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ZLX Ltd against James Mackie Wholsesale Ltd (Sheriff Court Civil) [2024] SCGLA 38 (23 August 2024)
URL: http://www.bailii.org/scot/cases/ScotSC/2024/2024scgla38.html
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[2024] SCGLA 38
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SHERIFFDOM OF GLASGOW AND STRATHKELVIN AT GLASGOW
[2024] SC GLA 38
GLW-CA82-23
JUDGMENT OF SHERIFF S REID
in the cause
ZLX LTD
Pursuer
against
JAMES MACKIE WHOLESALE LTD
Defender
GLASGOW, 23 AUGUST 2024
The sheriff, having resumed consideration of the cause,
MAKES the following FINDINGS-IN-FACT:
(1)
The pursuer provides tax advisory services to businesses, advising them on their
eligibility for research and development ("R&D") tax relief from His Majesty's
Revenue & Customs ("HMRC"), and assisting clients in the preparation and
submission of such claims to HMRC.
(2)
The defender is a fruit and vegetable wholesaler.
(3)
In August 2021, the pursuer's chief executive officer, Stephen McCallion, contacted
the defender's director, Robert Paterson, to arrange a time to meet in order to offer
the pursuer's services to the defender.
(4)
The parties had had no prior dealings or contact.
(5)
The pursuer had obtained the defender's contact details from a third party,
Tommy McConnell.
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(6)
Mr McConnell acts as an "introducer" for the pursuer, whereby he receives payment
from the pursuer to introduce new clients to the pursuer.
(7)
On 27 August 2021, the pursuer's Mr McCallion met with the defender's Mr Paterson
for about one hour at the defender's premises.
(8)
At the meeting, Mr McCallion advised Mr Paterson of the services provided by the
pursuer; Mr McCallion advised Mr Paterson that the defender was eligible to make a
claim to HMRC for R&D tax relief in relation to the installation by the defender of a
new refrigeration unit in the defender's premises; and Mr McCallion sought to
persuade Mr Paterson to engage the pursuer to prepare and submit a claim (on
behalf of the defender) to HMRC for R&D tax relief in relation to the installation of
the refrigeration unit.
(9)
At the meeting, Mr Paterson informed Mr McCallion that the unit had merely been
purchased by the defender "off the shelf" from a specialist contractor (called ISD
Solutions), from whom the defender had in the past purchased other refrigeration
units; that the unit was of a type commonly used by other wholesalers of fruit and
vegetables; and that the defender had spent no more than about 15 minutes in
selecting, purchasing and arranging the installation of the refrigeration unit.
(10)
Despite having been provided with the foregoing information, Mr McCallion insisted
that the defender was eligible to apply for R&D tax relief in relation to the
installation of the refrigeration unit; Mr McCallion offered to prepare and submit to
HMRC, on behalf of the defender, an R&D tax credit claim (in relation to the
installation of the refrigeration unit) on a "no recovery, no fee" basis, whereby the
pursuer would only charge a fee to the defender if the R&D tax relief claim was
successful, the fee being 30% of the value of any R&D credit so obtained for the
3
defender; and, on that basis, the defender's Mr Paterson accepted the pursuer's
offer, and appointed the pursuer to so act.
(11)
The pursuer's pro forma Terms and Conditions (now comprising the document
forming item 5/1/5/1 5/1/5/4 of process), specifically clauses 3, 10 & 11 thereof, were
not disclosed, or discussed, or referred to at the parties' meeting on 27 August 2021.
(12)
No further meeting or discussion took place thereafter between Mr McCallion and
Mr Paterson (or any of the defender's employees).
(13)
The pursuer's documents entitled "Storyboard" (forming item 5/1/1-19 of process)
and "Innovation Report" (forming item 5/1/9/1-10) were never shown to or discussed
with Mr Paterson or any of the defender's employees prior to commencement of
these proceedings.
(14)
In November 2021 the pursuer sent an email to Mr Paterson bearing to attach a
hyperlink to a document called a "Client Pack"; the hyperlink on the email was
inoperative; Mr Paterson was unable to access the Client Pack; and so, by email
dated 24 November 2021 (of which item 6/1/1 of process is a true copy), the
defender's Mr Paterson emailed the pursuer advising that the Client Pack was
inaccessible.
(15)
On 2 December 2021, the pursuer sent a further email to the defender's Mr Paterson
bearing to attach a "Client Pack" comprising the following three documents: (i) a
Client Authorisation Form; (ii) an HMRC Form entitled "Authorising your Agent";
and (iii) a "Project Letter" dated 25 November 2021 from the pursuer to the defender;
and, in the email, the pursuer requested that the defender complete, electronically
sign and authenticate, and return the documents to the pursuer via the "DocuSign"
facility.
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(16)
The Project Letter bears to attach an "appendix" which purportedly sets out the
pursuer's "general terms and conditions", but in fact no such appendix was attached
to the Project Letter.
(17)
The Project Letter also bears to attach (on the second page thereof) a hyperlink to a
document described as the pursuer's "Terms & Conditions", but again the hyperlink
was not attached; the defender was unable to access the pursuer's "Terms &
Conditions" through the purported hyperlink; and, as a result, the pursuer's said
"Terms & Conditions" were never seen by, or notified to, the defender.
(18)
On 2 December 2021, having considered the three documents within the Client Pack
(namely, the Client Authorisation Form, the HMRC Form and the Project Letter), the
defender's Mr Paterson appended his digital signature to each the three documents
and returned the signed versions to the pursuer via the DocuSign facility, together
with a copy of his driving licence (as requested in the Client Authorisation Form).
(19)
Item 6/2 of process is a true copy of the pursuer's email dated 2 December 2021;
items 6/2/4, 6/2/5-6 and 6/2/7-8 of process are true copies of the Client Authorisation
Form, the HMRC Form and the Project Letter, respectively, as digitally signed by
Mr Paterson on behalf of the defender; and item 6/2/9 of process is a true copy of
Mr Paterson's driving licence as authenticated as returned to the pursuer via the
DocuSign facility.
(20)
The facility to allow digital signatures to be appended to the documents was
provided by means of a software device known as "DocuSign", which records the
digital signing or authentication of documentation; the "DocuSign" device
electronically records the authentication of such documents; it produces a separate
document referred to as a "Certificate of Completion" to identify the documents so
5
authenticated, together with the date and time of authentication; and it reproduces
the documents so authenticated, with each page thereof bearing the same unique
DocuSign identification number.
(21)
Item 5/1/6/1 is a true copy of a DocuSign Certificate of Completion recording inter alia
the digital authentication by Mr Paterson of the Client Authorisation Form, the
HMRC "Authorising your Agent" Form, and the Project Letter dated 25 November
2021, together with a copy of Mr Paterson's driving licence, bearing to comprise 6
pages in total, all pertaining to a unique DocuSign identification number (namely,
ID 9B2997F7-F1D1-48A1-8BF6-9086E1E8B118); and items 6/2/4, 6/2/5-6 and 6/2/7-8 of
process are true copies of the foregoing documents (also comprising 6 pages in total),
each page of which bears the same unique DocuSign identification number.
