Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2012] CSOH 66
CA24/10	OPINION OF LORD MENZIES in the cause IRENE HENDERSON LIMITED Pursuers; against EDDIE MAIR LIMITED Defenders: ­­­­­­­­­­­­­­­­­________________

Pursuers: Beynon; Lefevre Litigation

Defenders: S Smith; Anderson Strathern LLP

20 April 2012

Introduction

[1] Mrs Irene Henderson is the sole shareholder and director of the pursuers. Between about 1999 and 2005 she worked for the defenders, a company controlled by Mr Eddie Mair which operated a number of restaurants and take-away fish and chip shops in Peterhead, Fraserburgh, Banff and Mintlaw under the trade name "Zanre's". Mrs Henderson worked as a manager for the defenders. By Franchise Agreement and related but separate Lease, both dated 30 November and 29 December 2005, it was agreed between the parties that the pursuers as franchisees would operate the chip shop business at Mintlaw, the defenders being the franchisors; the pursuers were the tenants of the premises, and the defenders were the landlords. Both the Franchise Agreement and the Lease were to endure for a period of 10 years from 1 September 2005. The most relevant terms of the Franchise Agreement are set out below.

[2] The pursuers operated the chip shop premises in Mintlaw after 1 September 2005. They paid the initial fee of £100,000 plus VAT to the defenders. The pursuers purchased some (but never all) of their supplies from the defenders. In about December 2007 the pursuers agreed to operate the adjacent public house business on behalf of the defenders; however, this arrangement was not successful, and came to an end on about 31 August 2008. From the summer of 2008 the business relationship between the parties deteriorated. The pursuers found that the chip shop business was less profitable than they had anticipated and had difficulty in making payments to the defenders for the agreed service charge and rent and for supplies provided by the defenders. On about 6 January 2009 the defenders stopped making deliveries of supplies to the pursuers. The pursuers purchased supplies from other suppliers, and found them to be cheaper than those which had been supplied by the defenders.

[3] By letter dated 12 January 2009 the defenders' solicitors wrote to the pursuers terminating the Franchise Agreement. This termination was stated to have been brought about by

(a) the pursuers' failure to make and maintain payment of the service charges due under the Franchise Agreement.

(b) the requisition or purchase by the pursuers of products from a source other than the defenders without their permission.

(c) the failure by Mrs Henderson to devote her whole time and attention to the operation of the business.

(d) persistent complaints made to the defenders in relation to the inferior quality and service and product being dispensed at the premises.

This letter required the pursuers to vacate the premises and deliver the keys to the defenders' solicitors on the following day. The pursuers complied with this requirement by vacating the premises and returning the keys to the defenders on 13 January 2009.

[4] The pursuers seek two remedies in this action. In their first conclusion (as amended on the last day of the proof) the pursuers seek payment of £50,027 which they claim the defenders overcharged them for goods supplied to them. In their second conclusion (again as amended) they seek payment from the defenders of £350,000 by way of damages for the defenders' wrongful termination of the Franchise Agreement. The defenders deny that they overcharged the pursuers. Moreover, they claim that in the circumstances they were entitled to terminate the Franchise Agreement when they did, and so no damages are payable for breach of contract. In any event, if they were in breach of contract, the defenders assert that the sum second concluded for is excessive.

The relevant contractual provisions

[5] Clause 1 of the Franchise Agreement included the following definitions:

" 'Gross Quarterly Sales' means the gross takings of the Franchisee's Business arising directly or indirectly from the conduct of the Franchisee's Business during each Three Month Period, that this agreement is in force (and for any period less than a complete Three Month Period).....

'Service Fee' means twelve and one half per cent of the Gross Quarterly Sales subject to a minimum quarterly fee of Twelve Thousand Five Hundred Pounds (£12,500.00), such minimum fee to be increased annually on each anniversary of the Opening Date by the increase in the Retail Prices Index ('RPI') during the immediately preceding 12 Month period. From the total annual service fee payable the sum of £10,000 shall be allocated to the annual rent payable for the Premises in terms of Clause 4.1 of the Lease".

Clause 7 made provision for the Franchisor's continuing obligations. Clause 8 made provision for the Franchisee's operating obligations, including the following:-

"In order to maintain the highest standard of service to be provided by the Franchisee and the Franchisor's other franchisees the Franchisee shall during the term of this agreement:

8.2.2 Obtain all its supplies of the Products, Equipment, Stationery and other products or services specified in the Written Company Procedures from the Franchisor at no more than a percentage mark up on the cost price to the Franchisor of 5 per cent or from such other person as has been previously approved in writing by the Franchisor;

8.3.2 Carry on the Franchisee's Business to the highest standards of service;

8.3.3 Use its best endeavours to promote and extend the Franchisee's Business;

8.3.4 Not to do anything which may bring the Business or the Franchisee's Business into disrepute or may have a detrimental effect on the Business or the Franchisee's Business and not assist any other person to do so".

Clause 9 dealt with accounting records and provided that the franchisee shall:

"9.4 Maintain at the Premises accurate books of account and supporting accounting records including all invoices, credit notes, statements and delivery notes and shall permit the Franchisor or its duly authorised agents during business hours to inspect any such accounts and records and take copies at the expense of the Franchisor".

Clause 19 dealt with termination, and included the following provisions:

"19.1 The Franchisor may terminate this agreement immediately by giving notice in writing to the Franchisee in any of the following events which because of the special nature of the Franchise relationship shall constitute repudiatory breaches of contract or in the case of sub-clauses 19.1.10-19.1.12 will in the Franchisor's opinion inevitably lead to such a repudiatory breach:

19.1.2 if the Franchisee shall at any time fail to pay any amounts due to the Franchisor unless such failure arises for reasons outside the Franchisee's control or occurs only once in any 12 month period and is immediately corrected on receiving notification from the Franchisor of such non-payment.

19.1.3 if the Franchisee shall, in the reasonable opinion of the Franchisor, have a detrimental effect on the goodwill of the Business or the Franchisee's Business;

19.1.7 if the Franchisee fails to obtain any prior written approval or consent of the Franchisor expressly required by this agreement;

19.1.13 in the event of persistent valid complaints to the Franchisor as to the quality of the service given by the Franchisee the Franchisee having been given timely notice of such complaints and having been given the opportunity to address the issues which are the subject of such complaints;

19.1.17 in the event of any repeated breach of any of the Franchisee's or the Individual's obligations under this agreement or the Written Company Procedures. For the purpose of this sub-clause a repeated breach shall be interpreted as two or more breaches of the same provision of this agreement by the Franchisee or the Individual during any calendar year".

The evidence

[6] In accordance with the interlocutor dated 26 May 2011, witness statements or affidavits were lodged on behalf of both parties, to stand as their evidence in chief. I do not repeat the contents of these here. I heard evidence from eleven witnesses, each of whom adopted their statements or affidavits (or, in the case of the two accountants, their reports).

[7] Mrs Irene Henderson spent 2 years at college and obtained a catering qualification, and thereafter worked as a chef. She began to work for the defenders in about 1999, becoming their general manager, with her main responsibility being the management of Zanre's chip shop in Mintlaw. On 1 September 2005 she set up the pursuers through her accountant, John Hannah, and the pursuers entered the Franchise Agreement with the defenders, together with the associated lease of the Mintlaw premises. The pursuers' accounts were prepared by Mr Hannah each year. She agreed that she had instructed Mr Hannah to prepare a report on the pursuers' claim for loss of profits from the termination of the Franchise Agreement (No.6/17 of process), but when she was asked whether she agreed with the projections to August 2009 and subsequent years, contained in Appendix A of that report, she observed that her understanding of accounts "doesn't go to much".

[8] Mrs Henderson had no way of knowing whether the defenders were overcharging the pursuers for the supplies which they provided. Clause 8.2.2 of the Franchise Agreement required the defenders to charge no more than a 5% mark up on the cost price to the defenders of all supplies to the pursuers; however, the defenders' invoices contained no breakdown of the cost price of the goods to them. This was the case throughout the whole period of the franchise. She constantly made requests to Mr Mair and to the defenders' office staff (including Susan Bruce and Linda Mair) requesting that they provide a breakdown of their costs, but she was never given this. The defenders provided the pursuers with invoices on a monthly basis, and each month Mrs Henderson made these requests, both in person and by telephone. Some of the goods supplied by the defenders would be delivered to the pursuers' shop by van, and Mrs Henderson would collect other items herself from the defenders' central store.

[9] Under reference to the documents at pages 108 - 476 of folder 3, Mrs Henderson explained the system which was operated for the ordering and delivering of supplies from the defenders' central store to the Mintlaw premises. The pursuers obtained about 75% of their supplies from defenders; they sourced some of their own fresh fish from elsewhere, along with a variety of other goods. They had always done this. Each evening the pursuers would send by fax an order sheet to the defenders' central store, listing what items they required for delivery on the following day. (Page 113 of folder 3 was an example of such a sheet). After goods were delivered on the following day, Mrs Henderson would check that all the items which had been ordered were in fact supplied, and the quantities supplied, and would note any shortfall. Sometimes a particular item was not supplied at all, or there was a shortfall between the quantity ordered and that supplied. If goods were required urgently, or Mrs Henderson was visiting the defenders' premises in Peterhead anyway, she would sometimes collect these goods herself from the central store. On other occasions goods which were not supplied or under supplied would be reordered for delivery on another day. Mrs Henderson did not know whether or not the pursuers were charged by the defenders for items which were not supplied or under supplied. The lists of goods under supplied or not supplied (e.g. pages 108 - 112, which related to the order sheet page 113) were prepared by Mrs Henderson at the request of her solicitors for the purposes of this litigation. They prices shown on these lists came from invoices in her possession and her knowledge of the trade. Despite her repeated requests for these, she never received any invoices from the defenders showing the cost price to the defenders of individual items, and the percentage mark‑up applied by them. At the date of the proof Mrs Henderson still did not know what she had been charged for, and she had never been provided with proper invoices.

[10] In the period of about 10 days in January 2009 between the date on which the defenders ceased to supply the pursuers and the date on which the pursuers ceased their involvement with the Mintlaw shop, the pursuers obtained all of their supplies from elsewhere. Mrs Henderson noticed that the pursuers' cost of supplies during this period was about half of what it had been when the defenders were providing the majority of the pursuers' supplies.

[11] There was a public house adjacent to the chip shop in Mintlaw called The Shak. Mrs Henderson said that there had been problems with broken glass outside the pub; she discussed these problems with Mr Mair, who said that the only solution would be to take over the lease of the pub. He told her that it could be combined with the chip shop into one business. The defenders took on the lease of the pub, and although there was no formal agreement in this regard, Mrs Henderson agreed that the pursuers would manage the pub and operate both the pub and the chip shop. The pursuers did this from December 2007 until 31 August 2008. The arrangement was not profitable, and the pursuers' business lost money as a result. The pursuers' accountant Mr Hannah told Mrs Henderson that the pursuers had lost about £17,000 in the eight month period during which they operated the pub, so Mrs Henderson ended her involvement with the pub at the end of August 2008. By this time the pursuers owed the defenders about £50,000. Mr Mair told her that she should continue to pay ongoing costs associated with the pub, such as the monthly satellite television subscription, and these payments would be deducted from the pursuers' liability to the defenders

[12] In about October 2008 the police carried out a spot check on the pub. Mrs Henderson was socialising with friends in the pub at the time. She was called to see the local police inspector who told her that her behaviour was inappropriate for the nominated person of the pub. She explained to him that she was not the nominated person and that she had had no involvement in the management of the pub since 31 August 2008. She then told Mr Mair what she had told the police inspector: he was angry with her and persuaded her to retract her statement that she was not the nominated person in respect of the pub.

