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ITS Drilling Services v. Qualitank Services [2004] ScotSC 40 (3 June 2004) SHERIFFDOM OF GRAMPIAN HIGHLAND AND ISLANDS AT ABERDEEN

A2320/03

		JUDGEMENT of SHERIFF PRINCIPAL SIR STEPHEN S T YOUNG Bt QC
		in the cause
		ITS DRILLING SERVICES LIMITED
		Pursuers and Respondents
		against
		QUALITANK SERVICES LIMITED
		Defenders and Appellants

Act: Mr I N J Artis, advocate, instructed by Iain Smith & Co, Aberdeen

Alt: Mr D H Sheldon, advocate, instructed by Ledingham Chalmers, Aberdeen

Aberdeen: 22^nd June 2004

The sheriff principal, having resumed consideration of the cause, allows the appeal and recalls the interlocutor of the sheriff dated 31^st March 2004; reserves meantime all questions of expenses and appoints parties to be heard thereon at Aberdeen Sheriff Court on Tuesday 20^th July 2004 at 9.30 am.

Note

[1] In this case the pursuers and respondents sought decree for payment against the defenders and appellants of the sums of £18,486.45 (crave 1), £19,002.69 (crave 2) and £13,254.56 (crave 3), all with interest and expenses. The defenders counterclaimed seeking decree against the pursuers for payment to them of the sum of £657,000 with interest and expenses.

[2] The action followed the normal course of an ordinary cause, and the options hearing was assigned to take place on 31 March 2004. On 18 March 2004 a motion, no. 7/1 of process, was lodged on behalf of the pursuers in terms of which they moved the court to grant summary decree in terms of the crave (sic) of the initial writ. A notice of opposition to the motion was lodged on behalf of the defenders, and parties were heard on the motion on 31 March 2004. The upshot was that the sheriff pronounced an interlocutor in the following terms:

The Sheriff, having heard parties' procurators in respect of Pursuers' motion No 7/1 of Process, Grants Summary Decree as craved; finds the Defenders liable to the Pursuer in the expenses of the cause to date; Allows an account thereof to be given in and Remits same to the Auditor of Court to tax and Report thereon; on Pursuers' motion, Discharges the Options Hearing assigned for today's date and Sists the cause.

It is this interlocutor which is the subject of the present appeal.

[3] In article 2 of the condescendence the pursuers aver that they were contracted by the defenders to provide goods and services conform to copy invoice number 36087 dated 31 July 2003. The sum due in terms of this invoice is £18,486.45, and the pursuers aver that this sum relates to the supply of goods by them to the defenders as detailed on the invoice. They then aver that the supply of goods under the invoice has no bearing on any alleged contact (sic) between the parties for the hire of tanks.

[4] The invoice no. 36087 is no. 5/1/1 of process. It is addressed to the defenders, is dated 31 July 2003 and has the narrative: "To Charge you with goods purchased on your behalf during the month of July". There is then a reference to an attached schedule which is headed "Listing of goods bought on behalf of Qualitank Services - July 2003" and which has a list of items, each of which appears to have been identified by a number only (albeit that in each case the name of the supplier is stated). The total value of these items is stated to be £13,681 and to this figure, according to the invoice itself, the pursuers have added a handling charge of £2,052.15 and VAT of £2,753.30 to bring out the total of £18,486.45.

[5] In answer 2 the defenders admit that the pursuers were contracted by them to provide goods and services conform to the invoice no. 36087 dated 31 July 2003. Otherwise they deny the pursuers' averments in article 2. They explain and aver that the pursuers are in material breach of contract, as more fully condescended upon in the statement of facts in the counterclaim. They aver that, as a result of the pursuers' breach of contract, they have suffered loss and damage as more fully condescended on in the statement of facts in the counterclaim. They then say that in the circumstances they are entitled to retain the sum sued for pending resolution of the counterclaim.

