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KEVIN JONES AND SUSAN JONES AGAINST CRAIGTON HOLDINGS LTD [2024] ScotCS CSOH_33 (21 March 2024)
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]2024] CSOH 33,
[2024] ScotCS CSOH_33
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OUTER HOUSE, COURT OF SESSION
[2024] CSOH 33
CA84/23
OPINION OF LORD BRAID
In the cause
KEVAN JONES AND SUSAN JONES
Pursuers
against
CRAIGTON HOLDINGS LIMITED
Defender
Pursuers: Tosh;
Gillespie Macandrew LLP
Defender: McIlvride KC, E Brown; Campbell Smith LLP
21 March 2024
Introduction
[1]
By share purchase agreement dated 31 October 2022 the pursuers agreed to sell the
whole issued share capital of a limited company, Craigton Packing Limited, to the defender.
The agreed purchase price, in terms of Clause 3 of the agreement, was £1 million, plus and
minus certain add-ons and deductions. Clause 5 of the agreement provided for adjustment
of the purchase price following preparation of Completion Accounts in accordance with
part 6 of the schedule, which also provided a mechanism for the defender to dispute
specified items in those accounts, entailing the service of a Dispute Notice within a specified
period. By Clause 6 of the agreement, the pursuers warranted to the defender that the
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warranties and tax warranties given pursuant to part 4 of the schedule were true, accurate
and not misleading on the date of the agreement.
[2]
Paragraph 4 of part 6 of the schedule sets out the basis on which the completion
accounts should be prepared and provides, among other things, as follows:
"4.2.1 Full provision shall be made for all debtor balances over 90 days old (such
period commencing on the date of the relevant invoice). In the event that such
balances are paid to the company prior to the later of (i) the Adjustment Date or
(ii) the date falling twenty four months after the Completion Date, the buyer shall
procure that the full amount of these balances received after Completion are paid to
the Sellers within 30 days of the receipt thereof."
[3]
A dispute has arisen between the parties as to whether accounts which were
prepared were Completion Accounts drawn up in accordance with the agreement; and
whether a Dispute Notice, in terms of the agreement, was served on the pursuers. It is not
necessary to go into the finer points of that dispute for present purposes; suffice to say that
it is the subject of this commercial action, in which the pursuers each sue for payment of the
sum of £121,197 being the balance of the adjusted purchase price which they aver is due to
them in accordance with the agreement. Those are the sums third and fourth concluded for.
[4]
The pursuers also aver that the sum provided for in the accounts for all debtor
balances over 90 days old was £68,444.78; and that, as a result of the normal payment
patterns for such debtors, a significant proportion of those debtor balances has been paid
and the rest is likely to be paid within 24 months after the completion date. They aver that
the defender is in breach of its obligation to procure that the full amount of those debtor
balances be paid to the pursuers in terms of paragraph 4 of part 6 of the schedule. The sum
of £68,444.78 is the sum fifth concluded for by way of damages. In response to those
averments, the defender avers that as at 5 January 2024, of the debtor balances over 90 days
provided for, £56,624.42, together with VAT thereon, had been paid. It does not offer any
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substantive defence to the averment that it is in breach of its obligation to procure that that
sum be paid to the pursuers. Those averments have prompted a motion for summary
decree by the pursuers for payment of the sum of £56,624.42.
The procedural history of the action
[5]
The action has, until now, proceeded reasonably expeditiously as a commercial
action. The preliminary hearing took place on 10 November 2023, in advance of which a
joint statement of issues was lodged, which focused on issues surrounding whether the
accounts relied upon by the pursuers were Completion Accounts, and whether an email sent
on 22 December 2022 was a Dispute Notice, having regard to the terms of the agreement;
and, in relation to the debtor balances, whether they had been or were likely to be paid to
the company within the period of 24 months after the completion date and whether the
defender had, or was likely to fail to procure that any such debtor balances were paid to the
pursuers within 30 days of receipt. At the preliminary hearing, the parties were allowed
until 8 December 2023 in which to adjust their pleadings and a procedural hearing was fixed
for 20 December 2023.