[13] Thereafter the relationship between Mrs Henderson and Mr Mair deteriorated. He found any grounds to complain about the business, such as that the windows were dirty or that there was rubbish not placed in the bin. Mrs Henderson was not aware of any complaints from customers; in particular, she was not aware of a complaint from Macduff Shellfish (Scotland), nor David Smith Contractors, nor from Mrs Duthie, Mrs Jennings or Mrs Leitch. No complaints from these customers were ever brought to her attention, and Mr Mair, Susan Bruce and Linda Mair did not contact her about any complaints from these customers. She had never had any negative dealings with the environmental health department, and indeed she had been awarded the Eat Safe Award in 2006.

[14] Mrs Henderson did not accept that any of the four grounds for termination contained in the letter from the defenders' solicitors to the pursuers dated 12 January 2009 were justified. With regard to the claim that the pursuers failed to make and maintain payment of the service charges due under the Franchise Agreement, she observed that towards the end of the parties' relationship the defenders' figures were merely estimates and were not truly payable. It was all very confusing; after the pursuers ceased to be involved with The Shak pub, and their financial circumstances deteriorated, Mr Mair told her to order supplies only from the defenders, and not to pay any other creditors. He told her that the sums paid by the pursuers in respect of continuing obligations in relation to the pub would be credited against their liability for other amounts due to the defenders. He indicated that he was happy to allow the pursuers time to pay, but the pursuers were never told how much they were required to pay, nor was any period of time for payment ever agreed.

[15] Mrs Henderson did not regard the second ground of termination, namely the purchase by the pursuers of products from other sources, as a breach of the Franchise Agreement, because she had always used other suppliers for some products, and the defenders had never objected to this. In particular she had used a different supplier for much of her supplies of fish and frozen products. Mr Mair was aware of this and never objected to it.

[16] There was no merit in the third ground of termination, because Mrs Henderson devoted her whole time to the business. Her home was within walking distance of the shop. Neither was there any merit in the fourth ground - the defenders never made her aware of any complaints from clients in relation to inferior quality and service.

[17] Mrs Henderson was shown the statement of Mr Craig Hooper; she agreed that he had worked for her in the chip shop from late 2007 until the end of the pursuers' franchise, initially in the shop, then in the pub and thereafter again in the shop. She did not accept one word of what Mr Hooper said in his statement. Her explanation for his giving false evidence was that she accompanied him on one occasion to a police station in Fraserburgh in relation to an allegation about damage to, or theft from, a vehicle. She was present when he was interviewed by the police; he had told her a different story when they were together in the car driving to Fraserburgh from the story he gave to the police. After the police interview she told the police that he had lied to them. He was now trying to get back at her for this.

[18] Mrs Henderson was also shown the statement of Susan Margaret Bruce; she disagreed with the contents of this statement. She could not give any explanation as to why Susan Bruce should lie in this statement. Susan Bruce was the person Mrs Henderson had requested on many occasions to give her itemised invoices, and these requests were never met. Susan Bruce had worked for the defenders for many years.

[19] If the Franchise Agreement had not been terminated by the defenders, the pursuers would have continued to trade throughout the period of the Franchise Agreement. The pursuers had installed a new fry range in the premises at a cost of about £40,000, and had carried out other decorative improvements to the premises.

[20] In cross‑examination Mrs Henderson accepted that the averments in article 4 of the summons had been drafted on her instructions, that these were inconsistent with the terms of the witness statement which she had adopted, and that her statement was incorrect. She agreed that the pursuers were invoiced monthly by the defenders, and that at the end of each month the arrangement was that the pursers would send a fax to the defenders stating their turnover for the past month. There was then a meeting between her and Mr Mair, at which she was issued with three sets of invoices, one for VAT goods, another for non‑VAT goods, and the third for service charge. The invoices were discussed at this monthly meeting.

[21] The system whereby the pursuers ordered, and the defenders delivered, goods was as follows (the statement for 1 December 2008, page 113 of volume 3, being used as an example). Mrs Henderson would fax an order to the defenders' central store each evening, for goods to be delivered on the following day. The figures in the columns headed "stock" and "order" were in Mrs Henderson's handwriting; the figures and marks in the column headed "cost" were not hers but were inserted by whoever was working in the Mintlaw shop on the following morning. It was put to her that Susan Bruce stated in her statement that the pursuers would only be charged for the items and quantities marked on the sheets, but Mrs Henderson said that she did not know what she was being charged for, nor did she know if she was being overcharged or not. She agreed that she had the opportunity to raise questions with the defenders about quantities delivered, and that she would in fact raise these questions. She also agreed that if the item was in stock with the defenders, she would often go into the defenders' warehouse and collect the items. This was done on the basis of mutual trust, and having collected items she would leave a signed note in the defenders' office of what she had taken. She had no way of knowing if she was being charged for items which had not been delivered or not - she never received a credit note and she was just assuming that she had been charged.

[22] With regard to the pub, it was Mr Mair's idea to run the two businesses as one. However, the pursuers did not run the pub under the Franchise Agreement, and no service fees were paid in this regard. There was no agreement between the parties relating to the pub. Mrs Henderson agreed that the passage in paragraph 4 of her affidavit about her conversation with Mr Mair regarding the negative financial effect of running the pub, and Mr Mair's solution to this, could have been in the late summer of 2008. She was sure however that Mr Mair agreed to give the pursuers a period of credit, or time within which to make payment of the sums which the pursuers were due to the defenders, although no time limit was ever specified. This was on condition that the pursuers obtained all their supplies from the defenders. Despite this, the pursuers did not obtain all their supplies from the defenders; with Mr Mair's agreement, Mrs Henderson continued to purchase much of her fish from other suppliers. Although Mrs Henderson stopped operating the pub at the end of August 2008, the arrangement for credit with the defenders continued thereafter.

[23] Mrs Henderson denied that Mr Mair had a conversation with her in September 2008 suggesting that she should try to reduce her debts to other suppliers. On the contrary, he told her that she had to pay him and not any other suppliers. He said "Don't pay a penny to anyone else, just me". However, she did pay her other suppliers, without Mr Mair's knowledge.

[24] Mrs Henderson blamed the financial problems which the pursuers suffered on her involvement in running The Shak pub - she did not consider that it was anything to do with the way she ran the chip shop. The pursuers carried out refurbishment works in late 2007 which resulted in relocation of part of the seating area, but the capacity remained the same. Throughout the period of the agreement she was involved in frying and in doing other duties. It was not correct that she just turned up in the morning to collect the cash from the till. She disagreed with Mr Hooper's evidence - he was only the customer assistant and she was solely in control of wages. She denied that she gave staff wage rises too readily although she accepted that the actual increase in wages shown in appendix A to the financial projections (which rose from £85,769 in the year to August 2006 to £107,828 in the year to August 2008) was a quite remarkable increase. Even towards the end of 2008 she was always able to pay herself, and she denied that there was ever a time when staff went unpaid. In the year to 31 August 2007 she received a salary of £6,500 and a dividend of £40,000; in the following year the equivalent figures were £6,500 and £6,000, and in the period from 1 September 2008 to 15 January 2009 the equivalent figures were £2,500 and £10,500. On 21 January 2009 she signed a Trust Deed for creditors. Several of the liabilities included in the estimated statement of her affairs as at that date related to personal guarantees which she had given in respect of the pursuers' business (e.g. £22,000 in respect of Elite Shopfitters, which related to refurbishment works to the chip shop, and £65,000 to The Royal Bank of Scotland which related to the pursuers' business overdraft).

[25] Mrs Henderson stated that paragraph 4 of her affidavit should be altered to state that by 31 August 2008 Mr Mair told her that the amount which she owed was about £50,000. With reference to paragraph 6, she stated that the defenders began to press for payment of the sums owed by the pursuers in about October 2008. At the end of December 2008 Mr Mair told her that she had to clear the pursuers' debts to the defenders, but he never stated to her what the amount of the debt was. She accepted that she had received invoices from the defenders in respect of the licence fee due each month (those dated 31 August and 30 September 2008, pages 82 and 85 of volume 4, being examples), and she also received statements from the defenders (that dated 6 January 2009, page 100 of volume 4, being an example). She did not agree that the figures for the licence fee had to be an estimate, because she had not given the defenders the pursuers' monthly turnover figures - she was giving the defenders monthly turnover figures regularly. It was put to her that even if estimated figures were removed from the statement, there was still a balance due by the pursuers to the defenders; Mrs Henderson accepted this, but stated that she could not be sure what that balance was. On 6 January 2009 the pursuers did not receive deliveries from the defenders so they started to source products from other suppliers; on doing this Mrs Henderson realised that large savings could be made ordering supplies from elsewhere.

[26] In re‑examination Mrs Henderson was asked to confirm her position about overcharging by the defenders. She stated that she did not know for what she was being charged, as she was only given an itemised price for fish, chips, ice‑cream and mixture. On balance she believed that she was being overcharged, but she reached this view on the basis of what John Hannah told her. She was asked to explain why wages in the chip shop had increased so markedly between 2007 and 2008, and she stated that this was because she was having to work in the pub, so she had to employ somebody else in the chip shop. She accepted that during the summer of 2008 the pursuers had difficulties in paying other creditors; it was at this time that Mr Mair told her to stop ordering from other suppliers and that she was not to pay anybody else but only the defenders.

[27] Mr Rodger Grant Morrison adopted the terms of his affidavit (No. 6/24 of process). Until 2001 he had owned and operated the chip shop at Mintlaw, as well as the pub next door. He sold the chip shop business to the defenders, and leased the pub premises to another tenant. He told Mr Mair that if he ever decided to sell the pub, Mr Mair would have the right to purchase it. However, he never decided to sell.

[28] At some point Mr Morrison was told that work had commenced to knock a door through from the pub to the chip shop. He could not remember when he heard about this, although he understood that Mrs Henderson was running both the pub and the chip shop when this happened. Mr Mair was Mr Morrison's tenant and required his consent before carrying out any works to the pub. No such consent had been sought, so he was instructed to stop the works. The works were stopped, and the property reinstated.

[29] Mr Mair was married to Mr Morrison's niece; Mr Morrison found him to be very ambitious, with a lot to learn. He described Mr Mair as bullying and with an unstable attitude. At a time when Mr Morrison was suffering from emotional difficulties, he thought that Mr Mair took advantage of his mental state at the time. He described Mr Mair as flying off the handle easily, and being well known for remonstrating with others; he was far from cool, calm and collected.

[30] Mr John Nelson Bell had been an environmental health officer since 1973. He inspected the chip shop premises in 1997 and again in January 2006 and was satisfied that they met the criteria for the Eat Safe Award. The only record that he had of any complaint relating to the chip shop premises was that recorded in the Enforcement History Summary which he had prepared, and which occurred in December 2007. This complaint related to building and electrical works which had been left uncompleted; the problem was resolved by the following day. He would have expected members of the public to make complaints to the local authority if they had concerns about environmental health in the premises; no such complaints had been received by the local authority in relation to these premises.

[31] Mr David Harrison operated a business selling fireplaces and stoves from premises across the road from the chip shop. Between 2005 and about early 2009 he would purchase a fish supper from the chip shop every Thursday. As far as he was concerned, the standard of food and service was good, and the cleanliness of the premises was good. He was not aware of any complaints being made to the franchisor. However, he agreed that he was not in a position to be aware of whether or not such complaints were made.

