Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION
	[2014] CSOH 19
CA109/13	OPINION OF LORD TYRE in the cause (FIRST) STEVEN WORBEY and (SECOND) KEVIN STUART FARRELL Pursuers; against STEVEN ELLIOTT Defender: ________________

Pursuers: A Smith QC, Barclay; Simpson & Marwick

Defender: Currie QC, McClelland; Brodies LLP

6 February 2014

Introduction

[1] In this action the pursuers seek an accounting by the defender of his intromissions with the receipts obtained by him from two social networking applications ("apps"), and payment of such sum as may be found to be due to them following that accounting. In the alternative, they seek payment of a sum estimated to represent the sum due to them. The action came before me for debate of the defender's preliminary pleas to jurisdiction and relevancy.

The pursuers' averments

[2] The pursuers reside in Scotland; the defender resides and, for the purposes of the Civil Jurisdiction and Judgments Act 1982, is domiciled in the south of England. The pursuers aver that in about 2009 they and the defender discussed the development of an app for mobile phones to facilitate social contact among members of the gay community. These discussions took place orally and in email correspondence. The first pursuer suggested the name "Bender" for the app; there was subsequent discussion of the launch of a similar app for the lesbian community called "Brenda". The pursuers acknowledge in their pleadings that the agreement that they claim subsisted was never reduced to writing; they aver, however, that the parties formed a concluded agreement to the following effect. The defender was to provide technical expertise in the development of the app. He would negotiate with organisations such as Apple and Google to enable the app to be launched on the market. The pursuers would contribute such funding as might reasonably be required by the defender from time to time to facilitate the initial development of the app. They would also provide marketing advice and assistance. Profits would be divided as follows: 51% to the defender; 49% to the pursuers (and a third individual whose involvement ceased at a later stage). It is averred that the contract was formed "no later than 17 October 2009". In this regard the pursuers found upon the terms of an email sent by the defender to them and to the third individual on 17 October 2009, in which the defender intimated that he had purchased a second hand laptop computer - the implication being that it would require to be paid for by the pursuers - and also indicated his approval of the name Bender suggested by the first pursuer. The email continued (the triple dots appear in the original):

"We need to get something in writing that just states in basic terms how we all fit together with this. I'm obviously going to be the developer, at least for the foreseeable future ... and you guys are going to be a mixture of investors/marketing gurus etc. To get something up and running, I'll probably be investing hundreds of hours programming, and then when it is running ... there will be constant work to improve it, deal with issues etc. So, to reflect that ... and also to safeguard my control over the application that after all that time will probably feel like "my baby", I said to Steven and Kevin that my only condition would be I have a controlling interest so that if in five years time for example, if it's a massive success and some investor offers you guys an fantastic amount of money to buy you out, but I don't want to ... I can't lose control to them because your shares add up to more than mine. So, what we agreed on the other night was that I have 51%, and the other 49% can be divided up between you three however you fancy."

[3] The pursuers aver that in implement of such an agreement they provided funds amounting in total to £2,100, including reimbursement of the cost of the laptop, to assist the defender in development of the app. They carried out marketing and testing of the app. In 2010, the first pursuer, at the defender's request, applied for and paid for a trade mark in the name of Bender.com. According to the pursuers' averments, the parties continued to act in accordance with their agreement by, respectively, the pursuers providing funding and marketing input and the defender attending to the technical development of the app. On 14 December 2010, the defender emailed a business plan for Bender to the first pursuer in which he proposed an amended profit sharing of 80% to the defender and 20% to the pursuers and the third individual; the pursuers aver that this attempted re-negotiation of the profit sharing was not agreed. In February 2011 the defender intimated to the pursuers his intention to operate the business through the medium of a limited company and observed in an email: "You should fully expect the first few injections of cash to be eaten up by expenses, so don't be expecting a payday check just yet". It is averred that by March 2011 the defender was deriving income from the app, but shortly thereafter stopped providing information to the pursuers. In April 2011 the defender indicated an intention to instruct a solicitor to draft an agreement between the parties in revised terms. Direct communications between the parties thereafter ceased.