[6]
The parties needed longer for adjustment than anticipated and the initial timetable
was varied, allowing for structured adjustment until 9 February 2024 (subsequently
extended in relation to one specific issue, not relevant for present purposes) until
29 February 2024. A procedural hearing took place on 22 February 2024, when a 4 day diet
of proof, commencing on 20 August 2024, was reserved, and the hearing was continued until
7 March 2024.
[7]
On 29 February 2024 the defender intimated adjustments, not in relation to the single
issue on which they had been permitted to adjust, but seeking to introduce a new defence:
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stated briefly, that the pursuers are in material breach of the share purchase agreement,
having breached a substantial number of the warranties granted by them, giving rise to
warranty claims estimated by the defender to have a total value of £1,500,000. The proposed
adjustments include an averment that the pursuers' obligation was to provide the defender
with a shareholding of a company with the assets, and free of liabilities, as warranted by the
pursuers, being the counterpart of the defender's obligation to pay the total price, and that
in those circumstances the defender is entitled to retain the remaining part of the total price
due to the pursuers (including the sum representing the now paid debtor balances) pending
the resolution of their claims against the pursuers. Alternatively, if the defender's obligation
to pay the sums concluded for are not the counterpart of the pursuers' obligation to provide
the defender with the whole shares in the company in the condition warranted by them, the
defender avers that it is just and equitable in the circumstances to allow it to retain the whole
remaining price, if any, otherwise due to the pursuers (including the debtor balances)
pending the determination of the defender's claims against the pursuers. Corresponding
pleas-in-law are also sought to be introduced.
[8]
The defender has also lodged a proposed counter claim in the sum of £1,500,000 in
which it makes averments as to the particular warranties which are said to have been
breached under reference to a letter of claim dated 29 February 2024 which gave the
pursuers formal notice of the claims for breach of the general warranties and the tax
warranties. It is unnecessary to delve further into the detail of the warranty claims at this
stage; suffice to say that the warranty claim appears to have been made in accordance with
the provisions of the agreement, and as regards the merits of the claims, as counsel for the
pursuers submitted, it is impossible to tell at this stage whether they are well-founded or
not.
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The continued procedural hearing
[9]
Three matters were argued before me at the continued procedural hearing, namely:
(1)
Whether the pursuers' motion for summary decree ought to be granted.
(2)
Whether the defender's late adjustments ought to be allowed.
(3)
Whether the counterclaim ought to be received.
[10]
A considerable amount of time was taken up at the hearing on the law of retention
and in particular whether the company had any right to retain the debtor balances (insofar
as received by it) in respect of the defender's admittedly illiquid warranty claims. Counsel
for the pursuers founded heavily on two Inner House authorities, McNeill v Aberdeen City
from which he derived the following propositions: first, that a right to withhold
performance of one obligation because of failure to perform another arose only where the
respective obligations were the substantive obligations under the contract; second, that the
obligations must be mutual; third, that a plea of retention provided security for future
performance only; and fourth, that it was subject to the equitable control of the court. He
acknowledged that there was also a right to "special retention" arising only in exceptional
circumstances where the court could conclude that it was just and equitable to allow a party
to withhold performance. Applying those propositions to this case, the defender had no
right of retention and therefore no defence to the fifth conclusion (or at least, to the motion
for summary decree) whether or not the late adjustments were allowed. As regards
allowance of the adjustments, and counterclaim, these came too late in the day and should
be refused. The pursuers had insufficient notice of the detail of many of the individual
warranty claims, and a considerable amount of investigation into all of the warranty claims
would be needed.
