Repayment of the loan capital and any interest due will be made in such instalments as may be agreed from time to time between myself and the company. Always provided that the company's ability to meet its other liabilities as they fall due would not be adversely affected by such repayment."

First basis for non-payment: Another liability

[7 ] The defenders aver that the principal liability for which they must at present provide, and which prevents them from repaying the loan, is a potential liability in case of the eventual success of the pursuer in proceedings in the Court of Session relating to a pensions claim. The defenders are one of the associated employers in respect of an occupational pension scheme. The pursuer raised proceedings in the Court of Session against the trustees of the pension scheme seeking payment of certain sums considerably in excess of the amount of principal outstanding in respect of the loan. The defenders aver that in the event of success by the pursuer in that action there will be a significant deficit in the funds of the pension scheme and the defenders will be obliged to make good a share of that deficit. They aver that the pursuer was a trustee of the pension fund until about January 2003 when she raised these proceedings. They aver that as at the time of her resignation she was fully aware as trustee of the information available to the trustees as to its funding, and also of the impact on that funding of having to meet a claim such as that presented in her proceedings in January 2003. In these circumstances they aver that the pursuer is not presently entitled to repayment of the loan.

[8 ] Mr Sandison was critical of the vagueness of these averments and submitted that there were two substantive reasons why the defenders' averments on this matter were irrelevant. Mr Sandison pointed out that the defenders were not averring that they had a liability presently due. It was a potential liability which might become due. That, said Mr Sandison, was not a relevant defence with respect to the terms of the 1986 letter. It was not an offer to prove something that would invoke the condition in the 1986 letter, namely, that there was an existing liability. The liability would only come into being on the occurrence of certain contingencies: success by the pursuer in her action; and a deficit in the pension fund. He submitted that if a contingent liability were to be regarded as invoking the condition, then the loan would never be repayable so long as the company continued to exist. It would always have contingent liabilities, even if only the cost of its own winding up.

[9 ] He went on to explain that in the pensions claim the pursuer had been successful before the Lord Ordinary but that the day before the hearing of the Procedure Roll debate before me the action had been dismissed by the Inner House. Thus, there was no extant action at all. The possibility of an appeal to the House of Lords was simply a further contingency.

[10 ] Mr Sandison also submitted that even if a liability which fell within the terms of the 1986 letter did exist, the defenders had advanced no claim that they would be unable to meet that liability and the liability to the pursuer to repay the loan. Such averments would be required in order to invoke the 1986 letter. At page 12B all the defenders averred was that they would be "severely compromised" in their ability to meet the claim if the loan were repaid. All that meant was that they might or might not be able to meet the claim. This simply underlined the vagueness of the defenders' averments in attempting to invoke the terms of the 1986 letter.

[11 ] Mr McNeill conceded that there was no dispute as to the pursuer's entitlement to seek repayment of the capital sum. On 11 January 2007 the Inner House had found in favour of the trustees and the actions were dismissed. Thus, the pursuer had three months in which to decide whether to appeal to the House of Lords and if she did so decide the potential for liability revived. This merely reflected the fluctuation of fortune with respect to the existence of the liability. The defenders had to have regard to the potential re-emergence of the liability. Because the pursuer had terminated the lease of the castle to the defenders, the defenders had no other assets on which to trade and no other source of funds.

[12 ] As noted, I was advised in the course of the hearing before me that the Inner House had dismissed the pursuer's claim in the pensions case. While the case was at avizandum the period for appeal to the House of Lords expired and I was given to understand that the pursuer had not marked an appeal. In these circumstances it seems to me that it is not open to the defenders to claim that there exists a liability that they require to meet such as to bring them within the terms of production 7/1 and relieve them from the obligation to repay the loan. Accordingly, I shall exclude this defence from probation.

Second basis for non-payment: Retention
[13 ] The defenders aver that they are entitled to retain any sum due in repayment of the loan pending resolution of the counterclaim. They aver that the loan was originally made to the defenders by Trustees of a settlement made in respect of the Sixth Earl's marriage to his first wife in order to provide working capital for a new business being run by the beneficiaries of the trust. The loan was appointed to the pursuer as the wife of the Sixth Earl and maintained by her to support the continued financial stability of the company and thereby enhance the availability of benefits to her by reason of her position as managing director and the individual in control of the company. They aver that the amounts counterclaimed arise in respect of the pursuer's actings and payments taken during her period in office as managing director. They aver that both the circumstances giving rise to the amounts counterclaimed, and the circumstances giving rise to the maintenance of the loan and claim for repayment, relate directly to the pursuer's employment with the defenders.

