S&P PROPERTY COMPANY LIMITED AGAINST TAYLOR & FRASER LIMITED
SHERIFFDOM OF NORTH STRATHCLYDE AT PAISLEY
[2016] SC PAI 34
A269/14
JUDGMENT OF SHERIFF PRINCIPAL DL MURRAY
In the cause
S&P Property Company Limited
Pursuers / Appellants;
Against
Taylor & Fraser Limited
Defenders / Respondents:
Act: Thomson
Alt: Garrity
Paisley, 15 April 2016
The sheriff principal, having resumed consideration of the cause, allows the appeal and recalls the sheriff’s interlocutors of 14 October and 7 December 2015 except in relation to certification of the debate as being suitable for junior counsel; Allows parties a proof before answer on their averments and reserves parties’ pleas-in-law; certifies the appeal as suitable for junior counsel and awards the expenses of the appeal in favour of the pursuer, Allows an account to be given in and remits the same when lodged to the auditor of court to tax and report.
NOTE
Background
1. The pursuers and appellants’ (S&P) area of expertise was within the construction industry. Their principal director and shareholder was Roy Paterson. The defenders are a building company. Prior to 2012 S&P had provided project-management services to the defenders in terms of a series of building contracts. At the beginning of 2012 the defenders indicated the wish to provide project-management services in-house. As a consequence, as averred by S&P, parties entered into agreements whereby the defenders acquired S&P’s business, and the employees of S&P had their contracts of employment transferred to the defenders.
2. A compromise agreement was entered into dated 7 June and 14 October 2013 produced at 5.1.1 of process. Unusually the compromise agreement involved three parties, the defenders, Roy Paterson and S&P. It included obligations between the employer, the defenders in the current action, and S&P. In particular in terms of clause 5, S&P waived all rights and claims which they may have against the employer (the defenders) whether under prior consultancy agreements or otherwise. The compromise agreement provided for a lump sum payment of £100,000 which was to be payable, by the defenders to S&P subject to the employee (Roy Paterson) and S&P’s compliance with all obligations under the compromise agreement, in particular, but not limited to the provisions of clause 13.
3. It is a matter of admission at the material time Scott Taylor was an authorised signatory of the defenders. The defenders are a wholly-owned subsidiary of Barnaigh Group Ltd. Scott Taylor was a Director of Barnaigh Group Ltd. He was neither a director nor an employee of the defenders. S&P aver that in terms of the defenders’ organisational diagram he was described as “Chief Executive” and they further aver he had a vested interest in the performance of the defenders and owned 99.64% of the shares in Barnaigh Ltd, with the remainder being owned by the Scott Taylor Family Discretionary Trust.
4. In short, S&P’s case is that the exercise of discretion not to authorise payment of the lump sum payment of £100,000 required to be undertaken in a manner which was neither capricious, arbitrary, nor so outrageous in its defiance of reason, that it was perverse. S&P aver that the honest and good faith exercise of discretion against the background that Roy Paterson and S&P complied with their obligations would necessarily result in payment of the lump sum identified. The critical issue in this matter is whether S&P, has for the purposes of the debate, focused their claim against the defenders or whether any complaint should be directed against Scott Taylor as an individual.
5. The applicable clause to be interpreted here is clause 2.3 of the compromise agreement which states:
“Subject to the Employee’s and S&P’s compliance with all obligations under this agreement, in particular, but not limited to the provisions of clause 13 below, the Employer will, at the sole discretion of Scott Taylor, pay to S&P the lump sum payment on 30th September 2014”
6. Clause 2.3 is to be contrasted with clause 3.3 which states:
“In the event that the Employer in his sole discretion determines it appropriate that for operational reasons the Employer shall be entitled forthwith to terminate the Employee’s contract of employment. In that event a payment will be made in lieu of salary up to 30 September 2013. Early termination under this Clause 3.3 shall not affect the Employee’s rights under clause 2.2.”
