Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2012] CSOH 104
CA114/11	OPINION OF LORD HODGE in the cause SOCCER SAVINGS (SCOTLAND) LIMITED Pursuers; against SCOTTISH BUILDING SOCIETY Defenders: ­­­­­­­­­­­­­­­­­________________

Pursuer: Dean of Faculty, McColl; MacRoberts LLP

Defenders: Hanretty, Q.C., Robertson; Biggart Baillie LLP

19 June 2012

[1] Soccer Savings (Scotland) Limited ("SSSL") carries on a business in which it licenses a provider of financial services to brand its savings accounts with the name and branding of certain football clubs in the Scottish Premier League ("SPL") and Scottish Football League ("SFL").

[2] SSSL avers that by agreement dated 25 June 2010 ("the Agreement") it entered into a contract with the Scottish Building Society ("SBS") by which SBS would pay SSSL for an entitlement to provide savings accounts with the brands of Scottish football clubs. The Agreement was to operate for 5 years until 30 June 2015 and SBS contracted to pay a guaranteed minimum commission of £250,000 per year and additional commission if the sums which it held in the branded savings accounts exceeded a specified level.

[3] SSSL avers that it complied with its obligations under the Agreement but that SBS came to regard it as a bad deal because customers opened fewer branded savings accounts that it had wished. By letter dated 21 June 2011 solicitors acting on behalf of SBS purported to terminate the Agreement and asserted that SSSL had made incorrect representations to induce SBS to enter into the Agreement and that, in any event, it was in material breach of contract.

[4] SSSL denies those assertions. It alleges that SBS has broken the contract by its failure to offer and promote the branded savings accounts and by its non-payment of commission. In a letter dated 10 August 2011 SSSL's solicitors intimated that, as a result of that breach of contract, SSSL held the contract to be terminated. SSSL claims as damages the net present value of the unpaid commission which it calculates as £943,775. SBS challenges the relevancy of SSSL's case. I heard a debate on its plea to the relevancy in which Mr Hanretty QC sought dismissal of the action.

The principal issues
[5] The principal issues in the debate are (i) whether the Agreement, properly construed required SSSL to have in place an agreement with an SPL or SFL club for the use of that club's name on the commencement date of 1 July 2010 and (ii) if so, whether SSSL's failure to have such an agreement in place on that date amounted to a material breach of contract that entitled SBS to rescind the Agreement.

[6] Other issues are whether SSSL has relevant and sufficiently specific pleadings on (a) how it complied with certain contractual obligations, (b) its assertion that the provision of Supporter Bonds by another financial services provider did not breach the exclusivity provision in the Agreement because such bonds were life assurance plans and not savings accounts and (c) its response to SBS's assertion that it was in breach of contract by failing to give notification to the Information Commissioner in terms of section 17 of the Data Protection Act 1998. SBS also challenges the relevancy of an averment about its failure to open a branch in Dunfermline.

[7] I deal with each in turn.

(i) Whether the Agreement required SSSL to have an agreement with a football club in place on 1 July 2010

[8] In the Agreement SSSL was described as "the Company" and SBS as "the Society." The commencement date was defined as 1 July 2010. "Customer" was defined as "a customer who opens an Account with the Society under the Scheme". "Account" was defined as "a savings account which is established and held by the Society pursuant to and for the purposes of the Scheme". "The Scheme" was defined as follows:

"Scheme means the provision in Scotland of savings accounts which are branded with the name and branding of a Scottish Premier League or Scottish Football League club with which the Company has an agreement for such use of the club's name and branding."

[9] The recitals, which have no contractual effect, narrated the background including:

"A. The Company has developed and operates the Scheme ... ;

...

C. The Company wishes to appoint the Society to provide, hold and operate the accounts which are established pursuant to the Scheme and will endeavour to identify potential Customers for referral to the Society, all subject to the terms of this Agreement."

[10] Clause 2.2 provided that the Agreement and SBS's appointment under it commenced on the commencement date (1 July 2010) and was to endure for five years until 30 June 2015. Clause 3 set out the obligations on SSSL with effect from the commencement date and so far as relevant obliged it to:

"3.1.1 market and promote the Scheme in accordance with clause 6, below; ...

3.1.3 use all reasonable endeavours to generate referrals of potential Customers to the Society;

3.1.4 respond to and deal with enquiries about the Scheme which it receives directly from potential Customers; ...

3.1.7 act in good faith in its dealings with the Society and the performance of its obligations under this Agreement."

