Agri Energy V. Ian Logan Mccallion
| Jurisdiction | Scotland |
| Judge | Lord Woolman |
| Neutral Citation | [2014] CSOH 13 |
| Court | Court of Session |
| Docket Number | CA80/13 |
| Published date | 28 January 2014 |
| Date | 28 January 2014 |
| Year | 2014 |
| OUTER HOUSE, COURT OF SESSION | |
| [2014] CSOH 13 | |
| CA80/13 | OPINION OF LORD WOOLMAN in the cause AGRI ENERGY Pursuer; against IAN LOGAN McCALLION Defender: ________________ |
Pursuer: J Brown; Balfour & Manson
Defender: D Maclean; Thorley Stephenson
28 January 2014
Introduction
[1] The pursuer bought Mr McCallion's business in October 2009. It agreed to pay him £100,000 on completion of the sale agreement ('the initial consideration'). It also agreed to pay him five further instalments as part of the purchase price ('the deferred consideration'). Mr McCallion ceased to be engaged in the pursuer's business in October 2010. After he left, he breached the restrictive covenant in the sale contract. In this action the pursuer seeks to recover part of the deferred consideration from him. It founds upon a recoupment provision in the sale contract. The issue for determination is whether it is a penalty clause and therefore unenforceable.
The facts
Background
[2] For a period of about 20 years, Mr McCallion operated a domestic oil business in the North East of Scotland. He supplied oil to retail outlets, including fish and chip shops. He also removed waste oil from the same outlets, which he aggregated and sold at a profit for conversion into bio-diesel. He held a licence from the Scottish Environment Protection Agency (SEPA) for that purpose.
[3] The pursuer is an unlimited company involved in the same field of business. It was formerly known as "Agri Energy", but it changed its name to Olleco with effect from 2 April 2013. It operates from ten locations throughout the United Kingdom and has a substantial turnover. In 2009, it approached Mr McCallion with a view to purchasing his business. Previously, it had purchased other similar businesses in Scotland, including MacLennan Oils and Richardson Oils.
The original agreement
[4] The parties negotiated sale terms, which are recorded in a written contract dated 9 October 2009. They agreed that he would continue to run the business on its behalf. It was envisaged that he would stay on as an employee for a period of at least five years. The initial consideration was £100,000. The deferred consideration was payable at the end of each year from the date of completion. Each instalment could not exceed £20,000. The precise sum to be paid depended on the financial performance of the business:
"If the Collection Target is not achieved for any particular Year, the Deferred Consideration payable to the Seller pursuant to clause 3.2 in respect of that Year shall be payable to the Seller subject to a pro rata adjustment and the Buyer shall retain the balance of the Deferred Consideration payable to the Seller pursuant to clause 3.2 in respect of that Year."
[5] Accordingly, the maximum purchase price was £200,000.
The Amendment agreement
[6] The pursuer paid Mr McCallion the initial sum. Before he had received the first instalment payment, however, he decided to terminate the sale contract. The parties entered into an amendment agreement dated 14 October and 1 November 2010, which varied the terms of the original sale agreement. Under the revised terms, the pursuer had to pay sums to Mr McCallion on two dates. In October 2010 it required to pay him: (a) £20,000, being the first instalment of the deferred consideration; and (b) £40,000, being an advance payment toward years 2, 3, 4 and 5. In October 2014, it had to make a final payment of £40,000.
[7] The pursuer paid the sum due in October 2010. After he left the business, Mr McCallion breached the undertakings contained in the restrictive covenant. These allegations are set out in more detail, in my opinion in the interdict action brought by the pursuer against Mr McCallion. It is enough to say here that he substantially admits the breaches in his defences.
The basis of the claim
[8] The pursuer bases its claim upon clause 3.7.2 of the amended sale agreement, which states:
"[If] the Seller (in the reasonable opinion of the Buyer) has breached any of the Seller's undertakings set out in clause 15.2, the Seller shall:
(a) return the full amount of the advance payment to the Buyer within 10 Business Days of being requested to do so by the Buyer; and
(b) forfeit the Seller's right to receive any payments due from the Buyer or that may become payable by the Buyer under this Agreement including, without limitation, any amount of the final payment that may be payable by the Buyer."
[9] Clause 15.2 is the restrictive covenant...
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Commercial Justification for Penalty Clauses: The Death of the Old Dichotomy?
...disentitles the contract breaker from receiving a sum that would otherwise be due to him;6 6 But see Agri Energy v Ian Logan McCallion [2014] CSOH 13, although the focus of Lord Woolman's decision appears to be on whether the pursuer could recoup sums already paid over (analysed as a deposi......