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[11]
Senior counsel for the defender, for his part, relied on Inveresk Plc v Tullis Russell
illiquid sums were due under a contract, arising from obligations which (broadly speaking)
were the counterparts of each other, the plea of retention is available; and he sought to
distinguish the cases relied on by the pursuers on their facts. He drew my attention to the
high test for granting summary decree (Henderson v 3052775 Nova Scotia Limited 2006 SC
(HL) 85), while at the same time conceding that the defender's defence to the debtor
balances part of the claim was contingent upon its late adjustments being allowed. He
submitted that the interests of justice favoured the allowance of the adjustments and
counterclaim; and that the motion for summary decree should be refused.
Decision
[12]
It is unnecessary in the context of this opinion to embark upon a detailed discussion
of the law of retention. Suffice to say that in neither McNeill nor Heathfield Farm was the
issue whether a party to a contract could withhold payment of a liquid debt in respect of an
illiquid claim arising out of the same contract, and I agree with senior counsel for the
defender that the factual scenarios under consideration in those cases were entirely different
from that we are concerned with here. I therefore do not agree with counsel for the
pursuers' submission that retention as a matter of right may be exercised only to secure
future performance of a substantial obligation owed by the other party, or that the effect of
McNeill and Heathfield Farm was to restrict the right of retention in the manner contended for
by the pursuers. That is plain from what Lord President Carloway said at para [19] of the
latter case, under reference to certain dicta of Lord Hope and Lord Rodger in Inveresk:
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"Inveresk...was concerned with the different situation where liquid and illiquid
sums were due under a contract. In that situation, it has long been recognised that
one party can refrain from paying the other (commonly known as retention)
pending the resolution of a compensatory or `offsetting' counterclaim for damages
in respect of breaches arising out of the same (or a related) contract...This is an
exception to the general rule that payment of a liquid debt cannot be withheld in
respect of an illiquid debt. As such the right was not disputed..."
[13]
The authorities do make clear, however, that for retention in such a situation to be
exercised as of right, the liquid and illiquid claims must be the counterparts of each other, a
broad view being taken to that question: see Inveresk, Lord Hope at para [42], where he said
that the analysis should start from the proposition that all the obligations that a contract
embraces are to be regarded as counterparts of each other unless there is a clear indication to
the contrary.
[14]
Applying all of that to this case, there would, at the very least, be a strong argument
to the defender (if allowed to advance it) that its warranty claims do provide it with a basis
to plead retention at least in relation to the conclusions for the balance of the purchase price,
where the warranties can properly be seen as counterparts of the obligation to make
payment for the shares. The argument is weaker insofar as the aged debtors are concerned,
not least because, although both counsel tended to gloss over the point, the obligation
incumbent upon the defender in that instance is to procure that the company make payment.
Although counsel for the defender argued that the aged debtors represented part of the
purchase price, I am not persuaded that that is the correct analysis, for the very reason that
payment is to be made by the company; so while the pursuers will receive an additional
benefit, it is not one funded by the defender. So, in relation to the obligation to procure
payment, the pursuers' argument founded upon McNeill and Heathfield is stronger; in other
words, the fact that the pursuers may have been in breach of the warranties does not
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obviously relieve the defender from the separate obligation to procure payment of the aged
debtors, once received by the company.
[15]
I turn now to the question of whether the defender ought to be permitted to adjust a
defence of retention into its pleadings. Paradoxically, the fact that a plea of retention is
likely to be available to the defender to justify non-payment of the balance of the price
(should that be found to be due) is a factor which favours the pursuers rather than the
defender, since the question is whether the defender should be permitted to introduce a new
defence at this stage in the action. As things stand, a proof is to take place in some
five months. The action, until now, has been focussed on the issues identified in the joint
note. The parties have had more than enough time to introduce all relevant issues into the
action. The adjustment period allowed by the court has expired, and as noted, adjustment
beyond 22 February 2024 was limited to one specific issue.
