Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2010CSOH 09
CA65/08	OPINION OF LORD MENZIES in the cause JH CUNNINGHAM & SON (HAULAGE) LIMITED Pursuer; against JAMES SMITH & OTHERS Defenders; ­­­­­­­­­­­­­­­­­________________

Pursuers: Reid Q.C; Brodies LLP

Defenders: Mrs S Wolffe Q.C, et Duthie; Biggart Baillie LLP

29 January 2010

[1] In the period prior to November 2006 both the pursuers and defenders were in engaged in the business of road haulage contracting. By means of a business sale and purchase agreement (the "agreement") between the pursuers and the defenders executed on 17 November 2006 the business and certain assets of the third defenders were sold to the pursuers as a going concern, and the business and certain assets of the fourth defenders were sold to the pursuers as a going concern. The agreement contained contractual warranties by the defenders in favour of the pursuers. In this action the pursuers seek damages from the defenders for losses which they aver that they have sustained as a breach of these contractual warranties. The summons in the present action was signetted on 5 January 2007. For further details as to the nature of the dispute between the parties I refer to my Opinion dated 25 January 2007, which, although issued at a very early stage in the proceedings and addressed to the question of recall of arrestment and inhibition, gives some flavour of the dispute.

[2] The procedural history of the case is of some relevance in the present context. After sundry procedure in the Outer House and the Inner House, the action was appointed to the commercial roll on 4 July 2008. On 3 February 2009 four weeks were provisionally reserved in the court diary for a proof before answer in this case, those weeks commencing on 27 October, 3 November, 17 November and 24 November all 2009. Those dates were confirmed and a proof before answer was fixed by interlocutor dated 17 July 2009. On 26 August 2009 the court appointed parties to be heard By Order on 9 October 2009 so that the court could be informed of parties' readiness to proceed to proof on the appointed dates. On 9 October 2009 both parties were appointed to lodge certain documents by no later than 19 October 2009, but it appeared that both parties were ready to proceed to proof on the dates appointed.

[3] On 27 October 2009 (i.e. the first day fixed for the proof before answer) the pursuers tendered at the bar a Minute of Amendment (which extended at that time to about 3 pages) and sought to lodge five Inventories of Productions (comprising about 11 lever arched files of documents) late. The defenders sought dismissal of the action. The court refused dismissal, and allowed the pursuers' Minute of Amendment (No 36 of process) and the defender's answers thereto (No 37 of process) to be received, and allowed adjustment of the minute and answers until close of business on 5 November 2009. On the same day, the first two weeks of the diet of proof were discharged, a further week of proof was fixed to commence on 1 December 2009, the pursuers were found liable to the defenders in the expenses of the discharge of the first two weeks of the proof, and the matter was put out By Order on 6 November 2009.

[4] On 6 November 2009 the pursuers' Minute of Amendment had been expanded by adjustment to approximately 16 pages, and on that date the pursuers sought leave to lodge a further five volumes of productions, which had only been disclosed to the defenders' agent at 4.45 pm on the previous day. The defenders had already enrolled motions for caution and recall of arrestment and inhibition, and it was clear that the issues between the parties were such that they could not be determined within the period of one hour allocated to the hearing. For this reason the By Order hearing was continued to 12 November 2009. On that latter date senior counsel for the pursuers (who had acted on their behalf throughout the action to date) intimated to the court that on 9 November 2009 he had become aware of a circumstance which had led him to form the provisional view that he had a conflict of interest. Having consulted a Faculty Office Bearer, he had informed his instructing agents that he could no longer act on behalf of the pursuers. Having intimated this to the court, he was allowed to withdraw. Mr Reid Q.C. was instructed for the pursuers at that time, but only for the purpose of opposing the defenders' motions and for any incidental matters arising; he made it clear that he did not have instructions to conduct a proof. He had only been instructed on the previous day, and he moved that the proof which had been fixed to start on 17 November and for the ensuing three weeks should be discharged. Senior counsel for the defenders agreed that it would not be possible for the proof to proceed on these days in light of what had had happened. The court therefore discharged the three week diet of proof set down to commence on 17 November 2009, and appointed parties to be heard at a two day hearing on 24 and 25 November 2009. The defenders' motions were continued to these dates.

[5] On 24 November 2009 Mr Reid Q.C. again appeared for the pursuers. The defenders had five motions enrolled - (1) for dismissal of the principal action, (2) for caution of £50,000 in terms of section 726 of the Companies Act 1985, (3) for an order for consignation of the sums sought in the defenders' counterclaim, (4) recall of the warrant for arrestment and inhibition on the dependence of the action, and (5) the expenses of the discharge of the three week proof fixed to commence on 17 November 2009. Senior counsel for the defenders submitted that the pleadings should not be allowed to be adjusted in terms of the pursuers' Minute of Amendment as adjusted (No 43 of process) and the defenders' answers thereto (No 44 of process). A full day was spent on submissions for and against the proposition that the pleadings should be allowed to be adjusted in these terms. I retired to consider these submissions, and reached the view that the pleadings should not be allowed to be adjusted in terms of the pursuers' Minute of Amendment (as adjusted) and the defenders' answers thereto. I gave my reasons for reaching this decision in an extempore judgment from the bench, but those reasons are encapsulated (albeit in abbreviated form) in my Note dated 25 November 2009.