Clause 3.2 provided:

"The Company shall not take any action or engage in any behaviour which may damage the reputation and goodwill of the Society."

[11] Clause 6.1 imposed on SSSL the following obligation in relation to marketing and promotion:

"The Company shall market and promote the Scheme through such means and to such extent it considers appropriate. The Company will obtain the Society's approval (which approval shall not be unreasonably withheld or delayed) of new material or literature which features or displays the Society's branding prior to its use of such new material or literature; provided that, there shall be no requirement to obtain the Society's approval where the new material or literature is derived from or based or based on existing material which has been approved by the Society or otherwise provided by it to the Company."

[12] Mr Hanretty's position was simple. The contract meant what it said. SSSL had to have in place a scheme and that involved at least one agreement with a relevant Scottish football club by 1 July 2010. He supported this submission by emphasising the use of the present tense in the definition of "Scheme" and in the recitals. He also derived support from clause 11.1 of the Agreement and the definition of "Marks" by which SSSL granted SBS a royalty-free licence to use the trade marks and logos of football clubs in respect of which it "has been granted a licence to operate the Scheme." He also relied on the warranty in clause 11.2 which provided:

"The Company warrants that it has the authority and is permitted to grant the licence to the Society pursuant to clause 11.1."

Again, the use of the present tense was significant. So also was the commercial consideration that SBS had to pay a guaranteed minimum commission quarterly in advance which meant that SBS had a strong commercial interest in seeing SSSL develop the scheme promptly by signing up football clubs and thus enabling SBS to market the branded savings accounts.

[13] The Dean of Faculty accepted that the commencement date was 1 July 2010 and that SSSL had obligations under clauses 3 and 6 which arose with effect from that date. But he submitted that the use of the present tense in the definition of "Scheme" did not require SSSL to have an agreement with a football club in place on that date. It was SBS which was to provide the branded savings accounts under the Scheme and it could do so only in relation to a football club with which SSSL had an agreement for the use of its name and branding. The present tense in that definition thus had no greater significance than that. The obligations on SSSL under clause 6.1 were not onerous; it could choose the football clubs to which it was to promote the Scheme.

[14] He submitted that the Agreement had to be construed against the averred factual matrix, which included the SSSL's assertion (in Art 4 of Condescendence) that both parties knew that it had not yet entered into any agreements with football clubs when they signed the Agreement on 25 June 2010.

[15] Although counsel produced a substantial bundle of authorities on the construction of commercial contracts, they were content to proceed on the basis that a judge in the commercial court was familiar with the leading authorities on this issue and did not detain me with any detailed citation. I adopt as the governing principle Lord Clarke of Stone-cum-Ebony's succinct summary in Aberdeen City Council v Stewart Milne Group Ltd 2012 SLT 205 at para 28:

"the ultimate aim in construing a contract is to determine what the parties meant by the language used, which involves ascertaining what a reasonable person would have understood the parties to have meant; the relevant reasonable person being one who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract."

[16] This objective approach to interpretation focuses on the language which the parties have used. Three points may be made to expand that summary as some contracts are easier to construe than others. First, where the words which the parties have used are unambiguous and there is no absurdity or unreasonableness in the result when viewed against the admissible background, the court will have particular regard to the reality that the terms are those which the parties were able to agree. A concluded deal may favour one party more than the other. But the court will enforce an improbable commercial result if the contractual provision is unambiguous: Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900, at para 23. Secondly, it is in the nature of language that the words which parties use in a contract may have more than one potential meaning. Where the words of a provision in a commercial agreement are open to different constructions, the court prefers a commercially sensible construction which produces a reasonable result as that is likely to be what reasonable business people would intend: Multi-Link Leisure Developments Ltd v North Lanarkshire Council 2011 SC (SC) 53, Lord Hope at paras 19 to 21; Rainy Sky SA v Kookmin Bank (above), at para 21. Thirdly, where the court identifies poor drafting and where it is driven by syntactical analysis towards a conclusion which flouts business common sense, it will give great weight to achieving a commercially sensible construction undeterred by niceties of language: Multi-Link Leisure Developments Ltd v North Lanarkshire Council (as above).

