Scottish Court of Session Decisions

SECOND DIVISION, INNER HOUSE, COURT OF SESSION

[2017] CSIH 9

CA201/13

 

Lord Menzies

Lord Drummond Young

Lord Malcolm

OPINION OF THE COURT

delivered by LORD DRUMMOND YOUNG

in the cause

by

HOE INTERNATIONAL LIMITED

Pursuer and Reclaimer

against

(FIRST) MARTHA GOODNOW ANDERSEN

(SECOND) SIR JAMES ALEXANDER FREDERIC AYKROYD

Defenders and Respondents

Pursuer and Reclaimer:  Sandison QC;  Brodies LLP

Defenders and Respondents:  O’Brien;  Shepherd & Wedderburn LLP

3 February 2017

[1]        In September 2012 the parties entered into a contract for the sale of the entire share capital in a company known as Speyside Distillers Company Ltd (hereinafter referred to as “Speyside”) by the respondents to the reclaimers.  The transaction was embodied in a share purchase agreement dated 19 September 2012.  The agreement contained a number of warranties granted by the defenders to the pursuer.  Speyside had been in dispute with a third party, Chambers Finance Ltd (hereinafter referred to as “Chambers”), and one of the warranties related to possible liability to that company.  On the same date as the share purchase agreement the sellers provided the purchaser with a disclosure letter.  This contained statements about the current position in the dispute between Speyside and Chambers.  These were to the effect that two actions had been raised by Chambers in 2011, but that both of these had been settled by agreement, and thereafter, although further claims had been intimated by Chambers, these had been investigated and Speyside had concluded that in fact money was due to it from Chambers.

[2]        On 1 July 2013 agents acting for Chambers wrote to Speyside setting out a further claim against the latter company.  The claim related to two matters:  first, the alleged sale by Speyside, without authority and at an undervalue, of stock held to Chambers’ order, and secondly, alleged overcharging by Speyside for rent payable by Chambers for the storage of whisky.  That claim was on its face contrary to the warranties and disclosure given by the defenders to the pursuer.  On 10 July 2013 the pursuer’s agents wrote to the defenders, giving notice of the claim by Chambers that had been intimated on 1 July and purporting to intimate a claim for breach of the warranties contained in the share purchase agreement.  Notice of any such claim was required by two clauses of the share purchase agreement, clauses 8.5 and 9.1.  Clause 9 further provided that in the event of a claim for breach of warranty the defenders were entitled to conduct the defence of the claim.  The defenders subsequently stated to the pursuer that they did not wish to conduct the defence of any claim by Chambers.

[3]        The defenders maintain that the letter of 10 July 2013 was not issued in accordance with the provisions of clauses 8.5 and 9.1.  Consequently they maintain that the pursuer has failed to give notice of the claim in the manner and within the time prescribed by the share purchase agreement.  That is said to amount to a bar to the pursuer’s claim against the defenders.  In November 2013 Chambers raised a commercial action in the Court of Session against Speyside in respect of the dispute intimated in July 2013.  That action was subsequently settled.  The settlement terms included the payment of compensation by Speyside to Chambers for the fair value of the whisky sold, which amounted to £725,048.40, and the fair value of the whisky casks, which amounted to £70,250.  They further included waiver of a sum otherwise due to Speyside by Chambers, amounting to £83,686.10, the writing off of warehouse rents otherwise due to Speyside by Chambers amounting to £30,624.65, and expenses of £74,488.

[4]        The pursuer asserts that the dispute between Chambers and Speyside existed at the date of the share purchase agreement and was not disclosed to the pursuer in either the share purchase agreement or the disclosure letter.  The result, it is said, is that the defenders are in breach of the warranties contained in the share purchase agreement.  That breach of warranty is said to have caused the pursuer a loss of £1,014,097.15, which is the total amount paid to Chambers in settlement of their action against Speyside.  The defenders contest that claim on a number of grounds.  For present purposes two grounds are material.  First, it is said that the defenders were not given proper notice of Chambers’ claim as required by clauses 8.5 and 9.1 of the share purchase agreement.  Secondly, it is said that the manner in which the notice was sent to the defenders did not conform to the requirements of clause 19 of the share purchase agreement, which deals with the giving of notice in terms of the contract.  The essence of the dispute between the parties is accordingly whether the notice given by the pursuer to the defenders on 10 July 2013 was in accordance with the foregoing clauses of the share purchase agreement, both in its terms and in its manner of communication.

 

Provisions of the parties’ contract
Warranties
[5]        The parties’ contract is for the sale of the entire share capital of Speyside by the defenders to the pursuer for an initial consideration of £3,500,000 and a deferred consideration of £500,000, the purchase price being subject to adjustment in terms of the contract.  Schedule 5 to the contract contains a substantial number of warranties.  These include warranties relating to possible claims against Speyside, including specifically claims at the instance of Chambers.  Paragraph 9.1 of schedule 5 warrants that neither Speyside nor any of its subsidiaries was engaged in any litigation (as defined).  Paragraph 9.3 provides as follows

“9.3     No such proceedings, investigation or inquiry as are mentioned in paragraph 9.1 … have been threatened or are pending and so far as the Sellers are aware there are no circumstances likely to give rise to any such proceedings”.

 

Paragraph 9.5 deals specifically with possible liability to Chambers.  It provides:

“9.5     The Company and the Subsidiaries have no further liability to Chambers Finance in respect of the 7,500 hogshead of whisky or the liability in the sum of £500,000 alleged by Chambers Finance as referred to in the disclosure against Warranty 9.3 within the Disclosure Letter”.

 

Thus the agreement contains a warranty that no liabilities existed beyond those referred to in the disclosure letter.  It is that warranty that is relied on by the pursuer in the present proceedings.

 

Disclosure letter
[6]        The disclosure letter (paragraph 9.3) contained specific disclosures in relation to the warranty at paragraph 9.3 of schedule 5 to the share purchase agreement.  These covered the dispute that had existed with Chambers.  It was stated that Chambers had raised a court action against Speyside in 2011 claiming title to (or a pledge of) approximately 7,500 hogsheads of whisky stored at Speyside’s premises, but that following investigation and correspondence agreement had been reached to the effect that Chambers had an effective pledge of the whisky.  A second action had been raised claiming that some whisky had been transferred to Speyside but not replaced, and in this case, again following investigation and correspondence, agreement had been reached and the action had been dismissed.  The disclosure letter then continued:

“A number of other issues were discussed by Speyside and Chambers while the two court actions were going on.  Chambers claimed that Speyside owed it up to £500,000, which related to insurance premiums, storage charges, and the sale of whisky to cover storage charges.  Chambers did not raise a court action.  Speyside carried out detailed investigations into Chambers’ claims and concluded that far from Speyside owing Chambers a substantial sum, in fact money was due to Speyside from Chambers.  This was made clear in correspondence with Chambers’ solicitors.  When agreement was reached on the dismissal of the court actions, around 2011, these other matters remained live, however, since then Speyside has worked amicably with Chambers, arranging the removal of Chambers’ whisky while invoicing and receiving payment for related charges.  Throughout this period Chambers has made no mention of having any continuing claims against Speyside, nor has there been any solicitor correspondence threatening legal action.

 

In recent discussions and correspondence between Jim Gordon of Speyside and Robert Spiers of Chambers discussing their ongoing business relationship this matter has not been raised.  Given the possible sale, Jim Gordon raised the issue of formally agreeing that all possible disputes between Speyside and Chambers had been resolved.  Robert Spiers responded by email dated 26 August 2012 that he is perplexed by the conversation concerning litigation between Chambers and Speyside.  Chambers’ solicitor also responded on 27 August 2012… saying that he is perplexed but if Tods Murray [Speyside’s solicitors] write to him, ‘he can discuss what, if anything, remains to be done, I assume at procedural level’.

 

There is a sum due to be paid to the Company by Chambers Finance.… This document has been intimated to Chambers but Chambers has not yet confirmed that this sum is finalized.  As far as the Sellers are aware, Chambers accept that there is a sum due to be paid to the Company”.

