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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> John Davidson (Pipes) Ltd v First Engineering Ltd [2000] ScotCS 282 (10 November 2000)
URL: http://www.bailii.org/scot/cases/ScotCS/2000/282.html
Cite as: 2001 SCLR 73, [2000] ScotCS 282

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OUTER HOUSE, COURT OF SESSION

CA51/00

 

 

 

 

 

 

 

 

 

 

OPINION OF LORD MACFADYEN

in the cause

JOHN DAVIDSON (PIPES) LIMITED

Pursuers;

against

 

FIRST ENGINEERING LIMITED

Defenders:

 

________________

 

Pursuers; A. F. Stewart; Tods Murray

Defenders; Di Emidio; McClure Naismith

 

10 November 2000

Introduction

[1] In this action the pursuers conclude for payment by the defenders of the sum of 57,860.05, with interest. They do so on the basis, formulated in their first

plea-in-law, that the defenders guaranteed payment of the sums due by F E Systems Limited ("FES") in respect of supplies made by the pursuers to FES, and that the sum sued for is so due to them by FES in respect of such supplies.

[2] The case was appointed to debate on the defenders' first plea-in-law, which is a plea to the relevancy of the pursuers' pleadings. The main focus of the debate was on the sufficiency of the averments in which the pursuers advanced the proposition that a guarantee of the obligations of FES had been given on behalf of the defenders.

 

 

The Pursuers' Pleadings

[3] It is convenient to begin by summarising those parts of the pursuers' pleadings that were examined in the course of the debate. They begin with an outline of the origins of the relationship between the defenders and FES. It is averred that in April 1998 the defenders approached FES (then known as SMW (Kendal) Limited) to assist the defenders' expansion into the motorway communications infrastructure business; that it was agreed between them that FES would be used as a vehicle for that expansion until a new company could be formed; that further to that agreement FES changed its name from SMW (Kendal) Limited to F E Systems Limited, and the defenders gave FES permission to use their address, logo and company colours; that the defenders' consultant, Innes Muir, was appointed a director of FES; and that the defenders permitted FES to use the defenders' stationery.

[4] The pursuers then aver that:

"In or about early February 1999 the defender's Mr John Cowie authorised said Mr Muir and Mr Watson to represent to third parties that the defender was standing behind the financial obligations of FES and that FES was 'part of' the defender. Said authority was not withdrawn until November 1999."

Although it is not the subject of express averment, it was accepted by the defenders that Mr Cowie was one of their directors, and that no issue arises as to his authority to give such authorisation to Mr Muir and Mr Watson. Mr Watson was a director of FES.

[5] The detailed averments about the dealings between the pursuers on the one hand and the defenders and FES on the other are set out in articles 4 to 8 of the condescendence. The narrative begins in the first fortnight of January 1999 when, it is said, the pursuers were negotiating with FES for the supply of goods and materials to FES. During those negotiations, Mr Watson represented to the pursuers' Mr Dunn that FES was "part of" the defenders, a substantial civil engineering contractor. On 19 January 1999 the pursuers obtained from Dun & Bradstreet a credit report on FES, the terms of which were such that FES did not qualify for credit from the pursuers. On the same day the pursuers submitted a quotation to FES. On 29 January Mr Dunn and the pursuers' sales director, Allan Cooper, visited FES's premises in Preston to discuss the proposed supply and to form a view of the standing of FES. They discovered that FES were using the defenders' name, logo, stationery and documentation, and were sharing an office with the defenders in Glasgow. It is then averred that:

"Mr Cooper raised with said Mr Steven Watson how he was proposing to pay for the substantial supply volumes which were being discussed. Mr Watson represented that the project was being funded by the defender and that the defender would pay for the supply. Mr Watson stressed that First Engineering would be good for payment."

