Scottish Sheriff Court Decisions

SHERIFFDOM OF LOTHIAN AND BORDERS AT EDINBURGH

2015SCEDIN21

OPINION
of

Sheriff N.A. Ross

in causa

ROBIN COLLINS

                                                                                                            Pursuer
                                                                     against

HOTEL IN THE SKYE LIMITED
                                                                                            Defender

Act: Gratwick

Alt: Duff

Edinburgh       March 2015: The Sheriff, having resumed consideration of the cause, repels the pursuer’s pleas-in-law and dismisses the action; fixes a case management conference on a date to be afterwards fixed for submissions on expenses.

Note:-

• [1]This is a claim for damages for a contractual sum payable to a third party, following the purchase and sale of a business. The case called for debate at the instance of the pursuer, seeking decree de plano, and of the defender, seeking dismissal. The parties are substantially in agreement on the underlying facts, and the argument turns on the construction of the parties’ contract.

  Background

• [2]In 2013 the pursuer sold his business, the Flodigarry Country House Hotel, to the defender. The missives comprised two letters, both dated 26 June 2013. The sale was of two heritable properties, together with the fixed and movable assets, and the business of the hotel, including the goodwill. As part of the bargain, the parties undertook obligations in relation to a part of the hotel operations defined as the Business Contracts.
• [3]The Business Contracts are defined in clause 1.6 of the missives as “Those contracts entered into by or on behalf of the Seller all as described in Part 3 and Part 6” of the missives. This definition includes a contract between the pursuer and Peninsula Business Services Limited (“Peninsula”) dated 1 and 6 March 2011 (the “Peninsula contract”), which was a contract for the provision of services including employment advice and health and safety advice. The present dispute concerns the failure to transfer the Peninsula contract.
• [4]Clause 8.1 of the missives stated:

  “With effect from the Completion Date, the Seller will (a) procure the transfer or novation of such of the Business Contracts (where the contracts are capable of transfer or novation) as are listed at numbers 1 to 4 inclusive in Part 2 of the Schedule and (b) the Business Contracts listed in part 6 of the Schedule and in all cases the Buyer shall accept all responsibility for and obligations under such contracts with effect from the Completion Date, all at the Buyer’s own cost.”

   

• [5]The Peninsula contract ran from 6 March 2011 for an initial period of five years, and the total fee was £14,400 plus VAT, payable monthly throughout that period. The Completion Date was 26 June 2013.At the Completion Date, the sum of £6,400 remained to be paid, as it became due, to Peninsula.
• [6]What happened subsequently is not in dispute. The pursuer, by an agent, wrote to Peninsula on the day following the Completion Date, informing them and requesting them to “transfer” the Peninsula contract to the defender. In about August 2013, a representative of Peninsula arrived at the hotel and spoke to a representative of the defender, informing her that Peninsula refused to accept the defender in place of the pursuer under the Peninsula contract, but that Peninsula would be prepared to offer a new contract to the defender for a period of five years, at a total fee of £30,000. That sum was more than double the original Peninsula contract fee. The defender refused that offer. It did not inform the pursuer of this decision. Neither the pursuer nor the defender made any continued payment of the monthly instalments of the Peninsula contract after the Completion Date. This amounted to a breach of the Peninsula contract and, under its terms, Peninsula became entitled to payment of the whole balance from the pursuer, for which they raised an action. The parties do not dispute that the pursuer was legally bound under the Peninsula contract to make payment, and that the sum presently craved represented a reasonable figure at which the Peninsula litigation was compromised, and was duly paid to Peninsula. The pursuer now seeks to recover that compromise figure from the defender. The pursuer claims that, under clause 8.1 the defender was obliged to relieve it of this liability. The defender claims that the pursuer cannot recover because the pursuer failed to “procure the transfer” of the Peninsula contract.
• [7]The legal principles were not in dispute, and are to be found in a well-known series of authorities, from Investors Compensation Scheme Limited v West Bromwich Building Society [1998] WLR 896, MRS Distribution Limited v DS Smith (UK) Limited 2004 SLT 631, Rainy Sky SA and others v Kookmin Bank [2011] UKSC 50, to Grove Investments Limited v Cape Building Products Limited [2014] CSIH 43 and Hill of Rubislaw (Q Seven) Limited v Rubislaw Quarry Aberdeen Limited [2014] CSIH 105. These cases were mentioned by the parties but neither felt it necessary to discuss them in any detail. The task at hand can be summarised (Hill of Rubislaw, above, at paragraph 29) as “[a] contractual provision must be construed according to its commercial purpose in the agreement of which it forms part and in the overall commercial context in which the agreement operates.”

