Act: Beynon; Drummond Miller LLP

Alt: Richardson; T C Young

30 January 2014

[1] The respondents, in these proceedings, sue the reclaimers for damages for losses arising from breach of contract. At a procedural discussion, on relevancy, before the Lord Ordinary, Lord Boyd of Duncansby, the reclaimers, relying on their second plea-in-law, sought to have excluded from probation certain averments of the respondents in relation to classes of loss which the respondents aver they have suffered as a result of the reclaimers' breach of contract. In the event, the Lord Ordinary decided that the appropriate course was to allow a proof before answer on all the parties' averments, with the exception of one averment made by the respondent to which reference will subsequently be made. Against that decision of the Lord Ordinary the reclaimers have now reclaimed.

[2] The contract to which the present proceedings relate was entered into between the respondents and the trustees of the Auchlochan Trust. It is averred that the Trust, by means of a transfer agreement dated 5 and 6 January 2009 transferred to the reclaimers its assets and liabilities. The contract, to which the present proceedings relate, was constituted by means of a letter of offer dated 5 April 2004 from the agents of the trustees and accepted on behalf of the respondents by their solicitors, whereby the trustees offered to sell two areas of ground to the respondents. It is averred by the respondents that the trustees of the Trust were aware that the purpose of the respondents' acquisition of these areas was the construction there by the respondents of a new factory unit in which unit "the pursuers were to manufacture and then sell and distribute animal food products". The respondents paid the purchase price of £250,000 and took entry and title to the subjects on 7 April 2004. Clause 13 of the offer, which was accepted by the trustees, provided that the trustees would undertake to procure, at their own expense, as soon as reasonably practicable, and in any event, within twelve weeks from the date of the conclusion of the bargain, the removal of overhead mains electrical supply cables across the site to an alternative route to the north and west round the perimeter thereof. It is a matter of agreement that the re-routing of the cables was not completed within the twelve weeks, although the circumstances in which non-completion in that time did not take place and, the reasons therefore, are a matter of dispute.

[3] In addition to the foregoing provision, clause 8 of the aforementioned offer which was accepted by the trustees, provided that a heritable and irredeemable servitude right of access for pedestrian and vehicular access to and from the subjects of sale would be provided from the public road B7078. The trustees were in terms of the agreement, obliged to make up at their expense the access road, to road base plus base course standard, prior to the commencement of the construction on the site by the respondents. The agreement contained ancillary obligations accepted by the trustees to ensure that the road was at a minimum standard required by the local authority, necessary for the issue of a temporary habitation certificate in respect of the purchaser's development. In addition the trustees were obliged to make up progressively the road, to road construction consent standard. While various time limits applied in respect of certain of the stages of the works it appears that, in general, the trustees were subject to the obligation that the work specified in the clause was to be carried out by them "without unnecessary delay and as soon as practicable". It is the respondents' position in averment, that it was reasonably practicable for all the works which the trustees were obliged to carry out, including the making up of the access road to an appropriate standard, to have been completed by the beginning of September 2004. As averred by the respondents, however, the trustees only achieved partial construction of the required access road by July 2005. As a consequence the respondents contend that the trustees were and continued to be in breach of their contract with the respondents, as a result of which the respondents claim they, the respondents, have sustained loss and damage.

[4] In summary the respondents contend that their loss and damage arise as follows. They aver that the trustees knew, at the time of the conclusion of the agreement, that they, the respondents, were intending to move the production, distribution and sale of animal foodstuffs from an existing facility, which they leased in Johnston to the unit which was to be constructed on the subjects of sale and that this transfer was to take place in or about 2005. Their existing lease of premises in Johnston, was due to expire in March 2005. Had the trustees fulfilled their obligation, the new unit would have been ready for operation by July 2005, at the latest. It is furthermore averred by the respondents that:

"that would have enabled the pursuers to achieve a seamless transfer of their production facility from their previous leased premises in Johnston and onto the new site ... relative to both feedblocks and feed buckets". ("Feedblocks" and "feed buckets", being animal foodstuffs intended to be manufactured at the new unit).

The respondents' averments continue

"the pursuers would then have been able to have the whole unit operating efficiently and at full capacity in time for the peak period for orders of animal foodstuffs which occurs during the winter months. During the summer months the pursuers carry out little or no manufacturing due to seasonal demand. The pursuers were only able to commence the installation of the manufacturing machinery once the access road and utility supplies were in place after July 2005."

