Inveresk Plc V. Tullis Russell Papermakers Limited
| Jurisdiction | Scotland |
| Judge | Lord Clarke,Lord Kingarth,Lord Wheatley |
| Judgment Date | 30 June 2009 |
| Neutral Citation | [2009] CSIH 56 |
| Court | Court of Session |
| Published date | 29 June 2009 |
| Date | 30 June 2009 |
| Docket Number | CA55/07 |
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| EXTRA DIVISION, INNER HOUSE, COURT OF SESSION | |
| Lord Kingarth Lord Wheatley Lord Clarke | [2009] CSIH 56 CA55/07 OPINION OF THE COURT delivered by LORD CLARKE in the Reclaiming Motion in the cause by INVERESK PLC Pursuers & Respondents; against TULLIS RUSSELL PAPERMAKERS LIMITED Defenders & Reclaimers: _______ |
Alt: Dean of Faculty, McNeill, Q.C., Delibegović-Broome; Dundas & Wilson CS LLP (Defenders & Reclaimers)
30 June 2009
Introduction
[1] In this commercial action the pursuers and respondents sue for the payment of £909,395 Sterling with interest. They also, in terms of the second conclusion of the Summons, sought a declarator, but before this court parties were in agreement that matter should be made the subject of determination by an alternative dispute mechanism entered into between the parties.
[2] The sum sued for, in the first conclusion, is a sum said to be "Additional Consideration" due to be paid to the respondents by the reclaimers in terms of contractual arrangements between the parties, whereby the respondents sold to the reclaimers certain business assets, including intellectual property rights and customer information, the assets in question relating to the manufacture of certain brands of paper. At the time of the sale, the parties executed two written agreements, the first being what was described as the Asset Purchase Agreement, the second being described as the Services Agreement. The first of the two Agreements, hereinafter referred to as the Acquisition Agreement, was the legal means by which the assets were sold to the reclaimers. By the second Agreement the respondents undertook to continue to manufacture, sell and distribute specific products for the period from 9 June 2005 until 8 November 2005, or until determination of the Services Agreement if that was at an earlier date. Subsequent to the raising of the present proceedings, the reclaimers themselves raised a commercial action in respect of alleged failures by the respondents in their performance of obligations under the Services Agreement, and also, to a limited extent, on the basis of the breach of a specific obligation contained in the Acquisition Agreement. The reclaimers seek to resist payment of the sum sued for in the present case on two distinct substantive grounds. The first is that no such payment is payable to the respondents until certain procedures provided for in the Acquisition Agreement are followed through. The second is that, in any event, the reclaimers are entitled to pray in aid the principle of retention in respect of the sum sued for in the present action by setting off against it the sums they are suing for in the other action.
The first line of defence
[3] The first substantive line of defence was discussed at debate before Lord Drummond Young. At that time, the defences to the present action did not include the second substantive line of defence, namely retention. By judgment dated 15 February 2008, Lord Drummond Young repelled the defences, as they then stood, and granted decree de plano for the sum sued for with interest. The present reclaimers reclaimed. They then sought leave to amend their pleadings before the Inner House. This motion was granted and the case was remitted to Lord Glennie. A further debate then took place before his Lordship, with both lines of defence being argued, the defence of retention having been added by amendment by the reclaimers. The discussion as regards the first line of defence, to some extent, took a somewhat different form before Lord Glennie than it had before Lord Drummond Young. In the event, by an interlocutor dated 11 September 2008, Lord Glennie repelled the defences and granted decree for the sum concluded for plus interest.
[4] The key elements of the Acquisition Agreement in relation to the consideration to be paid for the assets as sold thereunder are as follows:
Clause 2.1 is in the following terms:
"The Vendor agrees to sell as beneficial owner and the Purchaser agrees to purchase the Owned Intellectual Property Rights, the Customer Information and the Related Assets free of all Encumbrances as at the close of business on the Completion Date for the Consideration."
"Consideration" as defined in Clause 1 of the Acquisition Agreement is divided into two components, the "Initial Consideration" and the 'Additional Consideration'. The Initial Consideration and the Additional Consideration are, in turn, defined respectively by Clause 1.1 as "£5,000,000 (five million pounds) (exclusion of VAT, if any)" and 'the sum, if any, payable by the Purchaser in terms of Clause 5 and Part 5 of this Schedule up to a maximum of £2,000,000 (exclusive of VAT, if any)". Clause 5 provides that in relation to the Additional Consideration, "The provisions of Part 3 of the Schedule are to have effect". In Part 3 of the Schedule, para. 1.1, "Additional Consideration" is further addressed and is calculated according to a formula which depends on the production of certain paper products during the year from 8 November 2005 to 8 November 2006 (described as the 'Earnout Period') provided that such products were invoiced during the period from 8 November 2005 to 22 November 2006 (described as the "Invoice Period")."
