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The way in which agency is established in Scots law is an issue lacking clarity.  Lord Bannatyne’s decision in the case of Rodewald v Taylor, 18 Jan 2011, [2010] CSOH 05, available at http://www.scotcourts.gov.uk/opinions/2011CSOH5.html, provides some interesting food for thought on this issue.   

Judicial statements on the contractual nature of agency are not difficult to find, examples including Graham & Co v United Turkey Red Co 1922 S.C. 533, 5 per Lord Salvesan 546 and Lord Ormidale 549; Lothian v Jenolite Ltd 1969 S.C. per Lord Milligan at 120; Trans Barwil Agencies (U.K.) Ltd v John S. Braid & Co Ltd 1988 S.C. 222 per Lord McCluskey at 230; Connolly v Brown 2007 S.L.T. 778 per Lady Dorian at para [54].  This contract may be established either orally or in writing.  The conduct of both parties can be used in order to make an inference of the consent necessary to form the contract, see, for example Ben Cleuch Estates Ltd v Scottish Enterprise [2006] CSOH 35 in which Lord Reed (at para [143]) notes that agency may arise through a course of conduct “as a matter of implied agreement.” 

Others have argued that a contract is not necessary in order to establish agency, for example, Gow in The Mercantile and Industrial Law of Scotland at 516, and more recently, Forte and Van Niekerk who go much further, arguing that agency is not only non-contractual but non-consensual: “Agency” in K. Reid, R. Zimmermann and D. Visser, Mixed Legal Systems in Comparative Perspective: Property and Obligations in Scotland and South Africa, (2006, at p. 246).

In Rodewald v Taylor the dispute related to a property known as “Corshellach,” owned by the pursuer and tenanted by the BBC.  Rental payments appear to have been made to the defender.  The pursuer argued that the defender was acting as her agent in receiving these rental payments, and they therefore ought to have been remitted to the pursuer.  Counsel for the defender denied that any relationship of agency existed, and explained that the defender and her husband, Mr Nagy, were occupying another property owned by the pursuer, Glenwood, rent-free. In consideration for such rent-free occupation, the defender was to let and collect the rents for Corshellach.   

The pursuer rested her case on establishing a relationship of agency between her as principal and the defender as agent.  Agency was, counsel argued on her behalf, a contract.  Lord Bannatyne indicated (at para [33]) that, “…to give fair notice to a defender of the case made against that party, it requires the pursuer to aver the essentials of the contract which in my view are as follows:
(a) Who the parties are to the alleged contract;
(b)  Where the contract was entered into;
(c) When the contract was entered into;
(d) The terms of the contract; and
(e) The form of the contract.”

The pursuer was found ultimately to have failed to aver sufficiently the foundation of her case.

This case may appear unremarkable: Lord Bannatyne was, after all, responding to the fact that the pursuer had based her case on contract.  Arguably, therefore, it may contribute little to the debate over whether agency is always both consensual and contractual. 

In English law, one need not establish an actual contract in order to establish agency.   The key is, rather, consent.  According to McKendrick: “It suffices that P consents to the exercise of authority by A and that A consents to exercise that authority.” (Goode’s Commercial Law, (4th edn, 2010), 180, at footnote 16, relying on Yasuda Fire and Marine Insurance Co of Europe Ltd v Orion Marine Insurance Underwriting Agency Ltd [1995] Q.B. 174).  Had an English court been faced with these same facts, the result is likely to have been the same, however.  No averments were made in the case that the pursuer consented to the defender acting on her behalf.  The slight difference of focus between the two legal systems is, however, interesting.  The Scots position may be an echo of a civilian past, agency being built on the consensual but gratuitous contract of mandate (gratuitous contracts being problematic in English law because of the requirement of consideration).

The pursuer’s legal team does not appear to have made use of ad hoc agency, a concept recently articulated by Lord Drummond Young (Whitbread Group plc v Goldapple Ltd 2005 SLT 281; Laurence McIntosh Ltd v Balfour Beatty Group Ltd and the Trustees of the National Library of Scotland, [2006] CSOH 1907; John Stirling t/a M & S Contracts v Westminster Properties Scotland Limited [2007] CSOH 117; [2007] BLR 537).  In those cases, agency was established very easily, on the basis of inferences of consent.  I have argued that Lord Drummond Young’s approach to establishing agency failed to meet the requirements of decided case law (with Niall Whitty, ‘Payment of another’s debt, unjustified enrichment and ad hoc agency’, 2011 Edin L R 57).  In those cases, it seemed clear that Lord Drummond Young was using agency as a concept to achieve justice on the facts of the case.  Rodewald may be a case of equally compelling facts: the pursuer alleged that the defender retained rents which were not due to her.  Ad hoc agency was neither pled by the pursuers nor suggested by Lord Bannatyne. 

If there is, indeed no contract between pursuer and defender, the pursuer could have recovered the rents on the basis of unjustified enrichment.  There appears to have been no attempt by the pursuer to base her case on unjustified enrichment. 

What conclusions can we reach from this case?

(1) Where the pursuer seeks to establish agency as a contract, the standard of proof remains high;
(2) Arguably, it provides evidence of a tendency to use agency where the real solution lies in unjustified enrichment; 
(3) Ad hoc agency may remain stuck on the starting blocks;
(4) We continue to lack evidence that the Scottish courts are willing to conceive of agency as a non-consensual concept.    

