NOTE OF APPEAL BY FREELANDS AGAINST S. MCCLUE
SHERIFFDOM OF SOUTH STRATHCLYDE, DUMFRIES AND GALLOWAY
AT HAMILTON
SC610/09
2014SCHAM7
JUDGMENT BY
SHERIFF PRINCIPAL B A LOCKHART
In
NOTE OF APPEAL
by
FREELANDS
Pursuers and Respondents;
against
S McCLUE
Second Defender and Appellant:
Act: Santoni Solicitor, Hamilton
Alt: Cargill Solicitor, Glasgow
Hamilton, 1 December 2014
The Sheriff Principal, having resumed consideration of the cause allows the appeal and recalls the sheriff’s interlocutor of 1 May 2014 complained of; grants decree of absolvitor in favour of the second defender; finds no expenses due to or by either party in respect of the action before the sheriff; finds the second defender liable to the pursuers in the expenses of the appeal as assessed; remits the cause to the sheriff clerk to fix a diet of assessment in respect of these expenses.
NOTE
[1] In this summary cause the pursuers seek recovery of professional fees of £3,270 with interest in respect of representing a company known as L107 FM Ltd of which the defender was a director. I understood the pursuers were instructed by another director, Alan Shields on 19 May 2009. The Employment Tribunal took place during 21 May and 7 July 2009.
[2] The sheriff in his stated case made the following findings in fact:
“1. The Respondent is a firm of solicitors.
2. The appellant was a director of Perth FM Ltd from 22 August 2008. This became L107 FM Ltd and he remained a director there until 22 July 2009. The company had the company number SC277182 in Companies House. The Appellant was an additional purchaser of that company and an original shareholder, and entered into the contract for its acquisition. The Pursuer’s production 7 is the contract for this acquisition.
3. Alan Shields (a co-defender) was also a director of L107 FM Ltd during that period.
4. Alan Shields was responsible for the day-to-day running of the business. This was known and accepted by the Appellant and was the established business practice of the company. The company had only a handful of employees from a place of business in Hamilton. The Appellant was the principal Radio Presenter.
5. In 2009 an employee of L107 FM Ltd called Miss L McLuskey took the company to an Employment Tribunal.
6. Close to the date of the evidential hearing for this Employment Tribunal case, Alan Shields – acting in his capacity as a director of L107 FM Ltd – instructed the Respondent to take over this case for them.
7. This employment dispute was an area of work for which Alan Shields was responsible and his instruction of this work was intra vires.
8. The Respondent sent their standard terms of business to the business address of L107 FM Ltd on 2 occasions, addressed to Alan Shields. The Respondent did not write in identical terms to the Appellant.
9. The standard terms of business included a condition 7 that, ‘if we are given instructions by a private limited company then, unless otherwise agreed with you in writing in advance, it is a condition of our accepting instruction that all of the directors of the company are jointly and severally liable along with the company and each other for payment of all of our fees, expenses and outlays and any interest thereon’.
10. The standard terms of business have not been queried by any of the directors of L107 FM Ltd.
11. The Respondent carried out the work as instructed and represented L107 FM Ltd at the Employment Tribunal on 21 May and 7 July 2009.
12 L107 FM Ltd accepted the Respondent’s offer of services and its terms of business by allowing the Respondent to carry out the work for which it had been instructed.
13. After completing this work, the Respondent submitted an account to L107 FM Ltd on around 8 July 2009 for £3,270 for these services.
14. This account was not queried, but neither was it paid.
15. It was an established business practice in L107 FM Ltd that Alan Shields acted as an authorised agent for the company in the day-to-day running of the business, including the engagement of the Respondent for this work on the Respondent’s terms of business as issued to him.”
[3] The sheriff made the following findings in fact and law:
“1. A contract was entered into, on the respondents’ terms of business, between the company and the respondent.
2. That contract between the respondent and L107 FM Ltd – of which the appellant was a director – bound the appellant, the other directors and the company jointly and severally in liability to pay the respondents’ fees of £3,270.”
The sheriff found in law that the appellant was jointly and severally liable with the other directors and with 107 FM Ltd for the sum sued for. He accordingly found the second defender liable for the sum sued for with agreed expenses of £360. It should be explained that the action was raised by the pursuers against Alan Shields, S McClue and Derek McIntyre and L107 FM Ltd. The case only proceeded against the second defender who is the current appellant.
[4] On 1 May 2014, after giving an ex tempore judgment, the sheriff gave the second defender until 29 May 2014 to settle the sum awarded. The second defender did not do so and the sheriff accordingly granted decree.
