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FIRST DIVISION, INNER HOUSE, COURT OF SESSION

[2024] CSIH 30

A214/20

Lord President

Lord Pentland

Lady Wise

OPINION OF THE COURT

delivered by LORD CARLOWAY, THE LORD PRESIDENT

in the reclaiming motion

in the cause

WILLIAM GRAY

Pursuer and Reclaimer

against

(FIRST) STEPHEN McCALLION and (SECOND) ZLX LIMITED

Defenders and Respondents

____________

Pursuer and Reclaimer: A MacKenzie (sol adv); Harper Macleod LLP

Defenders and Respondents: Massaro; Brodies LLP

4 October 2024

Introduction

[1]

The pursuer reclaims (appeals) against the Lord Ordinary's refusal to dismiss the second

defenders' counterclaim as incompetent in terms of Rule 25.1(1)(b) of the Rules of the Court of

Session 1994. Separately, the defenders challenge the competency of the reclaiming motion on

the basis that the pursuer did not obtain leave to reclaim from the Lord Ordinary in accordance

with RCS 38.2. The appeal concerns the proper interpretation and application of these two

rules.

The pleadings

[2]

The second defenders provide tax advice to, and process research and development tax

rebate claims on behalf of, their clients. They provide these services by engaging consultants in

Scotland and England. The pursuer was one such consultant. The first defender is the sole

shareholder and director of the second defenders.

Principal Action

[3]

In his written pleadings, the pursuer avers that, although the second defenders are, as a

matter of law, an incorporated company, as a matter of fact they were a partnership between

him and the first defender. There is a dispute about whose idea it was for the pursuer and the

first defender to conduct business together and about the precise terms on which they agreed to

do so. In broad terms, there is agreement that, in 2018, the two decided to enter into the

research and development tax rebate claims business. The pursuer avers that the parties agreed

that they would incorporate a new company, namely the second defenders, through which to

carry out the business. He avers that he and the first defender agreed to share equally in the

profits and management of that business. Initially, the first defender was to be listed as the sole

shareholder and director of the new company. The pursuer would be paid by the second

defenders as a contractor. After certain events had taken place, notably the termination of the

first defender's employment with a separate company, Yamato Scale Dataweigh (UK) Ltd, the

first defender was to transfer 50% of the shareholding in the new company to the pursuer.

These events came to pass, but the first defender refused to effect the share transfer. The

pursuer concludes for an order for specific implement compelling the first defender to make the

transfer.

[4]

The defenders lodged joint defences. They deny that there was an agreement that shares

would be transferred to the pursuer. They contend that there was only a general agreement

that a share transfer might be agreed in the future. Such an agreement would be conditional

upon the second defenders' success and upon the pursuer making a sufficient contribution to

that success and demonstrating himself to be trustworthy and honest. The pursuer and the first

defender ceased working together in February 2020. The relationship did not end amicably.

The defenders aver that this was because the pursuer made a false application for finance to

Audi in the first defender's name. This caused the first defender to incur a personal liability of

£38,000. The defenders maintain that, after he left the second defenders' employment, the

pursuer set up his own tax rebate claims business and took some of the second defenders'

clients with him.

Counterclaim

[5]

The second defenders lodged a counterclaim. They say that the counterclaim arises out

of the same contractual relationships as those on which the pursuer's action is based. They

contend that the pursuer breached both his common law duty of care and an implied term in

the contract between them that he would perform his role with the care and skill of an

ordinarily competent tax rebate claims adviser. They say that the pursuer failed to: have claim

forms signed by clients; have the figures he submitted to HM Revenue & Customs approved by

clients; attach accurate tax computations to clients' claim forms; comply with HMRC standards

for tax agents.

[6]

On quantum, the second defenders incorporate brevitatis causa: (i) a table with a

summary of the pursuer's obligations, failures and the losses caused to the second defenders;

and (ii) a spreadsheet providing a breakdown of those losses. The spreadsheet details, inter alia:

(i) the names of those clients of the second defenders whose claims did not succeed as a result of

the pursuer's failings; (ii) the particular ways in which the pursuer failed in the preparation and

processing of those clients' claims; (iii) the value of the claims as submitted by the pursuer; (iv)

the actual value of those claims; (v) the fee which the second defenders lost in the year in which

those claims were submitted; and (vi) the fee which the second defenders reasonably estimate

they lost during the subsequent four years in relation to each of the affected clients. The second

defenders allege that the clients identified in the spreadsheet refused to continue to use their

services as a result of the pursuer's failings.