[32] Mr John Hannah was a certified accountant and a partner of SBP, Chartered Accountants and Business Advisors in Peterhead. He adopted his affidavit dated 6 October 2011 as his evidence. He had known Mrs Henderson since his school days, and in 2005 she approached him and asked him to form a company on her behalf in order to enter a Franchise Agreement with the defenders in respect of the fish and chip shop in Mintlaw. He agreed to do this, and arranged for a company to be formed for her called Irene Henderson Limited. On Mrs Henderson's instructions he prepared a business projection for the pursuers; most of the financial information for this was provided by Mrs Henderson herself. The pursuers required finance from Mrs Henderson's bank, and she was required to act as guarantor for the pursuers' debt. The business projection which Mr Hannah prepared showed a viable business; he remembered that Mrs Henderson was very keen to go ahead with the Franchise Agreement. Mr Hannah prepared the trading accounts for the pursuers for taxation purposes throughout the period of the Franchise Agreement. For the purposes of the present litigation he also prepared reports in support of the pursuers' claim for losses from the termination of the Franchise Agreement. These projections were based on the figures to 31 August 2007; this was because the figures for the previous and subsequent years were abnormal, and the margins in 2007 were more acceptable. In preparing these projections he had the advantage of looking at comparable figures for four other fish and chip shop businesses in the north east of Scotland for whom his firm acted. He disagreed with the view expressed by Judith Scott, the expert accountant for the defenders, that the economic climate would have contributed to the pursuers' inability to continue trading even if the agreement had not been terminated; the other four chip shop businesses are all trading well, and there is a strong local market. If the pursuers had not been overcharged, their business would not have been in difficulties. In general, the Aberdeenshire economy has been sheltered from the economic crisis which has affected the rest of the UK, and a wide variety of businesses in Aberdeenshire have traded profitably over the last several years.

[33] The profit margins which the pursuers achieved in their first year of trading were acceptable, but in the second year these dropped. Mr Hannah pointed this out to Mrs Henderson, and she could not provide any explanation for this. Mrs Henderson told him that she obtained the vast majority of the pursuers' supplies from the defenders, and she could not be sure that she was being charged correctly. Thereafter Mr Hannah saw the invoices submitted by the defenders to the pursuers; he did not consider that these contained enough detail. They ought to have shown the defenders costs, including quantities of goods supplied, the price per item to the defenders, and the 5% mark up which the defenders were entitled in terms of the Franchise Agreement to charge the pursuers. Mr Hannah discussed this with Mrs Henderson in November 2007, and she told him that she would obtain more detailed invoices from the defenders. After this, Mr Hannah had no further involvement with the issue of invoice content during the remainder of the operation of the Franchise Agreement.

[34] In the accounts to 31 August 2008 (No. 6/5 of process) the profit and loss figures for both the chip shop and the pub were shown together; there was a loss for both the chip shop and the pub. The accounts showed a loss for the whole business that year of £22,469, of which £15,471 was attributable to the pub and the balance to the chip shop. Mr Hannah considered that the chip shop losses in that period were caused by Mrs Henderson working in the pub and so having to employ somebody in the shop; there were also roadworks around the shop at that time, and refurbishment works. Mr Hannah's firm did prepare accounts for the pursuers for the period from September 2008 to January 2009, but Mr Hannah described these as "very sketchy"; the information on which they were based was not complete and he did not place reliance on them.

[35] Mr Hannah reached the view that from the start of the second year of the pursuers' trading the defenders had begun to overcharge the pursuers. Initially his evidence was that he could not put an accurate figure on this but he would estimate the extent of overcharging at a minimum of £25,000 per annum. However, he developed this aspect of his evidence. The pursuers' gross profit margin was 51.9% for the year ending 2006, and 47.8% for the following year. On the basis of the four other chip shops in the area which he used as comparators, Mr Hannah considered that the pursuers should have achieved a gross profit of 61%. This was in line with the gross profit achieved by the defenders. Applying a 61% gross profit to the pursuers' turnover in the year to 31 August 2007 and then making provision for deduction of the service fee indicate that the pursuers' gross profit in that year was £26,725 lower than it should have been. In the following year to 31 August 2008 the pursuers' gross profit was £23,301 lower than it should have been. Mr Hannah concluded that these figures represented the extent of overcharging by the defenders. However, he accepted that other factors apart from overcharging could have influenced these figures - for example, wastage, or under declared sales which were not put through the pursuers' accounts. Moreover, Mr Hannah had not had access to the defenders' source documentation to check the accuracy of the purchase prices incurred by the defenders.

[36] With regard to Mr Hannah's projections for the pursuers' profits if the agreement had not been terminated, he spoke to the terms of his reports, as modified by the joint statement dated 3 February 2012 signed by Ms Scott and Mr Hannah.

[37] In cross examination Mr Hannah explained that the views which he gave in his report (no 6/17 of process) regarding Mrs Henderson's skills and ability to run a successful fish and chip business were based on the fact that she was doing the same job as she had previously done. She demonstrated that she had control over her wages, certainly during the first year. He accepted that wages increased from £85,769 in 2006 to £94,237 in 2007, but the business was still profitable before taxation. After Mrs Henderson ceased to be involved in running the pub he expected that the pursuers' wage bill would diminish, as it would no longer be necessary to employ someone to replace Mrs Henderson in the chip shop. Although Mr Hannah had signed the joint statement dated 3 February 2012 which stated that the experts were agreed that the accounts for the period from 1 September 2008 to 15 January 2009 were not an accurate reflection of the final periods' trading, which was likely to be a loss, Mr Hannah departed from this view in evidence and disagreed that the final period was likely to be a loss. He accepted that some of the bills which were paid post 31 August 2008 (such as the Hydro Electric invoice for £2,650.92 and the Sangs invoice for £1,111.26) related to the period before 31 August 2008. He agreed that the sum which Mrs Henderson received by way of salary and dividend between 1 September 2008 and 15 January 2009 equated to annualised figures of about £7,500 by way of salary and about £41,000 by way of divided.

[38] Mr Hannah was asked what his position in evidence was regarding the possible profit of the pursuers if they had continued to trade; he stated that he was moving away from the position in his previous reports and as summarised in paragraph 4 of the joint statement. He had prepared another short report which was not before the court but which he had sent by e mail to Ms Scott on the week before the proof. This report included information from the defenders' profit and loss accounts for the years 2004 to 2010.

[39] Mr Hannah agreed that his approach to overcharging was a "top down" approach. He began by deciding what gross profit percentage the pursuers ought to have achieved, and then ascertained what gross profit percentage they did in fact achieve, and the balance might possibly be caused by the defenders' overcharging. He agreed that there were many possible explanations for the difference between the pursuers' actual gross profit percentage and what he considered should be the "proper" gross profit percentage. One such explanation was excessive wastage. Another possible explanation was overcharging by other suppliers - although, while Mr Hannah conceded that this was theoretically possible, his understanding was that the pursuers did not buy from other suppliers. If they did, this would be a possible explanation. The manner in which Mrs Henderson was running the pursuers' business, and factors such as refurbishment and roadworks, might affect the total sales figures but should not affect the profit margins.

[40] Mr Hannah agreed that the wages incurred by the defenders in chipping potatoes which were then sold to the pursuers formed part of the production costs, and were not a purchase on which the 5% mark up would apply. He agreed that all the four comparator chip shops were smaller than the pursuers' business. The defenders' gross profit percentage was 64% but he had amended this to take account of the 5% profit margin which the pursuers were charged, which brought this figure down to 63.2%. He agreed that in the years 2006 to 2009, the defenders' average gross profit percentage was between 60% and 65%, and that account then required to be taken of the service fee.

[41] In re-examination, Mr Hannah stated that the factors that he took into account when reaching the gross profit percentage of 61% which he believed the pursuers should have been making were: (1) the pursuers' gross profit percentage in the year to August 2006, (2) the pursuers' initial projections for 2007, and (3) the margins achieved by the four chip shops which he used as comparators.

Having since seen the figures for the defenders, he considered that the gross profit which the pursuers should have achieved should have been higher than this. The defenders' gross profit margin over the period of the pursuers' trading under the Franchise Agreement averaged at 60.5%; from this the service charge of 2.5% fell to be deducted, resulting in a figure of 58%.

[42] Edna Elizabeth Adams worked in the chip shop on a part-time basis over several periods, before and during the time that it was operated by the pursuers under the Franchise Agreement. She adopted the terms of her affidavit (no 6/25 of process). She stopped working at the chip shop a few days after the pursuers ceased to operate it.

[43] During the period that the pursuers operated the chip shop, it was open from about 9am until about 11pm seven days each week. Edna Adams worked there generally three days per week, between 9am and 3pm. Mrs Henderson was always there for a time in the mornings, and would do the frying. Mrs Adams got on well with her, and thought that the business was doing well. She did not enjoy working for Mr Mair, whom she found a hard task master who made her feel small. She remembered a time when Mrs Henderson was involved in running both the chip shop and the adjacent pub. At about the same time Mrs Henderson agreed to help Mr Mair with the running of his chip shop in Banff. Her involvement in the Banff shop was probably for fewer months than her involvement in running the pub, but she was at Banff quite a lot. She would arrive at the Mintlaw chip shop every morning, and then would set off for Banff just after she had arrived at Mintlaw.

[44] In cross examination Mrs Adams accepted that she was on friendly terms with Mrs Henderson, and that there might be benefits to the business of being a hard task master. Being too relaxed might cause problems for the business. She agreed that Mrs Henderson was relaxed, and allowed staff to take puddings and small items of food without charge after the school children had been served their lunch. Mrs Adams was not paid all the wages which she was due in her final month of working in the chip shop, but she had always been paid before then.

[45] Mr Edward Mair was the sole director of the defenders. He adopted his two witness statements as his evidence, subject to two corrections at pages 24 and 27.

[46] Mr Mair explained the defenders' system for invoicing the pursuers as follows. Each month the defenders would send three invoices to the pursuers, one being for the service charge, one being for vatable goods and the third being for non-vatable goods. Examples for 31 December 2007 were pages 290-292 of volume 5. Page 291 was the invoice for non-vatable goods, including fish and chips. This was prepared by Susan Bruce. The number of stone of fish would be taken from a spreadsheet derived from the central daily sheets and weekly sheets; the price of £44 per stone was taken from the invoices from the defenders' fish supplier and averaged over the month. The price which the defenders were charged for fish fluctuated daily. This was apparent from the invoices from Nolan Seafoods (UK) Ltd to the defenders (invoices and statements for the period covering 6 November to 21 December 2007 being numbers 11-50 in volume 5, showing the price per stone of haddock fillets varying between £38 and £46). Mrs Henderson could have seen these invoices at any time in the defenders' offices, but she never asked to see them. The pursuers did not buy all their fish supplies from the defenders, but purchased some from another supplier in Aberdeen named King Foods, who dealt with the wholesale deepfreeze fish market.

[47] The second element on the invoice dated 31 December 2007 from the defenders to the pursuers (page 291 of volume 5) related to 235 baskets of chips. The defenders would purchase bags of Maris Piper potatoes from Buchan Potato Growers Ltd, and one of the defenders' employees made these into chips. An example of the potatoes purchased by the defenders was the invoice dated 1 November 2007, (pages 218-220 of volume 5). Potatoes were purchased by the defenders in 25 kilogram bags, at the prices shown on the invoice. They were then peeled and chipped into 30 kilogram baskets, which were approximately equivalent to 1.5 bags of potatoes. Mr Mair had prepared a document (which was typed by Susan Bruce) to explain the method by which the defenders reached the price charged to the pursuers for potatoes (see page 107 of volume 2). This showed the cost of potatoes and the costs of labour involved in converting them into chips and delivering them to the pursuers. The invoice dated 31 December 2007 showed that 235 baskets of chips were delivered to the pursuers in that month; the cost per basket of £13.78 reflected the material costs for potatoes, and labour and delivery costs involved in making the chips.