[6] The pursuers go on to narrate that they re-quoted on 27 January 1999, offering FES better prices. They were not, however, willing to offer FES a line of credit without "a substantial and reliable covenant in support". The possibility of a director's guarantee was discussed. On 1 February the pursuers again re-quoted "subject to credit facilities and/or agreed terms between our companies". On 3 February FES applied to the pursuers for credit terms, but they did not meet the pursuers' requirements, and credit was refused. Mr Watson's reaction was to repeat that the defenders were funding FES's contracts and were prepared to underwrite FES's debts. On 12 February 1999 the pursuers obtained a credit report on the defenders from Dun & Bradstreet. While these discussions about credit were going on the pursuers were supplying FES on cash terms, and in making payments FES were using the defenders' stationery.

[7] Following receipt of the second Dun & Bradstreet report, Mr Dunn stated to Mr Watson that the pursuers would be prepared to give credit to FES provided payment was guaranteed by the defenders. The averments continue:

"On the morning of Monday 15 February 1999 Mr Dunn spoke by telephone to the defender's Mr David Kerr. He explained to Mr Kerr that the pursuer would not supply on credit to FES unless the supply (sic) was guaranteed by the defender. Mr Kerr confirmed that the defender was funding FES. He agreed that the defender would guarantee payment to the pursuer in respect of supplies by the pursuer to FES."

[8] The pursuers then aver:

"Mr Dunn wished to give effect to said guarantee by means of a mechanism whereby the supplies would be made and invoiced to the defender but delivered to FES. By fax dated 15 February 1999 ... Mr Dunn wrote to ... Mr Kerr asking Mr Kerr to confirm that he was able to approve said mechanism. ... On 19 February 1999 Mr Kerr faxed to the pursuer a Credit Application Form seeking credit for the defender. Thereafter goods were supplied by the pursuer to the defender in terms of the said mechanism".

[9] The faxes of 15 and 19 February are incorporated in the pursuers' pleadings brevitatis causa. The fax of 15 February (No. 6/9 of process) was in inter alia the following terms:

"Further to our telephone conversation of this morning we have been negotiating with the above company [FES] to supply materials to their contract c/o Alfred McAlpine M6 Juncs 13-16 for which we have be (sic) successful. Unfortunately the trading history of the above is such that we (sic) are unable to meet the credit rating requirement. This has been explained to Mr Steven Watson who has suggested that we contact yourselves with a view to issueing (sic) an order to cover the value of the goods in the name of First Engineering Ltd. Could you please advise me if this is acceptable ...

...

We look forward to your confirmation that you are able to approve the above."

The fax of 19 February (No. 6/12 of process) does not bear to be a direct reply to the fax of 15 February. It refers instead to Mr Kerr's discussions with the defenders' Mr Muir, encloses the Credit Application Form completed by the defenders (No. 6/13 of process), and makes various points about the form of paperwork required by the defenders, including a statement that "materials issued without a valid order number shall not be paid for". The purchase order which followed (No. 6/15 of process) to which reference was also made in the course of the debate, bears to be an order made by the defenders for purchase by them of the goods described. It bears their order number, 1CD 120409. It is signed by their materials buyer. It requests delivery to FES (described as "First Eng. Systems"). The description of the order ends with the words "All as discussed between Mr. S. Watson of First Engineering Systems and your Mr. C. Dunn", and indicates that exact delivery dates are to be advised to and agreed with "First Engineering Systems". The pursuers aver that the goods ordered by that purchase order were for the use of FES, not for the use of the defenders. The same applied to further supplies between February and May 1999.

[10] The next stage of the development of the relationship occurred in May 1999. The pursuers aver that the defenders failed to pay sums invoiced when they became due. That was because they were refusing to pay until Mr Watson had approved the invoices. When Mr Dunn pressed Mr Watson for payment in early May, Mr Watson explained that the delay was caused by "administrative delays in authorising payment by the defender of goods delivered to FES". In that situation, Mr Watson, it is averred, proposed that the "mechanism" be altered so that the pursuers sent invoices direct to FES. The pursuers would not agree to that "unless the defender continued to guarantee payment to the pursuer in respect of supplies to FES". The averments continue:

"In or about May 1999 the pursuer's Mr Innes discussed said proposal with Mr Watson by telephone. Mr Watson confirmed that the project was being funded by the defender. Mr Watson, on behalf of FES and the defender, assured Mr Innes that the defender would continue to guarantee said payments. On that basis, Mr Innes agreed to the change proposed by Mr Watson on behalf of the defender and FES. He would not have done so had said guarantee not been given by the defender. Mr Watson had actual authority to act on behalf of the defender. Further and in any event he had ostensible authority to do so. As hereinbefore and hereinafter condescended upon, throughout 1999 the defender held him out to the pursuers as having said authority."

