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Scottish Court of Session Decisions |
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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Mainland v. Mainland Salmon Ltd [2003] ScotCS 320 (19 December 2003) URL: http://www.bailii.org/scot/cases/ScotCS/2003/320.html Cite as: [2003] ScotCS 320 |
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OUTER HOUSE, COURT OF SESSION |
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CA36/03
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OPINION OF LORD CLARKE in the cause BRUCE MARTYN MAINLAND Pursuer; against MAINLAND SALMON LIMITED Defenders:
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Pursuer: Clark; Ledingham Chalmers
Defenders: G. J. Clarke, Simpson & Marwick, W.S.
19 December 2003
[1] This commercial action relates to a contract between the parties which is embodied in a document dated 21 November 2000 and which is No.1 of the documents founded upon in the summons. The document is a letter addressed by the defenders to the pursuer.[2] The background to the letter was a share acquisition agreement whereby the defenders purchased the entire issued share capital of a company known as "Mainland Salmon Limited". The pursuer was one of the two shareholders of the shares acquired.
[3] The terms of the letter are as follows:
"I refer to the completion today of the sale and purchase in terms of a Share Acquisition Agreement between us, EWOS Ltd ('the Purchaser') and each of Bruce Mainland and Hugh Mainland (the 'Agreement') in respect of the entire issued share capital of the Company. Words and phrases defined in the Agreement shall bear the same meaning in this letter unless otherwise indicated.
I am writing to confirm our agreement that:-
(i) if on or before 21 November 2005 the Company successfully negotiates or wins through successful litigation, damages, expenses and costs from OIC in respect of an ongoing insurance claim detailed in the Disclosure Letter ('the Claim') an aggregate amount in excess of £840,000 (net of unrecoverable costs and taxes), the Company shall and the Purchaser shall procure that the Company shall on receipt of such damages, expenses and costs from OIC which may be received after 21 November 2005 pay to you 30% of any excess over the net amount of £840,000 (together with interest at the rate of 6% per annum on such excess, such interest running for receipt of such successful payment by the Company of such amount) upon receipt of a demand from you following upon such receipt by the Company.
(ii) if the Company negotiates or wins less that £840,000 net of unrecoverable costs and taxes in aggregate damages, expenses and costs in respect of the Claim, then you shall pay to the Company on 21 November 2005 a sum equal to 30% of the amount by which the actual amount recovered from OIC is less than £840,000 (together with interest at the rate of 6% per annum on such sum such interest running from Completion until payment, which payment shall be due promptly on receipt of a demand from the Company in respect of such amount after 21 November 2005) but subject to a maximum amount of £175,000 plus any interest due thereon.
We agree that and shall procure that the Company agrees that you will be given full control of the prosecution and settlement of the Claim and without prejudice the foregoing generally the Claim will not be settled with OIC or its insurers without your prior written approval (which shall not be unreasonably withheld or delayed and which shall be deemed to have been given if our Q.C. advises there is no prospect of any successful appeal or better outturn).
Notwithstanding the terms of the Agreement the rights and obligations pursuant to this letter are not assignable.
This letter and acceptance hereof shall be governed by and construed in accordance with the law of Scotland."
The letter is signed by Nick Meakin for an on behalf of EWOS Limited. It is also stated in the letter as follows:
"On behalf of Mainland Salmon Limited, I hereby confirm its obligation to Bruce Mainland in terms of this letter."
That statement is signed for and on behalf of Mainland Salmon Limited by a director of the Company. Attached to the letter is an acknowledgement by the pursuer in the following terms:
"I hereby acknowledge receipt of the letter of which the foregoing as (sic) a copy and agree to the terms thereof."
It is averred by the pursuer in article 2 of conscendence as follows:
"By letter dated 21 November 2000 the defenders undertook to make payment to the pursuer of certain sums dependant on the outcome of an action which they had raised against Orkney Islands Council. Following determination of that action, payment of those sums was due on receipt of a demand for their payment being made by the pursuer."
In article 3 it is then averred:
"The action at the instance of the present defenders against Orkney Islands Council was resolved by agreement. In terms of the settlement agreement, payments totalling £908,946 were made to the present defenders in respect of the principal sums claimed in the action. In addition, £90,000 was paid to the present defenders towards the expenses of investigating and pursuing the claim. The aggregate sum paid was thus £998,946. The excess over the sum stated in the letter of 21 November 2000 is £158,946. Thirty percent of that sum is £47,683.80."
In answer 3 for the defenders it is averred, inter alia as follows:
"Admitted that the action at the instance of the present defenders against Orkney Islands Council was resolved by agreement. Admitted that in terms of the settlement agreement, payments totalling £908,946 were made to the present defender under explanation that an interim payment of £80,946 was made in 1995 and that the final payment of £828,000 was made in July 2002."
