Scottish High Court of Justiciary Decisons

NESS TRAINING LIMITED v. TRIAGE CENTRAL LTD &c [2001] ScotHC 94 (27th August, 2001)

[1] This is an action of count and reckoning and payment remitted from the Sheriff Court in which the pursuers convened three defenders, namely, Triage Central Ltd; BTCV Enterprises Ltd and Action Environment Ltd. Each of the defenders having taken issue with the relevancy of the action, particularly as respects the form of remedy which it seeks, the action was appointed to debate. Shortly before the debate the pursuers intimated their intention of abandoning the action so far as directed against the first defenders, Triage Central Ltd, and on the basis of that being done the first defenders did not take part in the debate.

[2] In the background to the dispute between the parties lies the decision taken in 1997 by the United Kingdom Government to involve the private sector in providing occupational training schemes for the unemployed. The name given by the government to this initiative was the "New Deal" and it appears that the contracts for the provision of training which the government intended to place with private commercial entities were seen as potentially profitable to the latter.

[3] The pursuers make averment to the effect that during the second half of 1997, having seen advertisements inviting tenders for New Deal contracts, one of their directors, a Mr Jackson, contacted a Mrs Kate Smith (who at this particular point in the pleadings is described as a director of the second defenders) and discussed with her the making of a joint bid. Mrs Smith is averred to have suggested that the third defenders be also involved. It appears that in this particular passage of the pleadings in Condescendence 4 there is a slip on the pleader's part in respect that it is apparent from what is averred elsewhere that Mrs Smith was in fact a director of the third defenders and the pleadings should, I think, be read with the appropriate correction. The defenders, for their part, have a somewhat different account of the way in which the initial discussions were instigated but for present purposes I do not think much turns on that aspect of matters.

[4] Following such initial contacts and discussions what is averred by the pursuers then to have occurred is in these terms:-

[5] What is averred (and in large measure not disputed) to have happened thereafter is that a company incorporated in England and Wales, which was a subsidiary of the second defenders' parent company and of whose capital of one hundred ordinary shares but two had been issued as subscriber shares to its parent, changed its name from "Conservation Training Ltd" to become "Triage Central Ltd". In March 1998 the directors of that company arranged for thirty-three of its one hundred shares to be held by each of nominees of the pursuers, the second defenders, and the third defenders respectively, with the remaining share being held by a nominee of another company, Stirling Business Links Ltd. The company adopted a new memorandum of association which included among its principle objects the obtaining of New Deal contracts and its engagement and contracting in "all Government sponsored training and education schemes at present existing, and future schemes". The three member board of directors was constituted by nominees of the pursuers, the second defenders and the third defenders respectively. Although, on 15 January 1998 the second defenders had submitted in their own name completed appraisal questionnaire to the Employment Service in March 1998 there was submitted on behalf of Triage Central Ltd an offer to the Employment Service to carry out work in connection with the New Deal in the Forth Valley area in relation to the training of 18-24 year olds. In that offer the shareholders in Triage Central Ltd are described as "corporate partners" and the shareholders are listed as being the pursuers, the second and third defenders and Stirling Business Links Ltd. On 26 March 1998 the Government announced that Triage Central Ltd had been selected to lead the New Deal for 18-24 year olds in the Forth Valley.

[6] It appears that thereafter there was an indication that the Employment Service preferred that the company have its registered office in Scotland. At a meeting of the board of directors of Triage Central Ltd on 6 June 1998 the directors, according to the minute of their meeting, decided to convene an extraordinary general meeting to consider and pass, among others, a resolution "to register the company's registered office from England to Scotland".

[7] Advised no doubt of the legal impossibility of achieving such a transfer of registered office and the need, were a registered office in Scotland necessary for the Government's purposes, to create a Scottish company, it appears that those involved in the matter arranged that the English company "Triage Central Ltd" change its name to "Triage Central Partnership Ltd". That change of name was effected on 11 June 1998 and on the following day there was incorporated in Scotland a different company with the former name of the English company, Triage Central Ltd. The Scottish company with that name is the first defender in this action. On 25 June 1998 a meeting took place of what is described as the "third" meeting of the board of directors of Triage Central Ltd, attended by the nominees of the parties to this action who had acted as directors of the English company now re-named as Triage Central Partnership Ltd. Paragraph 5c of the minute of that meeting states:

[8] Subsequently, a document dated 20 July 1998 and called "New Deal Private Sector Delivery Plan" was prepared by Triage Central Ltd for presentation to the Employment Service. Among many other things it stated that Traige Central Ltd was located in Stirling and that each of the pursuers, the second defenders and the third defenders had a 33% shareholding in the company, 1% being held by Stirling Business Links Ltd. By letter of 4 August 1998 the first defender - Triage Central Ltd - was advised by the Employment Service of the latter's intention to award Triage Central Ltd the contract for the provision of New Deal training in the Forth Valley area from 31 August 1998 and it is averred by the pursuers that the first defenders took over the running of the New Deal contract for the Forth Valley on 1 September 1998, although in fact the contract documentation was only executed retrospectively in December 1998.

