United Kingdom House of Lords Decisions

The opinion of the court was delivered by the Lord President (Hope).

OPINION OF THE COURT.—In this action the pursuer seeks payment from the defender of £50,000 as damages for breach of contract. According to his averments he entered into an agreement with the defender relating to the sale to the defender of his holding of 50 per cent of the shares in the company of which he was a director named Jatako Ltd. which was by then in receivership. The company had existed for the sole purpose of owning or running a discotheque called Maxims in Dundee. In January 1985, shortly after the company had gone into receivership, the defender met the pursuer at the former's request, and indicated that he wished to run the discotheque with a Mr Daniel Reilly who was already a director of the company. There then followed a verbal agreement between the pursuer and the defender by which the defender agreed to buy the pursuer's shareholding of £50,000 and in addition to assume responsibility for the debts of the company. The terms of the verbal agreement were substantially the same as those embodied in a typewritten agreement which was signed by both parties, by Mr Reilly and by two witnesses on 20th October 1985. The defender denies that a verbal agreement in relation to the shares or the discotheque was entered into at any stage. He admits that on 20th October 1985 he, the pursuer and Mr Reilly together with the witnesses signed what he describes as a typewritten paper, but he avers that this document was intended to be a preliminary statement only and was not to have legal force or effect. He also contends, for various other reasons, that it did not constitute a binding contract and that any such purported agreement is void and incapable of being enforced.

The action was raised more than three years ago and it has a complicated history. On 21st November 1986 the sheriff granted decree of absolvitor by default on the ground of the pursuer's non-appearance following a change in his solicitors. On 24th December 1986 the sheriff principal accepted an explanation for this non-appearance and recalled the decree of absolvitor. On 1st June 1987 a diet of debate was discharged to allow the pursuer to amend, and on 3rd February 1988 a debate took place on the preliminary pleas. On 30th May 1988 the sheriff sustained the pursuer's plea to the relevancy of the defences, and allowed a proof on the question of damages. The defender appealed to the sheriff principal and on 11th July 1988 he was allowed to lodge a minute of amendment. The cause was then remitted back to the sheriff to proceed as accords. On 16th November 1988 a further debate took place on the preliminary pleas, and on 30th November 1988 the sheriff again repelled the defences except in so far as relating to damages and allowed a proof restricted to that question. The defender once again appealed to the sheriff principal. The appeal was heard on 22nd December 1988 and on 13th January 1989 the sheriff principal allowed the appeal, sustained the defender's first plea-in-law which was a general plea to the relevancy, and dismissed the action. It is against that interlocutor that the pursuer has now appealed to this court.

Various arguments were developed in the appeal before the sheriff principal, but in the event he upheld only one of them and it is that argument alone which remains a live issue in this case. It was not suggested in the course of the hearing before us that the opinion which the sheriff principal formed about the other arguments was at fault. In this situation the only question for us is whether the sheriff principal was right to dismiss the action on this single point or whether he should have affirmed the sheriff's interlocutor of 30th November 1988 and allowed the action to proceed to a proof restricted to damages.

The argument with which we are concerned was directed to the wording of a particular phrase in the document which was executed on 20th October 1985. This document took the form initially of a letter typewritten on a single page which was addressed to the defender by the pursuer under the heading "Jatako Ltd. (Maxims)". It was dated 26th June 1985 and was unsigned. But at the foot of the page there had been typed spaces for signatures to be provided by the pursuer, the defender and Mr Reilly and two witnesses, and these spaces were completed by signatures in each case under the following words which were written in manuscript:

"Signed at ‘Three Barrels’ on Monday 20th October 1985".

Each of the pursuer, the defender and Mr Reilly also wrote the words "Adopted as holograph alongside" their signatures. The body of the document was in the following terms:

"Further to our recent discussions regarding your purchase of my 50 per cent shareholding in the above subjects, the agreement as I see it is as follows. I will transfer my share to you for a payment of £50,000 (fifty thousand pounds), you shall also take over my liabilities which are half of all of the outstanding creditors all as previously agreed and quantified. The £50,000 will then be lent back by me to the directors, namely yourself and Daniel Reilly, the loan will be secured on the subjects (Maxims) and payment shall be deferred for a period of one year, after which time, payment shall be negotiated to our mutual agreement and satisfaction. As you have also been successful in negotiating a brewer's loan I see no reason why the transfer should not be concluded quickly to allow yourselves to finalise matters with the receivers and gain control. I think if we all signed this and had it witnessed it would probably suffice."

