commercial value of the triplex pump and the other pumps said to have been sold by FZE for less than their full value. 

[37]      That is sufficient to dispose of the defender’s argument that the averments relating to the Panatown claim are irrelevant.  It is unnecessary to decide whether the pursuer’s averments setting out its Panatown claim would be irrelevant if, contrary to my view, they are apt to disclose that FZE may make a direct claim against the defender on the basis of one or more of the remedies suggested by Mr Lindsay.  However, in view of the time taken up at the debate addressing this matter, and given that it is possible that it may have a bearing on the future course of the litigation, it is appropriate that I provide a brief indication of my views.

[38]      Panatown explains the circumstances in which damages for breach of contract may be recovered by a pursuer although the actual loss has been incurred by another.

“The solution is required where the law will not tolerate a loss caused by a breach of contract to go uncompensated through an absence of privity between the party suffering the loss and the party causing it.” (Lord Clyde at page 535F).

 

However, where the contractual arrangements between the contracting parties, or between the third party and one or more of the contracting parties, provide for or contemplate the third party being given a distinct entitlement directly to sue a defender, the parties are likely to be taken to have intended to have excluded the option of a Panatown claim being made (Panatown, supra, per Lord Clyde at pages 530D, 531A-532C, 536D-E, per Lord Jauncey at pages 567D-568G, per Lord Browne-Wilkinson at pages 576C-577C, per Lord Millet at pages 582H-583A).

[39]      It forms no part of the defender’s case that the FZE has been given a distinct contractual right to sue the defender directly.  Rather, Mr Lindsay maintains that, taking the pursuer’s averments pro veritate, it is evident that FZE would be able to seek recovery of its loss from the defender on other, non-contractual, grounds.

[40]      Chitty on Contracts (31^st ed), para 18-058, footnote 356, states:

“The reasoning of the Panatown case has likewise been said not to apply where the third party has its own independent right against the promisor, not in contract, but in tort, Riyad Bank v Ahli United Bank [2005] EWHC 279 (Comm), [2005] 2 Lloyd’s Rep 409 at [173] (affd without reference to this point [2006] EWCA Civ 780, [2006] 2 Lloyd’s Rep 292).”

 

I agree with Mr Howie that this statement is not supported by paragraph [173] (or any other part of) Moore-Bick J’s judgment in Riyad Bank.  At paragraph [173] he observed:

“8.       The claim of RBE and Riyad Bank to recover damages on behalf of the Fund.

 

[173]    Finally, Riyad Bank and RBE submitted that if all else failed, they were entitled to recover damages for breach of the Technical Services Agreement in the amount of the loss suffered by the Fund on its behalf in accordance with the principles to be found in the line of authority which includes The Albazero [1977] A.C. 774, St Martin's Property Corporation Ltd v Sir Robert McAlpine Ltd [1994] 1 A.C. 85 and Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 A.C. 518.  This argument raises some interesting and potentially difficult questions of law.  It was not developed in any detail and does not arise for decision in view of my conclusion that the Fund has a good claim in its own right to recover any loss it may have suffered.  In those circumstances it is unnecessary to consider it further.”

 

It is clear that in Riyad Bank the Panatown claims were advanced on the basis that they should be considered if the claimants’ primary arguments were not accepted.  As Moore-Bick J accepted the primary arguments he held that it was unnecessary to give any further consideration to the Panatown claims.

[41]      Footnote 356 also appears to be inaccurate in stating that on appeal no reference was made to the Panatown point.  After affirming Moore-Bick J’s decision on the claimants’ primary arguments Longmore LJ observed ([2006] 2 Lloyd’s Rep.  292):

“[34]    That makes it no more necessary for this court than it was for the judge to consider the claim made by RBE in contract for the Fund's loss.  The scope of the exceptions to the principle that normally a claimant can recover only for its own loss is not well-defined and it would be unwise to add unnecessarily to the authorities on that matter.”