[11] From May 1999 onward, the pursuers supplied goods to FES on credit. By October the August invoice remained unpaid and overdue. In November the defenders withdrew their financial support for FES. FES is now in liquidation, owing the pursuers the sum sued for. The pursuers aver that they reasonably anticipate that no dividend will be paid. It is in these circumstances that the pursuers seek to rely on the guarantee that they claim the defenders gave in respect of FES's indebtedness.

The Defenders' Submissions

[12] Mr Di Emidio for the defenders submitted that the relevancy of the pursuers' case depended on the relevancy of their averments about the authority of Mr Watson to bind the defenders to guarantee the obligations of FES. The pursuers averred, at the end of article 8 of the Condescendence (in the passage quoted in paragraph [10] above) that Mr Watson had both actual and ostensible authority to do so. Mr Di Emidio adopted as a statement of the relevant law on actual and ostensible authority a passage from the judgment of Diplock LJ (as he then was) in Freeman & Lockyer v Buckhurst Park Properties (Mangal) Limited [1964] 2 QB 480 at 502-506. He referred also to Armagas Limited v Mundogas SA [1986] 1 AC 717, per Lord Keith of Kinkel at 777A-778A, in which the statement of the law set out by Diplock LJ was adopted in the House of Lords, and to two Scottish cases in which it had also been adopted, British Bata Shoe Co Ltd v Double M Shah Ltd 1980 SC 311 per Lord Jauncey at 317, and Dornier GmbH v Cannon 1991 SC 311 per Lord President Hope at 314.

[13] The passage which Mr Di Emidio relied upon from the judgment of Diplock LJ in Freeman & Lockyer included the following passages:

"It is necessary at the outset to distinguish between an 'actual' authority of an agent on the one hand, and an 'apparent' or 'ostensible' authority on the other. Actual authority and apparent authority are quite independent of one another. Generally they co-exist and coincide, but either may exist without the other and their respective scopes may be different. ...

An 'actual' authority is a legal relationship between principal and agent created by a consensual agreement to which they alone are parties. Its scope is to be ascertained by applying ordinary principles of construction of contracts ... To this agreement the contractor is a stranger; he may be totally ignorant of the existence of any authority on the part of the agent. Nevertheless, if the agent does enter into a contract pursuant to the 'actual' authority, it does create contractual rights and liabilities between the principal and the contractor. ...

An 'apparent' or 'ostensible' authority, on the other hand is a legal relationship between the principal and the contractor created by a representation, made by the principal to the contractor, intended to be and in fact acted upon by the contractor that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the 'apparent' authority, so as to render the principal liable to perform any obligations imposed upon him by such contract. To the relationship so created the agent is a stranger. ... The representation, when acted upon by the contractor by entering into a contract with the agent, operates as an estoppel, preventing the principal from asserting that he is not bound by the contract. It is irrelevant whether the agent had actual authority to enter into the contract. ...

The representation which creates 'apparent' authority may take a variety of forms of which the commonest is representation by conduct, that is, by permitting the agent to act in some way in the conduct of the principal's business with other persons. By so doing the principal represents to anyone who becomes aware that the agent is so acting that the agent has authority to enter on behalf of the principal into contracts with other persons of the kind which the agent so acting in the conduct of his principal's business has usually 'actual' authority to enter into.

In applying the law as I have endeavoured to summarise it to the case where the principal is not a natural person, but a ...corporation, two further factors arising from the legal characteristics of a corporation have to be borne in mind. ...