It was conceded in argument before the sheriff principal that the phrase in question which appears in the third sentence of the document was too uncertain to be enforced. This is the phrase "after which time, payment shall be negotiated to our mutual agreement and satisfaction". Counsel for the pursuer did not seek to withdraw this concession, and it was common ground before us that an agreement in terms of that phrase was incapable of being enforced by the court.

The pursuer's principal argument was that the presence of this phrase in the document was unimportant for present purposes. The document embodied two distinct agreements. The first, that relating to the transfer of the shareholding for a payment of £50,000, was separable from the other and was unaffected by this phrase. On a proper construction of the agreement, it was said, the contract of sale in the first part was not dependent on the contract of loan. It was pointed out that Mr Reilly, who signed the document, was involved only in the arrangements about the loan and that he was not a party to the contract of sale which was between the pursuer and the defender alone. In any event the pursuer's counsel contended that the phrase did not relate to an essential or material part of the contract of loan and that it could be disregarded. If this was done the document contained an agreement which embodied all the essentials of a contract as regards both the transfer of the shareholding and the loan, and it could be enforced. The argument for the defender was that the document comprised a single agreement which could not be separated because the two parts were necessarily inter-linked. The phrase in question affected the entire agreement, which was to be seen as nothing more than an agreement to agree. The essentials of a binding contract of loan had not been agreed because the phrase in question disclosed an absence of agreement about the period of the loan as well as about what security if any was to be given during this period and what interest if any was to be paid.

In our opinion the pursuer's principal argument that the document embodies two separate contracts is unsound and the sheriff principal was right to reject it. The document is introduced by a sentence which refers to previous discussions regarding the defender's purchase of the pursuer's shareholding and goes on to say "the agreement as I see it is as follows". The use of the word "agreement" in the singular is a clear indication that what follows was to be understood as all forming part of one contract. The next sentence relates to the transfer of the shareholding for a payment of £50,000 but it also stipulates for the taking-over by the defender of the pursuer's liabilities which are said to be one-half of all the outstanding creditors all as previously agreed and quantified. The next sentence relates to the loan, and as we see it this part of the agreement is intimately connected in two respects with the payment for the shares. First, it provides a means whereby the defender was to have the use of the price for a period, no doubt to enable him to discharge the pursuer's liabilities to outstanding creditors as and when required. Secondly, it regulates the time at which the pursuer was to have the benefit of the payment for the shares for his own use. There then follows a sentence noting that the defender had been successful in negotiating a brewer's loan and that the pursuer saw no reason why the transfer should not be conducted quickly. This sentence confirms our impression that it was a matter of importance to the working-out of the whole agreement that the defender should be in funds to meet the liabilities to the creditors of the company. We find it impossible to regard this document as containing anything other than a single agreement of which the arrangements about the loan form part. If there were a doubt on this point it would fall to be resolved in favour of the defender since it was the pursuer who framed the document, which was met with only a general acceptance by the defender: see Gloag on Contract 2nd edn., p. 400. But in our opinion there is no ambiguity on this matter because it is sufficiently clear from the language and structure of the agreement that each part is to be seen as integral to the whole. We see no difficulty in the fact that Mr Reilly was a signatory to the document for his interest as one of the directors to whom the £50,000 was to be lent, although the parties to the contract so far as the transfer of the shareholding is concerned were the pursuer and the defender only. It is a matter of common experience to find on an examination of a written contract between several parties that one or more of them is interested in only a part of the transaction.