(22)
None of the documents so signed or authenticated by the defender's Mr Paterson
bears to comprise the pursuer's "general terms and conditions" as referred to in the
Project Letter.
(23)
None of the documents so authenticated by the defender's Mr Paterson bears to
include the pursuer's pro forma Terms and Conditions (being the four page document
now forming item 5/1/5/15/1/5/4 of process).
(24)
The pursuer's pro forma Terms and Conditions (item 5/1/5/15/1/5/4 of process),
specifically, clauses 3.2, 10.2 & 11 thereof, did not form part of the Client Pack sent by
the pursuer to the defender by email dated 2 December 2021; they were not included
among the documents viewed or digitally signed by Mr Paterson on behalf of the
defender on 2 December 2021; and neither the existence nor import of clauses 3.2,
10.2 or 11 of the pursuer's pro forma Terms and Conditions was narrated or disclosed
6
in the body of the Project Letter, or otherwise within any of the documents within the
Client Pack.
(25)
In the event, the defender was induced to enter into the agreement to appoint the
pursuer by virtue of an express representation by Mr McCallion to Mr Paterson at
the meeting on 27 August 2021 that the defender was eligible for R&D tax relief in
relation to the installation of the refrigeration unit ("the First Representation"); the
First Representation was erroneous; in fact, the defender was not eligible for R&D
tax relief in relation to the installation of the refrigeration unit; and, having regard to
the absence of factual foundation or financial or accounting vouching therefor, there
was no reasonable basis on which the pursuer's Mr McCallion could reasonably have
made such a representation.
(26)
Separatim the defender was induced to enter into the agreement to appoint the
pursuer by virtue of a further express representation by the pursuer's Mr McCallion
that the engagement was on a "no recovery, no fee" basis only, whereby the only
financial liability undertaken by the pursuer to the defender would be the payment
of a fee equating to 30% of any R&D tax relief successfully obtained in relation to the
installation of the refrigeration unit ("the Second Representation").
(27)
In contrast, clauses 3.2 & 10.2 of the pursuer's pro forma Terms and Conditions
purport to define the duration of the pursuer's appointment as being for a minimum
period of 5 years, terminable by the defender only upon 12 months' written notice
given after expiry of the first year; and (ii) clause 11 purports to impose liability
upon the defender for significant cancellation fees, calculable by reference either to
hourly rates or as a fixed sum of £8,000 plus VAT, and payable upon the occurrence
of various events, including early termination within the minimum 5 year term, or
7
the defender choosing not to proceed with an R&D claim after being told by the
pursuer that it was eligible to do so.
(28)
If, prior to conclusion of the parties' oral agreement on 27 August 2021 (et separatim
prior to the defender signing and returning to the pursuer the three documents
within the Client Pack on 2 December 2021), the defender's Mr Paterson had been
made aware of the existence, import and content of clauses 3.2, 10.2 & 11 of the
pursuer's pro forma Terms and Conditions, the defender would not have agreed to
the pursuer's appointment, entered into an agreement with the pursuer, or signed
any of the three documents within the Client Pack.
(29)
If, prior to conclusion of the parties' oral agreement on 27 August 2021 (et separatim
prior to the defender signing and returning to the pursuer the three documents
within the Client Pack on 2 December 2021), the defender's Mr Paterson had been
made aware that the First Representation was erroneous, the defender would not
have agreed to the pursuer's appointment, entered into an agreement with the
pursuer, or signed any of the three documents within the Client Pack.
(30)
Later in December 2021, Mr Paterson discussed the pursuer's appointment (and the
proposed R&D tax relief claim) with the defender's accountant, Craig Butler of Milne
Craig, Chartered Accountants, Glasgow.
(31)
From that discussion, Mr Paterson became aware of the following facts: (i) the
defender was categorically not eligible for any R&D tax relief in relation to the
installation of the refrigeration unit at its premises; (ii) such a claim could have no
proper accounting legitimacy because, incontrovertibly, the refrigeration unit had
merely been purchased by the defender "off the shelf" from a third party specialist
contractor; the unit itself was not innovative in any sense; it was of a type
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commonly supplied to other wholesalers of fresh produce; its acquisition and
installation involved no research or development activity by any of the defender's
employees, and incurred negligible time and labour by the defender; (iii) the
veracity of such a claim was likely to be challenged by HMRC; and (iv) the
submission of such a claim was likely to be substantially prejudicial to the defender
as it was likely to result in the defender incurring a liability to repay to HMRC any
wrongfully-obtained R&D tax credit or payment, together with a statutory penalty
and interest thereon, as well as causing reputational damage to the defender.
(32)
Upon attaining this knowledge, the defender's Mr Paterson decided not to proceed
with the proposed R&D tax relief claim, and he instructed its accountants not to
release to the pursuer any information about the defender in relation thereto.
(33)
In the event, between December 2021 and June 2022, no further communication was
received from the pursuer by the defender or its accountants about the proposed
R&D tax relief claim.
(34)
By email dated 15 June 2022 (item 5/1/12/1), the pursuer attempted to send to the
defender a letter dated 15 June 2022 entitled "Polite Notice" (item 5/1/11/7 of
process); but, in the event, the email failed to transmit to the defender.
(35)
By a further email dated 17 June 2022 (item 5/1/12/1), the pursuer sent to the
defender the letter dated 15 June 2022 entitled "Polite Notice" (item 5/1/11/7 of
process); the letter attached a copy of the pursuer's pro forma Terms and Conditions;
the letter requested financial information from the defender with a view to seeking to
vouch the proposed R&D tax credit claim; and the letter and its attachment were
received by the defender on 17 June 2022.
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(36)
By email dated 17 June 2022 (item 5/1/13/1 of process), the defender notified the
pursuer that the defender did not wish to proceed with the proposed R&D tax credit
claim, and requested that the pursuer delete the defender's details from its records.
(37)
By letter dated 13 July 2022 (item 5/1/14/2 of process), the pursuer advised the
defender of its "potential breach of contract" by reason of its failure to engage with
the pursuer.
(38)
By letter dated 30 August 2022 (item 5/11/15/3 of process), the pursuer notified the
defender of its decision to terminate the parties' contract, purportedly on the basis of
the defender's breach thereof.
(39)
The pursuer's letter dated 30 August 2022 narrated the full content and import of
clause 11.2 of the pursuer's pro forma Terms and Conditions; and the letter attached
an invoice dated 30 August 2022 demanding payment from the defender of a
"cancellation fee" of £8,000 plus VAT, being the sum now craved, purportedly
pursuant to clause 11.2.
(40)
The existence and import of clause 11 of the pursuer's pro forma Terms and
Conditions was not brought to the defender's attention until 30 August 2022.