[48] The sum of £4,138.32 shown on the invoice dated 31 December 2007 for "goods non VAT" was taken from the daily and weekly central ordering sheets and put on the monthly statement. Page 316 of volume 5 was an example of the monthly total sheet which was provided to the pursuers, and page 295 was an example of the central weekly totals. The figure for ice cream goods on the invoice at page 292 was derived from the figure on the monthly totals sheet (page 316). The weekly and monthly totals on sheets 295 and 316 showed only what was actually delivered to the pursuers. Items that were ordered on daily sheets but were not delivered would be crossed out, and a tick would be placed against any item which was delivered. It was only those items against which a tick appeared that found their way onto the weekly and monthly totals and thence onto the invoices to the pursuers. There was therefore no question of the pursuers being overcharged, or being charged for goods which were not supplied or under supplied.

[49] Mr Mair explained that from about June or July 2008 he began to issue running statements to the pursuers showing what they owed to the defenders, because the pursuers were constantly in arrears of payments and Mr Mair wanted Mrs Henderson to keep in touch with what she had paid, and which payments related to which invoices. The statement dated 6 January 2009 (page 100 of volume 4) was an example of such a statement. This showed (amongst other things) that the sum of £288.32 was still outstanding as at 6 January 2009 in respect of invoices 208 to 223 dated between May and September 2008. Invoice 225 was paid on 9 December 2008, but invoices 224 and 227 to 229, dated September and October 2008 remained unpaid. Invoices 230 to 238 were marked as "estimate" because the pursuers had failed to give the defenders their monthly turnover figures for each month, so that the defenders could not calculate precisely the licence fee. This information about turnover was normally provided by the pursuers in the first day or two of the following month - so the November licence fee should normally have been capable of calculation by about 2 December 2008, but no such information was provided by Mrs Henderson, and the defenders were still waiting for this in January 2009. The reason that invoice 231 for fish and chips in November 2008 was marked as "estimate" was that Mrs Henderson would normally come to the defenders' offices for a reconciliation meeting in the first few days of the following month, and if she had any questions about quantities delivered, she would give details to Susan Bruce who would check these. Mrs Henderson did not do this in early December 2008. The defenders had received no payment for any of the invoices which were not marked "paid" on this statement. Mr Mair considered that the pursuers owed £69,549.44 to the defenders as at 6 January 2009.

[50] With regard to complaints, Mr Mair stated that several important customers who had been using the Mintlaw shop for many years had written to the defenders complaining about a deterioration in the quality and service at the chip shop in the course of 2008, and asking Mr Mair to do something about it. Mr Mair received such a letter of complaint from Macduff Shellfish (Scotland) Ltd and also from David Smith Contractors. Employees of these businesses were customers of several of the defenders' outlets and the complaints related to the standard of food and service at the Mintlaw shop. Mr Mair told Mrs Henderson about these complaints in the course of his conversations with her regarding the day to day running of the business, but he could not remember what her response was. Several other people complained about the standard of food and service at the Mintlaw chip shop; these complaints were made before and after July 2008. He accepted that it was not unusual to receive complaints from time to time, but these customers were important to the business, they had a large workforce and they had been customers for many years. Mr Mair was quite certain that he raised this in conversation with Mrs Henderson, and Susan Bruce or one of the other employees of the defenders would have raised it with Mrs Henderson too.

[51] With regard to the issue of the pursuers ordering from other suppliers, Mr Mair reiterated his position as stated in paragraph 31 of his first witness statement. Far from telling Mrs Henderson to stop paying her suppliers, he told her that she should reduce her debts to them. The defenders' other outlets depended on supplies from these suppliers, and Mr Mair did not wish the reputation of Zanre's to be damaged by the pursuers' indebtedness. For example, the defenders obtained supplies of fish from King Foods and from Colbeck, Sangs and others. Mr Mair told Mrs Henderson that she should pay these suppliers, and in future should obtain all her supplies from the defenders. He understood that the pursuers were obtaining all their supplies (apart from cleaning materials) from the defenders. He expected the sums which the pursuers owed to their major supplies to be falling, but they were not, and he received several phone calls from suppliers asking if there was a problem with the Mintlaw shop. The pursuers' debts were not reducing. In November 2008 Mr Mair met with Mrs Henderson and looked at her accounts; it was apparent that her debts had not reduced significantly at all.

[52] With regard to Mrs Henderson's management of the shop during the Franchise Agreement, Mr Mair stated that before the pursuers began to operate the shop in terms of the Franchise Agreement, the defenders had a clear policy listing which products staff could use for their meals, such as products nearing their "sell by date". By 2008 Mr Mair stated that the pursuers had departed from this policy, and that there was a "free for all" system for staff taking meals and drinks.

[53] In cross examination Mr Mair denied that he ever asked Mrs Henderson to help with the management of the Banff shop; that shop was going to be franchised, and she was interested in taking the franchise, which is why she went to look at it in the early part of 2008. With regard to purchasing from other suppliers, Mr Mair accepted that, at least until about the middle of 2008, the defenders did not object to the pursuers purchasing from other suppliers. He denied that Mrs Henderson ever made requests, far less repeated requests, for the defenders to provide the pursuers with detailed invoices specifying the prices which the defenders paid for supplies, the quantities supplied to the pursuers and the 5% mark up charged to the pursuers. He accepted that the invoice dated 31 December 2007 (page 291 of volume 5) specified a certain number of stone and a price for fish, but it did not show the cost to the defenders nor the 5% mark up to the pursuers. He accepted that the weight of the basket was not specified, but he denied that the average weight of a basket was 20 kilograms. Each basket weighed 30 kilograms, and this was not too heavy to handle safely or efficiently. He did not agree that the invoices were inadequate or showed insufficient detail. The invoices were paid by the pursuers at the monthly reconciliation meeting attended by Mrs Henderson, when all the background information to the invoices was available for inspection.

[54] It was put to Mr Mair that Mrs Henderson had supplied all information necessary to enable the invoices marked "estimate" on the statement dated 6 January 2009 to be confirmed, but he did not accept this. He denied that Mrs Henderson had asked him to provide detailed invoices, and maintained that his accountings systems were adequate. He had not investigated the environmental health history of the Mintlaw shop, and he accepted that the only involvement of the environmental health department was in December 2007/January 2008, although he did not agree that all the problems were rectified in 24 hours. He was certain that spreadsheets and other information were available to Mrs Henderson at his monthly meetings with her - it was not correct that she was never offered these throughout the period of the franchise. The defenders maintained a robust system to ensure that the products ordered by the pursuers were actually delivered.

[55] With regard to complaints, Mr Mair accepted that he was unable to produce the letters of complaint, but Macduff Shellfish and David Smith Contractors had definitely complained about the Mintlaw premises, and he regarded these complaints as a serious matter. Immediately the defenders received a letter of complaint, Mrs Henderson was telephoned to inform her of this. With regard to the allegation that there were under-deliveries to the pursuers, Mr Mair referred to paragraph 19 of his first statement and reiterated that Mrs Henderson would simply go to the defenders' warehouse and collect items which had not been supplied to the pursuers. She would sign a chitty, and Mr Mair would then tick the goods off on the faxed order. This system worked on the basis of mutual trust.

[56] Mr Mair denied bullying Mr Morrison and taking advantage of his vulnerable state. He knew that any works to knock a hole in the wall between the two premises would require Mr Morrison's consent as landlord, but Mr Mair denied starting such works without his consent. He attended meetings to discuss plans for changes to the premises, because the defenders owned the chip shop premises and were the tenants of the pub. The chip shop and the pub traded as one business for about 8 months, with the defenders' approval, but Mr Mair denied that he knew this would be unprofitable when the arrangement started. He agreed that in the period until August 2007, the Franchise Agreement operated to the satisfaction of both parties, but after the pub began to be managed by Mrs Henderson, financial problems arose for the pursuers. In about July 2008, Mr Mair and Mrs Henderson had a discussion about the pub and it was agreed that Mrs Henderson would cease managing the pub at the end of August 2008 and the parties would revert to the previous arrangements. Mr Mair never told Mrs Henderson that she was the nominated person for licensing purposes for the pub, as this was obvious to her and she knew it - she had to undergo training and obtain proper certificates in order to be the nominated person. He accepted that he bullied her to change her position to the police to say that she was the nominated person.

[57] Mr Mair denied that he agreed with Mrs Henderson that the pursuers would be given a reasonable time within which to clear their indebtedness to the defenders. With regard to the grounds for termination contained in the letter dated 12 January 2009, the pursuers did fail to maintain payment of the service charges due. Mr Mair accepted that the defenders had permitted the pursuers to purchase products from other sources for much of the duration of the Franchise Agreement, but this position changed in the latter part of 2008. With regard to the third ground of termination, Mrs Henderson did not devote her whole time and effort to the business. He denied instructing her to go to the Banff shop to dismiss the manager of that shop, and he denied that she helped to run the Banff shop between November 2006 and February 2007.

[58] In re-examination, Mr Mair stated that, with regard to clause 8.2.2 of the Franchise Agreement, he agreed to the pursuers obtaining supplies from other sources if this was beneficial to both parties; if it was not beneficial to both the pursuers and the defenders, the defenders required the pursuers to obtain all their supplies from the defenders. Mr Mair was aware that Mrs Henderson executed a trust deed for creditors on 21 January 2009; the defenders made a claim under that procedure, as did other suppliers to the pursuers such as Henry Colbeck Ltd. With regard to the complaint from Macduff Shellfish Ltd, the letter of complaint came from the HR director of that company; this letter stated that complaints had been made over a period to Mrs Henderson and nothing had been done about them. As far as Mr Mair was concerned, the Franchise Agreement was never varied; it applied right up to the moment of termination.

[59] Susan Margaret Bruce had been employed by the defenders as an administratrix since 2004. She adopted the terms of her witness statement. She was responsible for answering the telephones, issuing invoices, dealing with bills and correspondence and other office duties. She was responsible for invoicing the pursuers on a monthly basis. She prepared each of the monthly invoices, examples of which were pages 82-99 of volume 4. Initially there would be a reconciliation meeting attended by Mrs Henderson, Mr Mair and herself at about the beginning of each month to go over the monthly sales sheet, but by about the Autumn of 2008, Mrs Henderson stopped attending these meetings. Susan Bruce did not remember Mrs Henderson ever protesting or complaining about the lack of detail or specification on any of the invoices issued to the pursuers. The systems spoken to by Susan Bruce in her witness statement meant that there was no possibility of the pursuers being overcharged for goods or charged for goods which were not supplied or undersupplied. Although she could not remember exactly how much the pursuers owed to the defenders latterly, she remembered that the defenders were having great difficulty in obtaining payment from the pursuers.

[60] Susan Bruce did remember complaints about the Mintlaw shop, and particularly complaints from Macduff Seafoods Ltd.

[61] In cross-examination Susan Bruce agreed that the number of complaints were broadly the same in relation to each of Zanre's chip shop outlets - there was no particular preponderance of complaints relating to the Mintlaw shop. She did remember Mrs Henderson going to help run the Banff shop for a time, although she could not remember when. After this, the Banff shop was franchised. She was not aware of Mrs Henderson ever asking for the defenders' invoices to be more detailed; Susan Bruce always attached the weekly and monthly sheets to the back of the invoices before they were sent to the pursuers. If Mrs Henderson had asked for details of the costs of supplies incurred by the defenders, the quantities of goods, and the defenders' 5% mark-up, she would have been provided with this information. However, no such requests were made to Susan Bruce. She used to provide Mrs Henderson with copies of the original costing spreadsheets from her computer, but Mrs Henderson never used these. They were always available if she needed them.