 

 

Notice of claims under warranties
[7]        The parties’ dispute relates to the requirements of the warranty provisions in the share purchase agreement.  Two of these are material, clauses 8.5 and 19.  Clause 8, which includes clause 8.5, is headed “Limitations on claims”.  The expression “Claim” is defined in clause 1.1 of the agreement as “a claim for breach of any of the Warranties”, and the general purpose of clause 8 is to impose a number of restrictions relating to any such claim.  Clause 8.5 is in the following terms:

“The Sellers are not liable for a Claim … unless the Buyer has given the Sellers notice in writing of such Claim…, giving reasonable details of all material aspects of such Claim … known to the Buyer, including the Buyer’s bona fide estimate of the amount thereof and detailing the Buyer’s calculation of the loss alleged to have been suffered by it:

 

…

 

(b)        in the case of any Claim (other than a claim under the Tax Warranties), within the period of 18 months beginning with the Completion Date …”.

 

Clause 9 of the share purchase agreement deals with claims procedure.  It provides as follows:

“9.1     In the event of the Buyer becoming aware of a Claim, the Buyer shall notify the Sellers in writing as soon as reasonably practicable after becoming aware of the same and in accordance with Clause 8.5.

 

9.2       If a Claim results from a Third Party Claim [defined to include a claim by Chambers], the Sellers shall within 28 days of having received said notification intimated in writing to the Buyer whether or not the Sellers desire to conduct the defence of such Third Party Claim”.

 

[8]        Clause 19 is headed “Notice”.  It contains a number of provisions relating to the giving of notice under the share purchase agreement.  So far as material, it is in the following terms:

“19.1   A notice given under this agreement:

 

(a)        shall be in writing in the English language (or be accompanied by a properly prepared translation into English);

 

(b)        shall be sent for the attention of the person and to the address specified in clause 19 (or such other address or person as each party may notify to the others in accordance with the provisions of clause 19);  and

 

(c)        shall be:

 

(i)         delivered personally;  or

(ii)        sent by pre-paid first-class post or recorded delivery;  or

(iii)       (if the notice is to be served by post outside the country from which it is sent) sent by airmail.

 

19.2     Any notice to be given to or by all of the Sellers under this agreement is deemed to have been properly given if it is given to or by the Sellers’ representative named in clause 19.3.  Any notice required to be given to or by one only of the Sellers shall be deemed to be properly given if it is given to or by the Sellers concerned at the address as set out in Schedule 1.

 

19.3     The addresses for service of notices are:

 

(a)        the Sellers’ representative:

 

i.          name:  Tods Murray LLP

ii.         address:  Edinburgh Quay, 133 Fountainbridge, Edinburgh EH3 9AG

iii.        for the attention of:  [MH]

 

(b)        the Buyer …

 

19.4     A notice is deemed to have been received:

(a)        if delivered personally, at the time of delivery;  or

 

(b)        in the case of pre-paid first class post or recorded delivery 2 Business Days from the date of posting;  or

 

(c)        in the case of airmail, 5 Business Days from the date of posting;  or

 

(d)       if deemed receipt under the previous paragraph clause 19.4 is not within business hours… when business next starts in the place of receipt ...

 

19.5     To prove service, it is sufficient to prove that the envelope containing the notice was properly addressed to the address of the relevant party in accordance with this Clause and delivered either to this address or into the custody of the postal authorities.

 

19.6     Email shall not be deemed to be appropriate to serve notices and any notices so served shall not be deemed to be lawful or effective of notices for the purposes of this agreement”.

 

 

Notice served by reclaimer
[9]        As already noted, on 1 July 2013 Shepherd and Wedderburn, the solicitors acting for Chambers, wrote to Speyside to intimate a claim against them.  The claim was summarized in the following terms:

“On the instructions of Mr Spiers, Managing Director, of Chambers we are setting out, in short, our client’s claim in respect of three outstanding matters, namely:-

 

• Sales by SDCL [Speyside Distillers Company Ltd] (without authority of Chambers) of stock held to Chambers’ order, which stock was sold at a price significantly below market value to the detriment of Chambers and the advantage of SDCL (‘sale at undervalue’);
• In respect of improper increases in rental for stocks held by SDCL at its bonded warehouse at Duchess Road, Rutherglen for Chambers, as notified by SDCL to Chambers on 6 November 2008 and continuously contested since then (‘rent overcharge’);and
• Purported recovery of insurance premia by SDCL for, at times, non-existent cover and when cover had been procured and paid for by Chambers (‘Insurance Recharge’)”.

 

[10]      The letter went on to give details of each of the three heads of claim.  In relation to sale at an undervalue, the letter alleged that between 5 August 2009 and 30 September 2010 Speyside had sold stocks held to Chambers’ order without authority from Chambers, in order to meet liability for rentals and insurance that were purportedly due.  It was said that Speyside had consistently refused to acknowledge that they did not have authority to sell the stocks and that the stocks were sold at an undervalue.  A table was attached to the letter giving details of each of the quantities of whisky allegedly sold in this way, including what was said to be the market price, the market value at the time of sale, the Speyside sale price and the value of the whisky sold as at 30 June 2012.  The table brought out a claimed shortfall at the time of sale of £325,213.86, and a shortfall on mid-2012 market values of £587,770.87.

[11]      In relation to the alleged rent overcharge, Shepherd and Wedderburn’s letter referred to the rental rate charged for whisky stocks held to Chambers’ account in 2008 and the documents that evidenced those stocks.  It is then stated that 647 casks were missing from the stock certificate.  When this was drawn to Speyside’s attention the records were adjusted retrospectively, and the warehouse rent rate was reportedly altered to reflect the changes, and further re-charges relating to insurance were made.  These alterations were expressed in spreadsheets that were enclosed with the letter.  It was, however, stated in the letter that the alterations in the rent rates charged by Speyside were confused, and that consequently reassessment of those rates and an overall reconciliation were required.  For that reason, Shepherd and Wedderburn indicated that Chambers either required a further reconciliation on the basis that rental could be agreed retrospectively, or would require to seek a declarator of the appropriate basis of which the rental should be charged.  The letter concluded by stating that Chambers required a comprehensive statement from Speyside’s records together with an appropriate reconciliation.  In relation to the alleged overcharge of rent, no specific figures were produced in Shepherd and Wedderburn’s letter.  The spreadsheets attached to the letter did provide information about the stock that had been sold by Speyside, but this did not amount to a precise quantification of the claim that had been made.

[12]      Speyside passed Shepherd and Wedderburn’s letter to Swinburne Maddison, the solicitors acting for the pursuers, who by then had purchased the entire share capital of Speyside.  On 10 July 2013 Swinburne Maddison wrote to Tods Murray LLP, who had been acting for the defenders, the sellers of the shares.  It was addressed as follows:

“Tods Murray LLP
FAO:  [SC], Senior Associate
DX ED 58”.

 

As the last of those entries indicates, the letter was sent to Tods Murray by DX, and the heading to the letter, in particular the reference to a named senior associate, did not conform in its terms to what is said in clause 19.3 of the share purchase agreement.  The text of the letter was in the following terms:

“Re:  Speyside Distillers Company Limited

 

Please find enclosed a copy of correspondence received from Shepherd and Wedderburn LLP intimating a claim by Chambers Finance Limited against Speyside Distillers Company Limited.

 

This letter constitutes notice as required by clauses 8.5 and 9.1 of the share purchase agreement amongst James Alexander Frederic Aykroyd and Martha Goodnow Andersen (1) HOE International Limited (2) and Speyside Distillers Company Limited (3) dated 19 September 2012”.

 

Enclosed with the letter was a copy of Shepherd and Wedderburn’s letter of 1 July 2013 together with the enclosures that had been sent with that letter.

[13]      As already noted, the parties are in dispute as to whether Shepherd and Wedderburn’s letter of 10 July 2013 amounts to notice of a claim under the share purchase agreement for breach of warranty.  Two matters are in dispute.  The first is whether the terms of the letter conform to clause 8.5 of the agreement, and in particular whether Shepherd and Wedderburn, acting on behalf of the pursuer, had given the defenders sufficient notice in writing of the warranty claim, including “reasonable details of all material aspects of such Claim… known to the Buyer, including the Buyer’s bona fide estimate of the amount thereof and detailing the Buyer’s calculation of the loss alleged to have been suffered by it”.  The second matter in dispute is whether the manner in which the claim was intimated conformed to the requirements of clause 19 of the share purchase agreement.