  The parties’ submissions

• [8]The relevant clause is 8.1. It provides:-

  “With effect from the Completion Date, the Seller will (a) procure the transfer or novation of such of the Business Contracts (where the contracts are capable of transfer or novation) as are listed at numbers 1 to 4 inclusive in Part 2 of the Schedule and (b) the Business Contracts listed in part 6 of the Schedule and in all cases the Buyer shall accept all responsibility for and obligations under such contracts with effect from the Completion Date, all at the Buyer’s own cost.”

   

• [9]The pursuer’s agent submitted that clause 8.1 was in two parts. The first part ended “...listed in part 6 of the Schedule”, and dealt with the mechanism of transfer. The second part, commencing “…and in all cases…” applied irrespective of whether a successful transfer had taken place, and served to relieve the pursuer of any continuing liability under the Business Contracts after the Completion Date, whatever happened.
• [10]He submitted that on a proper interpretation, clause 8.1 meant that the pursuer had discharged its obligations under the first part. The pursuer had done what it could to procure the transfer, but inevitably a novation or assignation required the consent of Peninsula, which the pursuer could not guarantee. He submitted that it was enough to fulfil its obligations here that the pursuer had intimated the proposed transfer to Peninsula. This was the only reasonable interpretation, because after the sale the pursuer could not accept, or enjoy, any services under the Peninsula contract. The words “are capable” referred to consent of Peninsula. The liability for which the pursuer seeks relief arose as a result of the failure of the defender to reach terms with Peninsula.
• [11]Irrespective of this, the second part of clause 8.1 showed, clearly and unambiguously, that the pursuer was to be relieved in all cases of any continuing liability, and irrespective of whether they had been transferred successfully. If this were not the effect, this part would otherwise be redundant. It was not reasonable for the clause to be effective only if the defender agreed to the terms with Peninsula.
• [12]By contrast, the defender’s agent submitted that clause 8.1 was to be read as a whole. The effect of clause 8.1 was, he submitted, to place an obligation upon the pursuer to “procure” the transfer, which had not occurred, thereby preventing any recovery from the defender. The formula “such contracts” referred only to those transferred contracts, not all the Business Contracts. There was no stand-alone indemnity in this clause, both because of the purpose of the clause and because there was no drafting suggesting such an indemnity was anticipated. The Peninsula contract was “capable” of being transferred, because such capability did not depend on actual consent: rather, it referred to the content of the contracts. It was not likely that the parties had agreed that the defender was obliged to accept the Peninsula contract under any terms.
• [13]The parties agreed that clause 8.1 had the further complication of containing errors. The apparent errors are at least three. The first is that there are no such contracts “listed at numbers 1 to 4 inclusive in Part 2 of the Schedule” – they are in fact in Part 3 of the Schedule. The second is that there are no “(b) the Business Contracts listed in Part 6 of the Schedule” – there are none listed there at all. The third is that “Business Contracts” is already a defined term (clause 1.6) and therefore references to “such Business Contacts”, or a fresh attempt to define them is, at best confusing, at worst invites a conflict of obligations. Further, “transfer” is not a legal term. It is this kind of late-night, red-eye drafting which is frequently found to obstruct, sometimes to the point of confounding, the efforts of courts in attempting to bridge the gap between the principles to be applied to inferring the parties’ intentions and the perplexing reality of how the parties have expressed themselves.