MAKES the following FINDINGS-IN-FACT AND IN-LAW:
(1)
On 27 August 2021, the parties concluded an oral agreement for the appointment of
the pursuer to prepare, and submit to HMRC, on behalf of the defender, a claim for
R&D tax relief in respect of the installation of the refrigeration unit.
(2)
In terms of the parties' oral agreement, the pursuer agreed to act on a "no recovery,
no fee" basis, whereby the only monetary obligation undertaken by the pursuer to
10
the defender would be the payment of a fee representing 30% of any R&D tax relief
successfully obtained for the defender.
(3)
The pursuer has failed to prove that its pro forma Terms and Conditions (forming
item 5/1/5/1 5/1/5/4 of process), specifically clauses 3.2, 10.2 & 11 thereof, were in
existence as at 25 November 2021 or 2 December 2021; and, if they were, that they
were the same as the "general terms and conditions" referred to in the Project Letter.
(4)
The parties' oral agreement, concluded on 27 August 2021, did not refer to, or
otherwise incorporate, the pursuer's pro forma Terms and Conditions (including
clauses 3.2, 10.2 or 11 thereof).
(5)
The parties' written agreement, concluded on 2 December 2021, did not incorporate
clauses 3.2, 10.2 or 11 of the pursuer's pro forma Terms and Conditions.
(6)
Clauses 3.2, 10.2 & 11 of the pursuer's pro forma Terms and Conditions are onerous
and unusual in nature.
(7)
Due to the onerous and unusual nature of clauses 3.2, 10.2 & 11 of the pursuer's pro
forma Terms and Conditions, it was the duty of the pursuer to take sufficient steps
fairly and reasonably to bring to the defender's attention the existence and import of
those particular terms, prior to conclusion of the contract.
(8)
In the event, the pursuer failed to discharge the duty upon it to take sufficient steps
fairly and reasonably to bring to the defender's attention the existence and import of
clauses 3.2, 10.2 & 11, prior to conclusion of the parties' agreement.
(9)
As a result, clauses 3.2, 10.2 & 11 of the pursuer's pro forma Terms and Conditions
were not incorporated into the parties' oral or written agreement.
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(10)
Absent incorporation of clauses 3.2, 10.2 & 11 of the pursuer's pro forma Terms and
Conditions, the pursuer's appointment was terminable by the defender without
notice, and without incurring any liability for a "cancellation fee".
(11)
Separatim to the pursuer's knowledge, as at 25 November 2021 and 2 December 2021,
clauses 3.2, 10.2 & 11 of the pursuer's pro forma Terms and Conditions sought to
impose upon the defender a new, significantly different, and more onerous
contractual and financial liability than that set out in the Second Representation.
(12)
By virtue of the material change in circumstances described in the preceding finding,
it was the duty of the pursuer to bring that change in circumstances (that is, the
existence and import of clauses 3.2, 10.2 & 11, and their purported incorporation) to
the defender's attention, prior to conclusion of the contract.
(13)
In the event, the pursuer failed to discharge the duty upon it to bring that change in
circumstances to the defender's attention, prior to conclusion of the contract.
(14)
As a result, esto the pursuer's pro forma Terms and Conditions (specifically,
clauses 3.2, 10.2 & 11 thereof) were incorporated into the parties' agreement, the
agreement is vitiated by essential error on the part of the defender, such error having
been induced by the Second Representation (being the pursuer's misrepresentation
as to the restricted scope of the contractual and financial liability undertaken by the
defender to the pursuer) and the pursuer's non-disclosure of the foregoing change in
circumstances;
(15)
By email dated 17 June 2022 (item 5/1/13/1 of process), the defender validly
terminated the pursuer's appointment and the parties' agreement.
(16)
In any event, the parties' agreement is vitiated by essential error on the part of the
defender, such essential error having been induced by the pursuer's
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misrepresentation (specifically, the First Representation) as to the defender's
eligibility to claim R&D tax relief in respect of the installation of the refrigeration
unit.
MAKES the following FINDINGS-IN-LAW:
(1)
The parties' agreement not having incorporated the pursuer's pro forma Terms and
Conditions (specifically clauses 3.2, 10.2 & 11 thereof), the pursuer is not entitled to
payment of the sum craved.
(2)
In any event, the defender having been induced to enter into the contract under
essential error induced by the pursuer's misrepresentation (namely, the First
Representation), the contract should be reduced ope exceptionis.
(3)
Esto the parties' agreement incorporated the pursuer's pro forma Terms and
Conditions (including clauses 3.2, 10.2 & 11 thereof), the defender having been
induced to enter into the contract by reason of essential error induced by the
pursuer's misrepresentation (namely, the Second Representation), the contract
should be reduced ope exceptionis.
(4)
The defender not being liable in contract to the pursuer for the sum sued for, the
defender should be assoilzied;
ACCORDINGLY, Repels the pleas-in-law for the pursuer; Repels pleas-in-law numbered 1,
5, 7, 9 & 10 for the defender; Sustains pleas-in-law numbered 2, 3, 4, 6 & 8 for the defender,
whereby Assoilzies the defender from the craves of the writ; ope exceptionis Reduces the
parties' agreement; meantime, Reserves the issue of expenses; Appoints the sheriff clerk
forthwith to assign a case management conference to determine the issue of expenses, to
proceed remotely, by way of telephone conference call, before Sheriff S Reid.
13
NOTE
Summary
[1]
The pursuer provides tax advisory services. The defender is a fruit and vegetable
wholesaler.
[2]
The defender appointed the pursuer to prepare and submit to HMRC, on behalf of
the defender, a claim for a research and development ("R&D") tax credit. The pursuer had
expressly advised the defender that it would act on a "no recovery, no fee" basis, specifically
that it would only charge a fee representing 30% of the amount of any R&D tax credit or
payment successfully obtained from HMRC as a result of the claim.
[3]
A few months later, the pursuer emailed a "Client Pack" to the defender, including a
"Project Letter", bearing to record the parties' agreement. The Project Letter referred to the
pursuer's "general terms and conditions", which were said to apply. The Project Letter
purported to append a copy of, and attach a hyperlink to, those terms. In fact, no such
document was appended and the hyperlink was inoperative. The defender signed the
Project Letter electronically, and returned it to the pursuer.
[4]
The defender subsequently terminated the pursuer's appointment.
[5]
The pursuer now sues the defender for payment of a "cancellation fee" of £9,600.
[6]
The key issue in dispute is whether clause 11 of the pursuer's pro forma conditions,
which creates the fixed cancellation fee, was effectually incorporated into the parties'
agreement. In my judgment, it was not. First, the pursuer, on whom the onus lies, has
failed to prove that its pro forma conditions were in existence at the date of conclusion of the
contract. Second, clauses 3.2, 10.2 & 11 of the pro forma conditions, upon which the claim is
founded, are properly characterised as being onerous and unusual. Therefore, it is
14
incumbent upon the pursuer to show that it took sufficient steps to bring the existence and
import of those particular terms fairly and reasonably to the defender's attention
(Montgomery Litho Ltd v Maxwell 2000 SC 56; Interfoto Picture Library Ltd v Stiletto Visual
Programmes Ltd [1989] 1 QB 433). It failed to do so. Third, in any event,
t
he parties'
agreement is vitiated by essential error induced by the pursuer's express misrepresentation
that the defender was eligible for R&D tax relief. Fourth, esto clauses 3.2, 10.2 & 11 of the
pursuer's pro forma conditions are not onerous or unusual, to the pursuer's knowledge they
nevertheless sought to impose a new contractual and financial liability upon the defender
that was materially different from, and more onerous than, that which had previously been
expressly represented by the pursuer to the defender in pre-contract communications.
