Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2010] CSOH 78
CA52/08	SUPPLEMENTARY OPINION OF LORD GLENNIE in the cause B.S.A. INTERNATIONAL S.A. Pursuers; against (FIRST) HUGH McLELLAND IRVINE; (SECOND) JOHN ALASTAIR IRVINE; and (THIRD) DOUGLAS FORBES IRVINE Defenders: ­­­­­­­­­­­­­­­­­________________

Pursuers: Lake QC; Burness LLP

Defenders: Dean of Faculty, Mure QC; MacRoberts

23 June 2010

Introduction

[1] This Supplementary Opinion, the third issued so far in this case, deals with certain points which were left open at the end of the debate leading to my Further Opinion dated 28 January 2010 ([2010] CSOH 12). The points left open concerned the pursuers' claim for damages for negligent misrepresentation, whereas the earlier debate had considered their claim for breach of warranty. It was agreed that the points on the claim for misrepresentation should be dealt with before I pronounced an interlocutor capable of being reclaimed to the Inner House.

[2] The representation relied upon is in the same terms as the warranty founding the claim for breach of warranty. It is contained in clause 13 of Part 3 of the Schedule to the Share Purchase Agreement (the "SPA"), which provides as follows:

"13 COMPETITION

No Group Company has received any process, notice or communication, formal or informal, by or on behalf of the Office of Fair Trading or the European Commission or any other authority of any country ... having jurisdiction in anti-competitive matters in relation to any aspect of the business of that Group Company or any agreement of arrangement to which that Group Company is, or is alleged to be, a party, and so far as the Warrantors are aware, there are no subsisting circumstances that may give rise to any such process, notice or communication being received by any Group Company."

I shall refer to this as "the clause 13 warranty".

[3] Two matters of principle were raised as to the claim in misrepresentation. The first was as to the meaning, or the construction to be given to, the representation. This raised the same issues as dealt with in my Further Opinion at paras.[33] - [40] under the heading of Relevancy and Specification. At para.[39] I held that, for the claim for breach of warranty to succeed, the pursuer needed to establish not only that the defenders (as Warrantors) were aware of the facts which in the event did give rise to communication from the OFT, but also that they were, or ought reasonably to have been, aware that those circumstances might lead to such communication. Mr Lake QC, who again appeared for the pursuers, accepted that his clients could be no better off as regards the proper construction to be given to clause 13 if the claim was for misrepresentation rather than for breach of warranty. I need therefore say no more about this aspect. As things stand at present, and on the basis of my construction of the clause, the pursuers do not make averments to instruct a relevant claim for misrepresentation or for breach of warranty. It is open to the pursuers to reclaim this part of my decision along with that relating to the claim for breach of warranty. Should my decision be upheld, then, as already indicated in my Further Opinion, the pursuers would wish to consider whether to amend their pleadings.

[4] The other point took a curious turn. It had been anticipated at the end of the last debate that the only live issue (in addition to that mentioned above) was whether the time-bar provisions in Clause 2 of Part 4B of the Schedule to the SPA applied to misrepresentation in the same way as they applied to the claim for breach of warranty. I had held that the breach of warranty claim, if otherwise relevant, was not time-barred: see para.[31]. However, as the arguments were laid out before me by the Dean of Faculty on behalf of the defenders, it became clear that they raised a number of points.

[5] The claim for damages for negligent misrepresentation founds upon the same facts as that for breach of warranty. The relevant averments are sufficiently identified in my Further Opinion. In para.33 of my Further Opinion, I quoted from Article 17 of the Summons. Since that Further Opinion, the opening part of Article 17 has been amended by the pursuers and the relevant part now reads as follows:

"17. In the foregoing circumstances the representation given by the defenders that the facts were as stated in Clause 13 of Part 3 of the Schedule to the Share Purchase Agreement was false. Having regard to (a) of their active involvement and participation in the various matters set out above and (b) the provisions of the Share Purchase Agreement indicating what is meant by references to an awareness or knowledge of the defenders, the defenders and/or the persons identified in Clause 9.7 were aware at the date of the Share Purchase Agreement that there were subsisting circumstances which might give rise to the SO - being a process, notice or communication by or on behalf of the OFT - being received by McClelland. Accordingly, they failed to exercise reasonable care. The defenders knew or should have known that the representations made by them as to the absence of such subsisting circumstances was false. ..."

