SHERIFFDOM OF SOUTH STRATHCLYDE DUMFRIES AND GALLOWAY

 

A3769/07

	JUDGMENT OF SHERIFF PRINCIPAL B A LOCKHART
	in the cause
	ROBERT M GREER & MARGARET R GREER
	Pursuers and Respondents
	against
	HARTLEY HOLIDAY PARKS LTD
	First Defenders and Appellants
	AND   THE ROYAL BANK OF SCOTLAND PLC
	Second Defenders

 

Act: Docherty, of Messrs Wright Johnston MacKenzie

Alt: Brown, Advocate, instructed by Miller Beckett & Jackson

 

HAMILTON: 21 April 2009

 

The Sheriff Principal, having resumed consideration of the cause sustains the appeal and recalls the sheriff's interlocutor of 1 December 2008 complained of; sustains plea in law 1 for the first defenders and appellants and dismisses the cause; finds the pursuers and respondents liable to the first defenders and appellants in the expenses of the cause, including the expenses of the appeal; certifies the cause as suitable for the employment of junior counsel.

 

NOTE:

 

Background to the appeal

 

1.             This case involves a contract for the sale of a business by the pursuers and respondents (hereinafter referred to as "the seller") to the first defenders and appellants (hereinafter referred to as "the buyer"). The structure of the contract involved the sale of the shares of a company and was reduced to formal writing in a share purchase agreement (production 6/1). The detail reflected that the value of the transaction was in excess of £3,000,000.

 

2.             The sale was of the business as a going concern. As a necessary consequence there required to be a handover date when ownership and control of the business passed to the buyer to enable the business to be carried on. It was recognised that it was difficult, if not impossible, to have finalised accounts to hand on the date of handover. Accounting and reconciliation run in arrears. The mechanism used in this contract involved the relatively standard one that the price was indicated, but subject to adjustment in accordance with the provisions of the agreement. One of the mechanisms for adjustment of the price was that, following completion, there was to be a conclusive profit and loss statement made up down to the handover date. A sum was retained and held by the Royal Bank of Scotland plc (the second defenders). That sum fell to be released in accordance with the balance found due in the profit and loss statement.

 

3.             There were three methods by which the profit and loss statement could become conclusive:

(a)           The parties could agree the profit and loss statement provided;

(b)          In the event of disagreement the contract had a mechanism for reference to an accountant nominated by the Chairman of ICAS. His decision would be conclusive and final;

(c)           "A Deemed Finality Provision". Taken shortly, what the Agreement provides is for the seller to initiate a profit and loss statement verified by their accountants. The agreement provided that this should be submitted within 30 business days after the completion date to the buyer's accountants for review within 20 business days after the completion date. That started the clock ticking for an intention of notice to dispute to be lodged by the buyer. If the time limit expired without certain notices by the buyer, the seller's profit and loss statement was deemed to be conclusive and final. In other words, the seller's accountants were to provide a profit and loss statement. The buyer's accountants were given time to challenge. If they failed to challenge the profit and loss statement, the seller's profit and loss statement would become final.

 

4.             The essence of this dispute is that the seller claims that he invoked the mechanism effectively by intimating his accountants' profit and loss statement to the buyer direct. There was no reply on behalf of the buyer. The statement was accordingly deemed to be final. The buyer's case is that the seller has not effectively invoked the required mechanism as the profit and loss statement was not submitted to the buyer's accountants as required by the share purchase agreement. Unless the profit and loss statement provided by the seller is regarded as final, none of the remedies sought by the seller in this action could arise.

 

5.             Although the sum held by the Royal Bank of Scotland was about £60,000, that is not necessarily the limit financially of the dispute. I was referred to clause 4.4.1 of the share purchase agreement which provided:

"if there are any losses, a sum equal to the losses shall be deducted from the Retention Account in accordance with clause 6.2 and if the Retention Sum is less than the amount due to the Buyer under this sub-clause, the Seller shall pay such shortfall to the Buyer within 15 Business Days of agreement or determination of the Profit and Loss Statement."

Accordingly it was not just a question of who received the sum of £60,000 retained by the bank. The mechanism was a trigger for a general adjustment to the price. Underlying this litigation was the contention by the buyer that substantial adjustment of the price was merited.

 

6.             The relevant provisions in the share purchase agreement are:

A. "4.3 The Profit and Loss Statement shall be prepared, reviewed and agreed in accordance with this clause 4.3:

4.3.1 Forthwith after Completion, the Seller shall procure that the Seller's Accountants prepare the Profit and Loss Statement (in accordance with the principles set out in Part 6 of the Schedule) and submit it to the Buyer's Accountants for review within thirty (30) Business Days after the Completion Date. The Seller shall pay the charges of the Seller's Accountants and the Buyer shall pay the charges of the Buyer's Accountants."

B. The interpretation section of the contract:

"Buyer's Accountants" means BCS (North West) Limited, Company Number 2027811 of Border House, 60 Main Road, Bottom-Lee Sands, Carnforth, Lancashire LA5 8DN" and

"Seller's Accountants" means Wallace & Co, 10 Clydesdale Street, Hamilton ML3 0DP"

C. "4.3.2 If the Seller shall fail to procure the preparation of the statement in accordance with clause 4.3.1., the Buyer may procure the preparation thereof at the Seller's expense.

4.3.3 Unless within twenty (20) Business Days after receipt of the version of the Profit and Loss Statement pursuant to clause 4.3.1. the Buyer's Accountants shall notify the Seller's Accountants in writing of any possible discrepancy in, or disagreement or difference of opinion relating to, the Profit and Loss Statement, the parties shall be deemed to have accepted such Statement as accurate and they shall (save in the case of manifest error or fraud) then become final and binding on the parties for the purpose of this Agreement."

D. "4.3.4 If within the period of twenty (20) Business Days referred to in clause 4.3.3. the Buyer's Accountants notify the Seller's Accountants of any possible discrepancy in, or disagreement or difference of opinion relating to, the Profit and Loss Statement ("Notice of Disagreement") and if they are able to resolve such possible discrepancy, disagreement or difference of opinion within fifteen (15) Business Days of the Notice of Disagreement (confirmation of such resolution to be in writing), the parties shall be deemed to have accepted such Statement a accurate and it shall (save in the case of manifest error or fraud) then become final and binding on the parties for the purpose of this Agreement."

 

7.             It was accepted by both parties that the profit and loss statement was in fact sent to the buyer (the first defender and appellant) direct - not to their accountants as was provided in terms of clause 4.3.1. The core of this case is whether strict compliance with the terms of the contract was required.

 

8.             The buyer's position is that, as the strict terms of the clause had not been complied with, the seller has no rights against the buyer in terms of clause 4.3 of the Agreement. The action accordingly should be dismissed. The sheriff, however, allowed a proof before answer.

 

9.             The sheriff in his note gave reasons for his decision inter alia:

(i) At para 30:

"... The defenders deny the averments made by the pursers in condescendence 3. It is evident from answer 3 that the defenders interpretation of clause 4.3.1 differs from that of the pursuers. In answer 3 the defenders also make averments of a factual nature which are either denied by the pursuers or are not the subject of admission. In article 4 of condescendence, which is admitted, the pursuers say "the purpose of deeming the profit and loss statement as accurate was to ascertain whether there was to be any purchase price adjustment". In article 5 they say "... in the said hypothesis there is no contractual remedy which would permit or result in release of the retention sum to either party. Such result was not the parties' intention when entering into the share purchase agreement"."

(ii) At para 31:

"The pleadings demonstrate that parties are in dispute as to the interpretation of clause 4.3.1 and that there are disputed issues of fact between them. It was also evident at debate that they are in dispute as to the character of clause 4.3.1. and as to the issue of any ambiguity in the clause.

(iii) At para 32:

"Having considered matters I was not persuaded, at this stage, by counsel's submission that the pursuers' case should be dismissed. I did not accept the submission that the pleadings are silent as to the commercial intentions of the parties. It seems to me that there is material in articles 4 and 5 which goes to this issue. I was not persuaded by the submission that there is insufficient material in the pleadings to merit enquiry into the surrounding circumstances. I am of the view that the pleadings as they stand, including the material which has been incorporated into them, are sufficient to justify proof of the relevant surrounding circumstances. Whilst it is unnecessary for me to rehearse here the detail of the agreement it may be that there are clauses in the agreement on which I was not addressed at debate which may well be of relevance to the determination of this matter after proof. ... I am of the view that proof before answer is necessary in order that the surrounding circumstances can be established and thereafter brought to bear on the court's determination of the issue in this case."