We turn therefore to the pursuer's alternative argument which was that the phrase in question was not an essential part of the agreement and could be disregarded. Although this is a matter which must in the end of the day be decided on the construction of the particular document, it is important by way of background to note the principles which must be applied in a case of this kind. In May and Butcher Ltd. v. The King [1934] 2 KB 17 (Note) at p. 21 Viscount Dunedin stated the relevant principles in these terms:

"To be a good contract there must be a concluded bargain, and a concluded contract is one which settles everything that is necessary to be settled and leaves nothing to be settled by agreement between the parties. Of course it may leave something which still has to be determined, but then that determination must be a determination which does not depend upon the agreement between the parties."

The same points were made by Maugham L.J. in Foley v. Classique Coaches Ltd . [1934] 2 K.B. 1 where he said at p. 13:

"It is indisputable that unless all the material terms of the contract are agreed there is no binding obligation. An agreement to agree in the future is not a contract; nor is there a contract if a material term is neither settled nor implied by law and the document contains no machinery for ascertaining it."

As these passages indicate the question must always be whether the phrase in question relates to a matter which is necessary to be settled in order to create a binding contract. It is appropriate also to distinguish between clauses which leave something yet to be agreed: see Nicolene Ltd. v. Simmonds [1953] 1 Q.B. 543 per Denning L.J. at p. 551. In that case a condition that the sale was subject to the "usual conditions of acceptance" was ignored as being meaningless and clearly severable from the rest of the contract, leaving a contract which was complete in itself and enforceable. G. Scammell and Nephew Ltd. v. Ouston [1941] A.C. 251 to which the sheriff principal referred as being of assistance in the present case provides another example of a meaningless clause, but in that instance it was on a matter which was so essential to the bargain that it was impossible to hold that there was an enforceable agreement between the parties. The agreement was that a motor van should be purchased "on hire-purchase terms", but no particular terms were set out in the agreement and the law could not of itself define what are the normal and reasonable terms of a hire purchase agreement: Lord Wright at p. 273. A further example of this kind of case is In re Vince, ex p. Baxter [1892] 2 QB 478 to which the sheriff principal also referred and which he thought supported the defender's argument that the agreement in the present case was insufficiently certain to form a concluded contract. That case concerned an agreement about the interest to be paid on a loan. The agreement was that in certain circumstances the interest should "vary with the profits of the business". This phrase was held to be unintelligible and the agreement about interest was treated as void. We note in passing that the sheriff principal has read more into that case than is justified by the brief report. He said that the decision was the "whole agreement" was void for uncertainty, but the decision related only to the agreement about interest. The contract of loan was otherwise unaffected, because the balance of the loan was held to be repayable in the ordinary way: see the comment by Denning L.J. in Nicolene Ltd. v. Simmonds at p. 551. The sheriff principal has also attributed words to Bowen L.J. which do not appear in the report and for which counsel could give no explanation. However that may be, we do not regard these cases on which the sheriff principal relied as being of direct assistance in the present case, because the phrase with which we are concerned is not meaningless. On the contrary, the words "shall be negotiated to our mutual agreement and satisfaction" are perfectly intelligible. They show that the parties were leaving over the matter of repayment after one year as something about which they would agree in the future, so this case falls into the different category where the alleged contract contains a clause about something which is yet to be agreed. A clause of this type cannot simply be ignored, but it does not always follow that there is no contract.

In our opinion it is clear that the phrase in question is not merely dealing with something which was yet to be agreed. It is dealing with something which was deliberately being left over until a future date. The first part of the sentence in which it appears shows plainly that the arrangement was that the £50,000 was to remain on loan to the directors for a period of one year, since repayment was to be deferred for a period of one year. The second part of the sentence which contains the critical phrase is introduced by the words "after which time". As we read these words it was only after the period of one year that the parties were to negotiate about the date of repayment and what the terms, if any, were to be about interest in the meantime. This is, therefore, not the kind of case which often creates insuperable difficulty where a term of the contract necessary to its efficacy from the outset has yet to be agreed. The matter for negotiation was something which, it was proposed, should be dealt with at a future time, and without prejudice to the completeness of the contract for the transfer of shares and the lending back to the directors of the sum of £50,000. The defender by signing the document showed that he was content to leave the matter on this basis. In Freeman v. Maxwell 1928 S.C. 682, Lord Anderson, at p. 686, regarded a clause of this nature as subsidiary to the contract and not as essential to its constitution. R. & J. Dempster v. Motherwell Bridge and Engineering Co . 1964 SC 308 is another example of this approach. The parties had agreed on what had to be done to meet the immediate needs of the situation and were content that the question of price should be deferred, that matter not being an essential of their agreement: see Lord Guthrie at p. 332.