I have italicised the passage brought in by amendment. In Article 19 the pursuers aver that as a result of the defenders' negligent misrepresentation they have suffered loss and damage. They aver that had the facts not been misrepresented they would have paid less to acquire McClelland. They would have sought, and the vendors would have agreed, to include within the Share Purchase Agreement an indemnity provision which would have entitled them to seek reimbursement of any sums paid in respect of liabilities incurred by McClelland arising from the proceedings against them by the OFT, together with the costs arising out of such proceedings.

[6] On behalf of the defenders, the Dean of Faculty presented three main arguments. Although they overlapped, it is convenient to identify them separately. The first was that, standing the provisions of clauses 21.5 and 21.7 of the SPA, which contain an entire agreement clause, there was no scope for the pursuers to put forward a claim for negligent misrepresentation. Unless fraud was alleged, which it was not in this case, their only remedy lay for breach of warranty. Secondly, he submitted that it was necessary for the pursuers, in advancing a case in negligent misrepresentation, to plead and establish both (a) that the defenders owed a duty of care to the pursuers in respect of the accuracy of any representations made by them and (b) that the pursuers relied upon the representations in entering into the SPA. There were no relevant averments in support of such case. Thirdly, he referred to the difficulties faced by the pursuers in putting forward such a case, which difficulties, he submitted, were highlighted by the recent amendment to the averments in Article 17. To establish the representation, they had to resort to reliance upon the terms of the SPA itself. So also, to establish the requisite knowledge on the part of the defenders, they had to rely on clause 9.7 of the SPA, in terms of which the defenders were deemed to have the "awareness, knowledge, information [and] belief" of a number of people, including the Vendors, their solicitors and auditors, certain of their directors and three of the senior managers of companies within the group. How, he asked rhetorically, could the terms of the contract be prayed in aid to establish the very things upon which the pursuers claimed to have relied in entering into it?

[7] This last point has some superficial attraction. However, I do not think that it is right. The pursuers' case, as amended, is that the defenders represented, in terms of clause 13 of Part 3 of the Schedule, that, so far as they (the Warrantors) were aware - and I paraphrase rather than offer a construction of the clause - there were no subsisting circumstances which might give rise to the institution of any proceedings against McClelland by the competition authorities. Clause 9.7 explains what is meant by the words "so far as the Warrantors are aware". The awareness of the Warrantors includes the awareness of all the persons identified therein. In making the representation in terms of clause 13, therefore, the defenders are representing that neither they nor the various persons identified in clause 9.7 have any knowledge or awareness of such circumstances. That is something which the pursuers say they relied upon in entering into the SPA, which contained both the representation in clause 13 and the amplification of that representation in clause 9.7. I see no conceptual difficulty with that averment. The parties will obviously have been aware of the terms of the contract they were signing. They will have been prepared to sign it precisely because of what the draft contract said. So the fact that the representation (in clause 13) and the amplification of it (in clause 9.7) are to be found in the SPA itself is by no means inconsistent with the averment that they entered into the contract in reliance on those representations. Indeed clause 2.1 of Part 4A of the Schedule specifically contemplates that very thing. In terms of that clause, the Purchaser acknowledges and agrees that

"the Warranties are the only representations given by or on behalf of the Warrantors on which the Purchaser may rely in entering into this agreement". (emphasis added)

There might conceivably be some force in the argument put forward by the defenders if the situation, which is theoretically possible but hard to envisage, were that the terms of clause 13 were known to the pursuers at the time they entered into the contract but the terms of clause 9.7 were not. But there is no suggestion by either party that such was the case here.

[8] It was suggested that the pursuers had not pled their case in this way. The averments about reliance in Article 19 linked back to those in Article 17, to the effect that the representation relied upon was a representation contained in the SPA rather than one made before it was concluded. As a matter of substance, there is nothing in this point, for the reasons set out above. As a matter of pleading, I am of the opinion that if the averments are read sensibly, they give adequate notice of the case sought to be advanced.