[16]
As Lord Menzies observed in CSC Braehead Leisure Ltd v Laing O'Rourke Scotland
Ltd 2008 SLT 697, para [20], in the context of whether to allow a third party notice, there is a
tension between the aims of an efficient and speedy resolution of a dispute on the
commercial roll, and the interests of justice. While Lord Menzies was of the view that the
interests of justice must come first, with the speedy and efficient disposal of the action being
a very desirable second, he also recognised that the balance between those two competing
considerations may shift as an action progresses; in other words, the later in proceedings
that a third party notice (or, as in this case, a counterclaim coupled with the introduction of a
late defence) is moved, the more likely that the interests of justice may favour refusal.
Further, if the commercial court is to operate efficiently, it is important that case
management orders, including those which permit a limited period for adjustment, are
adhered to.
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[17]
With the best will in the world, the defender's claim for damages for breach of
warranty, whether pursued by way of counterclaim or in a separate action, will not be
capable of being resolved by the time of the August proof. Not only is it unlikely that the
pursuers will be able to fully investigate the claims by then, not least because of the lack of
specification presently given in relation to some of the claims, but the four days presently
allocated will be insufficient for evidence to be led in relation to the warranty claims in
addition to the issues already in dispute in the principal action. The consequence of
allowing the defender to plead retention will therefore be that if the pursuers succeed in the
principal action, they will nonetheless not receive payment until the warranty claims have
been adjudicated upon, possibly many months into the future. The question then becomes
whether that would be a fair outcome. As counsel for the pursuers pointed out, under
reference to certain vouching attached to the letter intimating the warranty claims, on the
face of it the defender has not only been aware of the existence of many of the warranty
claims, but has been able to quantify them, for many months; certainly since before the
commencement of the principal action. Even a fraction of the intimated claims would have
amounted to at least the sum sued for. It would therefore have been open to the defender to
have lodged its counterclaim, and introduced a plea of retention in reliance on its claims for
breach of warranty, long before it actually did so. In that event, all the issues could have
been dealt with together, sooner than can now be the case. That is unfair on the pursuers
should they succeed in the principal action, since they will be deprived of the use of money
which they would otherwise have had.
[18]
Turning to look at the matter from the defender's perspective, disallowance of the
adjustments will not affect its substantive rights. It will not be deprived of the opportunity
of asserting its right to damages by reason of breach of the warranties. It will simply be
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deprived of a potential right in security which it could otherwise have had, had it acted
more promptly. Even then, that will only have any practical impact should the defender fail
in its defence to the principal action; and even then, if it has concerns about the pursuers'
ability to satisfy any decree the defender might itself achieve, there are other remedies open
to it in the form of diligence on the dependence, should the criteria for granting same be
satisfied.
[19]
For all these reasons, I have concluded that the interests of justice preclude the
allowance of the late adjustments. The consequence of that is that the defenders have no
defence to the fifth conclusion, and the test for granting summary decree is met in relation to
that conclusion, to the extent of £56,624.42, the sum received by the company thus far.
[20]
Turning finally to consider whether the counterclaim should be allowed, the reality
is that the warranty claim will be pursued either by counterclaim or in a separate litigation.
When one also has regard to the fact that introduction of the counterclaim need not delay
resolution of the issues in the principal action (as Lord Malcolm pointed out in Whyte and
Mackay Ltd v Blyth & Blyth Consulting Engineers Ltd 2012 SLT 1073, para [9]), and the
desirability of cohesive case management, I have come to the view that it would be counter
to the interests of justice, and ultimately serve no sound purpose, to require the defender to
go to the expense of raising a separate action. I will therefore allow the counterclaim to be
received.
Disposal
[21]
I have refused to allow the defender's late adjustments to be received. Consequently,
I have granted summary decree for payment to the pursuers of the sum of £56,624.42 with
interest from today's date, reserving to pronounce further. I have allowed the defender's
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counterclaim to be received. I will put the case out by order to discuss what further orders
ought to be made in light of this opinion, both as regards the principal action and the
counterclaim.