[6] The submissions with regard to the amendment of the pleadings occupied the whole of 24 November 2009. When the court reconvened on the following morning, Mr Reid Q.C. moved for leave to reclaim against my interlocutor of the previous day. I heard competing submissions for and against leave to reclaim, after which I refused leave to reclaim. The pursuers' solicitors then immediately lodged a letter dated 25 November 2009 (No 45 of process) intimating that they were withdrawing from acting for the pursuers. Mr Reid Q.C. then sought leave to withdraw, and Mrs Wolffe Q.C. for the defenders moved for an interlocutor ordaining the pursuers to intimate whether they intended to proceed, on a shortened period of notice of seven days. I granted that motion, and indicated that the case would be put out By Order on 11 December 2009. I continued consideration of all outstanding motions to that date, and reserved all question of expenses.

[7] On 11 December 2009 junior counsel appeared for the pursuers and intimated that fresh agents had been instructed to act on behalf of the pursuers, but they had not yet received full transfer of the papers from previous agents. After some discussion, it was agreed that a hearing should be held on 5 and 6 January 2010 to consider the defenders' motions for caution, consignation and expenses.

[8] On 5 January 2010 Mrs Wolffe Q.C. on behalf of the defenders moved for (1) an order for the pursuers to find caution and to sist the proceedings until caution was found, in terms of section 726 of the Companies Act 1985, the amount of caution being sought being (by the end of her submissions) £160,000, (2) an order ordaining the pursuers to lodge the sum of £737,500 on joint deposit in the names of the parties' respective present solicitors, in terms of the third conclusion of the counterclaim (as amended by the defenders' Minute of Amendment (No 51 of process)); and (3) the expenses of the discharge of the diet of proof set down for the weeks commencing 17 November, 24 November and 1 December 2009, which was discharged by interlocutor dated 12 November 2009. This opinion is concerned with those motions. I deal with each motion in turn.

Caution

[9] Section 726 of the Companies Act 1985 provides as follows:

"Where in Scotland a limited company is pursuer in an action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the company will be unable to pay the defender's expenses if successful in his defence, order the company to find caution and sist the proceedings until caution is found.".

[10] At the outset of the hearing Mr Reid Q.C. properly conceded that if the defenders were successful in their defence to this action, the pursuers would not be able to pay the defenders' expenses. He accepted that the "credible testimony" test was met in this case, and that the only issue was whether the court should exercise its discretion to order caution and if so, at what level. Both parties accepted that section 726 of the 1985 Act was still in force.

[11] By way of background to her motion, Mrs Wolffe Q.C. observed that the sums sued for in the principal action amounted to just over £2,000,000. The total consideration which the pursuers were bound to pay in terms of the agreement was £1,627,500. Of this, the initial consideration of £890,000 was paid on 17 November 2006. The present action was raised within a matter of weeks thereafter, and none of the deferred consideration of £737,500 has been paid. Moreover, the pursuers have caught about £800,000 of the defenders' assets by their arrestments and inhibitions on the dependence of the action. The defenders had a reasonable suspicion that the pursuers never intended to pay for the business which they had acquired. These (together with factors referred to below) were matters which were relevant to the court's exercise of its discretion.

[12] Next Mrs Wolffe Q.C. referred to the pursuers' conduct of the action, which I have summarised above. She told me that the defenders had experienced great difficulty in obtaining the pursuers' expert report. Only in 2008 were they provided with a report, which was described as a second report and which did not offer detailed support for the pursuers' averments. At a very late stage in the proceedings two other reports from the same expert were lodged by the pursuers, one of which predated the report already lodged and one of which post dated it. All of these reports were uncritically dependant on the RHA analysis. The pursuers' late lodging of numerous large files of productions and a Minute of Amendment in the week before the proof resulted in the discharge of the first two weeks of the proof. There followed the attempt to expand the scope of the pursuers' case by means of significant and lengthy adjustments to the Minute of Amendment, and an attempt to lodge a further five files of productions; the withdrawal of senior counsel for the pursuers and thereafter the withdrawal of pursuers' agents resulted in the loss of the remaining three weeks of the proof. All of this occurred despite the defenders' strenuous opposition, and their repeated indication that they wished to proceed to proof if at all possible. The result is that the defenders still have a counterclaim for approximately £750,000, none of which has been paid, and a proof will not happen for many months. Many of the preparations undertaken by the defenders have been unnecessarily protracted as a result of the pursuers' conduct of the litigation, and all these preparations have occurred against the background of potentially insolvent pursuers. The pursuers have the protection of limited liability, whereas the defenders are individuals in partnership.

[13] Mrs Wolffe Q.C. submitted that the pursuers had displayed a lack of candour throughout the period since the agreement was concluded. One example of this lack of candour was the way in which the pursuers had altered their treatment of the value of the business acquired in their accounts, and their potential liability to pay the deferred consideration. The accounts for the year to 30 September 2007 (No 6/18 of process) were signed on 16 July 2008 - i.e. some 18 months after the present action was raised. In their report the directors of the pursuers indicated that the value of the goodwill purchased in November 2006 was considered to be nil and was being written off, one half in the year ended 30 September 2007 and one half in the year ending 30 September 2008. There was no provision in the 2007 accounts for payment of any deferred consideration at all. In the draft accounts for the year to 30 September 2008, (No 6/20 of process) again there was no indication of any provision for payment of the deferred consideration or any part of it. Moreover, despite the directors' declared intention to do so in the 2007 accounts, the remaining one half of the goodwill of the business was not written off, and remained as the only intangible asset of the pursuers. If this had been written off, the pursuers would have been balance sheet insolvent. It appeared from note 1.4 to the draft accounts that the decision not to write off goodwill was based on a decision that there was no permanent diminution in value. The final accounts for the year to 30 September 2008 (No 7/22 of process) reflected the draft accounts - no more goodwill has been written off, and there is no provision for payment of deferred consideration. The pursuers' continuing solvency as at 30 September 2008 depended on (a) their changed attitude towards permanent impairment of goodwill and (b) the absence of any provision for payment of deferred consideration.