Therefore, it was the pursuer's duty to bring that change in circumstances to the defender's
attention (that is, the existence and import of clauses 3.2, 10.2 & 11, and their purported
incorporation) (Shankland & Co v John Robinson & Co 1920 SC (HL) 103, 111; McBryde, The
Law of Contract in Scotland, 15-70). It failed to do so. Accordingly, in that scenario, the
parties' contract is vitiated by essential error induced by the pursuer's misrepresentation (by
non-disclosure). Fifth, I conclude that clause 11 constitutes an unenforceable penalty clause,
and is unenforceable. For each of these reasons, the pursuer's claim fails.
The evidence
[7]
The action called before me at a diet of proof on 14, 15 & 16 May 2024. For the
pursuer I heard testimony from Stephen McCallion, Murray Young and Shari Martin. For
the defender I heard evidence from Robert John Paterson and Craig Butler. Signed witness
statements for the pursuer's witnesses and affidavits of the defender's three witnesses were
also lodged in process in advance of the proof. Each of the parties' witnesses adopted the
15
terms of their related statement/affidavit as their evidence-in-chief, supplemented by oral
testimony. In addition, parties tendered a joint minute of admissions agreeing certain facts
and evidence.
Stephen McCallion
[8]
Mr McCallion (67), the founder and chief executive officer of the pursuer, testified
that he started completing research and development ("R&D") tax relief claims for his
former employer in around 2015; he continued this work until around 2018; and in
February 2019 he left his former employer to set up the pursuer. Throughout his testimony,
he was dismissive of the ability of accountants to advise on such claims: accountants were
said to be "more focused on numbers", whereas the pursuer provides "technical expertise"
to submit successful R&D claims. He testified that the defender was introduced to the
pursuer through a third party (Mr McConnell) who had "mentioned" that the defender
"might qualify" for an R&D claim. Mr McCallion arranged to meet the defender's director,
Mr Paterson, on 27 August 2021. The parties met for about one hour and 15 minutes.
Mr Paterson was not able to answer all of Mr McCallion's questions. Nevertheless,
Mr McCallion reached the view and expressly advised the defender's Mr Paterson at that
meeting that the defender was eligible for R&D tax credit in respect of the installation of a
refrigeration unit at the defender's premises. Mr McCallion spoke of the criteria necessary
to make such a claim.
[9]
He testified that he then had a second meeting with Mr Paterson and two other
individuals at the defender's offices. At that second meeting, he claimed to have gone
through a "Storyboard" prepared by him from his notes of the previous meeting and
internet research (item 5/1/1 of process). This second meeting also lasted for about an hour.
16
[10]
Following the second meeting, the pursuer's customer service department sent
contractual documents to the defender. The documents were duly signed and returned
electronically by Mr Paterson. Mr McCallion insisted that the defender must have accessed
the pursuer's terms and conditions via a hyperlink on the Project Letter because the
documents could not have been electronically signed without that link having first been
accessed.
[11]
Mr McCallion then gave his "Storyboard" to the pursuer's "technical department".
The technical department did not need any further information because, according to
Mr McCallion, he was so experienced in writing such reports. The notes were then
converted into another document called an "Innovation Report", but the pursuer was unable
to proceed further because financial information was required from the defender to
complete the claim, and the defender (and their accountants) then failed to further engage
with the pursuer. Mr McCallion testified that this failure to engage constituted a breach of
the pursuer's terms and conditions, triggering an entitlement on the part of the pursuer to
charge its cancellation fee of £8,000 plus VAT.
[12]
Mr McCallion testified that, in terms of the pursuer's terms and conditions, the
contract with the defender was due to subsist for 5 years, terminable only upon giving
12 months' notice thereafter. Mr McCallion spoke to the time alleged invested by him in
meeting the defender and preparing the "Storyboard" and the "Innovation Report".
[13]
In cross-examination, Mr McCallion acknowledged that he had never disclosed or
explained to the defender that there would be a withdrawal or cancellation fee payable by
the defender. He confirmed that the pursuer advertised its services on a "no win, no fee"
basis. He gave differing accounts as to the time actually spent on the work for the defender.
He acknowledged that no-one within the pursuer actually checks the content of the Client
17
Pack that is sent to clients. Specifically, no one checks the content of the Project Letter or
whether hyperlinks on it are operative. However, he insisted that the documents within the
Client Pack are not capable of being signed electronically unless the recipient client has first
accessed the hyperlink and read through the pursuer's terms and conditions. He admitted
that the document bearing to be the pursuer's pro forma terms and conditions is undated;
that the pursuer's terms and conditions had changed in 2023; and that none of the pages on
the document lodged in process (item 5/1/5/1-4 of process) bear the DocuSign unique ID
reference number.
[14]
He acknowledged (indeed insisted) that he had told Mr Paterson that the defender
was eligible for R&D tax relief in respect of the installation of the refrigeration unit. He
disagreed with any suggestion to the contrary, from the defender's accountants or
otherwise. He acknowledged that he had no financial information from the defender
relating to the installation of the refrigeration unit. Mr McCallion acknowledged various
errors on the Innovation Report and the Client Authorisation Form.
Murray Young
[15]
Mr Young (25), a trainee solicitor, had formerly worked as compliance officer of the
pursuer. He adopted his signed witness statement dated 6 May 2024. He identified certain
emails sent by him. He was not cross-examined.
Shari Martin
[16]
Ms Martin (31), a community care officer now employed by East Ayrshire Council,
was formerly employed by the pursuer as a client support manager. She was responsible for
"managing" the process of submitting R&D tax relief claims "from start to finish". She
18
spoke to her usual practices. She also recalled sending the Client Pack email to the defender
in this case because "there was an eagerness to complete the claim" as she and her
colleagues would then "receive a bonus". She confirmed that the pursuer did not have a
good relationship with the defender's accountants, Milne Craig. She acknowledged that
"alarm bells" started to ring when it emerged that Milne Craig were the defender's
accountants. She had tried to get the claim "over the line". She volunteered that she was
under some pressure. She was the only person within the pursuer who was managing the
claims at the time because her colleague was off sick. In her oral evidence-in-chief, she
conceded that she "wasn't really involved" with the pursuer's terms and conditions. She
acknowledged that complaints had been received by the pursuer from other clients that the
pursuer' terms and conditions, supposedly hyperlinked in the pursuer's Project Letter
template, were inaccessible.