[4] The pursuers seek an accounting and payment of a share of all of the defender's receipts from the Bender and Brenda apps. They aver that all versions of the Bender app for different platforms are derived from the name, idea and trade mark to which reference has been made, and that the Brenda app is essentially the same idea.

The defender's response

[5] As this is a debate of the pursuers' pleadings it is unnecessary to set out the defender's case in detail; it may be summarised as follows. The parties never went beyond the stage of negotiation regarding the nature and extent of the pursuers' financial participation in the app business, and no contract was concluded. The email of 17 October 2009 was a proposal which did not record an agreement capable of having contractual effect. Negotiations were still continuing in 2011 when the parties' relationship came to an end. In the meantime the pursuers had proved themselves unable or unwilling to provide, on a reliable and regular basis, the financial investment needed by the defender, and had failed to meet the costs that they had undertaken to meet. On 9 May 2011 the defender wrote to the pursuers terminating the negotiations and enclosing a cheque refunding the pursuers' contributions to date with interest. Esto there was a contract, the defender avers that it was lawfully rescinded in response to the pursuers' repudiatory breach of contract in failing to make financial contributions sufficient to cover the costs of the business. In any event the pursuers' marketing and testing input was limited to version 1 of the Bender iPhone app; they made no contribution to subsequent versions or platforms or to any Brenda app.

Jurisdiction

Argument for the defender

[6] On behalf of the defender it was submitted that the pursuers had failed to aver a relevant basis upon which the defender could be sued in a Scottish court. The pursuers relied upon paragraph 3(a) of Schedule 4 to the Civil Jurisdiction and Judgments Act 1982, which provides that a person domiciled in a part of the United Kingdom may be sued, in matters relating to a contract, in the courts for the place of performance of the obligation in question. Interpretation of paragraph 3(a) should accord with relevant decisions of the European Court of Justice on interpretation of article 5 of the Brussels Convention (Kleinwort Benson Ltd v Glasgow City Council [1999] 1 AC 153, Lord Goff of Chieveley at 163). The word "obligation" in article 5 referred to the contractual obligation forming the actual basis of the legal proceedings (De Bloos v Bouyer [1976] ECR 1497, paragraph 11; Custom Made Commercial Ltd v Stawa Metallbau GmbH [1994] ECR I-2913, paragraph 24). Where a number of obligations under the same contract formed the basis of the proceedings, the principal obligation would determine whether the court had jurisdiction (Shenavai v Kreischer [1987] ECR 239, paragraph 19). It was for the court to identify the principal obligation; a pursuer cannot camouflage the principal obligation by relegating it to a subordinate role in the way he chooses to express his claim (AIG Europe (UK) Ltd v The Ethniki [2000] 2 All ER 566 (CA), Evans LJ at paragraph 25). If two obligations with different places of performances were found by a national court to be of equal rank, they would have to be litigated in different courts (Leathertex Divisione Sintectici SpA v Bodetex BVBA [1999] ECR I-6747), although of course there remained the alternative of suing in the place where the defendant was domiciled.

[7] In the present case the principal obligation alleged by the pursuers was an obligation of accounting, not an obligation of payment. The two were distinct and the latter could not begin to be addressed until the former had been satisfied and only then if a balance was found to be due (cf Union Transport plc v Continental Lines SA [1992] 1 WLR 15, Lord Goff of Chieveley at p.22). The purpose of the two-stage procedure followed by Court of Session practice in actions of count, reckoning and payment was to bring the account before the court and so focus the issues in dispute between the parties in order that the true balance due may be ascertained (Wylie v Corrigan 1999 SC 97, Lord Coulsfield at 102D). This was a reflection of the underlying substantive law: the issue of whether a defender was under an obligation to account had to be resolved before, and separately from, any issue of how much might be due by him. It was incumbent upon a pursuer relying upon a special ground of jurisdiction to aver the basis upon which he maintained that the place of performance of the obligation in question was within the jurisdiction of the court (Eddie v Alpa Srl 2000 SLT 1062 (OH), Lord Eassie at 1067I). There was no authority to the effect that, as a matter of generality, an obligation to account must be performed at the defender's domicile. In the present case, the pursuers had failed to set out a basis upon which any obligation incumbent upon the defender to account to the pursuers for his intromissions with the app business fell to be performed in Scotland. It would be necessary to consider, for example, the place of the defender's business, the domicile of the company incorporated to carry it on, and the place where the business books and records were kept and could be examined. It was relevant that all of the parties' correspondence had been conducted by email and not at meetings in Scotland. The decision of the court in Bank of Scotland v Seitz 1990 SLT 584 was specific to the place of performance of an obligation to repay a debt to a bank with multiple branches; it had no application to an obligation of accounting. At the very least the obligations of accounting and payment were of equal rank and the former was not within the jurisdiction of the Scottish courts.

