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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Mrs Distribution Ltd v. Ds Smith (UK) Ltd [2004] ScotCS 116 (19 May 2004)
URL: http://www.bailii.org/scot/cases/ScotCS/2004/116.html
Cite as: 2005 SCLR 208, 2004 SLT 631, [2004] ScotCS 116

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Mrs Distribution Ltd v. Ds Smith (UK) Ltd [2004] ScotCS 116 (19 May 2004)

OUTER HOUSE, COURT OF SESSION

CA57/03

 

 

 

 

 

 

 

 

 

 

OPINION OF

LORD DRUMMOND YOUNG

in the cause

MRS DISTRIBUTION LIMITED

Pursuers;

against

DS SMITH (UK) LIMITED

Defenders:

 

________________

 

Pursuers: Sandison; DLA

Defenders: Reid, Solicitor; Maclay Murray & Spens

19 May 2004

[1]      The pursuers claim that the defenders have terminated a contract between the parties before its contemplated termination date. Consequently they conclude for payment of a sum which, they aver, is the early termination payment stipulated in the parties' contract. In the alternative, the pursuers claim that the defenders are in breach of the parties' contract, and they conclude for damages for that breach. The summons contains a third substantive conclusion for rectification of certain letters that are said to fail to express accurately the agreement reached between the pursuers and the defenders' predecessors, but the present opinion is not concerned with that matter. The pursuers make the following averments.

[2]     
In 1997 the pursuers entered into a contract for the provision of road haulage distribution services to a company known as Danisco Pack Limited from the latter's premises at Larkhall; Danisco traded from those premises as Danisco Pack Sheet Feeding (Scotland). The terms of the contract are contained in a written agreement bearing the date 21 April 1997; the contract was in fact executed on 11 and 12 September 1997 but was operative from 4 May 1997. The pursuers aver that they were subsequently appointed by Danisco as principal haulage contractors from the latter's premises at Kettering, Northamptonshire, on the same basis as the appointment at Larkhall; that agreement is said to have had effect from 28 November 2000. During the summer of 2001 the business carried on by Danisco at their Kettering premises was sold to the defenders. The pursuers aver that, in consequence of the transfer of that part of Danisco's business, the haulage contract relating to the Kettering premises was novated into a contract between the pursuers and the defenders on the same terms as those that had existed between the pursuers and Danisco.

[3]     
On 22 November 2001 the defenders sent the pursuers a letter which gave notice of termination of the Kettering contract with effect from 27 May 2002. The pursuers aver that that notice of termination took effect from a date prior to the expiry of the contemplated contract period, and that accordingly the defenders became liable under the early termination provisions of the contract to pay certain sums to the pursuers. That liability is said to have arisen under two separate clauses of the contract, clause 5(a) and clause 5A. The material provisions of the contract are as follows; in the contract the pursuers are referred to as "the Distributor" and Danisco Pack Sheet Feeding (Scotland) are referred to as "DP". First, clause 3 states:

"APPOINTMENT

DP hereby appoints the Distributor to provide the service for the period stipulated in Clause 4 hereof and the Distributor hereby accepts the Appointment on the terms and conditions set out herein".

Clause 4 provides:

"PERIOD

The Appointment shall commence and shall be deemed to have commenced on the completion date (subject to Clause 6 hereof) and shall continue initially for the period of 5 (FIVE) years then be subject to the termination provisions specified at Clause 6".

The completion date is defined as 4 May 1997 or such other date as might be agreed, but it was accepted by both parties that no other date had been agreed. Counsel for the pursuers submitted that the reference to clause 6 at the end of the foregoing clause was an obvious error, and that the reference should be to clause 5. In my opinion that is correct. Clause 5 contains provisions that permit the parties to terminate the contract after a period of five years, and thus agrees with the general intent of clause 4, which contemplates termination after the initial period of five years. Clause 6, on the other hand, confers power to terminate at any time for breach of contract, insolvency, or a party's ceasing to carry on business. Thus, if the reference were truly intended to be to clause 6, mention of a five-year period would be pointless. Clause 5 provides:

"TERMINATION PROVISION

(a) At any time after 5 years by giving six months prior notice in writing to that effect to the Distributor, DP may terminated this Agreement or the Distributor may, by like notice to DP withdraw the Service".

Clause 5(b) makes certain provisions consequential upon any such termination. Clause 5A then provides as follows:

"In the event that DP gives notice to the Distributor of termination of this agreement on a date prior to the expiry of (1), the period of appointment as specified in Clause 4 or (2), the termination provision specified at clause 5:

(a) Such notice of termination to be in writing from DP to the Distributor as specified at Clause 12(c) [in fact clause 11(c)].