[5] Counsel for the pursuer referred me to an averment of the defenders in answer 3, to the effect that: "The defenders are liable to pay corporation tax of £272,684 on the principal sum paid by Orkney Islands Council". What was not averred, however, counsel submitted, was that the defenders had ever paid any such tax in respect of that sum. If no such tax had been paid at the time, at which the demand for payment was made by the pursuer, following receipt of the settlement sum by the defenders, no deduction from that sum in respect of tax should be made in determining the rights of the pursuer to be paid in terms of the agreement. It was a matter of agreement that the demand for payment was made on behalf of the pursuer in June 2002. Counsel for the pursuer pointed out that the defenders, not only have not averred that they paid corporation tax on the sum they received, they do not aver that they will pay corporation tax on the sum received at some time in the future. What was revealed, in note 5 to the defenders' audited accounts for the period to 30 December 2001, which are lodged as No.6/1 of process, and which record the payment from Orkney Islands Council as income, is that
"No liability to UK corporation tax arose for the period ended 30 December 2001 nor for the year ended 30 June 2000. A nil tax charge arises through the level of accumulated losses and the availability of group relief."
Counsel submitted, therefore, that when the demand for payment was made in June 2002, the defenders should have been aware of their position regarding group relief being available to them and that no tax would be due by them in respect of the payment received from Orkney Islands Council. Accordingly, for these reasons, the provisions of para.(1) of the letter of 21 November 2000 should be construed, and applied, in such a way, as not to involve any reduction from the sum received from Orkney Islands Council of thirty per cent in respect of corporation tax.
[6] In reply, counsel for the defenders submitted that the phrase "net of unrecoverable costs and taxes" was a perfectly familiar one in relation to such matters and should be construed with regard to the nature of the payment it qualifies. If the payment in question is received gross, without tax having been deducted before receipt, then the tax liable to be paid on that receipt should be deducted and no regard should be had to the way in which the sum might, in due course, be treated in the recipient's accounts, and in particular, how the recipient may employ the provisions of section 393 of the Income and Corporation Taxes Act 1988 regarding loss relief.[7] Even if, as a matter of fact, corporation tax, was not, in the event, payable by the defenders on the sum received by them, the relevant phrase still required to be construed by reference to the intention of the parties, at the time they entered into the agreement. It surely could not be said that it was their intention that the pursuer might only be entitled to be paid in terms of the agreement, if the defenders chose to, and were able to, set off losses against the payment received. Counsel for the defenders then referred me to the provisions of section 393(1) and (2) of the Income and Corporation Taxes Act 1988, which provide that a company's trading losses may be set off against other income of the same accounting period, or an immediately preceding period of the same length, or carried forward against trading income of the same trade. One of the consequences of the provisions might be that the defenders could have paid tax on the sum received, only to have that repaid having regard to losses incurred later by them. The position, in the present case, became even more complicated in that the losses which could be set off included losses sustained by other companies in the defenders' group of companies. Ultimately, the short point was that the parties, at the time they entered into the agreement, did not provide for what was to happen in the event of the defenders setting off against the sum received, losses, employing the relief provision in section 393 of the 1988 Act and the parties had not intended to do so. What they had intended was that there should be deducted from the sum received by the defenders, thirty per cent of that figure in respect of tax which otherwise would be due in respect of the gross payment made to the defenders.
[8] Counsel for the defenders said that the averment in answer 3 to the effect: "The defenders are liable to pay corporation tax of £272,.684 of the principal sum paid by Orkney Islands Council" was inapt and should not have been made as it did not represent the present position. That did not, however, have any impact on the submissions he made in respect of the proper construction of the provision in question. Counsel for the defenders added that, as far as the interim payment which had been made, it had been entered in the defenders' accounts as profit but counsel could not say if tax had been payable upon it.
[9] I am satisfied that the defenders' approach to the construction of the relevant phase is to be preferred. The calculation, in terms of the relevant provision in the agreement, required to be carried out as soon as the sum in question was received from Orkney Islands Council by the defenders, and the demand for payment was made by the pursuer. At that time, whether or not, in the event, the defenders would be liable for tax on the receipt or not, depended on whether or not they could claim loss relief in terms of section 393 of the 1988 Act, which was a matter which could not necessarily be finally determined at the time the demand was made. There is no provision in the agreement for the calculation to be postponed until such matters are finally determined. I agree with counsel for the defenders that that being so, the intention of the parties, when they entered into the agreement, was that the calculation would be done by making a deduction of a deemed payment of thirty per cent of corporation tax, on the gross receipt, to arrive at the net figure. The complications which would arise, otherwise, in my view, would render the agreement quite uncertain, in its effect, if not unworkable. It could not have been the intention of the parties, as counsel for the defenders, submitted, that the sum in question would be determined by whether or not there was to be any loss relief available to the defenders and whether or not they chose to seek and obtain it. In sum, I am of the opinion that the construction of the phrase "net of unrecoverable taxes" does not depend on the way in which the payment in question was eventually treated in the defenders' accounts and, in particular, is not dependant on the availability and use of losses in terms of section 393 of the Income and Corporation Taxes Act 1988. I should add that neither side suggested that the word "unrecoverable" assisted in resolving the question of construction.
[10] It appears to me that my decision regarding the proper construction of the phrase in question, probably means that the pursuer's claim falls to be dismissed but there was some discussion before me that the matter should be put out By Order once I had reached by decision as to the point of construction so that there could be consideration as to the appropriate interlocutor to be pronounced. I will, accordingly, have the case put out By Order for that purpose.