[17]
In cross-examination, Ms Martin acknowledged that she populated many of the
fields within the template documents in the Client Pack. No one checked the Project Letter.
She did not pay much attention to the DocuSign certificate of completion. ("This page isn't
something I look at", she said.)
Robert Paterson
[18]
Mr Paterson (52) is the director and majority shareholder of the defender. He
adopted the terms of his affidavit dated 10 May 2024. In around 2018/19, he had arranged
for a new refrigeration unit to be purchased and installed on the defender's premises. It was
needed due to the growth of the company's business. It did not replace the existing freezer;
it merely added additional storage. It was purchased from and installed by a trusted third
party contractor called ISD Solution. They had installed all of the defender's previous and
19
existing refrigeration units. He had met Mr McCallion just once. There was no second
meeting with him or any of his staff. Mr McCallion told him he had an R&D tax relief claim.
He offered to prepare and submit it on a "no recovery, no fee" basis. There was to be no
hourly charge. It was a success fee only, being 30% of the value of any successful R&D tax
credit. After the meeting, there had been no correspondence from the pursuer until he
received an email from ZLX in November 2021 bearing to contain a "Client Pack". But the
"Client Pack" would not open. He could not view the document. He sent an email to the
pursuer on 24 November 2021 advising that the Client Pack was inaccessible. A further
email and Client Pack were sent to him on 2 December 2021 containing only three
documents (including the Project Letter). The Project Letter repeated the payment terms as
previously described by Mr McCallion, namely "no recovery, no fee". There was no
mention within the Project Letter of any other fees being payable by the defender.
[19]
In cross-examination, he confirmed he had spent minimal time in the purchase and
installation of the new fridge, perhaps 15 minutes or so talking to the contractor. He had
simply ordered a "like for like" refrigeration unit. The contractor (ISD) knew what it was
doing. He trusted it. Mr Paterson remembered trying to click on the words on page 2 of the
Project Letter that read: "Click here to view our terms and conditions", but the link did not
work, and no copy of any such terms and conditions was attached to the Project Letter. He
did not see any such terms and conditions until after the court action had started. He
testified that the only reason he had signed the documents was because Mr McCallion had
presented a "zero risk", "no recovery, no fee" service, and the Project Letter said nothing
about any other charges that could be payable by the defender. Had he been aware of the
pursuer's "cancellation" or withdrawal fee, Mr Paterson would not have signed the
documents in the Client Pack. He did sign them believing that the payment terms were as
20
had previously been discussed and agreed with Mr McCallion. At no point did Mr Paterson
see the pursuer's "Storyboard" or "Innovation Report". He dismissed the content as
generic, having been copied and pasted from the defender's website. In December 2021,
having returned the Client Pack to the pursuer, Mr Paterson spoke to Craig Butler of Milne
Craig, the defender's accountants, who clarified that the defender was not eligible for any
R&D tax relief in respect of the installation of the refrigeration unit and that the submission
of a claim was wholly ill-advised. Mr Paterson instructed a colleague to notify the pursuer
that the defender did not wish to proceed with the R&D tax relief claim.
Craig Butler
[20]
Craig Butler (45), a chartered accountant and director of Milne Craig Chartered
Accountants, Paisley, adopted the terms of his affidavit. He spoke to Milne Craig's long-
established connection with the defender as their external accountants, and of his
knowledge of the defender's business and accounts. In December 2021, he learned that the
defender had engaged the pursuer to process an R&D tax relief claim. He was surprised at
the pursuer's involvement. He contacted Mr Paterson. He expressed concern to
Mr Paterson about making of such an R&D tax relief claim because the defender plainly did
not qualify for any such tax relief; he was concerned about the veracity of any such claim;
he was aware that the defender had spent no time or money on research and development
activities. Mr Butler spoke to the mechanism by which R&D claims are processed by
HMRC. He explained that such claims are regularly challenged by HMRC, but often only
several years after the claim has been made and initially granted, resulting in a clawback of
tax by HMRC, and the imposition of significant interest and penalties on claims incorrectly
submitted.
21
Closing submissions
[21]
Helpfully, the parties lodged detailed written submissions in support of their
respective positions. For the sake of brevity, I shall not repeat them at length here.
Reasons for decision
[22]
On the evidence, I reached the following conclusions.
Oral agreement concluded in August 2021
[23]
Firstly, there was no dispute on the evidence that, at the meeting between the parties'
principal officers on 27 August 2021, Mr McCallion expressly advised Mr Paterson that
(i) the defender was eligible for R&D tax relief on the installation of the refrigeration unit
("the First Representation") and (ii) that the pursuer would prepare and submit a claim to
HMRC on a "no recovery, no fee" basis, with the only monetary obligation to be undertaken
by the defender to the pursuer being the payment by the defender of a fee representing 30%
of any R&D tax relief successfully obtained ("the Second Representation"). No mention was
made of any "cancellation" or "withdrawal" fee. No mention was made of any minimum
five year appointment of the pursuer.
[24]
Not unreasonably, the defender believed that the engagement of the pursuer to
provide its services was restricted to a single claim (in respect of the recent installation of the
fridge), which was certain to succeed. In addition, the engagement was believed to be "risk-
free" (as Mr Paterson put it) in financial terms to the defender because the defender's
liability to the pursuer was both restricted and conditional. It was restricted, in the sense
that it was limited to a fixed percentage (30%) of the value of any tax credit actually
22
obtained; and it was conditional, in the sense that it was only payable in the event that the
claim was successful.
[25]
In his testimony, Mr Paterson fairly conceded that he was initially sceptical. But
Mr McCallion was also insistent and persuasive. He made no bones about it. He had
indeed told Mr Paterson, clearly and categorically, that the defender was eligible to claim
R&B tax relief in respect of the installation of the fridge. Incontrovertibly, he made the First
Representation. Likewise, he did not dispute that he made the Second Representation.
Neither representation was qualified in any way. As a result of the two Representations,
Mr Paterson agreed, at the meeting on 27 August 2021, to appoint the pursuer to prepare
and submit a claim for R&D tax relief in respect of the installation of the refrigeration unit.
On these points at least, the evidence of Mr Paterson and Mr McCallion is consistent.
[26]
That explains why the next communication between the parties is the email from the
pursuer's administrative team in November 2021 with a "Client Pack" containing
documentation that purports both to formally record the parties' agreement (by means of
the Project Letter) and to implement it (by means of the Client Authorisation Form and
HMRC "Authorising your Agent" Form). If Mr Paterson had rejected Mr McCallion's sales
pitch back in August 2021, the subsequent email in November 2021 from the pursuer (with
the Client Pack), and Mr Paterson's unquestioning action in signing and returning it, would
have been incongruous. It would have been challenged, or ignored. Instead, the arrival of
the Client Pack (and its unchallenged authentication and return by Mr Paterson) is
indicative of the fact that Mr Paterson had already agreed to the appointment. The deal had
already been concluded in August when the two principal officers of the companies had
met. The evident purpose of the Client Pack documents was merely to formalise (and to
implement) the agreed appointment.