(b) DP will make agreed early termination payment to the distributor on the basis of the total of the expected annual gross contribution to the distributors fixed costs of 210,000 & the annual equipment depreciation costs of 102,725 for each complete year & pro-rated for each part year remaining to the expiry of the agreed period of appointment as specified at Clause 4.

(c) Such early termination payment to be made in full by DP to the Distributor prior to the date of termination of the appointment of the Distributor".

Clause 6 further provides that the agreement might be terminated with immediate effect by DP in the event of material breach of contract by the pursuers, or in the event of the pursuers' insolvency or ceasing to carry on business.

[4]     
The defenders have tabled a plea to the relevancy of the pursuers' averments, and the action was appointed to a debate on that plea. Three issues were argued. First, the defenders dispute that the contract between Danisco and the pursuers was transferred to the defenders by a process of novation, and they have challenged the relevancy of the pursuers' averments on that subject. Secondly, the defenders dispute that clause 5(a) has any application, and they have challenged the relevancy of the pursuers' averments on the application of that clause. Thirdly, the defenders dispute that clause 5A has any application, and they have challenged the relevancy of the pursuers' averments on that matter. I should record that certain other matters are in dispute between the parties; these are whether clause 5A was ever incorporated into the pursuers' contract with Danisco and whether the Larkhall contract was ever extended to cover Danisco's Kettering premises; in addition, the pursuers seek to rectify certain letters sent by Danisco in 1999, and their right to such rectification is disputed. It was accepted by the parties, however, that none of the latter issues could be dealt with simply as a matter of relevancy, and the debate was accordingly confined to the questions of novation and the termination provisions.

Novation

[5]     
In relation to novation, the pursuers make the following averments. In the summer of 2001 the business carried on by Danisco at their Kettering premises was sold or otherwise transferred to the defenders. The defenders were aware of the terms upon which the pursuers were providing their services to Danisco at the Kettering premises. After the transfer of the business, the pursuers continued to provide the haulage services that they had provided to Danisco and the defenders continued to accept and pay for those services on the basis of the contract that had existed between the pursuers and Danisco. The pursuers aver that the contract that had previously existed between them and Danisco for the provision of haulage services at Kettering was thereby novated by the actions of Danisco, the pursuers and the defenders into a contract between the pursuers and the defenders on the same terms as the contract that had existed between the pursuers and Danisco. In response to the defenders' averments the pursuers state that, after the defenders took over the business previously operated by Danisco at Kettering, the pursuers continued without interruption to provide to them the same haulage services as had been provided to Danisco, and the defenders continued to pay for those services on the same basis as had Danisco. No negotiation of any new terms of business took place. Both parties understood that, by their actions in requesting, accepting and paying for those services, the defenders wished to take the place of Danisco in the pre-existing contractual arrangement, and the pursuers, by continuing to provide the same services on the same terms, accepted the defenders in substitution for Danisco in that arrangement.

[6]     
The solicitor for the defenders submitted that the transaction averred by the pursuers involved delegation, which is the form of novation whereby a new debtor is substituted in place of the old debtor with the consent of the creditor. For novation by delegation to take place, it is necessary that the original debtor, the creditor and the third party who becomes the new debtor should all consent. Parties cannot drift unconsciously into delegation; their intention must be clear and plain. It was further submitted that there is a strong presumption against novation by delegation. Reference was made to Bell's Principles, 10th ed, paragraphs 576-578, Stair, Institutions, I.18.8, Gloag on Contract, 2nd ed, page 258, McIntosh and Son v Ainslie, 1872, 10 M. 304, and W. J. Harte Construction Ltd v Scottish Homes, 1992 SC 99. In the present case, the pursuers' averments did not disclose the tripartite consent that was necessary for delegation; in particular, they did not aver the consent of the original debtor, Danisco, to the discharge of its rights and liabilities under the agreement. The best that the pursuers could aver was a period of continuing trading, but that was equally consistent with a new ad hoc trading relationship and was not sufficient to establish delegation. In addition, it was a critical consequence of delegation that the defenders should assume liability under clause 5A. The pursuers' averments, however, were insufficient for the conclusion that all three parties consented to the defenders' assuming liability under clause 5A. For these reasons the pursuers' averments of novation by delegation were irrelevant.

[7]     
Counsel for the pursuers submitted that his averments were a sufficient basis for delegation. He argued that any presumption against delegation would be relatively weak in the present case. Instead of relying on such a presumption, it would be appropriate to consider, after proof, whether the facts establish by evidence were capable of giving rise to the inference that delegation had taken place. In any event, the presumption against delegation was probably to be understood as a presumption against the new debtor's acting as expromissor, or substituting himself for the original debtor for all purposes. There was no presumption against his acting as adpromissor, or interposing himself as an additional debtor. In the present case, it was sufficient for the pursuers' purposes that the defenders should have acted as adpromissores. So far as the consent of the original debtor was concerned, it was not clear on the authorities that that was required. In any event, it was capable of being implied from the whole facts and circumstances of the case, objectively construed.