 

Like the old case of Allen v Hyatt (1914) 30 TLR 444, the recent case of Park's of Hamilton's (Holdings) Ltd. v Campbell [2011] CSOH 38; 2011 G.W.D. 8-196 is one of those unusual cases where it was held that a director of a company owed fiduciary duties under the law of agency to the shareholders of the company. Section 170(1) of the Companies Act 2006 clearly states that a director owes the duties adumbrated in sections 171 to 171 of the Act to the company and not any individual shareholder. However, in Park’s of Hamilton (Holdings) Ltd. v Campbell, the director was held to be an agent of each individual shareholder of a company when he sent a letter to each of the shareholders indicating that a third party had made an offer for the entire share capital of the company and asked them to sign a power of attorney in his favour enabling him to sign the SPA on their behalf. Since the director was an agent of the shareholders, he owed them fiduciary duties under the common law (not sections 171 to 177 of the Companies Act 2006) and the main issue in the case was whether the director had breached the fiduciary duty not to make a personal profit out of his agency. The shareholders contended that the terms of a consultancy agreement to be entered into between the director and the company post-completion relating to his remuneration had been concealed from them. The director's defence was that there had been disclosure of the personal profit under the consultancy agreement to the shareholders and that the latter had provided informed consent. The director based these assertions on the fact that the solicitors of the company were aware of the terms of the share purchase agreement and consultancy agreement and that that their knowledge could be imputed to each of the individual shareholders since the terms of engagement of the solicitors expressly provided that they were acting as agents of the shareholders in respect of the sale of their shares in the company.

In the recent case of Commonwealth Oil & Gas Ltd. v Baxter 2009 SC 156, para. [10], Lord President Hamilton conceived of the ‘no-profit’ rule as having a fluctuating and self-modulating character somewhat alien to the uncompromising hard-edged duty described by Rimer LJ in the Court of Appeal case of [2009] 2 BCLC 666:

“… it seems to me that if, without the identification of any particular opportunity, the company, expressly or implicitly, were to give its prior consent to a director pursuing possibly competing interests, his duty would not extend to avoiding such conflicts. If, for example, in the present case agreement had been reached between [the director] and [the company] that some opportunities (say, any onshore) would be brought to [the company] but that others (say, offshore) could be exploited by [the director] for his own interest and benefit, the scope of [the director]'s duties would have been modified by that arrangement. Even without express agreement, the actings of parties could in some circumstances have given rise to a modification of [the director]'s duties…"

Thus, in terms of the text above, where the principal’s actions are such that it expressly or implicitly provides its consent to the agent exploiting an opportunity or making a personal profit, the agent will not be deemed to be in breach of duty. Thus, there are two stages for the director to go through to be relieved of liability: (1) Disclosure of the breach, including the source and extent of the profit; and (2) the receipt of informed consent of the principal. With regard to the disclosure requirement,  the director in Park's of Hamilton (Holdings) Ltd. argued that disclosure to the company’s solicitors was sufficient and that the shareholders would be deemed to have constructive knowledge in such circumstances. This assertion was predicated on the argument that the terms of engagement of the company's solicitors provided that they were acting as the agents of the director and each of the shareholders in the sale of their shares in the company. Lord Hodge indicated that it might indeed be possible for the disclosure requirement to have been satisfied by virtue of the doctrine of constructive knowledge, but was not convinced that the remit of the company's solicitors could be ascertained without a proof before answer. Evidence would need to be lead about the scope of the company's solicitors' agency and from whom instructions were received. The provisions of the terms of engagement of the company's solicitors would be part of the factual matrix, but of themselves could not be conclusive.

Although Lord Hodge's judgment in Park's did not settle the status and relevance of the constructive/imputed knowledge of a principal (through an agent such as a solicitor or accountant) and whether this was sufficient for another agent to have discharged its duty to disclose a breach of fiduciary duty, there are indications in that judgment that it is perfectly possible for this doctrine to play a role. Of course, if the question in the case had been about the director's duty to disclose the making of a personal profit at the expense of the company itself, the means by which disclosure could have been validly tendered would have been more restricted since section 175(5) of the Companies Act 2006 provides that disclosure must be made directly to the board of directors of the company. In such circumstances, there would be no scope for the company (via its board of directors) to have constructive knowledge of the director's breach of duty. This is another area where the law of director's duties in company law has diverged and followed a different path from its original sources in agency and trust law.

This Outer House case ([2011] CSOH 45)provided Lord Hodge with the opportunity to summarise the rules of interpretation of commercial contracts in Scots law.

Facts
The agreement between the parties was governed by Clause 2 of the contract, as follows:
"2.1 MHL or Maritsan shall identify Development Projects which they shall make available to Maritsan.
2.2 Maritsan undertakes that it shall use all of its reasonable endeavours to ensure that such permissions and consents as shall be required to sell on each Development Project to property developers and builders at the best price are obtained.
2.3 MHL shall provide consultancy services as reasonably required by Maritsan and such services shall in particular relate to the planning process generally. MHL shall make such services available to Maritsan in relation to Development Projects which they introduce."

The mechanism for payment by Maritsan to MHL was contained in Clause 3:
"3.1 Maritsan agrees that it shall remit a sum which is equal to one half of the Net Profits for and in respect of each Development Project to MHL within five working days of the settlement of the Sale. …"

Both parties had instructed the same firm to draft the agreement as a joint venture agreement.  The firm produced a different kind of agreement, and ceased to act on behalf of Maritsan, advising it to obtain independent legal advice.  From this point onwards, although the director of Maritsan continued to revise the agreement that had been produced, he did so without the benefit of legal advice.  The parties had entered into a prior agreement concerning land at Braidwood.  At that time, they had operated as a joint venture.  This being the case, no VAT was payable on MHL’s share of the profits.  Despite the fact that both parties had initially instructed the preparation of a joint venture agreement, the finally agreed document specified that the parties did not intend to enter into a partnership (in clause 7).