The second characteristic of a corporation, namely, that unlike a natural person it can only make a representation through an agent, has the consequence that in order to create an estoppel between the corporation and the contractor, the representation as to the authority of the agent which creates his 'apparent' authority must be made by some person or persons who have 'actual' authority from the corporation to make the representation. ... It follows that where the agent upon whose 'apparent' authority the contractor relies has no 'actual' authority from the corporation to enter into a particular kind of contract with the contractor on behalf of the corporation, the contractor cannot rely upon the agent's own representation as to his actual authority. He can rely only upon a representation by a person or persons who have actual authority to manage or conduct that part of the business of the corporation to which the contract relates. ...

If the foregoing analysis of the relevant law is correct, it can be summarised [as follows]. ... It must be shown:

(1) that a representation that the agent had authority to enter on behalf of the company into a contract of the kind sought to be enforced was made to the contractor;

(2) that such representation was made by a person or persons who had 'actual' authority to manage the business of the company either generally or in respect of those matters to which the contract relates; [and]

(3) that he (the contractor) was induced by such representation to enter into the contract, that is, that he in fact relied upon it; ..."

[14] In relation to the pursuers' averments about Mr Watson's actual authority, Mr Di Emidio made two points. The only averments of actual authority are (1) the bare statement in article 8 of the condescendence that "Mr Watson had actual authority to act on behalf of the defender", and (2) the averment in article 2 that in about February 1999 "the defender's Mr Cowie authorised ... Mr Watson to represent to third parties that the defender was standing behind the financial obligations of FES and that FES was 'part of' the defender." Mr Di Emidio's first point was that the latter averment was lacking in specification because there was no indication of the means by which authority was given by Mr Cowie to Mr Watson. In that respect, he submitted, the pursuers had failed to give the defenders fair notice of the case they sought to make. The second point was that the authority said to have been given was not authority to bind the defenders to a guarantee of the debts of FES. It was no more than authority to make a vague representation about the defenders' support for FES - that they were "standing behind the financial obligations" of FES, and that FES was "part of" the defenders. That averment did not suffice to carry the pursuers to the position of having offered to prove that Mr Watson had actual authority to grant on the defenders' behalf an obligation guaranteeing payment of the trade debts incurred by FES to the pursuers. If that averment were left out of account, the bare averment in article 8 that Mr Watson had actual authority to "act on behalf of the defender" was insufficiently specific to stand on its own.

[15] Turning to the question of the averments of ostensible authority, Mr Di Emidio pointed to the bare averment in article 8 of the condescendence to the effect that Mr Watson had such authority and to the following sentence: "As hereinbefore and hereinafter condescended upon, throughout 1999 the defender held him out to the pursuer as having said authority". He then followed that signpost back through the preceding averments in search of averments that in the period prior to May 1999 the defenders, or anyone with actual authority to do so on their behalf, had represented that Mr Watson had, or by conduct held him out as having, authority to commit the defenders to a guarantee of FES's trade debts to the pursuers. He considered the averments about the apparent relationship between the defenders and FES - the adoption by FES of the name which implied a connection with the defenders, their use of the defenders' logo and stationery, the shared use of an office, and the repeated assurances given by Mr Watson (with the actual authority of the defenders, according to the averment quoted in paragraph [4] above) and expressed in a variety of forms, to the effect that FES were part of the defenders, and that the project in question was being funded by the defenders who would underwrite FES's debts. All of these averments about the relationship between the defenders and FES fell short of supporting a case of the defenders holding out Mr Watson as having authority to bind them to a guarantee. The averments of connection between the defenders and FES all had to be seen in light of the pursuers' recognition, which was made plain throughout their pleadings, that the defenders and FES were separate and distinct legal entities. He then examined the averments about the exchange between Mr Dunn and Mr Kerr in mid-February. The apparent generality of Mr Kerr's averred agreement "that the defender would guarantee payment to the pursuer in respect of supplies by the pursuer to FES" had to be seen in light of the correspondence that immediately followed. What that correspondence set up was not a "guarantee mechanism", but an arrangement for the defenders themselves to purchase supplies on their own credit for delivery to and use by FES. In any event, those averments contained nothing that supported a case of representation that Mr Watson had authority to bind the defenders to a guarantee. Next, Mr Di Emidio examined the averments summarised in paragraph [10] above. Mr Watson's own assurance that the defenders would "continue to guarantee" FES's debts could not, he submitted, amount to a representation or holding out by the defenders. In summary, therefore, there was nothing in the pursuers' pleadings about events prior to the discussion in May 1999 that relevantly supported the averment that throughout 1999 the defenders held Mr Watson out as having authority to bind them. So far as the defenders' averments about events after the discussion in May were concerned, Mr Di Emidio's short point was that they could not, by themselves, set up a case of ostensible authority in support of the contention that Mr Watson bound the defenders in May 1999 to guarantee FES's debts in respect of continued supplies. In any event, they did not bear to do so.