[14] Mrs Wolffe Q.C. suggested that the pursuers' lack of candour manifested itself in other ways. In terms of a back letter of even date with the agreement (No 7/21 of process) the pursuers undertook not to transfer, sell or otherwise dispose of any part of the business transferred to them pursuant to the agreement (save where such transfer, sale or disposal was in the ordinary course of business or for full market value) unless and until they undertook to pay to the defenders within two business days of any such sale, transfer or disposal the amount of deferred consideration properly due and payable at that time or a bank guarantee for the benefit of the defenders. One of the premises from which the defenders' business was conducted, and from which the pursuers continued for some time to operate, was Monument Crescent, Shore Farm Industrial Estate, Prestwick. However, there were several adminicles of evidence to suggest that the pursuers no longer operated any business from that address. In July 2009 the pursuers had applied to the Traffic Commissioner for a decreased authorisation at the Monument Crescent site. This was granted. (Nos 7/16 and 7/15 of process). The pursuers' website contains only contact details at their site at Mossland Park, Glasgow, and there is no suggestion that they maintain premises at Monument Crescent, Prestwick (7/24 of process). The solicitors then acting for the pursuers wrote to the defenders' solicitors on 5 November 2009 asserting that the pursuers continued to operate from the Monument Crescent premises, and that in the previous week they had at least seven named drivers operating out of those premises (No 7/27 of process). In light of this assertion, the defenders obtained an affidavit from one of the named drivers, denying that he had worked from Monument Crescent in the previous week and asserting that neither he nor, to his knowledge, any other drivers of the pursuers have been based at Monument Crescent since 13 July 2009. The pursuers gave a letter to all their drivers in June 2009 stating that they were relocating from Monument Crescent to Hillington in June 2009 (7/29 of process). In light of this information the defenders instructed private investigators, who reported that following 2 days of surveillance they were satisfied that the pursuers were no longer trading from the Monument Crescent site (No 7/28 of process). All of this was indicative of a lack of candour on the part of the pursuers, as well as a decline in the pursuers' financial circumstances.

[15] With regard to the amount of caution sought, Mrs Wolffe Q.C. told me that in light of their previous experience in such matters her instructing solicitors estimated that the costs of senior counsel, junior counsel and agents would amount to approximately £5,000 plus VAT per day of a proof. A four week proof would therefore result in fees of about £80,000 plus VAT. In addition, it was reasonably estimated that 10 days of preparation would be required, at the same daily rate. This brought out a total including VAT of £152,750. This did not include any provision for further work required to be undertaken by the defenders' expert witness Mr Humphreys. It was estimated that his fees in this regard would be about £7,500. The defenders accordingly estimated their likely costs to be a minimum of about £160,000. Mrs Wolffe Q.C. also drew attention to the effect of the counterclaim for £737,500, together with interest thereon. The pursuers would require to succeed in obtaining an award greater than this sum in the principal action in order to avoid a finding of expenses against them. On the assumption that a proof was held later in 2010, the effect of interest being added to the sums sought in the counterclaim would be to increase the sums to about £854,000.

[16] By way of preliminary observations in response on behalf of the pursuers, Mr Reid Q.C. observed that these were motion roll hearings rather than a proof or submissions after a proof; this was not an appropriate time for affidavits, and the court is not in a position to make an assessment of credibility or reliability on the basis of affidavits at this stage. The underlying suggestion behind the defenders' submissions was that the pursuers had been acting in bad faith. The suggestion that the pursuers paid out more than £800,000 and then raised an action in order to arrest and inhibit as a method of treating the defenders was an extraordinary proposition. Moreover, there was nothing in the suggestion that the pursuers have lacked candour - throughout, the pursuers have been open about the nature and extent of their business. The circular letter which they gave to each of their employees regarding the proposed transfer to Hillington was a good example of this.

[17] Although the pursuers accepted that if the defenders were successful in their defence to this action the pursuers would not be able to meet the defenders' expenses, Mr Reid Q.C. urged me to exercise my discretion by refusing to order caution. The principal factor upon which he relied was the strength of the pursuers' case. The applicable laws warranty in the agreement (summarised at paragraph [4] of my Opinion dated 25 January 2007) is clear, and it is plain from Mr Humphreys' expert report that a large number of offences had been committed by the defenders before the completion date. Fairly read, both Mr Cross and Mr Humphreys acknowledged that there have been infringements. The principal line of defence is lack of specification, and an argument that any infringements were de minimis; however, the onus of establishing this lies on the defenders, and on the basis of Mr Humphreys' report the pursuers have a strong case.

[18] In support of the proposition that the strength of the pursuers' case is a factor to be considered by the court when exercising its discretion, I was referred to Monarch Energy Limited v Powergen Retail Limited 2006 SLT 743, particularly at paragraphs 10, 17 and 18. Mr Reid Q.C. acknowledged that if I took the view that the pursuers did not have a strong case, not much more could be said against the motion for caution. He observed that if caution was ordered, this would be the end of the case, as the pursuers could not afford to find caution. However, under reference to paragraph 35 of Lord Drummond Young's Opinion in Monarch Energy, which he accepted as being the correct general approach, Mr Reid Q.C. submitted that having regard to the present stage of the proceedings, in which no further diet of proof has yet been fixed, it would be appropriate to restrict caution to such further proof preparation as might be necessary. If this approach was taken, on the figures given by the defenders this would amount to ten days at £5,000 per day, being a total of £50,000. He stated that the pursuers would be able to find caution of up to £50,000 within a period of about 2 months, but they could not find caution in any greater sum.