 

Lord Ordinary’s decision
[14]      The Lord Ordinary began his detailed discussion of the issues in the case by setting out the legal framework.  It had been argued on behalf of the pursuer that, in addressing the requirements of a valid contractual notice, a distinction should be drawn between cases where the notice was intended to exercise an option and other, non-option, cases.  The Lord Ordinary considered that there was no justification in the case law for such a distinction.  He stated that in each case the court must approach matters using the principles of contractual interpretation summarized by Lord Neuberger in Arnold v Britton, [2015] AC 1619, at paragraphs 14-23.  For reasons discussed below, we consider that this is too simplistic an approach to the question of general contractual interpretation.  The Lord Ordinary then considered the cases dealing specifically with contractual notices, notably Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd, [1997] AC 749, and Scrabster Harbour Trust v Mowlem PLC, 2006 SC 469, and also the Outer House decisions in Muir Construction Ltd v Hambly Ltd, 1990 SLT 830, and Ben Cleuch Estates Ltd v Scottish Enterprise, [2006] CSOH 35.  On the basis of the first two of those cases he concluded that contractual notices should be assessed on an objective basis:  that of a reasonable man exercising his common sense in the context and in the circumstances of the particular case: Mannai Investment Co Ltd, at 782 per Lord Clyde.  In this respect, we are in agreement with the general approach followed by the Lord Ordinary.

[15]      The Lord Ordinary then considered whether the notice sent by the pursuer to the defenders contained all the necessary information required by the parties’ contract, in particular clause 8.5.  He concluded that it did.  Clause 8.5 had a twofold purpose:  to give notice to the sellers that a claim existed, and to furnish them with sufficient information to determine whether they wished to defend any action themselves.  He thought that a reasonable recipient would have been in no doubt that the letter of 10 July 2013 complied with clause 8.5, as it brought to be issued in terms of that provision and plainly related to the warranty granted in respect of claims by Chambers.  It provided all the details known to the pursuer at that stage.  That led on to a second question:  whether the pursuer served the notice by the correct means.  This turned on the requirements of clause 19 of the sale purchase agreement.  On clause 19, the Lord Ordinary held that the parties had specified how a notice had to be served, in some detail.  On that basis he concluded that they did not intend to allow deviation from the provisions of the clause, which specified exactly what constituted a valid notice.  Moreover, they had deemed that in certain cases service would be sufficient, but these did not include service by DX.  The Lord Ordinary accordingly held that the notice served did not comply with clause 19;  the pursuer had “failed to use the right key, and accordingly the lock will not turn” (wording taken from Ben Cleuch Estates Ltd, at paragraph [138], but derived originally from Lord Goff’s dissenting opinion in Mannai Investment Co Ltd, at [1997] AC 756).

 

Requirements of a contractual notice
[16]      Contracts, including leases, frequently contain provisions that authorize one party to issue a notice to the other party, either to bring about a particular legal result or to give notice of an event that will or may have legal consequences.  In determining the validity and effect of such a notice, two distinct types of question may arise.  First, the terms of the notice itself may be in issue:  are those terms sufficient to convey the necessary information to the recipient? Secondly, the method of giving the notice may be in issue:  has the notice been issued in accordance with the contractual provisions that govern the sending of the notice? The first of those questions turns largely on the construction of the notice itself;  the prime example is perhaps the leading case of Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd, supra.  The applicable principles are closely related to the general principles of contractual interpretation;  in Mannai Investment Co Ltd, detailed reference to those general principles and their relationship to the interpretation of notices is made in the majority speeches of Lord Steyn (at [1997] AC 770E-771E) and Lord Hoffmann (at 774D-775H and 779C-780B), and the speech of Lord Clyde (at 782C-D) is to the same effect.. 

[17]      The second question, whether the notice conforms to the requirements of the parties’ contract, will normally involve the direct application of the general principles of contractual interpretation.  The issue may take various forms.  Does a particular provision governing the notice require strict compliance, and if so how strict? What degree of formality does the provision require? If the specified formalities are not followed but the notice is received and is clear in its intention, is it nevertheless invalid? In each case the answer must turn ultimately on the meaning of the underlying contract.  Thus the general principles of contractual interpretation are important in determining the validity and effect of a contractual notice.  We will accordingly consider those principles first, and then will consider the specialties that apply to the two particular issues, the interpretation of the terms of a purported contractual notice and the question of whether the manner in which the notice was sent conforms to the terms of the underlying contract.  At this stage we should emphasize that contractual notices are normally issued under commercial contracts, and it is the principles of commercial interpretation that are relevant.

 

General contractual interpretation
[18]      The Lord Ordinary treated as definitive the principles of contractual interpretation that are said to be summarized by Lord Neuberger in Arnold v Britton, [2015] AC 1619, at paragraphs 14-23.  In our opinion that is an oversimplification of what was held in that case.  To discover the proper significance of that decision, we think it necessary to have close regard to precisely what was said by Lord Neuberger and also to the concurring judgment of Lord Hodge.  It is also essential to bear in mind the specific facts of the case. 

[19]      Lord Neuberger began by referring (at paragraph 14) to the case law on contractual construction over the previous 45 years, starting with the explanation by Lord Wilberforce in Prenn v Simmonds, [1971] 1 WLR 1381, and culminating in the speech of Lord Clarke in Rainy Sky SA v Kookmin Bank, [2011] 1 WLR 2900.  He summarized the effect of the case law in paragraph 15, in the following terms

“When interpreting a written contract, the court is concerned to identify the intention of parties by reference to ‘what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean’, to quote Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd, [2009] AC 1101, para 14.  And it does so by focusing on the meaning of the relevant words… in their documentary, factual and commercial context.  That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the lease, (iii) the overall purpose of the clause and the lease, (iv) the facts and circumstances known or assumed by the parties at the time the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party’s intentions”. 

 

A number of cases are cited as vouching such an approach, including Prenn and Rainy Sky.  We observe that the foregoing statement of the law is in accordance with the principles that have been applied in a large number of cases in recent years.  It is, however, essentially a “check-list” of the factors that have been treated as relevant in the decided cases;  it is not a statement of the intellectual process that is involved in interpreting a contract.  A clear statement of the underlying intellectual process is found in the opinion of Lord Clarke in Rainy Sky, at paragraphs 14 and 20-30, and it is that statement that is followed in the opinion of Lord Hodge in Arnold at paragraphs 76-77.

[20]      In Arnold, after summarizing the effect of the case law, Lord Neuberger continued (at paragraph 16) by stating that “for present purposes” it was important to emphasize seven factors, which are then set out at paragraph 17-23.  Paragraph 16 makes it clear that the discussion that follows is not a discussion of the general principles that apply to commercial interpretation, but a discussion of particular elements that were relevant to the problem confronting the court on the facts of Arnold.  Those facts were unusual.  The case concerned a clause that imposed a service charge in leases of the sites of holiday chalets and provided that the charge should be subject to an annual 10% compound increase.  Elementary arithmetic discloses that compounding in this way would result in an enormous increase in the service charge.  The relevant figures are found in the dissenting opinion of Lord Carnwath at paragraph 100, where it is indicated that an annual service charge of £90 imposed originally in 1974 would have increased by 2012 to an annual charge of £3,366.  Although the charge had, in the long term, very serious consequences for the tenants, it could not be said that there was any ambiguity in it;  it was an example (perhaps rare) of a clause which had true mathematical certainty.  Furthermore, the leases were concluded in the 1970s, at a time when inflation was running at very high levels – over 15% per annum for six of the eight years from 1974, when the leases were concluded:  see paragraphs 35-37.  Thus it could not be said that considerations of context and commercial common sense assisted the tenants, because they concluded the leases in times of great economic uncertainty and very high interest rates.

