[2013] CSOH 8



in the cause







Pursuers: Beynon; Drummond Miller LLP

Defenders: Richardson; TC Young

16 January 2013

[1] By missives dated 5 and 6 April 2004 the pursuers contracted to purchase two areas of ground extending in total to 13 acres. The exact location is not specified in the pleadings, but the land lies in the South Lanarkshire local authority area near Lesmahagow, adjacent to the M74. Access is taken from the B7078.

[2] The missives stated that 10 of the 13 acres of land were to be capable of commercial development. The purpose of purchasing the land was for the construction by the pursuers of a new factory for the manufacture and sale, and distribution, of animal food products.

[3] The sellers were the trustees for the Auchlochan Trust. By means of a transfer agreement between the Trust and the defenders dated 5 and 6 January 2009, the assets and liabilities of the Trust were transferred to the defenders.

[4] Clause 13 of the offer, which was accepted by the trustees, provided that the sellers would undertake to procure at their own expense, as soon as reasonably practicable, and in any event, within 12 weeks from the date of conclusion of the bargain, the removal of overhead mains electricity cables across the site to an alternative route to the north and west around the perimeter. It is accepted that the rerouting of the overhead cables was not completed within the 12 weeks, although the circumstances, and the reasons for the non-completion, are a matter of dispute.

[5] Clause 8 of the offer, 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 obliged to make up the access road at their expense to road base plus base coast standard prior to the commencement of the construction on the site by the purchasers. Thereafter there were further obligations 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 purchasers' building development. Furthermore, the trustees had to progressively make up the road to road construction consent standard. Various time limits applied to some of the stages, but it appears that in general the trustees were subject to the obligation that the work specified in clause 8 was to be carried out by them "without unreasonable delay and as soon as reasonably practicable". The pursuers aver that it was reasonably practicable for all of the works incumbent on the trustees, including the making up of the access road to an appropriate standard, to have been completed by the beginning of September 2004.

[6] The pursuers aver that, in fact, the trustees only achieved partial construction of the required access road by July 2005. As a result of the delay it is said that the trustees were, and continued to be, in material breach of contract. As a result of the failure to provide the access road between September 2004 and July 2005 the pursuers aver that they sustained loss and damage. They state that at the time the missives were concluded, the trustees knew that the pursuers were intending to move the production, distribution and sale of animal foodstuffs from an existing facility, which they leased in Johnstone, to the new unit which was to be constructed on the subjects and that this transfer was to take place in or around 2005. As a result of the access road not being completed timeously, essential utilities could not be installed. The pursuers' lease of their existing premises in Johnstone was to expire in March 2005. If the trustees had fulfilled their obligations, then the new unit on the subjects would have been ready for operation by July 2005, at the latest. This would have enabled the pursuers to achieve a seamless transfer of their production facility from their previous leased premises in Johnstone to the new site at Lesmahagow. The pursuers intended to produce two animal feed products - feed blocks and feed buckets at the new facility.

[7] In the event, they were unable to achieve manufacturing of feed blocks until November 2005 and feed buckets until the end of January 2006.

[8] They were able to obtain an extension of their lease of the Johnstone premises for April, May, June and July 2005 in order to minimise their loss. However, they lost production of these feedstuffs. In order to retain the goodwill of their customers they required to purchase feedstuffs for competitors. The pursuers claim for loss of profit, outlays and the extension of the existing lease as damages for breach of contract.

[9] In their answers the defenders aver, and the pursuers accept, that, in fact, despite the averments that the pursuers had a lease over the premises in Johnstone, the lease was in held by Strathclyde Nutrition Limited (SNL), a wholly owned subsidiary of the pursuers. Moreover, they aver that at the material time the manufacture and sale of feed buckets and feed blocks was not undertaken by the pursuers but by SNL, any profit of the manufacture and sale was earned by SNL and not by the pursuers.

[10] The pursuers' answer to these averments are to the effect that during all of the relevant times SNL, and another company Harbro Limited (HB) who manufactured the feed blocks and feed buckets, were acting as agents for the pursuers, who were the sole principal. SNL had at the material time an established and well-regarded brand name relative to the agricultural feedstuff sector, which the pursuers made use of. Both SNL and HB paid rent to the pursuers for the use of the subjects and the equipment. HB carried out the manufacture on a cost plus percentage and arm's length basis for SNL. Profit and losses were, during the material times, only earned or incurred at the holding company level, ie the pursuers. All of SNL's trading activity (including all matters relating to the 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.