[62] She did remember the complaint from Macduff Seafoods; she had looked for this but could not find it. There was a complaints file for complaints about all the Zanre's outlets, but she could not find this complaint.

[63] In re-examination Susan Bruce agreed that the complaint by Macduff's was an important matter for the defenders because of the number of meals served to employees of that company. Their complaint was that the food served at the Mintlaw shop was unable to be eaten.

[64] Susan Bruce stated that on several occasions she had to chase up Mrs Henderson to provide information about her turnover in order to enable invoices to be prepared. If this information was not available from the pursuers, she would prepare an invoice and mark it as "estimate". Mrs Henderson would give her figures for the amount of fish and chips which she had sold, and Susan Bruce would compare these figures with her own information. This exchange of information occurred in the first day or two of the following month. She recognised the statement dated 6 January 2009 (page 100 of volume 4) - she prepared this herself. She was asked why the word "estimate" appeared against all the invoices number 230-238; she explained that the information on which the licence fee was calculated should have been provided by Mrs Henderson but was not, and with regard to the other invoices for fish and chips and disposables, Susan Bruce had copies of the sheets showing the deliveries to the pursuers, and she was waiting for the pursuers to indicate how much of these deliveries they had used.

[65] Rachael McLean was a retired solicitor, formerly with Messrs Mason & Glennie. She adopted her witness statement as her evidence. She prepared the Franchise Agreement, and she also co-operated in the preparation of the letter dated 12 January 2009 terminating that Agreement. Each of the grounds of termination was included on the instructions of the defenders. Following this letter, the keys to the chip shop at Mintlaw were returned to her on 15 January 2009, and the pursuers vacated the Mintlaw premises that day.

[66] Craig Thomas Hooper was Managing Direct of Craig and Lee Trail Ltd. This company presently operates the Shak pub in Mintlaw, as sub-tenants of the defenders. Mr Hooper adopted his witness statement dated 2 November 2011 as his evidence in chief, subject to changing the dates in paragraph 2 to 2007. In cross-examination he stated that when he was employed by the pursuers first, he would have been aged 19. His business has had the tenancy of the Shak pub since August 2010. Neither the defenders nor Mr Mair have given his business any financial assistance. He had previous experience of managing a team of people, through a refurbishment contract he had with the council. It was put to him that Mrs Henderson had stated that she never gave him a management role in the chip shop; he disagreed with this. It was put to him that he travelled in a car with Mrs Henderson to Fraserburgh police station and in the course of this journey he gave an explanation of events which was untruthful and which differed from the version he subsequently gave to the police. He denied this in its entirety. He did not travel to the police station in a car with Mrs Henderson; rather, he met her at the police station. He explained the circumstances to her, and gave the same account to the police. He denied that he was being untruthful in his witness statement or in his evidence to the court.

[67] Mr Hooper stated that when he started at the Mintlaw chip shop it was a good business, and he was well trained by Mrs Henderson. However, things deteriorated, and both the quality of training and the service declined. Mrs Henderson spent less time behind the counter being involved "hands-on" in frying. Mr Hooper had previous experience serving food for large numbers of people single-handedly in a bingo hall, and he obtained a qualification in food hygiene in 2007. He had still not received payment by the pursuers of his wages for the month of December 2008.

[68] Judith Scott was a practicing chartered accountant having been admitted as a member of the Institute of Chartered Accountants of Scotland in 1986. She was the Forensic Accounting Director of BDO LLP, 4 Atlantic Quay, 70 York Street, Glasgow. She was instructed on behalf of the defenders to provide expert reports in relation to a claim for overcharging and a claim for loss of profits raised by the pursuers against the defenders. She adopted the terms of her three reports, the first being dated 11 March 2011, the second dated 6 May 2011 and the third dated 25 January 2012.

[69] The first report dated 11 March 2011 was concerned only with the pursuers' claim for overcharging. Ms Scott had access to all the defenders' records. She verified the defenders' purchase price of fish throughout the whole period of the Franchise Agreement, and illustrated this with reference to December 2007 (pages 1-289 of volume 5). Her findings were summarised at page 154 of volume 2. She found that over the course of the whole period of the Franchise Agreement the defenders overcharged the pursuers by a total of £1,831 in relation to fish. In relation to chips, Ms Scott verified the price to the defenders for purchasing potatoes for 12 out of the 36 months from February 2006 to January 2009 and then verified labour costs and invoice charges to the pursuers. In her third report dated 25 January 2012 (at paragraph 6.3) she concluded that the defenders undercharged the pursuers by approximately £36,000 for chips for the period December 2005 to January 2009. Adopting broadly the same methodology of verifying costs to the defenders and invoice charges to the pursuers, she concluded that the defenders undercharged the pursuers approximately £14,000 for the 33 months between November 2005 and October 2008 in respect of non-vat goods, and they undercharged the pursuers approximately £2,700 for the same period in respect of cleaning and disposables. In the result, rather than overcharging the pursuers, the defenders had undercharged them by approximately £50,900 in total over the period of the Franchise Agreement.

[70] Ms Scott did not consider Mr Hannah's methodology to be appropriate. Mr Hannah proceeded on the assumption that a particular gross profit percentage should have been achieved by the pursuers. There was no justification for such an assumption, particularly if based on the gross profit margins of other businesses of differing sizes and circumstances. This assumption was at odds with Ms Scott's own results which were verified against actual costs and invoices. Moreover, Mr Hannah assumed that the difference between the pursuers' actual gross profit margin and the hypothetical figure for the margin they should have achieved was only attributable to overcharging. This assumption was not well founded; there were several other possible explanations, including wastage, poor control of portion sizes, sales under declared or not put through tills; free meals to staff, or if the pursuers were buying products from different sources and the other suppliers were under supplying or over charging. The difference might also be explained by a different mix of sales (profit margins on take away sales being different from those on eat in sales). Each of these factors would require to be quantified and assessed in order to explain differing margins. This could only be done if the pursuers kept accurate and detailed management information, such as details of weekly wastage, and delivery notes. She did not believe that the pursuers kept such information. It was not produced in evidence and had not been shown to her.

[71] Turning to the question of the pursuers' likely profitability if the Franchise Agreement had not been terminated, Ms Scott remained of the view (as stated to be agreed between her and Mr Hannah at box 3 of No 50 of process) that the accounts for the period 1 September 2008 to 15 January 2009 could not be relied on as being accurate, but that the pursuers probably made a loss during this period. At best, they broke even. Looking to the summary in box 4 of No 50 of process, the pursuers' sales averaged about £440,000 over the three years from August 2006 to 2008. It was unrealistic to assume a 3% increase in sales on the 2007 figures until 2015, as Mr Hannah had done; for the reasons given in paragraphs 3.6 and 6.3 of her second report, she considered that £440,000 per annum would be a reasonable estimate of ongoing sales given the economic climate. This was more consistent with the trading performance of the defenders as summarised in the last page of No 50 of process, which showed that the defenders' sales increased by 14% in the year to 2007, but then decreased by 6% in 2008 and decreased by a further 9% in 2009. Although Ms Scott agreed with Mr Hannah's view that the Aberdeenshire area had been less severely affected by the economic recession than some other parts of the UK, she observed that there was anecdotal evidence that this was now changing and that the Aberdeenshire economy was beginning to suffer. There was a shortage of available credit there as elsewhere.

[72] With regard to Mr Hannah's comparators, it is always difficult to compare one business with another, particularly without full information as to all the businesses. Some of Mr Hannah's comparators are much smaller than the pursuers; there was no information available as to the quality of these businesses. Ms Scott considered that it was more appropriate to consider the historical position at the Mintlaw shop, and also to consider the performance of the defenders. Consideration of the relative performance of Mr Hannah's comparators highlighted the point that different factors may affect different business; between 2009 and 2010 sales at the first example remained almost unchanged, increasing by 0.88% whilst sales at the second example decreased in the same period by 16.81%.

[73] Mr Hannah took as his starting point the pursuers' sales in 2007; this was the highest sales figure ever achieved by the pursuers. To this he applied a compound increase of 3% until the end of the franchise. Neither of these approaches was justified. Ms Scott preferred her own methodology, which was to look for a reliable annual figure and then to consider an appropriate multiplier. Mr Hannah's figures required to be discounted to arrive at a net present value (see box 6 at page 8 of No 50 of process).

[74] The appropriate figure for gross profit margin was 49.5% because this was the average margin actually achieved by the pursuers over the period of the Franchise Agreement (see paragraph 2.1 of Ms Scott's second report). It was not appropriate to increase this, because there had been no overcharging by the defenders. The broad effect of the service charge was approximately 7.2%, and the mark up on costs of up to 5% was equivalent to a 2.5% impact on gross margins; these result in the pursuers achieving a gross profit margin of up to 9.7% lower than the defenders. Ms Scott accepted that there was an unexplained difference between the gross profit margins achieved by the parties, but this might be because the defenders were running a variety of businesses whereas the pursuers were running a single take away shop. Without any evidence of overcharging, there was no reason to assume that the pursuers would achieve the same margins as the defenders. The best method of estimating what margin the pursuers would have achieved if the Franchise Agreement had not been terminated was to look to the margins which they actually achieved in previous trading periods, ie 49.5%.

[75] The differences between Ms Scott and Mr Hannah on overheads, depreciation and interest were immaterial. However, there was a material disagreement as to the appropriate figure for inflation. Ms Scott reiterated that it was not necessary to take account of inflation, because the appropriate methodology was to find the net present value and then apply a multiplier to this. However, if the court is to have regard to inflation, the normal method of calculating inflation on cost prices is the cost price index. Applying inflation according to this index results in a compound increase of 3%, not the figure of 1.76% applied by Mr Hannah. If inflation is to be included in the figures, not only should sales be increased by 3% but overheads by 3% as well.

[76] Reverting to the question of whether the defenders actually supplied the quantities of goods for which the pursuers were invoiced, Ms Scott observed that as the pursuers had not kept delivery notes, this point could not be accurately verified. However, she was able to support each sales invoice (eg that for 31 December 2007, page 291 of volume 5) with the weekly and daily total sheets, so there was no basis for the complaint that there was insufficient vouching detail to support the invoices. On the issue of refurbishment works to the shop from December 2007, these might have affected not only turnover but also margins, if a higher margin was obtained on eat in business.

[77] Ms Scott retained real doubts as to whether the pursuers would have been able to continue trading, even if the Franchise Agreement had not been terminated, for the reasons set out in section 5 of her second report. She estimated that the net liabilities of the defenders as at 15 January 2009 were £20,137. Having regard to the list of liabilities included in the estimated statement of Mrs Henderson's affairs as at the date of her trust deed (pages 62 and 78 of volume 4) it appeared that the pursuers had a potential deficit as at 28 January 2010 of more than £100,000. Ms Scott did not believe that the pursuers would have been able to trade out of this position.

[78] In cross examination Ms Scott accepted that it would be reasonable to take an average between her figures for overheads, depreciation and interest in box 4 of No 50 of process, and Mr Hannah's figures. Adopting such an approach would result in an increase on Ms Scott's figure for profit before tax from £10,800 to about £12,300. If Mr Hannah was prepared to accept a gross profit margin of 49.5%, and if this approach was taken to his figures, this would result in his profit before tax figure being reduced from £40,595 to about £34,300. Ms Scott accepted that on her approach, the multiplicand would therefore be £12,300, and it would be a matter for the court to assess how long the Franchise Agreement would have been likely to endure in order to reach an appropriate multiplier.