Dispute
The dispute related to the terms of the agreement in relation to the payment of VAT.  This was dealt with in clause 4 of the agreement:
"All sums of money payable under this Agreement are, save where the context otherwise requires, expressed exclusive of Value Added Tax but if Value Added Tax shall be due on any payment due this shall be paid provided a valid Value Added Tax invoice in respect of such payment has been issued. Any taxes to be borne in respect of sums received by the parties to this Agreement shall be borne by the recipient which shall indemnify the other party in respect of any such liability."

Section 19 of the Value Added Tax Act 1994 is also relevant to this discussion.  It provides that a sum of money payable under a contract for a supply of goods or services is inclusive of any VAT on it.  Counsel for the defender referred to both Hostgilt Ltd v Megahart Ltd [1999] STC 141 and Wynn Realisations Ltd (in administration) v Vogue Holdings Inc. [1999] STC 524 as authorities illustrative of this point.

Parties’ submissions
Counsel for MHL argued that the meaning of the agreement was clear.  Clause 3 required Maritsan to remit a sum to MHL Ltd equal to one half of the "Net Profits" and clause 4 obliged Martisan to pay the VAT on that sum. 

Counsel for Maritsan argued that, in the event that his plea for rectification of the contract to provide it with a commercially sensible construction was unsuccessful, clause 3.1 should be interpreted in one or other of two ways which he put forward.  The first was that the sum to be given by Maritsan to MHL was inclusive of VAT.  Maritsan would receive one half of the net proceeds, give one half to MHL, and MHL would be bound to pay VAT out of its half.  The alternative submission was that clause 3.1 should be interpreted so that, after payment of VAT, each of the parties should end up with the same amount of net profit in their hands.

Decision
Perhaps not surprisingly, given that one party was not legally represented in the negotiations, Lord Hodge commented (para [29]):
“The contract is not easy to interpret and one is left with the feeling that the parties have given insufficient thought to the expression of their intentions.”

On the rules of interpretation of commercial contracts in Scots law Lord Hodge stated (at para [26]):
“There was no dispute between the parties as to the correct approach to the interpretation of commercial contracts and the exclusion of pre-contractual negotiations as an aid to construction. I was referred to Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, Lord Hoffmann at p.912 and Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101.”

In relation to the prior agreement concerning the land at Braidwood, Lord Hodge classed this as a pre-contractual negotiation, and as such the court could not consider its terms in order to interpret the contract before them (para [27]).   

On the applicable rules of interpretation, Lord Hodge stated (para [28]):
“There is no need to reiterate in any detail the principles which govern the interpretation of commercial contracts which judges of this court have summarised in various cases since the decision of the House of Lords in Investors Compensation Scheme Ltd (above). In this case the significant rules are that the court should (i) construe individual provisions of the contract in the context of the whole contract, (ii) apply an objective construction by reference to the meaning which a reasonable third party, who is aware of the commercial context in which the contract occurs, would give to the words which the parties have used, and (iii) adopt a commercially sensible construction, when the court is faced with competing interpretations. Further, the court cannot re-make the contract for the parties on what it considers would be sensible terms or disregard contractual terms. Where parties have included a provision in their contract, the court should strive to give a proper meaning to it: see, for example, Wynn Realisations Ltd (above) Morritt LJ and Clarke LJ at p.529b-e and h-j respectively.”

On clause 4, the clause which governed VAT Lord Hodge commented (para [31]):
“I am left with the clear impression that clause 4 has been lifted from another contract and inserted into this agreement in a context in which nobody has applied his mind to what the effect of VAT would be. I am not persuaded that the ordinary expectation that parties to a formal document have chosen their words with care is met in this case. But the court cannot reframe a formal contract, even if it is not skilfully drafted. As I have said, I have to consider what a reasonable businessman standing in the shoes of parties would have understood the parties to have meant by the words which they have used in the context of the contract as a whole and having regard to the relevant commercial background.”

In response to MHL’s argument Lord Hodge stated (para 34]):
“It makes no business sense that the parties should have agreed such an arrangement. While it is always necessary in construing a contract to bear in mind the possibility that one party has made a bad bargain, I am satisfied that the context, of which clause 4 speaks, qualifies the general rule in that clause, as set out below. Thus applying the ill-thought-out clause 4 results in a rejection of the pursuer's construction.”

In response to Maritsan’s argument Lord Hodge stated (para [33]):
“That may not be quite as unlikely an intention as the pursuers' position. But it makes little business sense in the context of the contract as a whole which sought the equitable deduction of costs, including irrecoverable VAT on the development costs.”

Lord Hodge’s approach can be understood from the following quote (para [36]):
“…I construe clause 3.1 in the context of the agreement as a whole as requiring the parties to share the actual net profits equally and the VAT charge on MHL's services to be calculated accordingly. I thus give effect to the rule in clause 4 but qualify it, rather than exclude it, to reflect the intention of the parties which I derive from the agreement as a whole.”

Finally Lord Hodge set out his calculation of the effect of the agreement (in para [37]).  First of all the net profits were calculated.  Then, one had to acknowledge that VAT was due on the sum payable to MHL as its share of the agreement.  It was necessary to allocate equally between the parties the burden of the VAT in order finally to arrive at the share of net profits payable to each party.
The result was that MHL was entitled to further sums from Maritsan in terms of the contract.  The challenge to the relevancy of the submissions made on behalf of Maritsan failed.  Maritsan was held entitled to a proof before answer on its counterclaim. The case was put out by order to determine further procedure.