[11] The pursuers go on to aver that they were required to produce group accounts under, and in terms of, the requirements of section 1159(1) and Schedule 6 of the Companies Act 2006, relative to themselves and all of their subsidiary companies, including SNL and HB. In fact, as Mr Richardson pointed out, section 1159(1) merely defines "subsidiary". Nevertheless, it is accepted that throughout the relevant period there was a statutory duty on the pursuers to produce group accounts, Companies Act 1985, section 227 and, from 6 April 2008, Companies Act 2006, section 399.

[12] Accordingly, the pursuers aver that 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 of the others of the pursuers wholly unsubsidiaries, who have sustained the losses relative to all the heads of claim.

[13] The pursuers claim for damages under two broad headings: viz (1) loss relative to feed buckets; and (2) loss of profit relative to lost feed block sales. In respect of the first heading, the calculation of damages is far from straightforward. In order to maintain customer goodwill, as narrated above, the pursuers purchased feed buckets from five rival manufacturers and this resulted in the pursuers incurring additional transport costs, totalling £53,109.60. They also incurred a loss of £14,677 through higher conversion costs on the feed buckets obtained from these manufacturers. They also lost profit margin, which is estimated at £81,690.

[14] In relation to the loss of profit relative to lost feed block sales, the pursuers estimate that at £12,000 during the financial year to 30 June 2006.

[15] These estimates of loss and damage are contained in a report by Bobby Anderson, Chartered Accountant, dated 17 January 2011. This report, with a minor exception, is produced and incorporated into the pleadings.

[16] Mr Richardson, for the defenders, moved me to uphold the defenders' second plea-in-law and to refuse to allow certain averments to probation. He also moved me to repel the pursuers' second plea-in-law.

[17] Mr Richardson took me to the report by Bobby Anderson, which incorporates as an appendix the accounts of SNL for 2005 and 2006. He also referred me to the Financial Reporting Standards for Smaller Entities published by the Accounting Standards Board. There are two which relate to the period of the claim. The first was effective in June 2002. That was superseded by another one, effective in January 2005. Under reference to these documents, he submitted that the accounts must reflect a true and fair view of the company's results. Regard must be had to the substance of any arrangement or transaction. To determine the substance of a transaction it is necessary to identify whether it is giving rise to new assets or liabilities for the reporting entity and whether it has changed the entities existing as a liability.

[18] He pointed out that SNL's accounts disclosed that the principal activity of the company continued to be the manufacture and distribution of chemicals and animal feed supplements. The accounts were audited and certified as giving a true and fair view of the state of the company's affairs for the relevant period. They included a profit and loss account and balance sheet, and disclosed that the company paid tax on its profits. The group relationship was clear from the accounts, including amounts owed to group undertakings. The parent company is shown to be the Harbro Group Limited, the pursuers in this action. The 2005 accounts also showed that SNL transferred its manufacturing operation, including fixed assets and stock, to Harbro Limited, a fellow group company and the company now operates solely as a retailer of chemicals and animal feedstuffs.

[19] He pointed out that nowhere in the accounts was there any reference to the pursuers acting as agents for SNL.

[20] Mr Richardson submitted that, like any contract, the existence or otherwise of a contract of agency is not purely a matter of fact, but of fact and law. In case of a parent and subsidiary company, the courts do not look favourably on the existence of a relationship of agency that would circumvent their respective separate, legal personalities (Bowstead on Agency, pages 4 - 18 and in particular page 18; Peterson Farms Inc v C & M Farming Ltd 2004 1 Lloyd's LR, page 603 per Langley J at para 60).

[21] So far as the statutory obligation to prepare group accounts is concerned, he submitted that this had no relevance to the separate legal personality of the entities that make up that group.

[22] It was, he said, incumbent on the pursuers to offer to prove the express relationships between the different entities, or set out a clear factual arrangement that SNL and HB were acting on behalf of the pursuers. He pointed out that there was no averment that SNL accounted to the pursuers for profit and there was no averment of commission. The factual averments pointed to the business being SNL's. SNL obtained products at arm's length from the pursuers. They paid rent to the pursuers. The relationship between the pursuers and SNL was one of landlord and tenant, not agency. The pursuers had failed to give fair notice of their case. The averments were inconsistent in so far as the two key averments were contradicted by the report by Bobby Anderson. There was no reference to agency agreement and the report proceeds on the basis that profits were earned by SNL and taxed in their hands. It follows, he said, that Articles 5 to 7 should not be admitted to probation.