[9] Turning to the argument based upon the entire agreement provisions, I should first set out the relevant clauses. These are in the following terms:

"21.5 The rights and remedies provided in this agreement are cumulative and not exclusive of any rights or remedies otherwise provided by law.

...

21.7 The agreement and any document referred to as being in the Agreed Form constitute the entire agreement among the parties and supersede any previous agreement, the parties. Each of the parties acknowledges and agrees that in entering into this agreement, and the documents referred to in it, it does not rely on, and shall have no remedy in respect of, any statement, representations, warranty of understanding (whether negligently or innocently made) of any person (with a party to this agreement or not) other than as expressly set out in this agreement as a Warranty. Nothing in this clause shall, however, operate to limit or exclude any liability for fraud."

The intent of a clause such as this, as the wording makes clear, is to preclude reliance upon extraneous statements, representations and promises. As Lightman J put it in Inntrepreneur Pub Co. v. East Crown Ltd. [2000] 2 Lloyd's Rep.611 at 614,

"The purpose of an entire agreement clause is to preclude a party to a written agreement from threshing through the undergrowth and finding in the course of negotiations some (chance) remark or statement (often long forgotten or difficult to recall or explain) on which to found a claim ... to the existence of a collateral warranty. The entire agreement clause obviates the occasion for any such search and the peril to the contracting parties posed by the need which may arise in its absence to conduct such a search."

This decision was cited with approval by Lord Reed in Macdonald Estates Plc v. Regenesis (2005) Dunfermline Ltd (unreported
[2007] CSOH 123) at para.[130]-[131]. The clause precludes reliance upon statements, representations, etc, "other than as expressly set out in this agreement as a Warranty". If the representation is not set out in the agreement as a Warranty, it may not be relied upon, except, of course, in the case of fraud. But if it is set out in the agreement as a Warranty it may be relied upon. The argument for the defenders proceeds upon the premise that if the representation may be relied upon only if it is set out in the agreement as a Warranty, then it may be relied upon only as a Warranty. I do not think that that is correct. Certainly there may be a claim for breach of warranty. But the existence of such a claim does not, to my mind, exclude the possibility of a claim for misrepresentation based upon the same statement which is set out in the agreement. Clause 21.5 provides to the contrary. It makes it clear that the fact that the pursuers may have a remedy under the contract for breach of warranty does not exclude "any rights or remedies otherwise provided by law". In principle, there is nothing inconsistent between an entire agreement clause in a contract and the ability of a party to make a claim for misrepresentation. The mischief to which such a clause is directed is the uncertainty introduced by the possibility that parties may seek to rely upon other statements than those which ultimately find their way into the contract, rather than the possibility that there might be more than one legal basis for a claim resulting from the representation being found to be incorrect or having been made negligently. Of course, there may be clauses which do seek to exclude claims in misrepresentation. Entire agreement and related clauses come in many different forms. Much will depend upon the drafting of the particular clause in the contract. But an entire agreement provision does not, of itself, preclude a claim for misrepresentation because, as Lightman J put it in Inntrepreneur Pub Co. v. East Crown Ltd., "the denial of contractual force to a statement cannot affect the status of the statement as a misrepresentation". Here, so it seems to me, clause 21.7 specifically contemplates reliance being placed upon representations which find their way into the SPA as warranties.

[10] The question arises as to whether clause 13 of the SPA can properly be regarded as a representation capable of founding a claim for misrepresentation. In the course of his submissions, Mr Lake QC pointed out that, in clause 9.1, the Warrantors jointly and severally "warrant and represent" in the terms set out in Part 3 of the Schedule (emphasis added). Clause 9 is headed "Warranties". Throughout the remainder of clause 9, the references to Part 3 of the Schedule describes them as "the Warranties", except in clause 9.8 where there is a reference to the purchaser warranting and representing something to the Vendors. Part 3 of the Schedule is headed "the Warranties". Mr Lake argued from this that the expression "Warranties" was used throughout the contract as a shorthand for warranties and representations. Standing the introductory words of clause 9.1, the effect of which is that the Warrantors "warrant and represent" in terms of the warranties in Part 3 of the Schedule, I think there is some force of this. That conclusion is fortified by other references in the contract to representations, such as clause 2.1 of Part 4A of the Schedule, to which I have already referred. The language of that clause appears to me to be couched in terms of a classic misrepresentation case.