 

[42]      In my opinion it is conceivable that in some circumstances the availability to a third party of a non-contractual remedy might exclude a Panatown claim.  However, where there has not been specific provision for, or clear contemplation of, the third party’s means of redress, if a non-contractual remedy is to exclude a Panatown claim it should provide equivalent means of redress and equivalent prospects of success to an action for damages for breach of contract.  If it does there is no risk of a legal black hole.  If it does not there is such a risk.

[43]      Accordingly, even if, contrary to my view, the pursuer’s averments disclose the suggested other bases of action, I am not persuaded that would be sufficient to exclude the availability to the pursuer of the Panatown claim. 

[44]      First, after inquiry into the facts it is entirely possible that FZE might be held not to have (or have had) any of the suggested alternative remedies.  In the absence of a Panatown claim there would remain the risk of the FZE’s loss falling into a legal black hole.

[45]      Second, pursuit by FZE of the suggested rights of action would be likely to be less satisfactory for the pursuer and FZE than the pursuer having the Panatown claim.  The Panatown claim is founded on the defender’s breach of contract.  By contrast, pursuing the suggested alternative grounds of liability would be different claims (cf Catlin Estates Ltd v Carter Jonas(A Firm) [2005] EWHC 2315, per Judge John Toulmin QC at paragraph 304).  Whereas liability for breach of contract would be strict, the suggested alternative remedies would be likely to present FZE with greater difficulty and uncertainty.  It is one thing to insist upon that course being followed where that is what the relevant parties have agreed or contemplated should happen (as in Panatown).  It is quite another to seek to impose it where, as here, no such intention falls be inputed to them.  The rationale of the Panatown exception is that where the imputed intention of the contracting parties is that a third party should benefit from a provision of the contract, the law will not tolerate a loss caused by a breach of that provision to go uncompensated through an absence of privity between the party suffering the loss and the party causing it (per Lord Clyde at page 535F).  It is open to the parties to exclude the exception by making alternative provision relating to the third party.  But where, as here, they have not done so, it is much more difficult to see why it should lie in the mouth of the contract breaker to deny the operation of the solution which the law would otherwise impose.  Mr Lindsay contends that there is no need for that solution because FZE can advance claims against the defender on other bases;  if it succeeds its loss will be compensated;  ergo it cannot be said there is a black hole.  I have discussed already what seem to me to be some of the flaws in that argument.  To those flaws there may be added that the contract breaker would avoid liability in substantial damages for his breach of contract and, instead, would be liable to compensate FZE for its losses only if FZE was able to bring home against him one or other of the more difficult, and more uncertain, cases.

 

The assignation point
[46]      I can deal quite shortly with the arguments concerning assignation.  I am not persuaded that s10.5 of the AEPA prevented the pursuer from obtaining a Panatown claim. 

[47]      Section 10.5 enables the pursuer - if it wishes - to assign rights it has under the AEPA to any wholly owned affiliate such as FZE.  It was - and is - under no obligation (either to the defender or to FZE) to do so.  That is a very precarious foundation for the argument which Mr Lindsay seeks to advance.

[48]      If the pursuer does have a Panatown claim, it was - and is - under no obligation to divest itself of that claim by assigning it to FZE.  Had it considered it appropriate to do so it could have assigned its rights under the AEPA to FZE before the present action was raised.  That it did not consider that to be appropriate is unsurprising.  At the time of raising the action the present claim for damages was not the only live claim.  The pursuer also wished to enforce the covenants in s7.2 of the AEPA and in s7.2 of the EPA.  As already noted, it sought interdict in terms of the first conclusion, and interim interdict was pronounced on 12 November 2013. 

[49]      There is a further difficulty with this branch of the defender’s argument.  The pursuer avers that the defender has breached the covenant in s7.2 of the AEPA.  The pursuer has title and interest to sue the defender in respect of his breach of contract, but the substantial loss in respect of the breach was sustained by FZE.  As matters stand FZE has a loss but no right to sue on the contract.  Unless the pursuer is entitled to recover from the defender the loss sustained by FZE neither company will be able to obtain substantial damages in respect of the defender’s breach of contract.  A Panatown claim made by the pursuer is the only means whereby substantial damages may be recouped for that breach. 

