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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Brown v Rysaffe Trustee Company (CI) Ltd [2011] ScotCS CSOH_26 (08 February 2011)
URL: http://www.bailii.org/scot/cases/ScotCS/2011/2011CSOH26.html
Cite as: [2011] CSOH 26, [2011] ScotCS CSOH_26

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OUTER HOUSE, COURT OF SESSION

[2011] CSOH 26

CA11/10

OPINION OF LORD GLENNIE

in the cause

JOHN KENNETH BROWN

Pursuer

against

RYSAFFE TRUSTEE COMPANY (CI) LIMITED

Defender

ннннннннннннннннн________________

Pursuer: Richardson; MBM Commercial LLP

Defender: M Ross; Turcan Connell

8 February 2011

Introduction

[1] The pursuer and the defenders were, at all material times, parties to a Loan Agreement ("the Loan Agreement") dated 12 June 2007. The Loan Agreement is at 6/1 of process. In terms of clause 2 of the Loan Agreement, the defender (as "Lender") agreed to lend to the pursuer (as "Borrower") a sum of money for the purpose of enabling the pursuer to buy shares in Kenmore Property Group Limited ("the Company"), a company of which the pursuer was a director. Clause 5.5 of the Loan Agreement gave the defender a discretion to waive re-payment of the loan. In the event of the defender exercising its discretion in that way, it undertook, in terms of clause 5.6, to indemnify the pursuer against any tax liability arising therefrom.

[2] By letter dated 30 April 2008, the defender notified the pursuer that it was exercising its discretion to waive repayment of the loan. The waiving of the loan triggered a tax liability on the part of the pursuer. It is averred by the pursuer that on 23 November 2009, he paid a sum to HMRC in full settlement of that tax liability. He now sues to recover that sum from the defender pursuant to the term of clause 5.6 of the Loan Agreement.

[3] Payment is denied by the defender on the ground that it entered into the Loan Agreement as Trustee of the Kenmore Property Group Employee Benefit Trust ("the Trust") and not in a personal capacity. In its Defences, this is pled as an implied term of the Loan Agreement. The defender has also lodged a Counterclaim seeking rectification of the Loan Agreement so as to make it clear that it undertook liability thereon as Trustee only.

[4] The matter came before the court at Debate on the defender's pleas to the relevancy of the averments in the Summons and the relevancy of the averments in the Answers to the Counterclaim. It was agreed that this issue could be determined on the documents.

The circumstances surrounding the making of the Loan Agreement
[5] Most, if not all, of the background to the Loan Agreement is uncontroversial. The pursuer was a director of the Company. In 2006/2007 the Company sought a means of allowing its employees to purchase shares in the Company. The means settled upon was the creation of a Trust which would make loans to employees of the Company, including the pursuer, for the purchase of shares. In due course, the Trust would usually waive the obligation to repay those loans. The arrangements involved the creation of a number of agreements and other documents, including the following:

(i) a Trust Deed constituting the Trust which was to acquire the shares, sell them to the employees, and make loans to the employees to enable them to buy the shares, with the defender as Trustee;

(ii) an Operating Agreement between the Company and the defender, in terms of which the defender, as Trustee of the Trust, was to acquire shares to satisfy Awards of shares to individual employees;

(iii) a Loan Agreement between the Company and the defender as Trustee of the Trust, in terms of which the Company agreed to loan the Trustee up to г5,686,290 for the purpose of acquiring shares under the terms of the Trust Deed and transferring those shares to employees;

(iv) a number of Award Agreements between the defender, as Trustee of the Trust, and employees of the Company to whom loans would be made, in terms of which the Trustee, as Grantor, agreed to sell the stipulated number of shares to the particular employee, the purchase of the shares being funded by the Grantor pursuant to a Loan Agreement between them to be entered into on that same day; and

(v) a similar number of Loan Agreements between the defender and employees to whom loans would be made, in terms of which the defender would provide a loan of a stipulated amount to be used by the employee for the purpose of acquiring the shares.

The Loan Agreement between the defender and pursuer, with which this action is concerned, is one of the Loan Agreements in that last category. Ms Ross, who appeared for the defender, explained the position in more detail by reference to the documents lodged in process.