23
[27]
I did not accept Mr McCallion's evidence that in September 2021 he had a further
meeting with Mr Paterson (and two other employees whose names he could not remember).
(A discrepancy also arose here: in his written testimony, Mr McCallion states that
Mr Paterson attended that meeting; in his oral testimony, he said that Mr Paterson did not
attend.) I did not accept Mr McCallion's evidence that he discussed his "Storyboard" with
the defender at that supposed second meeting (or indeed at any other time). Regrettably,
Mr McCallion was not an impressive witness. His testimony, on these and other disputed
issues, was unconvincing.
[28]
Throughout his testimony, Mr McCallion tended to make sweeping assertions,
general and vague in nature, with no specification. Attention to detail was not his forte. He
tended to exaggerate. His "Storyboard" and the grandly-titled "Innovation Report"
illustrate the approach. They are unimpressive. The former is little more than a re-hash of
the latter. Both are significantly incomplete. Both are formulaic in structure and
terminology. As Mr Paterson commented, they appear to have been cobbled together from
generic information elicited from Mr Paterson and a trawl of the defender's website. They
lack any financial or accounting detail (essential elements for such a claim). They are faintly
comical in their implausible attempts to present the simple purchase of a fridge from a third
party (taking 15 minutes or so of the defender's time) as a triumph in research and
development, shifting "baseline technology" to achieve "technological advances". I was
unimpressed by them. They bear the hallmarks of documents concocted to create the
appearance of industry.
[29]
In cross-examination, he obfuscated when presented with the DocuSign Certificate of
Completion, which evidenced that only six pages had been digitally authenticated by
Mr Paterson, each bearing (on the top left of the page) the unique DocuSign ID reference
24
number. He refused to accept (the undeniable truth) that the document now founded upon
as the pursuer's "Terms and Conditions" did not bear that unique DocuSign ID number. He
initially sought to argue that the "appendix" referred to in paragraph 1 of the Project Letter
was a reference to the "Client Authorisation Form", not the pursuer's "general terms and
conditions" at all. That interpretation is untenable on a plain reading of the document.
Eventually, he conceded that the pursuer's "general terms and conditions" were not
attached as a separate "appendix" to that Letter, but insisted (in written and oral testimony)
that the purser's terms and conditions must nevertheless have been accessed and read by
Mr Paterson because the Project Letter was otherwise incapable of being authenticated
electronically through DocuSign. It was all rather unconvincing. There was no other
independent or qualified evidence that the DocuSign device operated in that way. Besides,
if it did operate in that way, one would still expect that the terms and conditions so accessed
would bear the unique DocuSign ID reference number. Otherwise, a principal benefit of the
DocuSign authentication process is defeated, namely, that every page of every contractual
document is verified by the adhibition of the unique DocuSign ID reference number.
[30]
That apart, my confidence in the reliability of Mr McCallion's unvouched assertion
was undermined by evidence of the pursuer's repeated botched electronic communications
with the defender. Mr McCallion casually sought to dismiss those blunders, but the
evidence tends to undermine the reliability of his unvouched testimony that the hyperlink to
the pursuer's terms and conditions was operative and accessed. Instead, the more natural
inference to be drawn from the pursuer's repeated botched communications is that
pursuer's administrative support structure at the time was unpredictable, unreliable, under
strain, and driven by the motivation quickly to clinch a deal to secure an employee "bonus".
Mr McCallion and Ms Martin both conceded that there was no system in place to quality-
25
check the content of the pursuer's correspondence to clients. In her written and oral
testimony, Ms Martin candidly conceded that she was "really keen" to conclude the deal
with the defender because she was tantalisingly close to achieving a sales target that would
earn her and her colleagues a "bonus"; she was therefore under considerable pressure to
"get this claim over the line" in order to meet the "bonus" deadline, all while she was
working from home on her own because her colleague was off sick. None of this filled me
with confidence in the reliability and integrity of the pursuer's systems.
[31]
More generally, I was troubled by Mr McCallion's penchant for hyberbole and his
nonchalant attitude to inconvenient detail. He constantly talked up the pursuer's expertise
as if he was presenting a sales pitch to the court, while missing no opportunity to denigrate
the abilities of professional accountants to understand or submit R&D tax relief claims to
HMRC. He presented the pursuer as a substantial business concern with "15 offices" in
Scotland, but ultimately had to concede, with no apparent sense of contrition, that within
this calculation he had included boardrooms within shared office space. It was a rather silly
gaffe, but it gives a small insight into the nature of his modus operandi. He exaggerated the
time spent by him in his dealings with the defender, including most obviously travel time to
and from their premises. Overall, my clear impression of this witness was that he was
unreliable on material issues. In contrast, Mr Paterson impressed me as candid, careful and
plainspoken. I preferred his recollection of events where it conflicted with that of
Mr McCallion.
Which pro forma conditions were sought to be incorporated?
[32]
Secondly, against the background of the concluded oral agreement in August 2021, it
is evident that the pursuer first sought to introduce its "general terms and conditions" in late
26
November/early December 2021. The first reference to any "terms and conditions" appears
in the Project Letter received by the defender on 2 December 2021. The onus lies on the
pursuer to prove that the document upon which it now relies (the "Terms and Conditions"
forming items 5/1/5/1 5/1/5/4 of process), were in existence at the date of conclusion of the
parties' contract, and that they were indeed the "general terms and conditions" to which
reference was made in the pursuer's Project Letter. In my judgment, the pursuer has failed
to discharge that onus.
[33]
The document founded upon by the pursuer is undated and unauthenticated. There
is no credible or reliable evidence to identify that particular document as the same document
to which reference is made in the pursuer's Project Letter. The document was not attached
as an "appendix" to the Project Letter, despite wording in gremio to that effect. No operative
hyperlink to the document was attached to the Project Letter, again despite wording in
gremio to that effect. The pursuer's original email to the defender purportedly attaching a
"Client Pack" also contained no operative hyperlink to any of the documents within the
pack. These persistent failures undermine my confidence in the reliability of the pursuer's
administrative systems.
[34]
In addition, interestingly, both Mr McCallion and Ms Martin candidly conceded in
their oral testimony that the version of the pursuer's terms and conditions that was in
existence as at November 2021 had, in fact, since been amended. In cross-examination,
Mr McCallion conceded that he did not know exactly when the version relied upon was
created (he speculated that it was in 2020), but he conceded that the pursuer's general terms
and conditions were changed in 2023.
[35]
In the context of persistent administrative failures within its business, I am left in
genuine doubt as to whether the (undated, unauthenticated) document now produced and
27
relied upon by the pursuer (item 5/1/5/1-4 of process) was actually the version that was in
existence as at November/December 2021, or whether it is a subsequent iteration of the
pursuer's "general terms and conditions", revised and amended since that date. None of the
pursuer's witnesses reliably addressed that basic issue. The approach of the pursuer's
witnesses to the identification of the applicable terms and conditions was casual, sloppy,
and unreliable.