 

10.         It is against that decision to allow a proof before answer that the buyer now appeals.

 

Submissions for buyer (the defenders and appellants)

 

11.         Counsel for the buyer submitted that throughout clause 4 there were references to this being an exercise carried out between accountants. Counsel described the short point which was at issue in this case as follows - unless the first intimation of the profit and loss statement complies with the requirements of clause 4.3.1 and in particular is to the buyer's accountants, then the clock does not start ticking and the deemed finality mechanism provided for in clause 4.3.3 cannot operate.

 

12.         It was submitted it was instructive to note that references were also made in clause 4.3.3 and 4.3.4, as in clause 4.3.1 to "Buyer's Accountants" and "Seller's Accountants". It was also noted that in clause 4.3.5, which set out the position were there was no agreement, there was again a reference to "Seller's Accountants" and Buyer's Accountants" and a mechanism for referring the matter to an independent accountant. The interpretation section of the share purchase agreement gave the full designations of the seller's accountants and the buyer's accountants

 

13.         As far as the commercial purpose of the agreement was concerned, it was submitted that the commercial purpose of this clause was plain - it was to provide a fair, principled and clear mechanism by which a conclusive profit and loss statement may be arrived at. It was submitted that it was important to notice certain features of the mechanism:

i.  Time limits are tight;

ii. The consequences of the mechanism operating are potentially very significant - particularly they include the loss of a right to insist on a significant price reduction. What would be lost from the buyer's prospective if, on a true view of the books and records the account is overstated, would be an appropriate rebate from the £3,000,000 plus they had paid for the business.

Accordingly the initial intimation of the profit and loss statement was a step of some significance, because if it is done properly it commences the clock running down to 30 business days later when there may be material irreversible consequences.

 

14.         The principal submission for the buyer, was that, where parties have agreed particular formalities in a contract, they are entitled to hold each other to these formalities. Counsel referred to the following authorities in support of that proposition:

(i)             Muir Construction Ltd v Hambly Ltd 1990 SLT 830. That case involved the service by contractors of a warning notice on employers seeking payment under an interim certificate. The contract provided for service of the notice by registered post or by recorded delivery and the question was whether hand delivery was sufficient to comply with the contract. I was referred to Lord Prosser stated at page 833:

"With some hesitation, I have come to the view that in the present case the notice was rendered invalid by the failure to send it by registered post or recorded delivery. ... I have no doubt that the contract must be construed in a commonsense business way. I am not however satisfied that there is anything contrary to commonsense, or anything inconsistent with a business approach, in concluding that precise words in a carefully structured provision are intended by the parties to have a precise effect in a carefully structured procedure. ... I think I would see it as sensible for a party determining employment to be allowed to do this by notice delivered by hand, as an alternative to sending it by registered post or recorded delivery. But I am none too confident that my feeling as to what might be sensible coincides with the views of those actually involved in building contracts, or that judicial impressions have much place in such an issue. More fundamentally, I think it important to distinguish between an overall view of what would be sensible, and what, when looking at specific words in an existing provision, is a sensible interpretation of these words. It is true, no doubt, that the basic function of this provision is letting the employer know that the contractor is determining his employment. If that was all that the parties were concerned about, there would be no need for the words "by notice", far less for the words "by registered post or recorded delivery". Everything could have been left to proof. Even on their own, the words "by notice" seem to me to indicate that parties are concerned to make positive requirements as to the way in which the employer is to be given the required information."

And at 834:

"... In operating these important and somewhat complex provisions, I see nothing unduly demanding in expecting that the contractor or those acting for him will have the terms of CL.28 in front of them, and will assume that cutting corners is dangerous. On the whole matter, I see the required formality as intentional, binding, and useful to both parties. If written notice is all that was required, that could easily have been said, and any unilateral interest in recorded postage left to the party choosing to determine, and how to determine, his employment. In my opinion, the pursuers' pleadings contained no relevant averment of valid determination of employment."

It was submitted that that case was the beginning of the modern line of authority to the basic proposition on which counsel based his case, namely that when parties have agreed particular formalities, they are entitled to hold each other to these formalities.

 

(ii)           Prudential Assurance Co Ltd v Smith's Foods 1995 SLT 396. This case involved a rent review in a commercial lease. In that case a rent review clause provided that the tenants could give to the landlords notice in writing containing a proposal as to the amount of the revised rent in certain circumstances. In terms of a further clause in the agreement the notice would be sufficiently served if sent by recorded delivery post to the landlords' head or registered office. Lord Morton of Shuna said at 370:

"the interpretation of cl sixth of the lease turns on the question of whether the provisions of the clause are obligatory or permissive ... In my opinion, cl sixth requires any notice to be in writing. That is an obligatory provision because it states that the notice "shall be in writing". Thereafter, the clause provides that a notice shall be sufficiently served if sent by recorded delivery post. These provisions on any ordinary reading appear to me to provide a method which shall be sufficient without confining the sender of the notice to that method only. ..."

It was submitted that there was a distinction between that case and the circumstances of this case. In that case Lord Morton of Shuna held that notice had been given in writing to the landlords and that was all that was required in terms of the contractual provision. Recorded delivery post was one way that this could be carried out. In the present case notice required to be given to the buyer's accountants and that had not been done in terms of the contractual provisions.

 

(iii) Capital Land Holdings Ltd v Secretary of State for the Environment 1997 SC 109. This case involved a break option in a commercial lease and whether this had been validly exercised. The clause was in the following terms:

"Any notice request, demand, consent or approval under the lease shall be in writing and shall be deemed to be sufficiently served at the expiry of 48 hours after posting if sent by recorded delivery post. ... Any notice to the landlord (if an incorporated body) shall be sent to it's registered office and, (if a person) sent to him at his last known address in Great Britain or Northern Ireland."

The notice required to be served at the registered office. It was in fact served on the landlords' agents at the leased premises. At debate Lord Penrose held that if a notice was served upon a landlord, on a sound construction of the lease, it was a prerequisite of a valid notice that it had to be sent to the registered office of the landlord. He allowed proof on averments by the tenant that agents acting with the authority of the landlord had requested notices to be sent to those agents and that accordingly service of those agents was valid notice within the terms of clause 7. After proof, Lord Cullen held that service on the agents was not a valid service. At appeal the opinion of the court, given by Lord Sutherland, stated at page 114:

"Clause 2 refers to 12 months' notice in writing and quite plainly this is mandatory. If that clause had stood alone there might have been arguments as to what constituted notice and there might have been arguments as to what constituted proper service on the landlord. Clause 2, in our opinion, cannot be read in isolation but must be read as qualified by cl 7, it being a cardinal principle of construction of any contract that the contract has to be read as a whole. When that is done it is clear that when clause two refers to a notice in writing, it means a notice in writing served upon the landlord at the landlord's registered office. This is not a provision conceived in favour of the sender of such a notice but appears to us to be conceived in favour of the recipient. Because of the terms of cl 7 the recipient knows where he has to look for any notices which are being served upon him and does not require to make arrangements for notices being served at any other business address which he might have. The parties to this arms' length contract of lease have made specific provision for the places to which the notices must be sent and the parties are entitled to hold each other to such a provision. We do not consider that cl 7 can be construed as a whole as being simply a directory provision. The provisions relating to the place of service are stated in words which are plainly intended to be mandatory, even though there are other provisions in cl 7 which relate to what is deemed to be sufficient service and sufficient proof of service. ..."

It was submitted this case clearly supported the approach which had been adopted by Lord Prosser, and the buyer's submission.

 

(iv) Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd 1997 AC 749. This case involved a break option in a commercial lease. In a notice the wrong date was inserted namely 12 January 1995 instead of 13 January 1995. In that case it was held in the House of Lords:

"that construction of the notices had to be approached objectively, and the question was how a reasonable recipient would have understood them, bearing in mind their context; and the purpose of the notices was to inform the landlord of the tenants' decision to determine the leases in accordance with the break clauses; that a reasonable recipient with knowledge of the terms of the leases and the third anniversary date would have been left in no doubt that the tenant wished to terminate the leases on 13 January 1995 but had wrongly described it as 12 January; and that accordingly, the notices were effective to determine the leases."

It was submitted there was a distinction between, on the one hand, whether there had been compliance with the formal requirements imposed by the contract in respect of service of the notice, and on the other hand, the quite separate question of construction of the notice in the sense of what the notice was intended to mean. Having referred to various dicta from Lord Hoffman, it was submitted that in essence he was saying that he was only able to read 12 to mean 13 having first satisfied himself that the notice in question brought itself within the notice provisions i.e. it was a notice in writing addressed to the landlord. Once he was satisfied that the contractual formalities had been completed regarding intimation of the notice, he then went on to consider the second question of what notice was intended to communicate i.e. the exercise of the break option. Lord Hoffman made it clear that, if there was something objectively trivial which had not been complied with which was subject to express provision within the lease, failure to observe that could have been fatal. He expressed it in this way at 776B:

"If the clause had said that the notice had to be on blue paper, it would have been no good serving a notice on pink paper, however clear it might have been that the tenant wanted to terminate the lease."

