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Gerard Davis against James Davis (Sheriff Appeal Court Civil) [2024] SACCIV 47 (15 October 2024)
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[2024] SACCIV 47
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SHERIFF APPEAL COURT
[2024] SAC (Civ) 47
PAI-A273-20
Sheriff Principal D C W Pyle
Appeal Sheriff G K Murray
Appeal Sheriff P Mann
OPINION OF THE COURT
delivered by APPEAL SHERIFF GREGOR MURRAY
in the appeal in the cause
GERARD DAVIS
Pursuer and Appellant
against
JAMES DAVIS
Defender and Respondent
Pursuer and Appellant: D M Thomson KC; Levy & McRae Solicitors LLP
Defender and Respondent: Crawford KC; Dentons UK and Middle East LLP
15 October 2024
Background
[1]
For over thirty years, the appellant and his father, the respondent, managed
James Davis (Insurance Brokers) Ltd and G.L. James Davis (Holdings) Limited (respectively
"Brokers", "Holdings" and, together, "the Business").
[2]
The appellant avers that in August 2010, the parties verbally agreed terms by which
he would acquire ownership of the Business in what they regarded as a tax efficient manner:
the appellant would transfer his 49.99% shareholding in Brokers to the respondent;
2
Holdings and Brokers would become group companies and the respondent would make
testamentary provision for the appellant to inherit the Business.
[3]
In consequence, the appellant avers, he transferred his shareholding to the
respondent, Holdings acquired 100% of Brokers' shares and the respondent executed a
codicil to his Will, in which he bequeathed to the appellant "...all of my shares, of whatever
kind, in (Holdings) and (Brokers)." Though the appellant continued almost exclusively to
manage Brokers, the respondent controlled the Business as he solely owned Holdings'
issued shares.
[4]
However, the appellant then avers, in November 2019 the respondent unilaterally
removed him as a director of Holdings, appointed his sister in his place, arranged for
administrators to be appointed to Holdings and had Brokers wound up by the court.
[5]
Those events led to these proceedings, in which the appellant seeks damages as he
avers that the respondent's actions in 2019 breached an implied term of the 2010 contract
that he:
"would take no steps to prevent the pursuer from inheriting the Business, and thus
from enjoying the value of the Business, on (the defender's) death. That implied
term necessarily had effect such that the defender was obliged not to seek to wind up
or dissolve the Business, or otherwise to harm it and the value of the Business, or to
cause the Business itself to take such steps, without proper cause. Such a term was
necessary to give to the parties' contract such business efficacy as they, as reasonable
persons circumstanced as they were when they entered into the agreement, intended
it to have".
Procedure before the sheriff
[6]
After debate, the sheriff sustained the respondent's preliminary pleas and dismissed
the action, against which decision appeal is now taken.
3
[7]
The sheriff considered that the proposed term failed to meet the second, third and
fourth conditions narrated by the Supreme Court in Marks & Spencer plc v BNP Paribas
"for a term to be implied, the following conditions (which may overlap) must be
satisfied... (2) it must be necessary to give business efficacy to the contract, so that no
term will be implied if the contract is effective without it; (3) it must be so obvious
that `it goes without saying'; (4) it must be capable of clear expression..."
[8]
The sheriff considered that the alleged contract was effective without the proposed
term as the appellant's averments demonstrated it had been fulfilled. That the appellant had
not derived the benefit he had hoped for was an insufficient basis for the term to be implied.
[9]
Separately, the proposed term was not so obvious that it went without saying. It was
not sufficient for the appellant to show that had the parties foreseen the eventuality, they
would have wished to make provision for it; it also had to be shown either that there was
only one contractual solution or that one of several possible solutions would doubtless have
been preferred.
[10]
The implied term was not capable of clear expression as it raised questions about
how and on what date the "value of the Business" could be ascertained and what "proper
cause" might cause the Business to be wound up or dissolved.
[11]
Finally, the sheriff considered the appellant's averments of loss were irrelevant. The
appellant averred that his plan was to retire in December 2025, to sell the Business and to
continue to work part-time for a further two years. However, as the respondent remained
alive, the appellant had not incurred any loss.
[12]
Standing those reasons, the sheriff considered it unnecessary to address the
relevancy and specification of the defences, parts of which the appellant argued were
irrelevant and lacking in specification.
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Appellant's submissions
[13]
The sheriff's decision should be recalled, certain of the respondent's averments
excluded from probation and parties allowed a proof before answer of their averments.
[14]
While the sheriff considered the correct tests, he had erred in his application of them.
[15]
A verbal contract fell to be assessed as a matter of evidence after proof (Barton v
subjective understandings were admissible as evidence of what, as a matter of fact, they did
agree, as the court did not require to ascertain the meaning of an agreed written text.