[14 ] Mr Sandison submitted that it was not possible save in the most unusual circumstances to retain sums due under one contract on the basis that a claim exists against the person seeking payment based on some other matter extraneous to that contract. He submitted that a mere relation between the claims was not enough for the exceptional application of retention.

[15 ] Mr McNeill submitted that although the matters pled did not arise out of the same contract the claims were sufficiently related and close to liquidation that to refuse the defenders a right of retention would not be to do justice between the parties. He submitted that the claim with respect to the loan and the counterclaims with respect to the expenditure and the bonus both related to the maintenance of the company for the purpose of the initial beneficiaries under the initial trust which made the loan. Both related to the pursuer's role as managing director and controlling mind of the company.

[16 ] Further, Mr McNeill submitted that in the present case if it were not for the pursuer insisting on arguing her pleas the case would be going to proof before answer on the action and the counterclaim. Accordingly, the counterclaim would be well in the course of being made liquid.

[17 ] Where the counter-obligations arise from a single contract the principle of retention is applicable. I was referred to the following passage in Walker, The Law of Civil Remedies in Scotland, at p.61 under the heading 'Retention of Money until Counter-claim is Satisfied':

"Where counter-obligations arise from a single contract, each is dependent and conditional on the other and if performance on one side is not made, or defectively made, the other party may withhold payment until performance is made or his claim for damages for non-performance or defective performance quantified."

[18 ] The general rule applicable where claims do not arise out of a single contract is set out in Gloag on Contract, p.624 under the heading Breach of Separate Contract:

"As a general rule, it is no excuse for failure of performance that the other party is in default on another contract."

However, at p.625, under the heading 'Claims Immediately Verifiable', Gloag continues:

"An illiquid claim has been sustained as a dilatory plea where there were materials for its instant or easy verification, and where, in the opinion of the Court the ends of justice would be defeated if it were repelled."

I was referred to the Opinion of Lord McLaren in Ross v Ross 1895 22 R. 461 at p.464:

"In disposing of the pleas in this case I think that the Lord Ordinary has rightly dealt with the plea of compensation, because that is a matter of statutory regulation, and the plea is confined to cases where both debts are liquid or capable of immediate ascertainment; but then there is another principle under which one obligation may be suspended until the performance of a counter obligation - the principle of retention, and that, not being subject to the conditions of any statute, must be regarded as an equitable right to be applied by the court according to the circumstances of each case as it shall arise. The doctrine has received much extension in cases of bankruptcy and insolvency, where it is practically settled that anyone who has a claim against an insolvent estate is entitled to keep back money which he owes to the estate, and cannot be compelled to pay in full while he only receives a dividend. But the principle is not limited to bankruptcy cases, and it seems to me that the circumstances of the present case constitute a very clear ground for its application..."

[19 ] Mr McNeil referred to a passage in the opinion of Lord Curriehill in Munro v Macdonald's Executors 1866 4 McPh. 687 at p. 688:

"I do not think that we at all go in the face of the very important rule of law, that an illiquid claim cannot be pleaded by way of compensation to a liquid claim. As your Lordship has stated, that rule is not without exception. If a claim is in the course of being made liquid, it may be pleaded by way of compensation. The word statim in the rule, as expressed in Erskine, implies some discretion on the part of the court. A great deal of enquiry may be necessary in order to ascertain and make a claim liquid. But if it is in the fair course of being made liquid by decree at an early date, and there is no allegation of unnecessary delay, I think that the court is entitled to exercise a discretion."

[20 ] A number of points may be taken from the above authorities in relation to cases in which the counter-obligations do not arise from a single contract. Retention operates to suspend an obligation until counter-obligations are fulfilled. Retention is not restricted to cases where the counter-obligations arise out of the same contract. In cases where the counter-obligations do not arise out of a single contract the court has a discretion to apply the principle of retention as an equitable right. The court may allow an illiquid claim to be pled against a liquid claim where the illiquid claim is in fair course of being made liquid by decree. It seems to me that in applying these considerations to the present case there is force in the submissions of Mr McNeill. Both the claim for repayment of the loan and the counterclaim are closely related and the counterclaim is well in the course of being made liquid. I am unable to say that the defenders have failed to plead a relevant defence of retention and they should in my opinion be allowed a proof before answer on that defence.