[5] The second defender lodged a note of appeal requesting the sheriff to state a case. The points of law upon which the appeal was to proceed were stated to be:
“Background
On 1 May 2014 the case called for proof. The second defender was unrepresented at said diet and appeared as a party litigant. Evidence was heard. The sheriff continued the cause to a continued calling on 29 May 2014. In the interim the second defender obtained legal advice. On 29 May 2014 an agent duly appeared for the second defender but decree had already been granted on 1 May 2014.
Points of law
1. The pursuers sue upon terms of business purportedly issued to the fourth defender, a limited company. Between 22 August 2008 and 22 July 2009 the second defender was a director of said limited company. On said last mentioned date he resigned as a director of the fourth defenders. The pursuers assert that the terms of business provide that directors of the company are jointly and severally liable along with the company for the payment of fees, expenses and outlays. Said terms of business are undated and unsigned. The pursuers do not aver nor did they prove in evidence that the terms of business were intimated upon the second defender at the point of their instruction or that he was otherwise aware of same or indeed the instruction by the fourth defenders of the pursuers. The limited company was controlled by the first defender. As a matter of law the second defender cannot be bound by the terms of business. Accordingly, he is not liable to pay the sum sued for by the pursuers. In the absence of a contractual relationship between the pursuers and second defender there is no other legal basis upon which the second defender can be held liable to the pursuers. I heard this appeal in Hamilton Sheriff Court on 17 November 2014.”
Submissions for the second defender and appellant
[6] The solicitor for the second defender submitted:
(a) The findings in fact do not support a contractual relationship between the pursuers and the second defender.
(b) Absent evidence and appropriate findings in fact on the issue of whether the clause sought to be relied upon by the pursuers was unusual or onerous, the learned sheriff was unable to conclude a contract existed between the pursuers and the second defender.
[7] I deal with these two issues as follows:
(a) The findings in fact do not support a contractual relationship between the pursuers and the second defender.
Condition 7 of the pursuers’ terms of business, is set out in finding in fact 9 of para 2 hereof. In terms of finding in fact 8, the pursuers sent their standard terms of business to the business address of L107 FM Ltd addressed to Alan Shields. The pursuers did not write in identical terms to the defender. The second defender was unaware of the terms and conditions. In finding in fact 4, the sheriff found that Alan Shields was the director who was responsible for the day to day running of the business. On the basis of the sheriff’s findings in fact, the defender was not aware of the fact that his co-director had entered into a contract which made him, as a director, personally liable for the debts of the company.
[8] A director, in the course of his normal duties of a director, does not guarantee payment of company debts incurred in the course of business. Any such contract of guarantee should have been brought to his notice. I was referred to the case of McClure Naismith LLP v Steven where Sheriff Reith, in an unreported judgment dated 31 October 2011 required to deal with a case where the pursuers were a firm of solicitors who sought payment of fees. The issue in that case also arose as to whether a director was personally liable to the solicitors for their fees. In that case, it was submitted that the defender’s position was that he was not acting in a personal capacity but at all times to be acting solely and only as a representative and director of Caledonian Property Ltd. In that case the letter from the firm of solicitors was sent to the defender personally. The sheriff noted as follows:
“1. The letter was addressed to the defender personally and then commenced ‘Dear Ruari’.
2. Throughout the letter there are references to the pursuers acting ‘on your behalf’, ‘on your instructions’, ‘confirm your agreement to act’, ‘you have asked us to act for you’, ‘thank you for your instructions ...’.
3. Paragraph 2 states ‘unless we hear from you in writing to the contrary, we shall be entitled to accept instructions only from you ... in this engagement, we are treating you as the client’.
4. Paragraph 7 states ‘where you instruct us to act on behalf of a limited company ... you accept that it is appropriate that you personally guarantee payment of our fees and outlays ...’.
5. The defender accepts that he personally signed and dated the acceptance of terms at the end of the letter in the following terms ‘I/we agree to the terms of the foregoing letter’.”
The sheriff concluded “in my opinion, it is perfectly clear from the plain terms of the letter the defender personally is the client. There is no ambiguity whatsoever about the letter”.
[9] In this case the first defender was Alan Shields. He was the company officer who had control over the company’s business affairs. The second defender (the defender in this case) was not sent the pursuers’ terms and conditions.
(b) The clause was onerous and ought to have been drawn specifically to the attention of the second defender.
It seeks to impose personal liability on a director of a limited company. The second defender was in fact being asked to give a personal guarantee of a company debt.
