Inveresk Plc v Tullis Russell Papermakers Ltd
| Jurisdiction | Scotland |
| Judge | LORD HOPE,LORD SAVILLE,LORD RODGER,LORD COLLINS,LORD CLARKE |
| Judgment Date | 05 May 2010 |
| Neutral Citation | [2010] UKSC 19 |
| Court | Supreme Court (Scotland) |
| Date | 05 May 2010 |
[2010] UKSC 19
Lord Hope, Deputy President
Lord Saville
Lord Rodger
Lord Collins
Lord Clarke
Appellant
Richard Keen QC, Dean of Faculty
Almira Delibegovic-Broome
(Instructed by Dundas & Wilson CS LLP)
Respondent
Heriot Currie QC
Jonathan Lake QC
(Instructed by McGrigors LLP)
This is an appeal against an interlocutor of an Extra Division of the Inner House of the Court of Session (Lords Kingarth, Wheatley and Clarke) dated 30 June 2009 ( [2009] CSIH 56; 2009 SC 663) refusing a reclaiming motion by the defenders, Tullis Russell Papermakers Ltd ("Tullis Russell"), against an interlocutor of Lord Glennie sitting in the commercial court dated 11 September 2008 ( [2008] CSOH 124). By that interlocutor he granted decree in favour of the pursuers, Inveresk plc ("Inveresk"), in terms of the first conclusion of the summons, as amended, for payment by Tullis Russell of the sum of £909,395. Prior to the raising of these proceedings Tullis Russell had raised a separate action in the commercial court against Inveresk (CA31/07) in which, among other things, they claimed damages for breach of contract arising out of the same transaction as that which had given rise to Inveresk's claim for payment. Those proceedings are the subject of a lengthy proof before answer which is in the course of being heard in the commercial court by Lord Drummond Young.
The transaction to which these two sets of proceedings relate was the sale by Inveresk to Tullis Russell of property rights in the Gemini brand of paper, customer information and related assets and the maintenance of the value of the brand by the effective transfer of customer connections. It was recorded in two documents, following a style which is commonly used for transactions for the sale and purchase of intellectual property. They were both executed at the same time on 9 June 2005. They were (i) an agreement for the acquisition on 9 June 2005 by Tullis Russell of the Gemini brand, customer information and related assets ("the Asset Purchase Agreement") and (ii) an agreement ("the Services Agreement") by which Inveresk undertook to continue to manufacture, sell and distribute specified products for the period from 9 June 2005 until 8 November 2005 or until the agreement was terminated. In recital (C) of the Services Agreement it was stated that Tullis Russell had requested that Inveresk enter into that agreement to ensure continuity in the manufacture and distribution of those products, facilitate the integration of their manufacture and distribution into Tullis Russell's operations and enable Tullis Russell to obtain the full benefit and value of the assets being acquired under the Asset Purchase Agreement.
The transaction provided for various payments to be made to Inveresk for the assets and services that were being purchased by Tullis Russell. The consideration for the assets that Tullis Russell were to acquire under the Asset Purchase Agreement consisted of an Initial Consideration amounting to £5 million and a further sum as Additional Consideration. The amount of the Additional Consideration was dependent on the volume of certain products sold and invoiced by Tullis Russell during the period from 8 November 2005 to 8 November 2006. It was payable in terms of clause 5 and Part 3 of the Schedule up to a maximum of £2 million. Further sums were payable under the Services Agreement in consideration of Inveresk continuing to manufacture and distribute products pursuant to that agreement.
In implement of the transaction Tullis Russell have paid £13 million to Inveresk, consisting of £5 million under the Asset Purchase Agreement and £8 million under the Services Agreement. In this action Inveresk seek a further payment of £909,395 as Additional Consideration under the Asset Purchase Agreement. In the other action Tullis Russell seek payment by Inveresk of £5,358,032.90. They aver that Inveresk failed to manufacture paper products during the currency of the Services Agreement that complied with the relevant quality standards and dealt with the customers in a way which diminished the value of the assets sold by them to Tullis Russell.