[8]     
There is accordingly a dispute between the parties as to the legal principles that govern novation by delegation. In my opinion the following principles are applicable.

1. The general principles of the law are summarised in Erskine's Institutes at III.iv.22, a passage that was cited with approval by Lord Justice-Clerk Ross in W. J. Harte Construction Ltd v Scottish Homes, supra, at 110-111. That passage is in the following terms:

"Obligations are also dissolved by novation or innovation, which, in the strict acceptation of the word, denotes the change of one obligation to another in such manner that both the debtor and creditor continue the same. ... The debtor remains bound only by the new obligation. Delegation, which may be accounted a species of novation, is the changing of one debtor for another, by which the obligation which lay on the first debtor is discharged; ex. gr. if the debtor in a bond should substitute a third person, who becomes obliged in his place to the creditor, and who is called in the Roman law expromissor, this requires not only the consent of the expromissor, who is to undertake the debt, but of the creditor; for no debtor can get quit of his obligation without the creditor's consent, except by actual performance; and no creditor can be compelled to accept of one debtor for another against his will. Neither novation nor delegation is to be presumed; for a creditor who has once acquired a right ought not to lose it by implication; and consequently the new obligation is, in dubio, to be accounted merely corroborative of the old".

2. Novation, whether by delegation or otherwise, can be inferred from facts and circumstances; it is not necessary that it should be effected by an express agreement. That appears from Stair's Institutions, I.18.8, where it is pointed out that Scots law differs in this respect from Roman law; from Erskine's Institutes, III.iv 22, where it is stated at note (a) (by Nicholson, in the 5th edition) that novation and delegation are so entirely questions of fact and intention that it is impossible to lay down any general rules as to what will constitute either of them; from Hunter v Falconer, 1835, 13 S 252, where the decision was expressly based on inferences from facts and circumstances; and from Johnston v Greenock Corporation, 1950 SLT (Notes) 53, another case where the decision clearly proceeds on a similar basis.

3. It follows that in this area of law decided cases are of limited value as precedents, beyond establishing the general principles that are applicable. Statements to that effect are found in Buchanan, Watson and Co v Adam, 1833, 11 S. 762, at 769 per Lord Balgray, and in W. J. Harte Construction Ltd v Scottish Homes, supra, per Lord McCluskey at 116.

4. The question of whether novation or delegation has taken place must be decided in accordance with objective criteria. That is the general approach taken by the law of contract. On its application to novation and delegation, authority is found in W. J. Harte Construction Ltd v Scottish Homes, supra, per Lord McCluskey at 117, and in McIntosh & Son v Ainslie, supra, per Lord Deas at 310 and Lord Ardmillan at 311.

5. The consent of the creditor is required for novation, whether by delegation or otherwise. The reason for that is obvious, in that novation involves the substitution of new contractual obligations, or in the case of delegation a new or additional debtor.

6. It is less clear whether the consent of the original debtor is required. Counsel for the pursuers, in an interesting argument, submitted that possibly all that was required was that the original debtor should not object positively to the new debtor's taking over his obligations. He referred to McIntosh & Son v Ainslie, supra, per Lord President Inglis at 309, to Ker v McKechnie, 1845, 7 D 494, per Lord Jeffrey at 498, and to the decisions in Davidsons v Ranken, 1733, M 7061, and Re European Assurance Society, 1876, 3 Ch Div 391. In McIntosh Lord President Inglis stated

"Now, it may be that delegation might take place even without the knowledge of the original debtor, provided another person represents him in undertaking the obligation as expromissor, and the creditor acquiesces in that arrangement".

There is no reference to the consent of the original debtor. It was held, however, that there was no evidence of any such arrangement in that case. In the other three cases referred to by counsel, the original debtor could at least be said to have acquiesced in the transfer of the obligations to the new debtor. For present purposes, I do not think that it is necessary to decide the abstract question of whether the original debtor's consent is necessary for delegation. It seems clear on the basis of the authorities cited by counsel that it is not necessary for the original debtor to consent expressly to the transaction; nor is it necessary that his consent should be obtained ab ante, before the new debtor undertakes obligations in favour of the creditor. Instead, it is sufficient if the consent of the original debtor can be inferred from facts and circumstances. It is likewise sufficient if, from facts and circumstances, it is possible to infer that the original debtor has acquiesced in the new debtor's taking over his obligations in favour of the creditor. That is in accordance with the principle discussed at 2 above.