It was contended for the defender that the absence of an express agreement about the period of the loan, the rate of interest and security meant that details had been left open which must be regarded as being essential to a binding contract of loan. These matters could not be left simply to implication, especially as an appropriate rate of interest could not reasonably be determined in the absence of agreement about security or about the period for which the loan was to exist. In our opinion, however, these are all matters which can be settled without difficulty by reference to the ordinary principles of law. In Thomson v. Geekie (1861) 23 D. 693, Lord Justice-Clerk Inglis said, at p. 701, that an acknowledgment for money generally presumes that the money was advanced on loan, "and it follows that there is, first, an obligation on the party granting it instantly to repay the sum; and, secondly, another obligation that so long as the sum remains unpaid, the party shall pay legal interest. The acknowledgment itself does not express these obligations; but these are the obligations which result in law from the loan." So it is implied in every contract of loan that the lender is entitled to repayment of the money. It is not essential that the parties should agree about the period of the loan because, in the absence of agreement to the contrary, a loan is repayable at any time on demand. If, as in this case, there is agreement that repayment shall be deferred for a period of one year, it becomes repayable on demand at the end of that period unless otherwise agreed. Agreement about security has never been regarded as essential to a valid contract of loan, so if the lender wishes to have security this must be a matter of express provision in the contract as has been done in this case. As for the question of interest on a loan, the law implies that interest shall be paid although this is a presumption which is capable of being displaced by the circumstances and, of course, by agreement to the contrary: Bell, Commentaries, Vol. 1, p. 693: Gloag on Contract, 2nd edn., p. 681; Smellie's Executrix v. Smellie 1933 S.C. 725 per Lord Justice-Clerk Alness at p. 727. So express agreement on this matter is not essential to the validity of the contract. With regard to the rate of interest, there is no need for agreement about this to enable interest to be recovered. The court will normally award interest on a debt of any period for which interest is due at the judicial rate for the time being, unless there is a contractual rate to which it can give effect. For these various reasons we consider that there is no substance in the suggestion that the fact that the agreement left open the question what was to be done about repayment after the period of one year and was silent about interest meant that there was no concluded contract.

It was not suggested that there was any other reason for holding that the agreement contained in the document was incapable of being enforced. In our opinion, therefore, the sheriff principal's interlocutor dated 13th January 1989 must be recalled and we shall affirm the sheriff's interlocutor dated 30th November 1988.

The defender thereafter appealed to the House of Lords. The appeal was heard in that House before Lord Keith of Kinkel, Lord Brandon of Oakbrook, Lord Ackner, Lord Oliver of Aylmerton and Lord Jauncey of Tullichettle on 21st February 1991.

At delivering judgment, on 21st March 1991;—

LORD KEITH OF KINKEL .—My Lords, I have had the opportunity of reading in draft the speech to be delivered by my noble and learned friend Lord Jauncey of Tullichettle, and I agree with it.

The passage in the document of 20th October 1985 which is said on behalf of the appellant to indicate that no concluded agreement was reached between the parties is this:

"The £50,000 will then be lent back by me to the directors, namely yourself and Daniel Reilly, the loan will be secured on the subjects (Maxims) and payment shall be deferred for a period of one year, after which time, payment will be negotiated to our mutual agreement and satisfaction."