The respondents then proceed, in the following terms, to make averments regarding the lease of the subjects which had been in place in relation to the factory where previously manufacture had been carried out:

"The pursuers obtained an extension on their lease of the Johnston premises for the months of April, May, June and July 2005 in order to minimise their losses. This resulted in a rent being incurred for these four months (and August 2005 for site clearance purposes) at £8,000 per month ie £40,000 plus legal fees incurred in negotiating this occupancy of £807. This claim of £40,807 is included within the sum craved for first. If the defenders had not been in breach of contract then these outlays of £40,807 would not have been incurred. Their landlords were not willing to extend the lease beyond the end of July 2005 and were not obliged to do so. The pursuers also have to hire a generator due to the absence of connected utilities at a cost of £10,313." (Article VII of Condescendence).

In article VII of condescendence the respondents also set out detailed averments of loss in relation to the loss of profit arising from the inability to manufacture feed buckets and feedblocks, between certain periods, due to the failure of the reclaimers to fulfil their obligations in terms of the contract. Throughout those averments the respondents maintain that the loss of profit claimed was loss suffered by them.

[5] In reply to those averments, the reclaimers aver, inter alia, in answer VII:

"Explained and averred that the pursuers did not have a lease over premises in Johnston. The lease was between Strathclyde Chemical Co Ltd and Strathclyde Nutrition Ltd ['SNL']. SNL is a subsidiary of the pursuers. In the circumstances, the pursuers are called upon specifically to aver:

(i) what sums were incurred by the pursuers as opposed to any of their subsidiaries in respect of the extension of the lease over the Johnston premises:

(ii) on what basis any such sums were incurred. Their failure to answer these calls will be founded upon."

[6] The reclaimers continue:

"further explained and averred that the manufacture and sale of feed buckets and feedblocks was at the material time not undertaken by the pursuers. At the material time, the manufacture and sale of feed buckets and feedblocks was carried out by SNL. Any profit on said manufacture and sale was earned by SNL and not the pursuers. In the circumstances, the pursuers are called upon specifically to aver:

(i) what costs were incurred by the pursuers as opposed to any of their subsidiaries in respect of the manufacture of feed buckets and feed blocks;

(ii) what profits were lost to the pursuers as opposed to any of their subsidiaries in relation to the sale of feed buckets and feed blocks. Their failure to answer these calls will be founded upon."

[7] The response to those averments by the respondents is as follows:

"With reference to the averments in answer it is explained and averred that Strathclyde Nutrition Ltd ('SNL') is a wholly owned subsidiary of the pursuers. SNL were the tenants of the former leased premises. SNL carried out all of the sale, supplying and marketing of the feedblocks and feed buckets during the material times condescended upon. During all of those times, SNL and HB (a company described below) were acting as agents for the pursuers who were their sole principal."

It should be noted however that, in discussion before the Lord Ordinary, counsel for the respondents disclaimed that last averment in relation to agency and the Lord Ordinary excluded it from probation. The respondents' relevant averments continue:

"SNL had at those times, an established and well regarded brand name relative to the agricultural feed stuffs sector which the pursuers made use of. The pursuers purchased the subjects as specified and then proceeded to have the new manufacturing premises and facilities constructed thereon as specified above. During the material times condescended upon, the feed blocks and feed buckets were manufactured by another of the pursuers' wholly owned subsidiaries Harbro Ltd ('HB'), who employed the relevant staff and ordered and paid for the required new materials. Both HB and SNL paid rent to the pursuers for the use of subjects and the equipment. HB carried out the said manufacturing on a cost plus percentage and arms length basis for SNL. Profits and losses were during the material times condescended upon only earned or incurred at the holding company level ie the pursuers. All of SNL's trading activity (including all matters relating to payment of rent, outlays, purchases, profits and losses), is consolidated into the pursuers' Group Accounts on an annual basis both prior to and after the conclusion of the Missives. The pursuers were required to prepare Group Accounts under and in terms of the requirements of section 1159(1) and Schedule 6 to the Companies Act of 2006 relative to themselves and all of their wholly owned subsidiary companies including SNL and HB. Group and SNL accounts will be produced. As a result of this group structure in terms of shareholding and accounting, all of the heads of claim sought by the pursuers in this action are properly recoverable by the pursuers. It is the pursuers and not SNL or any other of the pursuers' wholly owned subsidiaries who have sustained the losses relative to all heads of claim sought in this action."

[8] The respondents in article (VII) of condescendence aver that their losses in respect of breaches of both clauses 8 and 13 of the contract had been investigated and reported on by an accountant, Robert Anderson. His report is incorporated into the pleadings in article IX.