It was submitted that, properly understood, this case determined nothing that ran contrary to the principle which counsel had sought to extract from the dicta of Lord Prosser in Muir Construction Ltd v Hambly Ltd supra or the Extra Division in Capital Land Holdings Ltd v Secretary of State for the Environment supra, namely that when parties have agreed particular formalities, they are entitled to hold each other to these formalities.

 

(v) Ben Cleuch Estates Ltd v Scottish Enterprise 2006 CSOH 35 (Outer House) and 2008 CSIH 1 (Inner House). This case involved a commercial lease with a break option. The notice was served not on the actual landlords, but on the parent company, Bonnytoun Estates Ltd. The two companies had the same managing director and the same registered office. In the Outer House Lord Reed opined:

"138... I am satisfied that the break notice was not validly served. This result may be thought to confer an adventitious bonus on the pursuers, enabling them to take unmeritorious advantage of the defenders' error when they realised perfectly well that the defenders intended to exercise their entitlement under the break clause. This criticism however misses the point that the parties have agreed, at it were, on the key which is to be capable of turning the lock; if the tenant has not used the right key, then the lock will not turn. The absence of confusion or prejudice on the part of the landlord is irrelevant. If the parties had intended that the break clause should require no more than that the tenant should evince a clear intention to terminate the lease, which should come to the attention of the landlord, then they could have said so in their contract. They did not; and it is not for the court to re-write their contract for them.

139. In this connection I would respectfully adopt certain observations which were made, in a similar context, by the Lord Ordinary, Lord Penrose, in his Opinion in Capital Land (unreported, 16 May 1995):

"I consider that the general approach to construction in Lord Prosser's opinion in Muir Construction Ltd v Hambly Ltd 1990 SLT 830 is helpful. There can be little doubt on a reading of that opinion that the Lord Ordinary was less than enthusiastic for the result at which he felt compelled to arrive but at page 833 he makes observations with which I find myself in agreement and which are important in this case. He says:

"... I have no doubt that the contract must be construed in a commonsense business way. I am not however satisfied that here is anything contrary to commonsense, or anything inconsistent with a business approach, in concluding that precise words in a carefully structured provision are intended by the parties to have a precise effect in a carefully structured procedure ..."

One might identify points at which the present deed lacks indicia of precision in its construction and expression. However that is of little significance in a context in which one is dealing, clearly, with a formal document negotiated between parties with a view to defining the respective rights and obligations towards each other in the course of a significant relationship such as arises under a commercial lease. ... Lord Prosser has in my opinion correctly warned against excessive confidence that a judge's view or feeling as to what might be sensibly necessarily coincides with the views of those actually involved in commercial contracts. What is consistent with business requirements in a commercial context is primarily a matter for business men.""

Lord Reed's comments were endorsed on appeal in the report 2008 CSIH 1. At para 59 Lord Macfadyen, giving the opinion of the court stated:

"In our opinion the Lord Ordinary reached the correct conclusion on this aspect of the case: the break notice sent to Bonnytoun at its registered office was not given to the Landlords of the Premises, and was therefore ineffective."

 

(vi)         Scrabster Harbour Trust v Mowlem plc 2006 SC 469. The question in this case before the Inner House was whether an arbitration provision had been validly invoked. Giving the Opinion of the Court, Temporary Judge Sir David Edward, QC stated:

"[47] Our conclusion from an analysis of the speeches in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd, as far as relevant for present purposes, is that the court should interpret and apply commercial instruments in a commonsense "commercial" or "business" way, eschewing linguistic and legalistic niceties. Where a contract gives one party the right unilaterally to bring the contractual relationship to an end, or to alter it in some other way, then that party must, if he chooses to exercise that right, comply with the agreed conditions for its exercise. If strict compliance with a particular condition is called for, then strict compliance will be enforced.

[50] "Lord Prosser's decision in Muir Construction Ltd v Hambly Ltd appears to us to be precisely in line with the conclusions we have drawn from Mannai. In that case, the contractor served a warning notice on the employers seeking payment under an interim certificate and thereafter, no payment having been made, purported to terminate the contract by service of a notice of determination. It was averred that service of the notice had been by hand delivery to an employee of the employers. The contract provided that the contractor may by registered post or recorded delivery to the Employer or Architect forthwith determine the employment of the Contractor under this Contract". The employers argued that the notice alleged to have been served by hand was invalid.

[51] Having analysed the contract and the purpose of the requirement for service by registered post or recorded delivery, Lord Prosser concluded that "the required formality [was] intentional, binding and useful to both parties" (p 834H). "Precise words in a carefully structured provision are intended by the parties to have a precise effect in a carefully structured procedure" (p 833J). Consequently, the notice averred to have been served by hand was invalid.

[52] We observe in passing that the clause under consideration in Muir Construction Ltd v Hambly Ltd, requiring service by registered post of recorded delivery, seems to be a better illustration of the point Lord Hoffman was making in Mannai than his example of a clause requiring a notice on blue paper."

Accordingly, it was submitted the Inner House in Scrabster Harbour Trust v Mowlem plc approving the approach taken in principle by Lord Prosser in Muir Constructions Ltd v Hambly Ltd, and in particular at para 47 above approved the interpretation of the Mannai Investment Co Ltd decision contended for by he buyer. .

 

15. Counsel for the buyer submitted that the clause 4.3.1 in this case was properly to be categorised as a notice provision. This clause conferred upon the seller the right in certain circumstances to have a profit and loss statement deemed to be conclusive, potentially to the considerable prejudice of the buyer. There were service and time limit provisions which should be construed as requiring compliance. Clause 4.3.1 required the seller's accountants to submit the profit and loss statement to the buyer's accountants for review within 30 business days after the completion date. This had not been done. The parties had agreed in the contract that it was the seller's accountants and the buyer's accountants who would be involved in this procedure. The agreed procedure did not involve the parties themselves. The seller had not complied with the terms of clause 4.3.1. and their case must fail.

 

16. The sheriff had allowed a proof before answer. His reasons were stated at paras 30, 31 and 32 of his note which I have set out in para 9 hereof. It was submitted the sheriff was wrong for two reasons:

(a)           The sheriff stated:

"Whilst it is unnecessary for me to rehearse the detail of the Agreement it may be that there are clauses in the Agreement on which I was not addressed at debate which may well be of relevance to the determination of this matter after proof."

It was submitted this was a complete inversion of the proper approach which is to assume that, if material is considered to be relevant to the decision on which either party wishes to rely, it should be brought to the sheriff's attention in the pleadings. In any event, it was submitted that in fact there was nothing in the Agreement which had any bearing on the issue.

(b)          There was nothing in the pleadings which could be characterised as shedding any light on this matter. The sheriff stated:

"I did not accept the submissions that the pleadings are silent as to the commercial intentions of the parties. It seems to me that there is material in articles 4 and 5 which go to this issue."

Counsel dealt with these two condescendences as follows:

(i) Condescendence 4 provides:

"The purpose of deeming the Profit and Loss Statement as accurate was to ascertain whether there was to be any Purchase Price Adjustment in terms of Clause 4.4 of the share purchase agreement. Part of the purchase price was placed, at Completion of the sale and purchase, into a joint bank account maintained by The Royal Bank of Scotland Plc at their Charing Cross, Glasgow branch in the joint names of the Pursuers' and First Defenders' respective solicitors. This "Retention Sum" amounted to £66,509.00."

However this clause was admitted in its entirety and proof was accordingly unnecessary. That was the purpose of the overall mechanism. However, that clause told the reader nothing that could possibly bear on the question of whether the parties are to be taken to have intended that submission of the accounts had to be to the buyer's accountants. There was nothing inconsistent with the general commercial objective in that the parties chose to provide an exact mechanism for the accounts exercise to take place. It was submitted that there was no evidence which could be led on these averments which could affect the outcome. I was referred to the case of Mitchell v Glasgow City Council 2008 SC 351. The Inner House by a majority allowed a proof before answer. I was informed that, on the first day of the hearing of the appeal before me, the House of Lords had, unanimously, supported the dissenting judgment of Lord Reed. Counsel had a copy of the decision of the Lords which was embargoed until 10.30 am, being the start of the hearing before me. The issue was whether a proof is always required. At para 135 Lord Reed said:

"In the present case, in accordance with Scottish procedure, both parties' pleadings are in a finalised state. They have each had an opportunity to recover any documents which they might require for the purpose of making relevant and specific averments. My conclusion that no duty of care of the kind averred was owed to Mr Mitchell is not based on the "fair, just and reasonable" criteria, but on factors which, in the terms of the tripartite test in Caparo would fall under the rubric of "proximity". That conclusion has been reached by legal analysis, on the assumption that the pursuer's averments in fact are true. Counsel for the pursuers sought to make something of the fact that more would be known about the relevant events if evidence were to be heard in support of those averments and the facts were established. This appears to me to be a point without substance, since the court assumes that the pursuers' averments are true. My conclusion is not dependent on nuances and details in the evidence which might be led on the basis of those averments. It would be altered only by evidence which went beyond the scope of the averments. If my conclusion is correct, there is no reason why effect should not now be given to it by sustaining the defenders' plea to the relevancy of those averments."