7. The sheriff’s findings in relation to clause 2.3 are found at paragraph 99 of his judgement. This refers to the pursuers but parties accepted this should refer to the defenders, not the pursuers, in the second sentence and consequently the reference to admit should be admits. The reference to article 4 of condescendence should be to answer 4. Thus it should read:
“The terms of clause 2.3 are clear and unambiguous. The [defender admit[s]] the terms of clause 2.3 in [answer 4]. The parties to the compromise agreement choose to distinguish what discretion should be available to the employer, namely the pursuer in the present action and Mr Taylor in an individual capacity. Giving the words their ordinary meaning, payment of the Lump Sum Payment was to be made at the sole discretion of Scott Taylor. Mr Taylor was not a party to the compromise agreement. Mr Taylor was not an agent for the defenders. The pursuers aver in article 3 of condescendence that Mr Taylor was neither a director nor an employee of the defenders. The parties had control of the language used in the compromise agreement in that all three parties to the compromise agreement had received legal advice before entering into the agreement.”
8. At paragraph 101 the sheriff found:
“Accordingly, the parties agreed in terms of clause 3.3 that the defenders in the present action should have a sole discretion in relation to the termination of an employee’s contract of employment. If the parties had intended that the defenders should have sole discretion in terms of clause 2.3, or that Mr Taylor was to exercise that sole discretion as an agent for the defenders or that the defenders should have a sole discretion then there was no reason why that was not set out in clause 2.3. Further, and in any event, the parties to the compromise agreement could have agreed that Mr Taylor be a party to the compromise agreement. The parties chose not to do so. As I have indicated, the terms of clause 2.3 are clear and unambiguous and do not support the position of the pursuers on record.”
9. The sheriff concluded that it could not be implied Mr Taylor was an agent for the defenders. He found, Mr Taylor having determined that the lump sum should not be paid, a decision Mr Taylor was to take at his sole discretion, there to be no contractual obligation on the defenders to pay the lump sum payment. The appeal before me was therefore directed as to whether the sheriff was correct in reaching that view, which resulted in his upholding the second plea in law for the defenders and dismissing the action.
Submissions for S&P
10. Mr Thomson for S&P maintained that the sheriff had to consider why, and in what capacity the parties had agreed that the discretion be exercised by Scott Taylor. To be correct in his decision to sustain the defenders’ second plea-in-law and dismiss the action the sheriff had to accept that S&P were bound to fail even if they proved all of their averments. Jamieson v Jamieson. 1952 SC (HL) 44. I was invited to recall the sheriff’s interlocutors of 14 October and 7 December and allow a proof before answer.
11. In relation to the averments it was submitted that S&P offered to prove Scott Taylor was at all material times “the decision maker” of the defenders, who conducted negotiations and took decisions on behalf of the defenders particularly in relation to the compromise agreement. Further S&P averred he did not require approval of the directors of the defender to bind the defenders. S&P averred Mr Taylor was ultimate beneficial owner of the defenders and that he was the agent of the defenders. S&P offered to prove it was precisely because of the status which Mr Taylor had, that he was named as the person to exercise the discretion. The sheriff was not entitled to treat S&P’s averments as untrue. Rather he should treat them pro veritate.
12. It was submitted that the sheriff had fallen into error when he stated at paragraph 99:
“ Mr Taylor was not an agent for the defender”
and at paragraph 112:
“ Scott Taylor was not the same as the defenders nor was he an agent for the defenders nor could it be implied that Mr Taylor was an agent for the defenders nor could it be implied that the sole discretion in terms of clause 2.3 was available to the defenders rather than Mr Taylor.”
13. It was submitted the sheriff had to determine whether the averments of S&P that the discretion which was to be exercised by Scott Taylor was to be exercised on behalf of the defenders, even if established still meant that the action was bound to fail. It was further submitted the sheriff erred in concluding that S&P was bound to fail in establishing this was the proper construction of clause 2.3 of the compromise agreement.