Third basis for non-payment: Compensation
[21 ] At p.18D the defenders aver "separatim, said expenditure and the unauthorised bonus have repaid any sums due under the loan." There were no further averments in support of this bald claim. Mr Sandison submitted that where compensation was to be relied upon it required to be pled (Stair Encyclopaedia, The Laws of Scotland Vol.13, para.96). Further, the same difficulty arose as arose under retention, namely, that the defenders were trying to set off a liquid debt, the loan, against the debts which are illiquid regarding, the greenhouse and the bonus.

[22 ] Under reference to the passage at p.18D and plea-in-law 4, Mr McNeill submitted that the plea to compensation should not be refused probation.

[23 ] In my opinion no relevant defence of compensation has been pled by the defenders and I shall refuse probation to the defence of compensation.

Interest
[24 ] The defenders' position with respect to the interest due on the loan is set out in Answer 2 at pages 14B-15B. They aver:

"When charged, the rate of interest used was 10%. This was in accordance with the said letter signed by the pursuer and dated 31 March 1986 confirming that no arrangements for charging interest had been formalised and repayment of capital and interest would be made in such instalments as might be agreed. By memorandum dated 9 June 1986 to F. M. Forbes, Estate Factor/Accountant the pursuer indicated that she had 'decided to charge a 10% on my loan to Cawdor Castle (Tourism) Limited.' There was no company or board minute. From about the time of the death of the pursuer's husband the 6^th Earl and by which time the pursuer controlled the company by reason of her shareholding and position and Managing Director, an annual interest charge of 15% was applied to the amount of the loan outstanding as no significant repayments of capital were made."

They aver that in accordance with arrangements approved by the pursuer as Managing Director of the defenders and as lender, interest payments were made and accepted by the pursuer up until that for the period May to October 2002. Mr Sandison pointed out that the defenders did not aver that the interest rate of 15% had not been agreed. He suggested that it was difficult to see how the defenders had any answer to the pursuer's claim to the rate of 15% continuing. The defenders had paid interest up until 2002 and should pay 15% from 2002 until payment. Alternatively, as a minimum, there should be payment from the date of citation at the rate of 8%.

[25 ] Mr McNeill said that the defenders' position was that the charging of interest at a particular rate had never been formalised. The pursuer's position was set out in Article 1 of Condescendence at page E to 9B where it is averred:

"The memorandum of 9 June 1986 is similarly referred to, under explanation that the decision to charge a 10% rate of interest set out in that memorandum, like all other decisions as to the rate of interest to be charged on the loan from time to time, was made after informal discussion with, and with the agreement of, all interested parties, including the directors of and shareholders in the defenders, at regular meetings of the Cawdor Family Trusts, at which meetings the affairs of the defenders as a company owned by one of those Trusts and by family members were habitually discussed and agreed, and that at no point before the raising of this action did any person claim that the 15% rate of interest applicable to the loan (being the rate shown as chargeable in the defenders' audited accounts condescended upon) was being applied other than by the continuing agreement of the parties."

Mr McNeill submitted that even although it was a matter of history that a rate of 10% or 15% might be applicable at a particular stage, there was no averment that the rate of 15% or any particular rate was agreed as always to be chargeable. It was a matter for the discretion of the Court as to what rate of interest should be applicable and from what time interest at the court rate should be applicable. It is averred at pages 16-17 by the defenders that the rate of 15% had been for many years excessive had it not been for the benefit of a controlling director:

"Upon the assumption that the pursuer is entitled to a payment of interest on the amount of the loan outstanding, she is entitled to no more than a fair rate for the period in question. A rate of 8 per centum per annum would be appropriate. Separately, upon the assumption that the notes to the accounts do not evidence the basis upon which the loan was maintained, there is no pactional rate of interest to which the pursuer is entitled."

[26 ] I am satisfied that in the light of the competing averments of fact on the question of rates of interest to be charged on the loan it would be impossible for the court to reach a concluded view on the appropriate rate of interest without hearing evidence and I shall accordingly allow a proof before answer on the question of the rate of interest to be applied to repayment of the loan.

Payment in lieu of notice
[27 ] Conclusion 3 is for payment by defenders to the pursuer of the sum of £11,219. Plea-in-law 5 for the pursuer is as follows:

"The defenders having contracted to pay the pursuer salary in lieu of notice, and having failed to do so in respect of the period and to the extent condescended upon, decree should be granted as third concluded for."

[28 ] In Article 4 of Condescendence, the pursuer avers that the period of notice stipulated in her contract of employment was 13 weeks. There was provision for the defenders to give payment in lieu of wages. She avers as follows:

"By her letter of resignation as director of the defenders, the pursuer indicated that she was prepared, and intended to work that notice period. The defenders however, decided that they did not desire her to work her notice, but that she should cease to be employed as their managing director immediately."