Conclusion
Lord Hodge’s judgment is useful for those seeking a brief statement of the governing principles of interpretation of commercial contracts in Scots law.  Beyond that, it suggests that parties should be slow to seize upon an interpretation favourable to them, which has arisen fortuitously as a result of ambiguous drafting.  Such attempts are unlikely to succeed given that the courts, construing the contract as a whole, seek to identify a “commercially sensible” construction. 

The case is an interesting illustration of the difficulties arising where one of the parties has not been represented by a solicitor.  Clearly the parties had contracted in the past and had adopted the format of a joint venture.  VAT was not therefore payable on profit shares on that occasion.  In the transaction which was the subject of this new dispute, the parties had rejected the form of a joint venture, but did either of them realise that decision resulted in a payment to VAT?  Certainly, the party lacking representation seems not to have realised these consequences.  In such circumstances, few of us would be persuaded that the unrepresented party should benefit from more favourable interpretative rules. Nevertheless, given that the eventual contract is likely to be difficult to interpret, it potentially presents a more pressing case for the operation of the “commercially sensible” construction, looking both to the terms of the contract as a whole and the overall transaction contemplated by the parties.  

Despite high profile and damaging data losses in previous years, it seems that data controllers are still not ensuring compliance with their obligations under the Data Protection Act. 

The BBC today reports details of a very serious data loss which, if true, would suggest a significant breach of the seventh data protection principle.  According to the report, confidential police tapes were found at Buchanan Street bus station in Glasgow, relating to a child abuse inquiry.  The tapes reportedly contained an interview of a six year old girl, in relation to an alleged drunken assault by her father on her younger brother.

Such data is of course classified as sensitive personal data, since it has to do with the potential commission of an offence by the father and also relates to the health of the girl and her brother.  Failing to keep personal data or sensitive personal data secure is a breach of the seventh data protection principle, which requires that "Appropriate technical and organisational measures shall be taken against unauthorised or unlawful processing of personal data and against accidental loss or destruction of, or damage to, personal data".

Since April 2010, the Information Commissioner has enjoyed stronger powers to impose monetary penalties of up to £500,000 for breaches of the data protection principles (in terms of section 55A of the Data Protection Act 1998, which was inserted by the Criminal Justice and Immigration Act 2008, section 144(1).)  It remains to be seen whether this breach, if proven, will lead to a penalty for the responsible authority, but in the meantime, the quest for protecting personal data continues.

 

On 23 December, the Scottish Government launched its "Identity Management and Privacy Principles".  These principles are intended to "help ensure that respect for privacy is central to the way public services prove identity or entitlement."  As this rationale makes clear, the Principles only extend to public sector bodies – often the ones that handle an individual's most private or sensitive data.

The Principles centre round five key areas of data handling, with five corresponding principles:

Proving identity or entitlement – people should not be asked to prove who they are unless it is necessary. Public bodies should ask for as little information as possible, identifying themselves and offering alternative ways to provide identity and/or entitlement for a service

Governance and accountability – public service organisations should adopt privacy and security policies and procedures

Risk management – organisations should carry out Privacy Impact Assessments on any new initiative that enables access to services and involves collection, storage or use of personal information

Data and data sharing – public services should minimise the personal information they hold, avoid creating centralised databases of information and store personal and transactional data separately

Education and engagement – there should be efforts to raise public awareness of the principles and ensure those handling the data have a good working knowledge of the issues.

These standards are the result of detailed work carried out by an expert group, including the University of Edinburgh's Professor Charles Raab.  A consultation exercise followed the initial draft principles, and resulted in the finished product launched last month.

While the principles are not statutory (and have not resulted in any changes to the Data Protection Act 1998), they provide a useful benchmark for public sector organisations when dealing with personal data.  Rather than complying with data protection principles in order to comply with the law, the new Identity Management and Privacy Principles aim to promote the importance of the privacy of personal data.  While the changes are not legally binding, it is to be hoped that they help introduce a new ethos when dealing with personal data – one which may, in time, spread to other sectors.  They are certainly to be welcomed as a new start for the new year.

 

The Information Commissioner has confirmed (again) that data protection laws do not prevent parents taking photographs at their child's nativity play.  The myth that the Data Protection Act is a bar to proud parents taking pics has been circulating for some years, and typically pops up twice a year, in relation to summer sports days and Christmas plays. 

However, the Data Protection Act contains a clear exemption for personal use:  section 36 provides that any personal data processed by an individual only for the purposes of that individual’s personal, family or household affairs (including recreational purposes) are exempt from the data protection principles and the provisions of Parts II and III of the Data Protection Act 1998.  So long as the pictures are indeed for personal or family albums, rather than commercial or public use, there should be no problem with parents snapping away – thus providing hours of entertainment for doting relatives over Christmas…

In October 2009, Christopher Graham, the newly appointed Information Commissioner, addressed a data protection conference in Edinburgh and assured the audience that he was prepared to supplement the traditional "carrot" approach to data protection enforcement, by bringing the "big stick" out of the cupboard.  The message was clear: those found responsible for some of the worst breaches of the Data Protection Act 1998 could in future expect to face tougher enforcement action.

Further significance was given to his words in April 2010 when new powers were introduced, allowing him to fine data controllers up to £500,000 for serious breaches of the data protection principles.  (These eight principles are contained in Schedule 1 to the Data Protection Act, and ensure that personal data are used fairly, lawfully, and securely, for example to minimise damage to individuals.)

These measures were designed to redress the situation where serious breaches of the data protection legislation resulted in minor (or even no) penalties – a situation which was further exacerbated when contrasted with the wide-reaching powers of other bodies, such as the FSA, for levying significant fines for data losses.