Lord Reed referred to the well known passage of Lord Reed in Jamieson v Jamieson:

"Finally I do not think that the decision of your Lordships in this case should be taken as casting any doubt on the value of the Scottish procedure of disposing of suitable cases on relevancy without enquiry into the facts ... If it can be shown that, even if the pursuer succeeds in proving all that he avers, still his case might fail, it appears to me to be highly advantageous that time and money should not be spent on fruitless enquiry into the facts."

Lord Hope in the House of Lords' decision in Mitchell v Glasgow City Council 2009 UK HL 10 opined:

"(10) The defenders seek dismissal of the action on the ground that the pursuers' pleadings are irrelevant; see their first plea in law. It is well established that an action will not be dismissed as irrelevant unless, even if the pursuer proves all his averments, it must necessarily fail (Jamieson v Jamieson 1952 SC HL 44).

(12) No advantage is to be gained by sending a case to proof where it is clear from the averments that, even if everything the pursuer avers is proved, the case must fail ... In such cases it is not just that there would be no advantage in sending the case to proof. It would be unfair for the defenders to be required to spend time and money on what will obviously be a fruitless inquiry."

As far as the facts of this case were concerned the question arose to what evidence could be legitimately led on the basis of the pleadings as they stood which could shed any light on the construction of the clause. Condescendence 4 set out the need to have a mechanism to ascertain whether there was to be any purchase price adjustment in terms of clause 4.4 of the share purchase agreement. But condescendence 4 tells the reader nothing about why parties chose the particular mechanism set out in clause 4 of the share purchase agreement. It was submitted that there was no issue as to the general commercial purpose reading clause 4 as a whole. It was to provide a route to obtain a final set of accounts. Whereas in this case the issue was the distinction between sending a set of accounts to a party or to a party's accountants, there was nothing which detracted from the general commercial purpose of the clause. The purpose was to provide a route to a final set of accounts. It was for the parties to agree time limits and the manner of service. The method may be recorded delivery, or registered post, or by hand, and the time limits may be 20 or 30 days. Whatever was decided by parties, that sat well with the general commercial purpose of the clause which was to provide a final set of accounts. To achieve that purpose, parties agreed on a mechanism whereby that purpose was achieved. If there was to be a proof in this case, it was submitted there would require to be averments which indicated that parties cannot have intended intimation to be only to the accountants and that intimation to the buyer themselves was sufficient. There was nothing to this effect on record.

(ii) Condescendence 5 provided at line 16:

"With reference to the First Defenders' averments anent Clause 4.3.5, such clause only applies if there has been timeous intimation of a Notice of Disagreement. In the hypothesis condescended upon by the First Defenders, neither event happened, and accordingly Clause 4.3.5 would offer no remedy. In the said hypothesis there is no contractual remedy which would permit or result in release of the Retention Sum to either party. Such result was not the Parties' intention when entering into the share purchase agreement. In any event, the First Defenders' hypothesis being denied, explained and averred that the Seller's Accountants having failed to provide a Notice of Disagreement in terms of Clause 4.3.2 of the share purchase agreement, the Profit and Loss Statement has become final and binding and there is accordingly no dispute to be referred to an independent chartered accountant appointed by the President for the time being of the Institute of Chartered Accountants in Scotland."

It was submitted there were three comments which could be made about that:

i. It was an averment of the negative. While it said what the parties' intention was not when entering into the share purchase agreement, it did not say what was parties' intention.

ii. It suffered from a degree of conceptual confusion as it conflates two distinct issues. What it said was that respondents have not complied with the clause and as a result they are in a mess - the parties could not have intended that - therefore the meaning of the clause cannot be what the buyer maintains. It was submitted that all were familiar with the technique of testing a clause by working through its consequences - this was often seen when the exercise was completed and, if the application led to an anomalous result that might indicate parties did not intend it to work in that manner. But one would normally carry out that exercise assuming compliance with the clause. Here, there was nothing difficult with compliance with the clause. What was required of the seller was simple - to intimate the accounts to the buyer's accountants. That did not involve anything that was onerous or unreasonable. It was submitted that essentially what the seller was saying was that, if he did not do what was required of him in respect of that clause, this would give rise to problems and parties could not have intended that. However, what parties intended was that, if the clause was complied with, there would be an agreed procedure and a final set of accounts.

iii. The averments are not correct in what they say about the operation of the contract. If this action was dismissed they were entitled to compel, by a litigation if necessary, the rerunning of the process and intimation of draft accounts.

I was referred to clause 12 of the agreement:

"The Seller shall promptly execute and deliver all such documents, and do all such things, as the Buyer may from time to time reasonably require for the purpose of giving full effect to the provisions of this Agreement."

Accordingly, if this action was dismissed, it would be open to the buyer to call upon the respondents to obtemper their obligations in terms of clause 4 of the agreement.

 

17.         In summary, in terms of clause 4.3.1, for the seller to succeed, it was submitted that he had to establish that the words "submitted to the buyer's accountants for review" did not mean "submitted to the buyer's accountants for review". It was irrelevant to say that what the seller had done, namely made intimation to the buyer directly, was better intimation. They might endeavour to submit that the requirement to submit to the buyer's accountants might be satisfied by submission directly to the buyer. This also was unsound. It was submitted the generality of the whole of clause 4.3 made it clear that what was intended was a process between accountants. The parties' accountants are referred to in clauses 4.3.3 and 4.3.4. Parties had gone to the trouble of specifying in their contract the names and addresses of the accountants. Anyone could see that there were obvious commercial considerations in specifying intimation to a professional adviser. One could assume they had proper systems for incoming mail, filing, appropriate prioritisation, and an office staff to open during business hours. None of this might exist if intimation was made direct to a client. When in fact it would be the accountants who would say what was right or wrong with the accounts, one could see how parties had elected in the contract that matters should be dealt with between accountants. The share purchase agreement provided at clause 4.3.1:

"Unless within 20 (20 Business Days) after receipt of the version of the profit and loss statement pursuant to clause 4.3.1 the buyer's accountants shall notify the seller's accountants in writing of any possible discrepancy in, or disagree or difference of opinion relating to, the Profit and Loss Statement, the parties shall be deemed to have accepted such statement as accurate and they shall, save in the case of manifest error or fraud, then become final and binding on the parties for the purpose of this agreement."

It was submitted it was plain that parties must have intended these provisions to be complied with. The parties had agreed they should be able to hold each other to the provisions of the contract. There was no necessity for proof. Evidence would add nothing. The whole of clause 4 could be construed as it stood. It was submitted the case should either be dismissed or there should be decree in favour of the seller. The former course was urged upon me.

 

Submissions for the seller (pursuers and respondents)

 

18.         Solicitor for the seller submitted that the arguments put forward on behalf of the buyer did not fully consider the terms of the sheriff's decision. He proposed to divide his submissions into three areas (a) the content of the sheriff's decision (b) what that decision was based on and (c) what the sheriff's decision means in the context of the case generally. I deal with these in turn.

 

A. The sheriff's decision

19.         It was submitted that the operative parts of the sheriff's decision were contained in paras 31 and 32 as follows:

"[31] The pleadings demonstrate that parties are in dispute as to the intention of clause 4.3.1 and that there are disputed issues of fact between them. It is also evident at debate that there are in dispute as to the character of clause 4.3.1 and as to the issue of any ambiguity in the clause.