The sense of this appears to me to be that the loan is to remain outstanding for one year, and that after the expiry of one year the parties are to negotiate about whether it is to remain outstanding any longer, and, if so, on what terms. Either party might refuse to negotiate at that stage, or they might fail to reach agreement. In either situation the loan would be repayable as at the end of the one-year period. In effect, the parties are going to wait and see whether they can agree on an extension of the period of the loan, but there is no indication that this is intended to have any effect as regards the transfer of the shares and the registration of it. The loan is to be for a certain fixed period or for longer if the parties so agree at the end of that period. There is no uncertainty about that. If they do not agree, the fixed period will rule. There is no express provision about interest on the loan during the one-year period. It is, however, a question of construction, which it is unnecessary for present purposes to resolve, whether the loan is to be free of interest or whether it is intended to carry interest at a reasonable rate. In either event there is no uncertainty.

I am therefore of the opinion that the appellant's argument on uncertainty is without merit, and I would dismiss the appeal accordingly.

LORD BRANDON OF OAKBROOK .—My Lords, for the reasons given in the speech to be delivered by my noble and learned friend, Lord Jauncey of Tullichettle, I would dismiss the appeal.

LORD ACKNER .—My Lords, I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Jauncey of Tullichettle. I agree with it and for the reasons which he has given, I, too, would dismiss the appeal.

LORD OLIVER OF AYLMERTON .—My Lords, I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Jauncey of Tullichettle. I agree with it and for the reasons which he has given, I, too, would dismiss the appeal.

LORD JAUNCEY OF TULLICHETTLE .—My Lords, the pursuer was a director and holder of 50 per cent of the ordinary shares of a company, Jatako Limited, which owned and operated a discotheque in Dundee called "Maxims". Another director of the company was one Daniel Reilly. In January 1985 the company went into receivership and in the same month the defender entered into negotiation with the pursuer for the purchase of the latter's shares. On 20th October 1985 a typewritten document prepared by the pursuer was signed by him, by the defender and by Reilly before two witnesses. The document was in the following terms:

"Jatako Ltd. (Maxims).

"

Dear Jeff,

Further to our recent discussions regarding your purchase of my 50 per cent shareholding in the above subjects, the agreement as I see it is as follows. I will transfer my share to you for a payment of £50,000 (fifty thousand pounds), you shall also take over my liabilities which are half of all of the outstanding creditors all as previously agreed and quantified. The £50,000 will then be lent back by me to the directors, namely yourself and Daniel Reilly, the loan will be secured on the subjects (Maxims) and payment shall be deferred for a period of one year, after which time, payment shall be negotiated to our mutual agreement and satisfaction. As you have also been successful in negotiating a brewer's loan I see no reason why the transfer should not be concluded quickly to allow yourselves to finalise matters with the receivers and gain control. I think if we all signed this and had it witnessed it would probably suffice." Thereafter the defender took no steps to obtain a transfer of the pursuer's shares.

On 26th September 1986 the pursuer raised an action against the defender in Dundee Sheriff Court craving payment of £50,000 as damages for breach of contract. Thereafter the action had a somewhat chequered procedural history. It is, however, only necessary to refer to the three interlocutors directly leading up to this appeal. On 30th November 1988 the sheriff sustained preliminary pleas of the pursuer and repelled the defences except in so far as relating to the quantum of damages. On 13th January 1989 the sheriff principal allowed the defender's appeal, sustained his first plea-in-law and dismissed the action. On 1st December 1989 the First Division allowed the pursuer's appeal, recalled the interlocutor of the sheriff principal and affirmed the interlocutor of the sheriff. The defender now appeals to your Lordships' House.

At the beginning of the appeal your Lordships invited counsel to address them on the question of possible illegality arising from the words in the document "the loan will be secured on the subjects (Maxims)". This matter had, your Lordships were informed, been canvassed in the sheriff court but not before the First Division. Senior counsel for the appellant submitted that the document provided for a loan to him by the respondent to enable him to purchase the shares, which loan was to be secured over assets of the company. By virtue of secs. 151, 152 and 330 of the Companies Act 1985 the arrangement was unlawful and therefore even if the document constituted a concluded contract it was unenforceable. Senior counsel for the respondent argued that the document provided in effect for the loan to the company and that even if it was to the appellant as an individual the provision for security thereof, being solely for the benefit of the respondent, was severable and the remainder of the provisions in the document remained enforceable. The above-mentioned sections of the Companies Act 1985 so far as relevant are in the following terms: [his Lordship quoted the terms thereof as set out supra and continued].