[17] I must construe the Agreement in the light of the averred factual matrix but I do not need proof of those averments. I assume that SSSL can prove (i) that both parties were aware on 25 June 2010 that it had not yet entered into any agreements with football clubs and (ii) that the parties knew that it needed to have the Agreement in place before football clubs would sign agreements with it. Nothing else is averred by way of background to inform the construction of the relevant provisions. Making those assumptions and having regard to the language that the parties used, I consider that the Agreement nonetheless provided for SSSL to have in place an agreement with a relevant football club by 1 July 2010. In reaching this view I have regard to (i) the definition of "Scheme" in clause 1.1, (ii) the present appointment of SBS in clause 2.2, (iii) the commencement of SSSL's obligations under clause 3 as at 1 July 2010 and (iv) the present grant of the licence and the warranty in clause 11. I also note that SSSL had five days between signing the Agreement and the commencement date to enter into one or more such agreements with football clubs. There is no ambiguity in the words used and SSSL could have signed up a club by 1 July 2010.

[18] It is agreed that there was no such agreement by that date and that written agreements with the Rangers Football Club plc ("Rangers"), Celtic FC Ltd ("Celtic") and Heart of Midlothian Football Club Ltd ("Hearts") commenced on 1 September, 20 September and 8 December 2010 respectively. SSSL also avers that it entered into oral agreements with Hamilton Academical Football Club Ltd and St Mirren Football Club Ltd in July and October 2010.

[19] As there was no agreement with a relevant football club on 1 July 2010, I consider that SSSL was in breach of contract. But that does not mean that that breach entitled SBS to rescind the contract.

(ii) Whether that failure amounted to a material breach of contract

[20] If it were established that the parties signed the Agreement in the knowledge that SSSL would enter into contracts with most significant football clubs only after 1 July 2010, it is not evident that the failure to have one such agreement in place on that date was a breach which went to the root of the contract. The materiality of the breach is a question of fact which in this case can be ascertained only after proof.

[21] SBS did not rely on such a breach of contract in its letter of 21 June 2011 in which it purported to terminate the agreement on the basis of alleged misrepresentations and breaches of clauses 3.1.7, 3.2 and 12.1 of the Agreement. This does not suggest that at the time SBS treated a failure to have an agreement in place on the commencement date as a fundamental breach of contract.

[22] The existence of a breach of contract which may or may not have been material does not in my view render SSSL's claim irrelevant.

[23] For completeness I record that the Dean of Faculty also submitted that SBS had not invoked clause 9.1 of the Agreement in its purported termination of the contract. That clause provided:

"Either Party may terminate this Agreement immediately by written notice and without liability to the other Party if the other Party:

9.1.1 Commits a breach of any material term of this Agreement and (if such breach is remediable) fails to remedy that breach within a period of 14 days after being notified in writing to do so."

Mr Hanretty argued that that clause was simply a permissive mechanism and that on his construction of the contract the failure on which he founded was not remediable. In my view parties can explore the significance, if any, of clause 9.1 at proof.

(iii) SSSL's pleadings of performance of its obligations

[24] SSSL avers that it complied with its obligations under the Agreement until 21 June 2011. Mr Hanretty submitted that such a general averment was insufficient and that SSSL had failed to respond to calls to aver how it had complied with specific contractual provisions. He asserted that he was entitled to know what SSSL had done. SSSL could not insist on SBS's performance of the contract if it had not performed its obligations. It was not fair for SSSL to make a bald assertion of performance and leave SBS to test it on cross-examination.

[25] The Dean of Faculty submitted that SBS was not entitled to further specification in the pleadings. SBS's solicitors had specified certain alleged breaches of contract as the basis for terminating the Agreement. SSSL had answered those allegations. It was not for the party suing on a contract to aver in detail everything it had done. There was no burden on the pursuer to prove due performance of the contract. The Dean of Faculty referred to Carruthers v Macgregor 1927 SC 816, Lord Murray at p.822 and Gloag, "Contract" (2^nd ed.) pp.720-721. He submitted that when contract work had apparently been completed, there was a presumption of performance and the onus of proving that the work or goods were not according to contract rested on the person so asserting.

[26] I am not persuaded that I need deal with questions of the burden of proof and presumptions of performance at this stage in the proceedings. The Agreement envisaged actions which were very different from the sale of goods or the carrying out of builder works which Lord Murray and Professor Gloag discussed. Presumptions are probably not appropriate in this context. SSSL has averred that it performed its obligations under the Agreement. That may be sufficient for relevancy but SBS may legitimately wish to explore what that performance entailed. Commercial procedure is sufficiently flexible to ensure that fair notice is given of a party's position before a proof is heard, either through the recovery of documents or by ordering signed witness statements on specific issues. I am therefore not prepared to dismiss the action for lack of specification on this issue.