[6] In article 3 the pursuers aver that they were contracted by the defenders to provide goods and services conform to a second invoice dated 31 July 2003, this time numbered 36096. The sum due in terms of this invoice is £35,664.19. The pursuers aver that they have rendered to the defenders a credit note no. 37109 dated 31 August 2003. The total of the credit note is £16,661.50. The pursuers aver that this has been "contra'd" against the invoice no. 36096 so that the balance due thereon is £19,002.69 "as craved". The pursuers then aver that the sum due under this invoice relates to the supply of goods and services by them to the defenders as detailed on the invoice and that the supply under the invoice for which payment is sought in terms of the second crave has no bearing on any alleged contract of hire between the parties.

[7] The invoice no. 36096 is no. 5/1/2 of process. It is addressed to the defenders, is again dated 31 July 2003 and has the narrative: "To Charge you with services provided to you during the month of July in respect of your ISO tanks". There are then references to Fabrication services and Support services, in respect of each of which there is a schedule attached to the invoice. These two schedules appear to be a record of labour charges for certain employees (of whom is not clear), and the total brought out as due for Fabrication services is £15,615 and for Support services £14,737.50. These two sums are shown on the invoice itself and, together with VAT of £5,311.69, add up to the total of £35,664.19.

[8] The credit note no. 37109 is no. 5/1/4 of process. It is again addressed to the defenders, is dated 31 August 2003 and has the narrative: "To Credit you with revenue from use of your ISO tanks per the attached schedules". There are two schedules attached, one for July 2003 and the other for August 2003. They give details of a series of charges for 28 tanks between 29 July and 31 August 2003. The total sum shown as due for July 2003 is £1,100.00 and for August 2003 £13,080. These two sums total £14,180 which, with VAT of £2,481.50, brings out the total on the credit note of £16,661.50.

[9] In answer 3 the defenders admit that the pursuers were contracted by them to provide goods and services conform to the invoice no. 36096, that the pursuers have rendered to them the credit note no. 37109 and that this has been contra'd against the invoice no. 36096. Otherwise they deny the pursuers' averments and give exactly the same explanation as in answer 2 to the effect that they have themselves suffered loss and damage as a result of the pursuers' breach of contract and are entitled to retain the sum sued for pending resolution of their counterclaim.

[10] In article 4 the pursuers aver that they were contracted by the defenders to provide goods and services conform to an invoice no. 37110 dated 31 August 2003. The sum due in terms of this invoice is £13,254.56 and the pursuers aver that this relates to the supply of goods by them to the defenders as detailed on the invoice. They say too that the supply of goods under this invoice for which payment is sought in terms of the third crave has no bearing on any alleged contact (sic) between the parties for the hire of tanks.

[11] The invoice no. 37110 is no. 5/1/3 of process. It is dated 31 August 2003 and otherwise appears to be in exactly same terms as the invoice 36087 except that it refers to goods purchased on the defenders' behalf during the month of August and the sums shown as due are different. The amount brought out in the attached schedule is £9,809.11, the handling charge is £1,471.37 and the VAT £1,974.08. These three sums total £13,254.56.

[12] In answer 4 the defenders admit that the pursuers were contracted by them to provide goods and services conform to the invoice no. 37110 and otherwise they deny the pursuers' averments in article 4. Again there is the same explanation to the effect that they have themselves suffered loss and damage as a result of material breach of contract on the part of the pursuers.

[13] The defenders tabled four pleas-in-law in response to the pursuers' claims. The first two are directed to the relevancy and specification of the pursuers' averments and the third to the truth of these averments. The fourth is in the following terms:

The defenders having suffered loss and damage through the pursuers' material breach of contract and being entitled to reparation therefor, are entitled to retain any sum due to the pursuers pending resolution of the counterclaim for the defenders.