Board Meeting of 20 March 2007

[6] A meeting of the Board of Directors of the Company was held on 20 March 2007, attended by Mr Brook, as Chairman, and by the pursuer in his capacity as director. It is recorded in the minutes of that meeting (7/6) that the meeting was convened to consider and, if thought fit, to establish a discretionary employee benefit trust to facilitate, amongst other things, the acquisition of shares by employees. The key terms of the proposed trust included a definition of permitted beneficiaries, to include not only employees and former employees of group companies, including executive directors, but also spouses and civil partners (and surviving spouses and civil partners), and children and step-children. It was proposed that the defender would be the first trustee of the trust: see para 3.7 of the minutes. A draft copy of the proposed trust deed was produced to the meeting. After careful consideration, it was resolved at the meeting that the Company should establish an employee benefit trust in the form produced to the meeting and would pay by way of gift an initial contribution of г10 to the defender in order to constitute the trust property; and, further, that any two directors, or a director and the Company Secretary, be authorised and instructed to execute all documents necessary to give effect to the scheme.

The Trust Deed of 20 March and 2 April 2007
[7] The Trust Deed (7/1) between the Company and the defender was signed on 20 March 2007 by the Company and on 2 April 2007 by the defender. The pursuer signed on behalf of the Company. The defender was described as "the Original Trustees". In the Introduction, at para.(A), it was asserted that the Board of the Company had approved the establishment of the Trust for the purposes described in the Deed. The terms of clause 3.3 should be noted:

"3.3 Notwithstanding anything hereinbefore contained but subject always to Clauses 2 and 4 the Trustees may in exercise of their powers and discretion to pay or apply the capital of the Trust Fund for the benefit of all or any one or more of the Beneficiaries:

3.3.1 transfer shares to a Beneficiary either absolutely or subject to any conditions pursuant to an Employees Share Scheme or otherwise;

3.3.2 grant or procure the grant of rights to acquire Shares at the expense of the Trust Fund to a Beneficiary or Beneficiaries whom it is thereby sought to benefit if the grant of such rights would in the opinion of the Trustees be advantageous to such person or persons;

3.3.3 sell Shares to any one or more Beneficiaries for a consideration which is less than the Trustees might have obtained by selling such Shares to a third party

3.3.4 purchase Shares from Beneficiaries whom it is thereby sought to benefit for a consideration which is more than the Trustees might have had to pay to obtain such Shares from a third party if the purchase of such shares would, in the opinion of the Trustees, be beneficial to such persons."

I should also refer to clause 3.8 which provided as follows:

"3.8 In the event that the Trustees make any payment to a Beneficiary and in consequence thereof the person treated for any tax purpose as the employer of that Beneficiary, or any other person, is liable to account to HM Revenue & Customs for any amount of, or on account of, income tax thereon, the Trustees may pay to such person (for the benefit of the Beneficiary) a sum sufficient to discharge any such liability."

It is not necessary to go into any more detail about the terms of the Trust Deed.

The Operating Agreement of 12 June 2007
[8] On 12 June 2007 the Company and the defender entered into an Operating Agreement (7/2). The Operating Agreement was signed on behalf of the Company by the pursuer. Although not designed as such in the title, the defender was referred to in the Operating Agreement as "Trustee". Under the heading "Background", the Operating Agreement referred to the fact: (A) that the defender ("the Trustee") was the current trustee of the Trust, the abbreviation used in the Operating Agreement to mean the Kenmore Property Group Employment Benefit Trust; (B) that the Company had requested the Trustee to grant the Awards described in the Schedule under the relevant Share Scheme, defined as a share option, share acquisition or any other share incentive scheme established by the Company for the benefit of its eligible Employees; and (C) that the Company might ask the Trustee to grant further Awards under a Share Scheme in the future and might ask the Trustee to satisfy such Awards on the same terms. The Trust Deed was identified as being the Trust Deed to which I have referred in the previous paragraph. In clause 2.1 the Trustee agreed to provide Shares to satisfy the Awards specified in the Schedule. Clauses 3 and 4 concerned funding, respectively by gift and by loan, of the Trust to enable the Trustee to acquire Shares for the purpose of the Scheme and to pay any tax liability of Employees arising from the award of Shares or the manner of payment therefor. Clause 4.5 provided that, except in the case of fraud, negligence, breach of trust or breach of the Operating Agreement, the liability of the Trustee for any loans made to it by the Company to enable it to acquire Shares, was to be limited to the value of the assets held by it in its capacity as Trustee on the terms of the Trust Deed, and the Company was to have no recourse to any of its other assets. Clause 5 dealt with "Acquisition of Shares etc". It provided that the Trustee was to use money given or lent under the Operating Agreement to acquire Shares at such times and on such terms as might be specified by the Company or, if no such times or terms were specified, at such times and on such terms as it considered reasonable to enable it to satisfy its obligations thereunder. In addition, the Trustee might use any money given or lent under the deed to pay any tax liability of the Employees arising from the circumstances surrounding the award of Shares or the manner of payment therefor.