Argument for the pursuers

[8] It was accepted on behalf of the pursuers that the court's task was to identify the principal obligation forming the basis of these proceedings: the difference between the parties concerned the identification in the present case of the principal obligation. It was submitted that that was an obligation of payment, which was what the pursuers wished to obtain. The obligation to account was merely a procedural aspect of the claim or, at worst, was ancillary to the obligation to pay. The case of Falco Privatstiftung v Rabitsch [2009] ECR I-3327 afforded an example of a debtor in what was, in effect, an obligation to account being sued in the domicile of the claimant, although the point was not expressly addressed. If, as the pursuers contended, the principal obligation was one of payment, the law applicable to the present case was as stated by the court in Bank of Scotland v Seitz. Nothing about that decision was peculiar to banking practice: it established that a debtor could be sued in the courts of the place where the creditor had his domicile. There was no need to aver circumstances in which the defender's obligation of accounting fell to be performed in Scotland because that was not the principal obligation with which these proceedings were concerned.

Discussion

[9] In my opinion the argument for the pursuers is to be preferred. I do not go so far as to say that in all claims which are required by Scottish procedure to be pursued by way of an action for count, reckoning and payment, the obligation of accounting will necessarily be subsidiary to the obligation of payment. It seems to me that the question of what is the principal or substantial obligation will depend upon the circumstances of each case. Applying the authorities cited to the facts of the present case, I bear in mind that the European Court of Justice in both De Bloos v Bouyer and Custom Made Commercial Ltd v Stawa Metallbau GmbH referred specifically to the contractual obligation which formed the basis of the legal proceedings. What the pursuers aver in this case is that the defender is under a contractual obligation to pay them a share of the profit generated by the Bender and Brenda apps in their various versions and platforms. Because they do not know what (if any) profit has been made, and the defender denies that he is under an obligation to make any payment at all, they are under the necessity of seeking an order that the defender produce an accounting as the first stage in the process of determining what is owed to them. In my opinion that stage may properly be regarded as ancillary to the principal obligation of payment. It seems to me that the observation by Evans LJ in AIG Europe (UK) Ltd v The Ethniki that it is for the court to identify the principal obligation is supportive of the pursuers' argument: to focus on the accounting aspect of the defender's obligation, which must necessarily precede payment, is in my opinion to camouflage the principal obligation. The matter may perhaps be tested this way: if, hypothetically, there was no dispute between the parties that a share of profit was due by the defender to the pursuers, the latter would still be entitled to production of an account showing the calculation of the amount due to them, but the principal contractual obligation incumbent upon the defender would not be production of such an account but payment of the sum due.

[10] I reject the submission on behalf of the defender that the ratio of Bank of Scotland v Seitz is restricted to place of payment of a debt due to a creditor such as a bank with multiple branches. In my opinion, the case establishes a general rule, in absence of express contractual provision, that the place of performance of a contractual obligation to make payment is the domicile of the creditor. On that basis I hold that this court has jurisdiction to determine the present case.