[21]      Consequently the tenants were compelled to argue that the clause should be construed as requiring payment of a suitable proportion of the cost of the services provided, with the financial provisions in the relevant clause being treated as merely a cap on liability.  That involved substantial rewriting of the clause rather than a question of mere construction;  this is made clear by Lord Hodge at paragraphs 67 and 77 of his opinion.  Thus the comments of Lord Neuberger at paragraphs 16-23 deal with a specialized situation rather than an ordinary or typical case of contractual interpretation.  It appears to us that those comments, in their emphasis and balance, are directed towards the relatively extreme case where it is argued that rewriting is required, and not with the ordinary case of contractual construction of a clause containing a degree of ambiguity.  For the proper approach to ordinary cases of contractual interpretation, we are of opinion that regard should be had to the factors listed at paragraph 15, to the opinion of Lord Hodge, and to the earlier analysis by Lord Clarke in Rainy Sky. 

[22]      The correct approach is in our opinion summed up in the following passage from Lord Clarke’s opinion, which is cited by Lord Hodge (at paragraph 76):

“It is not… necessary to conclude that, unless the most natural meaning of the word produces a result so extreme as to suggest that it was unintended, the court must give effect to that meaning.

The language used by the parties will often have more than one potential meaning.  I would accept… that the exercise of construction is essentially one unitary exercise of which the court must consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant.  In doing so, the court must have regard to all the relevant surrounding circumstances.  If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other” (Rainy Sky, paragraphs 20-21).”

 

We should emphasize that that statement of the law was not new when Rainy Sky was decided;  its antecedents include the well-known speeches of Lord Wilberforce in Prenn v Simmonds and the subsequent case of Reardon Smith Line Ltd v Yngvar Hansen-Tangen, [1976] 1 WLR 989, the decision of the First Division in Bank of Scotland v Dunedin Property Investment Co Ltd, 1998 SC 657, and much older cases such as, in England, Charrington v Wooder, [1914] AC 71 (which contains clear statements of the law by Lords Kinnear and Dunedin) and, in Scotland, Bank of Scotland v Stewart, 1891, 18 R 957, per LP Inglis at 960, and Jacobs v Scott & Co, 1899, 2 F (HL) 70. 

[23]      Before we leave the general principles of contractual interpretation, we should note four further points, which we consider of some importance.  First, when a contract is drafted, it is in practice extremely difficult – indeed impossible – to foresee every contingency that might result.  This means that the central terms of the contract – for example, the property sold, the price, the basis on which the price will be adjusted to deal with contingencies and the key warranties – will usually be considered and drafted with scrupulous care.  On the other hand, terms dealing with less central features are likely to receive much less attention by those drafting the contract.  For this reason we think that there must be limits to how far it is legitimate to state that the parties must have specifically focused on an issue when agreeing the wording of a particular provision;  in practice, for obvious reasons, parties and their advisers tend to concentrate on the key terms of the contract and draft the others on the basis of standard forms or past precedents, which may not be perfectly adapted to their particular circumstances.

[24]      Secondly, if the courts adopted an over-strict and over-literal approach to contractual interpretation, the result would inevitably be that written contracts became much longer, incorporating large numbers of terms to deal with what are, viewed realistically, unlikely scenarios.  If, by contrast, contextual and purposive construction and commercial common sense are given proper weight when a contract is construed, the contractual documentation can be shorter and can focus more precisely on the important features of the parties’ transaction. 

[25]      Thirdly, if all possible contingencies have to be catered for and contracts become longer in consequence, that will impose greater transaction costs on the parties when a contract is drafted.  That can be avoided if the courts adopt a purposive and contextual approach to contractual construction and have due regard to commercial common sense.  It can be said that in cases where a dispute arises such an approach may lead to more protracted and more expensive litigation, which in itself increases transaction costs.  Nevertheless, it is important to bear in mind that such cases are the exception, not the rule, and consequently the overall increase in cost is likely to be reduced and for the most part confined to difficult cases.  If, by contrast, the parties are compelled to draft every contract with the most meticulous foresight, that will impose substantial transaction costs in every case other than the simplest;  in addition, the longer contracts that result will not necessarily lend themselves to easy interpretation.  That itself produces uncertainty and unpredictability, which is clearly undesirable.  Overall, relying on the courts to adopt a sensible commercial interpretation is in our opinion likely to produce a reduction in transaction costs.  It is also likely to produce greater predictability, as contracts will be construed according to the standards of a reasonable commercial person.  That, we consider, is the practical significance of the approach to contractual construction that is encapsulated in the Rainy Sky decision.  (On the foregoing, see Posner, Economic Analysis of Law, 9^th ed, section 4.1).

[26]      Fourthly, the Rainy Sky approach does not mean that evidence about the commercial context will be required in every case.  With the common forms of contract, it can be expected that the commercial context will be comfortably within judicial knowledge.  If there are any special or unusual features, notice should be given in the parties’ pleadings, to discover how much of the background really is disputed.  This should, we think, go a considerable way to avoid the problems of lengthy evidence that became a feature of contractual cases in England and Wales following the decision of the House of Lords in Investors Compensation Scheme v West Bromwich Building Society, [1998] 1 All ER 98.

 

Interpretation of contractual notices

[27]      As we have noted, two distinct issues may arise in relation to the giving of a contractual notice:  first, whether the terms of the notice itself are sufficient to convey the necessary meaning to the recipient;  and secondly, whether the method of sending the notice is in accordance with the provisions of the parties’ contract.  Both of these issues arise in the present case.  The first is the subject of respondents’ cross-appeal:  whether the notice sent on behalf of the reclaimer contained all of the information required by clause 8.5 of the share purchase agreement.  The second is the subject of the reclaiming motion:  whether the notice was sent in the manner required by clause 19 of that agreement.  We consider the law on each of these issues separately.  Nevertheless, the general approach that has been taken in case law demonstrates that the questions are to some degree interrelated, and both turn on the approach that the courts take to general contractual interpretation.  In general, it can be said that recent cases disclose reluctance to adopt an over-formal attitude, provided that the notice itself is sufficiently clear and is actually received by a responsible person.

 

Terms of the notice

[28]      The meaning of a contractual notice is governed by the general principles that govern construction of commercial contracts.  This is clear from the majority opinions in Mannai Investment Co Ltd, supra.  The leading speech for the majority was delivered by Lord Steyn, who set out his reasoning in a series of propositions (at [1997] AC 767D-769B).  First, a distinction was drawn between cases that turn on the meaning conveyed by the notice and the contractual requirements of sending a valid notice (the distinction drawn above at paragraph [16]). Mannai itself did not involve “a contractual right to determine which prescribes as an indispensable condition for its effective exercise that the notice must contain specific information”;  in other words it fell into the first category rather than the second.  Secondly, in relation to the first category, the question was not how the recipient understood the notices.  The construction of the notices had to be approached objectively, and the issue was how a reasonable recipient would have understood the notices.  In addressing this question, the notices were to be construed taking into account the relevant objective context.  As authority for such an approach Lord Steyn cited Reardon Smith Line Ltd v Yngvar Hansen-Tangen, supra, a case in which Lord Wilberforce developed the general approach to contractual interpretation that he had set out in Prenn v Simmonds, supra, and which was continued and further developed by Lord Clarke in Rainy Sky. 

[29]      Thirdly, the purpose of a contractual notice is important. Mannai involved a break clause, and a notice under such a clause served one purpose only:  to inform the landlord that the tenant had decided to determine the lease in accordance with the right reserved.  That purpose was relevant to the construction and validity of the notice.  Fourthly, there was no justification for placing notices under break clauses in leases in a unique category.  Such notices belonged to the general class of unilateral notices served under contractual rights reserved.  The foregoing tests were then applied to the facts of the case:  a reasonable recipient of the notice had to be credited with knowledge of the terms of the lease, and on that basis a mistake in the notice in specifying the anniversary when the break was exercisable would not have misled the recipient, who would have understood what the notice was intended to do..

