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Scottish Court of Session Decisions


You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Farleyer House Hotel Ltd v Smart & Anor [2007] ScotCS CSOH_47 (01 March 2007)
URL: http://www.bailii.org/scot/cases/ScotCS/2007/CSOH_47.html
Cite as: [2007] CSOH 47, [2007] ScotCS CSOH_47

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OUTER HOUSE, COURT OF SESSION

 

[2007] CSOH 47

 

A374/05

 

 

 

 

 

 

 

 

 

 

 

OPINION OF LADY CLARK OF CALTON

 

in the cause

 

FARLEYER HOUSE HOTEL LIMITED

 

Pursuers;

 

against

 

WILLIAM SMART and ROBERT ANDREWS

 

Defenders:

 

 

ннннннннннннннннн________________

 

 

 

Pursuers: MacColl; Shepherd & Wedderburn

Defenders: Davidson; Simpson & Marwick

 

1 March 2007

 

Overview

[1] This case came before me on procedure roll in respect of the second, third and fourth pleas-in-law of the defenders. The debate centred on the second and third pleas-in-law. Counsel for the pursuers did not seek to debate the preliminary pleas for the pursuers and offered a proof before answer. The note of argument for the defenders, No.13 of process, was the basis of the oral submissions made by counsel for the defenders. In summary there were two main issues in contention: (1) the interpretation of the assignation referred to in the pleadings at pages 51E-52C and 54B-55A and (2) issues of specification and fair notice in relation to averments about loss and quantum in Article 8 of condescendence. Counsel for the defenders sought dismissal of the action, which failing, he sought deletion of major parts of Article 8 of condescendence.

 

Interpretation of the assignation: the third plea-in-law for the defenders
[2
] It was averred by the defenders at 54A - 55B that an assignation had been made by the pursuers in favour of the Governor and the Company of the Bank of Scotland. The fact that an assignation had been made and the terms of the assignation were not disputed by the parties. The issue in dispute was the meaning of the assignation. If the construction of the assignation put forward by counsel for the defenders is correct, it was contended on behalf of the defenders that the pursuers had assigned their right to pursue the present action. It was further contended that accordingly the third plea of no title to sue was well founded. The assignation provided:

"We Farleyer House Hotel Limited (Company registration Number 02740278) ... HEREBY ASSIGN all rights competent to us now, or that may become competent to us in the future, as proprietors of the business known as Farleyer House Hotel trading from premises at Farleyer House, by Aberfeldy, Perthshire, at common law or statute, including all rights title and interest to pursue claims from damages, repetition recompense or otherwise, and to raise any necessary Court proceedings relative to the actings of any persons who have liability to us the said Farleyer House Hotel Limited arising out of their involvement in a fraudulent scheme perpetrated by, inter alios, Andrew Cole .... and others, the identity of whom are to us unknown whereby sums, the total value of which is to us unknown, were embezzled by the said Andrew Cole and others between January 1996 and May 2001 IN FAVOUR OF The Governor and the Company of the Bank of Scotland ...".

[3] There was agreement about the approach which the court should adopt in this case to the construction of the assignation. The pursuers' counsel relied on Bank of Scotland v Dunedin Property Investment Company Ltd 1998 SC 657 and in particular passages from the Opinion of Lord President (Rodger) at 661D-E:

"It was agreed that the proper starting point for consideration of the interpretation is to consider what is the ordinary meaning of the words."

[4] The words which have given rise to dispute in the present case are the words "We (the pursuers) ... hereby assign all rights ... relative to the actings of any persons ... arising out of their involvement in a fraudulent scheme perpetrated by inter alios, Andrew Cole ... and others ...". The underlining is mine and relates to the words which are central to the dispute.

[5] It was submitted by counsel for the defenders that the word "involvement" has a very wide meaning. He relied on that wide meaning. He submitted that "involvement" may be direct or indirect. He pointed to the averments at page 32B-C where it is averred that the defenders contracted with the pursuers to act as auditors and management accountants and the defenders audited the financial statements of the pursuers from 1 July 1996 to 30 June 2000. He conceded that he was unable to rely on any averments that there had been any active participation by the defenders which would amount to involvement in a fraudulent scheme perpetrated by others. His contention was that the defenders were not perpetrators, but because of their accountancy and auditing role averred by the pursuers, they were "involved". The defenders as auditors had been duped by the fraudulent scheme of Andrew Cole and others. There was some discussion of various hypothetical situations. Counsel for the defenders gave the analogy of a referee, who is not in the ordinary meaning of the word a "player" in a football game. He submitted, however, that the referee would in the ordinary meaning of the word be described as being "involved" in the game. Even if the referee did not notice or see a foul being committed by a player, that does not mean he was not involved.