[7]

The pursuer's defence to the counterclaim is that he was not the consultant with

responsibility for the claims. He takes a preliminary challenge to the competency of the

counterclaim on the basis that it did not form part of, or arise out of, the same grounds of action

as his claim against the defenders. It was not necessary to decide the matters raised in the

counterclaim in order to determine the question in controversy between the pursuer and the

first defender in the principal action. The counterclaim did not therefore comply with

Rule 25.1(1)(b) and was incompetent. In addition, the counterclaim was so lacking in its

specification of loss that it was irrelevant.

Relevant Rules of the Court of Session

[8]

RCS 25.1(1) provides that a defender may lodge a counterclaim:

"(a)

where the counterclaim might have been made in a separate action in which it

would not have been necessary to call as a defender any person other than the pursuer;

and

(b)

in respect of any matter

(i)

forming part, or arising out of the grounds, of the action by the pursuer;

(ii)

the decision of which is necessary for the determination of the question in

controversy between the parties; or

(iii)

which, if the pursuer had been a person not otherwise subject to the

jurisdiction of the court, might have been the subject-matter of an action against

that pursuer in which jurisdiction would have arisen by reconvention."

[9]

RCS 38.2 sets out the types of interlocutor against which a party may reclaim without

leave of the Lord Ordinary. Insofar as relevant to the issues in this appeal, these include any

interlocutor disposing of part of the merits of a cause (RCS 38.2(4) and (5)(a)). Interlocutors not

so specified in RCS 38.2(1), (3) or (5) can only be reclaimed with the leave of the Lord Ordinary

(RCS 38.2(6)).

The Lord Ordinary

[10]

On 7 September 2023, the Lord Ordinary held that the counterclaim was competent. The

rationale behind RCS 25 was expediency. A broad approach to the rule was merited. The

principal action related to a business venture which had been entered into by the pursuer and

the first defender and involved the transfer of 50% of the shares in the second defenders in

furtherance of that business. The counterclaim related to the pursuer's action relative to the

second defenders, taken in the interests of that business. The second defenders were an integral

and material part of the business. Both claims had their origins in, or related to (Tods Murray v

Arakin 2000 SLT 758, at para [10]), or arose out of, the business. The counterclaim fell within

RCS 25.1(1)(b)(i) and was competent.

[11]

A party required to have averments which gave their opponent fair notice of their case.

An action (or counterclaim) could be dismissed for want of specification. That rule found its

proper application where the opponent did not know the case made against them and objected

to being taken by surprise at a proof. Where facts were said to be within the opponent's

knowledge, the level of specification may be less. In this case, there was a fundamental dispute

about what was, or ought to have been, within the pursuer's knowledge. The second defenders'

counterclaim was predicated upon the basis that the relevant claims were compiled and

submitted by the pursuer. If the second defenders failed to establish those facts, they would

likely fail to establish their case. It would be premature, standing the existence of a factual

dispute, to take the draconian step of dismissing the counterclaim.

[12]

The second defenders were entitled to peril their case on the contention that they had

suffered loss of income, rather than loss of profit. If the court considered that the correct

measure of loss was loss of profit, and the second defenders had no pleadings on that, they

might find themselves unable to establish loss. The pursuer's position in relation to quantum

would remain protected by allowing a proof before answer. Although the second defenders'

pleadings on quantum were, in part, confusing, in light of the pursuer's motion to allow

amendment of his own pleadings, it was not unreasonable to allow the second defenders an

opportunity to amend their pleadings in the course of that procedure.

Submissions

The pursuer

[13]

The reclaiming motion was competent. An incompetent action was one without merit.

The Lord Ordinary's interlocutor, which repelled the plea to the competency, disposed of part

of the merits of the cause. Leave to reclaim was therefore not required in terms of RCS 38.2(4)

and (5)(a). The defenders' interpretation of "merits" was too restrictive. As a matter of plain

English and simple logic, the merits of the cause must encompass its competency. Such an

interpretation gained support from the context of the remaining parts of RCS 38.2(5). A finding

that it was incompetent to proceed further on the merits of the case could be reclaimed without

leave (Mackay: Manual of Practice in the Court of Session at 295). That was the obverse of the

interlocutor pronounced by the Lord Ordinary. Even if leave were required, it was still open to

the court to determine competency in the exercise of its inherent jurisdiction to deal with

matters that were pars judicis.