  Discussion

• [14]I have mentioned the drafting perplexities for a reason. At the best of times, it is not straightforward for a court, at second hand, to establish the commercial purpose, within a commercial context, of the parties, where the parties have not explained themselves with precision. The greater the laxity, the greater the number of possible outcomes. In the present case, the parties proffered equal but opposite explanations of their agreement. For example, it could be said that no seller would want to remain liable under a third-party contract for which he had no further use. It could equally be said that no buyer would want to be bound by a third-party contract unless it was on terms reasonably acceptable to him. It could be said that a seller could not possibly guarantee that a third-party would consent to “transfer”. It could equally be said that no buyer would agree to assume the risk of liability under a third-party contract which he could not enforce. In short, while the legal principles are a matter of agreement, in the present context there is no clear overall purpose to the present missives, other than to regulate, to some effect or other, the overall transfer of the business. In the context of a debate, I can be clear as to the commercial purpose of the missives (to regulate, to some effect or other, the transfer of a business and assets as a going concern) but I cannot tell what the overall commercial context might have been. There may be perfectly good financial or other reasons, such as unequal bargaining power, or a forced sale, or a bidding war, to explain unusual or apparently unfair aspects of the bargain. In these circumstances, there is a real danger that the court, in attempting to make its own selection between the parties’ submissions, strays from the actual commercial context (whatever that might have been) to imposing a bargain upon the parties that bears no resemblance to the actual commercial context. It is not for a court to relieve either party of the consequences of a poor bargain. For that reason, I have been all but unable to accept the parties’ assertions that “the parties cannot have intended…” or “no business person would intend…”.
• [15]Consequently, I am constrained, in my view, to considering the commercial purpose, and the commercial context, solely from the drafting itself. For completeness, I note that the parties did draft a joint minute of agreed facts, but I record that none of these facts really strays beyond the bare bones of the background which I have set out above, and I have not found it possible to infer from these facts any particular commercial context. The infelicities of drafting introduce an element of uncertainty in attempting to identify, in clause 8.1, a clear line of logic. This, however, is an exercise which a court simply has to get on with.
• [16]Applying the principles of construction, discussed above, to the drafting of clause 8.1, and in the context of the requirement to construe the document as a whole, I have been able to come to a clear view as to the effect of clause 8.1.
• [17]Starting with the contract as a whole, there are a number of indicators as to the fundamental commercial purposes, as follows:-
• [18]The contract identifies that there is a class of Business Contracts which will not transfer (namely that class of Business Contracts which are not “capable of transfer or novation”), and for which the seller will remain liable. Clause 3.4 provides: “Unless expressly provided in the Missives, the Seller shall sell and the Buyer…shall purchase…3.4.5 the benefit of the Business Contracts”. This is one indication that there is a distinction to be drawn between “the Business Contracts” and “the benefit of the Business Contracts” – a distinction without purpose if the buyer were simply to step in to the shoes of the purchaser. While this may be no more than a stock phrase, placed as it is in the sale and purchase clause, it certainly gives no indication that there is any indemnity involved for the remainder: quite the reverse.
• [19]Clause 3.5 makes mention of matters not transferred, but sheds no light on the content of clause 8.1.
• [20]Clause 8.2 states: “All payments under the Business Contracts being transferred to the Buyer shall be apportioned…”. It does not answer how the mechanism of clause 8.1 works, but it does introduce an oddity – why are apportionments only appropriate to some (transferred) Business Contracts, and not to others (those not transferred)? On the pursuer’s argument, the defender will assume liability, irrespective of whether the Business Contracts are transferred or not. Why would the parties provide for apportionments in relation to transferred contracts (by apportioning payments) but not in relation to non-transferred contracts? It would mean that, if the seller has overpaid Peninsula, it cannot recoup any such payments and the buyer gains a benefit. It is consistent with there being simply no class of “non-transferred Business Contracts” for which the buyer becomes liable. It would, however, make sense if the pursuer remained liable for those Business Contracts which were not transferred, because the defender would have no interest in them.
• [21]On the other hand, the contract has some features which indicate that there may be no continuing liability on the seller. For example, the nature of Clause 10.1 does tend to indicate a clean break was the overall purpose of the bargain, albeit with the qualification “save where the Missives otherwise provide.” In addition, Clause 21.2.2 obliges the seller to deliver to the buyer “The Business Contracts…”, without qualification. This, on the face of it, is not consistent with the seller retaining liability under some or all of these.
• [22]Overall, having regard to the overall contract, none of these indications is strong enough, by itself and against a background of ambiguous drafting, to give a clear direction to the contract.
• [23]It will, accordingly, be necessary to find the purpose of clause 8.1 on the basis of a construction of the clause itself.
• [24]Clause 8.1 deals with transfer of Business Contracts, a defined term referring to the contracts listed in part 3 and 6 of schedule. The definition does not assist the present dispute. To reiterate, clause 8.1 provides:

  “With effect from the Completion Date, the Seller will (a) procure the transfer or novation of such of the Business Contracts (where the contracts are capable of transfer or novation) as are listed at numbers 1 to 4 inclusive in Part 2 of the Schedule and (b) the Business Contracts listed in part 6 of the Schedule and in all cases the Buyer shall accept all responsibility for and obligations under such contracts with effect from the Completion Date, all at the Buyer’s own cost.”

   

• [25]The first question is what is intended by “procure”. The second question, whatever that answer, is what qualification is intended by “where the contracts are capable of transfer or novation”. The third question is what “in all cases” is intended to cover.
• [26]As to the first question, the parties did not refer to any authorities, and therefore I will rely on the dictionary definition. “Procure” tends to be an absolute obligation (“procure: to bring about by care or pains; to cause, effect, produce; to prevail upon, induce, persuade” – Shorter Oxford English Dictionary, third edition). The reference to “prevail upon, induce, persuade”subsumes the possibility that an external party is involved and requires to be won over before procurement is complete. The word “procure”, in this context, where third parties are unavoidably involved, is an absolute obligation to persuade and obtain, in my view, and is not inherently qualified in any relevant way. As I have discussed, there is nothing else in the missives which might tend to shape the otherwise plain meaning of the word “procure”.
• [27]This does not provide a complete answer, however, because clause 8.1 has a built-in qualification, namely “(where such contracts are capable of transfer or novation)”, which is the second question – what does this import? It either refers to the underlying quality of the Business Contract, or to the subsequent actings of the parties (including Peninsula) in giving or withholding consent.
• [28]Again, the starting point is the plain meaning of the word “capable” (“capable: open to; susceptible; having capacity, power or fitness for; having general capacity” – op cit). The word therefore appears to refer to an innate quality, not how it is dealt with. An assignable contract, to which consent to assignation is refused, must therefore, still be “capable” of being assigned, for example upon a subsequent application or following a change of heart. Again, the tenor of the contract does not detract from the plain meaning of the word “capable”.
• [29]To summarise so far, it follows that (i) the seller has an obligation to persuade the third party about any transfer; and (ii) is only relieved of this obligation where the Business Contract in question has, as an inherent quality, an inability to be transferred (such as, presumably, an element of delectus personae, or a contractual prohibition on transfer, such as is frequently found in leases). Does the Peninsula contract have any such inherent prohibition? The answer, on the averments, is no.
• [30]Accordingly, subject to anything else clause 8.1 says, the plain meaning is that the pursuer undertook an obligation to transfer the Peninsula contract to the defender, if necessary by persuading Peninsula.
• [31]The remainder of clause 8.1 is, according to the pursuer’s position, a separate and free-standing indemnity. If true, that would mean that transfer was irrelevant, and the defender would be assuming liability for third party contracts irrespective of whether it was a party to them.
• [32]In my view, that is not correct, for three reasons. The first is the nature of the wording relating to the obligation. Where indemnity is truly intended, one would expect the language of indemnity to be used. The purpose would be to make sure that the seller remained free from liability. However, the wording does not mention indemnity. It does not deal at all with the seller. It deals with the third party. The assumption of responsibility and obligations is not the same as making sure that the original party is relieved of responsibility and obligations. For example, it does not rule out the possibility of joint liability, and does not alter the fact that the seller remains the principal obligant under the third-party contract. The words “accept all responsibility” can only refer to where the buyer is novated, or is an assignee. It can’t refer to an indemnity, because the seller would remain as the principal obligant (albeit with a right of relief). The buyer would not be “accepting all responsiblilty”, but rather indemnifying the seller, and performing the seller’s obligations. The wording only makes sense, at least to a lawyer, if the contract has actually been transferred.