[50]      An assignee acquires no greater right than that possessed by the assignor.  An assignation by the pursuer to FZE (whether of the pursuer’s claim against the defender, or of all his rights under the AEPA) would not entitle FZE to recover its own losses from the defender unless at the time of assignation the pursuer had been entitled (on Panatown grounds) to recover those losses from the defender (see Panatown, per Lord Clyde at page 531F-G, per Lord Goff at page 542C-D;  Darlington Borough Council v Wiltshire Northern Ltd [1995] 1 WLR 68, per Dillon LJ at page 74A-75B, per Steyn LJ at page 79C-80D, per Waite LJ at page 81b-C;  cf Offer-Hoar v Larkstore Ltd, supra).  For the losses to be recoverable by FZE from the defender the pursuer would have to have been invested with a Panatown claim, and that claim would have had to have been included in the rights assigned by the pursuer to FZE.  Otherwise, any assignation by the pursuer to FZE would not enable FZE to recover substantial damages.  If the pursuer had no right to recover substantial damages at the time of assignation FZE could acquire no better right.

[51]      The defender’s argument, however, is that the existence of the right to assign prevents the emergence of a Panatown claim - the pursuer does not obtain a right to recover FZE’s losses.  But if the pursuer was not invested with any right to substantial damages, it would have no such right to assign to FZE.  No assignation by the pursuer to FZE would be of any avail to FZE. 

 

The suggested amendment
[52]      Mr Lindsay did not actually move the tentative amendment he discussed.  He indicated that he would propose to amend in those terms if it was necessary to do so.  Since the mooted amendment was not actually moved, and since it would not have addressed the difficulties for the defender’s argument which I have already highlighted, I am not inclined to treat Mr Lindsay’s invitation as if it had been a motion to amend.  Had a motion in relation to amendment been made, the appropriate course - for the reasons outlined in paragraph 35 above - would have been for a minute of amendment to be received with a period thereafter for answers.

 

The Shareholders’ Agreement
Introduction
[53]      In terms of clause 15.1 of the Shareholders’ Agreement the defender and Mr McGinigal undertook, inter alia, for as long as he was a shareholder or employee in the pursuer and for a period of two years thereafter, to refrain from, and use reasonable endeavours to cause all of their affiliated persons or companies to refrain from, any action or inaction which might adversely affect the business of the pursuer, its profits and/or entail or increase its losses, and/or which may have any other negative impact on the pursuer’s business.  In terms of cl 15.2 the defender and Mr McGinigal declared that for the term of the Agreement and for two years thereafter they would not disclose or use any proprietary, confidential or non-public information relating to the pursuer, its business and affairs.  Clauses 15.3 and 15.4 provide:

“15.3    In the case of breach of Clause 15.1 and 15.2 set out above all shares in the [pursuer] owned by the Private Shareholder in breach of said clause(s) at such time shall be assigned to the [pursuer] with compensation to the said Private Shareholder as stipulated in Clause 13.1.

 

15.4      In the event that the [pursuer] has been exposed to a documented economic loss as a consequence of the Private Shareholders breach of this clause 15, the [pursuer] shall, notwithstanding Clause 15.3, have the right to claim damages from the breaching Private Shareholder.  The fair market value of the shares assigned to the [pursuer] under Clause 15.3, shall however be deducted from any damages due to the [pursuer] hereunder.”

 

Clause 13.1 provides that in certain circumstances where the defender or Mr McGinigal are in breach of certain provisions of the Agreement the pursuer should have the right to purchase or redeem the shares in that party’s shares in the pursuer.  The provision continues:

“The Party in breach shall, without limiting any other claims the other Parties may have based on this Agreement or applicable law as a result of the breach, be entitled to receive a consideration for the shares equal to the fair market value, less a discount of 50%.”

 

Clause 23 provides for the laws of Norway being the law governing the Agreement.  Clause 24 provides for disputes arising out of or in relation to the Agreement being resolved by amicable written agreement between the parties failing which by arbitration in Oslo pursuant to the Norwegian Arbitration act of 14 May 2004 no 25.

