Group companies and agency: The Harbro Group v MHA Auchlochan

The Harbro Group Limited v MHA Auchlochan [2013] CSOH 8, decided earlier this month, provides evidence (if any were needed) of the challenges which the group company structure poses in litigation.  I am grateful to my colleague Dr Dan Carr for bringing this case to my attention. 

The dispute concerned commercial missives to purchase two areas of ground near Lesmahagow.  The purchasers intended to construct a new factory there from which to operate their business, the manufacture, sale and distribution of animal food products.  The sellers of the land were the trustees for the Auchlochan Trust.  The Trust had transferred their assets and liabilities to the defenders.   Certain obligations under the missives were not timeously performed by the Auchlochan Trust, including the dismantling of overhead mains and making up of the access road.  This delayed entry for the pursuers, requiring the pursuers to extend their existing lease and eventually resulting in the cessation of some of their manufacturing.  The action was therefore one of damages for breach of missives, the pursuers seeking to recover both costs related to the extension of the lease and loss of profit through the cessation of manufacturing work. 

So far, so straightforward, except that the lease of the existing premises was held, not by the pursuers, but by a different company, Strathclyde Nutrition Ltd (SNL), a wholly owned subsidiary of the pursuers.  Indeed the manufacturing business seemed to be carried out by SNL too, and SNL earned the profit.  This raised the question of whether the pursuers (the holding company) had actually suffered a loss. 

The pursuers made what seem to this blogger to be confusing averments on the law of agency.  They answered the defenders averments on agency by suggesting that SNL (and another company in the group, HB, who manufactured feed blocks and feed buckets) were acting as agents for the pursuers (para [10]).  However, counsel for the pursuers explained that they were not suggesting that a contract of agency existed (para [23]).  Rather, they used agency averments to “reinforce the de facto control by the pursuers of all the group activities” (para [23]).  The essence of the pursuers' case appeared to be that a holding company can raise an action for losses suffered by its subsidiaries. 

Lord Boyd dealt swiftly with the agency point: “Either the subsidiaries are agents for the pursuers, or they are not” (para [29]).  Not surprisingly he considered the defender’s averments on agency to be irrelevant. 

Lord Boyd allowed the parties a proof before answer.  The defenders had relied on Lord Clyde’s speech in Alfred McAlpine Construction Ltd v Panatown Ltd (2001) A.C. 518 as authority to the effect that one could not sue for another’s losses.  That case is a highly complex one in which the judges took differing approaches.  Lord Boyd hinted at this: “Yet the discussion of the possible exception in building contract cases where there is a group structure in the speeches of their Lordships, seems relevant to the issues in this case, as is the debate on the application of any principles arising in Scotland (see e.g. the article by Professor Joe Thomson, Restitutionary and Performance Damages 2001 SLT 71 and Sheriff J A Taylor in Clark Contracts Ltd v Burrell Company (Construction Management) No 2 Ltd 2003 SLT (Sh Ct) 73)” (para [34]).   

This case report is as interesting for what it doesn’t say as for what it does.  Even though counsel for the pursuers was not seeking to establish agency between the pursuers and SNL, the case provides the opportunity to recap on the principles of creation of agency.  Agency does not require to be formed by a written contract, but rather can arise as an express oral contract or as an implication from the facts.  Where the latter applies, agency is an implied contract between principal and agent.  Relevant averments of fact require to be made to establish this implied contract.  Those averments might describe acts the agent has performed on the principal’s behalf, most obviously the negotiation of a contract but also other commercial activities.  Whatever the activities, they have to create a picture of representative activity on the part of the agent.  The simple connection between a holding and a subsidiary company is not sufficient to create agency.  Indeed, counsel for the defenders cited both Bowstead & Reynolds on Agency, pages 4-18 and Peterson Farms Inc v C & M Farming Ltd ((2004) 1 Lloyd’s Rep 603 per Langley J at para 60) as English authority suggesting that the courts do not look favourably on the existence of a relationship of agency that would circumvent their separate legal personalities (para [20]).  Counsel for the defenders also stated, “like any contract, the existence or otherwise of a contract of agency is not purely a matter of fact, but of fact and law” (para [20]).  

What is (thankfully) missing from the case is any reference to ad hoc agency.  This is an idea which was created by Lord Drummond Young in three cases: Whitbread Group plc v Goldapple Ltd (No 2) (2005 SLT 281); Laurence McIntosh Ltd v Balfour Beatty Group Ltd and the Trustees of the National Library of Scotland ([2006] CSOH 197); and John Stirling t/a M & S Contracts v Westminster Properties Scotland Limited ([2007] CSOH 117).  In these cases, Lord Drummond Young used agency to avoid the consequences of the separate legal personality of companies to reach what he saw as commercially useful results.  Lord Drummond Young offered up his concept for use in group company situations.  He stated in McIntosh (para 16): 

“Within groups of companies, it is relatively common to find one company performing tasks for another company within the group.  This may take many different forms; for present purposes, an example that is relevant is that one company may perform debt collection functions on behalf of other companies within the group.  In such a case, the debts do not become due to the debt-collecting company; they remain due to the original contracting party, but the debt-collecting company acts as an agent for the payment of debts into a bank account in the name of the debt-collecting company; the latter company’s function is merely that of an agent, and the underlying contractual structures are not affected.”

This blogger, in an article published with Niall Whitty, criticised ad hoc agency (‘Payment of another’s debt, unjustified enrichment and ad hoc agency’ (2011) Edin L R 57.  Not only does the concept subvert the separate legal personality of companies, it ignores the rules of creation of agency summarised above.  In the three cases decided by Lord Drummond Young, there was almost no evidence of representative activity on the party of the so-called agent.  Equally, in this case, presumably once again there was no representative activity by the pursuers on behalf of SNL and that may be why the pursuers’ legal team did not seek to establish agency.  Whatever their reasons, it is heartening to see that ad hoc agency is not taking hold. 

We can look forward to the further stages of this case.  The problems caused where loss and the right to sue are split between different entities are very difficult ones.  As such they are also of interest.  Scottish judicial analysis of the concepts discussed by the judges in McAlpine would make interesting reading.  This may provide something for us to look forward to in these dark January days (apart from the Supreme Court decision in Lloyds TSB Foundation for Scotland v Lloyds Banking Group plc).