[9] It appears from the parties' pleadings that at about the time at which the first defenders began to provide New Deal services in September 1998 certain difficulties arose concerning computer software which it had been intended would be supplied by the pursuers to Triage Central Ltd. The nature of those difficulties and the attribution of responsibility for them are matters of apparently keen dispute. It is not necessary to enter into the details of that dispute. However, in the event, by a letter dated 27 November 1998 the second and third defenders wrote to the pursuers referring to those difficulties and purportedly terminating their relationship with the pursuers. In regard to that letter of 27 November 1998 it is averred by the pursuers:-

[10] As at the date of that letter, other than a subscriber share held by the third defenders, no shares in the first defenders, Triage Central Ltd, had been issued. At the time of the last meeting of the board of directors on 8 October 1998 a draft shareholder agreement and a draft of a revised memorandum and articles of association existed but had not been finalised. The minute of that meeting, after noting, in section 7, that the third defenders had provided more than £28,000 to the company goes on to record that the second defenders and the pursuers:

Some months later, on 26 March 1999, the authorised share capital of the company was increased from £1,000 to £50,000 and 10,000 of the £1 shares were allotted to the second defenders and 9,999 to the third defenders. No shares were then or subsequently allotted to the pursuers.

[11] Against that averred factual history that the pursuers now seek count and reckoning and payment by the defenders. The material parts of the amended operative crave in the action are in these terms:-

[12] The basis advanced in the pleadings for such a claim is expressed thus in Article 10 of the Condescendence:-

[13] In view of the pursuers' intended abandonment of the action in so far as directed against the first defenders, it follows for the present that the contention that the first defenders have any obligation to account to the pursuers for a portion of the profits earned them has accordingly been abandoned. In the course of his submissions Mr Howlin, who appeared for the pursuers, put the pursuers' primary position along these lines. The relationship between the pursuers, the second defenders and the third defenders was, he said, properly one of joint venture or partnership. The prospects of obtaining and exploiting the two New Deal contracts for the Forth Valley area were "business opportunities" of the partnership and as partners in that partnership the second and third defenders were under a fiduciary duty not to take the benefit of those contracts, which were assets of the partnership. In preventing the pursuers from becoming a corporator in the first defenders (Triage Central Ltd) the second and third defenders had thereby appropriated the benefit of those contracts to themselves. A person appropriating property in the management of which he was under a fiduciary duty was liable to account for any profit derived from it.

[14] In relation to the scope of fiduciary duties and the liability to account for profits in the event of a breach of fiduciary duty Mr Howlin referred to a number of authorities. These were Aberdeen Railway Co v Blaikie (1854) 17 D (HL) 20; Cooke v Deekes [1916] AC 554; Pathirana v Pathirana [1967] 1 AC 233; Boardman v Phipps [1967] 2 AC 46; Industrial Development Consultants v Cooley [1972] 2 AER 162. Counsel also referred to the opinion of Lord Hunter in Inglis v Inglis 1983 SC 8. Mr Howlin submitted that the second and third defenders owed a fiduciary duty to the pursuers. That fiduciary duty arose because there was an underlying relationship of partnership and that partnership could only terminate upon the pursuers' becoming corporators in the first defenders - an event which did not take place.

[15] For her part, Miss Grahame, who appeared for the second defenders, and whose submissions were also adopted by Mr Wallace for the third defenders, submitted that while the pleadings referred to the existence of a joint venture or partnership as the basis for seeking an accounting there were no relevant averments of the existence of such a legal relationship. On an examination of the pursuers' pleadings what was averred was truly an agreement to form a company. Section 1 of the Partnership Act 1890, defined partnership as being the "relation which subsists between persons carrying on a business in common with a view of profit", but excluded the relation between members of any limited company. Section 2 of the Act contained certain rules to assist in determining whether a partnership existed. Counsel further referred to Dollar Land (Cumbernauld) Ltd v CIN Properties Ltd 1996 SLT 186 in which, at 191 K ff, the Lord Ordinary reviewed the features or factors commonly employed to establish or negative the existence of a relationship of partnership. She submitted that those tests, when applied in the present case, negatived any notion that the pursuers and the second and third defenders carried on, or ever contemplated carrying on, business in common. The expressed and averred intention was that the business be conducted by the limited liability company and not by the pursuers and the second and third defenders in common. Thus there was, she said, no suggestion of those parties holding property in common or in keeping joint accounts. Nor was there any suggestion of their being liable for losses or for the acts of the other or others of the alleged partners. Accordingly the basis of the claim, namely the existence of a partnership, was ill-founded.