[54]      On 30 January 2014 the pursuer declared that they were claiming to set off the purchase price of the defender’s shares against the damages claimed in the present action (“the Claim”).  A dispute between the parties regarding the legality of that set off and of the pursuer’s assignation to itself of the defender’s shares, and the proper valuation of the shares and their purchase price, was referred to arbitration in terms of cl 24.  By a Settlement Agreement dated 8 May 2014 the parties agreed to settle the dispute on the basis that the pursuer purchased the shares for a “Purchase Price” (US $450,000) equal to the fair market value of the shares (US $ 900,000) less a discount of 50% (US $450,000).  It was also agreed:

“vi.      For the avoidance of doubt, this Agreement does not restrict [the defender] from making any submissions on the interpretation of section (sic) 15.4 of the Shareholders’ Agreement to the Court of Session in respect of the Claim as he sees fit, however so that this article (vi) shall under no circumstances be considered (sic) having altered the provisions on governing law and arbitration in the Shareholders’ Agreement whereas Axon will maintain all rights and positions under said Agreement, if not otherwise stated in this Agreement, hereunder to oppose any submissions from [the defender] before the Scottish Court of Session related to the Shareholders’ Agreement.

 

…

 

viii.      The parties agree that any set-off, without undue delay, is to be formalized between the Parties in writing after the Final Interlocutor has been issued and the issue of expenses determined, and the Parties agree that any set-off of the Claim against the Purchase Price will be as follows:

 

• If a sum is due to [the pursuer] in terms of the Final Interlocutor and exceeds the Purchase Price, [the defender] shall pay the amount awarded in favour of [the pursuer] (including any expenses) less the Purchase Price, to [the pursuer] in accordance with the Final Interlocutor;

   

• If a sum is due to [the pursuer] in terms of the Final Interlocutor but does not exceed the Purchase Price, [the pursuer] shall within 14 days of issue by the Court of Session of the Final Interlocutor and determination of the account of expenses pay to [the defender] the purchase price less the sum due to [the defender (including any expenses);

   

• If a sum is due to [the defender] in terms of the Final Interlocutor, [the pursuer] shall within 14 days of issue by the Court of Session of the Final Interlocutor and determination of the account of expenses, pay to [the defender] the Purchase Price together with any sums due to [the defender] in accordance with the Final Interlocutor (including any expenses).

   

• [The pursuer] shall not have the right to set-off any part of the payment due to [the defender] against any other claim against [the defender] except for the Claim, whether such other claim is incurred before or after the signing of this Agreement …”

 

The Settlement Agreement provided that it would be governed by and construed in accordance with the laws of Norway and that any dispute arising out of or in connection with it should be settled by agreement failing which by arbitration in Oslo pursuant to the Norwegian Arbitration act of 14 May 2004 no 25.

 

The pleadings
[55]      In Answer 13 the defender avers that the Shareholders’ Agreement makes provision for liquidate damages;  that damages of US $450,000 were deducted by the pursuer from the purchase price of the defender’s shares in the pursuer;  and that in terms of cl 15.4 the pursuer requires to deduct that sum from its claim for damages.  In Condescendence 13 the pursuer admits that a “bad leaver” discount of US $450,000 was deducted in calculating the purchase price of those shares.  It avers that cl 15.4 applies only to claims for damages for breach of clauses 15.1 or 15.2 of the Shareholders’ Agreement, and that it has no application to the claim for damages in the present action.  (Reference was also made by both parties to cl 14 but it was common ground that that clause  had no application.  It deals with a scenario which does not arise here - where a private shareholder had resigned from employment with the pursuer.  I also note that although both counsel described the defender as having been treated as a “bad leaver”, in fact that designation applied only to persons who fell within the ambit of cl 14.1 (which the defender did not)).