[30]      The majority of the House of Lords in Mannai overruled the earlier decision of the Court of Appeal in Hankey v Clavering, [1942] 2 KB 326, where a meticulously strict approach was taken to the construction of a contractual notice that purported to exercise a right to terminate a lease.  Lord Steyn referred (at [1997] AC 770F) to a shift that had taken place over the previous half-century “from strict construction of commercial instruments to what is sometimes called a purposive construction of such documents”.  After referring to whether the expression “purposive construction” was applicable to contracts, as against statutes, he expressed the view that it was better to speak of a shift towards “commercial interpretation”.  This was illustrated by a well-known passage in the speech of Lord Diplock in Antaios Compaia Naviera SA v Salen Readerierna AB, [1985] AC 191, at 201:

“if detailed semantic and syntactical analysis of a word in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense”.

 

Lord Steyn continued (at (771A):

“In determining the meaning of the language of a commercial contract, and unilateral contractual notices, the law therefore generally favours a commercially sensible construction.  The reason for that approach is that a commercial construction is more likely to give effect to the intention of the parties.  Words are therefore interpreted in the way in which a reasonable commercial person would construe them.  And the standard of the reasonable commercial person is hostile to technical interpretations and undue emphasis or niceties of language.… Such notices, even if they entail the exercise of important options, are habitually drafted by commercial men rather than lawyers.  It would be a disservice to commercial practice to classify such notices as technical documents and require them to be interpreted as such.  Nowadays one must substitute for the rigid rule in Hankey v Clavering the standard of a commercial construction”.

 

In our opinion that is the approach that should be taken in construing contractual notices generally.  Occasional exceptions exist, such as the documents required by bankers’ commercial credits, where for reasons of policy everything turns upon what appears on the face of the document (see Lord Hoffmann at 779C-F);  that document is a negotiable instrument and thus must be intelligible on its face to any recipient.  Nevertheless, the approach set out in Mannai is the norm.

[31]      Lords Hoffmann and Clyde delivered speeches to similar effect.  Both agreed that the meticulous approach that had been followed in Hankey v Clavering, supra, was wrong.  Lord Hoffmann indicated, with illustrations, the way in which a statement that in terms is plainly wrong can in context be interpreted as conveying the correct meaning.  He further accepted the distinction between the interpretation of the terms of notice and the conditions that may be prescribed by the contract for the valid service of a notice.  As an example of the latter he mentioned, no doubt with a touch of irony, a clause that said that the notice had to be on blue paper but the notice was served on pink paper.  That does not apply, however, to construction of the notice itself and the determination of its meaning ([1997] AC 776A-C).  Lord Clyde stated (at [1997] 782C-D) that in judging whether a contractual notice is sufficiently clear,

“The standard of reference is that of a reasonable man exercising his common sense in the context and in the circumstances of the particular case.  It is not an absolute clarity or an absolute absence of any possible ambiguity which is desiderated.  To demand a perfect precision in matters which are not within the formal requirements of the relevant power would in my view impose an unduly high standard in the framing of notices such as those in issue here.  While careless drafting is certainly to be discouraged the evident intention of a notice should not in matters of this kind be rejected in preference for a technical precision”.

 

The reference to the formal requirements of the relevant power clearly points to the second of the categories mentioned at paragraph [16] above:  whether the notice has been issued in accordance with the relevant contractual requirements.  The general import of all of the majority speeches, however, is that the terms of notice should be construed in accordance with the ordinary principles of contractual construction, which we have set out above.

 

Contractual requirements for a valid notice
[32]      The interpretation of the contractual requirements for the sending of a valid notice must also be determined in accordance with the ordinary principles of contractual construction;  what requires to be construed is a term of the contract itself rather than the notice sent under the contract.  There is considerable case law in this area, and we were referred to a number of previous decisions, which were to varying effect.  We do not think it necessary to consider those cases in detail.  The traditional approach of Scots law is based on principle rather than analogy.  We endorse such an approach, and we are accordingly of opinion that it is more important to determine the underlying principles that should govern the validity of contractual notices rather than the details of individual cases.  In this connection we note that individual cases generally turn on the particular form of contract that is in issue;  that is not a helpful guide to other forms of contract.

[33]      As a matter of principle, the crucial question is normally whether strict compliance is required with one or more requirements of the clause that empowers the sending of a notice.  This is sometimes phrased as involving the question whether a contractual requirement is mandatory or directory:  see, for example, Yates Building Company Ltd v RJ Pulleyn & Sons (York) Ltd, [1976] 1 EGLR 157.  We think, however, that the more helpful formulation is whether strict compliance is required.  In determining that question we are of opinion that the ordinary principles for the construction of contractual contracts are applicable:  regard must be had to the terms of the relevant clause, which must be construed in the context of the document where it is found and in the general contractual context where the parties are operating;  the requirement must be given a purposive construction;  and where appropriate commercial common sense should be applied.

[34]      In this area the need for a purposive construction appears to us to be particularly important.  Such an approach requires the court to focus on the core obligation or requirement that is at issue, concentrating on what really matters rather than being preoccupied with a morass of detail that is of at most peripheral importance to the critical question.  In relation to the validity of a contractual notice, two distinct purposes are potentially relevant:  the purpose of the notice itself and the purpose of any particular requirement that has not been complied with.  The purposes of contractual notices vary greatly.  In general, it may be said that the more drastic the consequences of a notice, the greater the need for strict compliance with what is prescribed in the contract.  Thus a notice may bring about a fundamental alteration in the parties’ legal relationship, as with a break clause in a lease, which brings the contract to an end, or an option to purchase.  Notice of revocation of a contract also has major consequences, as (if well founded) it relieves the parties of future performance.  Notice invoking the right of retention is a lesser remedy, as it does not purport to do more than suspend future performance.  A range of less drastic notices are found:  for example, a notice submitting a dispute to arbitration or adjudication.  In the present case the notice in dispute is intimation of a pending claim by a third party.  That can be regarded as an issue that is at the lower end of importance.  The actual dispute is likely to be disposed of by litigation or arbitration, and the purpose of giving prior notice is to permit the defenders to decide whether they want to defend any claim made by Chambers against Speyside.  For present purposes, we think it significant that the consequences of the notice in question fall at the less drastic end of the scale, with the result that there is no overwhelming argument in favour of rigid formality.

[35]      The purpose of particular requirements can likewise vary greatly, and their importance will vary accordingly.  It is obviously of the utmost importance that any notice should arrive in the hands of someone with authority to act on behalf of the recipient;  otherwise the purpose of the notice is frustrated.  Provided that the notice arrives in the hands of such a person, however, other requirements may not be important, especially if they are of an essentially formal nature.  The fundamental question is perhaps:  if a particular formal requirement is not complied with, is the would-be recipient prejudiced, in a practical sense?  If there is in fact no prejudice, the court should in our opinion be slow to hold that failure to comply with a formal requirement is fatal.  That is so even in cases where the purpose of the notice is drastic, as with a notice invoking a break clause or an option to purchase.  If there is no prejudice, insisting on strict compliance for its own sake serves no useful purpose.

[36]      We are of opinion that such an approach is strongly supported by commercial considerations.  The present case is concerned with clause 19 of the parties’ contract, which is set out at paragraph [8] above and which provides a good example of the varying significance of particular requirements.  Clause 19.1, read short, requires that any notice given under the agreement should be in writing in English, should be sent for the attention of a named person at a named address (the office of the firm of solicitors), and if sent from within the United Kingdom should be delivered personally or sent by pre-paid first class post or recorded delivery.  The first of these requirements is clearly important, at least in relation to a notice sent to the defenders’ representatives, because Mandarin is not widely spoken in the United Kingdom.  So far as the second requirement is concerned, provided that the notice ends up in the hands of the named person, or another responsible person within the firm of solicitors, it is difficult to see why that should cause any difficulty to the recipient.  The same is true of the third requirement:  provided that the notice is actually received by a responsible person the means of delivery are of no real significance.