(iv) Supporter Bonds and savings accounts

[27] Another dispute concerned SSSL's response to SBS's allegation that it had broken its obligation of exclusivity set out in clause 7.1 of the Agreement, which provided:

"The Company may not, for the duration of this Agreement, appoint any other financial services institution to provide the Scheme in Scotland."

SBS avers that SSSL appointed Scottish Friendly Assurance ("SF") to provide savings products within the Scheme and refers to clauses in agreements with Celtic and Hearts which state that SF would provide such supporter bonds.

[28] SSSL avers that the proposed supporter bonds, which had not been issued, were not savings accounts but life assurance plans. Mr Hanretty submitted that those averments did not give fair notice of its defence and called for more specification.

[29] I am not persuaded that I should order any further specification at this stage. The redacted agreements between SSSL and Celtic and Hearts respectively, to which I was referred, contained in Schedule 2 a summary of the key features of the supporters bond. Those features included (a) monthly savings over ten years and (b) a guaranteed tax-free cash lump sum at the end of the term. This appeared to be describing an endowment assurance or life assurance plan rather than an instant access savings account covered by the Scheme. SBS can, if it so wishes, seek to recover relevant documents from SSSL or SF. I see no need for greater specification in the pleadings.

(v) Breaches of the Data Protection Act 1998

[30] Mr Hanretty also submitted that SSSL could not sue under the Agreement as it was in breach of its obligations in relation to data protection under clause 13.1 of the Agreement which provided:

"The Parties shall use their respective reasonable endeavours to comply with the Data Protection Act 1998 ("the Act"), any regulations made thereunder or pursuant thereto and any statutory amendments or re-enactments made."

In particular, he asserted that SSSL had failed to comply with section 17(1) of the Data Protection Act 1998 ("the 1998 Act"), which provides:

"Subject to the following provisions of this section, personal data must not be processed unless an entry in respect of the data controller is included in the register maintained by the Commissioner under section 19 (or is treated by the notification regulations made by virtue of section 19(3) as being so included)."

Failure to comply with that section is a criminal offence: section 21 of the 1998 Act.

[31] It was not disputed that when the Agreement was in operation SSSL was not so registered. SSSL applied for registration under section 18 of the 1998 Act on 1 December 2011 but denied that it needed to be registered for the purpose of the Agreement. SSSL founded on Regulation 3 of and para 3 of the Schedule to the Data Protection (Notification and Notification Fees) Regulations 2000 (SI 2000 No 188), which exclude from the scope of section 17 the processing of data which is

"for the purposes of advertising or marketing the data controller's business, activity, goods or services and promoting public relations in connection with that business or activity, or those goods or services."

[32] The parties disputed whether SSSL's activities fell within the scope of para 3 of the Schedule to the notification regulations. Mr Hanretty submitted that under the Agreement SSSL was charged with promoting SBS's goods and services and not its own. SSSL had failed to give specific answers to his averments which, he suggested, were supported by minutes of Football Saver meetings which he had lodged in process.

[33] I am satisfied that it is not appropriate to rule on this issue without proof of the underlying facts. I have reached this view for three reasons. First, the court can deal with the questions of specification and fair notice by ordering the disclosure of documentation and the production of witness statements. Secondly, there are factual disputes as to what SSSL did to implement the Agreement and those include whether it carried out activities which would have required it to register under the 1998 Act. Thirdly, if SSSL were in breach of the Agreement in failing to register, it is not clear whether that amounts to a material breach of contract. SBS averred that such conduct might damage its reputation and goodwill and thus was a breach of SSSL's obligations under clause 3.2 of the Agreement. Whether that is so is a question of fact to be determined after proof.

(vi) The averment that SBS did not have a branch in Dunfermline

[34] Mr Hanretty also attacked as irrelevant an averment by SSSL that SBS did not open a branch in Dunfermline. I am satisfied that there is no substance in that challenge. The averment was part of a narrative explaining how SSSL, in performance of its obligations under the Agreement, had tried to enlist the co-operation of Dunfermline Athletic Football Club Ltd but had been hampered by the absence of any SBS branch in Dunfermline.

Conclusion
[35] The issues which parties have raised in this debate, other than the construction of the Agreement, cannot be determined without hearing evidence. I will therefore reserve SBS's plea to the relevancy and have the case put out by order to determine further procedure.