[32] Having considered matters I was not persuaded, at this stage, by counsel's submission that the pursuers' case should be dismissed. I did not accept the submission that the pleadings are silent as to the commercial intentions of the parties. It seems to me that there is material in articles 4 and 5 which goes to this issue. I was not persuaded by the submission that there was insufficient material in the pleadings to merit enquiry into the surrounding circumstances. I am of the view that the pleadings as they stand including the material which has been incorporated into them are sufficient to justify proof of the relevant surrounding circumstances. Whilst this is unnecessary for me to rehearse here the detail of the Agreement it may be that there are clauses in the Agreement on which I was not addressed at debate which may well be of relevance to the determination of this matter after proof. Overall, having considered the authorities to which reference was made at debate and having regard to the opinion of the court in City Wall Properties (Scotland) Ltd v Pearl Assurance plc 2007 CSIH 79 as well as to the areas of dispute between the parties I am of the view that proof before answer is necessary in order that the surrounding circumstances can be established and thereafter brought to bear on the court's determination of the issue in this case. "

It was submitted that the sheriff had decided that the parties were in dispute as to the interpretation of clause 4.3.1, on a number of issues of fact, and whether there was any ambiguity in the clause. The sheriff concluded that there was sufficient material in the pleadings on record regarding the commercial intention of the parties to justify a proof of the relevant surrounding circumstances. Proof of the relevant surrounding circumstances would guide the court's determination of the disputed issues.

 

20.         It was submitted it was also crucial to note what the sheriff's decision was not. The decision was not one which decided what the contract meant or what the parties intended. The buyer's submissions proceeded on the basis that the sheriff did not require to hear any evidence about the parties' intentions and that the court ought to be able to come to a conclusion on the contract without hearing evidence. The sheriff had not made any decision on what the parties intended. The sheriff's decision was not that a proof was necessary on all occasions. All the sheriff said was that a proof was necessary in this case because there was sufficient factual material on which evidence required to be heard before a decision could be made. I was referred to the case of Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd supra where Lord Styen at 768A said:

"... three propositions can be formulated. First, in respect of contracts and contractual notices the contextual scene is always relevant. Secondly what is admissible as a matter of the rules of evidence under this heading is what is arguably irrelevant. But admissibility is not the decisive matter. The real question is what evidence of surrounding circumstances may ultimately be allowed to influence the question of interpretation. That depends on what meanings the language read against the objective contextual scene will let in. Thirdly, enquiry is objective: the question is what reasonable persons, circumstanced as the actual parties were, would have had in mind. It follows that one cannot ignore that a reasonable recipient of the notices would have had in the forefront of his mind the terms of the leases. Given that the reasonable recipient must be credited with knowledge of the critical date and the terms of the clause 7(13) the question is simply how the reasonable recipient would have understood such a clause."

It was submitted that the question of what a reasonable recipient would have understood was relevant to the question of construction. However the sheriff in this case made no comment on that because of the first two principles which require information as to the contextual scene. It was submitted that the sheriff in this case had not decided that the buyer really ought to have known what they were receiving when the accounts were sent to them. All the sheriff had decided, following the principles laid down, was that proof of the contextual scene was required.

 

B. What the decision was based on

21.         The sheriff referred in an earlier part of his judgment to the submissions made to him. He relied particularly on the case of City Wall Properties (Scotland) Ltd v Pearl Assurance plc supra (hereinafter referred to as "City Wall"). It was submitted it was clear from the reading of his decision that he placed great reliance on the City Wall decision and other authorities mentioned in it.

 

22.         Counsel had sought to distinguish the City Wall case by submitting it was not a case about a notice provision. It had been suggested that the present case did involve a notice provision. Solicitor for the buyer suggested that this was a false distinction to make. He suggested this was not a case about a notice provision. The case was about a clause which operates in favour of or against both parties. It was a mutual clause. It was submitted that a notice clause in a rent review or a termination of relief situation was for one party to achieve something at the expense of the other. The present case was about a clause which determined the final amount of the purchase price. Both parties will either benefit or gain from it in much the same way as the clause in the City Wall case which concerned a rent review. The rent would go up or down depending on how the clause was interpreted.

 

23.         It was submitted that what the City Wall case did was set out the principles of contractual interpretation. For that reason the decision was relevant in this case. I was referred to the following passages of the opinion of Lord Philip.

(i) para 11:

"After the solicitors had been instructed, there followed a number of letters and telephone conversations between them in which the defenders' solicitors attempted to propose their own version of the rent review clause in place of the pursuers' formula. The defenders' version provided a straightforward indexation of the passing rent to reflect the increase in the average daily rate charged at the comparator car parks. The pursuers, however, insisted on the retention of their version and the defenders ultimately agreed, apparently on the view that the two versions had the same effect. The Minute of Agreement was then executed by the defenders on 30 July and by the pursuers on 9 August 1999. It is of some significance that on 24 August 1999 Mr Leishman wrote to Mr Macphail in the following terms:

"As the review formula was calculated from the average of increased daily rates my client felt it would be useful to confirm that the 9 hour rate as at 1 July 1999 for the three car parks in question were as follows:

(1)     Multi-storey College Street, Aberdeen £5

(2)     Bon Accord, Aberdeen £10

(3)     Trinity Centre, Aberdeen £8.50

Could you please confirm that your clients agree the above figures which will then form the datum from which the increases can be determined at review."

This letter had the effect of confirming that, subject to some minor rounding up, the new rent payable under the Minute of Agreement from 1 July 1999 could be arrived at by multiplying "the product of 96 multiplied by the car park factor" as at 1 July 1999 by 35. A reasonable commercial person might infer from this that clause 3 was intended to provide for the maintenance of the same relationship between the reviewed rent and the average of the daily car park charges at future review dates. The importance of the evidence of communication between the parties to which I have referred is not as evidence of the subjective view of the parties or their representatives as to the meaning of clause 3, but as evidence of the background or context in which the parties were operating. As such it was appropriate for the Lord Ordinary to have regard to it."

It was significant that evidence of the communications between the parties were considered by Lord Philip to be appropriate for the consideration of the Lord Ordinary. In that case the decision was made after proof when evidence was available.

(ii) para 15:

"In his opinion the Lord Ordinary found that the parties were not at cross purposes as to what they intended to agree, but shared a common intention. The primary argument of both parties, however, was that there was no ambiguity in the wording of clause 3, and that the court should determine that the plain meaning was in accordance with their respective interpretations. The Lord Ordinary rejected those arguments and concluded that while both parties' constructions of the wording were possible, both required a somewhat strained reading. In those circumstances he asked the question whether, having regard to the relevant context, one construction could be preferred to the other. On the evidence he found that neither Mr Evans nor Mr Strachan had ever considered that the new rent review provision should provide for an indexation type of formula to produce a figure to be added to the passing rent. He also found that neither Mr Leishman nor Miss Knox had envisaged that the wording had the effect advanced by the pursuers. The intention was that the indexation process was to be applied, at the date of the review, to the passing rent applicable to one of the 35 spaces, and that the result of that process was not to be added to the passing rent. That, he concluded, was what the protagonists saw as the principle or purpose of the review clause. Against that background he found that the reasonable commercial person would conclude that the correct construction was the one put forward by the defenders."

(iii) At para 23 Lord Philip referred to the five principles set out by Lord Hoffman in the case of Investors Compensation Scheme Ltd v West Bromwich Building Society 1998 1WLR 898 at 912F where he said:

"My Lords, I will say at once that I prefer the approach of the judge. But I think I should preface my explanation of my reasons with some general remarks about the principles by which contractual documents are nowadays construed. ... The principles may be summarised as follows:

1.               Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having 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.

2.               The background was famously referred to by Lord Wilberforce as "the matrix of the fact", but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

3.               The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.

4.               The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meaning of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words of syntax; see Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd.

5.               The "rule" that words should be given their "natural and ordinary meaning" reflects the commonsense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had ..."

It was submitted that essentially the court had to consider the meaning which the document would convey to a reasonable person, having all the background knowledge which would reasonably have been available to the parties at the time of the contract. The meaning of the document is what the parties using these words against the relevant background would reasonably have understood them to mean. The court is not necessarily bound to take the natural or ordinary meaning if that would attribute to the parties an intention which they plainly could not have had.

(iv) para 24 of Lord Philip in City Wall:

"The effect of the passages I have cited is, it seems to me, that the court begins its consideration of the construction of a contractual provision already equipped with the information available as to the circumstances surrounding the contract, and that information is brought to bear on the court's consideration from the beginning. The court does not begin by looking at the words themselves, as it where in a vacuum, without reference to the surrounding circumstances, in order to ascertain whether they have a plain meaning or whether there is an ambiguity. To adopt that approach, it seems to me, is to assimilate so far as possible, the way in which the document is interpreted to the common sense principles by which any serious utterance would be interpreted in ordinary life, and to discard "the old intellectual baggage of "legal" interpretation". If I am right in that interpretation, it is not necessary for the Lord Ordinary to decide that the words of clause 3 were ambiguous before he could deploy the evidence of the surrounding circumstances."