She avers that the net sum which she was due for salary in lieu of notice is £11,219.

[29 ] In answer, the defenders aver that the letter of resignation sent by the pursuer on 10 October 2002 indicated a decision to resign as a director with immediate effect. She did not give 13 weeks notice of termination of her employment.

[30 ] This dispute turns on the construction of the letter sent by the pursuer on 10 October 2002 (Production 6/7) and the reply from the defenders (Production 6/1). The letter sent by the pursuer on 10 October 2002 is in the following terms:

"I am writing to inform you of my decision to resign as a director of Cawdor Castle (Tourism) Limited, with immediate effect.

I appreciate that I am an employee of the Company and I am quite prepared to carry on working my notice period of 13 weeks from today's date. Unless I hear from you to the contrary, I shall continue my employment until the end of my notice period."

In his reply, the Seventh Earl Cawdor wrote (Production 6/1):

"Thank you for your letter of 3 October informing me of your resignation as a director of Cawdor Castle (Tourism) Limited. I note that you would be prepared to work out a 13 week notice period. However, I do not believe that would be desirable. I am therefore treating your resignation as a director and as managing director of the Company as being effective from today."

[31 ] Mr Sandison submitted that when both letters were read as a whole it was clear that the pursuer's letter of resignation was not indicating that she was leaving there and then but that she was giving the appropriate notice. The Earl's reply was consistent with that interpretation. That is the obvious construction of the letter. The defenders' averment that the pursuer did not give 13 weeks notice of termination of her employment is irreconcilable with the correspondence.

[32 ] Mr McNeill agreed that the question of the liability to pay the payment in lieu of notice turned on the construction of the exchange of letters. He submitted that the defence was relevant. He submitted that paragraph 1 of the pursuer's letter of resignation made it clear that she was resigning with immediate effect. Paragraph 2 muddied the waters. Paragraph 2 simply represented an offer to work. It would be a strained view of the construction of the letter to suggest that she was giving notice. He drew attention to certain averments in the pursuer's pleadings. At page 6A the pursuer avers that she gave notice of resignation which was accepted by the defenders with immediate effect. In Article 3 of Condescendence at page 18D she avers that she was employed by the defenders as managing director until she tendered her notice on 10 October 2002 and it was accepted by the defenders with immediate effect. In Answer 2 to the counter-claim at page 42C-D she admitted that a letter dated 10 October 2002, she gave notice of her resignation as a director and employee of the defenders. Mr McNeill submitted that her case on record was that her employment terminated on 10 October 2002. Mr McNeill submitted that the first paragraph of the reply from Earl Cawdor responded to what she had said in her letter.

[33 ] It was also important to have regard to the contract itself (Production 6/4). It was necessary to bear in mind the contractual context in which the letters were sent and received. It was also necessary to consider the question of waiver of a right by an employee who was otherwise entitled to notice. Here there was a specific provision for waiver. He submitted that the proper construction of Production 6/1 taken with Production 7/12 was that there had been waiver of the notice period, the result being that neither party could claim that the other was in breach of contract. Looking at the terms of the contract what would have been in the mind of the pursuer was that she appreciated the existence of the notice period but also thought that she might not be held to it.

[34 ] Finally, Mr McNeill submitted that there might be a question as to whether there was ambiguity in the letters and it might be necessary to have regard to the surrounding matrix of fact to resolve any ambiguity.

[35 ] In my opinion the obvious and straightforward construction of the correspondence between the pursuer and the Seventh Earl is that for which Mr Sandison contended. Under the contract of employment between the pursuer and the defenders the section dealing with notice in the event of termination of employment is as follows:

"Notice which will be given by the Company/ employee.

Over 4 weeks service - 13 weeks.

By mutual agreement these notices can be waived by either party. Payment in lieu of notice may be given."

In her letter the pursuer specifically states that she intends to continue her employment until the end of the period of notice. In this respect she made it clear that she was prepared to fulfil her contractual obligation to work her notice. In his reply the Seventh Earl simply fails to address the issue of payment in lieu at all. It seems to me that the defenders would not have been in breach of contract if having decided not to insist on the pursuer working her notice they had instead made a payment in lieu of notice. By simply advising her that she was not to work her notice while not stating that a payment in lieu of notice would be made instead and by failing to make a payment in lieu of notice the defenders put themselves in breach of contract. It does not seem to me that the various averments made at other points in her pleadings undermine the position of the pursuer. I am unable to read the correspondence as implying waiver. Nor does it seem to me that there is any ambiguity which might require consideration of the factual matrix. I shall refuse probation to this defence. This would include the averments in relation to termination of the lease between pages 24 D-E and 25 D. Mr Sandison accepted that the defenders had pled a relevant defence to the claim for payment in lieu of notice by relying on the principle of retention in relation to the claim by them that the pursuer had claimed an unauthorised bonus. Accordingly, I shall allow the issue of payment in lieu of notice to proceed to proof before answer on that limited basis.