[9] In that state of the respondents' pleadings, the reclaimers before the Lord Ordinary argued that the respondents' averments of loss were wholly irrelevant. The report of Mr Anderson is incorporated as an appendix to the accounts for SNL for 2005 and 2006. It was pointed out to the Lord Ordinary that SNL's accounts disclosed that the principal activity of SNL was the manufacture and distribution of animal food supplies. The accounts were audited and certified as giving a true and fair view of the state of that company's affairs for the relevant period. They included a profit and loss account and balance sheet and disclosed that company, SNL, paid tax on its profits. The group relationship between the respondents, SNL and other companies was clear from the accounts, including amounts owed to group undertakings. The parent company in the accounts was shown to be the respondents. The 2005 accounts also showed that SNL transferred its manufacturing operations, including fixed assets and stocks to Harbro Ltd (HB) another group company and SNL now operated solely as a retailer of chemicals and animal feedstuffs. It was submitted before the Lord Ordinary, on behalf of the reclaimers, that the statutory obligation to prepare group accounts had no relevance to the separate legal personality of entities that made up the group in question. The reclaimers contended that it was incumbent upon the respondents to aver and prove the exact relationship between the different entities or set out a clear factual arrangement that SNL and HB were in some way acting on behalf of the respondents. To illustrate the point it was said that there was no averment that SNL accounted to the respondents for profit and there was no averment of commission or the like passing as between the parties. As previously noted, the respondents disclaimed, ultimately, any relationship of agency obtaining between any of the companies. The respondents' averments, as they stood, it was submitted, pointed to the business of manufacture at the relevant times, when the contract in question was alleged to have been breached, belonging to SNL. SNL obtained products, at arm's length, from the respondents. They paid rent to the respondents. The respondents' averments were inconsistent and contradictory. They were inconsistent, indeed, with what was set out in Mr Anderson's report on which the respondents rely and which is incorporated as part of their pleadings. That report showed the relevant profits to have been earned by SNL and taxed in their hands.

[10] Counsel for the respondents, before the Lord Ordinary, submitted that their case amounted to the following. The respondents were a group company and controlled all that its subsidiaries did. The activities "the group carried out through its subsidiaries" were to manufacture and sell animal foodstuffs. He, nevertheless, as noted disclaimed any relationship of agency as existing at the relevant time between the respondents and their subsidiaries. The issue, counsel contended, was whether or not the respondents themselves, as a separate company have incurred the losses claimed. As things stand, counsel contended, it could not be said that the respondents were bound to fail in establishing their claims for the losses claimed, at any proof that might follow and that, accordingly, a proof before answer should be allowed in relation to the averments as they stand.

[11] At paragraph 32 of his opinion, the Lord Ordinary said:

"I am not persuaded that the matter is quite as simple as Mr Beynon makes out. The individual companies within the group structure remain individual and separate legal entities. This structure has, no doubt, been created and maintained because it is in the interests of the pursuers to do so. But each component part remains a separate legal entity. SNL make profit on its trading and they, and not apparently the pursuers, are taxed on it. It is therefore important to consider which entity has incurred losses, either by way of outlays or loss of profit. It is not sufficient to say that they are all group losses and one does not need to enquire too deeply into which part of the group has in fact incurred the loss."

That, in our respectful opinion, was a proper response to the respondents' submissions in support of their averments of loss. It would seem to us to have been wholly adequate justification for the Lord Ordinary accepting the reclaimers' submissions that the averments of loss, as framed, were irrelevant. The Lord Ordinary, however, went on to state at paragraph 33 of his opinion:

"On the other hand I am not persuaded by Mr Richardson's argument that the defenders could not be liable for losses incurred by a subsidiary of the pursuers. The background is that the trustees were aware that the purpose of the purchase of the land was the construction by the pursuers of a new factory for the manufacture and sale and distribution of animal products. They incurred obligations in terms of the missives inter alia to construct an access road to certain specifications. If it is the case, as the pursuers aver, that the trustees were and are in material breach of contract by failing to construct the access roadway within a reasonable time, then the question arises as to what is the proper measure of damages. In particular, the issue is whether or not the pursuers may sue for damages, some or all of which may have been incurred by a subsidiary."

The Lord Ordinary then, at paragraph 35 of his opinion, after having said that he had thought of putting the case out by order, for further discussion, concluded "that on the pleadings it cannot be said that the pursuers are bound to fail."