[36]
The onus falls upon the pursuer on this preliminary issue. I conclude that the
pursuer has failed to prove that the pro forma Terms and Conditions (item 5/1/5/1-4 of
process), on which this action is predicated, were even in existence at the date of conclusion
of the parties' agreement, and that they were the "general terms and conditions" referred to
in the Project Letter. This conclusion is fatal to the pursuer's claim.
The duty of fair dealing: onerous or unusual terms in pro forma conditions
[37]
Second, even if there were a credible and reliable evidential foundation on which to
conclude that the lodged Terms and Conditions are indeed the "general terms and
conditions" referred to in the Project Letter, I conclude that clauses 3.2, 10.2 & 11 thereof
were not validly incorporated into the parties' agreement.
[38]
These particular terms, found within a pro forma set of standard conditions, are
properly characterised as unusual and onerous. (They also substantially innovate upon the
terms of the parties' existing oral agreement for the appointment of the pursuer.) They
purport to transform the parties' agreement from a common-place, one-off, project-specific
appointment, terminable without notice, to one that endures for a minimum five year
period, terminable only on lengthy notice, with a substantial financial penalty on the
defender for early termination or breach. In those circumstances, the law imposes a duty
28
upon the pursuer, as the proferens, to prove that it took sufficient steps fairly and reasonably
to bring to the defender's attention the existence and import of those particular onerous and
to do so.
[39]
It is notorious that people hardly ever trouble to read printed standard conditions.
Over the years, pro forma conditions have tended to become more and more complicated,
and more and more one-sided in favour of the party who is imposing them. The other
parties, if they notice the printed conditions at all, generally still tend to assume that such
conditions are only concerned with "ancillary matters of form and are not of importance"
(Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] QB 433). To address that
reality of life, in the so-called ticket cases the courts developed a principle that reasonable
steps had to be taken to draw the other parties' attention to pro forma standard conditions as
a whole, or they would not form part of the contract (Parker v South Eastern Railway Co (1877)
2 CPD 416; Hood v Anchor Line (Henderson Brothers) Ltd [1918] AC 846; McCutcheon v
was then said to be a "logical development" of the common law that if a party seeks to
enforce a term, found within its pro forma standard conditions, that is onerous or unusual in
nature, the onus lies on that party to prove that it took sufficient steps fairly and reasonably
to bring to the attention of the other party the existence and import of that particular term
(Interfoto Picture Library Ltd, supra, 445). If the onus was not discharged, the term would be
treated as not having been incorporated into the contract. In Scotland, this principle was
[40]
How much is required will vary from case to case, depending upon the nature of the
condition. Where the particular term founded upon is not unusual, it may not be necessary
29
for the party founding upon it to prove much more than that the intention to attach some
conditions had been fairly brought to the notice of the other party. However, where the
particular term founded upon is unusual in that class of contract, or particularly onerous,
the party seeking to rely upon it must show that the intention to incorporate such a term
was fairly and reasonably brought to the notice of the other party. As Lord Denning
memorably explained, in some cases the term may require to be drawn to the attention of
the other party "in the most explicit way", for example, by being "... printed in red ink with
a red hand pointing to it, or something equally startling" (Thornton v Shoe Lane Parking Ltd,
supra, 169-170).
[41]
In the present case, the pursuer argued that the defender was bound by the pursuer's
pro forma terms and conditions because the defender had ticked a box on the Client
Authorisation Form stating that it had received a copy of them; because the Project Letter,
signed by the defender, expressly referred to the pursuer's "general terms and conditions";
that the defender must have accessed and viewed those conditions, through the hyperlink,
prior to signing the Project Letter; and because the pursuer's digital signature on the Project
Letter was preceded by the words: "The terms of this letter are agreed and confirmed". But
all that misses the point. As was explained by the Inner House in Montgomery Litho Ltd v
Maxwell, supra:
"The point is not whether the standard terms and conditions which may be
voluminous have been read in whole or in part by one of the parties. The question
really is whether a particular condition is of such an unusual nature that it should
specifically be drawn to the attention of the other party rather than being left simply
as part of a large collection of other terms and conditions which are of a fairly
standard nature."
Thus, in Montgomery Litho Ltd, the defender had signed an application form with the
statement: "I have read and accepted the company's standard Terms and Conditions". The
30
Extra Division held that the addition of those words "adds nothing". The principle involved
here has "very little to do with a conventional analysis of offer and acceptance" (Interfoto
Pictures Library Ltd, supra, 443, per Lord Bingham), and more to do with an autonomous
(though admittedly curtailed) concept of fair and open dealing in relation to specific onerous
or unusual terms.
[42]
What then constitutes an onerous or unusual term? In Langstane Housing Association
Ltd v Riverside Construction (Aberdeen) Ltd 2009 SCLR 639, Lord Glennie stated
(paragraph [40]):
"If there is some condition which is of particular importance, in the sense of
departing in a material way from the terms usually incorporated into that type of
contract, then, by a parity of reasoning, the recipient of the document should not
only be made aware that the document contains contractual terms but should have
his attention drawn to that condition. This has been described in the cases as
applying to unusual, onerous, exorbitant, or draconian conditions, but I do not think
that anything turns on the epithet. The important characteristic is that the condition
departs in a material way from the terms which would reasonably be expected to
apply to that type of contract."
This analysis was adopted by Sheriff Ross in Difference Corporation Limited v Unitel Direct
Limited [2019] SC EDIN 56. Interestingly, the learned sheriff also observed that a distinction
may be discernible between those cases where a printed condition seeks to impose an
and those cases where the contentious term merely seeks to regulate the liability of the
proferens as the performing party (at least to a conventional extent only). In the former cases,
Sheriff Ross observed that the incorporation of such a term has tended to fail; in the latter,
the incorporation of the term might more readily be tolerated.
31
[43]
In the present case, the impugned terms fall squarely into the former category. They
seek to impose a significant and unexpected burden upon the non-performing party. They
are onerous and unusual. They depart in a material way from the terms which would
reasonably be expected to apply to this type of one-off, speculative appointment. Nothing
sufficient has been done by the pursuer to bring the defender's attention, fairly and
reasonably, to these onerous, unusual and innovative terms. No copy was appended. No
working hyperlink was attached. The specific contentious terms were never highlighted to
the defender. On the contrary, the Project Letter merely replicates in gremio those terms that
had previously been expressly disclosed, discussed and agreed concerning the defender's
restricted and conditional contractual and financial liability to the pursuer, with not a hint or
"heads-up" that the pursuer's general pro forma conditions might materially alter the nature
or extent of the defender's commitment. For those reasons, the pursuer has failed to
discharge the duty incumbent upon it. Accordingly, the pursuer has failed to prove that
clauses 3.2, 10.2 & 11 of its pro forma conditions were incorporated into the parties'
agreement.