[14]

The Lord Ordinary erred in holding that the counterclaim satisfied any of the

requirements of RCS 25.1(1)(b). The pursuer's ground of action was a contract between the

pursuer and the first defender. The second defenders were called only for their interest, because

an order for the transfer of 50% of their shares may have practical consequences for them. The

second defenders had an interest in the principal action only to that very limited extent. They

had joined with the first defender in defending the principal action, but they did not aver that a

share transfer would be inequitable because the pursuer had breached his obligations to them.

There was no tripartite element.

[15]

Taking each part of RCS 25.1(1)(b) in turn, subparagraph (i) did not apply. The broad

approach taken by the Lord Ordinary did not find support in the authorities (JW Chafer

(Scotland) v Hope 1963 SLT (Notes) 11; Tods Murray v Arakin 2001 SC 840). The action and the

counterclaim concerned different legal relationships between separate legal persons. The

contract between the first defender and the pursuer was the sole ground in the principal action.

The counterclaim did not arise from that ground. Whether the first defender was contractually

obliged to transfer shares to the pursuer was unrelated to whether the pursuer was liable in

damages for breach of a separate and subsequent contract with the second defenders.

[16]

Subparagraph (ii) did not apply. It was conceded that, in ascertaining the question in

controversy, the court required to take into account the defence to the principal action as

pleaded, but not an unconnected counterclaim. The determination of the counterclaim was not

necessary for the determination of the question in controversy in the principal action. The

pursuer was domiciled in Scotland and was subject to the jurisdiction of the court so

subparagraph (iii) did not apply.

[17]

The pursuer's action was simple and straightforward. It could proceed expeditiously to

proof. In contrast, the counterclaim was a wide-ranging professional negligence action. If the

counterclaim were dismissed at this stage, the defenders could raise a separate action. To tie the

actions together was anathema to expediency.

[18]

The Lord Ordinary erred by refusing to dismiss the counterclaim as lacking in

specification. The second defenders sued for lost commission. In order to have earned that

commission, the clients would first have had to have recovered sums from HMRC. Taking the

second defenders' claim at its highest, they had lost the opportunity to make commission

because their clients had lost the opportunity to claim tax relief. The second defenders required

to establish that, had the clients been competently advised, they would have made claims for

tax relief and that those claims would have had a real and substantial chance of success had the

breach of duty not occurred. If the second defenders surmounted that hurdle, the court would

assess the value of the lost opportunity by reference to the underlying merits of the lost claims

(Perry v Raleys [2020] AC 352, at paras 15 24; Centenary 6 v TLT 2023 SLT 555). The principle of

fair notice required the second defenders to aver the basic facts about the lost claims. This

included, for example: what expenditure would have qualified for tax relief; what research and

development that expenditure related to; under which legislative provisions the expenditure

qualified; and in which financial periods the expenditure had occurred.

[19]

The second defenders had provided no notice of the basic details of their clients' claims.

Those details might reveal that the underlying claims had no, or only a remote, chance of

success. For example, they may have been timebarred, or have related to expenditure which

did not properly qualify for tax relief. Without averments of the details of the lost claims, the

court could not value the opportunity lost. The pursuer could not prepare for proof. The

second defenders could not avoid the requirement to give fair notice by contending that the

pursuer had knowledge of the claims. There was no fair notice of the second defenders' claim

for lost commission in subsequent years. A client may have qualifying expenditure in one year,

but that did not extrapolate into subsequent years. Tax relief claims would have been subject to

a higher risk of scrutiny in the case of some of the clients (tier 2 or 3). The pursuer had sought

commission and diligence in relation to the underlying claims, but there was a dearth of

evidence on which to base any kind of qualitative assessment.

The defenders

[20]

The reclaiming motion was incompetent. The pursuer had not obtained leave to

reclaim. The Lord Ordinary's interlocutor did not dispose of part of the merits or fall into any

of the other categories of interlocutor (RCS 38.2(1), (3) and (5)) which could be reclaimed

without leave. The purpose of RCS 25 was expediency. Refusing to allow a counterclaim was a

refusal of a specific procedure. The substantive rights which were the subject of the

counterclaim could still be vindicated by a competent procedure (Tods Murray v Arakin at

paras [6] and [8]). Such a refusal did not affect substantive rights. The fact that a plea-in-law

had been sustained or repelled would mean that a substantive part of the cause had been dealt

with in many situations, but not in any situation (Lord Carloway, Civil Procedure, in Stair

Memorial Encyclopaedia (re-issue) at para 257). A decision to allow a counterclaim to proceed was

not a decision which dealt with part of the merits of the cause.