[16] In the event that contrary to the primary argument on behalf of the defenders it were the case that the existence of a partnership or joint venture had been sufficiently averred, counsel for the compearing defenders had further submissions relating to, or turning on, the averment of termination in November 1998, but it is perhaps convenient first to consider the primary issue whether the pursuers have properly averred the existence of a joint venture or partnership.

[17] It is of course possible to refer loosely to a "joint venture" or to speak of people being "partners" without there being a legal relationship which the law would properly characterize as partnership. An example of such a loose use of language is indeed to be found in the written contract between the Secretary of State and the first defenders which describes itself as "New Deal Partnership Agreement" and refers to the first defenders as the "Partner". Yet it is plain that the relationship between the first defenders and the Secretary of State as defined in that contract is not one of partnership. It is in my view inappropriate simply by using the terminology of partnership in the pleadings then to seek to apply the consequences of the law of partnership if the relationship is in substance one which the law would not characterize as a partnership. I am satisfied that, at least from early February 1998, the averred relationship between the pursuers, the second defenders and the third defenders was not that of partnership or joint venture in the proper sense of the term. It is clear on averment that what was agreed in February 1998 was that the commercial activity of obtaining and executing the New Deal contracts offered by the Employment Service was to be carried out by a limited liability company. In agreeing that the activity be carried out by a limited liability company the parties were, as Mr Wallace put it, agreeing something which was contrary to their carrying on that activity or business in partnership. As counsel for the defenders pointed out, nothing was averred indicating satisfaction of any of the tests or factors commonly used to establish the existence of a partnership. Counsel for the pursuers for his part did not dispute the absence of averment of any of what he described as the "badges of partnership". He stated that it was a mistaken approach for the defenders to look for such badges within the pursuers' pleadings because there never would be any badges of partnership, the arrangement being that there be a limited company to carry on the business of exploiting the commercial opportunities afforded by the New Deal contracts. In so saying, it appears to me that counsel for the pursuers implicitly, but inevitably, conceded that the relationship was not one of partnership.

[18] At some points in the course of his submissions, counsel for the pursuers rather suggested that it was immaterial that the agreement was to form a limited company to carry on the business in question, the company simply being a mere mechanism to that end. In my view there is a clear and important distinction between carrying on business in partnership and being a shareholder in a limited liability company. The distinction needs, I think, little elaboration and I am in little doubt that had the pursuers been shareholders in the first defenders, and had the first defenders fallen into insolvency, they and the other defenders would strongly, and successfully, have resisted any suggestion by the creditors of the first defenders that the first defenders were a mere mechanism or pawn in a partnership relationship thus exposing them to unlimited liability.

[19] I would further record that I understood counsel for the pursuers also to advance the view that, there being on the pursuers' averments an initial agreement to enter into a joint venture (I assume stricto sensu), that initial agreement continued as a form of substratum notwithstanding the agreement averred by the pursuers to have been reached in February 1998 whereby the parties would not conduct business in common as a partnership the New Deal contracts being instead conducted by a different person in the shape of the limited liability company. In so far as that contention was advanced, I am unable to accept it. In my view, having substituted the agreement to take equal shareholdings in a limited company, it is not open to the pursuers, simply because that agreement be not fulfilled by the other parties, to revert to an agreement which had been thus superseded or novated.

[20] As an alternative position, in the event that the pursuers had not relevantly averred the existence of a partnership, Mr Howlin submitted that the existence of fiduciary duties was not confined to partnership but applied more broadly and he submitted that, even if there were no contract of partnership, it would be open to the Court to hold that there were mutual duties of good faith in the circumstances here disclosed giving rise to a fiduciary duty. He referred in particular to what was said in Boardman v Phipps as indicating that there was no clear definite categorisation of the particular circumstances in which a fiduciary duty might arise. The question of a more general fiduciary duty - a contention which went beyond the scope of the pursuers' pleadings - having thus arisen in the course of the debate, Miss Grahame referred me to such authority as she had located in the interval before her response, namely the discussion of the matter in the Stair Encyclopaedia, Volume 24 para. 170 ff and the case of Huntington Copper and Sulphur Company Ltd v Henderson (1877) 4 R 294.

[21] It is of course clear that fiduciary duties may arise in circumstances outwith partnership. It is also, I think, accepted that there is no precise categorization or enumeration of particular relationships in which a fiduciary duty may arise. That said, counsel for the pursuers accepted that there was no authority suggestive of the existence of a general duty of good faith in contractual relationships. As I understood him, counsel for the pursuers also accepted that he was unaware of any case which settled that a shareholder, as such, owed any fiduciary duty to fellow shareholders, or indeed that promoters of a company owed a fiduciary duty to each other.

