Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION

[2017] CSOH 2

 

A473/13

OPINION OF LORD MULHOLLAND

In the cause

SAJJAD SOOFI

Pursuer

against

JEFFREY MARTIN DYKES

Defender

Pursuer:  Sandison QC, Rose;  Balfour & Manson Solicitors LLP

Defender:  McBrearty QC;  CMS Cameron McKenna Solicitors LLP

6 January 2017

Introduction
[1]        The pursuer Sajjad Soofi is suing as assignee of Bonafied Enterprises International Limited (in administration) [ BEI].  The defender is Jeffrey Martin Dykes, a solicitor with Dykes, Glass and Co, a Glasgow firm of solicitors.  The action concerns the purchase of a petrol station, car wash and shop in Alexander Street, Airdrie in 2008.  This unincorporated business, known as Airdrie Autopoint, was purchased by BEI from Ms I A Young.  The purchaser was represented by the defender.  The terms of the bargain were contained in an offer dated 9 November 2007, a qualified acceptance dated 25 March 2008, letters dated 16 April and 29 August 2008 and a letter concluding a binding contract dated 29 August 2008.  Entry was taken on 1 September 2008.  The price paid was £850,000 apportioned £450,000 to the heritable property, £385,000 to goodwill and £15,000 to fixtures and fittings.

 

The Pursuer’s Case
[2]        In advance of the purchase BEI had obtained from the seller financial information relating to the trading history of the business, which financial information was used inter alia for the purpose of valuing the business including the goodwill.  The pursuer avers that the defender failed to have included in the missives a provision to warrant the accuracy and completeness of the financial information provided by the seller and relied on by BEI in the purchase.  The pursuer further avers that the defender failed to take any steps to advise BEI as to whether it should seek such a warranty, or obtain the informed instructions of BEI as to whether it should seek such a warranty.  It is averred in the pleadings that such warranties are commonly sought and granted in transactions of this nature and had the defender displayed the skill and care to be expected of an ordinarily competent solicitor, advice would have been tendered to the purchaser that such a warranty should be sought from the seller.  The defender denies negligence.  The pursuer’s case is twofold.  The principal case is a no transaction case, namely that had such a warranty been sought the seller would not have agreed to it and as a result the purchase would not have taken place.  The alternative case is that had such a warranty been provided, the purchaser would have an action against the seller for breach of warranty.

 

Plea of No Fair Notice
[3]        The action came before me for debate on the issue of whether the pleadings give fair notice to the defender of the pursuer’s case.  Counsel for the defender submitted that the central plank of the pursuer’s case was that the financial information provided by the seller was inaccurate.  If the pursuer failed to establish this then he will not have established loss and the action would fail.  It was not enough to establish a breach of duty. With regard to the pleadings there was a lack of essential specification as to the manner in which the financial information provided by the seller was inaccurate.  The defender has not received fair notice as to what the pursuer’s case is on this essential point.  In particular, there is no specification on the financial performance of the business post-sale so that it can be compared with the financial information provided to and relied on by the purchaser pre-sale.  The financial information provided pre-sale was for 2004 – 2006 (appended to a valuation report which is No 6/4 of process).  No information was provided in relation to the financial performance post-sale. In circumstances where the pursuer avers that the financial information provided by the seller was inaccurate it was necessary for him to detail the specific aspects which is said to be inaccurate and the extent to which it is said to be so.  The pursuer has failed to do this.  The pleadings on this are in the broadest terms.  This has placed the defender in a position where he does not have fair notice of the pursuer’s case, and as a result is not in a position to properly investigate and prepare to meet the pursuer’s case, such as the instruction of a forensic accountant. No expert accountancy report has been produced by the pursuer on the inaccuracy of the financial information provided.  The defender is left to speculate as to the pursuer’s case.  For example, does the inaccuracy relate to inflated sales figures or understated costs?  The defender does not know and cannot know from the pleadings.  The pursuer’s case as pled was that the business did not make a profit from 2008 onwards and could not be run at a profit, therefore there must have been a problem with the financial information provided pre-sale to the purchaser.  This was a non sequitur.  There could be many reasons why the business was not run at a profit such as high interest costs of the purchase being met from the business or the amount of wages paid.  On this approach the pursuer required to detail the financial performance of the business post-sale, compare it with the financial information provided pre-sale and identify where the financial information was inaccurate.  There was therefore a failure to give specification of a basic level of fair notice to the defender.