14. It was submitted on behalf of S&P, if the sheriff had taken account of the background material and context he would not have concluded, as he did, that the terms of clause 2.3 are clear and unambiguous. S&P submit it is an elementary principle of construction of a contract that the contract must be construed against the background known to both parties at the time of their contracting. I was referred to Marley v Rawlings [2015] AC 129 at 144 where Lord Neuberger stated :
“As Lord Hoffmann said in Kirin-Amgen Inc v Hoechst Marion Roussel Ltd [2005] 1 All ER 667 , paragraph 64, “No one has ever made an acontextual statement. There is always some context to any utterance, however meagre.” To the same effect, Sir Thomas Bingham MR said in Arbuthnott v Fagan [1995] CLC 1396 , 1400 that “courts will never construe words in a vacuum”.”
15. It was submitted that there was nothing in the terms of clause 2.3 of the compromise agreement which made clear the capacity in which Mr Taylor was to exercise his discretion. The authorities made clear that the question the sheriff should have addressed was what a reasonable person, with the knowledge the parties had at the time of contracting would have understood the parties contract to mean.
16. It was submitted that far from taking account of the averments made by the pursuers the sheriff had determined that they were untrue. Having regard to the background knowledge of the parties, the sheriff should have, certainly, for he purposes of debate, accepted that the pursuers’ averments about the parties to the compromise agreement and in relation to Mr Taylor being the defenders’ decision-maker, authorised signatory agent and beneficial owner. That being the case it was submitted the sheriff was not entitled at the stage of a debate to conclude that the parties had agreed to the appointment of Mr Taylor, as an independent third party to decide whether the conditions necessary for payment had been satisfied. Indeed it was submitted that the fact Mr Taylor was not a party to the compromise agreement supported the construction S&P argued for.
17. It was submitted that the position of the defenders was to liken the appointment of Mr Taylor to the appointment of an expert. However, where an expert, who would usually be independent, was appointed it was submitted one would expect the expert to be a party to the agreement or their appointment confirmed in terms of a subsequent agreement.
18. It was submitted the sheriff had erred in giving undue consideration to the fact that clause 3.3 referred to discretion of the employer. It was submitted that consideration of the terms of clause 3.3 did not did not provide support for the construction of clause 2.3 which found favour with the sheriff. That one particular discretion was to be exercised on behalf of the defenders by a named person while another discretion was simply identified to be exercisable by the employer, it was submitted did not support the conclusion that a deliberate distinction was being drawn, to the effect that clause 2.3 discretion was to be exercised by a third party acting in a personal capacity. S&P submitted clause 3.3 is entirely neutral as far as a dispute concerning the proper construction of 2.3 is concerned.
19. It was also submitted on behalf of S&P, the minutes of the meeting held on 24 February 2012, number 5/2 of process was part of the background. That minute set out the arrangements for the lump sum payment as follows:
“It is agreed that a goodwill payment of £100K, excluding VAT, will be paid by the company to S&P, on the proviso that all matters have been concluded to the satisfaction of the company and that senior members of staff remain in place and in generally work in a positive manner with the company through the process of integration. The decision regarding satisfactory implementation will lie with Scott Taylor and will be reviewed on a regular basis with any shortcomings being discussed and resolved at the time. Given that the decision by Scott Taylor is positive the payment will fall due to be paid on 30th September 2014.”
It was submitted that this clause set out that Mr Taylor was the person on behalf of the defenders who had to be satisfied before the payment would be made by the defenders.
20. It was S&P’s position that the sheriff’s finding at paragraph 101 was simply wrong. At worst for S&P the reference to “at the sole discretion of Scott Taylor” admits to more than one meaning. If it admits of more than meaning, to correctly interpret the clause one should have regard to the background facts know to the parties at the time of contracting and the meaning makes more commercial sense, should prevail.
21. As set out in ground 6 of the note of appeal it was submitted the sheriff had mistakenly concluded that S&P’s position was that it was an implied term of the compromise agreement that Mr Taylor was to act as an agent of the defenders. Rather S&P’s case as pled was that on a proper construction of the compromise agreement, Mr Taylor was appointed for the purpose of 2.3 as an agent of the defenders.