[9] The Schedule to the Operating Agreement set out the "Existing Awards to be satisfied under this deed". These were described in five columns, headed respectively "Award holder", "Scheme name", "Date of grant", "Acquisition price" and "Number of Shares". Award holders were employees to whom it had been decided to award shares under the Share Scheme. Some 60 award holders were named, including the pursuer and Mr Brooke, the Chairman. It was recorded there that the pursuer was to be awarded 250 shares in the Company, the acquisition price of which was г750,000.

The Loan Agreement between the Company and the defender of 12 June 2007
[10] On 12 June 2007 the Company and the defender entered into a Loan Agreement (7/4). This is a different Loan Agreement from that under which the present claim is made. The pursuer was one of the signatories to this agreement on behalf of the Company. In the Loan Agreement the defender is designed as "RYSAFFE TRUSTEE COMPANY (C.I.) LIMITED ... as trustee of the Kenmore Property Group Employee Benefit Trust". The preamble explained that the Lender (the Company) had settled certain assets on the Trust which were held on terms of the Trust Deed, that the Borrower (the defender) had been appointed as Trustee of the Trust, and that the Lender had agreed to provide the Borrower with the Loan. In the definitions in clause 1, it identified the Trust Deed as being the Trust Deed to which I have referred earlier. It also defined "Tax Liability" as being any liability of the Borrower to account to HM Revenue & Customs or to indemnify any Employee in relation to any Tax which arises from a waiver of any loan by the Borrower to that Employee.

[11] The purpose of the Loan Agreement, as set out in clause 2, was the provision by the Company to the defender of a Loan in a maximum amount of г5,686,290, that Loan to be used for (a) acquiring Shares to be held by the Borrower under the terms of the Trust Deed, (b) if so requested, transferring those Shares to Employees under the rules of any Share Scheme, and (c) paying any stamp duty and other expenses in relation to such acquisitions. In clause 9, under the heading "Limitation on recovery from the Borrower", it provided that except in the case of fraud, negligence, breach of trust or breach of duty, (a) the Borrower's liability would be limited in the same manner as under clause 4.5 of the Operating Agreement, i.e. to the value of the assets held by the Borrower in its capacity as Trustee on the terms of the Trust Deed, the Company having no recourse to any of its other assets; and (b) the Borrower should never incur personal liability except to the extent that it could lawfully indemnify itself out of the Trust Fund.

The Award Agreement of 12 June 2007
[12] The Award to the pursuer of 250 shares in the Company was regulated, as between the defender and the pursuer, by the Award Agreement (7/3), also dated 12 June 2007. In the Award Agreement, to which both the pursuer and the defender were parties, the defender was similarly designed as "RYSAFFE TRUSTEE COMPANY (C.I.) LIMITED, as trustee of the Kenmore Property Group EBT". The pursuer is referred to as the "Awardholder" while the defender is called the "Grantor". In the preamble, there are references, at (B) to the Company having established a share scheme in order that it might recruit and retain valuable employees, in partial implement of which the Company had contributed and/or lent certain assets on the Kenmore Property Group Employee Benefit Trust (the "Trust") which were held on the terms of the Trust Deed of which the Grantor (i.e. the defender) was the trustee; at (C) to the Grantor having subscribed for a number of 'B' Ordinary Shares with a view to such shares being transferred on to key members of staff; also at (C), that, in order to retain the continued services of the Awardholder (i.e. the pursuer), the Company had requested the Grantor to sell 250 of those shares (the "Forfeitable Shares") to the Awardholder; and at (E), that the Grantor had agreed to sell and the Awardholder had agreed to buy the Forfeitable Shares upon the terms set out.

[13] Clause 2 of the Award Agreement provided for the purchase and sale of the shares. Clause 4 set the price at г750,000. Clause 5 dealt with "Completion". The purchase and sale was to be completed on the Completion Date when, amongst other things, the Grantor and the Awardholder (i.e. the defender and the pursuer) would enter into a Loan Agreement in Agreed Form, i.e. in terms already agreed between them.