[21]

The counterclaim was competent in terms of both RCS 25.1(1)(b)(i) and (ii). In terms of

(i), matters "arising out of" the pursuer's grounds of action included any defence to the action.

Subparagraph (ii) performed a more expansive role than (i). It required consideration of the

case as a whole (Fulton Clyde v JF McCallum & Co 1960 SLT 253, at 255 256). The question was,

what was the controversy? The court had a discretion to refuse specific implement. It would

generally do so where what was sought would force another party into a partnership or a

contract of employment (McBryde: Contract (3rd ed) at para 23.20). The pursuer had averred

that the parties were in a relationship akin to partnership. In the principal action, it was the

defenders' contention that, even if there had been an agreement that the pursuer would receive

50% of the shares, the court should refuse to grant specific implement compelling the transfer.

This was partly because the pursuer had breached his contract with the second defenders,

thereby causing them substantial loss and damage. These averments were the same as the

second defenders' averments in support of the counterclaim. The defenders were not seeking to

establish breach of contract in the principal action. They contended that the pursuer's breach of

contract made it inequitable to order specific implement. The pursuer, who sought to amend

his pleadings on the matter, accepted that the contractual arrangement between the three

parties was unclear. Based on the pursuer's averments, there was only one contract involving

all three parties.

[22]

The second defenders were entitled to avail themselves of RCS 25.1. The pursuer had

raised the action against them. He had not called them only for their interest. Even if it was

right to say that there were two different contracts underlying the principal action and the

counterclaim respectively, JW Chafer (Scotland) v Hope and the line of authority cited therein

(Burt v Bell (1861) 24 D 13; Grewar v Cross (1904) 12 SLT 84; Scott v Aitken 1950 SLT (Notes) 34;

Borthwick v Dean Warwick 1985 SLT 269) did not assist in answering the question. Chafer could

be distinguished. In Chafer, the existence of a debt was admitted and the only defence advanced

was set off. The court refused to permit a counterclaim to be advanced in order to set off of a

liquid claim against an illiquid debt. In the present case, there was no admission of a debt

being due. The defence advanced was not set off.

[23]

A court would only dismiss an action for lack of specification if there was a lack of fair

notice. The lack of specification required to be material (Richards v Pharmacia c/o Pfizer 2018 SLT

492 at para [47]; Chalmers v Diageo Scotland [2024] CSIH 2 at para [23]). The pleadings in support

of the counterclaim contained averments specifying: (i) that the pursuer acted in breach of

contract and duty when dealing with tax rebate claims on behalf of the second defenders'

clients, leading to the rejection of those claims by HMRC; (ii) the identities of the affected

clients; (iii) the ways in which the pursuer was said to have failed, with reference to a

spreadsheet incorporated into the pleadings; (iv) that quantum comprised loss of commission

for the year of submission of the failed claims and the subsequent four years; and (v) how the

claim was calculated, with reference to the incorporated spreadsheet. The pursuer had met

these averments with a bare denial. It had been the pursuer's responsibility to prepare and

submit claims. He ought to know whether those claims had merit or not. There were

difficulties with the pursuer, having submitted those claims to HMRC, now seeking to argue

that they were without merit (Centenary 6 v TLT, at para [121]). The Lord Ordinary was correct

to conclude that the counterclaim was not materially lacking in specification. The pursuer had

fair notice of the claim against him.

Decision

[24]

Lodging a counterclaim under RCS 25 is the equivalent of raising an action (HM

Advocate v Frost 2007 SC 215, Lord Osborne, delivering the opinion of the court, para [28]). It is

a form of procedure designed to avoid the necessity for a cross-action by the defender

(Thomson and Middleton, Manual of Court of Session Procedure, at 78). A decision to allow a

claim to proceed by way of counterclaim is a procedural decision. Such a decision does not

determine any substantive rights (Tods Murray v Arakin 2001 SC 840, at para 6), although it may

have practical consequences for the party's ability to vindicate those rights. The merits of a case

are the substantive or real matters in issue, not the technical or procedural points raised (see

Walker, The Oxford Companion to Law at 836 and Garner, Dictionary of Legal Usage (2011) at 573).

A decision to allow a counterclaim to proceed is not a determination of part of the merits of the

cause. Leave to reclaim the Lord Ordinary's interlocutor of 7 September 2023 was required in

terms of RCS 38.2(6). It was not obtained and the reclaiming motion is therefore incompetent.