[14] In statement of fact 2 of their counterclaim the defenders aver:

On or about March 2003 the pursuers entered into a contract with the defenders for the hire of tanks. The tanks were intended to be used to remove drill cuttings from oil rigs in the North Sea. The material terms of the contract between the pursuers and the defenders were: (i) the defenders would modify twenty four tanks in order that they could be used to remove drill cuttings from oil rigs in the North Sea; (ii) the modifications would be carried out at the defenders' expense; (iii) after the tanks had been modified the pursuers would hire all twenty four tanks from the defenders for a period of three years; and (iv) the pursuers would pay hire charges to the defenders of £35 per day per tank whilst in use and £25 per day per tank whilst on stand-by. The defenders fulfilled all of their contractual obligations and modified all twenty four tanks, to the pursuers' design and specification, in order that they could be used to remove drill cuttings. The defenders incurred costs of £350,000 in modifying the tanks. Some of the modifications were carried out by the pursuers. The invoices which form the subject matter of the principal action relate to the modifications which were carried out by the pursuers. After the defenders had modified the tanks they supplied all twenty four tanks to the pursuers in accordance with the contract between the parties. The pursuers used all twenty four tanks to remove drill cuttings from an oil rig in the North Sea. Thereafter, the pursuers refused to fulfil their contractual obligation to hire all twenty four tanks for the agreed contractual period of three years.

[15] These averments are denied by the pursuers in their answer 2 to the counterclaim. They describe, in short, what was envisaged would happen but they then aver that the negotiations with regard to the hire of the tanks were not completed and no consensus was reached. Finally they aver that any period in which the tanks were on hire to the pursuers "for which payments due has been settled to the defenders" (sic).

[16] In their statement of facts 3 the defenders aver:

As a result of the pursuers' material breach of contract the defenders have suffered loss and damage. As hereinbefore condescended upon, the pursuers were contractually obliged to hire twenty four tanks from the defenders for a period of three years at a minimum rate of £25 per day per tank. The pursuers have refused to honour this obligation and therefore the defenders have sustained a loss of £657,000 which is the sum counterclaimed for. The tanks were modified to the pursuers' own designs and specifications. Accordingly, they are only suitable for use by the pursuers and cannot be offered to other potential customers.

[17] In their answer 3 the pursuers again deny these averments and explain that no contract between the parties with regard to the hire of the tanks continuously for a period of three years was reached and that the defenders had been paid all sums properly due to them with regard to any period in which the tanks were on hire to the pursuers.

[18] In response to the defenders' note of appeal, the sheriff wrote a note dated 22 April 2004 explaining why he granted the pursuers' motion for summary decree. This note speaks for itself and I need not set it out in full here.

[19] Opening the appeal, counsel for the defenders moved that the appeal should be allowed, the sheriff's interlocutor of 31 March 2004 recalled and the cause remitted to the sheriff to proceed as accords. He submitted that the sheriff had erred by failing to take into account the oral submissions which had been made to him by the defenders' agent in deciding whether or not there was a genuine defence to the pursuers' claims. In particular, the sheriff had failed to take into account the credit note, no. 5/1/4 of process, to which reference had been made by the defenders' agent. In the second place, the sheriff had erred in concluding that the pleadings disclosed two separate and unrelated contracts between the parties. When the averments in the principal action and in the counterclaim were read together, it was plain, at least on the defenders' version of events, that there had been, as it were, a composite contract which had involved the performance of various obligations on both sides, in particular in relation to the provision and modification of the tanks in question and the expenses incurred in carrying out these modifications. And thirdly, it was submitted that the sheriff had misunderstood the basis of the defence set out in the pleadings and had accordingly erred in characterising it as one of set-off when in fact it was expressly stated to be one of retention.

[20] In response, counsel for the pursuers stated that their position was that each of the invoices upon which they founded represented a separate contract between the parties which is why each of them had been made the subject of a separate article of condescendence. There had been no suggestion before the sheriff that the works referred to in the invoices had not been done, or not done properly, or that the sums of money brought out in the invoices were not due in principle. The defenders had perilled their defence on their plea of retention. On a fair reading of the sheriff's decision, it appeared that he had indeed taken into account the oral submissions made on behalf of the defenders. In the context of the defence to the principal action, the credit note was neutral and revealed nothing about the circumstances which bore on the issues of compensation, retention or administrative convenience. At the end of the day the question was whether the sheriff had been entitled to conclude that there had been at least two contracts between the parties, and not just one as maintained by the defenders. Despite the fact that there appeared in his decision to be some confusion between the separate concepts of set-off and retention, it was clear that the sheriff had been dealing with the issue of retention only and he had indeed been both entitled and correct to conclude on the basis of the parties' pleadings and the oral submissions which had been made to him that there had been at least two separate contracts between the parties.