[16] Accordingly, Mr Di Emidio's submission was that there were no relevant averments that Mr Watson had authority, actual or ostensible, to bind the defenders to guarantee debts incurred by FES to the pursuers in respect of supplies made in or after May 1999. In the absence of relevant averments of such authority, the pursuers' whole case was irrelevant. The defenders' first plea-in-law should therefore be sustained and the action dismissed.

The Pursuers' Submissions

[17] For the pursuers Mr Stewart submitted that the pursuers had made sufficient averments to justify the allowance of a proof before answer. The circumstances of the case were, he submitted, unusual, and it would be appropriate to defer determination of the legal issues that arose until the circumstances had been fully explored in evidence.

[18] Mr Stewart accepted that the law applicable to the case was correctly stated in the authorities to which Mr Di Emidio had made reference.

[19] So far as actual authority was concerned, Mr Stewart argued that the averment quoted in paragraph [4] above was capable of supporting the proposition that Mr Watson was thereby given actual authority to bind the defenders to guarantee the trade debts of FES. That was but one way in which the defenders might "stand behind the financial obligations" of FES. Further, the authority to represent that FES was "part of" the defenders might be seen as enabling Mr Watson, who was a director of FES, to bind the defenders. Mr Stewart stressed the desirability of deferring a decision on the relevance of the averments of actual authority until their bones had been fleshed out by detailed examination of the circumstances in evidence.

[20] Before making his submissions about the averments of ostensible authority, Mr Stewart sought to set out an overview of how the arrangements for supplying FES developed. There was, he submitted, an over-arching agreement in February 1999 which was then put into effect in two successive ways. The overarching agreement was that given by Mr Kerr in the course of his telephone conversation with Mr Watson on 15 February (see paragraph [7] above), to the effect that "the defender would guarantee payment to the pursuer in respect of supplies by the pursuer to FES". The first way in which that agreement was put into effect was by the arrangement worked out in the correspondence of 15 and 19 February (see paragraphs [8] and [9] above). Although under that arrangement the pursuers were the nominal purchasers, and incurred the liability to pay the pursuers, the supplies were required not by them but by FES and were delivered to and used by FES. In substance it was accurate to describe that as a guarantee mechanism. When that arrangement encountered practical difficulties, the alternative arrangement, still in implement of Mr Kerr's agreement that the defenders would guarantee payment to the pursuers in respect of supplies delivered to FES, was put in place. The pursuers' averment was that the change was that "the pursuer [would send] invoices direct to FES", but Mr Stewart accepted that implicit in that change was the fact that from then on the orders were placed by FES and FES were the party contracting with the pursuers. In that context, the statement that the defenders "would continue to guarantee said payments" involved something that was covered by Mr Kerr's original agreement.