[37]      In determining whether a contractual notice has been validly sent, we think it essential to consider both the purpose of the notice and the purpose of the contractual requirements, in the manner described above, in order to determine whether the failure to observe any particular contractual requirement is fatal to the validity of the notice.  That is of course one component in the application of the general approach to contractual interpretation.  On the whole this approach appears to have been followed in the more recent decided cases.  One example is the leading Scottish case in this area, Scrabster Harbour Trust v Mowlem PLC, [2006] CSIH 12;  2006 SC 469.  In that case the approach taken in Mannai was followed, and a distinction was drawn between the construction of a contractual notice and the construction of the requirements for a valid notice (paragraphs [45]-[48]).  On its facts, Scrabster Harbour Trustees involved a notice of arbitration following adjudication.  The contract was governed by a version of the ICE Conditions, but any arbitration was to be governed by the Scottish Arbitration Code.  That Code provided that any notice of arbitration should include the name of a proposed arbiter.  The contractor served a notice of arbitration, but without naming an arbiter.  It was held that compliance with that provision of the Code was not intended to be formally essential for the service of a valid notice of arbitration.  The Code had not been designed specifically for the parties’ contract, but was capable of use in a wide range of different contracts, and that was a point against its mandatory character.  Furthermore if the relevant part of the Code were applied literally, a notice of arbitration would be automatically invalid if it did not expressly mention a range of factors that would be known already to the recipient (paragraphs [57]-[68]).  Sir David Edward, the author of the opinion, concluded (paragraph [69]) by remarking that it would be unfortunate if a Code designed to promote recourse to alternative dispute resolution were to become “a quarry for litigation over legal niceties”.

[38]      Thus the court favoured a practical approach that did not have undue regard to legal niceties that were not essential to fulfilling the purposes of either the contractual clause or the particular notice in question.  A similar approach is found in several other cases.  In Yates Building Company Ltd v RJ Pulleyn & Sons (York) Ltd, supra, written notice purporting to exercise an option to purchase was rejected because, although received timeously, it had not been sent by registered or recorded delivery post, as specified in the option clause.  The Court of Appeal held that the notice was valid, because it had in fact been received in time, and the method of sending it was not relevant.  There was no prejudice.  A similar approach was taken in JM Hill & Sons Ltd v London Borough of Camden, (1982) 18 BLR 31, where the court again focused on the total absence of prejudice (see in particular the opinion of Ormrod LJ), and Worldpro Software Ltd v Desi Ltd, 1997 WL 1104573;  [1997-98] Info TLR 279.

[39]      Two Scottish decisions in the 1990s were based on a strict construction of provisions governing contractual notice.  Muir Construction Ltd v Hambly Ltd, 1990 SLT 830, concerned notice served by a contractor on an employer under the then current version of the JCT Standard Form of Contract purporting to terminate the contract following failure to pay under an interim certificate.  The contract specified that the notice should be sent by registered post or recorded delivery, but the actual notice was hand delivered, although it was timeously received.  Lord Prosser stated that “The principle that a contract of this type must be construed in a commonsense business way hardly needs asserting” (at 832D), but went on, “with some hesitation”, to hold that the notice was not valid.  He was not satisfied that there was anything contrary to common sense, or inconsistent with a business approach, in concluding that “precise words in a carefully structured provision were intended by the parties to have precise effect in a carefully structured procedure”.  Regard must be had to the specific words used, rather than an overall view of what would be sensible.  In the particular circumstances of the case, a requirement to use registered or recorded delivery post might help to make it plain that what was involved was a formal step in a process that had been laid down.  While a lawyer might feel uneasy about coming down on the side of formality, the case under consideration was governed by contractual conditions which, overall, were decidedly formal (at 834F).  The second case, Capital Land Holdings Ltd v Secretary of State for the Environment, 1997 SC 109, concerned service of a notice under a break clause which specified that any such notice was to be sent to the landlord’s registered office.  The notice was in fact sent to one of the landlord’s places of business and to two agents for it.  It was held that the notice was invalid.  The purpose of the provision under consideration was conceived in favour of the landlord, so that it knew where it had to look for any notices served under the lease.

[40]      The last two cases appear to us to turn on the wording and structure of the particular contractual provisions that were under consideration.  In each case the court’s conclusion was that, on a commercial construction, the formal requirement served a business purpose, and must therefore be complied with.  We would observe, however, that in both of those cases the absence of prejudice does not appear to have figured largely in the arguments.  We would regard the absence of any material prejudice as an important factor in analyzing whether failure to comply with a formal requirement is fatal to the validity of a contractual notice.  Furthermore, we think that in considering that question, it is important to have regard both to the purpose of the notice reportedly served and to the purpose of the particular provision that is not complied with.  In both Muir Construction and Capital Land the purpose of the notice had drastic consequences:  termination of the contract in each case.  Furthermore, we think that the court’s approach to these questions must now be determined by the general approach taken in Mannai Investments Ltd and Scrabster Harbour Trustees, which involves great stress on the purposive construction of notice provisions.

[41]      In Muir Construction it was observed that where business relationships are regulated by formal contractual conditions which attempt to be precise a strict and formal approach to construction should be adopted.  Similarly, in Senate Electrical Wholesalers Ltd v Alcatel Submarine Networks Ltd, [1999] 2 Lloyd’s LR 423, discussed below, it was observed that certainty is important in commercial matters.  We accept that there may be cases where the contractual structure suggests that a formal approach is required.  Nevertheless, while certainty is an important factor in commercial dealings, predictability is also important.  The problem with a highly formal approach is that any failure, even of a minor nature, to conform to the strict contractual requirements will result in a notice’s being ineffectual, which in turn is likely to cause loss to the party sending the notice.  That means that the validity and effectiveness of a notice turn on matters of detail that may easily be overlooked under the pressures of everyday business.  That produces unpredictability, which in turn creates a different form of uncertainty.  The alternative is to devote meticulous attention to every contractual notice that is sent.  Apart from the difficulties presented by the everyday pressures of business, the need for meticulous attention inevitably increases transaction costs each time that a notice is sent.  For this reason we are of opinion that, on a commercial basis, a court should be slow to adopt an especially strict approach to contractual requirements governing the sending of notices.

[42]      The most recent Scottish decision in this field is West Dunbartonshire Council v William Thompson and Son (Dumbarton) Limited, (2015) CSIH 93, where a landlord purported to serve a written notice triggering a recent review on the tenant.  The notice required to be served on the tenant, but it was addressed to the wrong person;  instead of “William Thompson and Son (Dumbarton) Limited”, as specified in the lease, it was sent to “Wm Thompson & Sons Ltd”.  It was held following a review of the authorities, including Mannas Investment Co Ltd and Scrabster Harbour Trust, that the notice was invalid in view of the number and importance of the errors in the case of the tenant.  The most serious being the omission of “(Dumbarton)”.  These errors put the case well beyond instances of mere mis-spelling.  We note that the addition of words such as “(Dumbarton)” in the name of a limited company can be significant if companies in a group have the same basic name but are distinguished from one another by parenthetical additions.  Consequently we think that the case can readily be distinguished from the present case.

[43]      We were referred to a number of further English decisions.  As we have observed, we do not consider these to be of great assistance in a legal system that proceeds by way of principle rather than analogy, but we note them briefly. Senate Electrical Wholesalers Ltd v Alcatel Submarine Networks Ltd, supra, concerned a letter intimating that a claim for breach of warranty was likely to be made;  thus there is a close analogy with the present case.  The relevant contractual clause required that the grounds for the alleged breach of warranty should be set out in writing.  It was held that an oral exchange of information was not sufficient.  The court referred (at paragraph 90) to the importance of considering the commercial purpose that the relevant clause was intended to serve;  we would agree entirely with that proposition.  The court went on (paragraph 91) to state that certainty is a “crucial foundation for commercial activity”, and that the recipient of a notice should be left in “no reasonable doubt” of the particulars of the grounds of claim.  We would doubt whether that reasoning can survive the analysis of the majority of the House of Lords in Mannai Investments Ltd.  where the focus is on a commercially sensible construction that does not place undue emphasis on niceties of language.  In the words of Lord Clyde (at 782D), “the evident intention of a notice should not… be rejected in preference for a technical precision”. 