7. It is said that there is a presumption against novation, and in particular against delegation: see, for example, Erskine's Institutes, III.iv.22, McIntosh & Son v Ainslie, supra, per Lord President Inglis at 309, and W. J. Harte Construction Ltd v Scottish Homes, supra, per Lord Justice-Clerk Ross at 112. In my opinion this proposition requires to be examined with some care. So far as delegation is concerned, two forms of the transaction must be distinguished. The new debtor may be an expromissor, in which case his obligations are substituted for the obligations of the original debtor. Alternatively, he may be an adpromissor, in which case his obligations are provided in addition to those of the original debtor. The latter form of the transaction can accordingly be regarded as a form of caution. In relation to delegation, the nature of the presumption is in my opinion accurately stated by Lord Curriehill in Pollock and Co v Murray and Spence, 1863 2 M. 14, at 16:

"The presumption of law, however, is, that a third party interposing does so as an additional security, and the evidence in this case entirely confirms that presumption".

Thus the presumption is against the new debtor's being an expromissor rather than an adpromissor. This is confirmed by Stair who, in the Institutions at I.18.8, states that

"Innovation is not presumed by granting of a new obligation, either by the debtor or another; but it is rather held to be as caution or corroboration of the former obligation, consistent therewith".

Erskine in the passage quoted above (Institute, III.iv.22) is clearly dealing with the position of an expromissor, as is Lord President Inglis in McIntosh & Son v Ainslie. Sound practical reasons exist for distinguishing between the two situations. If the new debtor is an adpromissor, no contractual obligations are discharged, and the creditor has the benefit of an additional obligant. In these circumstances, there is no obvious need for any presumption; all that the law must ensure is that the consent of the adpromissor and the creditor is adequately demonstrated.

8. The strength of the presumption against novation was discussed by Lord McCluskey in W. J. Harte Construction Ltd v Scottish Homes, supra, as follows:

"If one party is contending that there has been novation or delegation, in the proper sense of the term, then no doubt that party has to overcome a presumption against any novation which extinguishes obligations and effectively transfers the duties related to them to a different party. But it may be that, in an ordinary commercial transaction where no formal documentation is required, the burden of overcoming the presumption against novation is not greatly different from the responsibility of showing that, as a matter of fact, the parties have reached a consensus which transfers certain rights and responsibilities under the contract from one person, a party to the contract, to another, not a party to the contract".

On that basis, the presumption against novation is unlikely to be of great significance until the conclusion of a proof, and even then it is only likely to be of importance in the most finely balanced cases.

9. In modern practice, novation in the form of delegation perhaps occurs most commonly in transactions involving the sale or other transfer of a business. The person selling the business will typically have concluded a range of contracts for the supply of goods and services to the business, and also for the sale of goods or services to the customers of the business. Such contracts are clearly essential to the conduct of the business, and it is obvious that, on the sale of the business, the purchaser will normally want to ensure that such contracts remain in force, to ensure continuity in the conduct of the business. Likewise, the suppliers and customers will normally be anxious that their contracts should continue in force; in that way they are able to keep their customers or suppliers, as the case may be, in place. The seller of the business will clearly be anxious to pass on any liability under such contracts and thus to avoid any continuing liability on his own part. Consequently, when a business is sold, I consider that any presumption against novation in the form of delegation is relatively weak, for the simple reason that it does not accord with the commercial reality of the transaction. For the same reason, it will often be very easy in such cases to infer from the conduct of the parties after the sale of the business that contracts with suppliers or customers have been subject to delegation.