[21] Against the background of that overview of the arrangements, Mr Stewart went on to submit that there were relevant averments that Mr Watson had ostensible authority to commit the defenders to continuing to guarantee payment for the supplies made by the pursuers to FES. He accepted the need for averments to the effect that the defenders had represented to the pursuers that Mr Watson had such authority, but submitted that such representations might be made by conduct. He submitted that it was necessary to examine the whole history of the matter, beginning with the averments that the defenders, wishing to expand into motorway-related work, arranged to use FES as a vehicle for such expansion. Account had to be taken of all the averments about ways in which the defenders held out FES as part of their own organisation, by permitting the change of name, the use of the logo and stationery, and the sharing of offices. If Mr Watson had been a director of the defenders, there would have been no challenge to his ostensible authority to bind the defenders to the guarantee. He was in fact a director of FES, and conduct on the part of the defenders holding out FES as "part of" the defenders might be found to be relevant to support the inference that he was being held out as having as a director of FES the same authority as he would have had as a defender of the defenders. Further, Mr Stewart relied on a combination of Mr Watson's discussion with Mr Cooper (see the passage quoted at the end of paragraph [5] above) and Mr Kerr's subsequent statement of the defenders' position (see the passage quoted at the end of paragraph [7] above). What those averments showed was that the pursuers in the person of Mr Cooper had asked how FES were going to pay; Mr Watson had replied that the defenders were funding the project and would pay; the pursuers, in the person of Mr Dunn had then approached the defenders in the person of Mr Kerr, and he had confirmed what Mr Watson had said, namely that the defenders were funding FES and would guarantee payment. Those circumstances could be construed as a confirmation by the defenders of Mr Watson's authority to commit them. Mr Stewart accepted that the averments in article 9 of the condescendence about events after May 1999 did not support the case of ostensible authority. He submitted, however, that the averments to which he had drawn attention, when taken together, were capable of supporting the inference that the defenders had held Mr Watson out as entitled to commit them to guaranteeing the trade debts incurred by FES to the pursuers.

[22] Mr Stewart also submitted that the averments about Mr Watson's actual or ostensible authority were not essential to the relevancy of the pursuers' case. Even if those averments were excluded from probation, he submitted, there was sufficient in Mr Kerr's agreement in February 1999 to bind the defenders to guarantee the debts in question.

Actual Authority

[23] In my opinion the pursuers have not relevantly averred that Mr Watson, in purporting to assure Mr Innes "on behalf of FES and the defender ... that the defender would continue to guarantee said payments", acted within the scope of actual authority conferred on him by the defenders. Two passages of averment require to be considered in this connection. One is the bare statement in article 8 of the condescendence that "Mr Watson had actual authority to act on behalf of the defender". The other is the passage in article 2 about authority given by Mr Cowie. The sentence in article 8, if it had stood alone, would not in my opinion have constituted a relevant averment of actual authority. In taking that view I do not rely on the vagueness of the words "to act on behalf of the defender", because it seems to me to be clear from the context provided by the immediately preceding averments that what is meant is authority to act on behalf of the defenders in binding them to guarantee FES's trade debts to the pursuer. But it seems to me that a bare statement of actual authority so to act would be irrelevant for want of proper specification of the circumstances in which the authority had been granted. It seems to me, therefore, that the averment in article 8 can form part of a relevant case of actual authority only if, elsewhere in the pursuers' pleadings, there can be found averments providing the necessary degree of specification. The relevancy of the case of actual authority therefore, in my opinion, stands or falls with the relevancy of the averment in article 2.

[24] I do not consider that there is any merit in Mr Di Emidio's submission that the averment in article 2 is irrelevant for want of specification of how Mr Cowie conveyed the authority to Mr Watson. The averment identifies the person who gave the authority, namely Mr Cowie. It does not identify who he was, but that is of no moment, since the defenders accept that he was one of their directors and was in a position to confer such authority. It identifies approximately when the authority was given, and I did not understand Mr Di Emidio to suggest that "early February 1999" was too inspecific an identification of date. It sets out what the authority given was. In these circumstances, it does not seem to me that the defenders have suffered any material prejudice as a result of the fact that the averment does not state whether the authority was given orally at a meeting, over the telephone or in writing. The details that are given are in my view ample to enable the defenders to investigate the allegation. There is, in my opinion, no substance in the submission that the averment fails to give the defenders fair notice of the case against them.