[44]      Ener-G Holdings PLC v Hormell, [2013] 1 All ER (Comm) 1162, was another case involving notice of a warranty claim.  The sender of the notice relied on a permissive provision to the effect that any notice delivered personally should be deemed to be received when delivered.  It was held by a majority of the Court of Appeal that the clause involved a notion akin to “personal service”, and that in turn required that the notice must be handed to the intended recipient personally (Lord Neuberger MR at paragraph [33]).  Thus service by a process server who left the document at the recipient’s house would not suffice.  Furthermore, it accorded with commercial common sense to make it clear that service of documents could only take place in specified ways (paragraph [38], and Gross LJ at paragraph [65]).  Longmore LJ dissented, on the ground that the notice had actually been received by the recipient in good time, and the failure in procedure relied on by the majority related only to an optional method of service.  We see some force in that dissent.  Newbold v Coal Authority, [2014] 1 WLR 1288, is a further recent decision in this area.  It concerned notice of a claim for compensation on account of subsidence through mining operations.  The form of notice required was specified by statute, and the notice served contained a number of defects.  It was held by the Court of Appeal that the notice was sufficient.  It was necessary to consider “the words of the statute or contract, in the light of its subject matter, the background, the purpose of the requirement, if that is known or determined, and the actual or possible effect of non-compliance on the parties” (paragraph [70]).  A sensible, commercial result should be reached: ibid.  We would endorse that general approach.  It can be seen from these cases that differing views have been taken in England about the construction of notice clauses and their requirements.  This, it seems to us, endorses the validity of the general Scottish view, that the law should be decided on principle rather than by analogy with other decided cases.  The latter approach is rarely helpful.

 

Application to the parties’ contract

[45]      The material provisions of the parties’ contract are found in clause 8.5, which is set out at paragraph [6] above, and clause 19, which is set out at paragraph [7].  The notice sent by the pursuer to the defenders and the manner in which it was sent are summarized at paragraphs [8]-[13].  We consider each of clause 8.5 and clause 19 in turn.

 

Requirements of clause 8.5
Clause 8.5
[46]      Clause 8.5 states that the Sellers, the defenders, are not be liable for a claim under the warranties “unless the Buyer [the pursuer] has given the Sellers notice in writing of such Claim …, giving reasonable details of all material aspects of such Claim … known to the Buyer, including the Buyer’s bona fides estimate of the amount thereof and detailing the Buyer’s calculation of the loss alleged to have been suffered by it …”.  Clause 9.1 specifies that, if the Buyer becomes aware of a claim, it must notify the Sellers in writing “as soon as reasonably practicable after becoming aware of the same”, and in accordance with clause 8.5.  Clause 9.2 specifies that, if any claim by the Buyer [the pursuer] against the Sellers results from a claim such as that by Chambers, the Sellers have the option to decide whether or not they wish to conduct the defence of that claim.  If they decide to do so they are obliged to intimate that fact in writing to the pursuer within 28 days of receiving notification. 

[47]      This option of the Sellers is, we think, a material part of the context that lies behind any notice given by the pursuer to the defenders.  Moreover, it is apparent that the principal purpose of such notice is to enable the defenders, if they wish, to take over the defence of the claim.  There would be obvious advantages in such a course.  If any such claim is successful the defenders will probably be obliged to reimburse the pursuers, and thus they are the party that stands ultimately to lose from any such claim.  In addition, the defenders were the owners of Speyside until the sale, and would accordingly have a considerable degree of background knowledge as to any claims that might be made against Speyside as a result of events during the period of their ownership.  The pursuer, by contrast, had newly acquired ownership of Speyside, and thus might be expected to have less knowledge of Speyside’s past dealings, although it would of course have access to the records of Speyside and the knowledge of Speyside’s employees.  Nevertheless, there are obvious practical advantages in permitting the defenders to take over the defence of any such claim.

 

Interpretation of clause 8.5
[48]      The critical question is what a reasonable person in the position of the defenders would expect in fulfilment of clause 8.5, given its wording, its context and in particular its purpose.  The clause refers to “reasonable details of all material aspects” of Chambers’ claim.  In our opinion that expression, construed objectively, must be directed towards giving the defenders all available information to enable them to decide whether they wish to take over the defence to such claim, or alternatively to leave such defence to Speyside itself under the direction of the pursuer.  Furthermore, what the pursuer can do to satisfy clause 8.5 is inevitably limited by the amount of information provided by the party making the claim, in this case Chambers.  In our opinion a reasonable person in the position of the defenders could not expect more than that.  No doubt the pursuer could ask for further information from Chambers’ advisers, but clause 9.1 requires intimation to the defenders as soon as reasonably practicable, and the underlying purpose of such intimation, to let the defenders know whether they wish to take over the defence to Chambers’ claim, clearly requires that the available information should be disclosed as soon as possible.

 

Adequacy of Swinburne Maddison’s letter of 10 July 2013
[49]      On the foregoing basis we are of opinion that the information provided in Swinburne Maddison‘s letter of 10 July 2013, as set out in paragraph [12] above, was sufficient to satisfy the requirements of clauses 8.5 and 9.1 of the share purchase agreement.  In so holding, we have followed to the approach to construction found in Mannai Investment Co Ltd, supra, having regard to the terms of those clauses in context and having regard to their purpose.  On such an approach, we are of opinion that the following factors are relevant.

[50]      In the first place, the letter of 10 July 2013 referred in terms to those two clauses, which makes its purpose quite clear.  In the second place, it enclosed the lengthy letter dated 1 July 2013 that had been received from Shepherd and Wedderburn, the agents acting for Chambers, which sets out the basis of Chambers’ claim.  It also included the appendix and spreadsheet that had been attached to that letter.  At the time when Swinburne Maddison’s letter was sent, that was all the information that the pursuers had about Chambers’ claim and its possible quantification.  No doubt the information was not complete.  Nevertheless, it set out everything that Shepherd and Wedderburn had disclosed on behalf of Chambers.  Consequently, as a matter of commercial common sense, it is difficult to understand how the pursuer could reasonably have been expected to disclose any more.

[51]      In the third place, any further commentary by the pursuer would have been of very little, if any, value to the defenders.  Counsel for the defenders submitted that the pursuer had not attempted to provide any definitive quantification of Chambers’ claim;  nor had it attempted to assess the potential merits of the claim, even at a very basic or provisional level.  It is not obvious what commercial advantage would have accrued from such an exercise.  The pursuer was attempting to pass on the information that it had as rapidly as possible, giving “reasonable” details of the material aspects of the claim known to it.  Whether the claim was well founded, and how much it was worth in reality, would require considerable investigation, at factual, accounting and legal levels.  In our opinion it cannot reasonably be held that clauses 8.5 and 9.1 were intended to oblige the pursuer to carry out such investigation before intimating a claim, for two reasons.  First, the purpose of intimation was to allow the defenders to form their own view as to the validity, and no doubt the extent, of any claim.  Provided that the whole of the available information was passed on, the pursuer’s estimates would add little or nothing to that.  Secondly, although clause 8.5 states that the Buyer should provide a “bona fide estimate” of the amount of any claim, we consider that the only reasonable view that the pursuer could take was to pass on the claim, taking it at face value before any further (and probably prolonged) investigation was carried out.

[52]      In the fourth place, clause 8.5 specifies that the Buyer’s intimation of a claim to the Sellers should detail “the Buyer’s calculation of the loss alleged to have been suffered by it”.  In our opinion the only reasonable inference from Swinburne Maddison’s letter of 10 July 2013, taken together with the accompanying letter of 1 July 2013, was that the pursuer’s calculation of its loss was the full sum that Speyside might be found liable to pay to Chambers.  Chambers’ claim was a financial claim against Speyside for certain losses alleged to have been suffered.  If any sum were found due by Speyside to Chambers, on the payment of that sum that would represent a straightforward loss to the pursuer, given the manner in which the share purchase agreement was structured and the way the material warranties, those in clauses 9.1, 9.3 and 9.5 of Schedule 5, were expressed.  The defenders had warranted that Speyside was under no undisclosed obligation to Chambers, and if there were a breach of that warranty the amount of the loss would, prima facie, be the amount that Speyside was obliged to pay Chambers.