[9]     
The pursuers' averments in this case are in my opinion quite sufficient to instruct a relevant case of novation by delegation. They aver three critical matters: the transfer of Danisco's business to the defenders, the defenders' knowledge of the terms on which the pursuers were providing services to Danisco, and that following the transfer of the business they continued to provide haulage services to the defenders and the defenders continued to pay for such services on the basis provided for in the contract between the pursuers and Danisco. The transfer of the business gives rise to the considerations discussed in subparagraph 9 above. In those circumstances, I do not agree with the solicitor for the defenders that there is a strong presumption against delegation; I consider the presumption to be weak in a case involving the transfer of a business, and only of any real significance in a marginal case after proof. The defenders' knowledge of the contractual terms applying as between the pursuers and Danisco is hardly surprising. Transactions for the sale and purchase of businesses typically involve elaborate investigation of the business that is being sold and wide-ranging disclosure of matters that are relevant to the conduct of the business. That must clearly involve contracts with suppliers of goods or services, as these are critical to the manner in which the business is carried on. Against that background, the pursuers aver that their contractual relationship continued as before, but with the defenders substituted for Danisco. Whether that is correct must obviously be the subject of evidence; nevertheless, on the basis of the averments of knowledge and continuing trading, I am of opinion that it is quite possible that the pursuers will be able to establish the consent of the defenders to the novation of the contract with Danisco. Likewise, on the basis of the averments that, following the sale, the pursuers provided the services that they had previously provided to Danisco to the defenders and the defenders paid for such services, I consider it quite possible that the pursuers will be able to establish the consent of Danisco to the novation, in the manner discussed in subparagraph 6 above. If Danisco sold the business carried on at their Kettering depot to the defenders, it would make no commercial sense for them to continue in a distribution contract with the pursuers in relation to the business carried on at that depot. If in fact the pursuers provided the same services to the defenders as they had previously provided to Danisco, it would not be difficult to conclude that Danisco acquiesced in the novation of the contract to the defenders. In these circumstances it would in my view be relatively easy to infer Danisco's consent from the facts and circumstances of the transaction.

[10]     
For the defenders it was submitted, on the authority of McIntosh and Son v Ainslie, supra, that parties cannot drift unconsciously into delegation, but must make their meaning clear and plain. While it is obviously correct that the fact of delegation and the parties' intentions must be sufficiently clear, that clarity can be a matter of inference from facts and circumstances, based on the objective construction of the parties' actings. There is no need for express consent. It was further submitted that the pursuers failed to aver the consent of Danisco to the discharge of its rights and liabilities under its agreement with the pursuers. It is true that there is no express averment to that effect. Nevertheless, the function of pleadings in the Commercial Court is to give fair notice of each party's case to the other. Provided that that is achieved, averments of a wholly formal nature are unnecessary. In the present case, there are clear averments of novation, and that tends to imply that Danisco consented, in the manner discussed in subparagraph 6 above. That in my opinion is sufficient. The same is true of a further submission for the defenders that the pursuers did not aver when, how, and through which representatives consensus in idem was reached among the three parties involved to discharge Danisco of all liabilities and to substitute the defender as the new obligant in place of Danisco for all purposes. As I have indicated, I consider that that might be a very natural inference in the context of the sale of a business. The pursuers' case is clearly based on an inference from the transfer of Danisco's business and the actings of the parties thereafter. To the extent that the details of what occurred are relevant, it is likely that they will appear from the correspondence and other documentation, which must obviously be lodged in process. What has been said gives fair notice of the pursuers' case.

[11]     
The defenders further submitted that the pursuers' averments were insufficient to justify the inference of delegation rather than the establishing of a new ad hoc trading relationship. The pursuers aver that no negotiation of any new terms of business took place between them and the defenders. That in itself tends to negate any suggestion of an ad hoc trading relationship. In any event, for the reasons explained above I consider that there are relevant averments of novation by delegation, and I do not think that any choice can be made between delegation and an ad hoc relationship until after evidence has been led. Finally, the defenders argued that the pursuers failed to aver that the defenders were aware of, and still less consented to the assumption of liability under, clause 5A of the contract with Danisco. The answer to that is in my opinion that consent must be assessed objectively. It is in dispute between the parties whether clause 5A formed part of the contract between the pursuers and Danisco. If it was part of that contract, however, the pursuers are offering to prove that on an objective approach the defenders assumed the whole of the liabilities of Danisco under the contract. If the pursuers succeed in establishing that contention, there is no basis for distinguishing clause 5A from any other provision of the contract. In this respect there is, as counsel for the pursuers pointed out, an analogy with a person who signs a contract without reading it. It is no defence for such a person to say that, objectively, he was unaware of any particular provision of the contract.

[12]     
I have already indicated that I consider the presumption against novation by delegation to be relatively weak in cases such as the present. In his submissions the solicitor for the defenders placed some emphasis on the discharge of Danisco's obligations to the pursuers as a result of the transaction averred. Counsel for the pursuers pointed out that the discharge of Danisco was not essential to the pursuers' case; it was sufficient for their purposes if the defenders were merely an adpromissor rather than an expromissor. In that event there was no presumption against delegation. In an appropriate case that might well be correct. In the context of the transfer of a business, however, I think that the more natural inference is that the obligations of the party selling the business are discharged. Any final decision on the matter, however, should await proof.