[79] With regard to inflation, Ms Scott reiterated that on her approach it was not necessary to take this into account. If it required to be taken into account, this needed to be done both at the stage of the defenders purchasing goods and services and at the time that they sold these. She remained of the view that it was appropriate to use the cost price index in calculations involving cost assumptions, but the exercise of projecting inflation was not a precise one.

[80] With regard to the detail shown on the defenders' invoices to the pursuers, quantities supplied were shown in stones of fish and baskets of chips. She assumed that the weight of the baskets was known to everyone. Other goods were specified on the daily and weekly total sheets. The 5% mark up was not explicitly stated but she concluded that this was applied on an informal basis. The task undertaken by Ms Scott and her firm involved consideration of a huge volume of papers. It was not unreasonable to take a weighted average for fish costs over a month; if this was not done, the price would need to be revised every day. Taking a monthly weighted average was a perfectly normal way to proceed in such a business. The exercise carried out by Ms Scott was to establish whether there has been under or over charging, and whether the 5% mark up had been applied. Her conclusion, as already stated, was that overall there had been significant undercharging. There were invoices missing for some months, but this did not affect her conclusions.

[81] It was put to her that Mr Hannah's approach to future projections of the pursuers' profits and the value of the franchise rested on several factors. One of these was Mrs Henderson's ability to run a business, and it was suggested that he was in a better position that Ms Scott to express a view about this. Ms Scott was of the opinion that this was not a question that any accountant should be assessing; it was something beyond her knowledge. It was also suggested that Mr Hannah was in a better position that she was to assess the immediate local economy of the pursuers' business; Ms Scott disagreed. Her opinions were based on all the available facts, and she was well qualified to express these opinions.

[82] Ms Scott accepted that if the comparators referred to by Mr Hannah were truly comparable, they might be a relevant cross check. However, the second example had a lower gross profit margin than the defenders, and the first example had about the same average adjusted gross profit margin as the defenders. Ms Scott did not have enough information to enable her to decide whether they were truly comparable. It was not possible to estimate whether the pursuers' sales would have increased after 2009. She had not analysed what had happened to the defenders' sales since January 2009. She was content to proceed on the basis of a current net value of £12,300 being the appropriate multiplicand.

Submissions
[83] Each counsel helpfully provided a written note of submissions or skeleton argument; I do not seek to repeat the detail of these here, but I have taken them into account, together with the oral submissions made at the bar.

Submissions for the pursuers

[84] Mr Beynon invited me to find the witnesses for the pursuers both credible and reliable, and to prefer this evidence to that led for the defenders. He submitted that Mrs Henderson's evidence that she had complained to the defenders about the lack of details in invoices from the defenders to the pursuers was supported by Mr Hannah's evidence. The independent evidence suggested that the pursuers maintained high standards at the Mintlaw chip shop. No weight should be attached to Mr Hooper's evidence on this point. Mr Mair was unwilling to implement properly an invoicing system as required by Clause 8.2.2 of the Franchise Agreement. His demeanour and the rest of the evidence supported Mr Morrison's evidence that Mr Mair was a bully.

[85] Mr Hannah's methodology and evidence should be preferred to those of Ms Scott. Use of comparator evidence is permissible in a situation such as this - Mendelsohn and Bynoe on Franchising, paragraph 17.6.1. As at the date of termination the defenders were not able to provide proper vouching of the pursuers' indebtedness to them. Mr Hannah had direct professional experience of the local economy and acted for the four comparator businesses. There was no contractual basis for the defenders to apply a monthly average to fish prices. Ms Scott's evidence that there was an informal system for adding a 5% mark up did not form part of the defences and did not feature in Mr Mair's evidence. Her position that the defenders were not a suitable comparator when considering the likely post termination profitability of the pursuers was never put to Mr Hannah, and there was no justification for this. It was submitted that Ms Scott was too keen to protect the defenders' position, and rejected too readily the four comparators to which Mr Hannah had regard. However, Mr Beynon accepted that a conservative and reasonable approach required to be taken to the assessment of future profits, and that some discount was appropriately to be applied to Mr Hannah's figures to reflect the uncertainties of business life, and further to reflect the benefit to the pursuers of receiving a lump sum before the end of the period of the Franchise Agreement.

[86] Looking to the notice of termination, it was important to note that the first ground for termination did not relate to non payment of goods, but was confined to a failure to make and maintain payment of the service charges. The pursuers had three responses to this - (a) at the date of termination the overall financial position between the parties was not established; (b) the pursuers maintain that there was an agreement between the parties whereby the pursuers were to be allowed a reasonable time within which to clear their indebtedness; and (c) the defenders' failure to operate Clause 8.2.2 put them in material breach, which precluded them from relying on the first ground for termination.

[87] With regard to the second ground for termination, both parties had agreed that the pursuers were to have freedom to purchase products from sources other than the defenders. Clause 8.2.2 should properly be construed against the background of mutual trust between the parties at the time they contracted. A very literal reading of the Clause is not in accordance with the parties' mutual objective - there was a degree of flexibility, and the letter of termination took no account of this. Mr Mair conceded that he allowed the pursuers to obtain supplies from other sources.

[88] With regard to the third ground of termination, the evidence showed that Mrs Henderson did devote her whole time and attention to the business. The only times when she did not do so - namely when she was working at the pub or when she was visiting Banff - were at the behest of the defenders. Mrs Adams' evidence and that of David Harrison supported the evidence of Mrs Henderson that she devoted substantially her whole time to the business. The evidence of Mr Hooper in this regard should be discounted as incredible.

[89] With regard to the fourth ground of termination there was no credible explanation for the absence of the letters of complaint. The letters from the defenders to customers (pages 46 to 50 of volume 4) spanned a period between April and October 2008, yet Susan Bruce maintained that all the relative letters of complaint had been misplaced. There was insufficient evidence to enable the court to hold that there had been such persistent complaints as to amount to a material breach justifying termination. Such evidence as there was was lacking in detail. There was no evidence from dissatisfied customers; there was evidence from a satisfied customer.

[90] Mr Mair encouraged Mrs Henderson to become involved in the management of the pub, and in plans to unite the two businesses. Counsel accepted that this was simply background information, but it had a bearing in assessing the credibility and reliability of the witnesses; it also provided an explanation for the decline in the pursuers' profitability in the year to 31 August 2008, and put in context Mrs Henderson's evidence that Mr Mair had agreed to give the pursuers a reasonable time within which to pay off their indebtedness to the defenders.

[91] With regard to the issue of overcharging, the evidence of Mr Hannah should be preferred to that of Ms Scott. Three factors supported Mr Hannah's approach - (i) the defenders' poor record keeping, (ii) the decline in the pursuers' gross profit margin, and (iii) wastage could be excluded as an explanation because Mrs Henderson was in his view competent to run a business of this type. There was no evidence of undeclared sales. Ms Scott's suggestion that multiple suppliers could explain the decline in the gross profit margin should be disregarded, because there was no evidence that the pursuers changed their practice in this regard. Moreover, although counsel accepted that the payments made by the pursuers to the Hydro Electric and Sangs on 1 September 2008 must have related to the period when they were operating the pub, there were several payments which were paid by the pursuers for the period after they ceased to be responsible for the pub. There was also Mrs Henderson's evidence about being charged for items which were not delivered.

[92] With regard to the second conclusion, counsel was content to split the difference between Mr Hannah and Ms Scott's figures regarding overheads, depreciation and interest in box 4 on page 4 of the joint statement (No. 50 of process). He was also prepared to concede that the appropriate gross profit margin should be 49.5%. This resulted in Ms Scott's figure for profit before tax being increased from £10,800 to £12,300, and Mr Hannah's figure for profit before tax being reduced from £40,595 to £35,933.

[93] For the reasons explained in paragraph 6.2 of his written submissions, counsel urged the court to prefer the approach of Mr Hannah to that of Ms Scott. Any award required to cover the period from January 2009 until August 2015. The evidence did not support the conclusion that the pursuers would not have been able to continue to trade in any event, even if the Franchise Agreement had not been terminated in January 2009. There was no evidence from other creditors of the pursuers to this effect.

Submissions for the defenders

[94] In moving for decree of absolvitor in respect of each of the conclusions of the summons, counsel for the defenders began by considering the credibility and reliability of the witnesses. He submitted that no witness was entirely incredible. Susan Burns was entirely credible and reliable, and her evidence, taken together with Mr Mair's evidence, should be preferred to that of Mrs Henderson. Ms Adams was entirely credible and reliable, but she only worked in the shop part time and in the mornings. Mr Morrison was a credible witness but not reliable on any matters germane to the case (and counsel questioned whether the issue of whether Mr Mair was a bully or not was relevant). Mr Hooper was entirely credible and reliable; he had a clear recollection and gave compelling evidence which cast doubt on Mrs Henderson's evidence in several respects. Contrary to the submission for the pursuers, Mr Smith did put Mr Hooper's allegations to Mrs Henderson; by contrast, he submitted that Mr Beynon did not challenge the great bulk or detail of Mr Hooper's statement. There were aspects of Mrs Henderson's evidence which were neither credible nor reliable, and throughout her evidence tended to be vague and shifting. Initially she stated that handwritten tallies of deliveries were prepared contemporaneously, but subsequently she accepted that these were prepared in contemplation of litigation. She departed from the evidence in her witness statement that the defenders had given her a "credit line" in order to operate the pub, and shifted to the position that the defenders were prepared to grant her a more generous (but unspecified) time to pay. Mr Mair was generally credible and reliable, although he was perhaps vague about some dates.

[95] Of the two expert witnesses, Ms Scott should be preferred to Mr Hannah. Although Mr Hannah was doing his best to assist the court, his position was coloured by his close professional association with the pursuers. Moreover, his experience did not go beyond general accounting, and in particular forensic accountancy was not his area of expertise. By contrast, Ms Scott's qualifications and experience in this area were more impressive. Mr Beynon's complaint that there was nothing in the defences nor in Mr Mair's evidence to justify the argument that parties operated on an informal basis for the application of the 5% mark up was simply unfounded - there were detailed averments in answer 5 in this regard, and Mr Mair dealt with this at paragraphs 11 to 21 of his first statement. Mr Mair explained in evidence how the prices charged by the defenders to the pursuers were achieved, and this was vouched in detail in the productions. With regard to the suitability of the defenders as a comparator, Ms Scott merely sounded a cautionary note about the need to be aware of other factors which might affect different businesses.

[96] On the issue of overcharging, all that Mrs Henderson could say was that she had ordered some goods which were not delivered; she could not state that she had been charged for these goods. By contrast, Susan Bruce and Mr Mair were each able to give detailed evidence to show that the pursuers were only charged for goods which were supplied to them. There was nothing to support the suggestion that the defenders charged more than a 5% mark up. The pursuers' case amounts to no more than that, for period of some 10 days in January 2009, they were able to purchase supplies at a lower price than that charged by the defenders. However, the defenders were under no contractual obligation to supply to the pursuers at prices that were lower than might be obtained elsewhere.

[97] The pursuers' case for overcharging came to rely principally on the evidence of Mr Hannah. His methodology in this regard was unsatisfactory, and proceeded on the basis of looking at what gross profit margin the pursuers achieved in their first year, then looking at what they actually achieved thereafter, and assuming that the difference should be explained by "possible" overcharging. Even Mr Hannah accepted that there were other possible reasons for a decline in gross profit margin, including wastage and undeclared sales. This is equivalent to a "global claim" or "total cost claim" in building law; in such a case, the contractor must eliminate from the causes of his loss and expense all matters that are not the responsibility of the employer - John Doyle Construction Limited v Laing Management (Scotland) Limited 2004 SC 713 at paragraphs 12 to 14. In other words, if there is just one possible cause that is not the responsibility of the employers, the contractors' claim must fail. The onus rests on the pursuers to eliminate an alternative. Mr Hannah himself recognised wastage and undeclared receipts as possible explanations. He accepted that another explanation might hypothetically be that the pursuers were overcharged by other suppliers, but he rejected this on the assumption that the pursuers in fact obtained substantially all of their supplies from the defenders - an assumption which, on Mrs Henderson's own evidence, was clearly unfounded. There were also other explanations which were not excluded, such as portions being too large, giving away free produce, the removal of the seating area and a different mix between take away and eat in. Ms Scott's evidence on these matters was not challenged.