The proceedings in this action have been protracted. By an interlocutor dated 15 February 2008, following a debate in the commercial court, Lord Drummond Young repelled the defences and granted decree in Inveresk's favour for the sum of £909,395: [2008] CSOH 26. Tullis Russell reclaimed against that decision to the Inner House. They also sought leave to amend their pleadings by including a plea that they were entitled to retain any sums that might be due to Inveresk pending the resolution of their own claim against them for damages. On 20 June 2008 an Extra Division of the Inner House, without hearing full argument or issuing an opinion, allowed the summons and defences to be amended, recalled the Lord Ordinary's interlocutor of 15 February 2008 and remitted the whole matter back to the commercial court for a fresh debate on the amended pleadings. It was in the light of that debate that Lord Glennie pronounced the interlocutor of 11 September 2008 to which the Extra Division adhered in its interlocutor of 30 June 2009 which is the subject of this appeal.
Two distinct issues are raised in the appeal. The first relates to Inveresk's claim for £909,395 as Additional Consideration, which is the sum sued for in the first conclusion of their summons. The question is whether the amount that is due to Inveresk as Additional Consideration has been determined in terms of clause 5 and Part 3 of the Schedule to the Asset Purchase Agreement. Tullis Russell maintain that no sum is payable as Additional Consideration until the procedures provided for in the Schedule have been carried through and that this has not yet happened. The second issue relates to Tullis Russell's plea of retention. The question is whether Tullis Russell are entitled to retain performance of their obligation to pay the Additional Consideration due under the Asset Purchase Agreement pending payment of sums due in respect of their claims against Inveresk in the other action, in which sums are sought as damages for breaches of the Services Agreement and of certain post-sale obligations of the Inveresk under the Asset Purchase Agreement. Inveresk maintain that the obligations for breach of which Tullis Russell claim damages are not the counterparts of their obligation to make payment of the Additional Consideration, so the plea of retention is not available.
Having examined the provisions of Part 3 of the Schedule and the actings of the parties with regard to them, the Lord Ordinary held that Tullis Russell were obliged to pay as Additional Consideration an amount based on the Tonnage shown in the draft Consideration Accounts and that their defence that the action had to be sisted for a Tonnage Audit to take place was irrelevant: para 23. He also held that Tullis Russell's plea of retention was irrelevant. He said that, although the two agreements had to be viewed together, the plea must fail for want of mutuality or reciprocity between the obligations to perform the services in the manner required on the one hand and the obligation to pay any part of the price under the Asset Purchase Agreement on the other: para 45. The Extra Division agreed with the Lord Ordinary that the situation that had arisen as a result of the parties' actings could be accommodated within the provisions for payment in Part 3 of the Schedule and that a Tonnage Audit was not required. They also agreed with him, for the reasons set out in paras 51-53 of Lord Clarke's opinion, that the plea of retention was irrelevant.
The Additional Consideration
(a) The Facts
The way which the amount due as Additional Consideration is to be calculated is set out in Part 3 of the Schedule. Put very simply, the calculation of the amount due depends on the amount in tonnes of the relevant paper products for which Tullis Russell received orders during the period from 8 November 2005 to 8 November 2006 and issued invoices during the period from 8 November 2005 to 22 November 2006. The first step is the preparation in draft by Tullis Russell of accounts, referred to in Part 3 as the draft Consideration Accounts, specifying the Tonnage and a calculation of the Additional Consideration according to an agreed arithmetical formula. Inveresk are then given an opportunity according to a prescribed timetable to examine the draft Consideration Accounts, to decide whether or not to accept them or to elect that a Tonnage Audit be carried out by Tullis Russell's accountants to confirm and verify the Tonnage to be included in the calculation. Agreement as to the Tonnage, or its verification by means of a Tonnage Audit, provides the key to the amount of the Additional Consideration. The date when payment is due varies according to the decisions that Inveresk takes with regard to the various options that are available. The carefully defined procedures that Part 3 of the Schedule sets out appear to have been designed on the assumption that the Tonnage could be ascertained simply by examining the entries in the books and records kept by Tullis Russell during the relevant period.
Unfortunately that was not how things turned out when the procedures were put into practice. Tullis Russell did prepare draft Consideration Accounts as required by Part 3 of the Schedule. They were served on Inveresk by Tullis Russell on 8 November 2006, which was within the prescribed timetable. This draft gave a figure for Tonnage which would have produced Additional Consideration amounting to £910,080. Following a meeting at Tullis Russell's premises on 10 and 11 January 2007 at which their books and records were available for...
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