Interpretation of contract

[13]     
In the cause of the argument I was referred to a familiar series of authorities dealing with the interpretation of contracts. I do not think that it is necessary to go through these in detail, because the approach that Scots law has followed since at least the 19th century can be summarised fairly briefly. In the first place, it is trite law that a contractual provision must be construed in the context of the contract in which it occurs. That contract must obviously be interpreted as a totality, and the fundamental commercial purposes that appear from its terms must be taken into account. In the second place, a commercial contract should be given a commercially sensible construction; that is an example of the wider rule that a construction that yields a reasonable result should be preferred over one that does not: Glasgow City Council v Caststop Ltd, 2002 SLT 47, at 56-57 per Lord Macfadyen. In the third place, it is permissible for the court to have regard to the circumstances in which the contract came to be concluded for the purpose of discovering first the facts to which it refers and secondly its commercial objectives. This principle is summarised in Charrington & Co Ltd v Wooler, [1914] AC 71; first, Lord Kinnear, discussing the meaning of the expression "fair market price", stated (at 80):

"Words of this kind must vary in their signification with the particular objects to which the language is directed ; and it follows that a contract about a market price cannot be correctly interpreted or applied without reference to the facts to which the contract relates.... Evidence is not admissible to put a peculiar meaning upon plain and unambiguous words. But it may be necessary to prove the relation of the document to the facts; and I take to be sound doctrine that for this purpose evidence may be given to prove any fact to which it refers, or may probably refer, or to identify any person or thing mentioned in it".

Lord Dunedin stated (at 82):

"[I]n order to construe a contract the Court is always entitled to be so far instructed by evidence as to be able to place itself in thought in the same position as the parties to the contract were placed, in fact, when they made it -- or, as it is sometimes phrased, to be informed as to the surrounding circumstances".

Lord Wilberforce, in Reardon Smith Line Ltd v Hansen-Tangen, [1976] 1 WLR 989, quoted those two passages and commented (at 997):

"I think that all of their Lordships are saying, in different words, the same thing -- what the court must do must be to place itself in thought in the same factual matrix as that in which the parties were".

Earlier in the same case, Lord Wilberforce stated (at 995-996):

"No contracts are made in a vacuum: there is always a setting in which they have to be placed. The nature of what is legitimate to have regard to is usually described as 'the surrounding circumstances' but this phrase is imprecise: it can be illustrated but hardly defined. In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating".

In Scotland the foregoing principle has been applied in a number of cases, notably Bovis Construction (Scotland) Ltd v Whatlings Construction Ltd, 1994 SC 351, at 357 per Lord President Hope, Bank of Scotland v Dunedin Property Investment Co Ltd, 1998 SC 657, at 665 per Lord President Rodger, at 670-671 per Lord Kirkwood, and at 676-677 per Lord Caplan, Waydale Ltd v DHL Holdings (UK) Ltd (No 2), 2002 SLT 224, at 229 per Lord Hamilton, and Glasgow City Council v Caststop Ltd, supra, at 56 per Lord Macfadyen.

[14]      In the fourth place, when a court construes a contract it is not permissible for it to have regard to anything said or written in the course of the negotiations that resulted in the contract. This rule was not relied on in the present case, however, and it is accordingly unnecessary to discuss it further. In the fifth place, in Scottish practice, if a party to a contract intends to rely on specific facts and circumstances extraneous to the contract itself, he must normally aver what those facts and circumstances are. Obviously this does not apply to matters that are common knowledge, but anything that is peculiar to the contract in question, or goes beyond the sphere of common knowledge, must normally be the subject of averment. In this way Scots law should be able to avoid the difficulties that seem to have affected English law following the decision in Investors Compensation Scheme Ltd v West Bromwich Building Society, [1998] 1 WLR 896. In England, following that decision, it appears that evidence of extraneous facts and circumstances was regularly led at great length, regardless of the materiality of such evidence to the construction of the contract: see Scottish Power PLC v Britoil (Exploration) Ltd, 18 November 1997, and Bank of Credit and Commerce International SA v Ali, [2002] 1 AC 251, at 269. If, however, a party relying on extraneous circumstances is required to plead, however briefly, what those facts and circumstances are, their materiality can be determined as a matter of relevancy in a relatively short space of time. I should emphasise that, at least in the Commercial Court, extraneous circumstances need not be pled at great length; all that is required is a brief indication of what the circumstances are, in such a way as to give adequate notice to the other party and to the court of what is relied on.

Construction of clause 5(a)

[15]      The terms of this clause are quoted in paragraph [3] above. The defenders contended that effective termination could occur at any time after five years from the completion date, provided that notice was given six months previously. Thus the earliest date on which the six months' prior notice referred to in the clause could be given was four years and six months after the completion date; notice given then would be effective after five years. The pursuers, on the other hand, contended that six months' notice of termination could not be given until the period of five years from the completion date had expired; the result of that was that the minimum duration of the contract was five years and six months. That period ran from the completion date of the Larkhall contract, 4 May 1997. Consequently notice of termination could not be given before 4 May 2002, and could not be effective prior to 4 November 2002. In the present case the notice of termination given by the defenders in their letter of 22 November 2001 had effect from 27 May 2002, prior to the expiry of the contemplated contract period. The result was that the defenders thereby became liable to make a payment to the pursuers under the early termination provisions of the contract.