[19] Finally, Mr Reid Q.C. recognised that a "broad brush" approach to caution is appropriate, and there is no statutory limitation as to what factors should be taken into account by the court when exercising its discretion in this matter. He acknowledged that the defenders had a prima facie entitlement to caution because of the pursuers' financial circumstances. However, it was relevant to note that the motion for caution was not enrolled until after the discharge of the first 2 weeks of the proof. He did not suggest that this amounted to a bar or waiver of the defenders' right to seek caution, but the lateness of the motion was a relevant factor.

[20] Turning to some of the details of Mrs Wolffe's submissions which he described as peripheral, Mr Reid Q.C. did not accept that there had been any lack of candour on the part of the pursuers. Unless the court was satisfied that the accounts had been improperly prepared or contrary to the principles of sound commercial accounting, the submissions based on the accounts were of no significance. The directors of the pursuers are road hauliers, not accountants; they rely on the advice of their accountants when preparing or approving accounts. Although the 2008 accounts were lodged with Companies House just over two months late, Companies House was notified that the accounts would be late and gave no adverse reaction. The writing off of one half of the goodwill, being £426,765, in the accounts to September 2007 was discussed with HMRC, who appeared to be content with the approach to be taken. Mr Reid Q.C. could shed no light on the background to the change in approach to goodwill between 2007 and 2008, but no inference adverse to the pursuers could be drawn from this, because they relied on their accountants' advice.

[21] The pursuers' finances were not as parlous as Mrs Wolffe Q.C. suggested. They are continuing to trade, they have the support of their bank, and they have no immediate shortage of business. They have been in business for many years; the fact that they are less profitable than they had hoped to be is a result of what they found having taken over the defenders' business.

[22] There was nothing in the point about the premises at Monument Crescent. The pursuers still carry on business from these premises although they are no longer based there. They have approval to operate 10 vehicles and 10 trailers from these premises; although the premises are not used to the same extent that they used to be, they are regularly used for loading and unloading of freight. The pursuers believed that the private investigators instructed by the defenders were carrying out surveillance on different premises, and not the premises from which the pursuers operate. No part of the business has been sold, alienated or transferred and there has been no breach of the back letter. The contents of Mr Craig's affidavit are, insofar as they suggest that the premises at Monument Crescent are no longer used, simply wrong. In any event, the question of whether the pursuers were still operating from Monument Crescent, or had downgraded their operations there, was really neither here nor there for the purpose of the exercise of the court's discretion on caution.

[23] In reply Mrs Wolffe Q.C. referred me to the Monarch Energy case and to the observation that it was exceptional to refuse caution if the statutory test had been met, as it has been met in the present case. While the court could properly look to the strength of the pursuers' case, a cogent defence had been set out and was supported by Mr Humphreys. While there had been breaches of the applicable law, many of these were irrelevant or de minimis, and many others did not sound in damages. With regard to the effect of an order for caution on the pursuers' right to obtain a remedy, it was important to remember that the pursuers have not been denied a proof in this case - they had a 4 week proof allocated, and this required to be discharged through their own fault. The effect of an order for caution on the pursuers is a factor to be given little or no weight.

Discussion on the motion for caution

[24] It was accepted on behalf of the pursuers that the statutory test in section 726 of the Companies Act 1985 was met in this case, and if the defenders were successful in their defence to this action, the pursuers would be unable to pay the defenders' expenses. The only reason advanced on behalf of the pursuers for the court exercising its discretion to refuse to order caution is the strength of the pursuers' case.

[25] I agree with the views expressed in Monarch Energy Limited v Powergen Retail Limited that the relative strengths of the parties' cases may be a relevant factor. As Lord Drummond Young observed at paragraph [10],

"if the pursuers' case appears strong and there is no obvious stateable defence, it would be unusual to order caution; an example of that is where the pursuer sues for the price of goods supplied and the defender does not allege any defect in the goods. Nevertheless such proceedings are the exception; if both sides put forward what appear to be clearly arguable cases it will rarely be possible to refuse caution on this basis."

This point was developed further in paragraph [17] of Lord Drummond Young's Opinion, in which he observed:

"in particular, if it appears that either party's case is lacking in good faith, or is plainly irrelevant in law, or is manifestly unfounded in fact, that is clearly of significance in determining whether caution should be ordered. For example, where a pursuer sues for the price of goods that it has supplied to the defender, and the defender makes no complaint about the quality of the goods and does not assert any right of set off, caution would not normally be ordered. The same might be true if the defender's argument was obviously contrary to the available documentary evidence; in such a case the court might conclude that the evidence was unfounded in fact and hence refuse caution. Those are clear cases, however. Where, by contrast, the parties present arguments that cannot be described as clearly irrelevant or unfounded in fact, it is much more difficult to rely on the strengths of the parties' cases as a factor in determining whether caution should be ordered. In such a case the normal rule, that caution will be ordered if it appears that a company pursuer will be unlikely to pay the defender's expenses if the latter is successful, must be applied."