Submissions for the defenders
22. On behalf of the defenders Mr Garrity invited me to refuse the appeal and uphold the sheriff’s interlocutors. He invited me to accept the sheriff’s analysis in dismissing the action. The defenders’ position is that no obligation has arisen on the part of the defenders to make payment under clause 2.3 of the compromise agreement. The precondition of payment has not been satisfied, as Mr Taylor determined the lump sum payment was not to be made. They maintain the action is irrelevant, for the exercise of discretion resulted in no payment being due. The sheriff it was submitted correctly found Scott Taylor was not the same as the defenders, nor was he an agent of the defenders, nor could it be implied that he was an agent of the defenders, nor could it be implied that the sole discretion in terms of clause 2.3 was available to the defenders rather than Mr Taylor. In these circumstances it was said the sheriff concluded correctly there was no contractual obligation on the defenders to pay the lump sum payment, in the absence of Mr Taylor, in the exercise of his sole discretion, authorising payment of the lump sum payment. The action was accordingly misconceived and the sheriff correct to have dismissed the action by sustaining the defenders’ second plea- in-law.
23. Mr Garrity submitted S&P plead their case on the basis that Mr Taylor was an agent of the defenders. This required clause 2.3 of the compromise agreement to be interpreted as having that effect.
24. Mr Garrity maintained his submission to the sheriff that the terms of clause 2.3 were clear and unambiguous. The discretion was simply stated in terms of clause 2.3 to be exercised by a named individual - Scott Taylor. A submission accepted by the sheriff. As a consequence the sheriff was obliged to construe the clause in terms of its natural meaning. Authority for that was to be found in the speech of Lord Clarke of Stone-cum-Ebony in Rainy Sky SA v Kookmin Bank [2011] 1WLR 2009 at paragraph 23:
“Where the parties have used unambiguous language, the court must apply it.”
25. This approach as set out in Rainy Sky it was noted had been recently endorsed by the inner house in Global Court Services (Scotland) Ltd v Global Energy (Holdings) Ltd and others [2015] CSIH 42 paragraph 30:
“The wording of the clause not being ambiguous nor being open to more than one interpretation, it is not open to the court to construe it in a manner contrary to its natural meaning. It must apply that meaning, even if the result is a commercial outcome which could be considered to be improbable.”
26. The defenders maintain that the sheriff was obliged to accept the clear and unambiguous language used in the contract. The unqualified reference to Scott Taylor, on the submission of the defenders makes it abundantly clear; it is he who is to exercise the discretion. The sheriff had as a result, no need to have regard to the background circumstances. The defenders submit that S&P are viewing matters through the wrong end of the telescope – using averments of fact as a ground of ambiguity, rather than to explain any ambiguity in the contract itself. The defenders further submit that S&P are incorrect when they submit the sheriff proceeded in the basis that their averments were untrue. The defenders submit he had no need to consider these averments, for he correctly found no ambiguity in the plain words used in clause 2.3.
27. There is no reference in the compromise agreement of Scott Taylor acting as an agent. As a matter of law there is no presumption of agency and it was further submitted no relevant averment of agency, in relation to Mr Taylor exercising his discretion as an agent, in the pleadings. It being submitted that the pleadings only aver Mr Taylor was acting as an agent in respect of the negotiations.
28. The defenders submit there is no specification by S&P of how it intends to prove that Mr Taylor was appointed “decision maker or agent” of the defenders.
29. The defenders maintained their cross appeal. This was directed at what was submitted to be the sheriff’s error in making certain findings in fact at paragraphs 93 and 95, it not being open to the sheriff to make findings in fact in the context of a debate.
Discussion and decision
30. The compromise agreement, which falls to be interpreted in this case, is unusual in having three parties, rather than simply regulating the position between employer and employee. As well as being unusual it is not well drafted. In the action, S&P, a company seek payment from the defenders, also a company, based on the terms of clause 2.3 of the compromise agreement, which is set out above. Payment under that clause is conditional upon a named individual, Scott Taylor, exercising his discretion to ascertain whether the payment falls due. The defenders’ position is that Scott Taylor not having exercised his discretion to the effect that payment was not due, the defenders were, and are, under no obligation to make payment to the pursuers.