The power to levy a monetary penalty was inserted into the Data Protection Act as section 55A, by section 144(1) of the Criminal Justice and Immigration Act 2008, s 144(1)).  In terms of the new s55A, the Information Commissioner can issue a monetary penalty notice where he is satisfied that:

1. there has been a serious contravention of section 4(4) of the Data Protection Act 1998 by the data controller,
2. the contravention was of a kind likely to cause substantial damage or substantial distress;
3. the contravention was deliberate; and
4. the data controller failed to take steps to prevent the contravention, despite knowing (or where it ought to have known) that there was a risk of a breach, and that the breach would be likely to cause substantial damage or substantial damage or distress.

Substantial damage or distress will arise where the data subject suffers in a tangible way (for example, through identity theft) or through anxiety and worry, even if his concerns do not come to pass.

These powers have now been put use for the first time, with the announcement today that the Information Commissioner has fined two data controllers for significant breaches of the data protection principles.

Hertfordshire County Council has been fined £100,000 for two incidents (which happened within two weeks of each other), where employees faxed highly sensitive details to the wrong recipients.  The information in question related to child sexual abuse and to care proceedings, both of which had the clear potential to cause serious damage to the subjects of the information.  Sending such sensitive personal data by fax, and failing to ensure its security, is a clear breach of the first and seventh data protection principles.

The second monetary penalty was imposed on A4e, an employment services company, for the loss of a laptop, containing unecrypted personal data relating to 24,000 people.  The penalty imposed here was £60,000.  Again, the loss of unsecured data is a breach of the seventh data protection principle, which requires "Appropriate technical and organisational measures shall be taken against unauthorised or unlawful processing of personal data and against accidental loss or destruction of, or damage to, personal data."

In both cases, the data controllers at fault reported the losses to the Information Commissioner, which is a positive step in addressing the serious breaches.   Nevertheless, the breaches were significant and the fact that the Information Commissioner now has the power to impose meangingful penalties is a welcome development in establishing a strong commitment to protecting personal data in the UK.

When the provisions of sections 170 to 178 of the Companies Act 2006 were introduced and codified the law of directors' duties, they were heralded by the Government as representing a long overdue modernisation of the applicable law. In particular, commentators pointed to section 172 of the Act which enjoined directors to take decisions in a way which would promote the success of the company for the benefit of the members as a whole, pursuant to which they were compelled to consider the interests of stakeholder constituencies such as suppliers and employees.

However, on closer inspection, the statutory codification is not as radical as perhaps one might initially think. This has been noted by the judiciary south and north of the border. For example in West Coast Capital (Lios) Ltd. [2008] CSOH 72 at para. [21] Lord Glennie made the following obiter statement:

“It is no doubt because of the need to show that the conduct of the directors or the majority is in breach of some agreement or duty that the Dean of Faculty drew my attention to ss.171 and 172 of the 2006 Act. There was no equivalent in the earlier Companies Acts, but these sections appear to little more than set out the pre-existing law on the subject.”

A similar point was made by Warren J in Cobden Investments Ltd. v RWM Langport Ltd. [2008] EWHC 2810 (Ch) at para. [52] and Lord Hodge in Eastford Ltd. v Gillespie [2010] CSOH 132; 2010 G.W.D. 32-656 at paras. [13]-[14]. Indeed, in Eastford, Lord Hodge examined the relationship between the common law and the statutory statement of directors' duties. In particular, he drew attention to section 170(3) of the Act which directs that the statutory provisions replace the common law and then went on to explain the purpose of section 170(4) of the Act. 

“One must look to the purpose of the statutory statement which is revealed in the 2006 Act. Subsections (3) and (4) of section 170 set out the relationship between the general duties which are stated in the Act and the pre-existing common law rules and equitable principles on which they are based. Subsection (3) provides:

'The general duties are based on certain common law rules and equitable principles as they apply in relation to directors and have effect in place of those rules and principles as regards the duties owed to a company by a director.'

Thus the statutory statements replace such of the common law rules as have been subjected to statutory formulation. But sub-section (4) provides:

'The general duties shall be interpreted and applied in the same way as common law rules or equitable principles, and regard shall be had to the corresponding common law rules and equitable principles in interpreting and applying the general duties.'

This subsection seeks to address the challenge which the Law Commissions and the Company Law Review had identified, namely of avoiding the danger that a statutory statement of general duties would make the law inflexible and incapable of development by judges to deal with changing commercial circumstances. Parliament has directed the courts not only to treat the general duties in the same way as the pre-existing rules and principles but also to have regard to the continued development of the non-statutory law in relation to the duties of other fiduciaries when interpreting and applying the statutory statements. The interpretation of the statements will therefore be able to evolve. The statutory statement of the general duties of directors is intended to make those duties more accessible to commercial people. I see nothing in the statutory provisions, including section 180(5) (which provides that, subject to specified exceptions, the general duties have effect notwithstanding any rule of law), which suggests that Parliament intended to alter the pre-existing rules on ratification by a board of a director's unauthorised acts. I am supported in my opinion by Lord Glennie in West Coast Capital (Lios) Ltd Petr [2008] CSOH 72, (at para 21) in which he expressed the view that section 171 of the 2006 Act did little more than set out the pre-existing law on the subject. I also derive some support from leading company law textbooks such as Gore-Browne on Companies (at para 15[8A]) and Palmer's Company Law, which (at para 8.2309) suggests that older cases remain relevant to the interpretation of the statutory duties "since the codified duties are generally formulated in a way that quite faithfully reflects the older case law". The statutory formulations do not, by a side wind, alter the law of agency or prevent ratification of the unauthorised acts of a director.”