[26] I agree with these views. I do not consider that the present case falls into any of the straightforward categories in which caution might be refused. As I observed in my Opinion dated 25 January 2007 when refusing to recall arrestment and inhibition on the dependence, the pursuers have made out a prima facie case - that is a good arguable case - that the defenders fraudulently, or in any event wilfully concealed or misrepresented matters when they granted the warranty on which the pursuers relied. However, it does not follow from that that the pursuers will succeed in this action. It is quite impossible at this stage - and indeed would in my view be inappropriate - for the court to assess the strengths or weaknesses of the parties' cases on the pleadings as they stand in this action. It cannot be said that either party's case is lacking in good faith, nor can I say that either case is plainly irrelevant in law or manifestly unfounded in fact. The present case is far removed from the example of a pursuer suing for the price of goods supplied and the defender failing to allege any defect in the goods. The present case falls into the category of cases considered in the last two sentences of paragraph [17] of the Monarch Energy case. Although the pursuers put forward a prima facie case, albeit subject to criticisms as to specification, the defenders put forward a coherent and arguable defence, and have made a counterclaim for a not insignificant sum. I cannot conclude from the documents put before me, and in particular Mr Humphreys' report, that the defenders do not have an arguable defence to the principal action. In light of this, I do not consider that it would be a proper exercise of my discretion to refuse to order caution on the basis of the strength of the pursuers' case.

[27] I should indicate that in reaching this view I have not attached much weight to the submissions made on behalf of the defenders that the pursuers have acted with a lack of candour. I find the treatment of goodwill in the pursuers' accounts to September 2007 and 2008 as surprising, and I am also surprised that there is no provision in either year to meet the pursuers' potential liability to make payment of deferred consideration to the defenders. However, in the absence of expert evidence on these matters from either side I do not feel able to attach much, if any, weight to them. Similarly I have not attached much weight to the points made by Mrs Wolffe Q.C. regarding the apparent decrease in the level of business at the premises at Monument Crescent. It may or may not be the case that the pursuers have been less than candid in this respect; I cannot form any view as to this at the present stage of the proceedings, and I regard this aspect of the arguments as peripheral.

[28] It remains to consider the appropriate amount of caution. I agree with Lord Drummond Young that section 726(2) of the 1985 Act envisages a guarantee of the defenders' judicial expenses, rather than merely a level of comfort. As indicated above, senior counsel for the defenders estimated that the defenders' expenses in preparing for and attending a 4 week proof would be in the order of about £160,000. Senior counsel for the pursuers did not challenge this figure, but indicated that the most that the pursuers could realistically hope to find by way of caution was £50,000. He drew my attention to the approach of the court in Monarch Energy, in which the court ordered the pursuers to find caution for the defenders' further preparation for a 5 week proof which was 3 months off, but without taking account of the expenses of the proof itself. However, senior counsel could not provide a logical explanation for this approach, and I do not understand the reasoning behind it. It may be that parties in that case envisaged another application to the court for caution immediately before the proof began. If so, I do not understand the practical benefit of such an approach, particularly in the circumstances of the present case. It would mean that parties would incur substantial expenditure in preparing for a proof, and the defenders would then require to return to court to seek a further order for caution, which the pursuers would (at least on the information provided to me now) be unable to pay. I consider that the proper approach is to make an order in terms of section 726 of the 1985 Act that is likely to meet the whole, or substantially the whole, expenses that the defenders will incur from now until the conclusion of any proof in these proceedings.

[29] I therefore propose to make an order in terms of section 726 of the Companies Act 1985 ordering the pursuers to find caution in the sum of £150,000, and to sist the proceedings until caution is found.

Consignation

[30] Senior counsel for the defenders submitted that Clause 5 of the Agreement dated 17 November 2006 provided a contractual security which worked for the protection of both parties, and that in the present circumstances the defenders were entitled to avail themselves of this contractual remedy. The consideration payable by the pursuers to the defenders was divided into the initial consideration and the deferred consideration. The initial consideration was £890,000. In terms of Clause 5.2 of the Agreement, the pursuers were obliged to pay the deferred consideration to the defenders in three instalments totalling £737,500. The first of these instalments was in the sum of £237,500 and was payable no later than 31 December 2007. The second instalment was in the sum of £250,000 and payable no later than 31 December 2008. The third instalment was also of £250,000 and payable no later than 31 December 2009. In their counterclaim the defenders aver that the pursuers have failed to pay any of these instalments. The pursuers admit this.

[31] Read short, Clause 5.3 of the Agreement provides that if the pursuers make a claim against the defenders under or otherwise in connection with the Agreement at a time when the pursuers would otherwise be due to make a payment of the deferred consideration, the pursuers shall be entitled to withhold such amount from the deferred consideration as is equal to the amount claimed. The pursuers will pay such an amount withheld to the pursuers' solicitors and instruct them to place such amount on joint deposit with the defenders' solicitors. Any sums so withheld shall be released when the claim is finally determined, less the amount required to meet such claim and other claims made which at that date remain outstanding, and any amount of the deferred consideration withheld and not applied in satisfaction of claims will be thereafter paid by the pursuers to the defenders.

[32] Senior counsel for the defenders submitted that the pursuers had availed themselves of the mechanism provided by Clause 5.3 by withholding payment of the deferred consideration. They were accordingly subject to the concomitant obligation to consign the withheld sums in joint names. This was a contractually agreed remedy, and the scope for exercise of discretion by the court was less than would be the case in judicial remedies. Giving effect to this Clause would be consistent with its intended purpose, and consistent with business efficacy - parties had agreed this provision as a means of protection for each party against bad faith by the other party.