The document appears to envisage that after transfer of the shares and payment therefor a loan would be made by the respondent to the directors. If the loan was intended to be to the appellant as an individual this could easily have been stated and it is not easy to see why it was necessary to mention the directors and to make Reilly a party to the document. If on the other hand the loan was to be to the directors acting on behalf of the company the presence of Reilly is explicable and the granting of security over the company's assets would be quite normal. I consider that the preferable construction of the document is that which provides for a loan to the company to be secured over the company's assets. This preferred construction is fortified by the presumption of legality which exists where a contract is reasonably susceptible of two meanings. It follows that the provisions are not struck at by any of the above statutory provisions. I would only add that even if the proper construction did bring the document within the ambit of the above statutory provisions or any of them, the provisions dealing with security for the loan are ancillary to the principal provisions of the document dealing with the transfer of shares, are conceived solely for the benefit of the respondent and are accordingly severable. If authority to support this conclusion is required it is to be found in Carney v. Herbert [1985] AC 301, where, the facts being very similar to those in the present case, Lord Brightman in delivering the judgment of the Board said at p. 317:

"Subject to a caveat that it is undesirable, if not impossible, to lay down any principles which will cover all problems in this field, their Lordships venture to suggest that, as a general rule, where parties enter into a lawful contract of, for example, sale and purchase, and there is an ancillary provision which is illegal but exists for the exclusive benefit of the plaintiff, the court may and probably will, if the justice of the case so requires, and there is no public policy objection, permit the plaintiff if he so wishes to enforce the contract without the illegal provision."

For these reasons I have no doubt that the justice of the case would require that the respondent be entitled to enforce the contract for the sale of his shares if it is held that such a contract is otherwise contained in the document.

I turn to consider the principal issue in this appeal which is whether the document contains an enforceable contract for the purchase by the appellant of the respondent's shares. The appellant maintained that it did not as the payment of the loan having been deferred for a year was then to be "negotiated to our mutual agreement and satisfaction". This was merely an agreement to negotiate which was unenforceable and which in turn rendered the whole agreement unenforceable. The respondent submitted that the First Division were correct in concluding that no part of the agreement which was essential to its performance at the date of execution had been left unsettled and that accordingly the agreement for the sale of the shares was enforceable.

My Lords, it is trite law that an agreement which leaves a part, essential to its implementation, to be determined by later negotiation does not constitute a concluded and enforceable contract. In May and Butcher Ltd. v. The King [1934] 2 KB 17 (Note), Viscount Dunedin said at p. 21:

"This case arises upon a question of sale, but in my view the principles which we are applying are not confined to sale, but are the general principles of the law of contract. To be a good contract there must be a concluded bargain, and a concluded contract is one which settles everything that is necessary to be settled and leaves nothing to be settled by agreement between the parties. Of course it may leave something which still has to be determined, but then that determination must be a determination which does not depend upon the agreement between the parties. In the system of law in which I was brought up, that was expressed by one of those brocards of which perhaps we have been too fond, but which often express very neatly what is wanted: certum est quod certum reddi potest. Therefore, you may very well agree that a certain part of the contract of sale, such as price, may be settled by someone else. As a matter of the general law of contract all the essentials have to be settled. What are the essentials may vary according to the particular contract under consideration."

Observations to a similar effect are to be found in G. Scammell and Nephew Ltd. v. Ouston [1941] A.C. 251, per Lord Russell of Killowen at p. 261, Nicolene Ltd. v. Simmonds [1953] 1 Q.B. 543 per Denning L.J. at p. 551, and Courtney & Fairbairn Ltd. v. Tolaini Brothers (Hotels) Ltd . [1975] 1 W.L.R. 297 per Lord Denning M.R. at p. 301. However that principle does not necessarily determine the issue in favour of the appellants. The fact that in the usual case a particular term will be considered essential to the existence of a concluded agreement does not prevent parties from contracting in a particular case that it shall not be essential. In R. and J. Dempster Ltd. v. Motherwell Bridge and Engineering Co . 1964 SC 308, a contract for the sale of steel over a period of three years contained this provision:

"The prices to be mutually settled at a later and appropriate date."