[21] It was accepted by counsel for the defenders that the sheriff's decision to grant summary decree was one made in the exercise of his discretion so that I should only be entitled to interfere with it if, for example, he had failed to take into account some relevant consideration or had misdirected himself in law - see Macphail's Sheriff Court Practice (2^nd Edn) at paragraph 18.111. It does appear to me that the sheriff did indeed fail to take into account a relevant consideration, namely the credit note which was issued by the pursuers to the defenders. I did not understand counsel for the pursuers to dispute the statement by counsel for the defenders to the effect that their agent had referred to the credit note in the course of her submissions. But there is no mention of this in the sheriff's summary of the submissions made to him. Nor is there any explicit reference by the sheriff to the credit note in the section of his own note in which he explained his decision.

[22] The importance of the credit note I think becomes apparent when consideration is given to the question whether the sheriff also misdirected himself in law. The issue here is whether the sheriff was correct in holding himself satisfied that there was no relevant defence stated to the principal action or to any part of it to which the pursuers' motion, no 7/1 of process, related - see rule 17.2(4)(a) of the Ordinary Cause Rules. Here it is important to bear in mind the high test which the pursuers had to overcome in order to satisfy the sheriff on this point. Thus in P & M Sinclair v The Bamber Gray Partnership 1987 SC 203 Lord Prosser spoke at page 206 of "the near certainty as to an absence of a defence which would justify granting summary decree". And in Mackays Stores Limited v City Wall (Holdings) Limited 1989 SLT 835 Lord McCluskey commented at page 836: "The test I have to apply at this stage must be to ask myself if the question of law which is raised (the only question being one of law) admits of a clear and obvious answer in the pursuers' favour" (my emphasis).

[23] I get the impression from reading the sheriff's note that both the solicitors who appeared before him, and quite possibly also the sheriff himself, were confused between the two separate and distinct concepts of, on the one hand, compensation or set-off and, on the other hand, retention. Thus in the second paragraph of his note the sheriff records that: "It was accepted by both Mr Torrance for the pursuers and Ms Lane for the defenders that the general principle is that it is not competent to set off an illiquid claim against a liquid claim and both accepted that the pursuers' craves 1, 2 and 3 are liquid claims and that the defenders' 4^th plea-in-law relates to an illiquid claim". It is I think doubtful, to say the least, whether the three sums sued for by the pursuers in craves 1, 2 and 3 may be characterised as liquid claims. Besides, the issue whether or not an illiquid claim may be set off against a liquid claim is one which arises where the defence is one of compensation rather than retention (which is manifestly the basis of the defenders' fourth plea-in-law in the principal action).

[24] This confusion was persisted in by the pursuers' solicitor when he referred the sheriff to paragraph 573 of Bell's Principles, 10^th edition, (which is about compensation rather than retention), but not in the reference which followed to Gloag on Contract, 2^nd edition, at pages 624/5. And in the middle of the third paragraph of page 3 of his note the sheriff states that "set-off is not therefore available to the defenders" (which if course is not what they are seeking in terms of their fourth plea-in-law).

[25] In fairness to the sheriff it does appear from the remainder of this paragraph, and also the final paragraph on page 3 of his note, that he did in fact consider the real issue focused by the defenders' fourth plea-in-law, namely whether the contract upon which the pursuers founded in the principal action was one and the same as that upon which the defenders founded in their counterclaim. (In passing, I note that it appears to have been maintained for the pursuers before the sheriff that their three separate claims were based upon a single contract, and not three contracts as maintained by counsel for the pursuers in the appeal). The sheriff held that the contracts founded upon by the parties were not one and the same but were unrelated. In my opinion he went too far in reaching this conclusion in light of the information currently available, and in particular the averments in statement of facts 2 in the defenders' counterclaim and the contents of the invoice no. 36096 and the credit note no. 37109.