[33] Senior counsel for the defenders submitted that there was no basis for the argument advanced on behalf of the pursuers in answer 8 to the counterclaim that on its proper construction Clause 5 does not oblige the pursuers to pay any part of the deferred consideration to the defenders or to place any part of it on joint deposit when the pursuers had been induced to enter into the agreement by the defenders' fraudulent misrepresentations, or alternatively that there was an implied term to that effect. Such a term was justified neither by business efficacy nor obviousness. The pursuers' averments of fraud were wholly inspecific and not supported by an expert report. The parties had in any event considered the effect of fraud on the Agreement. Part 3 of the schedule to the Agreement dealt with limitation of liability; senior counsel submitted that paragraphs 4 and 8 of that part were particularly relevant. Paragraph 4 provides that "the aggregate liability of the Warrantors under the Warranties shall not exceed an amount equal to the aggregate of the Consideration and the ACS Consideration", and paragraph 8 provides that "nothing contained in this Agreement or otherwise shall limit the liability of the Warrantors in respect of their fraudulent acts or omissions." The parties had therefore contemplated the operation of fraud and had reached Agreement as to its effect on limitation of liability; they had made no similar provisions for limitation in respect of the mechanisms provided in Clause 5.3. Even if some fraud were to be established therefore, a proper construction of the agreement as a whole would not relieve the pursuers of their obligation to consign under Clause 5.3, where they had undertaken the first step of retaining deferred consideration.

[34] The court's power to make the order sought derived from section 47(2) of the Court of Session Act 1988. The principles to be applied when considering whether or not to grant an order under that section were enunciated by the Inner House in Scottish Power Generation Limited v British Energy Generation (UK) Limited 2002 SC 517, particularly at paragraph [26]. Applying these principles, the legal basis of the defenders' claim was clear; it is a matter of contract set out in Clause 5.3 of the Agreement and the sums sought are due as a matter of unqualified admission in the answers to the counterclaim. It follows that the defenders have demonstrated a prima facie case. There is no question of the order which the defenders seek innovating upon the contract - rather, the order is founded on the clear provisions of Clause 5.3 of the Agreement. Finally, the balance of convenience favours the granting of the order sought. The purpose of Clause 5.3 of the Agreement was to ensure that the defenders were paid the sums which might be found due to them, and to protect them against the insolvency or bad faith of the pursuers. In this regard the submissions made on behalf of the defenders in relation to their motion for caution were relevant; the pursuers' financial circumstances were parlous, there was no provision in either of the last 2 years' accounts for payment of any deferred consideration to the defenders, they admitted that they were unable to raise more than £50,000, and they displayed a lack of candour. Their accounts were produced about one year later than they should have been, and only in response to an order from the court. The defenders had a real concern as to whether the pursuers would be able to pay any deferred consideration. The defenders were entitled to the protective measures provided for in the contract in order that consideration deferred for a period of 3 years after the contract could be secured. It would be catastrophic for the defenders if this order was refused and the pursuers were unable to make payment of the deferred consideration.

[35] Senior counsel for the pursuers urged me to refuse the motion. He submitted that the obligation on the pursuers to place the deferred consideration on joint deposit was disapplied by paragraph 8 of Part 3 to the schedule to the Agreement. That paragraph disapplied any limitation on the liability of the warrantors in respect of their fraudulent acts or omissions. Absent the obligation contained in Clause 5.3 to consign, the pursuers who were founding on the defenders' fraudulent conduct would be entitled to exercise the common law right of retention of the liquid sum otherwise payable as deferred consideration, pending resolution of their illiquid claim for damages, because both liquid and illiquid claims arise from the same contract. If there had been no Clause 5.3, or other limitation in the agreement, that common law right would have been exercisable, and no question of consignation would have arisen. The liability of the warrantors was the obligation to concede the enforceability of a claim or right. In this agreement, the obligation to concede the enforceability of the pursuers' common law right of retention is limited by the provisions of Clause 5.3 requiring joint deposit. That limitation is overridden by paragraph 8 of Part 3 of the schedule, because fraud is averred. The allegation of fraud disapplied the application of Clause 5.3.

[36] The pursuers aver that but for Clause 5.3 they would have a common law right of retention. Clause 5.3 limits the obligation of the warrantors to recognise that right, so the sums agreed by way of deferred consideration cannot be retained but must be placed on joint deposit. However, where, as here, fraud is averred, that limitation of the warrantors' obligation does not apply. The limitation of liability with which Part 3 of the schedule is concerned is not confined to liability to pay a sum of money; the intention of paragraph 8 of Part 3 of the schedule was to create a different regime where fraud was in issue. Where fraud is averred, the provisions of the Agreement which would otherwise apply ad interim do not apply.

[37] Mr Reid Q.C. did not challenge the competency of the defenders seeking such an order in terms of Section 47(2) of the Court of Session Act 1988, but submitted that on a proper construction of the whole circumstances of the contract the order should be refused. Under reference to the observations of Lord President Hope in McKenzie's Trustees v Highland Regional Council 1995 SLT 218 (and in particular to the passage quoted in the last sentence of paragraph 21 of the Scottish Power Generation case), senior counsel submitted that the pursuers had a strong case on record. The likely harm to be suffered by the pursuers if such an order were to be made was enormous, because the making of such an order would effectively resolve the whole litigation in favour of the defenders. The court would have to be satisfied that there was a contractual right to consignation, notwithstanding the provisions of paragraph 8 of Part 3 to the schedule. It was accepted that the court had a discretion in this matter, but it should be exercised by refusing to grant the order sought. The court required to have regard to all the factors, including the consequences which might flow from such an order being granted.