The Loan Agreement between the pursuer and the defender
[14] The Loan Agreement between the pursuer and the defender referred to in the Award Agreement is the Loan Agreement with which this action is concerned. It was signed on behalf of the defender on 12 June 2007 and by the pursuer on 12 July 2007. I have referred briefly (in para.[1] above) to the main terms but I should set out parts of the Agreement in more detail at this point.

[15] The first point to note, and it is the main point on which the pursuer relies in seeking to hold the defender personally liable in this action, is that in the title the defender is not designed as Trustee for the Trust. But the preamble refers in terms to the Trust. It reads as follows:

"WHEREAS:-

(A) Kenmore Property Group Limited ... (the "Company") has settled certain assets on the Kenmore Property Group Employee Benefit Trust (the " Trust") which are held on the terms of the Trust Deed (as hereinafter defined).

(B) The Lender has been appointed as trustee of the Trust.

(C) The Lender is transferring Shares to the Borrower in part implement of a Share Scheme in return for payment of the purchase price thereof by the Borrower.

(D) The Lender has agreed to provide the Borrower with the Loan to meet the amount of the payment on the following terms and conditions."

The "Share Scheme" is defined as

"a share option scheme, share acquisition scheme or any other share incentive scheme established by the Company or any Group Company for the benefit of its eligible Employees."

This is the same definition as that contained in the Operating Agreement. The "Trust Deed" is defined as the Trust Deed between the Lender (the defender) and the Company to which I have referred in para.[7] above. Clause 1.2 makes it clear that terms defined in the Share Scheme and in the Trust Deed are to have the same meanings when used in the Loan Agreement unless the context otherwise requires.

[16] The amount and purpose of the loan is made clear in clause 2. The amount of the loan is г750,000. Clause 2.2 provides that the proceeds of the Loan are to be used

"... for acquiring Shares to be made available to the Borrower under a Share Scheme."

Clause 4 deals with interest. Although the parties "do not envisage that interest will be charged on the Loan", it is provided that the Lender may charge interest at up to 1% above base rate. Clause 5 is headed "Repayment, Prepayment and Waiver". It provides, so far as is material, as follows:

"5.1 Subject to clause 5.2, clause 5.5 and clause 9, the Loan shall be repayable in full together with any other amounts outstanding, including interest (if any) on demand, on a date to be agreed between the parties.

5.2 Subject to clause 9, the Borrower may prepay the whole or any part of the Loan. To do this, it must give the Lender at least two Business Days' (or such other period as may be agreed between the parties) prior written notice, specifying the date and intended amount of the prepayment.

...

5.5 The Lender shall be entitled, at its sole discretion, to waive in whole or in part the obligation of the Borrower to repay the Loan. In the event of the Lender choosing to exercise its discretion to waive as aforesaid the Lender will notify the Borrower of the extent of the waiver in writing as soon as reasonably practicable thereafter.

5.6 In the event of the Lender exercising its discretion to waive repayment of the Loan in whole or in part under Clause 5.5, the Lender undertakes to free, relieve and indemnify the Borrower from any Tax Liability. ..."

It is not necessary for present purposes to set out any other terms of the Agreement.

Subsequent correspondence
[17] On 3 December 2007 (7/7), the Company wrote to the defender setting out a statement of principles drawn up to provide guidance to the Trustee "on the circumstances in which the Trustee should waive the limited recourse loan made by the EBT to the employee to permit the employee to buy shares in the Company." It pointed out that the decision to waive the loan or to seek repayment will arise when the employee sells the shares or is required to sell the shares or, if the shares have already been sold by the Trustee, is receiving the proceeds of that sale. The importance of this letter is not so much for its content as for the fact that it was signed on behalf of the Company by the pursuer as its Finance Director. The letter suggested that the Trustees should work on the assumption that the loan "should be waived unless there is a compelling reason to seek repayment in whole or in part". Examples were given of circumstances, e.g. where the employee had a poor work record, had not been employed for long or was leaving without giving proper notice, in which the assumption might be rebutted.

[18] On 30 April 2008 (6/2), the defender wrote to the pursuer in the following terms:

"Dear Mr Brown

KENMORE PROPERTY GROUP EMPLOYEE BENEFIT TRUST

RYSAFFE TRUSTEE COMPANY (C.I.) LIMITED

In our capacity as trustee of the Kenmore Property Group Employee Benefit Trust ("the Trust") we hereby confirm that we have exercised our discretion to waive the loan of SEVEN HUNDRED AND FIFTY THOUSAND POUNDS (г750,000) made to you by the Trust under the Loan Agreement dated 12 June 2007 and 12 July 2007 and any interest accrued thereon. The proceeds of the loan were used by you to acquire 'B' ordinary shares in Kenmore Property Group Limited.