[16]
The core of the proposed implied term was that the respondent "would take no steps
to prevent the pursuer from inheriting the business". That was fundamental, as a party
could not take advantage of its own wrong (Crimond Estates Ltd v Mile End Developments
Ltd 2022 SLT 570 at para [20]; Reliance (AB) Limited v Quantum Claims Compensation
Specialists Limited [2024] SAC (Civ) 9 at para [39]). Contextually, the meaning of the words
"not to wind up or dissolve the business without proper cause" was clear and
straightforward.
[17]
The sheriff's focus on the "value of the Business" was misplaced. The appellant's
case was that he contracted to inherit the Business upon the respondent's death. He offered
to prove that the Business was successful and profitable without the respondent's
involvement. Whether or not it later encountered difficult trading conditions was irrelevant,
as he did not suggest the Business would have a particular value on any particular date.
Instead, he offered to prove that the defender was obliged not to harm it.
[18]
The sheriff neither explained why the proposed term was not "obvious", nor
identified any other which might have been under consideration. The proposed term was
5
founded upon the prevention principle: it was "obvious", such that it went without saying,
that the parties would have agreed the respondent would not, without proper cause, wind
up the very business which they agreed the appellant would inherit.
[19]
To contract to bequeath a company to someone in exchange for valuable
consideration and then to wind it up without proper reason exemplified the sort of "dirty
trick" which required the implication of a term to combat it (Barton at para [29]).
[20]
The appellant's averments of loss were not bound to fail. Assessment of loss was a
jury question, to be determined with a broad axe at proof before answer (Duke of Portland v
Wood's Trs (No.2) 1926 SC 640 at pp 651-652; Watson Laidlaw & Co Ltd v Pott Cassels &
Williamson (A Firm) 1914 SC (HL) 18 at pp 29 - 30). Any loss fell to be assessed at the date of
breach - in this instance, November 2019. The respondent could challenge any later events
which might alter its extent by averment - for example his survival to the date of
proof - which the sheriff could then relevantly take into account (Bwllfa and Merthyr Dare
Steam Collieries (1891) Ltd v Pontypridd Waterworks Co [1903] AC 426; Golden Strait
Corporation v Nippon Yusen Kubishika Kaisha [2007] 2 AC 353 at [11] - [12]).
[21]
The appellant sought to recover the loss of a value of a business, not loss of a chance.
Loss of a chance of the type generally envisaged required the involvement of a third party
[22]
Finally, the sheriff erred by neither addressing nor excluding from probation the
respondent's averments which the appellant submitted in his note of basis of preliminary
plea were irrelevant and/or materially lacking in specification.
6
Respondent's submissions
[23]
Whether a term fell to be implied should be approached in the same way, whether a
contract was written or oral (Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988
at para [17].
[24]
No amount of evidence about the circumstances in which the Business was
transferred to the respondent could show the parties intended that the respondent should
not wind it up. That the appellant did not derive the outcome he hoped for was irrelevant to
the question of whether business efficacy required that the respondent should not wind up
the Business. The appellant fell into the trap of using hindsight to fashion an implied term
to deal with the situation in which he found himself. Such an approach had been expressly
disapproved (Philips Electronique Grand Public SA v British Sky Broadcasting Ltd
[1995] EMLR 472 at p 481).
[25]
Even in the context of an oral contract, the proposed implied term was neither the
only contractual solution nor one of several which the parties would have preferred to
ensure that the appellant should benefit from the value of the Business.
[26]
The reference in Barton to playing a dirty trick was another way of expressing the
Marks & Spencer business efficacy condition. Even if there were relevant averments to that
effect, it would be an example of a term necessarily implied to ensure that the contract was
effective. Even assuming it was necessary to achieve business efficacy, the appellant made
no averments from which it could be held, after proof, that the proposed implied term was
the least onerous (Barton at para [32]).
[27]
In any event, it was incapable of clear expression. The sheriff correctly noted the
appellant's averments did not answer three issues: the "value of the Business"; how and at
what date such value fell to be ascertained; and what would amount to "proper cause". In
7
addition, the sheriff was entitled to note that as the respondent was still alive, the implied
term was irrelevant.
[28]
If, as the sheriff also noted, the appellant's loss was dependent on his intention to
retire in December 2025 and then to realise the value of the Business, it amounted to loss of
the chance that the respondent would then not be alive. However, the appellant made no
relevant averments to quantify such a loss. That was not simply a jury question to be
assessed in light of all of the circumstances; a basis for it needed to be pled.
[29]
It followed that there was no requirement for the sheriff to address the defences. In
any event, the averments complained of afforded a proper context to assess whether there
was a contract at all and, if so, whether the proposed term was implied. If established after
proof, those averments would both demonstrate that any "dirty trick" was in fact played by
the appellant and add relevant context to the circumstances in which the Business was
wound up, to show that was done with "proper cause".
Decision
[30]
The thrust of the appellant's case is, firstly, that he and the respondent contracted
in 2010 for him to inherit the Business then, secondly, that the respondent later deliberately
engineered the insolvencies of Holdings and Brokers to deprive the appellant of his
contractual right. At this stage, of course, that case must be accepted as true.