[10] I was referred to the case of Montgomery Litho Ltd v Maxwell 2000 SC 56. In that case a director signed a contract on behalf of a company. The terms and conditions attempted to impose a personal obligation on the director. Lord Sutherland, giving the opinion of the court stated:
“The question really is whether a particular condition is of such an unusual nature that it should specifically be drawn to the attention of the other party rather than being left simply as part of a large collection of other terms and conditions which are of a fairly standard nature. We are quite satisfied that in the present case the imposition of a personal obligation of guarantee on a director of a company is something which is unusual, to say the least, to be found in terms and conditions which purport to regulate the contract as between the two companies. It certainly is not unusual for a director to be asked to sign an obligation guaranteeing the company’s liability, particularly in the case of a small limited company. It is, however, distinctly unusual for this to be done under the guise of terms and conditions relating to the contract between the two companies. We accept there is no reason in principle why a credit application form of this kind could not incorporate both an application for credit on behalf of the company and a personal guarantee by an individual of the company’s obligations. The latter provision would, however, require in our view to be so expressed as to give fair notice that it concerned the individual as such and that it imported an obligation by him personally. In the present case there is nothing to indicate that the defender signed the form in any capacity other than as a director of Newtext. There is nothing to indicate that he signed it in a personal capacity, giving a personal guarantee for the company’s obligations. It follows that there is no legal basis for the pursuers’ assertion of joint and several liability ...”.
It was submitted that this was an accurate statement of the law. To impose a contractual condition on a director of a company to personally guarantee company trading debts was, on the face of it, unusual and onerous. In that case the Inner House had taken the view that this was not something which required to be proved. It was obvious. In this case the defender should not be liable as he was not aware of the instruction of the pursuers by his fellow director on the basis of which he was said to give a personal guarantee for a company debt.
[11] It was submitted that this was not a situation where the second defender sought to put forward new material or additional evidence. On the basis of the findings in fact, the sheriff could not conclude that there was a contract between the pursuers and this defender which effectively amounted to the second defender giving a guarantee to the pursuers in respect of a trade debt of which he had no knowledge. Solicitor for the defender emphasised that the defender was not involved in the instruction of the pursuers. The first defender instructed the pursuers on behalf of the company. There was no question of any authority of one director to bind a fellow director personally in a contract with a third party. The first defender had an obvious authority to bind the company in connection with contracts in the normal course of trade, but the terms of business went further and attempted to bind the second defender as an individual with a third party in respect of a contract of which he had no knowledge. The sheriff did not conclude there was any contractual relationship between the pursuers and the second defender. The first defender had contracted on behalf of the company with the firm of solicitors. The company were thereby bound as he was acting in the normal course of business. However, the second defender could not be liable in what was effectively a contract of guarantee of a company debt without the matter being drawn to his attention and accepted by him.
Submissions for the pursuers and respondents
[12] Solicitor for the respondents intimated that the sheriff had issued a comprehensive note following hearing the evidence and submissions made by parties at that time. Regard required to be given to these issues. As far as the case of Montgomery Litho Ltd v Maxwell supra was concerned, it was to be noted that in that case the terms and conditions were never sent to the company. A director had signed a credit agreement and the credit agreement referred to terms and conditions which contained the liability clause. The director who had been sued never requested the terms and conditions nor had they ever been sent to him. It was submitted that what was decided in that case was that, because the terms and conditions were never sent or given to that director, the significance of the conditions were not brought to that director’s attention.
[13] Solicitor for the pursuers referred to the case of Budge v Donald 2002 SLT (SC) 18 which was referred to by the sheriff at pages 8 to 10 of his note. The sheriff pointed out that this case was not mentioned at the proof where in fact no case law was referred to at all. That case again involved a firm of solicitors seeking payment of fees for professional services rendered to a company in an action against the directors personally. In that case the sheriff principal held (1) the question of whether the clause was either unusual or onerous could only be determined after proof. (2) That the directors had been given fair notice of the clause. (3) That if the pursuer’s averments that each of the defenders were sent a copy of the conditions letter and that they thereafter instructed the pursuers to carry out legal services for the company, were proved it would be open to infer acceptance by the directors as individuals of the terms of the letter. The appeal was allowed and a proof before answer was allowed. The sheriff had concluded that this case gave some support for his view that condition 7 of the respondents’ terms of business were neither unusual or onerous and the appellant was given fair notice of them by the pursuers’ act of sending the terms and conditions to Alan Shields, the director responsible for the day to day running of the company, on two occasions.
[14] It was submitted the appellant had not, in terms of the ground of appeal argued, proved that the clause was either unduly onerous or unusual. The grounds of appeal require to be amended before that point could be argued. If even if he was wrong on that, it was argued for the defender that the sheriff covered the matter in the note following his findings in fact where he took the view that the conditions in this case, in the particular facts of the case, were not unusual or onerous. For the defender to argue that a clause was unduly onerous, it had to be (a) pled (which it was not), (b) argued at proof (which it was not), (c) be part of the grounds of appeal (which it was not) and (d) shown that the sheriff was wrong in his consideration this in his consideration that the clause was not an unduly onerous consideration (not a specific finding in fact).