It was submitted that in this case the buyer was urging the court to dispense with information available as to the circumstances surrounding the contract and to look at the words in a vacuum. It was submitted this was wrong and the sheriff was correct to have held that he required to have that evidence before he can consider the true meaning of the contract and what was done.

 

24.         I was further referred to Lord Kingarth in the City Wall case:

(i) para 31

"The primary issue raised in this reclaiming motion is a short question of construction of a clause in a commercial contract. The principles to be applied, derive from numerous well known authorities, were explored fully in the debate before us, and, although certain different emphasis were put upon them by each party, there was, it seemed to me, by the end of the hearing, broad agreement as to what these principles are and how they fall to be applied in the present case. In particular, as I understood it, it was agreed that, however much assistance could legitimately be gained from consideration of surrounding circumstances, the relevant clause could only properly be construed as having a meaning which the words were capable of bearing as a matter of language."

(ii) para 36:

"Without going further, it can, it seems to me, already be said that the respondent's construction is, on the face of it, a commercially sensible construction; the reclaimer's is not."

(iii) para 38:

"The matter is, however, in my view, put beyond doubt by consideration of the aim and object of the clause as found by the Lord Ordinary in evidence. It seems entirely clear, from his assessment of the evidence of the parties communings ... that the Lord Ordinary felt able to deduce without any real hesitation an apparently agreed aim to produce a formula to enable the rent to be reviewed in a way which would allow it's level to be kept in line with increases in car parking rates ..."

It was submitted that Lord Kingarth had relied on the appropriateness of having heard evidence as to the aim and object of the clause, and he took that from the parties' communings.

 

25.         It was submitted that in this case what the sheriff has done, after considering these passages, was to conclude at para 29 of his judgment:

"It is clear, from Lord Philip's opinion, that in considering a construction of a factual provision a court should have regard, from the outset, to the circumstances surrounding the contract. Lord Philip outlines the type of evidence which can be admissible and the use to which that evidence can be put. He makes it plain that the court can have regard to surrounding circumstances whether or not there is an ambiguity in the clause."

It was submitted this was a correct summary, not only of Lord Philip's opinion, but of the state of the law. It was submitted that the sheriff then went on to consider what matters of fact and evidence might be put before the court as to the circumstances surrounding the contract.

 

26.         I was then asked consider condescendence 3. A number of facts averred by the seller were denied by the buyer, namely:

(i)           Whether the seller timeously provided the profit and loss statement.

(ii)         What the seller says the buyer was obliged to do.

(iii)        Whether the buyer did not do it.

(iv)       Whether the seller's accountants reasonably anticipated that the buyer would provide his accountant with the profit and loss statement.

(v)         The seller's solicitors wrote to the buyer's solicitors outlining the procedure for issuing a notice regarding any disagreement.

It was submitted that the sheriff was correct to consider these matters were relevant surrounding circumstances on which there required to be evidence in deciding what the clause meant.

 

27.         It was submitted it was significant that at no stage did the buyer accept having received the accounts. All that was averred was that the accountants did not receive them. It was submitted that was a fundamental issue. It was submitted that the crucial fact, namely knowledge that the intimation was what triggered the calculation process, had to be established before the court could consider the terms of the agreement and consider whether they had been implemented. It was submitted that the court would have to hear evidence on these facts before it could make a determination as to what reasonable parties in light of these surrounding circumstances would understand the contract to mean. It was submitted the sheriff was correct to base his decision on the City Wall case as there were disputed issues of fact.

 

C. What the decision means in the context of the case generally

28.         Solicitor for the seller noted that in his decision the sheriff had reserved the buyer's preliminary pleas. They had not been repelled. After a proof it would still be open to the buyer to raise objection should the seller seek to introduce evidence of matters not on record. Critically, the buyer would still be able to argue, once evidence had been led, that their construction of the contract was correct. It might be, as suggested on behalf of the buyer, that the seller would have some difficulties at proof, but it was submitted that any such difficulties as to what evidence might be led should be dealt with by the right to object and, if appropriate, by findings of expenses. It was submitted that what could not be said now was that, if the seller proves all that they aver, they would necessarily lose.

 

29.         It was submitted that this decision prevented the absurd position arising which would otherwise apply, namely that there would be no mechanism, if the action was dismissed, to allow further money to be released to the buyer. Counsel for the buyer had referred to two alternatives, neither of which were pled. What steps might be open to parties in the event that this action was dismissed was not in fact central to this appeal. Solicitor for the seller contented himself with stating that the application of clause 4.3.2 would require a strained contractual construction. He did not consider that clause 12 would assist. For the present purposes, it was sufficient that one or other option would not necessarily assist to have this matter resolved. In view of the lack of clarity as to what would happen if the case was dismissed, it was submitted this was a further reason why proof should be allowed.

 

30.         It was submitted that all the sheriff had done was fix a proof at which the buyer could object to evidence and, after evidence, they would be entitled to submit that their interpretation of the contract was correct. Any question of prejudice to them could be dealt with by an award of expenses. It was submitted that the sheriff's decision was based on a sound interpretation of the law and a proper analysis of the pleadings. I was asked to adhere to the sheriff's interlocutor of 1 December 2008 and remit the cause to the sheriff to fix a proof before answer.

 

31.         It was agreed that expenses should follow success and the only formal objection was made to certification of the case as suitable for the employment of counsel.

 

Decision

 

32.         I agree with the analysis of the decision in the case of Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd supra set out for counsel for the buyer. I accept there is a distinction between, on the one hand, the question of whether there has been compliance with the formal requirements imposed by the contract of service of a notice (or in this case intimation of the profit and loss statement), and on the other hand the construction of the notice or intimation in the sense of what the notice or intimation was intended to mean. Lord Hoffman makes this clear at 776A to C:

"Because such notices have unilateral operation, the conditions under which they may be served must be strictly complied with. I have already said that this principle is accepted by both sides ... If the clause had said that the notice was to be on blue paper, it would have been no good serving notice on pink paper, however clear it might have been that the tenant wanted to terminate the lease."

Lord Hoffman is there dealing with the formal requirements of notice imposed by the contract. This falls to be compared with what he says at 774H:

"A reasonable recipient will see that in purporting to terminate pursuant to clause 7(13) but naming 12 January 1995 as the day upon which he will do so, the tenant has made a mistake. He will reject as too improbable the possibility that the tenant meant that unless he could terminate on 12 January, he did not want to terminate at all. He will therefore understand the notice to mean that the tenant wants to terminate on the day on which, in accordance with clause 7(13), he may do so i.e. 13 January."

Lord Hoffman is there considering the construction of the notice in the sense of what the notice was intended to mean.

 

33.         In my opinion the following dicta support the proposition that when parties have agreed particular formalities in a contract, they are entitled to hold each other to these formalities.

(i)             Lord Prosser in Muir Constructions Ltd v Hambley Ltd supra at 833:

"I am not however satisfied that there is anything contrary to commonsense, or anything inconsistent with a business approach, in concluding that precise words in a carefully structured provision are intended by the parties to have a precise effect in a carefully structured procedure. ... on the whole matter, I see the required formality as intentional, binding and useful to both parties. If written notice is all that is required, that could easily have been said, ..."

(ii) Lord Sutherland in Capital Land Holdings Ltd v Secretary of State for the Environment supra at 114:

"The parties to this arms length contract of lease have made specific provision for the places to which the notices must be sent and the parties are entitled to hold each other to such a provision. We do not consider that Cl 7 can be construed as a whole as being simply a directory provision. The provisions relating to the place of service are stated in words which are plainly intended to be mandatory ..."

(iii) Lord Reed in the Inner House in Ben Cleuch Estates Ltd v Scottish Enterprise supra at 138:

"... I am satisfied that the break notice was not validly served. This result may be thought to confer an adventitious bonus on the pursuers, enabling them to take unmeritorious advantage of the defenders' error when they realised perfectly well that the defenders intended to exercise their entitlement under the break clause. This criticism however misses the point that the parties have agreed, at it were, on the key which is to be capable of turning the lock; if the tenant has not used the right key, then the lock will not turn. The absence of confusion or prejudice on the part of the landlord is irrelevant. If the parties had intended that the break clause should require no more than that the tenant should evince a clear intention to terminate the lease, which should come to the attention of the landlord, then they could have said so in their contract. They did not; and it is not for the court to re-write their contract for them."

It seems to me that this is exactly the situation which occurred in this case. The "key" to turn the lock in terms of the contract agreed between the parties was that the profit and loss statement should be intimated by the seller's accountants to the buyer's accountants. This was not done. The mechanism to open the procedure described as "a deemed finality provision" was thus not operated.