[31]
The appellant's remaining averments need to be considered in light of the
respondent's response.
[32]
While he denies any contract was formed, the respondent admits that the appellant
transferred his 49.99% shareholding in Brokers to him, that Brokers became grouped with
Holdings and as a result, that the latter came to wholly own the former and that he came to
8
wholly own and control the Business. While he does not admit he executed a codicil in the
appellant's favour, he accepts that in November 2019, he wished to leave his son his interest
in Brokers on his death. He also admits that in 2019, he removed the appellant as a director
of Holdings, appointed his daughter in the appellant's place and that they then resolved
administrators be appointed to Holdings and Brokers be wound up by the court.
[33]
The respondent also provides explanations for those admissions. He avers that the
appellant transferred his shares in Brokers to him as the appellant feared personal
insolvency following the failure of a separate company in which he had invested. The
respondent explains in detail that over time, he became concerned about the appellant's
conduct as a director of Brokers, his management of it and the failure of investments he
made on its behalf. In consequence, the respondent concluded that the appellant was unable
to manage Brokers and that the parties were no longer able to agree a trading strategy for
the Business. After taking legal and insolvency practitioner advice, he then arranged for
Brokers to be wound up and, as it provided Holdings with its sole source of income, for it to
be placed in administration.
[34]
The appellant's remaining averments, which must also be accepted as true, both
address and contradict the respondent's explanations. There was no question of any
possible personal insolvency at the time his Brokers shares were transferred. His
management of Brokers was entirely successful, which it recognised by entering into a
Service Agreement with him. During the period to 2019 when he managed Brokers, it was
in rude health. It was profitable, he substantially increased both its turnover and the
amount of funds under its management, arranged for its premises to be expanded and for
related costs to be met.
9
[35]
It is against that background that parties' submissions, the agreed legal principles
and their application in this case, as summarised above, fall to be considered. In our
opinion, for the following reasons, it cannot be said at this stage that the appellant's case will
necessarily fail. Instead, it can only be resolved after evidence is heard.
[36]
We accept the appellant's primary submission that the sheriff erred by holding his
averments did not meet the second, third and fourth conditions narrated in Marks & Spencer.
[37]
As regards the second condition, the appellant's case, taken at its highest, avers the
proposed implied term was necessary to give efficacy to a business contract. After the
parties expressly agreed a mechanism by which he was to inherit the respondent's interest
in the Business, a mechanism which entailed him transferring his Brokers shares to the
respondent, the respondent deliberately and without proper cause took steps which were
designed to ensure there would no longer be any interest to inherit. In that context, as the
proposed term seeks to give effect to the parties' express contractual intention, its
implication is necessary to give efficacy to the contract.
[38]
Separately, the contract was not wholly fulfilled. While the parties may have
fulfilled their obligations under it, fulfilment of the contract was conditional on the
respondent's death, the event which the parties agreed would trigger transfer of his interest
in the Business to the appellant.
[39]
In relation to the third condition, the sheriff held that the proposed term was not so
obvious that it went without saying. Instead, he considered that after a crisis arose, the
appellant was asking the court to fashion a term to address an issue he failed to foresee at
the time the contract was formed. However, in reaching that conclusion, the sheriff ignored
the same context. We accept the appellant's submission that, if proved, the respondent's
conduct would exemplify the type of "dirty trick" described in Barton, one which obviously
10
requires the implication of a term designed to prevent it. In that context, an implied term of
the type proposed would be the only solution to the difficulty the respondent created for the
appellant.
[40]
On the fourth condition, the sheriff concluded that the proposed term was incapable
of clear expression as it raised issues over the meanings of "the value of the Business" and
"proper cause". In addition, it did not clearly express how the value of the Business would
be ascertained and at what date. On those points, we also accept the appellant's
submissions. The value of the Business is a jury question, to be determined with a broad axe
at the date of the alleged breach after evidence is heard. Its meaning is sufficiently clear.
[41]
The inclusion of "proper cause" is a necessary proviso, the meaning of which is also
clear in context. As the person who controlled the Business, the respondent had title and
interest to take certain steps in relation to it, in this instance to competently wind up or place
in administration its constituent parts before his death. The inclusion of "proper cause"
affords him an opportunity to justify any such actions, as of course he seeks to do in his
answers.
[42]
For these reasons, we shall recall the interlocutor dismissing the action and allow
parties a proof before answer. On the issue of the scope of the proof, as the reasons above
explain, the averments which both parties seek to exclude from probation largely bear upon
the disputed issues of whether the parties contracted and the circumstances which led the
respondent to wind up Brokers and appoint administrators to Holdings. In those
circumstances, we have reserved parties' preliminary pleas and allowed a proof before
answer at large.
11
[43]
We shall find the respondent liable in the expenses of the debate before the sheriff
and the expenses of the appeal. Parties were also agreed that the appeal was suitable for the
employment of senior counsel. We also agree.