It was held that this did not prevent there being a concluded contract between the parties. Lord Guthrie said at p. 332:

"The object of our law of contract is to facilitate the transactions of commercial men, and not to create obstacles in the way of solving practical problems arising out of the circumstances confronting them, or to expose them to unnecessary pitfalls. I know of no rule of law which prevents men from entering into special agreements to meet the requirements of special circumstances."

Later on the same page he said:

"The matter for decision must always be whether parties have not got beyond the stage of negotiation, or whether there is a concluded bargain. In the usual case, the price to be paid is one of the essential matters on which agreement is necessary before either party is bound. If they have not agreed upon the actual sum or on a method of deciding that sum, there is not the consensus in idemrequisite before a contract can be completed. But if they agree that the question of price shall be deferred, and agree on the things to be done to meet the immediate needs of the situation, there is consensus in idem, and each can require the other to do what he has undertaken to do before the price is settled. In such circumstances the matter of price is not ‘vital to the arrangement between them,’ to use the words of Lord Buckmaster in May and Butcher Ltd. v. The King ."

The question here is whether the time and manner of repayment of the loan were essential to the taking effect of the contract as a whole. On analysis the document contains provisions for six matters: (1) transfer of shares by the respondent to the appellant in exchange for a payment of £50,000; (2) assumption by the appellant of the respondent's liabilities; (3) the lending back of £50,000 by the respondent to the two directors, the appellant and Reilly; (4) the securing of the loan on Maxims; (5) payment of the loan to be deferred for one year; and (6) thereafter payment to be negotiated. The document also refers to the transfer of shares being concluded quickly. It is quite clear that the parties intended that the transfer of shares and the subsequent loan-back should take place as soon as possible. It is equally clear that they contemplated that this would take place long before the time and manner of repayment of the loan fell to be considered by them. Indeed until payment for the shares had been made there would be no loan and the one-year period would not start running. As the Lord President said repayment of the loan was "deliberately being left over until a future date".

My Lords, on no view was agreement as to the time and manner of repayment of the loan necessary to the completion of the sale and transfer of the shares. Was it then essential to that part of the agreement dealing with the loan? In Thomson v. Geekie (1861) 23 D. 693, Lord Justice-Clerk Inglis said at p. 701:

"It admits of no doubt, that an acknowledgment for money generally presumes that the money was advanced in loan, and it follows that there is, first, an obligation on the party granting it instantly to repay the sum; and secondly, another obligation that, so long as the sum remains unpaid, the party shall pay legal interest. The acknowledgment itself does not express these obligations; but these are the obligations which result in law from the loan. This is the general case."

In Bell's Principles of the Law of Scotland, 10th edn., para. 201 it is stated in relation to Mutuum:

"And so action will lie for the thing or its value as at the time and place stipulated for restoration, or otherwise at the time when a legitimate demand for restitution of the thing lent may be made."

I take from these passages that every loan carries with it an obligation of the borrower to repay. If the contract contains provisions for repayment those provisions will prevail. If, however, the contract contains no provisions or if for some reason the provisions turn out to be ineffectual then the obligation to repay on demand revives. I entirely agree with the observations of the Lord President that:

"It is not essential that the parties should agree about the period of the loan because, in the absence of agreement to the contrary, a loan is repayable at any time on demand."

Furthermore, payment of interest is not an essential condition of a contract of loan. An interest-free loan is perfectly valid and parties can contract to that end. If nothing is said about interest it becomes a question of construction whether the parties intended that none should be payable or that the rule of law refered to by the Lord Justice-Clerk in Thomson v. Geekie should apply.

For the foregoing reasons I have no doubt that the parties never intended that agreement as to the time and manner of repayment of the loan was a condition essential to the implementation of the agreement to sell the shares. It follows that the First Division reached the correct conclusion and that the appeal should therefore be dismissed.