[25] Mr Di Emidio's other point is, however, in my opinion well founded. What is necessary to support the pursuers' case that Mr Watson had actual authority to bind the defenders to a guarantee of the trade debts incurred by FES to the pursuers is an averment of the conferring of such authority either, narrowly, in terms which made express reference to the incurring of such an obligation or, more broadly, in terms which were capable of encompassing the incurring of such an obligation. As Diplock LJ pointed out in Freeman & Lockyer at 502, it is a matter of applying ordinary principles of construction of contracts. In this case, it is a matter of construing the pursuers' averment as a statement of the provision of the contract between principal and agent. Approaching the matter in that way, it seems to me to be clear that the authority which Mr Cowie is said to have given to Mr Watson was not, in express terms, authority to grant a guarantee on behalf of the defenders. It is no doubt right, as Mr Stewart submitted, that granting a guarantee of their trade debts is one way in which the defenders might have "stood behind the financial obligations of FES". But it seems to me that authority to represent to third parties that the defenders were in general terms supporting FES financially fell materially short of authority to make on the defenders' behalf a decision as to the particular form in which such support was to be made available, namely a guarantee, and to commit the defenders in a legally binding way to that particular form of support.

[26] The second part of the authority said to have been given by Mr Cowie to Mr Watson does not, in my view, strengthen the pursuers' case. Authority to represent that FES was "part of" the defenders cannot, in my view, be construed as conferring authority on Mr Watson, as a director of FES, to contract on behalf of the defenders as if he were one of their directors. It is clear from the pursuers' pleadings as a whole that they do not suggest that they were led to think that FES was not a separate legal entity from the defenders, or that Mr Watson was a director of the defenders.

[27] I am therefore of opinion that the averment about the authority given by Mr Cowie to Mr Watson in February 1999 does not relevantly support the case that Mr Watson had actual authority to bind the defenders to guarantee the trade debts incurred by FES to the pursuers in the period after May 1999.

Ostensible Authority

[28] In the same way as the bare averment in article 8 of the condescendence that Mr Watson had actual authority is not sufficient relevantly to support a case of actual authority, the bare averment in the same article that he had ostensible authority is not sufficient on its own relevantly to support a case of ostensible authority. What is required for relevancy is the presence of specific averments of the representations or conduct by which the defenders held Mr Watson out to the pursuers as having authority to bind them to the guarantee obligation founded upon. The penultimate sentence of article 8 directs the reader to earlier and later averments of holding out. As the matter developed in the course of the debate, attention concentrated on the averments of events antedating the discussion in May 1999. Mr Stewart accepted, as I understood him, that subsequent events could not set up a case of ostensible authority.

[29] It was also common ground that no reliance could be placed by the pursuer, for the purpose of making a case of ostensible authority, on assertions made by Mr Watson himself from which an inference might be drawn that he had authority to commit the defenders to a guarantee (Freeman & Lockyer per Diplock LJ at 505 and 506).

[30] In the result, therefore, Mr Stewart was constrained to seek an inference that the defenders had represented or held out Mr Watson as having authority to bind them to a guarantee from averments about the appearance of the relationship between the defenders and FES and about the course followed by the discussions or negotiations among the three parties. In the end, I understood Mr Stewart to rely on the averments about FES's change of name, their use of the defenders' logo and stationery, and their sharing an office, as background, rather than as themselves constituting a representation of authority. In my view those averments do no support an inference that the defenders held Mr Watson out as having authority to bind them. There was, in my view, ample material for an inference that FES was being held out as being in a position similar to that of a subsidiary of the defenders, but that does not in my view go to support the proposition that the defenders gave the appearance of having authorised Mr Watson, one of the directors of FES, to bind the defenders in contractual matters. Nor, in my view, does the fact that, after Mr Watson had said to Mr Cooper that the defenders were funding FES in the motorway contracts and would pay for the supply of materials to FES, Mr Kerr of the defenders confirmed that the defenders were indeed funding FES and would guarantee payment for the supply of goods to FES, help to support an inference that Mr Watson had authority himself to bind the defenders. On the contrary, it seems to me to point the other way. Moreover, whatever force Mr Kerr's agreement in February 1999 may have had in its own right (see paragraphs [32] and [33] below), it does not in my view contain any representation about authority possessed by Mr Watson.

[31] In these circumstances, I am not persuaded that there are any relevant averments that the defenders held Mr Watson out to the pursuers as having authority to bind the defenders to guarantee payment to the pursuers for supplies ordered by and delivered to FES. The pursuers' case of ostensible authority is therefore in my opinion not supported by relevant averments.