[38] In reply senior counsel for the defenders submitted that the pursuers' argument based on paragraph 8 of Part 3 to the schedule should be rejected as wholly inconsistent with the language and structure of the agreement considered as a whole, and also inconsistent with business efficacy. Part 3 of the schedule was clearly concerned with limitation of financial liability. This was clear when looking at each of the paragraphs of the Part, which were concerned with circumstances in which a claim is made. There were provisions regulating how and when a claim could be made, and the quantum of such claims. The whole of Part 3 was concerned with monetary claims, and a limitation of liability in respect of such claims. Paragraph 8 qualifies these limitation of liability provisions, but just as the provisions relate to financial liability, so does the qualification to them. The construction urged on behalf of the pursuers was convoluted and inconsistent with the language, structure and purpose of the Agreement; there was nothing in the Agreement to support the proposition that paragraph 8 of Part 3 disapplied the interim protective mechanisms agreed between the parties in Clause 5.3.

Discussion on consignation

[39] The principles to be applied in considering whether or not to grant an order of this nature are helpfully set out by the Inner House in paragraph 26 of the Scottish Power Generation case. The legal basis of the defenders' claim for consignation of sums on deposit in joint names of parties' solicitors is the contractual mechanism provided for by Clause 5.3 of the Agreement. This appears to me to be a clear mechanism for protecting parties against financial insecurity or bad faith on the part of the other party. It is intended to preserve the position ad interim, until any disputes between the parties have been finally resolved. I am satisfied that the defenders have demonstrated a prima facie case that an obligation to consign the deferred consideration into the joint names of parties' solicitors exists. On the basis of the accounts lodged on behalf of the pursuers, and the concession by senior counsel for the pursuers that they would be unable to obtain more than £50,000 to meet any order for caution, there is a real risk that the pursuers will not be able to make payment of any deferred consideration to which the defenders may ultimately be found entitled. I do not consider that there is any question in the present case of such an order innovating upon the parties' contractual rights and obligations - properly construed, the Agreement makes provision for the consignation of deferred consideration into the joint names of the parties' solicitors. Rather than innovating upon the contract, such an order is founded upon and expressly provided for in the contract.

[40] On the issue of balance of convenience, it may well be the case that an order for consignation will effectively resolve the whole litigation in favour of the defenders. That is a factor which I have in mind when considering the exercise of my discretion. However, I must also have regard to the consequences for the defenders if no such order is made and the result of this litigation is that they are found to be entitled to payment of some, or all, of the deferred consideration. In that event they will have been deprived of the protective mechanism for which they contracted. The defenders are individuals without any corporate protection. The pursuers are a company. The defenders would face very significant prejudice if they were successful in obtaining an award as a result of their counterclaim and the pursuers were unable to meet this award or went into liquidation. I am persuaded that the balance of convenience favours the granting of consignation as provided for in the Clause 5.3 of the Agreement.

[41] I do not consider that paragraph 8 of Part 3 to the schedule has the effect contended for by senior counsel for the pursuers. The liability which is limited by Part 3 is a liability to make payment of a monetary sum following upon the making of a relevant claim. Paragraph 3 excludes liability in respect of any relevant claim unless the aggregate amount of the liability for all such relevant claims exceeds £16,375. Paragraph 4 (quoted above) is concerned with the aggregate liability not exceeding an amount equal to the aggregate of the consideration and the ACS Consideration. Paragraph 5 is concerned with the amount of any successful relevant claim, which shall be deemed to constitute a reduction in the consideration. On a proper construction of the agreement as a whole, I consider that the liability which is limited by Part 3 is a liability to pay an amount or amounts following upon the making of a relevant claim. The construction urged by senior counsel for the pursuers is much wider than this, but I can find no justification for such a wide construction. The mechanism provided by Clause 5.3 is intended to provide an interim protection for parties until all relevant claims have been determined. I do not consider that it is obvious that the pursuers' averments of fraud against the defenders have the effect of depriving the defenders of this interim protection. The language, structure and purpose of the Agreement does not favour such a construction. I see no obviousness which would justify the implication of such a term, nor do I consider that business efficacy requires the implication of such a term. Nothing in the averments of fact supports the implication of such a term. The pursuers have availed themselves of the right conferred on them by Clause 5.3 of the Agreement to retain payment of deferred consideration. Having availed themselves of this right, they must comply with the obligation imposed on them by Clause 5.3, and consign the amounts of deferred consideration which are admittedly unpaid in the joint names of parties' present solicitors.

[42] For these reasons I propose to grant the defenders' motion and make an order in terms of section 47(2) of the Court of Session Act 1988 and in terms of the third conclusion of the counterclaim. However, that conclusion seeks an order for consignation in joint names of parties' solicitors within 3 days of the making of such order. Senior counsel for the defenders did not seek such a short timescale, and indicated that 28 days from any interlocutor ordering consignation would be sufficient. I propose to make the order sought, but within 28 days from the pronouncing of an interlocutor to follow hereon.