[5] The formula is expressed in the following terms:
"Additional Consideration means:
(a) In the event that the Tonnage is less than 15,000, nil.
(b) In the event that the Tonnage is equal to or more than 15,000, but is less than 25,000, a sum equal to
a/1,000 x £160,000
where (a) is the Tonnage in excess of 15,000, subject to a maximum of 10,000
(c) In the event that the Tonnage is equal to or more than 25,000, a sum equal to
(a/1,000 x £160,000) + (b/1,000 x £80,000)
where:
a is 10,00 and
b is the Tonnage in excess of £25,000, subject to a maximum of 5,000".
As has been seen, production of the relevant products in respect of which Additional Consideration may be paid is measured in terms of "Tonnage". That is defined in para. 1.1 of Part 3 of the Schedule as follows:
"the amount in tonnes of the Product for which the Purchaser receives orders during the Earnout Period and thereafter issues invoices in relation to such tonnage in the Invoice Period as provided for the in the Consideration Accounts." 'Product' is defined as "Products (as defined in the Services Agreement) incorporating the Trade Marks."
The result of that last definition is to encompass paper products coated with solid bleached sulphate that incorporate two trade marks sold by the respondents to the reclaimers, those relating to their Gemini and Inver X brands. Paragraph 3(1) of Part 3 of the Schedule provides:
"The Consideration Accounts shall specify the Tonnage and a calculation of the Additional Consideration".
Paragraph 4 of Part 3 of the Schedule then provides for the finalisation of the draft Consideration Accounts. Paragraph 4.1 provides:
"The Purchaser shall prepare and serve on the Vendor within 5 Business Days of 1 November 2006 a draft of the Consideration Accounts (draft Consideration Accounts)."
The purchasers i.e. the reclaimers are, accordingly, responsible for the preparation of the initial draft of the Consideration Accounts, no doubt on the footing that, after the date of the execution of the Acquisition Agreement, they would be best placed to do so, having access to the books and financial records which would provide the basis of the accounts. Para 4.2 of this Schedule provides, however, for a challenge of the draft Consideration Accounts by the vendor (the respondents) in either of two ways. It does so in the following terms:
"The Vendor may, within the period of 10 Business Days, after service of draft Consideration Accounts on the Vendor in accordance with paragraph 4.1 (Review Period):
(a) notify the Purchaser in writing of any adjustments they consider need to be made to the draft Consideration Accounts (together with the reasons for such adjustments); or
(b) elect that the Purchasers Accountants carry out a Tonnage Audit in accordance with paragraph 5 of this Schedule."
If the vendor, in the event, does not initiate either of those procedures, during the Review Period of ten business days, then the position is provided for by paragraph 4.3, which states:
"If:
(a) The Vendor notifies the Purchaser during the Review Period that no adjustment needs to be made to the draft Consideration Accounts; or
(b) The Vendor notified the Purchaser during the Review Period that it does not wish to elect that a Tonnage Audit be undertaken;
(c) The Vendor does not notify the Purchaser during the Review Period of any proposed adjustment to the draft Consideration Accounts, the draft Consideration Accounts, Tonnage and Additional Consideration specified in it shall be the Consideration Accounts, Tonnage and Additional Consideration for all purposes of this Agreement."
On the other hand, if the vendor does notify adjustments during the Review Period, para. 4.4 deals with that situation. It provides:
"If the Vendor notifies the Purchaser during the Review Period that certain adjustments need to be made and
(a) the Purchaser and the Vendor agree, in writing, on the adjustments to be made to the draft Consideration Accounts and/or Tonnage, and/or Additional Consideration they shall jointly incorporate such adjustment into the draft Consideration Accounts and the draft Consideration Accounts as so adjusted and the Tonnage and Additional Consideration specified in it shall be the Consideration Accounts and the Tonnage for all purposes of this Agreement; or
(b) if the Vendor and the Purchaser are unable to so agree within 5 Business Days then paragraph 5 of this part 3 of the Schedule shall apply."
Pausing there, it is to be noted that the structure of the agreement's provisions so far means that if the parties are able to reach agreement as to the Consideration Accounts and, in particular, the Tonnage and...
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