If you haven't already done so, you will still need to complete the two year service period with the Group before the shares become free from forfeiture. Once this happens, you may dispose of them, in accordance with the articles, without the loan requiring to be repaid or waived at that time.

This waiver of loan does not affect any other restrictions on your shares.

Yours faithfully

Rysaffe Trustee Company (C.I.) Limited"

It may be noted that in sending this letter, which was clearly to do with its operation of the Trust as Trustee, the defender did not qualify its signature or design so as to make it clear in any formal way that it was acting as trustee.

[19] On 31 August 2009 (6/4) the pursuer wrote to the defender pointing out that the waiver of the loan had created a liability to tax and asked for the sum claimed in respect of his liability to tax to be remitted to him. On 18 December 2009, after some further correspondence, the defender wrote to agents acting for the pursuer saying that whilst they sympathised with the pursuer's position "the Trust does not have sufficient funds to meet [his] claim".

Submissions
[20] For the defender, Ms Ross submitted that the scheme in implement of which these various agreements were made was one in which the sums were being advanced from the Trust to individual employees to enable them to purchase shares in the Company. It was obvious to anyone who stopped to think about it that, when entering into the Loan Agreement with the pursuer - and, from this point on, when I refer to the Loan Agreement I am referring to the Loan Agreement between the defender and the pursuer - the defender was acting as Trustee for the Trust. The Loan Agreement contained references to the other documentation, showing that it formed part of the Scheme by which money would be lent to employees of the Company for the purpose of buying shares in it. In this particular case the pursuer himself had actual knowledge of the arrangements, having been at the meeting of the Board of Directors of the Company at which it was decided to set up this scheme, and having personally signed each of the agreements on behalf of the Company, as well as having signed the letter from the Company to the defender offering guidance as to the circumstances in which repayment might be waived. She argued that, on a proper construction of the Loan Agreement, understood against the background of the scheme of which it formed part, the contracting party was the defender in its capacity as Trustee of the Trust and not in any personal capacity. The same result could be reached by way of an implied term of the Loan Agreement, on the basis that such implication was necessary to give business efficacy to the contract, to make it work in the way in which it was intended to work, or on the basis that the point was obvious (the "of course" test). If she was wrong about that, the Loan Agreement should be rectified under s.8(1)(a) of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985 so as to give effect to the antecedent agreement of the parties, which remained current at the time of entering into the Loan Agreement, that the pursuer would borrow a sum of money from the Trust for the purpose of acquiring shares in the Company.

[21] Mr Richardson, who appeared for the pursuer, argued that there was no room for such a construction or for the implication of a term to the effect contended for. He pointed to the wording of the Loan Agreement and some of the other formal documents, and argued that, had this been intended, the capacity of the defender in entering into the Loan Agreement could have been qualified as it had been in the other documents. The terms of the Loan Agreement had been agreed at the time of entering into the Award Agreement. There was therefore no mistake as to its terms. There was nothing in the background to the Loan Agreement to displace the plain meaning of the words used. Nor was there any necessity to imply a term. It was plain from the decided cases that even if a person entered into an agreement stating, under his signature, that he was a trustee, that did not of itself mean that his liability was to be restricted. Any such restriction of liability had to be made clear. Nor did business efficacy compel any such an implication. A term should not be implied which contradicted an express term, and here the express term was that the defender in its personal capacity undertook liability on the agreement. In any event, the court should be slow to imply a term into a complex written arrangement. So far as concerned the rectification argument, he argued that the defender had to show an earlier or contemporaneous agreement between the same parties (i.e. between the pursuer and the defender, and not between the defender and other parties) which disclosed that at the time the Loan Agreement was entered into it was the common intention of the parties that the defendant should be under no personal liability. The mere fact that the pursuer knew that the defendant was not intending to assume personal liability was insufficient.