Expenses

[43] Senior counsel for the defenders moved for the expenses of the discharge of the latter 3 weeks of the proof, which was discharged by interlocutor dated 12 November 2009. The court had already found the defenders entitled to the expenses occasioned by the discharge of the first 2 weeks of the proof. She moved for the expenses of the last 3 weeks of the proof on an agent and client basis, client paying. The loss of the proof was not as a result of any actings or omissions by or on behalf of the defenders. The defenders had expended considerable time and effort in attempting to answer the pursuers' growing minute of amendment. The defenders did all in their power to preserve the proof, and the withdrawal of the pursuers' senior counsel and subsequently the pursuers' agents was nothing to do with the defenders. The problem was caused by a very late amendment on behalf of the pursuers, and a large body of productions which the pursuers sought to lodge very late indeed, and subsequently the withdrawal of counsel and agents. No explanation had been provided on behalf of the pursuers, and the defenders could have acted no differently. The pursuers could have sought to amend their pleadings and to lodge all of the late productions in early 2009, when their previous productions were lodged. They were truly the authors of their own misfortune: why should the defenders be prejudiced by this? The defenders have lost a 5 week proof and the opportunity to determine an action which was raised against them some 3 years ago (during which period a significant amount of the defenders' assets had been subject to arrestment and inhibition), and without any reason or explanation having been given. Senior counsel referred me to the helpful summary of the law on awards of expenses on the solicitor and client scale given by Lord Hodge in McKie v Scottish Ministers [2006] CSOH 54, 2006 SC 528, at paragraph [3].

[44] Senior counsel for the pursuers opposed the defenders' motion for the expenses occasioned by the discharge of the last 3 weeks of the proof. It was ultimately discharged because of the withdrawal from the case of senior counsel for the pursuers; that is a hazard of litigation for which parties must assume the risk, so he submitted that expenses should be expenses in the cause. The withdrawal of senior counsel for the pursuers had nothing to do with the conduct of the pursuers or their directors, nor with any information provided by the pursuers. Alternatively, if the court was not prepared to find the expenses of discharge as expenses in the cause, senior counsel submitted that the court might consider whether it was appropriate to defer consideration of expenses until the solicitors formerly acting for the pursuers had been given an opportunity to explain what had happened. On the face of matters, everything which had gone wrong was to do with the conduct of the litigation. There was no force in the suggestion made by senior counsel for the defenders that the pursuers had acted with lack of candour or good faith in this litigation. The court should pay no heed to the theme being advanced on behalf of the defenders that the pursuers' actings in raising this action amounted to bad faith and that they never intended to pay for the defenders' business - these suggestions were absurd and should be rejected.

Discussion on expenses

[45] I make it clear at the outset on this issue that I express no views on the suggestion that the pursuers have raised these proceedings in bad faith and have never intended to pay for the acquisition of the defenders' business. That may or may not be the case, but I leave it entirely out of account when reaching my decision on expenses.

[46] However, I consider that the criticisms of the pursuers' conduct of the litigation which were made by senior counsel for the defenders are justified. It is of course impossible (and unnecessary) to determine at this stage who was responsible for this conduct, whether the pursuers themselves or their advisors acting on their behalf. It is unnecessary because in a question of expenses with the defenders the pursuers are regarded as responsible for the conduct of those acting on their behalf. [47] I agree with senior counsel for the defenders that the discharge of the last 3 weeks of the proof was occasioned through no fault of the defenders, and was attributable entirely to the way in which the pursuers conducted the litigation. They lodged large numbers of productions on the morning of the first day of the first part of the proof, and they have already been found liable to the defenders in the expenses occasioned by the discharge of that part of the proof. Thereafter they sought to change the focus of their action significantly, expanding what was a relatively short minute of amendment substantially. Their motion to allow the pleadings to be amended in terms of that expanded minute of amendment and the defenders' answers thereto was ultimately refused by the court. After the first part of the proof was discharged, they sought leave to lodge many more bulky productions. Their counsel withdrew from acting on the basis of a potential conflict of interest. After their motion to allow the pleadings to be amended was refused, their solicitors immediately withdrew from acting. No satisfactory explanation for these events has been provided to the court. All of these events occurred at a very late stage in the proceedings. The proof dates were provisionally reserved in the court diary on 3 February 2009; the first part of the proof had to be discharged on 27 October 2009, that is, the first day fixed for the proof. The last 3 weeks of the proof were due to start on 17 November, and had to be discharged on 12 November. This resulted in inefficient use of commercial court time, which is a scarce resource. It also resulted in inevitable expense to the defenders, and was not caused to any extent by the defenders' conduct of the litigation. I consider that this case falls squarely within the third and fourth propositions summarised by Lord Hodge in paragraph 3 of his Opinion in McKie v Scottish Ministers. I am persuaded that the pursuers' conduct of this litigation, at least in the months and weeks leading up to the discharge of the last 3 weeks of the proof, may properly be categorised as incompetent or unreasonable and has thereby caused the defenders unnecessary expense. The pursuers do not appear to have been adequately prepared for the proof. The discharge of the last 3 weeks of the diet of proof was entirely caused by the way in which the pursuers and their then advisors conducted the litigation. This conduct of the litigation has wasted court time and caused unnecessary expense to the defenders. I am in no doubt that the defenders should be found entitled to their expenses occasioned by this discharge. I am also satisfied that it is appropriate in this case that the court should impose, as a sanction against such conduct, an award of expenses on the solicitor and client scale. Accordingly I propose to find the pursuers liable to the defenders in the expenses occasioned by the discharge of the 3 week proof fixed to commence on 17 November 2009, these expenses to be taxed on the scale of solicitor and client, client paying.

[48] Both parties indicated that they would welcome an opportunity to consider this Opinion before any formal interlocutor was pronounced giving effect to its terms. This case will be put out By Order to enable parties to consider their positions in light of the terms of this Opinion, before any substantive interlocutor is pronounced.