[12] Before this court, counsel for the reclaimers renewed, in substance, the submissions he made before the Lord Ordinary emphasising once more that the averments of loss are self-contradictory. Foreseeability of loss on the part of the reclaimers for breach of contract could only arise in relation to losses actually incurred by the respondents and not third parties. The report of Mr Anderson incorporated into the respondents' pleadings made it clear that the respondents and SNL were separate legal entities and the manufacture and sale of the products in question were carried out not by the respondents, but by a subsidiary. In paragraph 2.1 of Mr Anderson's report it is expressly stated:

"Manufacture and sale of Blocks and Buckets was undertaken by Strathclyde Nutrition Ltd ('SNL') a wholly owned subsidiary of Harbro."

Appended to his report were audited accounts for SNL which made it clear that costs in respect of trading activity were incurred by SNL and profits were earned by SNL, those profits being taxed in the hands of SNL. While the companies' legislation created an obligation for the preparation of group accounts, that did not innovate on the law of contract. The averments of the respondents were self-contradictory, in offering to prove and aver, at the same time, that they and their subsidiary were the tenant under the relevant lease. They were seeking to recover sums in respect of loss of profits which had been earned through the manufacture and sale of feed buckets and feed blocks, while at the same time they averred that it was SNL that had earned the profits arising therefrom. Counsel for the reclaimers submitted that those self-contradictory averments were irrelevant, precisely because they were self-contradictory. There was nothing left to support the claim for losses once those averments were disregarded.

[13] In reply, counsel for the respondents' position was, in effect, a re-statement of his position, before the Lord Ordinary. The issue was, as he contended, a very straightforward one. It was whether or not a controlling company could recover, in law, losses of the kind averred by the respondents in the present case. He accepted that there appeared to be no decided authority which answered that question in the affirmative. It could not, however, be said that the respondents would fail in their claims in respect of losses, after proof.

[14] We have no hesitation in holding that the Lord Ordinary was wrong in not acceding to the motion of the reclaimers and, on the other hand, apparently accepting that the respondents might establish their case relating to loss and damage, after proof. A party's pleadings must make sense in law and give adequate notice to the other parties to the case and the court of what the factual and legal basis of the case is. Self-contradictory averments do not do that. It remains the purpose of debates on relevancy to ensure that these requirements are met before any proof is allowed. The averments of the respondents, moreover, betray a complete lack of understanding of the basic principles of the law of contract and company law where a group of companies is involved. That is all concisely stated in Pennington's Company Law 6^th edition at pages 748 to 749 in relation to English law. We are satisfied that the position therein stated is also an accurate description of the law of Scotland in these matters. The passage in question is headed: "THE GENERAL LAW OF GOVERNING GROUPS OF COMPANIES". It continues as follows:

"English law has not developed a distinct body of law governing relationships between parent or holding companies and subsidiaries, and between companies which have substantial shareholdings in other companies not conferring legal powers of control over them. Instead, the ordinary rules of company law are applied to such companies and to transactions between them and to transactions by them with other persons as though no special relationship existed. Consequently, the assets of such companies are treated as owned by them, both legally and beneficially, as a distinct legal entity, and except where the circumstances enable the court to discover an agency or trustee relationship between them, a parent or holding company is not treated as the owner of any of its subsidiaries' assets. Conversely, the liabilities of companies which are members of the same group are those of the individual companies which incur them; there is no common group liability imposed by law for the obligations of individual members of the group. ... In the same way the rights and obligations of other persons are not affected by the fact that the company with which they deal is a member of a group ... The concept of the group of companies has as yet little significance in English law, except as a means of extending certain prohibitions imposed on companies and their directors and as a framework for extended disclosure of information in parent companies' annual accounts and directors' reports."

The respondents' submissions, in our judgment, involved a failure to recognise these principles.

[15] In all the foregoing circumstances we are satisfied that the reclaimers' motion falls to be allowed. We shall recall the Lord Ordinary's interlocutor of 16 January 2013 except insofar as it deletes the sentence in the pleadings at page 54E (in fact at page 45D) "During all of those times, SNL and HB (a company described below) were acting as agents for the pursuers who were their sole principal"; sustain the defenders' and reclaimers' second plea-in-law- to the extent of excluding from probation the averments in articles V to VII of condescendence; repel the pursuers' and respondents' second plea-in-law; and in respect that the respondents also have a conclusion for implement with supporting averments which were not attacked by the reclaimers at this stage, allow those matters to be remitted to the Lord Ordinary for a proof before answer.