[26] The invoice no 36096 narrates that it is a charge to the defenders for services provided to them during the month of July in respect of their ISO tanks. Separate figures are then given for fabrication services and support services. So at once there is a link established between the services being charged to the defenders and their ISO tanks. Turning then to the credit note, one sees that it narrates that it is crediting the defenders with revenue from use of their ISO tanks "per the attached schedules". These schedules relate to July and August 2003 (which are the two months referred to in all three of the pursuers' invoices), and the first sixteen entries on each appear to relate to eight separate ISO tanks, for each of which two daily rates were chargeable, namely £35 and £25. These, it will be noted, are the very same rates as the defenders aver in statement of facts 2 in their counterclaim were to be charged in terms of the contract which they say the pursuers entered into with them in about March 2003. In this same statement of facts, after narrating the remaining terms of the contract, the defenders go on to refer to the modifications which were carried out on the tanks and they then aver that: "Some of the modifications were carried out by the pursuers. The invoices which form the subject matter of the principal action relate to the modifications which were carried out by the pursuers. After the defenders had modified the tanks they supplied all twenty four tanks to the pursuers in accordance with the contract between the parties. The pursuers used all twenty four tanks to remove drill cuttings from an oil rig in the North Sea". So there is here an express averment of a link between the modifications to the tanks which the defenders say were carried out by the pursuers and the invoices which form the subject matter of the principal action, and the existence of such a link appears, at least on one view, to be borne out by the terms of the invoice no. 36096 and the credit note. Moreover, the latter appears to support the defenders' averments at least to the extent that eight tanks were supplied to the pursuers and used by them to remove drill cuttings from an oil rig in the North Sea.

[27] The position is admittedly not at all clear, but it certainly appears to me that, at least in relation to the services rendered by the pursuers and charged to the defenders in terms of their invoice no. 36096, it may well turn out to be true that the contract in terms of which these services were rendered was one and the same as the contract upon which the defenders found in their counterclaim. Thus it may be that the services rendered by the pursuers for which they have charged in their invoice no. 36096 were carried out in pursuance of a variation of the contract upon which the defenders found. The situation is not made any clearer by the uncertainty found in the pursuers' own pleadings in the principal action (and highlighted in the difference of approach between the pursuers' solicitor before the sheriff and counsel for the pursuers in the appeal) as to whether the pursuers' three claims are based upon a single contract or three separate contracts. In all the circumstances I am very far from being persuaded that there is at this stage, to borrow the language of Lord Prosser in P & M Sinclair, the near certainty as to the absence of a defence which would justify granting summary decree against the defenders, at least in terms of crave 2.

[28] On the assumption that each of the three invoices depended upon a separate contract between the parties, it is less easy to see how there could have been a link between the invoices nos. 36087 and 37110 on the one hand and, on the other, the contract upon which the defenders found. But it was not suggested that it would be appropriate to grant summary decree in terms of craves 1 and 3 only of the initial writ.

[29] In addition to the authorities which I have already mentioned, I was referred to Armour & Melvin Limited v Mitchell 1934 SC 94, Frimokar (UK) Limited v Mobile Technical Plant (International) Limited 1990 SLT 180, Bank of East Asia Limited v Scottish Enterprise 1997 SLT 1213, Hoult v Turpie 2003 SCLR 577, Matthews v Scottish Legal Aid Board 1995 SCLR 184, Robinson v Thomson 1987 SLT 120 and Walkers on Evidence, para. 3.11.1.

[30] Counsel for the defenders submitted that the expenses of the appeal should follow success. But counsel for the pursuers asked me to reserve the expenses of the appeal and in the circumstances I have thought it appropriate to do so.