Error induced by the First Representation
[44]
Third, in any event, even if the pursuer's pro forma conditions (including the
contentious terms) were validly incorporated into the parties' agreement, on the evidence I
am satisfied that the defender was induced to enter into that agreement on the basis of a
material express misrepresentation by the pursuer (namely, the First Representation, that
the defender was eligible for R&D tax relief).
[45]
On the evidence, the defender is not so eligible. I accepted the testimony of
Mr Butler on this issue. It was careful, measured, knowledgeable and qualified. I rejected
32
Mr McCallion's competing evidence on the issue. It was glib, casual, uninformed, and
unvouched by any essential financial or accounting data. I acknowledge that an honest
expression of opinion, or mere "advertising puff", will not readily be characterised as a
misrepresentation. However, Mr McCallion's First Representation went further than that. It
was a categoric, unqualified representation of a fact (eligibility for R&D tax relief), which
lacked any reasonable evidential or factual foundation standing the manifest absence of any
accounting or financial vouching. Accordingly, the parties' contract should be reduced ope
exceptionis.
Error induced by the Second Representation
[46]
Lastly, esto the parties' agreement incorporated the pursuer's pro forma Terms and
Conditions (including clauses 3.2, 10.2 & 11 thereof), to the pursuer's knowledge those terms
nevertheless sought to impose a new contractual and financial liability upon the defender
that was materially different from, and more onerous than, that which had previously been
expressly represented by the pursuer to the defender in pre-contract communications.
[47]
Therefore, it was the pursuer's duty positively to bring to the defender's attention
the existence and import of those new, materially different, and more onerous terms. Those
new terms represented a material change of circumstances (Shankland & Co v John
Robinson & Co 1920 SC (HL) 103; McBryde, The Law of Contract in Scotland, 15-70). The
pursuer failed discharge that duty. Accordingly, the parties' contract is vitiated by essential
error induced by the pursuer's misrepresentation (by non-disclosure).
[48]
To explain, misrepresentation can arise from non-disclosure or concealment only in
circumstances where there is a positive duty of disclosure. A duty of disclosure can arise
where a change of circumstances has taken place, or facts are discovered to be other than
33
they were believed to be, between the stage of the representation and the stage of
completion of the contract (Blakiston v London & Scottish Banking and Discount Corporation
Ltd (1894) 21R 417; Walker, The law of contracts, 14.66). Put simply, "[i]f facts alter after a
representation, there may be a duty to disclose the new facts" (McBryde, supra, 15-67). In
Shankland & Co, supra, 111, Lord Dunedin stated:
"Now we are here dealing with a contract of sale, which is a contract made at arm's
length, not a contract uberrimoe fidei such as insurance. There is, therefore, no general
duty of disclosure of all surrounding circumstances. I do not doubt that, once the
representation had been made, if anything had happened to alter the pursuers' view
of the truth of that representation, they would have been bound to disclose what had
happened, for the representation was a continuing representation."
[49]
Mr McCallion did not dispute the unqualified terms of his Second Representation.
Mr Paterson was equally clear that it was a material factor in inducing him to agree to the
pursuer's appointment. The appointment was "risk-free" from the defender's perspective.
However, in November/December 2021, when the facts changed and, to the knowledge of
the pursuer, it sought to introduce new contract terms buried within its pro forma conditions
that were materially different from that Second Representation (in that they sought to extend
the defender's contractual commitment to a minimum five year term, and to impose a new
liability on the defender for hefty cancellation and withdrawal fees) the pursuer came
under a positive duty to disclose that change of circumstances to the defender. It failed to
do so. That failure resulted in there being a misrepresentation by the pursuer (by non-
disclosure to the defender), which induced the defender to conclude the contract.
Accordingly, in that alternative scenario, the parties' contract should also be reduced ope
exceptionis.
34
Unenforceable penalty clause
[50]
Lastly, in any event, I conclude that the "cancellation fee" charged by the pursuer is
an unenforceable penalty at common law.
[51]
It purports to entitle the pursuer to charge the defender a fee "fixed at £8,000 per
year" (clause 11.2(iii)) for the duration of the 5 year minimum term of the agreement.
[52]
The correct test for a penalty clause is whether the sum or remedy stipulated as a
consequence of the breach of contract is exorbitant and unconscionable when regard is had
to the innocent party's legitimate interest in the performance of the contract. Though not
always so confined, an innocent party's legitimate interest in the enforcement of the contract
will rarely extend beyond compensation for breach (Parking Eye, [32]). An extravagant
disproportion between the stipulated sum and the highest level of damages that could
possibly arise from the breach would amount to a penalty, and be unenforceable (Cavendish
Square Holding BV v Talal El Makdessi; Parking Eye Ltd v Beavis 2015 UKSC 67).
[53]
Here, the stipulated fixed sum of £8,000 (a fortiori £8,000 per year, for the five year
minimum term of the agreement) bears no relation whatsoever to any evidenced genuine pre-
estimate of loss (Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79). I
rejected, as neither credible nor reliable, Mr McCallion's vague, unvouched and exaggerated
testimony of the time invested by him and his staff in the preparation of this claim and
others. I rejected, as neither credible nor reliable, his sweeping, unvouched assertions of the
vastly differing ranges of tax relief likely to be secured by the pursuer for other clients, and
of the related likely percentage returns for the pursuer. As a result, I was left with no
evidential foundation to conclude that the stipulated sum of "£8,000 per year" in this
agreement was proportionate to the highest level of damages that could possibly arise from
35
the defender's breach of this contract. Absent such evidence, the stipulated sum is ex facie
arbitrary, exorbitant and unconscionable.
[54]
Moreover, there was no evidence quantify or estimate the R&D tax credit that was
likely to be obtained for the defender under this contract in the first tax year in respect of the
installation of the fridge. (The pursuer led no financial or accounting data to verify the
existence of, still less to quantify, any such R&D claim.) By logical extension, the estimated
percentage fee likely to be earned by the pursuer (or lost upon a breach) was also entirely
unknown. Likewise, there was no evidence to suggest that any further R&D claims were
even remotely anticipated in any of the succeeding years of the minimum 5 year term, or the
estimated level of tax credit achievable, or the resulting estimated percentage fee return.
The court cannot be expected to speculate in a vacuum. It was for the pursuer to define the
extent of its "legitimate interest" in performance of the parties' contract, and the "highest
level of damages that could possibly arise" from a breach (Parking Eye, supra, [255]). It failed
to do so. The pursuer's alternative approach (of seeking to calculate loss based on hourly
rates and time invested) also failed, due to the weaknesses of Mr McCallion's testimony. He
sought to talk up the amount of time involved in meeting clients, in research, in preparing
the "Storyboard" and "Innovation Report", in submitting a claim to HMRC, all without
documented evidence of time-recording or reliable time-estimates. I rejected his unreliable
testimony on these issues.
[55]
Accordingly, esto the impugned clauses were incorporated into the parties' contract,
and esto the contract does not otherwise fall to be reduced ope exceptionis, I would have
found that the cancellation fee charged by the pursuer under clause 11 was unenforceable at
common law as an unlawful penalty.