 

Submissions for the defender
[56]      The parties had provided that if the defender breached cl 15.1 or 15.2 the purchase price payable for his shares would be discounted by 50%.  While the terminology of cl 15.3 read with cl 13.1 was that of discount, it was as plain as could be that the parties were in fact providing for the payment of liquidate damages in the event of a breach.  Reference was made to the discussion of penalty and liquidate damages clauses in El Makdessi v Cavendish Square Holdings BV & Anor [2013] EWCA Civ 1539.  Clause 15.4 made it clear that, notwithstanding the discount provided for by cl 15.3, a damages claim could still be made in respect of the breach, but that in that event the discount had to be deducted from the damages claim.  That was what a reasonable person, with all the background knowledge available to the parties, would have understood cl 15.4 to mean (L Batley Pet Products Ltd v North Lanarkshire Council 2014 SLT 593, per Lord Hodge at paragraph 18).  The breach giving rise to the enforcement of cl 15.3 had been a breach of cl 15.1.  That clause  covered the same ground as s7.2 of the AEPA and s7.2 of the EPA.  The circumstances said to have given rise to the breach of clause 15.1 and s7.2 of the AEPA were the same circumstances.  The pursuer could not avoid the application of cl 15.4 through the stratagem of relying only on breach of s7.2 of the AEPA in the present action.  While in terms of cl 23 of the Shareholders’ Agreement it was governed by and construed in accordance with Norwegian law, the pursuer did not aver that the applicable Norwegian law differs in any respect from Scots law.  Accordingly the court required to assume that it was the same as Scots law (Kraus’s Administrators v Sullivan 1998 SLT 963, per Lord Eassie at page 966B).

[57]      Even if cl 15.4 did not apply to the claim, the pursuer was seeking to recover a sum greater than its loss.  The defender’s alleged breach of s7.2 of the AEPA had been a material factor in the pursuer holding the defender to be in breach of cl 15.1.  Accordingly, as a result of the breach of s7.2 the pursuer had gained US $450,000 it would otherwise have had to have paid the defender.  That gain had to be taken into account otherwise the pursuer would recover more than its actual loss.

[58]      While the defender’s fifth plea-in-law sought dismissal of the action for damages on account of the pursuer not deducting US $450,000 “as it is obliged to do by clause 15.4”, Mr Lindsay accepted that dismissal of the action would not be appropriate if he succeeded on this ground but the Panatown claim was held to be suitable for inquiry.  In that event he suggested that the case should simply be put out By Order for discussion as to further procedure. 

 

Submissions for the pursuer
[59]      On a proper construction of the Shareholders’ Agreement cl 15.3 read together with cl 13.1 did not make provision for the payment of liquidate damages.  It simply made provision for ascertainment of the purchase price in certain eventualities.  The fact that in cl 14 some of the circumstances in which a 50% discount was applied might not involve a breach of contract tended to indicate that neither cl 14 nor cl 15 contained liquidate damages clauses.  In any case, liquidate damages were usually a limit on the damages which could be recovered.  Clause 15.4 made it clear that the 50% discount was not a limit on recoverable damages.

[60]      Whether cl 15 contained a liquidate damages clause  or not it was clear that cl 15.4 had no application to the present claim.  Clause 15.4 only applied where there was a claim for damages for breach of cl 15.  The present claim was not such a claim.  The defender’s fifth plea-in-law should be repelled.

[61]      Mr Howie accepted that when assessing damages for breach of contract the court required to deduct any savings to the pursuer which were a direct consequence of the breach of contract complained of.  However the US $450,000 did not fall into that category.  The discount had not been not caused by the breach of s7.2 of the AEPA.  It had a different source - the Shareholders’ Agreement and the Settlement Agreement. 

[62]      It could not be said that the pursuer’s averments anent damages were not suitable for inquiry.

 

Decision and reasons
[63]      It was common ground between the parties that cl 15.3 of the Shareholders’ Agreement was enforceable.  Neither party suggested that it was an unenforceable penalty clause .  Both parties were also at one that although cl 15.4 referred to “The fair market value of the shares assigned to the Company under clause  15.3” being deducted from damages, those words ought to be construed as meaning the fair market value as discounted.