On another note, if some of the directors of a company commit the company to take a particular course of action without the authority of the board of directors, is it the case that they have breached the company’s constitution contrary to section 171(a) of the Act? This was one of the other issues considered in Eastford. Lord Hodge answered that question in the affirmative, but went on to on to hold that there was no rule which provided that an unauthorised act of a director could not be ratified by the board of directors in paras. [11]-[12]:

"It is well established at common law that, unless a company's constitution otherwise provides, a board of directors can, within a reasonable time, ratify the acts of a director or directors who, when they acted, had no authority to bind the company: Re Portuguese Consolidated Copper Mines Ltd [1890] LR 45 Ch D 16, Breckland Group Holdings Ltd v London & Suffolk Properties Ltd [1989] BCLC 100 and Municipal Mutual Insurance Ltd v Harrop [1998] 2 BCLC 540. See also Danish Mercantile Co Ltd v Beaumont [1951] Ch 680. The statutory statement of the general duties of directors in Chapter 2 of Part 10 of the 2006 Act has not superseded that line of authority. Section 171 provides that a director of a company must act in accordance with the company's constitution. That might, taken by itself, suggest that an unauthorised act could not be ratified. But it is clear on examining the statutory statement of the general duties of directors that that statement does not prevent a company by a resolution of its board from ratifying the acts of a director which were unauthorised but were within the power of the board."

The above analysis is interesting, particularly when considered against the backdrop of section 239 of the Act which  is a provision which had no precursor or counterpart in the Companies Act 1985 and does not appear to have been considered in Eastford. Since a breach of section 171(a) of the Act clearly amounts to a breach of a duty of a director to obey the constitution, one wonders what remains of the cases of Re Portugese, Breckland Group Holdings, Municipal Mutual and Danish Mercantile in light of section 239(1) and (2) of the Act which provides 'This section applies to the ratification by a company of conduct by a director amounting to negligence, default, BREACH OF DUTY or breach of trust in relation to the company… [and t]he decision of the company to ratify such conduct MUST be made by resolution of the members of the company.' It is submitted that the above clearly demonstrates that the company only has the power to ratify a breach of section 171(a) via the medium of an ordinary resolution of the shareholders and the board has no locus to do so. It would have been interesting to note if the result would have been the same if the role of section 239 of the Act had been analysed. Admittedly, one might argue that a breach of agency authority on the part of a director would not amount to a breach of the constitution on the facts of Eastford when two of the directors (out of a total of 4) instructed the company's lawyers to raise legal action without the consent of the other two directors. However, since Lord Hodge's judgment tells us that Eastford's articles of association/constitution were based on Table A, there is no mileage in any argument that the two directors had not breached the company's constitution when they raised the legal action, since Table A regulation 88 provides that all 'questions arising at a meeting shall be decided by a majority of votes' and Table A regulation 92 directs that decisions taken by the directors outwith a board meeting must be taken by a resolution in writing signed by every director. Since the decision had not been taken in accordance with Table A regs 88 or 92, the inevitable conclusion is that the two directors were clearly in breach of section 171(a) of the Act when they took such a decision to initiate legal action. Breach of section 171(a) is a breach of a director's duty and so only an ordinary resolution of the shareholders (which complies with section 239(3) and (4) and (7) of the Act) can serve to lawfully ratify the director's breach. Curiously, if the directors had exceeded their powers by settling or releasing a legal action already commenced, the position might be different (see section 239(6)(b) of the Act), but that was not the case in Eastford. To that extent, although some things remain the same post-Companies Act 2006, others have indeed changed, namely the mechanics of the law of ratification of breaches of directors' duties.

Last week the Institute of Law in Jersey hosted a conference on Contract Law (the programme is here). The conference was considering contract law generally, and the possibility of codification of the area. Among the speakers was Lord Hope who delivered a fascinating speech on "the role of the judge in developing contract law", published this week on the website of the Supreme Court of the United Kingdom. His comments are of particular interest in Scotland where the Scottish Law Commission is turning again to contract law in its eighth programme of law reform. The SLC project will re-examine various unimplemented reports on formation of contract, interpretation in private law, and remedies for breach of contract in the light of the publication of the Draft Common Frame of Reference.

Lord Hope's speech suggests to his Jersey audience that in considering possible reforms it should not just look to English law, and indeed he expressly concludes that

"it would seem unwise, if I may say so, for you to adopt wholesale the entirety of English contract law. In so many respects is out of keeping with that of most, if not all, of the other jurisdictions who wish to be part of the European project: as to its requirement for consideration, its rejection of the broad notions of good faith and reasonableness and its exclusion of evidence of pre-contractual negotiations, for example. It may look attractive today. That may not be so fifty years on from now, when so much more will have been done to encourage harmonisation along the lines favoured by the current generation of code-makers."

Before reaching this conclusion Lord Hope ranges widely over the development of contract law within the legal systems in the United Kingdom, examining the late nineteenth century codification projects, before moving on to consider codification generally and the possible reform of the law in Jersey. His speech is well aware of the approach at EU level to the DCFR – that mandatory codification at EU level is unlikely in the near future – and that the DCFR is a tool that can be used in a variety of ways by law reformers (in this respect he refers to Professor MacQueen's consideration of the House of Lords EU sub-committee E report on the DCFR and contract law).  He notes, for his Jersey audience – but remarks also of value to a Scottish reader:

"In contrast to the movement towards more uniformity between English and Scots law which was current there in the 1890s, there is now a much wider perspective. A wholesale incorporation of English law into the laws of Jersey and Guernsey is not the only option which is open to you. My task is to offer some reflections, from a judge’s perspective, on the question whether you should retain what you have or whether there useful lessons to be learned from the various European Contract Code projects."