[11] The main difficulty concerns the time-bar provisions of Part 4B of the Schedule. The Dean of Faculty, for the defenders, argued that the time-bar provisions only applied to claims for breach of warranty. Clause 1 of Part 4B applied the time-bar only to claims "for breach of any of the Warranties"; and it defined such a breach of warranty claim as "a Claim" for the purposes of Part 4B. It did not cover claims for misrepresentation. It could not have been the intention of the parties that by pleading a breach of warranty case as a claim for damages for misrepresentation, a party could circumvent the time-bar provisions to which they had freely agreed. I agree with that submission. So also, as I understood it, did Mr Lake. But it was his submission that there was no question of the pursuers being able to avoid the operation of the time-bar provisions by framing their claim in misrepresentation. He argued that Part 4B covered claims for misrepresentation as well as claims for breach of warranty. Although clause 1 of Part 4B applied to "any claim for breach of any of the Warranties", that had the extended meaning to which I have already referred. The Warranties in Part 3 of the Schedule were what was "warranted and represented" in clause 9.1 of the SPA. Accordingly there was no difficulty in treating Part 4B as applying also to misrepresentations. He accepted that it was not happily worded, but it was a permissible construction and the only one that made sense.

[12] On balance I prefer the argument for Mr Lake. The paramount consideration, in my opinion, is the fact that the parties could not have intended to allow one party to circumvent the carefully drawn time-bar provisions by formulating their claim as one for misrepresentation rather for breach of warranty: see e.g. per Lord Goff of Chieveley in Henderson v. Merrett [1995] 2 AC 145 at 190H-191D, Bottin (International) Investments Ltd. v. Venson Group plc (unreported, [2004] EWCA Civ 1368) at paras.64-5. Had I not been persuaded that the time-bar provisions in Part 4B were capable of being read so as to apply to a claim for misrepresentation, I would have held that no such claim was permitted under the SPA. However, the references to "represents" and "representations" to which Mr Lake has drawn my attention persuade me that the parties to the contract did not intend to exclude such a claim. They must, so it seems to me, have intended, therefore, that the time-bar provisions in Part 4B should apply to such a claim as well as to a claim for breach of warranty. On that basis, the claim for misrepresentation is as apt to go to proof as that for breach of warranty.

[13] I turn finally to the argument that the pursuers have not made sufficient averments of duty and reliance so as to instruct a relevant case in misrepresentation. In their Note of Arguments, the defenders contended that, in order to maintain a claim for damages for negligent misrepresentation under s.10 Law Reform (Miscellaneous Provisions) (Scotland) Act 1985, the pursuers required to plead and establish that the defenders "voluntarily assumed responsibility for the pursuers' economic interests, knowing that the pursuers were relying on them to exercise some expertise or reasonable care". It was submitted that the pursuers not only did not plead but could not show any such reliance or duty. On the contrary, they relied upon the contractual warranty in the SPA and expressly stated that they did not rely upon any non-fraudulent representation not set out in the contract as a Warranty. It would not be fair and reasonable for the pursuers to rely upon the defenders to exercise reasonable care where the parties had contracted in those terms.