[22] Looking at the cases and examples in which a fiduciary duty is commonly recognised it appears to me that a principal feature of the relationship in question is that the person upon whom the fiduciary duty reposes has also the task of managing, or transacting with, property or material interests belonging to another. Miss Grahame having brought to the attention of the Court the decision in Huntington Copper and Sulphur Company Ltd v Henderson Mr Howlin pointed to the generality of expression employed by the Lord Ordinary when he said:

In the course of his submissions Mr Wallace pointed out, that in the report of Aberdeen Railway v Blaikie 1 McQ 461, 471 the Lord Chancellor placed fiduciary duty in the context of the existence of interests of a third party, which the fiduciary was bound to protect. However, in the present case, on their averments, the entitlement of the pursuers was to receive shares in the first defenders. One was, said Mr Wallace, accordingly not in such a "trustee" situation but in the situation of an ordinary contract for the allotment or issue of shares.

[23] In my view there is force in the approach taken by the defenders' counsel. On a proper analysis of the averred agreement, I have difficulty in seeing that there was an asset, or interest, which the defenders as individuals would manage on behalf of the pursuers or were entrusted with protecting on behalf of the pursuers. The contracts with the Employment Service were the only assets (or even to use Mr Howlin's phrase "business opportunities") in issue and they were to be the assets of the first defenders. Those assets were in fact always the assets of that company. To say that the second and third defenders appropriated to themselves the benefit of those contracts involves a somewhat distorted view of the relevant legal relationships. The distortion is evident when one looks to the moment of the supposed "misappropriation", namely the allotting of shares in the company (the first defenders) to the exclusion of the pursuers. At that time the New Deal contracts were unquestionably placed with the first defenders. Indeed, given the admission on behalf of the pursuers that the first defenders were running the contracts from 1 September 1998, it is equally clear that as at 27 November 1998 the only assets in issue were held, as parties intended, by the first defenders - Triage Central Ltd.

[24] In these circumstances I conclude that - perhaps as a reflection of the very absence of a legal relationship of partnership - that the invocation of some fiduciary duty otherwise based must also fail. In its essence, the complaint of the pursuers is simply that, in breach of the agreed arrangements, the second and third defenders failed to allot to them an appropriate shareholding in the first defenders. For the failure to transfer or allot shares in a limited liability company remedies exist but they do not, in my view, extend to the extensive remedies sought by these pursuers. The inappropriateness - and irrelevancy - of what is currently claimed is underscored by the fact that, certainly following abandonment against the first defenders, there is no proper basis for saying that the defenders have received profits from the New Deal contracts in issue. Any profits earned from those contracts were plainly earned by Triage Central Ltd, the first defenders. They are not profits properly regarded as accruing pro rata to the shareholders, who participate only by way of a dividend should that be decided upon or changes in the value of a share.

[25] Accordingly, in summary, I am unable to accept either the case pled for the pursuers of the existence of a relationship of partnership or the alternative suggested by their counsel of some other broadly equivalent fiduciary duty. However, even if, contrary to that conclusion, if one were to assume the existence of a relationship or partnership, with assets subsumed in its enterprise, the pursuers in their pleadings do not address the issues arising from their acceptance, confirmed by counsel on their behalf, that the assumed partnership was terminated on 27 November 1998. On that basis as counsel for the defenders pointed out the pursuers' entitlement would not be to a continuing receipt of profits (to the earning of which they have ex hypothesi made no active contribution) but to the remedies specified in the Partnership Act. As submitted by counsel for the defenders, the omission thus to address the consequences of the second and third defenders' termination of the assumed partnership is not elided by describing those defenders motives for that step as "spurious".

[26] For all these reasons I consider that the claim currently advanced by the pursuers is irrelevant. Counsel for the pursuers suggested that if the present action were irrelevant he should be allowed the opportunity of converting it into a relevant action by amendment. I am not minded to accede to that invitation. One is not concerned in this instance with a matter such as a want of specification curable by a short amendment but rather with a more fundamental question of whether there be a liability on the defenders, particularly the second and third defenders, for an accounting. That issue has been largely central to the dispute throughout the proceedings following their remit to the Court of Session and notwithstanding such additional flexibility as may be available in commercial cases I do not consider it appropriate to allow the pursuers to use the present process to re-formulate some truly different claim.

[27] I shall accordingly uphold the second and third defenders' preliminary pleas to the relevancy of the action and dismiss it as against them. As respects the first defenders, I shall give effect to the pursuers' minute of abandonment under Rule of Court 29.1 (b) by pronouncing the appropriate interlocutor relating to expenses.