But in generally discussing codification (and the proposed criminal codes prepared in Scotland and in England and Wales in recent years) notes that

"The rules of procedure, which are invariably written down, are much easier to deal with in this way than the substantive law."

In considering codification in the context of contract law, Lord Hope focuses on an aspect of the law relating to interpretation and looks at the case of Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101, a case of particular interest to the Edinburgh Centre for Commercial Law as the speech of Lord Hoffman refers to our first annual lecture delivered by the late Lord Bingham, later published in (2008) Edinburgh Law Review pp. 374-390.

Lord Hope refers to Article 39 of the European Code of Contract (a project headed up by Professor Gandolfi) and quotes paragraphs 3 and 4 which provide

"3. In case of doubts arising on examination of the text which cannot be resolved by a comprehensive evaluation of that text, which doubts may be in connection with the statements or conduct of the contracting parties even after the conclusion, but compatible with the text, of the contract, the contract shall be interpreted in conformity with the common intention of the parties which can also be ascertained by recourse to extrinsic elements concerning the parties.

4. In any event the interpretation of the contract shall in no way produce effects contrary to good faith or reasonableness."

Lord Hope considered this in the context of the Chartbrook case which re-examined (and re-affirmed) the traditional analysis in both England and Scotland that pre-contractual negotiations could not be referred to in interpreting the terms of contracts (for England and Scotland see the cases referred to in WW McBryde, The Law of Contract in Scotland (3rd edn) para 8-28). Lord Hope refers to criticisms of the approach by Lord Nicholls, in "My Kingdom for a Horse: The Meaning of Words" (2005) 121 LQR 577, Professor David McLaughlan, "Contract Interpretation: What is it about?" (2009) 31.5 Sydney Law Review 5; and the different approach taken by the Unidroit Principles of International Commercial Contracts (1994 and 2004 revision) and the Principles of European Contract Law (1999) and the United Nations Convention on Contracts for the International Sale of Goods (1980), as well as the United States, Restatement (Second) Contracts. In addition he could have referred to the suggestion that the law in Scogtland could move towards the approach in the international codes by my colleagues Laura Macgregor, writing with Judge Carole Lewis in "Interpretation of Contract" in Zimmermann, Visser and Reid (eds) Mixed Legal Systems in Comparative Perspective: Property and Obligations in Scotland and South Africa (2004) 66 at p 85. However, despite the international approach the possibility of referring to pre-contractual negotiations was rejected by Lord Hoffmann. He described the approach as reflecting the French approach to interpretation (para [39]) and could not then be transplanted into the English system with its more objective approach.  His view is quoted by Lord Hope,

 "French law regards the intentions of the parties as a pure question of subjective fact, their volonté psychologique, uninfluenced by any rules of law. It follows that any evidence of what they said and did, whether to each other or to third parties, may be relevant to establishing what their intentions actually were. There is in French law a sharp distinction between the ascertainment of their intentions and the application of legal rules which may, in the interests of fairness to other parties or otherwise, limit the extent to which those intentions are given effect."

Lord Hoffmann's analysis in this respect is questionable (Lord Hope references Professor Clive's consideration of the case). But his position, with which the other judges agreed, was that there was no clearly established case for departing from the exclusionary rule. Lord Hope notes in this context, the views of Baroness Hale, as a former law commissioner.

"Baroness Hale of Richmond confessed to seeing some attraction in counsel’s invitation to reconsider the rule in Prenn v Simmonds [[1971] 1 WLR 1381] especially as the parties’ pre-contract negotiations, of which the committee had been made aware, made their position crystal clear. But she said that her experience on the Law Commission had shown her how difficult it was to achieve flexible and nuanced reform by way of legislation. The courts, on the other hand, are able to achieve step-by-step changes which can distinguish between cases where evidence of pre-contractual negotiations is helpful from cases where it is not. I echoed those remarks when I said that one of the strengths of the common law is that it can take a fresh look at itself so that it can keep pace with changing circumstances."

And stresses the practical benefits of the exclusionary rule of interpretation, contrasting it with the code provision which he suggests is limited only a principle of good faith – which is not part of the English system (albeit Lord Hope suggests that it may be part of Scots law).

"risks opening the door to an uncertain, wide-ranging and possibly fruitless inquiry at the expense of the advantages of economy and predictability which the rule in Prenn v Simmonds seeks to preserve."

From the example, and the historical approach to codification which he considers, Lord Hope makes a plea on behalf of the judiciary as law reformers. The passages are worth quoting in full:

"One has to bear in mind what judges can and cannot do. One has to bear in mind too the methods that they use. At the centre lies the adversarial system within which they work. This depends to a large degree on the contribution that is made to the way they think by the advocates. The work that they can do, by researching and presenting written and oral argument, must not be underestimated.

…

"The Scottish system of contract law was developed, as I have said, from the principles of the law of obligations that had been expounded by the jurists. The role of the judges was to fill in gaps where they were found and to develop and apply the basic principles. To some extent they could be creative in carrying out these functions. But their duty was to apply the law as they believed it to be. Their approach is, I think, inevitably, conservative rather than revolutionary. There are limits to the extent that the judges can reform the law. Structural changes must be left to the legislators.

"Furthermore, as the judges see it, the code-makers do not have the same day-to-day experience as they do of how disputed facts are actually dealt with under our domestic legal systems. One cannot, the judges will say, divorce reforms which may at first sight appear attractive in principle from the way in which they will work out in practice in the event of a dispute which has to come to court for resolution. Rules of procedure and rules as to the admissibility of evidence have been fashioned, mostly by the judges, in the light of experience. They should not be discarded without a careful assessment of the consequences of doing so. There is, of course, much to be said for the harmonisation of laws to promote commerce, especially in the international context. But such a process is bound to lead to the making of compromises, as the Scots found when they were confronted with the proposal to codify the law of sale of goods in the 1890s which led to the 1893 Act. The judges would say that each one needs to be examined critically with a close eye as to how the proposed new rule will work out in practice in each judicial system, having regard to its own rules of evidence and procedure. It would only be if it survives this scrutiny that it would be wise to adopt it."