[98] Judith Scott's methodology proceeded on the basis of a careful perusal of all of the defenders' purchase invoices and sales invoices for the period. This was information which Mr Hannah did not appear to have seen, although it was available. It was information which was, in the early stages of the operation of the Franchise Agreement, issued to Irene Henderson, and on the basis of the evidence of Susan Bruce and Eddie Mair, it was available for Mrs Henderson to check if she ever wanted to do so, although she never requested this. The defenders were under no contractual obligation to provide this information, although they were prepared to do so. By contrast, the pursuers were under a contractual obligation (by virtue of Clause 9.4 of the Franchise Agreement) to maintain accurate books of account, including amongst other things all delivery notes. They had kept no such information. For the reasons summarised in paragraph 25 of the skeleton argument, the pursuers had failed to establish their claim for overcharging.

[99] Turning to the question of termination, counsel for the pursuers accepted that there was a sum due by the pursuers to the defenders for the period September 2008 to January 2009, both by way of unpaid service fee (of at least £12,500) and for goods supplied. The pursuers had therefore departed from their averment in article 7 of condescendence that no sum was due by the pursuers to the defenders in respect of service charges as at 12 January 2009. Mrs Henderson did not dispute, for example, that invoice 227 in respect of the licence fee for October 2008 totalling £4,643.63 remained due and unpaid. In these circumstances, Clause 19.1.2 of the Franchise Agreement entitled the defenders to terminate.

[100] The pursuers argued against this that the defenders had agreed to give the pursuers time to pay. Their position on this should not be accepted. Mrs Henderson's evidence was extremely vague. In her witness statement she referred to an agreement in May 2008 to allow her a credit line, without specifying the amount or duration of this. In her oral evidence she accepted that this might have been in August or September 2008, and she distanced her self from the words "credit line" and spoke of time to pay, but again no amount or duration was mentioned. Mr Mair's evidence was that from about August or September he exercised greater control over the pursuers' business, and encouraged Mrs Henderson to pay other creditors first, provided that the pursuers obtained all their supplies from the defenders. The pursuers did not adhere to either of these conditions. In any event, there was no suggestion in the pleadings nor in the evidence that the Franchise Agreement had been varied or that the defenders had waived or abandoned their rights under it. On the evidence, what appears to have happened was that there was an informal chat about relaxing the terms of payment; it was inherently unlikely that this was intended to have a legally binding effect. It is unclear how much time the pursuers would have to pay, how much indebtedness would be allowed to accumulate, and what business circumstances were envisaged by the parties to allow this informal arrangement to persist. This was no more than an informal indulgence by the defenders, which could be withdrawn at any time. There was no question of waiver - and the point is put beyond doubt by Clause 30.1 of the Franchise Agreement. The defenders were still entitled to rely on Clause 19.1.2.

[101] The pursuers also argue that they were entitled to set off sums which they claimed to have been overcharged against their liability in terms of Clause 19.1.2 to make payment. There is no logical justification for such an argument. In any event, it is expressly excluded by Clause 35 of the Franchise Agreement which prohibits the franchisee from withholding or reducing any payment required by the franchisor to be made to the franchisor for any reason whatsoever (subject to two exceptions, neither of which applies).

[102] The pursuers also complain about the lack of detail in the defenders' invoices, and that there was no proper system for showing the contractually agreed mark up. There was no contractual obligation on the defenders to do this. In any event, the evidence was that the arrangements between the parties were informal, there were monthly reconciliation meetings, and spreadsheets and vouching were available if required. There was a conflict between Mrs Henderson on the one hand and Mr Mair and Susan Bruce on the other as to whether Mrs Henderson ever requested such information or complained about lack of detail in the invoicing; on this matter, Mr Mair and Susan Bruce should be preferred.

[103] The third ground of termination, namely purchasing from other suppliers without permission from the defenders, only applied to the period after August/September 2008. Before that time, the defenders were aware that the pursuers were obtaining products from other suppliers, and took no exception to this. However, Mr Mair made it clear in about August or September 2008 that the pursuers must obtain all their supplies from the defenders. Mrs Henderson accepted in evidence that Mr Mair said this, and also accepted that she continued to obtain products from other suppliers. She did not reduce her indebtedness to her other creditors, as Mr Mair had wished. This ground of termination is also made out on the evidence.

[104] The third ground of complaint related to the failure of Mrs Henderson to devote her whole time and attention to the operation of the business. Clause 22.2.3 of the Franchise Agreement required this, and repeated breach of this obligation constituted a termination event in terms of Clause 19.1.17. Mr Mair's evidence was that Mrs Henderson allowed standards in the chip shop to decline and did not devote her full time and attention to the business. This was supported by Mr Hooper. This evidence could not be fully rebutted by Edna Adams, who only worked part time and in the mornings. The third ground of termination was made out.

[105] The fourth ground related to persistent complaints. Mr Smith accepted that Clause 19.1.13, when read with Clause 39, required written notice to be provided to the pursuers of such complaints. However, the evidence of Mr Mair and Susan Bruce should be accepted that such complaints were made, and it is clear that they had a detrimental effect on the good will of the business and of the defenders business, and so were relevant for Clause 19.1.3. Moreover, the contractual right to terminate set out in Clause 19 was expressly without prejudice to any other rights which the parties may have to terminate whether at common law or otherwise, and the defenders' arguments in this regard are based on their common law rights. Accordingly, each of the grounds of termination were made out.

[106] Damages only arise if the defenders' arguments on termination are ill founded. In this regard, it should be borne in mind that Clause 19.1.12 of the Franchise Agreement entitled the defenders to terminate if Mrs Henderson or the pursuers gave them reasonable grounds for believing that they were unable to meet their debts as they fell due within the meaning of section 123 of the Insolvency Act 1986. Mrs Henderson entered into a trust deed for creditors on 21 January 2009. Termination of the Franchise Agreement was not listed as a reason for her signing this trust deed. The defenders would have been entitled to terminate the Franchise Agreement on 21 January 2009 by reason of Clause 19.1.10. Even if the pursuers had a valid claim for overcharging, this result would have happened - Mrs Henderson's statement of affairs (page 78 of volume 4) showed creditors' claims of £146,936.20 against total assets of £46,000. It was unlikely that the pursuers would have been able to continue to trade even if the agreement had not been terminated - see paragraphs 5.1 to 5.12 and 7.2 of Judith Scott's report dated 6 May 2011.

[107] If, however, the court took the view that the pursuers would have been able to continue trading after January 2009 but for the defenders' termination, and if that termination was unjustified, the approach to the assessment of loss of profits should be that of Ms Scott in preference to that of Mr Hannah. The revised figure of £12,300 by way of annual profit should be taken as the multiplicand, and an appropriate multiplier applied to this.

Discussion
[108] There are three principal issues raised in these proceedings: -

(1) Did the defenders charge the pursuers more than they were entitled to in terms of the Franchise Agreement?

(2) Were the defenders entitled to terminate the Franchise Agreement when they did? and

(3) If not, to what damages are the pursuers entitled as a result of wrongful termination?

I shall deal with each of these issues in turn.

Overcharging

[109] The pursuers' first conclusion, as amended, seeks payment from the defenders of the sum of £50,027. This relates to their claim that they were overcharged by the defenders in each of the years to August 2007 and 2008, as brought out in Mr Hannah's evidence and the calculations contained in number 51 of process. No claim is made for overcharging for the period up to August 2006.

[110] Mrs Henderson was not able to advance very far the pursuers' claim in this regard. Her evidence was that on occasions not everything that she ordered was delivered, but she had no way of knowing if the pursuers were charged for undelivered items. As she put it in cross-examination, "I didn't know what I was being charged for; I wouldn't know if I was being overcharged or not." The suspicion that the defenders overcharged the pursuers during this period appears to have arisen because, during about the last ten days of the duration of the Franchise Agreement, and when the defenders had ceased to supply the pursuers with any products, the pursuers sourced products from elsewhere and found that they were cheaper than those provided by the pursuers.

[111] There was also a complaint by Mrs Henderson that the invoices provided by the defenders were so lacking in detail that she could not ascertain the cost of supplies to the defenders, nor that the defenders were properly charging the pursuers no more than a 5% mark up on their cost prices. This evidence was disputed by Mr Mair and Susan Bruce. I found that both Mr Mair and Ms Bruce were entirely credible and reliable on this point. I accepted that supporting information was attached to the invoices from the defenders to the pursuers in the early part of the duration of the Franchise Agreement, but that this ceased as Mrs Henderson did not require it. The arrangement between the parties was an informal one, based on mutual trust. If Mrs Henderson was concerned that items had not been delivered to the pursuers, she would raise these concerns at the monthly reconciliation meetings with Mr Mair and Ms Bruce. If the pursuers required items urgently, Mrs Henderson would simply collect them from the defenders' central depot, and if nobody was there, she would leave a note of what she had taken. I do not accept that Mrs Henderson repeatedly requested further specification or details to be provided on the monthly invoices from the defenders to the pursuers. I accept the evidence of Mr Mair and Ms Bruce that no such requests were made, but that if they had been made, full vouching and information would have been provided to Mrs Henderson. In any event, there was in my view no contractual requirement for the defenders to provide a detailed breakdown of the costs which they incurred in purchasing the goods which they then sold to the pursuers, nor to set out their calculation of the mark up which they charged to the pursuers. If the pursuers were concerned that they were receiving under deliveries, it was for them to check their delivery notes against the defenders' invoices. They do not appear to have kept their delivery notes, although they were contractually obliged to do so; certainly, no delivery notes were lodged as productions on behalf of the pursuers. Mrs Henderson's evidence about possible overcharging was vague and inspecific, and I did not find her to be a credible or reliable witness in this respect. By contrast, Mr Mair and Ms Bruce gave clear, credible evidence to the effect that the defenders did not overcharge the pursuers, and this was supported by detailed vouching.

[112] The pursuers' case on overcharging came to rely on the evidence of Mr Hannah. He reached the conclusion that the defenders may have overcharged the pursuers, without apparently having seen any of the detailed vouching documentation which the defenders produced. His methodology began with a consideration of what gross profit margin he considered the pursuers ought to have achieved in the two years in question. He reached this figure on the basis of the gross profit margin which the pursuers achieved in the period up to August 2006, together with a consideration of the margins achieved by four comparators and the margins achieved by the defenders themselves. Having reached a figure for the gross profit margin which he considered the pursuers should have achieved in these years, he looked at the gross profit margin which they actually achieved. The difference he attributed to possible overcharging by the defenders.

[113] I am not persuaded that this methodology is sound. It does not follow that because a business achieves a particular gross profit margin in one year, it will succeed in maintaining the same profit margin in following years. While it may be appropriate to test assumptions by looking at comparators, it is obviously necessary to check that, so far as possible, the comparators are truly comparable. Every business will have different circumstances. There may be differences in geographical location, size, management policies, product, and no doubt many other factors. It is unlikely that any business will present exactly the same features as any other business. This is not to suggest that the use of comparators may never be of assistance to the court, but the court must be satisfied that there are not too many distinguishing features or differences between the subject and the comparators.