Relevancy

Argument for the defender

[11] Senior counsel for the defender sought dismissal of the action on the ground that the pursuers' case was irrelevant for two separate reasons. Firstly, they failed to aver a relevant basis upon which the defender owed them an obligation to account. In order for such an obligation to arise by operation of law, the defender must have intromitted with property in which the pursuer has an interest (Coxall v Stewart 1976 SLT 275 (OH); Huewind Ltd v Clydesdale Bank Plc 1996 SLT 369; Ritchie and Readman v EFT Industrial Ltd 1997 SCLR 955). In the last of these cases, Sheriff RJD Scott drew a distinction between, on the one hand, a right of ownership of a percentage of funds (or the value of property) in the hands of the defender and, on the other, a personal obligation incumbent on the defender to pay the pursuer a sum to be arrived at in a certain way. Only the former gave rise to an obligation to account; the present case fell into the latter category. The pursuers had no interest in the receipts of the business as such nor in the defender's intromissions with them; the interest they claimed arose only after a profit had been returned. There were no clear averments by the pursuers of the nature of the relationship said to give rise to the obligation; expressions such as agency, partnership and joint business venture were variously and inconsistently used.

[12] Secondly, it was submitted that the pursuers' averments were insufficient to support the existence of the extremely wide-ranging obligation that they asserted, i.e. to pay 49% of profits from all sources arising out of the Bender and Brenda apps, of whatever version, for whatever platform, whenever the code was or will be written without limit of time. Such a contractual entitlement was not recorded in the email of 17 October 2009 and the pursuers averred no other source of it. The pursuers asserted that this was the "reasonable understanding" of the parties, but pled no basis upon which that understanding could have arisen. They accepted that the word "profits" was never used but pled no basis, meeting the high test for implication of contractual terms, upon which this was the "only reasonable interpretation" of the discussions. They failed adequately to specify what their own contractual obligations were said to have been. In particular, there were no averments to support any agreement to share profits derived from Brenda.

Argument for the pursuers

[13] On behalf of the pursuers it was submitted that a sufficiently clear and relevant basis had been averred for the existence of a contract between the parties. The pursuers offered to prove that the parties had had discussions prior to 17 October 2009 about creating the app; that the first pursuer had suggested the name "Bender"; that the parties discussed the division of the proceeds of a venture to exploit an app of that name; that the email of 17 October 2009 was sent; that although at that time the precise mechanics of the business (such as incorporation) had not been discussed, they were discussed and agreed in correspondence subsequent to that date; and that the parties acted in a manner consistent only with an agreement having been concluded. The essentials of the contract had been agreed, namely that the parties would contribute to the exploitation of the apps named Bender and Brenda and that the fruits would be divided in the 51/49 ratio. The precise contributions by each party were not essential terms of the contract. The court should not be over-analytical of the parties' positions but should be influenced by the pursuers' averments with regard to performance of the contract. If the terms of a contract are deficient, the court should imply them more readily if the contract has been performed (cf McBryde, Contract (3^rd ed, 2007), para 5-16 citing, among other authorities, F&G Sykes Ltd v Fine Fare Ltd [1967] 1 Lloyds Rep 53). Having regard to the parties' actings following the sending of the email of 17 October 2009, it could not reasonably be suggested that there was no contract between them. So far as Brenda was concerned, it was accepted that this app was not expressly mentioned in the email but the pursuers offered to prove that it was all part of a single idea. In response to the argument that there was no relevant basis pled for an obligation to account, it was submitted that there was no need to attach an exact label to the parties' relationship (Khan v Miah [2000] 1 WLR 2123 (HL), Lord Millett at 2126). The pursuers averred the existence of a joint venture of a fairly common kind, giving rise to an obligation on the part of one party to it to account to the others for a share of the proceeds of exploitation of the app.

[14] It was further submitted that the defender's averments that the pursuers were in material breach of contract, so as to entitle the defender to rescind, were wholly lacking in specification. The defender failed to specify the obligations that he claimed the pursuers had undertaken or the nature of their alleged material breach of contract. That being so, there was no relevant defence pled to the action and the court should hold, on the pleadings and documents before it, that the pursuers were entitled to an order for production by the defender of an accounting in terms of the first conclusion.