[16]     
Counsel for the pursuers accepted that clause 5(a), read solely in the context of the terms of the contract, was capable of bearing either of the meanings contended for by the parties. The most that the pursuers could derive from the terms of the document itself was the statement in clause 4 that the contract should continue initially for a period of five years "then be subject to the termination provisions". That by itself, however, was accepted to be a relatively weak indication of the proper construction of clause 5(a). Counsel for the pursuers further accepted that a purposive construction of the clause, based on the allocation of resources by the haulage contractor, was not of help in choosing between a period of five and five and a half years. Thus it is accepted that the first and second of the principles of contractual interpretation discussed above are not sufficient by themselves to support the pursuers' case. Counsel submitted, however, that the third principle was of critical importance in the present case. He argued that the background facts averred by the pursuers were important in construing the clause. In this connection, he relied on averments made by the pursuers as follows. The intention of the parties to the 1997 agreement, objectively construed against the background of the relevant facts known to those parties at the time, was that its minimum total period would be five years and six months, being a minimum initial duration of five years plus a notice period of six months from any date after the expiry of that initial period. Contracts for a minimum initial duration plus a further notice period are common in the road haulage industry, as both the pursuers and Danisco knew. As they both knew, the minimum initial duration and the length of the further notice period are taken into account by the haulage provider, and were taken into account by the pursuers in the present case, in committing resources to such contracts and in setting the rates for the provision of the services. The resources required for such contracts have generally to be hired, obtained or financed from external sources. Consequently, when the pursuers and Danisco entered into the contract between them for the provision of services by the pursuers at Kettering, they both intended that the contract would run for the same duration, and the subject to the same termination provisions, as the Larkhall contract. The result was that the earliest date at which the Kettering contract could be terminated without penalty, assuming six months' prior notice was given, was 4 November 2002, five years and six months from the completion date of the Larkhall contract, 4 May 1997.

[17]     
The argument for the pursuers is accordingly based on averments of common practice in the road haulage industry, a practice that is said to have been known to both the pursuers and Danisco. Against the background of that practice, it is said that the most natural construction of clause 5(a) is that it provided for an initial period of five years and a separate notice period of six months. In my opinion it is not possible at this stage to exclude such a construction, if the pursuers' averments summarised in the last paragraph are established by evidence. In a contract such as that concluded between the pursuers and Danisco, it is clear that the haulage contractor would require a sufficient initial period to recover his fixed costs, and would require a notice period to enable him to allocate resources at the end of the contract. The practice in the industry may well provide a guide to how those considerations are normally dealt with, and that in turn may provide a valuable guide to the intention, objectively construed, of the parties to the particular contract. In these circumstances I am of opinion that the pursuers' averments as to the construction of clause 5(a) cannot be held irrelevant at this stage, but must be the subject of a proof before answer. The circumstances that are relied on are set out succinctly but clearly, and in my view they give fair notice to the defenders of the matters that the pursuers seek to prove.

[18]     
The solicitor for the defenders contended that the focus of clause 5(a) was on the termination of the contract, not the giving of notice of termination. The result might have been different, he submitted, if the individual components of the clause had been arranged in a different order, in such a way as to make it clear that the six months' notice period could only start to run after a five-year initial period had elapsed. That was not, however, what the parties had provided. In my opinion this approach is only of limited assistance in the present case. In almost any case involving the construction of a contract it is possible to reconstruct the clause in dispute in such a way that the result is made clear. Moreover, such an exercise can usually be performed by both sides. The fact that other formulations might have been used is accordingly of very limited assistance in the task that a court must perform, namely determining the objective meaning of the wording that has actually been used by the parties. That is particularly so in a case where extraneous circumstances are relied on. Consequently, in the present case I consider that detailed consideration of the terms of the parties' contract should be reserved for proof before answer, at which point evidence relating to the pursuers' averments of surrounding circumstances can be considered and a properly informed decision reached on the construction of clause 5(a).