[114] In the present case, for quite proper reasons of client confidentiality, Mr Hannah was not able to provide detailed information about the four comparators which he used. However, their turnover was in each case smaller than that of the pursuers. Although they were each situated in the north east of Scotland, their detailed locations were not disclosed. They showed different margins and different trends. The defenders' business was also different in important respects from the pursuers' business, with several outlets. (I note in passing that the passage in Mendelsohn and Bynoe on Franchising which was relied on by counsel for the pursuers states that "The court may consider evidence such as the average turnover of the other franchisees in the network"; neither the defenders nor the other four comparators considered by Mr Hannah were "other franchisees in the network").

[115] If Mr Hannah is correct in his opinion as to what gross profit margin the pursuers should have achieved in these two years, it is still necessary for the pursuers' claim to succeed that all possible explanations for the difference between the gross profit actually achieved and the gross profit margin which should have been achieved are excluded, apart from overcharging by the defenders. Mr Hannah accepted that there might be other possible explanations for the pursuers' reduced gross profit margin, including wastage, policy on free staff meals etc. There was no evidence before me which would enable me to exclude these. Mr Hannah also proceeded on the assumption that the pursuers purchased all of their supplies from the defenders, and so overcharging by other suppliers could be excluded as a possible explanation. However, this assumption was unfounded in fact; Mrs Henderson stated that she always purchased about 25% of her supplies, including some of her fish supplies and cooking materials, from other suppliers. If Mr Hannah's methodology is to be adopted, these possible explanations require to be excluded, and the onus of excluding them rests on the pursuers. They have not discharged that onus.

[116] By contrast, the defenders have produced detailed vouching, and Ms Scott has assessed this, compared the defenders' purchase invoices with their sales invoices, and concluded that overall there has been no overcharging by the defenders in the two years in question, but instead that there has been an element of undercharging. This methodology appears to me to be more robust than that adopted by Mr Hannah, and I prefer it. I accepted the evidence of Judith Scott.

[117] In the result, the pursuers' claim for overcharging fails.

Were the defenders entitled to terminate?

[118] The first ground for termination was the pursuers' failure to make and maintain payment of service charges. Mr Mair spoke to the terms of the statement dated 6 January 2009 (page 100 of volume 4), and his evidence received support from Susan Bruce. I accepted their evidence in this regard, and I am satisfied that the statement dated 6 January 2009 was substantially accurate, insofar as it was possible to be accurate without the information which the pursuers ought to have supplied to the defenders. I am satisfied that by 6 January 2009 the pursuers had failed to make payment of significant sums of money which they owed to the defenders in respect of both goods supplied by the defenders to the pursuers, and also in respect of the service charge, which was unpaid for the months of October, November and December 2008.

[119] Mrs Henderson did not dispute that sums were due by the pursuers to the defenders, although she claimed that she could not be sure how much was owed. I do not accept that there was a binding, enforceable agreement between the parties whereby the defenders allowed the pursuers a "credit line" or a particular time to pay. Mrs Henderson did not suggest that a binding agreement had been reached allowing the pursuers a particular sum by way of credit, nor any specific period within which the defenders would not press for payment. On the basis of the evidence all that Mr Mair did was to grant an informal indulgence to the pursuers to enable them to clear their debts to other suppliers. The pursuers did not clear these debts, and continued to incur debts to other suppliers. There is nothing to suggest that the defenders acquiesced in this, or waived their right to rely on Clause 19.1.2 of the Franchise Agreement.

[120] It was also argued on behalf of the pursuers that they were entitled to set off against any sums due by them to the defenders the amount of any sums which the defenders had overcharged them. I have already held that the pursuers' claim for overcharging fails, and this argument must fail with it. In any event, Clause 35.1 of the Franchise Agreement prohibits the pursuers from arguing set off. To the extent that the pursuers attempted to argue that the defenders were in breach of contract by failing to have a proper system of recording and accounting for the mark up, I do not consider that such an argument is well founded. There was no contractual obligation on the defenders in this regard. In any event, detailed information was available to support each of the defenders' invoices to the pursuers, which I am satisfied was available for inspection if the pursuers had sought this. I am therefore satisfied that the defenders were entitled to rely on the first ground of termination.

[121] The second ground of termination related to purchase by the pursuers of products from a source other than the defenders without the defenders' permission. Throughout the period of the operation of the Franchise Agreement the defenders gave their informal consent to the pursuers making some purchases from other suppliers. Mrs Henderson stated in evidence that she had always purchased some of her fish from King Foods, and she obtained necessary supplies such as cooking oil from other sources. Mr Mair stated that he was aware of this and took no exception to it. However, this changed in about August/September 2008. Mrs Henderson accepted in evidence that Mr Mair told her that the pursuers should no longer purchase supplies from other suppliers, but that she continued to do so. Mr Mair stated that he had understood that she would stop purchasing from other suppliers; it was only when he saw that the pursuers' indebtedness to these suppliers was not diminishing that he realised that the pursuers were continuing to purchase elsewhere. Whether, as Mrs Henderson stated, Mr Mair told her that she should not pay any of her suppliers but pay everything to the defenders, or whether, as Mr Mair stated, he told her to concentrate on paying off her other suppliers, is not directly relevant to this issue. For such relevance as it may have, I preferred the evidence of Mr Mair in this regard. His explanation that the defenders also purchased from these suppliers, and that he did not want the good standing and reputation of the Zanre's name to be undermined by the pursuers' non payment, struck me as having the ring of truth to it. Be that as it may, after August/September 2008 the defenders made it clear that they expected the pursuers to obtain all their supplies from them. It must have been clear to Mrs Henderson that from that time the defenders were relying on the terms of Clause 8.2.2 of the Franchise Agreement. Nonetheless the pursuers continued to make repeated purchases from other suppliers throughout October, November and December 2008, in breach of their obligations under Clause 8.2.2. By reason of Clause 19.1.17 the defenders were entitled to terminate on this ground.

[122] The third ground for termination was Mrs Henderson's failure to devote her whole time and attention to the operation of the business, in breach of Clause 22.2.3. Mr Mair gave evidence that Mrs Henderson neglected running the chip shop and that he would quite often call into the shop to discover that she was not present. The evidence of Mr Hooper supported that of Mr Mair in this respect. I found both Mr Mair and Mr Hooper to be credible and reliable witnesses. Even Edna Adams provided some support for their evidence, stating that Mrs Henderson was away at Banff quite a lot; she was probably at Banff for less months than she was involved in running the pub, but she would set off for Banff just after she came into the Mintlaw shop. Taking the evidence as a whole I am satisfied that the defenders were entitled to rely on the third ground of termination.

[123] The fourth ground of termination related to persistent complaints about the quality and service and product at the Mintlaw chip shop. Mrs Henderson denied that she was aware of any such complaints. Mr Mair spoke of complaints about the Mintlaw shop, and that he was concerned about two of these complaints in particular. However, the evidence adduced for the defenders about these complaints was vague and unsatisfactory. Although there were five copy letters lodged on behalf of the defenders in apparent response to letters of complaint between April and October 2008, none of the letters of complaint were lodged. No witnesses were led to speak to having made complaints to the defenders. Although Susan Bruce stated that there was a file kept in the defenders' office which contained complaints, she stated that although she had looked for the letters of complaint to which replies were lodged, she could not find these. She also stated that there were complaints received about the defenders' other outlets, and that the number of complaints relating to the Mintlaw shop was more or less the same as for the other outlets. As counsel for the defenders accepted (at paragraph 44 of his skeleton argument), there was no evidence that written notice of these complaints was given to the pursuers. I am not persuaded that the defenders were entitled to rely on the fourth ground of termination. Recognising the difficulty which lack of written notice caused the defenders in this respect, Mr Smith valiantly argued that the defenders' right to rescind at common law was preserved by Clause 19.7 of the Franchise Agreement, and that this was what the defenders were relying on. I cannot construe the letter of termination as an attempt, in its fourth ground, at rescinding in reliance on the defenders' common law rights, but on the first three grounds relying on the express provisions of the Franchise Agreement. In any event, even if it was such an attempt, I am not satisfied on the basis of the evidence that there were such persistent complaints that would justify termination on this ground.

[124] In the result, despite my views as to the fourth ground, I consider that the first three grounds were made out. I am satisfied that the defenders were entitled to terminate the Franchise Agreement when they did.

Damages
[125] Having held that the defenders were entitled to terminate the Franchise Agreement, the issue of damages does not arise. However, in deference to the careful evidence in this regard, and to counsels' submissions on this point, I propose to set out briefly my assessment of what damages might have been, if I had answered the second issue differently.

[126] Again I prefer the methodology adopted by Judith Scott to that adopted by John Hannah. Mr Hannah has adopted as the starting point of his assessment of future profits the sales achieved by the pursuers in their busiest year, namely 31 August 2007. He has then assumed a 3% increase in these sales for the year ended 31 August 2009, which is an 11% increase on the 2008 actual sales figure. For the reasons given by Ms Scott at section 6 of her second report, I consider that this is unduly optimistic, and that the turnover for the year to August 2009 is more appropriately estimated at £440,000. I also prefer the approach of Ms Scott in attempting to find a figure for net present value, and then applying a multiplier to this multiplicand. Mr Hannah's alternative approach seems to me to include an element of speculation as to a number of variables, such as inflation rates on costs and on retail prices, future margins, future economic trends and others. The method of finding a multiplicand for present value, and applying a multiplier to it, is a method with which the court is familiar in many such cases. Ms Scott amended the figures contained at page 4 of the joint statement (number 50 of process) with the effect that profit before tax should be £12,300. I accepted her reasoning in reaching this figure, and preferred her evidence in this regard to that of Mr Hannah. Had it been necessary, (and subject to my observations in the following paragraph) I should have proceeded by applying a suitable multiplier to the sum of £12,300.

[127] However, on balance I am not persuaded that the pursuers would have been able to continue trading after January 2009, even if the defenders had not terminated the Franchise Agreement. The pursuers' financial circumstances were deteriorating sharply. Mr Hooper gave evidence about the pursuers' financial difficulties (paragraphs 10 and 11 of his witness statement). Despite the informal indulgence granted to them by the defenders, the pursuers continued to have substantial indebtedness to their other suppliers, and to the bank. They owed the defenders about £69,500. On 21 January 2009 Mrs Henderson signed a trust deed for the benefit of her creditors, which was an event which would have entitled the defenders to terminate the Franchise Agreement under Clause 19.1.10. Termination of the Franchise Agreement was not given as a reason for signing the trust deed. It appears from the estimated statement of Mrs Henderson's affairs as at 21 January 2009 that the pursuers owed their bankers £65,000, and the sum of £22,000 was still outstanding to shopfitters in respect of the refurbishment works. Mrs Henderson herself had quite significant personal debts and was not in a position to provide further finance to the pursuers. Having regard to the list of creditors' claims submitted as at 28 January 2010, and making a comparison between the pursuers' assets and liabilities, it is difficult to see how the pursuers could have continued to trade after January 2009, even if the defenders had not terminated the Franchise Agreement. Judith Scott comments on these matters at section 5 of her second report, and at paragraph 7.2 expresses the conclusion that it has not been demonstrated that the pursuers would have been able to continue to trade even if the agreement had not been terminated. I agree with that conclusion. For this reason, even if I had held that the defenders had wrongfully terminated the Franchise Agreement, I should have held that the pursuers have failed to establish that they sustained any loss as a result of such termination. Accordingly, no damages would be payable.

Conclusion
[128] For these reasons I shall sustain the defenders' third and fourth pleas-in-law, repel the pleas-in-law for the pursuers, and grant absolvitor.