Discussion

[15] In my opinion the pursuers' averments are sufficient to entitle them to a proof before answer. They offer to prove that by 17 October 2009 agreement had been reached at least in general terms as to the parties' respective obligations and as to the division of the fruits of exploitation of the app. I consider that there are sufficient averments, if proved, to entitle the pursuers to argue that the figures in the email of that date should reasonably be interpreted as references to shares of profit after deduction of expenses. I also accept the submission that events subsequent to the sending of the email may be relevant in assessing whether or not an agreement, binding upon the parties, had been reached by 17 October 2009. So far as the Brenda app is concerned, it does not seem to me that I would be entitled to hold, as a matter of relevancy and specification, that the pursuers had failed to aver circumstances in which an agreement reached between the parties by October 2009 was capable of extending to it as well as to the Bender app. Nor am I persuaded, having regard to the terms of the email, that the pursuers' claim that the agreement extended to all future versions of the app and platforms on which it would be offered must necessarily fail as irrelevant or insufficiently specific. These seem to me to be matters best addressed after evidence has been led. Given that the enquiry will be a proof before answer, and that it will remain open to the defender to renew his plea to the relevancy of the pursuers' case after the evidence has been led, it is better that I do not say much more about the factual circumstances at this stage.

[16] Nor am I persuaded that the pursuers have failed to present a relevant case for an accounting by the defender. The passage from Lord Maxwell's opinion in Coxall v Stewart (above) which was founded upon by the defender reads as follows:

"Where assets belonging to one person come into the possession of another and where the person to whom the assets belong has, broadly speaking, a right to recover those assets or their value from the possessor, but where the nature of the property, or the rights and obligations of the possessor, or both are such that the intromissions of the possessor may affect the precise extent or value of the owner's claim against him, at least in some cases our law provides the remedy of an action of count reckoning and payment. For example the remedy is clearly provided where the possessor's possession arises from a contract of agency."

As I read this passage, Lord Maxwell is not attempting to state a comprehensive definition of the circumstances in which an action of count, reckoning and payment may competently be brought. I understood senior counsel for the defender to accept - correctly, in my view - that "assets" in this context could consist of money as opposed to some other form of property. That being so, it seems to me to be clear from Lord Maxwell's observation that an action for accounting may arise out of a contractual relationship. The example given by him is agency; another possible example is partnership, either continuing or dissolved. In the present case the pursuers offer to prove the existence of a joint venture, similar in nature to a partnership, constituted by contract between the parties. Taking this scenario pro veritate, it would in my view be accurate, as a matter of law, to describe the net proceeds of the business of the joint venture, quoad the pursuers' share, as assets belonging to them which are in the possession of the defender. It accordingly falls, in my view, into the first of the two categories identified by Sheriff Scott in the passage to which I have referred.

[17] I reject, on the other hand, the pursuers' contention that the defender has failed to plead a sufficiently specific defence to their claim for an accounting. In my opinion, it is clear from the defender's pleadings that his secondary position is that, esto a contract between the parties was concluded in 2009 (which he denies), the pursuers' obligation was to provide adequate financial support to enable him to meet all of the costs of development of the app; this is set out with adequate specification in the first part of Answer 3. Given that the defender's primary position on the facts is that the parties' discussions never went beyond the stage of negotiation, it is unsurprising that he does not aver the detailed terms of a contract entered into between the parties. Instead he avers continuing uncertainty regarding the nature and extent of the pursuers' contribution as an aspect of the factual background supporting his primary position. These, too, are, in my view, matters to be resolved after proof.

Disposal

[18] For these reasons I shall allow a proof before answer. Given the two-stage nature of the procedure that must be followed in actions for count, reckoning and payment, it seems to me that such a proof ought to be restricted to matters relevant to the question of whether I should make an order for an accounting in terms of the first conclusion. In other words I would hear evidence on the issues of (a) whether a contract was concluded between the parties; and (b) if so, whether the pursuers were in material breach of contract so as to entitle the defender to rescind. Before pronouncing any interlocutor, however, I will put the case out By Order to be addressed by parties on the scope of, and timetable for, the proof that I have allowed.