(iv) Temporary Judge Sir David Edward, QC in Scrabster Harbour Trust v Mowlem plc supra at para 47:

"Our conclusion from an analysis of the speeches in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd, as far as relevant for present purposes, is that the court should interpret and apply commercial instruments in a commonsense "commercial" or "business" way, eschewing linguistic and legalistic niceties. Where a contract gives one party the right unilaterally to bring the contractual relationship to an end, or to alter it in some other way, then that party must, if he chooses to exercise that right, comply with the agreed conditions for its exercise. If strict compliance with a particular condition is called for, then strict compliance will be enforced."

 

34.         I accept the submission that where parties have agreed particular formalities in a contract, they are entitled to hold each other to these formalities. In clause 4.3. of the share purchase agreement the parties agreed the formalities of how the profit and loss statement should be prepared, reviewed and agreed. Clause 4.3.1 provided:

Forthwith after Completion, the Seller shall procure that the Seller's Accountants prepare the Profit and Loss Statement (in accordance with the principles set out in Part 6 of the Schedule) and submit it to the Buyer's Accountants for review within thirty (30) Business Days after the Completion Date...."

If parties, when they entered into the contract, were of the view that intimation could be effected direct to the buyer and this would have had the same effect, they should have said so. In the share purchase agreement the parties not only make reference at various different parts of the Agreement to the "seller's accountants" and the "buyer's accountants" but they also in the interpretation section of the contract identify that the buyer's accountants were BCS (North West) Limited, Company Number 20270911 of Border House, 60 Main Street, Bottom-Sands, Carnforth, Lancashire LA5 9DN and that the seller's accountants were Wallace & Co, 10 Clydesdale Street, Hamilton ML3 0DP. It is my opinion that the formalities which the parties agreed regarding intimation of the profit and loss statement was by the seller's accountants to the buyer's accountants. It is clear, reading the share purchase agreement as a whole, that this was a process involving the parties' accountants - not the parties themselves.

 

35.         In the case of Muir Constructions Ltd v Hambly Ltd supra the contract provided for notice by registered post or by recorded delivery. Notice was in fact hand delivered. It was held that when parties have agreed particular formalities, they are entitled to hold each other to these formalities. Hand delivery did not comply with the terms of the contract. In Capital Land Holdings Ltd v Secretary of State for the Environment supra the contract provided for a notice to be served at the landlords' registered office. In was in fact served on the landlords' agents at the leased premises. It was held that the provisions relating to the place of service were stated in words which were plainly intended to be mandatory. In Ben Cleuch Estates Ltd v Scottish Enterprise notice was served not on the actual landlords, but on the parent company. The two companies had the same managing director and same registered office. It was held that the requirements of the contract had not been obtempered.

 

36.         These cases, like this case, all involve the first question considered in Mannai Investment Co Ltd, namely whether there had been compliance with the formal requirements imposed by the contract in respect of the service of the notice - in this case intimation of the profit and loss statement. This is a totally distinct matter from the construction of the notice or intimation once served, in the sense of what the notice or intimation was intended to mean. In my opinion the dicta of Lord Philip and Lord Kingarth in the City Wall case, on which the sheriff relied and which I have set out in paras 23 and 24 hereof, deal with the second issue of the construction of the notice in the sense of what it was intended to mean. In particular I refer to para 29 of the opinion of Lord Philip in City Wall:

"For all these reasons I have come to the view that a reasonable commercial person, looking at the matter objectively, would conclude that the wording of clause 3 properly construed does not involve the addition of the product of the formula to the passing rent at the date of each review. I would therefore refuse the appeal."

The City Wall case was not a case dealing with a notice or intimation provision. The issue was the proper construction of a rent review clause in a commercial lease of a car park. The clause in question had a comparative element whereby the reviewed rent had to bear comparison with rents in other comparable car parks. City Wall was not a case involving the strict interpretation of a notice term in a contract. In my opinion the City Wall case is a good example of the type of situation where the court could, from evidence of surrounding circumstances, discern what the parties must have had in mind and intended at the time they reduced the agreement to writing. Such evidence was in fact led in that case. However, the interpretation of the terms of a clause in a contract is a different matter from a notice provision in the contract. This distinction was recognised by Lord Macfadyen in the case of Ben Cleuch Estates Ltd v Scottish Enterprise supra in the Inner House at para 64:

"Nothing turns in this case on the construction of the notice. It was invalid because it was not given to the landlord, but to a third party. The stage of considering how the notice would be understood by the recipient is not reached"

In this case, the construction of the notice in the sense of what it was intended to mean is not the issue. As Lord Macfadyen put it, the stage of considering how the notice would be understood by the recipient is not reached. In my opinion the notice or intimation provision in the share purchase agreement is clear. The seller's accountants are required to intimate the profit and loss statement to the buyer's accountants.

 

37.         It is significant that in the case of Capital Land Holdings Ltd v Secretary of State for the Environment supra Lord Penrose allowed a proof on averments by the tenant that agents acting with the authority of the landlord had requested notices to be sent to those agents and accordingly service on those agents was valid notice in the terms of the contract. In my opinion, in this case, it would only be open to allow a proof if there were relevant averments on the part of the seller that, notwithstanding the terms of the contract, the requirement for intimation in terms of clause 4.3.1 would be satisfied if the profit and loss statement was submitted direct to the buyer instead of to the buyer's accountants. It is accordingly necessary to consider in detail the seller's pleadings to ascertain whether there are any relevant averments on which a proof would assist with the interpretation of clause 4.3.1.

 

38.         I deal with the seller's pleadings as follows:

A Condescendence 3. I break the condescendence down as follows:

(i) "In terms of clause 4.3.1 of the share purchase agreement the pursuers were obliged, within 30 business days following 17 August 2007 (being the completion date) to provide the first defenders with a profit and loss statement in respect of the company.

This is not a proper statement of the seller's obligation in terms of clause 4.3.1 which states:

"the Seller shall procure that the Seller's Accountants prepare the Profit and Loss Statement (in accordance with the principles set out in Part 6 of the Schedule) and submit it to the Buyer's Accountants for review within thirty (30) Business Days after the Completion Date."

The seller has incorporated the terms of the share purchase agreement into the pleadings at condescendence 2. If the seller wishes to aver the terms thereof, he should do so accurately.

(ii)              "The pursuers timeously provided the first defenders with a profit and loss statement on or around 25 September 2007 (the last date for such documents to be prepared being 29 September 2007)."

The seller may have provided the buyer direct with a profit and loss statement on or around 25 September 2007. This, however, in the absence of averments that this was part of the share purchase agreement, is irrelevant in view of the terms of clause 4.3.1 which I have set out above.

(iii) "In terms of clause 4.3.3 of the share purchase agreement the first defenders were obliged, within 20 business days following receipt of the profit and loss statement, to notify the pursuers of any disagreement they may have had with the profit and loss statement, which failing the pursuers and the first defenders are deemed to have accepted the profit and loss statement as being accurate, final and binding."

The seller in condescendence 2 incorporates the share purchase agreement into the pleadings. This averment is not a proper statement of the buyer's obligation in terms of clause 4.3.3. It provides:

"... The buyer's accountants shall notify the seller's accountants in writing ..."

(iv) "The first defenders did not timeously notify the pursuers of any disagreement with the profit and loss statement (the last date for doing so being 23 October 2007). According, the profit and loss account was deemed to have been accepted by both parties as being accurate on or around 23 October 2007."

That is not a proper conclusion from the terms of the contract. The contract clearly places obligations on the seller's accountants and the buyer's accountants. It does not place obligations on the seller and the buyer. There are no averments to explain why intimation to the buyer direct can be considered intimation in terms of the contract.

(v) "With reference to the first defenders' averments in answer, the terms of clauses 4.3.1 and 4.3.3 are admitted and referred to for their terms, beyond which no admissions are made. The identities of the seller and buyer's accountants are admitted. ... not known and not admitted that BCS did not receive a profit and loss statement. Denied that the share purchase agreement specifically provided that Wallace & Co would provide BCS with the profit and loss statement. Explained and averred that the share purchase agreement provided that the pursuers would procure intimation on the profit and loss statement by Wallace & Co to BCS. In the end, the intimation was by Wallace & Co to the first defenders directly and under explanation that the seller's accountants issued the profit and loss statement to the first defenders as condescended upon above. The seller's accountants reasonably anticipated that the first defenders would provide their accountants with the profit and loss statement. Intimation to the first defenders was better intimation than to BCS, because the first defenders were then in a position to specifically instruct BCS in relation to any issues with the profit and loss statement, and were able to monitor compliance with any time limits ..."