 

The Inner House has decided the case of Aberdeen City Council v Stewart Milne Group Ltd in favour of the Council.  The opinion of the Court, delivered by Lord Drummond Young, can be found here:

 http://www.scotcourts.gov.uk/opinions/2010CSIH81.html

This case involves the interpretation of commercial missives in terms of which the Stewart Milne Group had purchased land for development from Aberdeen City Council.  The dispute centred around whether the sellers were entitled to an uplift on the purchase price in terms of clause 9 of the missives. Clause 9 of the missives contained the provisions establishing payment of the uplift:

"9. In addition to the purchase price detailed in Clause 2 hereof, the Purchasers and the Sellers have agreed that the Sellers shall be entitled to a further payment ("the Profit Share") upon the Purchasers purifying the suspensive conditions contained in Clause 4 hereof and issuing a notice to the Sellers intimating to the Sellers that the Purchasers wish to purchase the relevant part of the profit-share as defined in the Schedule to which the Sellers are entitled. The Sellers' entitlement to the relevant part of the profit-share will also be triggered by the Purchasers disposing either by selling or by granting a lease of the whole or any part of the subjects."

The definition of the Profit Share is particular significant: 

Sale of the subjects triggered a profit share, payable to the Council.  The Profit Share was defined as follows:  

“the Profit Share … means 40% of 80% of the estimated profit or gross sale proceeds or lease value lest [sic] the Allowable Costs as herein defined.”

The subjects were indeed sold by Stewart Milne, but, perhaps somewhat unexpectedly, they were sold to a company within the Stewart Milne Group.  This being the case, the sale price was not a market price, amounting to only £483,020.  Stewart Milne argued that the profit share payable to the Council should be calculated by reference to this relatively low, non-market price.  The Council argued that, had the subjects been sold on the open market, the price would have been £5,670,000, i.e. more than 11 times the price at which the Subjects were actually sold.  Not surprisingly, the Council argued that the profit share should be calculated by reference to the open market price at the time of sale.

At the hearing in the Outer House, Lord Glennie clearly did not see this is a difficult case.  He explained:

“It is clear, in my opinion, that the parties to the contract anticipated that the Subjects would be developed, as they were, and that in addition to the initial sale price the Sellers would be entitled to a share in the profit resulting from that development. They have endeavoured in clause 9, clauses 9.1-9.6 and in the definitions in the Schedule to the relevant missive letter, to set out how this is to be calculated.”

In finding in favour of the Council’s interpretation, i.e. that the profit share should be calculated by reference to open market values, he explained:

“It seems to me to be plain that the parties, in approaching the calculation of the Profit Share in the event of a sale, must have contemplated a sale at arms length and at open market value. Otherwise it would be within the power of the Purchasers in every case to defeat the Sellers' entitlement to receive any amount by way of profit share. This is something which, so it seems to me, the parties cannot have intended.” 

As a final comment he reminded us that:

“The test, of course, is not subjective. Expressed objectively, neither party can, in my opinion, be taken to have understood that the contract would work in this way.”

In the Inner House, upholding Lord Glennie's approach, Lord Drummond Young commented (at para 10):

"In our opinion it is clear that the parties must have intended, on an objective basis, that in the event of a sale of the subjects the profit share payable by the defenders should only be based on the actual price paid in the event that the sale is at arms length and at open market value.  If the sale is not of that nature, the profit share should be based on an open market valuation.  The commercial purpose of clause 9 seems to us to be very clear; if, as was obviously likely, the subjects of sale turned out to have a value in excess of the £365,000 paid at the time of the contract, the pursuers were to take a share of the increase in value.  That share was to amount to 32% (defined as 40% of 80% in the definition of profit share) of the increase in value.  If the defenders' construction of clause 9 is correct, it would be open to them to sell the property at an artificially low price to an associated company, and in that way to defeat the pursuers' entitlement to share in the increase in value.  That in our opinion does not make commercial sense; clause 9 is plainly an important part of the parties' bargain, and such a provision should not be capable of being defeated at the whim of one of the parties."  

What is notable about this approach is the emphasis placed on the idea of a commercially sensible construction as an interpretative tool.  It seemed abundantly clear that the parties could not have intended that payment of profit share could so easily be defeated by a sale to a related company.  The importance of a commercially sensible construction was emphasised by Lord Drummond Young (at para 11):

"In recent years the importance of construing contractual provisions in context, and in such a way as to give effect to the parties' commercial objectives, has been emphasized in a large number of cases; the principal authorities are well known and scarcely require discussion.  We note in passing, however, that at least in Scotland this approch is not new; it appears clearly from cases such as Mackenzie v Liddell (1881) 10 R. 705, Bank of Scotland v Stewart (1891) 18 R. 957, and Jacobs v Scott (1899) 2 F. (HL) 70." 

Both this decision and the approach of the Inner House are to be welcomed. 

For those interested in Scottish cases on interpretation of contract, the Supreme Court judgment in Multilink Developments Limited v North Lanarkshire Council was heard on 12 October, and the judgment should shortly be available.  This is a case involving a commercial lease, and the potential applicability of the Hoffmann approach (and my thanks to David Cabrelli for drawing my attention to this link), see:

http://ukscblog.com/case-preview-multi-link-developments-limited-v-north-lanarkshire-council