[19]     
The solicitor for the defenders presented a subsidiary argument based on the position of the defenders, as against Danisco. The pursuers only averred that the common practice on which they founded was known to themselves and Danisco, not to the defenders. If the common practice was to be of any help in a dispute with the defenders, however, the pursuers had to aver that the knowledge was readily available to the defenders at the time of the novation, as a new contractual obligation arose at that point. In my opinion this contention is not well founded. The pursuers found on the principle of delegation. If delegation is established, the result is to discharge the existing obligations of Danisco and to substitute the defenders as a new debtor in those obligations. The only alteration that is alleged to have occurred is the change of debtor; it is not suggested by the pursuers that the content of the contractual obligations, as against the party bound by them, has changed in any way. In such a case, the new debtor is bound by the obligations incumbent on the original debtor. It is immaterial whether the new debtor is aware of the whole of the background circumstances to the contract, including practice in the relevant industry. If delegation is sufficiently established on the evidence, the new debtor succeeds to the whole of the obligations, and rights, of the original debtor; the relevant principle is obviously analogous to assignatus utitur jure auctoris, although in this case it is obligations that are transferred as well as rights.

Construction of clause 5A

[20]     
Clause 5A is quoted above. The solicitor for the defenders submitted that liability under clause 5A was not triggered by the defenders' letter of 22 November 2001, for three reasons. First, clause 5A only applied where the proposed termination occurred prior to the expiry of the initial five-year period. The letter of 22 November 2001 had effect, however, at a date after the expiry of that period. Secondly, that letter bore to terminate the contract "in accordance with Clause 5(a) of the agreement". If the letter was ineffective as a notice under clause 5(a), it could not transmute at the pursuer's option or otherwise operate as a notice under an entirely separate clause, namely clause 5A. Thirdly, clause 5A provided a mechanism, exercisable at the option of Danisco, to terminate the contract prior to expiry of its initial five-year term on payment of a fixed sum calculable by reference to the formula in the clause. The option was subject to certain essential preconditions. One of these, found in paragraph (c) of the clause, was that Danisco should pay the early termination payment prior to the date of termination. In the present case no such payment had been made, and the consequence of such non-payment was that the contract was not terminated early.

[21]     
In my opinion the foregoing arguments are not well founded. In relation to the first, it is true that the initial part of clause 5A refers to termination of the agreement on a date prior to the period of appointment as specified in clause 4. The clause goes on, however, to refer to termination prior to the expiry of "the termination provision specified at clause 5". That provision could clearly apply after the initial five-year term of the contract specified in clause 4. Consequently I do not think that clause 5A can be limited to that five-year period. In relation to the second argument for the defenders, it is correct that the letter of 22 November 2001, after giving formal notice of termination of the agreement, stated

"In accordance with Clause 5(a) termination will take effect six months after the date of this notice being 27 May 2002 ".

I am nevertheless of opinion that the reference to clause 5(a) is not sufficient to prevent the notice of termination from having effect under clause 5A. Clause 5A does not require that it should be invoked expressly. Indeed, it provides for the possibility that Danisco "gives notice to [the pursuers] of termination of this agreement on a date prior to the expiry of" the two specified periods. All that is required, according to that wording, is notice of termination taking effect on a date prior to the expiry of one of the specified periods. The notice of 22 November 2001 specifically states "we hereby give you notice of termination of the agreement". Paragraph (a) of clause 5A further requires that the notice should be in writing and should conform to clause 11(c) of the contract. In fact the notice of 22 November 2001 was in writing, and there was no suggestion that it was not served in accordance with clause 11(c). That in my opinion is sufficient to bring clause 5A into operation, notwithstanding the reference to clause 5(a) in the following sentence.

[22]     
In relation to the defenders' third argument on clause 5A, I am of opinion that payment in terms of the formula contained in paragraph (b) is not an essential precondition to the pursuers' invoking the clause. For this purpose, it is probably immaterial whether the clause is properly to be regarded as a termination mechanism or, as counsel for the pursuers submitted, an ordinary liquidate damages clause. If anything, I tend to favour the latter interpretation; the clause assumes that notice of early termination is given, and provides a formula that is clearly designed to compensate the pursuers for fixed costs and annual depreciation costs. What seems clear, however, is that paragraph (c) does not make payment a precondition of the pursuers' invoking the clause. It stipulates that "Such early termination payment to be made in full by [Danisco] to [the pursuers] prior to the date of termination of the appointment of [the pursuers]". That in my opinion is a direction regarding the time of payment; it does not require payment as a condition of anything. In the circumstances I am of opinion that the pursuers' averments relating to clause 5A should be permitted to proceed to proof before answer.

 

Conclusion

[23] In the foregoing circumstances, I will allow the parties' averments to proceed to proof before answer. The defenders' second plea in law is that the pursuers' averments are irrelevant and lacking in specification, and should accordingly not be remitted to probation; I will repel that plea. Otherwise, however, all pleas in law will remain standing. I will have the case put out by order to enable the details of further procedure to be discussed.


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