The important issue is that the share purchase agreement provided that the profit and loss statement was to be submitted to the buyer's accountants - not the buyer. The seller avers that his accountants issued it to the buyer. It may well be that intimation direct to the buyer was better intimation than to the buyer's accountants, but that is neither here nor there. Evidence about how advantageous direct intimation to the buyer would be is not relevant evidence. The contract is quite specific. There is nothing in the averments to date on which evidence would be of assistance in allowing the court to conclude that the contract between the parties regarding intimation of the share purchase agreement was other than on the face of the document.

(vi) "Further explained and averred that in an attempt to procure notification of any disagreement the first defenders may have had with the profit and loss statement, the pursuers' solicitors wrote to the defenders' solicitors on or around 26 September 2007 outlining the deadline for receipt of any notice regarding a disagreement with the profit and loss statement. A copy of the pursuers' solicitors' letter is produced herewith and referred to for its terms which are held to be incorporated herein brevitatus causa"

This letter post-dates the formation of the contract. There is no averment that there was any response to the seller's solicitor's letter. In my opinion, evidence of the solicitor's letter would not be admissible in an issue as to the proper interpretation of the agreement between the parties at the time it was entered into.

(vii) "Further explained and averred that the first defenders did not avail themselves of the contractual remedy contained in clause 12 to require the pursuers to remedy any alleged deficiencies in the intimation of the profit and loss statement."

Clause 12 provides:

"The seller shall promptly execute and deliver all such documents, and do all such things, as the buyer may from time to time reasonably require for the purpose of giving full effect to the provisions of this Agreement."

I do not see the relevance of that provision in this context.

Accordingly, as far as condescendence 3 is concerned, in my opinion there are no averments, the leading of evidence in respect of which would assist in the interpretation of this contract as far as clause 4.3.1 is concerned.

B Condescendence 4 is in the following terms:

"The purpose of deeming the Profit and Loss Statement as accurate was to ascertain whether there was to be any Purchase Price Adjustment in terms of Clause 4.4 of the share purchase agreement. Part of the purchase price was placed, at Completion of the sale and purchase, into a joint bank account maintained by The Royal Bank of Scotland Plc at their Charing Cross, Glasgow branch in the joint names of the Pursuers' and First Defenders' respective solicitors. This "Retention Sum" amounted to £66,509.00."

This whole condescendence is admitted by the buyer. There is nothing to be gained from a proof on any of the matters referred to in this condescendence. It contains a statement of facts which are admitted and do not assist in the interpretation of the contract as far as the intimation provision in clause 4.3.1. is concerned.

C Condescendence 5. I break the condescendence down as follows:

(i) "The profit and loss statement, as deemed to have been accepted as accurate, brought out a purchase price adjustment of £15,044.00, which is a sum to which the first defenders are now entitled to be paid out of the said retention sum. In addition, in a concession made by the pursuers after deemed acceptance of the profit and loss statement, the pursuers informed the first defenders that they were prepared to allow a further £5,534.12 to be paid to the first defenders from the Retention Sum in respect of staffing costs up to completion but remaining unpaid. The pursuers are prepared to adhere to such concession, giving a total of £20,578.12 payable to the first defenders from the Retention Sum. The pursuers are entitled to be paid the balance, which amounts to £45,930.88."

In my opinion these averments lack specification and are accordingly irrelevant. If it is the seller's case that he informed the buyer that he was prepared to allow a further £5,534.12 to be paid to the buyer from the retention sum, there should be proper specification of how, where, when and to whom this communication was made. There is not. There is no averment of any acceptance or otherwise on the part of the buyer of the seller's proposed "concession". These averments do not assist the interpretation of the contract.

(ii) "With reference to the First Defenders' averments in answer, denied that the pursuers' agents failed to intimate the profit and loss statement as provided for in clause 4.3.1 on the share purchase agreement. Denied that the pursuers or pursuers' agents are in breach of contract."

If it is the seller's case that the profit and loss statement was intimated to the buyer's accountants in as provided for in terms of clause 4.3.1 that was something which would be in their knowledge and they are obliged to aver it. They have not done so. This averment bears comparison with the seller's averments in condescendence 3:

"explained and averred that the share purchase agreement provides that the pursuers would procure intimation of the profit and loss statement by Wallace & Co to BCS. In the end, the intimation was by Wallace & Co to the first defenders directly under explanation that the seller's accountants issued the profit and loss statement to the first defenders ..."

It is accordingly quite clear that, on record, the seller's position is that, as a matter of fact, their accountants issued the profit and loss statement to the buyer direct and not to the buyer's accountants. This is not in terms of clause 4.3.1 of the contract.

(iii) "The terms of 4.3.5 are admitted and referred to for their terms, beyond which no admission is made. With reference to the first defenders' averments anent clause 4.3.5, such clause only applied if there has been timeous intimation of the notice of disagreement. In the hypothesis condescended upon by the first defenders, neither event happened, and accordingly clause 4.3.5 would offer no remedy. In the said hypothesis there is no contractual remedy which would permit or result the release of the retention sum to either party. Such result was not the parties' intention when entering into the share purchase agreement."

In my opinion this has nothing to do with the point in issue at this stage. In the share purchase agreement the parties were setting out the method by which the deemed finality provision would be operated. The procedure is stated at clause 4.3.1. That provides that the profit and loss statement requires to be submitted to the buyer's accountants. The parties at the time they entered the contract were providing a mechanism as to how communication could take place between them - they were not concerned about failure to do so. What may or may not be the result of the failure on the part of one party to obtemper the terms of the contract is not a relevant matter to consider in light of the clear terms of clause 4.3.1. There are no averments on the part of the seller to suggest anything else than that provided at clause 4.3.1 was the contractual position regarding intimation of the profit and loss statement between them.

(iv) "In any event, the first defenders' hypothesis being denied, explained and averred that the seller's accountants having failed to provide a Notice of Disagreement in terms of Clause 4.3.2 of the share purchase agreement, the profit and loss statement has become final and binding and there is accordingly no dispute to be referred to an independent chartered accountant appointment by the president for the time being of the Institute of Chartered Accountants in Scotland."

These averments do not assist the seller. There would appear to be a typing error. It clearly is the seller's position that the buyer's accountants failed to provide a notice of disagreement in terms of clause 4.3.2. However, there are only obliged to do so if they receive from the seller's accountants the profit and loss statement in terms of clause 4.3.1.

 

39.         The sheriff concludes:

"It may be there are clauses in the Agreement in which I was not addressed at debate which may be of relevance to the determination of this matter at a proof"

If such clauses do exist - and on my examination of the contract they do not - and the seller wishes to place reliance on them, they should be averred.

 

40.         Having detailed all the averments in condescendences 3, 4 and 5 it appears to me that there is no material on which evidence would assist the seller in his suggestion that intimation to the buyer direct was part of the share purchase agreement and could be considered intimation in terms of that agreement. In these circumstances I take the view that there are no grounds for allowing a proof. The sheriff concludes that the pleadings demonstrate that the parties are in dispute as to the interpretation of clause 4.3.1 and that there are disputed issues in fact between them. He concludes it was also evident at debate that they are in dispute as to the character of clause 4.3.1 and as to the issue of any ambiguity in the clause. In my opinion clause 4.3.1 discloses that the parties agreed that it was for the seller's accountants to intimate the profit and loss statement to the buyer's accountants. There are no averments on the part of the seller in my view which would allow evidence to be led as to any other interpretation of clause 4.3.1 than that which it bears. Before there can be evidence of the surrounding circumstances of a contract to assist in the interpretation of it, there requires to be averments of what these surrounding circumstances are. I look in vain for such averments. I refer again to the dicta of Lord Hope in the House of Lords in Mitchell v Glasgow City Council supra at para 12:

"No advantage is to be gained by sending a case to proof where it is clear from the averments that, even if everything the pursuer avers is proved, the case must fail ..."

In my opinion this is such a case.

 

41.         I take the view that in the share purchase agreement the parties have agreed formalities regarding the intimation of the profit and loss statement and they are entitled to hold each other to these formalities. I have set out the case law which I consider supports that proposition. I emphasis the distinction between, on the one hand, whether there has been compliance with the formal requirements imposed by this contract in respect of notice or intimation of the profit and loss statement, and on the other hand the construction of that notice or intimation in the sense of what it was intended to mean. It is only with the latter issue that the City Wall case, on which reliance was placed by the seller's solicitor and the sheriff, is relevant. I consider that there are no averments on the part of the seller which, if proved, would assist the seller in the interpretation of clause 4.3.1 of the share purchase agreement for which he contends.

 

42.         The action accordingly fails. I sustain the appeal, recall the sheriff's interlocutor of 1 December 2008 and dismiss the cause. It was agreed that expenses would follow success. I am prepared to certify the cause as suitable for the employment of junior counsel.