[15] It was said that the sheriff had carefully set out the facts which he found proved after proof in his stated case. He made clear each case turned on its own facts. In this case he concluded at para 33 that the appellant was aware that his co-director, Alan Shields, dealt with the day to day running of the business and he endorsed that arrangement. This was the established business practice of the company. The work instructed to the pursuers was within the day to day running of the company business. The sheriff considered the pursuers corresponded with the co-director who was acting as an apparently authorised agent for the company and for his co-directors. It was to him that the respondents sent their terms of business. These terms of business included a clearly marked condition that the directors were to be jointly and severally liable with the company for the respondents’ fees. This was not an unusual condition of business nor was it abnormally onerous. The sheriff concluded at para 34:
“Putting all of the circumstances together, I am satisfied on the balance of probabilities that the appellant was properly bound by condition 7 of the respondents’ business terms and was therefore jointly and severally liable with L107 FM Ltd and its co-directors for the appellant’s fees.”
It was submitted in these circumstances that the co-director, Alan Shields, had ostensible authority to bind the company and the defender in this case personally.
Decision
[16] Facts on which this appeal requires to be decided are those set out in the findings in fact which I have narrated at para [2] hereof. I am not entitled to have regard to any apparent findings that the sheriff made in his note. The note is there purely to explain the findings in fact. The note cannot be used to add additional findings in fact to those set out in the findings in fact.
[17] Taking the findings in fact in their totality, I do not think the pursuers can succeed in this action and the appeal falls to be allowed. It is quite clear from the findings in fact that the day to day running of the business affairs of the company was entrusted to the director, Alan Shields, who is the first defender. As finding in fact 4 makes clear, this was known and accepted by the appellant and was the established business practice of the company. However, in my view, his ostensible authority rising from his responsibility for the day to day running of the business is to engage in contracts which involve the day to day running of the business, which is the private limited company. In so doing, the first defender is acting on behalf of the company. The second defender is a director of the company. The duties of a director are set out in the companies acts. Nowhere is there any provision that a defender is personally liable for the debts and liabilities of his company to any party with whom his company contracts.
[18] In this case, clause 7 of the pursuers’ standard conditions effectively place the directors of the company in position of guarantors of sums due to the pursuers in the normal course of the company business. This is not a normal or usual obligation imposed on a director of a private limited company in standard terms and conditions of a contract. For such a director (the second defender in this case) to be personally liable for the company debts, there requires to be satisfactory evidence that the obligation to guarantee the company debt has been brought to his attention and accepted or could be deemed to be accepted. There requires to be findings in fact to that effect.
[19] In this case there are no findings in fact to the effect that the second defender accepted personal responsibility for this debt incurred by the company on the instruction of the first defender. While it is quite clear that the sheriff was entitled to conclude, as he does in finding in fact 15, that it was an established practice of L107 FM Ltd that Alan Shields acted as an authorised agent for the company in the day to day running of the business, however, this could only extend to the liability of the company to a creditor. In my opinion, for there to be liability on the part of the second defender, the nature of condition 7 would have required to have been brought to his attention and he would require to have accepted that liability. This is not the case here. The appellant accordingly succeeds on their first ground of appeal.
[20] Although it is academic, I take the view that the defender also succeeds on their second ground of appeal. I respectfully agree with the view stated by the Inner House in the case of Montgomery Litho Ltd v Maxwell supra where they said:
“We are quite satisfied that in the present case the imposition of a personal obligation of guarantee on a director of a company is something which is unusual, to say the least of it, to be found in terms and conditions which purport to regulate the contract as between the two companies. It is certainly not unusual for a director to be asked to sign an obligation guaranteeing the company’s liability, particularly in the case of a small limited liability company. It is, however, distinctly unusual for this to be done under the guise of terms and conditions relating to the contract between the two companies.”
I do not accept that this is a matter on which there requires to be evidence. One director of a private limited company has no prima facie authority to bind fellow directors personally for the trading debts incurred by the company. In these circumstances, the appeal succeeds.
[21] As far as expenses are concerned, it is clear that the second defender’s case was not placed before the sheriff at proof in the same terms as was argued before me at appeal. As a result a substantial extra expense has been incurred. I think the interests of justice would be served if I find no expenses due to or by either party in respect of the action and find the defender liable to the pursuers in the expenses of the appeal.