31. It is a matter of agreement that Scott Taylor determined that no payment was due by the defenders to S&P in terms of clause 3 of the compromise agreement. Scott Taylor is not a party to the present action and S&P have not raised any separate action against Scott Taylor in respect of any wrongful exercise of discretion in terms of the compromise agreement.
32. The question to be answered in this appeal is straightforward: do the words “at the sole discretion of Scott Taylor” as they occur in clause 2.3 of the compromise agreement bear a meaning which may give S&P a right of action against the defenders, where Mr Taylor decides that the lump sum should not be paid? Standing the terms of the test as set out in Jamieson v Jamieson for the sheriff to be correct in dismissing the action S&P must be bound to fail even if they prove all their averments.
33. Lord Carnwath says in his dissenting judgment in Arnold v Britton [2015] 2 WLR 1593 at paragraph. 108 p. 1620:
“As Tolstoy said of unhappy families, every ill-drafted contract is ill drafted “in its own way.” However the authorities provide guidance as to the interpretative tools available for the task.”
34. In Arnold v Britton Lord Neuberger of Abbotsbury PSC, who delivered the leading judgment, reviewed the development of the law of interpretation of contractual provisions. At paragraph 15 pp. 1599, he emphasised at the need to focus on the meaning of the relevant words. At paragraphs. 17 - 23, he identified seven factors, in that case, to be considered in the interpretation of the contracts: (i) the reliance placed on commercial common sense and surrounding circumstances should not be invoked to undervalue the importance of the language of the provision; (ii) the clearer the natural meaning the more difficult it is to justify departing from it; (iii) commercial common sense is not to be revoked retrospectively; (iv) a court should be slow to reject the natural meaning of a provision as correct, simply because it appears to be a very imprudent term for one of the parties to agree, even ignoring benefit of wisdom of hindsight; (v) when interpreting a contract account may only be taken of the facts and circumstances known to the parties at the time the contract was entered into; (vi) if a subsequent event occurs which was not intended or contemplated by the parties if the court can discern what the parties would have intended the court can give effect to that intention and; (vii) in relation to service charge contracts, a court should not bring into such a clause anything which does not naturally belong there.
35. Lord Neuberger’s final two points, relating to an event, which subsequently occurs not intended or contemplated by the parties at the time of contracting or in relation to service charge cases are not relevant to the instant case.
36. In @SIPP Pension Trustees v Insight Travel Services Ltd 2016 SLT 131, the first four factors provided assistance. There Lady Smith said at paragraph 17 p.136:
“It is relevant for the purposes of the present case to note the emphasis placed by Lord Neuberger thereafter in pp. 1599 – 1600, paras. 17 – 20 in four matters – namely that commercial common sense should not be invoked to undervalue the importance of the language used by the parties in the contractual provisions being construed; that whilst poor drafting makes it easier to depart from the natural meaning and clear drafting it makes it more difficult to do so, the court is not thereby justified in embarking on an exercise of searching for or constructing drafting infelicities so as to facilitate such a departure; that commercial common sense is only relevant to how matters would have been perceived at the time of the contracting and is not to be invoked retrospectively; and although commercial common sense is very important the court should be slow to reject the natural meaning of a provision as correct simply because it seems to be a very imprudent term for one of the parties to have agreed, the purpose of the interpretation being not to identify what the court thinks parties ought to have agreed but what they have in fact agreed.”
37. The fifth point made by Lord Neuberger, the need to consider facts known to both of the parties at the time of contracting is also relevant to the instant case.
38. I have also found assistance in the observations of Lord Hodge in In L Batley Pet Products v Lanarkshire Council 2014 SLT 539 where he gave the leading judgement of the Supreme Court at paragraph 18 p. 597 reiterating what Lord Clarke of Stone-cum-Ebony stated at 2011 in Rainy Sky 2015 WLR 2908 paragraph 21:
““The exercise of construction is essentially one unitary exercise in which the court must consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract would have understood the parties to have meant. In doing so, the court must have regard to all the relevant surrounding circumstances. If there are two possible constructions, the court is likely to prefer the construction which is consistent with business common sense and to reject the other.”