• [33]The second reason is the nature of the wording relating to the subjects, namely the class of contracts. It would not be difficult to create an indemnity referring to the whole of the Business Contracts (i.e. whether transferred or not) simply by saying so. To achieve this, the second part of the clause would read: “…and in all cases the Buyer shall accept… under the Business Contracts…”. It does not, but rather refers to “such contracts”. At best, the word “such” introduces ambiguity; at worst it changes the class of contracts. What does “such contracts” mean? It must refer back to clause 8.1, which speaks of the seller procuring the transfer or novation of such of the Business contracts as are capable of transfer. In my view, “such contracts” refers to the “transferred contracts” only, and not to the Business Contracts as a whole. As discussed above, the Peninsula contract was capable of transfer, but was not transferred. On this reading, the defender is obliged to assume liability only where the contract has been transferred.
• [34]The third reason is that, in logic, the proposed mechanism (of indemnity) is all but unworkable. This is where a presumption against uncommercial results assists the defender. It is not possible for the buyer unilaterally to insist, in a question with Peninsula, that the buyer shall accept all responsibility for and obligations under a contract to which it is not a party. Peninsula can ignore the buyer entirely, if it so wishes. The pursuer’s construction would have the defender undertake an obligation that was impossible for the defender to enforce, while (see above) failing to protect the pursuer from direct enforcement or claims for damages from Peninsula. On the other hand, if only transferred contracts are referred to, it makes sense that the defender is made to assume responsibility. Another logical lacuna is that the buyer would be accepting unrestricted liability where Peninsula altered the contract terms (as in fact happened, doubling the contract price). Parties did not dispute that this would amount to a novation covered by clause 8.1. Placing one’s financial obligations, without recourse or appeal, in the hands of an unknown third party is not, generally speaking, a result intended by any commercial party. By contrast, placing the commercial risk of failure to transfer upon the seller is a known risk, with a known financial limit, and as such is much more likely to be an acceptable risk in a commercial setting.
• [35]In summary, the meaning of clause 8.1 was that the pursuer undertook an obligation to ensure, not merely to attempt or facilitate, the transfer of the Business Contracts. It failed to do so. I do not accept the pursuer’s submission that such a finding renders the second part of the clause redundant. The clause has counterpart obligations. The buyer is obliged to assume the obligations and liabilities under the Business Contracts, but only to the extent that the seller has managed to have these transferred. The pursuer is in breach (albeit unintentional) of its absolute obligation to procure transfer of the Peninsula contract. The defender’s potential obligation under the Peninsula contract is therefore not triggered. The pursuer’s liability is, however, capped at the original Peninsula contract price.
• [36]It follows that the pursuer remained liable under the Peninsula contract and, when Peninsula rightfully sought to enforce its terms, were obliged to make payment without right of relief from the defender. It follows that the action fails as irrelevant.

  Disposal

• [37]I will dismiss the action. I would normally do so by sustaining the defender’s preliminary plea and repelling that of the pursuer. The pursuer has no preliminary plea. The defender has no preliminary plea. The parties submitted at the bar that if the pursuer were successful I should grant decree, and if the defender were successful I should dismiss the action. The foregoing interlocutor is therefore in slightly unusual terms.
• [38]The parties did not address expenses. I have provided for a case management conference. The parties, if they can agree expenses, are able to apply by email for the diet to be discharged, failing which the clerks will assign a date.