[23] For the pursuers, Mr Beynon submitted that the pursuers' case was simple. The pursuers were a group company and controlled all that its subsidiaries did. The activity that the group carried out through its subsidiaries, was the manufacture and sale of animal feedstuffs. Whether or not subsidiary companies produced and had audited accounts, was nothing to the point. The issue was whether or not the pursuers themselves, as a separate company, have lost profit. At this stage, it cannot be said that the pursuers' case was bound to fail. A proof before answer should be allowed on all the averments. The pursuers were offering to prove that the group had sustained losses as a result of the breach of contract. He explained that the averments of agency, inserted in response to the defenders' averments, were not meant to imply a contract of agency as between the pursuers and their subsidiaries. Rather it reinforces the de facto control by the pursuers of all the group activities. All the trading activity was consolidated into group accounts. He sought to distinguish the case of Peterson v C & M Farming, pointing out that it dealt with an arbiter's award to a group when not all the parties were called to the arbitration. In essence, he said, it depended on an interpretation of an arbitration clause and was thus not on point. He made four other points.

[24] First, the pursuers are offering to prove that they lost profit and outlays at group level. Secondly, there are clear averments that trading activity was consolidated within group accounts. Thirdly, the subsidiaries were wholly controlled by the pursuers. Fourthly, the pursuers' claim is supported by the report by Bobby Anderson, which is incorporated into the pleadings. Without an enquiry into the facts, it was not, he said, possible to determine whether or not the pursuers' claim should fail.

[25] With regard to the point made by Mr Richardson that SNL was paying tax, he said that may well be true, but the issue was whether or not the pursuers had lost profit, not whether they paid tax.

[26] So far as the issue with agency was concerned, he did not dispute the point made by Mr Richardson, but said that it was not relevant. The issue was whether the pursuers themselves had lost profit and that was a matter for proof. The method of analysis by Mr Anderson was in dispute. It would be necessary in a proof to go into the group structure. The report concluded that the pursuers, as a group, had suffered loss of profit and incurred outlays as a result of the defenders' breach of contract.

[27] He moved me to repel the defenders' second plea-in-law and to allow a proof before answer on all the averments.

[28] In reply, Mr Richardson asked if agency was not being insisted upon, where that left the pursuers. It was well-established that a party could not sue for another person's losses (Alfred McAlpine Construction Ltd v Panatown Ltd 2001 1 AC 518 per Lord Clyde at page 522). The profit was not a profit by the group, but by SNL and there was no averment of counting for profit by SNL.

[29] Mr Beynon's acknowledgement that SNL and HB were not acting as agents for the pursuers was appropriate. The pleadings do not support that contention. I do not accept Mr Beynon's contention that the averment of agency is necessary to reinforce a de facto control by the pursuers of the group activities. Either the subsidiaries are agents for the pursuers, or they are not. I consider the averment irrelevant and I will exclude the sentence in the pleadings (at page 54E) "During all of those times SNL and HB (a company described below) were acting as agents for the pursuers who were their sole principle", from probation.

[30] Mr Richardson's position, in the face of Mr Beynon's acknowledgment that this was not a case about agency, is simple. The losses belonged to SNL, or at any rate not the pursuers. It is well established that one party cannot sue for another parties loss and in the absence of specification of loss by the pursuers, as opposed to SNL, the averments of loss and damage should not be admitted to probation.

[31] Mr Beynon's position is equally simple. This is a group activity. It is, ultimately, the pursuers have encouraged damage as a result of the defenders' breach of contract and they are entitled to a proof on their averments.

[32] 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.

[33] 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 road way 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.

[34] The issue was not addressed by either counsel. The only reference to McAlpine Construction Ltd v Panatown Ltd was by Mr Richardson, referring to Lord Clyde's dicta. Yet the discussion of the possible exception in building contract cases where there is a group structure in the speeches of their Lordships, seems relevant to the issues in this case, as is the debate on the application of any principles arising in Scotland (see eg the article by Professor Joe Thomson, Restitutionary and Performance Damages 2001 SLT 8 page 71 and Sheriff J A Taylor in Clark Contracts Ltd v Burrell Company (Construction Management) No. 2 Ltd 2003 SLT (Sh Ct) 73).

[35] I did consider putting the case out By Order for a fuller discussion of these points. However, at this stage, I noted that the pursuers seek a proof before answer. I agree with Mr Beynon that on the pleadings it cannot be said that the pursuers are bound to fail. I also agree that much will depend on the analysis of Mr Anderson, and that will depend on proof. Accordingly, I have come to the view that, with the exception of the averment by the pursuers relating to agency noted above, I should repel the defenders' second plea-in-law and allow the parties a proof before answer.

[36] Finally, I should record that it is a matter of agreement that the total sum sued for is £304,000, and not £500,000 being the sum first concluded for.