[4]        Counsel for the pursuer submitted that for the purposes of this debate the pursuer’s pleadings must be taken pro veritate.  The pursuer must set out in the pleadings what he proposes to prove but not how he proposes to prove it.  The pursuer’s case was a circumstantial one combining a number of circumstances from which a legitimate inference could be drawn that the financial information provided pre-sale was inaccurate.  The pursuer did not require to prove that he was bound to succeed but in order for the defender to succeed in his plea he had to prove that the pursuer was bound to fail on the pleadings.  With regard to the pursuer’s primary case it was that there was no value in the goodwill, which is where the loss occurred.  Proof of this was not founded on a comparison with pre and post-sale financial information.  A comparison of the pre and post-sale financial information would not automatically prove that the pre-sale financial information was inaccurate and this was recognised by the defender in the pleadings.  Proof of the inaccuracy of the financial information and consequential zero value of goodwill could be achieved by an inference drawn from a combination of facts and circumstances.

 

Decision
[5]        In the case of Macdonald v Glasgow Western Hospitals 1954 SC 453 Lord President (Cooper) said at page 465 that “the plea of lack of specification finds its proper application in a case where a defender does not know the case to be made against him and objects to being taken by surprise at the proof”.  The pursuer’s case is founded on the premise that the pre-sale financial information was untrue, inaccurate and incomplete.  The loss flows from the failure to provide advice and seek a warranty.  Therefore, in order to succeed in the action the pursuer requires to prove that the pre-sale financial information was untrue, inaccurate and incomplete.  It is certainly the case that one means of proving this could be by way of a comparison between the post and pre-sale financial information.  However, this is not the only way.  Other ways could be by means of exclusion of alternative explanations or by means of a comparison between the primary books of the business and the financial information provided pre-sale.  However, the pursuer does not seek to prove his case in this way.  According to Counsel for the pursuer an attempt by way of commission and diligence to obtain the primary books of the business from the seller was unsuccessful and the pursuer has been prevented from going down this route.  This is reflected in the pleadings, see page 16 A - B where it is recorded that:

“Neither BEI nor the pursuer has ever been provided with any primary material, such as books of account, underlying the entries in that financial information, and it is not known whether such primary material either exists or indeed ever existed.”

 

The post-sale accounts are in the hands of the liquidator of BEI but the pursuer has chosen not to seek to prove his case by reference to these accounts.  This was a choice which was open to the pursuer.  As the defender has recognised at page 18 C-D of the record, “such a comparison does not, of itself, permit a conclusion that the seller’s financial records were inaccurate.”

[6]        The mode of proof chosen by the pursuer is by an inference drawn from a combination of facts and circumstances.  These include inter alia that the purchasers were experienced in running petrol stations successfully, a firm of accountants had assessed that the business was capable of servicing the loan to purchase and still be run at a profit, sales of fuel had increased post-sale, the failure by the seller to produce primary books of account in response to an order of the court following a petition for commission and diligence meant either that they had not existed or that they had been disposed of, VAT returns submitted by the seller disclosed output/turnover substantially less than the turnover claimed in the financial information supplied by the seller pre-sale and the misleading statements in the financial information attributed to a firm of chartered accountants acting on behalf of the seller.  This is certainly a legitimate mode of proof and is one for a trier of fact to decide whether or not it has succeeded.  This is recognised and accepted by the pursuer.  The question therefore for the court is whether the pleadings give fair notice of this case.

[7]        In my opinion the pleadings give fair notice of this case.  The pleadings aver that:

(i)         the pursuer’s family have been involved in similar businesses since the early 1970’s (Condescendence 7 at page 17D of the Record);

(ii)        a firm of accountants engaged by BEI’s lender had concluded on the basis of the financial figures provided by the seller that the loan to purchase the business could manageably be serviced from the anticipated profits of the business (Condescendence 7 at page 17 D – E of the Record);

(iii)       sales of fuel had increased post sale (Condescendence 7 at page 14 C – D of the Record);

(iv)      Neither BEI nor the pursuer has ever been provided with any primary material such as books of account underlying entries in the financial information, provided pre‑sale and it is not known whether such primary material exists or ever existed (Condescendence 7 at page 16 A – B of the Record);

(v)       VAT returns made by the seller to HM Customs and Excise for the four quarters to 31 March 2005, which included the business sold to BEI, disclosed output/turnover almost £300,000 less than the turnover claimed in the financial information supplied pre-sale to BEI (Condescendence 7 at page 15E – 16A of the Record);

(vi)      Misleading statements in the financial information provided pre-sale had been attributed to a firm of accountants. The misleading statements were that the financial information provided had been prepared by that firm from the accounting records and was in accordance with best practice and ethical guidance issued by the Institute of Chartered Accountants of Scotland (Condescendence 7 at page 15 B – E of the Record);

The facts and circumstances which the pursuer intends to rely on in proving his case are therefore set out in the pleadings and the defender has fair notice of them.  The defender knows the case to be made against him and will not be taken by surprise at the proof.

[7]        For the reasons given I therefore refuse the defender’s motion for dismissal and remit the case to a proof at a date to be afterwards fixed.