The February Agreement

[32] There remains for consideration Mr Stewart's brief submission (see paragraph [22] above) that even if the pursuers' averments about Mr Watson's actual and ostensible authority fell to be excluded from probation, a proof before answer should nevertheless be allowed on the basis that the averment that Mr Kerr agreed in February 1999 that the defenders would guarantee payment to the pursuers in respect of supplies by the pursuers to FES might turn out after inquiry to constitute an adequate foundation for the guarantee founded on in the action.

[33] In my opinion that submission is not well founded. The averment about what Mr Kerr agreed requires to be read in context. What is averred is that the pursuers' Mr Dunn had explained to Mr Kerr that the pursuers would not supply FES on credit unless "the supply" was guaranteed by the defenders. That reference to guaranteeing the supply seems to me to be a slip of the pen. The context makes it reasonably clear, in my view, that what is meant is that Mr Dunn explained that the pursuers would not supply FES on credit unless payment was guaranteed by the defenders. Assuming that to be what was meant, the averments go on to narrate that Mr Kerr did two things: he confirmed that the defenders were funding FES and he agreed that "the defender would guarantee payment to the pursuer in respect of supplies by the pursuer to FES". Assuming that averment to be true, if what had followed had been a course of dealing in which the pursuers did indeed supply goods to FES on their order in reliance on what Mr Kerr had said about the defenders guaranteeing payment in respect of such supplies, the pursuers might well, in the event of default by FES, have been able to look to the defenders as guarantors for payment. But that is not what happened. As the averments go on to explain, what Mr Dunn wished was to set up an arrangement by which the goods were actually ordered, not by FES, but by the defenders. That is what he asked the defenders to agree to in his fax of 15 February (No. 6/9 of process), which is incorporated in the pursuers' pleadings; that is what Mr Kerr agreed to by submitting a credit application form in the defenders' name, and by insisting in his fax of 19 February (No. 6/12 of process) that the defenders would not pay for anything supplied without a valid order number (from the defenders); and that is what can be seen being put into effect by the defenders' order 1CD 120409 (No. 6/15 of process). It is no doubt right that in a loose sense that can be represented as a mechanism for putting into effect the defenders' expressed willingness to guarantee payment for goods supplied to FES; but the contractual structure of that mechanism involved the defenders, no doubt as an accommodation to FES, in taking on the role and the liabilities of the purchaser of the goods. Some three months passed with that arrangement in operation. Difficulty was then encountered because the defenders, who would as a matter of ordinary prudence wish, before making payment, to have confirmation from FES that invoiced goods had been duly delivered conform to the order, delayed payment while that matter was checked. At that stage, it is averred, Mr Watson proposed a change in the mechanism. The pursuers' pleadings say no more than that the proposed change was that the pursuers should send invoices direct to FES, but it is implicit in the fact that the pursuers seek to base their claim on a guarantee that the system by which the order was placed by the defenders, and they were thus in formal contractual terms the purchaser, was also departed from. What the pursuers rely upon in their pleadings at that stage is the assurance given by Mr Watson that the defenders would "continue" to guarantee the payments. It is expressly averred that it was "on that basis" that Mr Innes agreed to the proposed change. That being the way in which the course of dealing developed according to the pursuers' pleadings, it seems to me that their case is perilled on the assurance given by Mr Watson in May, and his having had authority, actual or ostensible, to give that assurance. It is not open to them, in my view, to seize upon their averment about what Mr Kerr said in February about guaranteeing payment for supplies to FES, and to argue that it by itself is a sufficient basis for holding the defenders liable as guarantors. Mr Kerr's indication of the defenders' willingness to guarantee payment for

Result

[34] In my opinion, therefore, the pursuers have not relevantly averred (1) that Mr Watson had actual authority to bind the defenders to guarantee payment for the goods supplied by the pursuers on the order of FES after May 1999, or (2) that he had ostensible authority to do so, or (3) that Mr Kerr had in February 1999 committed the defenders to such a guarantee. In the result, therefore, I am of opinion that the pursuers have no relevant case against the defenders. I shall accordingly sustain the defenders' first plea-in-law, and dismiss the action.


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