Counterclaim

[36 ] Mr Sandison accepted that the defenders' case based on unjustified enrichment was one in which the defender was entitled to a proof before answer. Mr Sandison attacked the case made by the defenders based on the breach of fiduciary duty and section 317 of the Companies Acts 1985. He submitted that these claims were not fit to be remitted to probation. They were irrelevant or so lacking in specification as not to give fair notice of the facts on which the defenders rely.

[37 ] Mr Sandison pointed out that although there was reference in the defenders' pleadings in the counterclaim to a breach of the articles of association, at no point was there any specification of what these were. Mr Sandison submitted that in examining a case alleging breach of fiduciary duty in respect of a transaction between a director and a company, one would expect to see averments setting out a clear statement on behalf of the company as to the circumstances in which the payment were made. For example, one would expect to see specification as to whether it was claimed that the payment was made without the knowledge of anyone else or whether anyone else was told and if so, whom. In relation to section 317 of the Companies Act, one would expect to see specification as to whether or not other members of the board had been advised and in relation to the common law requirements whether members of the company had been advised. One would expect some specification as to whether these persons expressed a view about the transaction. Mr Sandison submitted that without that basic information it was impossible to determine a relevant case of breach of fiduciary duty or regard what was stated as amounting to fair notice. The position in statement 3 of the counter-claim in relation to the greenhouse was similar.

[38 ] Mr McNeill submitted that it was important to have regards to the structure of the defenders' pleadings in statements 2 and 3 of the counter-claim. In statement 2 at pages 31-33, the defenders set out the case based on unjustified enrichment. Thereafter the defenders' responses to the pursuer's answers were averred together with certain calls made on the pursuer. Later, the issue of the Minute of Agreement was dealt with. Mr McNeill submitted that a difficulty which the defenders faced was in anticipating on the pleadings what the issues to be determined after proof would be. The defenders were under the impression that there was no signed Minute of Agreement. That view was shared on record by the pursuer until the surprising production of the Minute of Agreement in 2005. In these circumstances the court would be unable to determine the issue as a matter of pleading. There would be different outcomes depending on whether it was proved that there was or was not a signed Minute of Agreement. Mr McNeill submitted that there were many different types of situation in which a breach of fiduciary duty could be demonstrated.

[39 ] The factual averments setting out the case based on breach of fiduciary duty are set out in statement II at pages 39ff and in statement III at page 51. I recognise that it is necessary to read these averments in the light of the statements as a whole. While I agree that the averments in support of breach of fiduciary duty are open to criticism as being somewhat lacking in specification and would benefit from further specification, it does seem to me they are sufficient to be allowed to proceed to probation.

Decision

[40 ] I allowed certain amendments at the bar in order to deal with a number of erroneous references in the pleas-in-law in the counterclaim and errors in the figures in Statement III. For the reasons set out above I shall allow a proof before answer on the action and the counterclaim. I shall partially sustain the pursuer's first plea-in-law in the action and refuse probation to the following averments of the defenders:

· In Answer 2 from the words "The principal liability" where they occur at page 11 D-E to the words "severely compromised" where they occur at page 12 B.

· In Answer 2 from the words "Upon the assumption" where they occur at page 15 B to the words "entitled to repayment of the loan" where they occur at page 16 D.

· In Answer 2 the words "Separatim, said expenditure and the unauthorised bonus have repaid any sums due under the loan." where they occur at page 18 D.

· In Answer 4 from the words "On 10 October 2002 where they occur at page 24 C to the words "to terminate the lease" where they occur at page 25 D.

I shall reserve the question of expenses.

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	Scottish Court of Session Decisions
You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Cawdor v Cawdor Castle (Tourism) Ltd [2007] ScotCS CSOH_134 (31 July 2007) URL: http://www.bailii.org/scot/cases/ScotCS/2007/CSOH_134.html Cite as: [2007] ScotCS CSOH_134, [2007] CSOH 134

Scottish Court of Session Decisions

First basis for non-payment: Another liability