Lord Hodge continued:
“The starting points are the words the parties have chosen to use … the words must be construed in the context of the minute of agreement as a whole and having regard to the admissible background knowledge, which is often called the factual matrix.”
39. Here the parties have referred to Scott Taylor in clause 2.3 and the defenders set much store on the distinction between the reference to him by name in this clause and the reference to the employer in clause 3.3 Given the quotation from Lord Hodge directing that the words must be looked at in the context of the contract as a whole the distinction between the use of employer in 3.3 and Scott Taylor in 2.3 is a relevant consideration.
40. I also discern from the authorities that the observations in Rainy Sky on commercial common sense have been somewhat tempered by the later cases and clarification that any interpretative exercise should begin with focusing on the meaning of the words used.
41. As discussed the question to be resolved is whether the sheriff was correct to find that the phrase “at the sole discretion of Scott Taylor” is plain and unambiguous in granting the discretion to him as an individual to determine if the conditions for the payment of the lump sum are met or not. If so, that obviates the need to consider other interpretive tools.
42. It may be discerned from the authorities that the court is not to seek out drafting infelicities to enable an interpretation which strays from the natural meaning of the words used. But here it is necessary to identify who Scott Taylor is, for he is not designed. To ascertain who Scott Taylor is requires background knowledge. His name on its own does not allow for the contract to be clear and unambiguous. The only reference to him is in clause 2.3. The lack of full specification of Scott Taylor requires evidence of the parties’ background knowledge to enable him to be identified. The court requires to consider background knowledge to identify Scott Taylor. Accordingly I do not agree with the sheriff that the phrase “at the sole discretion of Scott Taylor” can be said to be clear and unambiguous. In these circumstances the other factors which aid contractual interpretation are live.
43. Once it becomes necessary to have regard to the parties’ background knowledge simply to identify Scott Taylor, the court will be assisted by evidence of the parties’ background knowledge to interpret the contract. This will enable the court to resolve in what capacity Scott Taylor is being asked to exercise his discretion.
44. This leaves the question of whether the pursuer has sufficient averments on record to allow the court to find Scott Taylor was acting as an agent of the defender in exercising his discretion. While the defenders are correct that in condescendence 3 the averments relate to the conduct of negotiations, in condescendence 4 S&P aver:
“Properly construed the discretion identified within clause 2.3 was that of the defender. Scott Taylor being the defender’s decision maker or agent.”
This taken together with the averments in condescendence 3 gives a basis on which S&P are entitled to a proof before answer.
45. The final argument of the defenders is that the sheriff was correct when he found at paragraph 104 – 105 that S&P were not entitled to imply agency in direct contradiction of the express terms of clause 2.3:
“ that the discretion in clause 2.3 was to be exercised by the defenders or by Mr Taylor as an agent for the defenders”.
The sheriff is correct when he states that agency may not be implied in direct contradiction of an express term. But, given my conclusion that a proof before answer is required to determine the meaning of “at the sole discretion of Scott Taylor” the finding was premature.
46. I therefore conclude that the sheriff should not have upheld the defenders’ first plea-in-law having regard to the test as set out by Lord Normand in in Jamieson v Jamieson 952 SC (HL) 44 at 50:
“The true proposition is that an action will not be dismissed as irrelevant unless it must necessarily fail even if all the pursuer’s averments are proved. The onus is on the defender who moves to have the action dismissed and there is no onus on the pursuer to show that if he proves the averments he is bound to succeed.”
There are clearly difficulties ahead for the S&P in this action but they are entitled to a proof before answer.
47. In relation to the cross appeal, by the defenders, given I have found in favour of S&P the interlocutor of 14 October will be recalled so the question does not arise.
48. Both parties were content that the appeal hearing was suitable for the instruction of junior counsel and I will so certify. Substantial success here rests with S&P and both parties invited me to find expenses in their favour if successful. I shall therefore apply the usual rule and award the expenses of the appeal to S&P.