[25]

The requirement to seek leave to reclaim in respect of certain types of interlocutor is an

important aspect of judicial case management. It is in the interests of the efficiency of the civil

justice system as a whole, as well as in an individual case, to have a mechanism by which the

court can ensure that there is no proliferation of appeals on procedural points. The pursuer

submitted that, even if leave ought to have been obtained, the court could still determine

competency since competency was pars judicis. If that were correct, a party would be able to

circumvent the requirement to seek leave. This would frustrate the important object of RCS 38.2

(Robertson v Robertson's Ex 1991 SC 21, LP (Hope) at 24). The matter is so obviously procedural

and so clearly within the province of the Lord Ordinary as to make leave essential as a

condition of review (ibid).

[26]

Had the reclaiming motion been valid, it would have been refused. The counterclaim is

competent in terms of RCS 25.1(1)(b)(ii). RCS 25.1(1)(b)(i) contemplates matters which are

directly connected with the pursuer's grounds of action. The classic example is the action for

payment in terms of a contract being met by a claim for damages for breach of that contract.

RCS 25.1(1)(b)(ii) contemplates matters which are more indirectly connected with the pursuer's

grounds of action. The question in controversy between the parties is wider than the pursuer's

grounds of action (Fulton Clyde v JF McCallum & Co 1960 SLT 253, Lord Migdale at 256). It can

include matters put in issue by the defences which may, at first glance, seem only tangentially

related to the pursuer's action.

[27]

This counterclaim is an example of this. The dispute between the pursuer and the

second defenders is intermingled with the dispute between the pursuer and the first defender.

The defenders aver that the pursuer's breaches of contract and duty are part of the reason why

it would be inequitable for the court to grant specific implement for the share transfer. They

aver that, if there was a contract for a share transfer, it was conditional on, inter alia, the pursuer

contributing to the success of the company. It cannot be said, in light of these breaches of

contract and duty, that he did so. The hearing on the Procedure Roll concerned only the

pursuer's preliminary pleas to the competency, relevancy and specification of the counterclaim.

The pursuer's preliminary pleas to the relevancy and specification of the defenders' averments

in the principal action were held over to another date. The Lord Ordinary was correct to assess

matters on the basis of the averments on record as at the date of the Procedure Roll. The

relationship at the centre of the action was tripartite in nature. The arrangement between the

pursuer and the first defender was meaningless without the incorporation of the second

defenders. The second defenders joined with the first defender in resisting the principal action.

The fact that they were called only for their interest is of no consequence. A defender called for

his interest is not bound to defend the action brought against him, but he is entitled to appear,

lodge defences, and, subject to the usual rules of standing, lodge a counterclaim (Sheldon: Title

and Interest in Macfadyen ed, Court of Session Practice C/122 at para [71]).

[28]

The purpose of counterclaim procedure is expediency. A broad and common sense

approach to RCS 25.1(1)(b) ought to be taken. The question under RCS 25.1(1)(b)(ii) is whether

the factual or legal basis of the counterclaim is sufficiently connected to that underlying the

principal action. If, as a result of a refusal to allow the counterclaim to proceed, the defender

will have to raise a separate action and proceed to a proof on substantially the same facts as

those which will be the subject of proof in the principal action, such an outcome is a strong

indicator that a sufficient connection exists.

[29]

Had the reclaiming motion been competent, the court would have repelled the pursuer's

plea to the relevancy and specification of the counterclaim. There are sufficient averments on

record to provide the pursuer with fair notice of the quantum of damages and the related

matters which he may have to investigate further in order to prepare for proof. The pursuer's

principal complaint was that there were no averments about the nature of the clients'

underlying expenditure. The pursuer could not confirm whether that expenditure would have

qualified for tax relief. However, the second defenders aver (statement of fact 3 of the

counterclaim) that the second column of the spreadsheet provides the value of the qualifying

expenditure which was incurred by each affected client. That general averment that the

expenditure, in respect of which lost commission is claimed, qualified for tax relief is sufficient

to allow the second defenders to lead evidence to prove that fact. If they fail to do so, they will

probably fail to recover lost commission. The basis of the second defenders' claim for lost

commission in the following four years is clear. They aver that the sums claimed are based on a

reasonable estimate of the fee which they would have earned but for the pursuer's alleged

failures. If following proof, the court does not consider that the estimate was reasonable, the

second defenders will fail.

[30]

The reclaiming motion is refused as incompetent.