 

Requirements of clause 19
[53]      The second issue is whether Swinburne Maddison’s letter of 10 July 2013 conforms to the formal requirements of the share purchase agreement relating to contractual notices, and in particular to clause 19.  As noted above at paragraphs [34]-[36], we consider that particular importance must be given both to the purpose of the notice that is to be sent and to the purpose of the particular contractual requirements that are said not to have been complied with.  In the present case, as we have already indicated, the notice was intended to give the defenders warning of a claim made against Speyside, to enable them to decide whether to take over the defence against such a claim:  see paragraphs [46]-[48].  It is not an executive notice, such as the exercise of a break clause or the repudiation of a contract;  it is essentially informative in nature.  In these circumstances its purposes can be achieved without construing the requirements for service of the notice with undue strictness.  Clause 19 contains requirements that apply to all notices given under the contract.  Nevertheless, we consider that the interpretation of each of those requirements must have regard to the purpose of the particular notice that Swinburne Maddison were purporting to send.  When a clause covers a range of different notices, it must be expected that the intention is that it should be interpreted flexibly, in accordance with commercial common sense and having regard to the purpose of the individual notice in question. 

[54]      The first group of requirements is found in clause 19.1.  The first of these requires that any notice should be in writing in the English language, but that is clearly satisfied.  The second is that the notice should be sent for the attention of the person and to the address specified in clause 19.  That appears to be a reference to clause 19.3, which indicates that any notice is to be directed to the Sellers’ representative.  This is named as Tods Murray LLP, and an address is given at Edinburgh Quay.  Swinburne Maddison’s letter was in fact sent to Tods Murray, and was received by that firm.  The address specified in the letter is a DX number rather than the address in Edinburgh Quay, and we discuss subsequently the issue of whether service by DX invalidated the notice.  Clause 19.3 further states that a notice should be “for the attention of [MH]”.  Swinburne Maddison’s letter was in fact marked for the attention of another individual, SC, who was at the time a senior associate in the firm.  It was, however, also headed “Re:  Speyside Distillers Company Limited”, in a standard and fairly prominent manner.  That made the subject matter of the letter clear.  The letter was addressed to and received by Tods Murray, who were the firm of solicitors who acted for the sellers.  The firm is an artificial legal person, which can only act through its partners, employees and other agents, and the significance of the reference to MH or SC is merely to identify an agent within the firm who was in a position to deal with the letter, or possibly to pass it to someone else will deal with it.  For that reason alone we consider that the identification of MH as the person for whose attention the letter was to be marked is of limited significance;  the contemplated recipient was in fact the firm of Tods Murray.

[55]      Moreover, the letter arrived in the hands of a person at Tods Murray who had authority to act on behalf of the defenders, and it is apparent that the defenders became aware of its contents.  The defenders do not aver that they were prejudiced in any way by the failure to name the specified person in the heading to the letter.  In these circumstances we are of opinion that the failure to name the designated person within Tods Murray at the start of the letter is not fatal to its validity as a notice under the contract.  This is supported by a practical consideration.  The specified person might be absent from the office at the time when a notice was received, for example because he was away on business, or on holiday, or indisposed.  Any competent firm of solicitors will have procedures in place to ensure that mail is dealt with effectively within the organisation, arriving in the hands of a person with the authority and knowledge to deal with it, even in the absence of the person to whom it is addressed.  The reference to Speyside in the heading to the letter would make it clear how the letter should be directed within the firm.

[56]      The third requirement in clause 19.1 specifies that the notice given under the agreement should be delivered personally, or sent by pre-paid first class post or recorded delivery, or in certain circumstances sent by email.  Swinburne Maddison’s letter of 10 July 2013 was sent by DX, and the defenders contend that this means that it was not validly transmitted.  In our opinion this argument must be rejected, for two reasons.  First, the letter was received by Tods Murray, and came in due course to the attention of the defenders.  There is no suggestion that the defenders were prejudiced in any way by the use of DX delivery.  As we have indicated (at paragraph [35]), if there is no prejudice the court should be slow to hold that non-observance of a formal requirement is fatal.  This is such a case.  Secondly, DX is a system of delivery used in the legal profession in Scotland (and more widely) to transmit documents between one firm of solicitors and another.  In our opinion that amounts to personal delivery within the meaning of clause 19.1(c) of the share purchase agreement.  In England it has been held, in Ener-G Holdings PLC v Hormell, supra, that “personal service” required that the notice must be handed to the intended recipient personally (see paragraph [44] above).  That case, however, was concerned with delivery to an individual, where the notion of handing a letter to the recipient personally made sense.  In the present case the recipient of the notice contemplated by clause 19.3 is a firm of solicitors.  As we have noted, an artificial legal person such as a firm can only act through agents, and normally handing over a communication to any person within the firm with authority to process that communication, by dealing with it or passing it to the correct person, will suffice to effect proper delivery.  In the present case, we are of opinion that the delivery by DX amounts to personal delivery;  a representative of the DX system passed the letter to Tods Murray, the designated recipient. 

[57]      Clause 19.2 is a deeming provision.  It specifies that any notice to be given to or by all of the Sellers is deemed to have been properly given if it is “given” to the representative named in clause 19.3.  That representative is Tods Murray, and it is not in dispute that that firm received Swinburne Maddison’s letter.  In these circumstances it could in our opinion be argued that clause 19.2 is satisfied, with the result that the notice is deemed to have been properly given.  Nevertheless it is not necessary to express a concluded view on this matter, as in our opinion clauses 19.1 and 19.3 are satisfied, for reasons already discussed.  Clause 19.4 is a further deeming provision, dealing with the time of delivery.  It is unnecessary to consider that sub-clause, the timing of the letter is not in dispute.  Clause 19.5 is a further deeming provision, and it too is not relevant for present purposes.  Finally, clause 19.6 provides that email shall not be deemed appropriate for the service of any notices.  That sub-clause is in clear and forthright terms, and we think it likely that its provisions are mandatory.  The obvious purpose of such a provision was to ensure that the parties and their legal representatives did not require to check emails for contractual notices.  Nevertheless, the fact that this sub-clause is mandatory, with the result that a failure to comply is fatal, does not in our opinion affect the construction of the other sub-clauses.  As we have already noted, each notice provision must be considered on its own, having regard to its own individual purpose.

[58]      For the foregoing reasons we are of opinion that Swinburne Maddison’s letter of 10 July 2013 conforms to the formal requirements of the share purchase agreement relating to contractual notices, and in particular to clause 19.  The Lord Ordinary stated that there was no common thread in clause 19 that obviously yoked the different modes of service together.  We agree with that observation.  He went on, however, to state that the clause specified how a notice had to be served, in some detail, and he concluded that the parties did not intend to allow deviation from the provisions of the clause.  In our opinion that is too strict an approach.  First, the clause must be viewed purposively, and when that is done it is apparent that the individual requirements must be interpreted in a practical and reasonable manner, without undue regard to niceties of language.  Secondly, it is not in dispute that Swinburne Maddison’s letter was received by Tods Murray, the designated recipients, and found its way into the hands of an individual who had authority to act for the defenders.  There is no suggestion of any prejudice resulting from the minor defects that occurred in the service of the notice contained in that letter.  In that situation, as we have indicated, we think that the court should be slow to hold that delivery was ineffective.  Thirdly, the notice that was intended to be given by the letter of 10 July 2013 was informative in nature, to allow the defenders to decide whether they wished to take over the defence of Chambers’ claim.  With such a notice, we do not think that strict interpretation of the requirements for service is required.

 

Conclusion
[59]      We are accordingly of opinion that the Lord Ordinary was correct in his interpretation of clause 8.5 but erred in his interpretation of clause 19.  We will therefore allow the reclaiming motion and refuse the cross-reclaiming motion.  It follows from this that we will recall paragraphs (2) and (3) of the Lord Ordinary’s first interlocutor of 2 March 2016 and repel the defenders’ first plea-in-law, which is to the relevancy of the pursuer’s averments.  We will also sustain the pursuer’s first plea-in-law, which is to the relevancy of the defences, by excluding from probation the defenders’ averments in answer 8 relating to the manner in which notices were given.  That will involve excluding from probation paragraphs 8.1, 8.3 and 8.4 of that answer, and also the words “in the manner, and” in line 5 of that answer.  Subject to those matters we will remit the cause to the Commercial Roll to proceed as accords.