[14] In his submissions, the Dean of Faculty contrasted s.10 of the 1985 Act with the position in England under s.2 of the Misrepresentation Act 1967. Historically in Scotland there had been a right to recover damages for fraudulent misrepresentation inducing a contract. But it had been established in the cases that there was no right to recover damages if the representation inducing the contract was merely negligent: Manners v. Whitehead (1878) 1 F 171. When delictual liability for negligent misstatement was recognised in the mid-1960s (c.f. Hedley Byrne v. Heller [1964] AC 465) and by a number of landmark decisions of the House of Lords in the years that followed, that was not perceived as altering the rule in Scotland that negligence was an insufficient basis for the recovery of damages by the pursuer for misrepresentation by the other contracting party, which misrepresentation had induced the pursuer to enter into the contract. Notwithstanding the flow of the tide of judicial opinion and the obvious anomaly that it created, Manners v. Whitehead was regarded as authority which still bound the courts in Scotland in that respect: see e.g. Twomax v. Dickson McFarlane & Robinson 1982 SC 113, 121-2. It was to alter the law to remove this anomaly that s.10 of the 1985 Act was enacted. The effect was to extend delictual liability for negligent misstatement to that situation. But it did not remove the requirements for the pursuer to establish that the defender owed a duty of care to the pursuer in respect of the accuracy of the statement. Lord Carloway, in Hamilton v. Allied Domecq plc 2001 SC 829, had equiparated the law in Scotland with that in England under the 1967 Act, and had thought that where the case was concerned with a representation made by one contracting party which had induced the other to enter into the contract, it was not necessary for the pursuer to plead or prove the criteria giving rise to the duty of care. That was wrong, it was submitted, and found no support in the judgments of the Inner House (2006 SC 221) or the House of Lords (2007 SC(HL) 142). Further, it had been the subject of criticism in an Article by Prof. Thomson in 2001 SLT 279.

[15] S.10(1) of the 1985 Act provides as follows:

"A party to a contract who has been induced to enter into it by negligent misrepresentation made by or on behalf of another party to the contract shall not be disentitled, by reason only that the misrepresentation is not fraudulent, from recovering damages from the other party in respect of any loss or damage he has suffered as a result of the misrepresentation; and any rule of law that such damages cannot be recovered unless fraud is proved shall cease to have effect."

I fully accept the account given by the Dean of Faculty as to the circumstances in which this section came to be enacted, and the mischief with which it was designed to deal. But, for my part, I do not see why that should point to the conclusion that it was necessary for the pursuers to plead and prove a delictual duty of care. The section appears to me to start from a recognition that in the case of a misrepresentation by one party inducing the other to enter into a contract, damages were recoverable at common law (in addition to the remedy of rescission) if the misrepresentation was fraudulent. That obviously did not require a duty of care to be separately established. What the section does, in my view, is to say that the fact that fraud is not made out does not mean that damages may not be recovered. It is enough to found a claim for damages that the misrepresentation was negligent, not fraudulent. I see no reason for any further gloss. In particular, I see no reason to import into this pre-existing relationship of intending contractual parties concepts that have developed in the law of tort and delict to identify other situations in which a party may owe a duty of care to another as regards the accuracy of statements made by him. I would apply the approach of Lord Carloway in Hamilton at para.[17], which is not doubted in either the Inner House or the House of Lords.

[16] Having said that, it seems to me that the issue is likely to be almost entirely academic, for two reasons. First, in the present case, the defenders' Note of Argument appears to be concerned that the pursuers' case of misrepresentation was based upon statements made by the defenders other than those which found their way into the contract. That is not the case. Secondly, as Prof. Thomson recognises in his Article, the criteria for the imposition of a duty of care to avoid economic loss "will invariably be satisfied when the misstatement is an operative misrepresentation". Thus, he adds, "a pursuer in this situation should have little difficulty in establishing the existence of a duty of care." The pursuers have adequate averments about the entry into the contract on the basis of the representations in it to justify remitting the matter to proof.

Disposal

[17] The result of this Supplemental Opinion, read with my earlier Further Opinion, is that (a) the pursuers' claims are not time-barred but (b) they have not pled a relevant case having regard to the proper construction to be given to clause 13 of Part 3 of the Schedule. In those circumstances, had they not wished to take the matter further, I would have afforded them an opportunity to amend so as to plead a relevant case. However, they wish first to challenge my decision on the construction of the clause. Accordingly, it seems to me that the appropriate course is for me to dismiss the action, leaving the pursuers to make an appropriate application to amend if they so wish should their appeal be refused. Since finalising this opinion I have received a request to put the case out By Order rather than issuing a determinative interlocutor. I am happy to do so.