[64]      Although the governing law of the Shareholders’ Agreement and the Settlement Agreement is Norwegian law, neither party has averred that in any material respect Norwegian law differs from Scots law.  Accordingly in so far as it is necessary to construe either Agreement I shall proceed on the basis that Norwegian law does not differ from Scots law (Kraus’s Administrators v Sullivan, supra, per Lord Eassie at page 966B). 

[65]      I am in no doubt that on a proper construction of cl 15.3, read together with cl 13.1, it makes provision for liquidate damages in the event of breach of cl 15.1 or cl 15.2.

[66]      Whatever may be the position with cl 14, I am clear that cl 15.3 is a provision which only has effect where there is a breach of contract.  Clause 15.3 does not make provision for discounting the purchase price on the occurrence an event other than a breach of contract:  see Bell Brothers (HP) Limited v Aitken 1939 SC 577, Granor Finance Limited v Liquidator of Eastore Limited 1974 SLT 296, and Export Credits Guarantee Dept v Universal Oil Products Co and Others[1983] 1 WLR 399. 

[67]      In my opinion it is of no moment that the form which cl 15.3 and cl 13.1 take is the imposition of a discount from the purchase price which would otherwise be payable absent the breach, rather than a provision which in terms provides for the payment of a sum by way of liquidate damages.  Their substance and effect are that a private shareholder who breaches cl 15.1 or cl 15.2 becomes disentitled to 50% of the fair market value of his shares.

[68]      Clause 15.4 appears to me to be consistent with cl 15.3 making provision for liquidate damages.  It was open to the parties to make such provision but also to provide that, nonetheless, a damages claim might be advanced.  The reservation of that right in cl 15.4 does not prevent cl 15.3 being a provision for liquidate damages.  Indeed, the fact that cl 15.4 provides that the discounted value is to be deducted when calculating damages is a further indication that the discount represents liquidate damages.

[69]      However, that only takes Mr Lindsay so far.  The problem for the defender is that cl 15.4 only applies to claims for damages falling within its ambit viz claims for damages arising through breach of cl 15.1 or cl 15.2.  The pursuer does not found on any such breach in the present action.  Mr Lindsay says that the pursuer could have founded on a breach of cl 15.1, and that taking its averments pro veritate the court should conclude that they give rise to a breach of cl 15.1.  I am not persuaded that that is a course which is open to me to adopt.  The fact of the matter is that the pursuer’s claim is founded solely upon breach of s7.2 of the EAPA, and that cl 15.4 has no application to such claims.  It follows that I agree with Mr Howie that the defender’s averments anent cl 15.4 are irrelevant, and that his fifth plea-in-law should be repelled. 

[70]      Finally, I come to Mr Lindsay’s subsidiary submission on damages - that the pursuer’s averments are irrelevant because they fail to take account of the fact that as a result of the breach of s7.2 the pursuer has obtained a benefit he would not otherwise have obtained viz the discounting of the purchase price of the defender’s shares.

[71]      Mr Lindsay and Mr Howie were not at odds as to the principles which apply to the assessment of damages for breach of contract.  In my opinion it is clear that gains which flow directly from a breach of contract must be taken into account in assessing damages for the breach (see eg McBryde, Contract (3^rd ed.), paragraphs 22-46 to 22-55 and the authorities there discussed).  The difficulty here for Mr Lindsay is that while he submits that the facts and circumstances founded upon by the pursuer as the basis for its damages claim are the same facts and circumstances which gave rise to the breach of cl 15.1 and the resulting discounting in terms of cl 15.3, those matters are not matters which the pursuer admits.  It cannot be said ex facie of the pursuer’s averments relating to damages that as a result of the breach of s7.2 it incurred the saving the defender avers.  Whether or not the pursuer’s loss is as it claims it to be, and (in particular) whether the discounting of the purchase price of the defender’s shares was a gain to the pursuer which flowed directly from breach by the defender of s7.2 of the AEPA, are matters in respect of which inquiry is necessary.

 

Disposal
[72]      I propose to put the case out By Order to discuss (i) the terms of an appropriate

interlocutor to give effect to my decision;  (ii) further procedure;  and (iii) the issue of expenses