[6] Counsel for the pursuers submitted that the approach by counsel for the defenders is misconceived. He submitted that the contested words are not broad enough to cover a situation where the averments are that the defenders, as accountants and auditors, have failed to notice what someone is doing. In this case it is not averred that the defenders are involved as perpetrators. It is not averred that the defenders were involved in any way. It is not even averred that the defenders had any knowledge of the fraudulent scheme before it was discovered by a third party. That lack of knowledge is the basis of the case pled by the pursuers against the defenders and provides the factual basis for the duties which the defenders allegedly breached. Counsel for the pursuers submitted that the terms of the assignation were wide enough to cover the involvement of the perpetrator or perpetrators. It might also cover someone who was involved not as perpetrator but involved indirectly, for example, in laundering money from the fraudulent scheme. But the ordinary plain meaning of the words could not be stretched to include a situation, as in this case, where there was a total failure by the defenders to notice that the perpetrator Andrew Cole and perhaps others were involved in a fraudulent scheme. In the present case there was an absence of participation by the defenders and an absence of knowledge of the scheme on their part.

[7] As a secondary submission, counsel for the pursuers stated that if a conclusion was reached that the ordinary meaning of the words was not enough by itself to achieve a sound construction, the proper course would be to give consideration to the surrounding factual circumstances which would support the grant of a proof before answer.

 

Discussion

[8] In my opinion, it is possible in this case to come to a view about the meaning of the disputed words in their context in the assignation by considering the ordinary meaning of the words. Looking to the pleadings, which incorporate the terms of the assignation brevitatis causa, I accept that the word "involvement" may have a wide meaning and may take colour and meaning from the context in which it is used. I accept that a person may become involved in activities in a variety of ways, including in the case of a referee as a result of the rules of the game. In the present case, I accept that the defenders as accountants and auditors were involved in a general sense in relation to the business, particularly in relation to the consideration and auditing of the accounts. Looking at the particular terms of the assignation, the issue is whether or not the defenders' actings, as averred, can be said to arise out of their involvement in a fraudulent scheme perpetrated by Andrew Cole and others unknown whereby sums were embezzled. It is not averred that the defenders were involved directly or indirectly as perpetrators and they were not the victims of the embezzlement. The victims were the pursuers. It is not averred that the defenders knew anything about the embezzlement. I am prepared to accept that the disputed words may be sufficiently wide to cover something less than participation as a perpetrator in a fraudulent scheme. But in my opinion, the ordinary meaning is not wide enough in the context of an auditor and accountant to cover a situation where that person knows nothing of a fraudulent scheme. Essentially I am not persuaded that the construction put forward by the defenders' counsel is correct. But even if I am wrong about that, there is plainly a disputed construction and there are strong arguments in favour of the construction advanced on behalf of the pursuers. If the interpretation of the assignation is unclear, I consider there is merit in allowing the case to proceed to a proof before answer as knowledge of the factual context in which the assignation was concluded may be of assistance in the interpretation. In these circumstances, I am not prepared to sustain the third plea-in-law for the defenders.

 

Article 8 of condescendence: specification
[9] Counsel for the defenders analysed the pleadings about loss in Article 8 of condescendence. He submitted that it was impossible to ascertain the basis of the claim, bearing in mind that the pursuers admitted that they had received the sum of г450,000 "under explanation that this was compensation in relation to cheques which had been cashed by Mr Cole outwith the terms of the mandate given to the Bank of Scotland" (50D-E). It was submitted that it was not possible to tell from this global sum how much compensation, if any, the Bank of Scotland had made to the pursuers in respect of losses for which they would be jointly responsible, such as the professional fees incurred, management time and, in particular, the alleged difficulties of selling the hotel and business as a going concern.

[10] In response, counsel for the pursuers submitted that the pleadings must be considered in their whole context. He made reference to Karlshamns Oljefabriker (A/B) v Monarch Steamship Co Limited 1949 S.C.(H.L) 1, Lord du Parcq at page 28. He pointed out that it had always been part of the pleadings of the pursuers that "the pursuers have been reimbursed by their bankers for monies drawn from their account by way of cheques in excess of the г1,000 mandate level" (48C-D). The reference by the pursuers in the pleadings to the specific sum of г450,000 as compensation is in answer to a specific averment and use of the term "compensation" by the defenders at 53D-E. It was submitted that on a fair reading of the pleadings, it was plain that the pursuers had made explicit that they had been reimbursed for their losses in respect of cheques paid in excess of the г1,000 mandate but no other compensation for other losses such as professional and management fees and the delay in failure to sell the hotel as a business were averred to be compensated. Thus it is plain from the averments that there was no element of double compensation.

 

Discussion

[11] Although there were submissions about the way in which the pleadings developed in relation to the averments about the sum of г450,000, I consider this was of historical interest only. As the discussion developed at debate, it became plain that the point in contention was a very narrow one. I consider that the pleadings when read as a whole, as submitted by counsel for the pursuers, are sufficient to give notice that the pursuers were reimbursed to the sum of г450,000. I do not consider that there is any ambiguity in the pleadings in relation to this matter, to justify exclusion of the averments about the heads of loss which the pursuers seek in compensation. There was no other attack made in relation to the specific heads of claim, in the event that the pleadings were so interpreted.

[12] In all the circumstances, for the reasons given, I grant a proof before answer and reserve the question of expenses.

 


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