Discussion
[22] Even without a detailed analysis of the Loan Agreement it is clear, in my opinion, that the defender was contracting as Trustee of the Trust. The overall documentation makes this clear. The loan was being advanced to the pursuer pursuant to the Company's share incentive scheme (the Share Scheme) administered by the Trust. In terms of that Scheme, the Trust was to acquire shares in the Company and sell them to employees of the Company, advancing loans to those employees for the purpose of enabling them to purchase the shares. The Award Agreements and Loan Agreements with individual employees were in implementation of that Share Scheme, the Award Agreements confirming the number of shares to be awarded to the employee and the price that the employee would have to pay, and the Loan Agreements providing for a loan to the employee of the price payable for those shares. In entering into the Award Agreements and the Loan Agreements with individual employees, the defender was clearly acting as Trustee of the Trust, which formed a pivotal part of the Scheme.

[23] A more detailed examination of the Loan Agreement itself leads to the same conclusion. Mr Richardson points out that in the Loan Agreement the defender is not designed as "Trustee", and, although in Recital (B) it is stated that the Lender (i.e. the defender) "has been appointed as trustee of the Trust", "trustee" in lower case was not a defined term either in that agreement or in any of the other relevant documentation. Further, the obligation in clause 5.6 of the Loan Agreement was to relieve and indemnify the Borrower from any Tax Liability. That obligation was unqualified. There was no mention of that obligation being limited by reference to the Trust funds held by the Trustee, as it was in other documents. All this is undoubtedly true, but it misses the bigger picture. The word "trustee" in lower case may not be a defined term, but "Trust" is. The "Trust" is the Kenmore Property Group Employee Benefit Trust established by the Trust Deed dated 20 March and 20 April 2007. The parties to the Loan Agreement must be taken to have notice of the Trust, its terms and its purpose. The defender is described as "trustee" of that Trust. There is no ambiguity. The Trust has only one Trustee. Further, Recital (C) states that the Lender (i.e. the defender) is transferring Shares to the Borrower in part implement of the Share Scheme. Share Scheme is a defined term, referring to the share option, share acquisition and/or share incentive scheme established by the Company for the benefit of its eligible employees. It is the Scheme for which the Trust was established. The parties must be taken to know this. Recital (A) narrates that the Company has settled assets on the Trust, which are held on terms of the Trust Deed. It is clear, therefore, from the Loan Agreement itself that the shares being transferred by the Lender (i.e. the defender) to the Borrower are shares acquired by the Trust and held on the terms of the Trust Deed for the purpose of the share scheme. In transferring shares from the Trust to the Borrower, the defender must be acting as Trustee of the Trust. He could not be acting in any other capacity. Recital (D) and clause 2 make it clear that the Loan being made available under the Loan Agreement is to be used by the Borrower to acquire the shares in the Company. Thus, the Loan is intrinsically bound up with the Share Scheme and is being provided by the Trust, through the Trustee, for the purpose of paying to the Trust the purchase price for the shares being acquired from the Trust pursuant to the Scheme. It seems to me that, where the terms of the Loan Agreement itself make it clear that the Lender is, and is acting as, the Trustee of the Trust, the omission of wording to that effect in the designation of the defender in the agreement is of no consequence. Understood in this light, the lack of any qualification on the obligation in clause 5.6 to relieve and indemnify the Borrower from any Tax Liability tells one nothing. It would be understood that, since the defender was a party to the Loan Agreement in his capacity as Trustee for the Trust, and only in that capacity, his liability as Trustee would be restricted to the extent of Trust funds in his hands.

[24] Ms Ross naturally placed some emphasis on the fact that the pursuer himself, as finance director of the Company, was fully aware of the of the overall working of the Scheme and of the role played by the defender in the Scheme as Trustee of the Trust. The point is well made. If it were necessary to rely upon the circumstances known to both parties at the time of entering into the Loan Agreement, and had there been no pointers in the Loan Agreement itself, this would be an important factor, since it would show that this particular employee knew the capacity in which the defender was entering into the Loan Agreement. Mr Richardson pointed out that a Loan Agreement in similar terms would have been entered into by many other employees to whom shares in the Company were being given as part of the same Scheme. They might have little or no knowledge of the arrangements. It would be odd, he argued, if the Loan Agreement to which the pursuer was a party was to be interpreted differently from the Loan Agreements with other employees of the Company. I agree. It would be odd. But there is no conceptual difficulty in such a result. Given that in construing a contract the court is required to take account of the surrounding circumstances of which the parties are or could reasonably have been aware, it is quite possible that a contract containing the same words and phrases, and the same terms in the same order, might be given a particular meaning when entered into between two parties who shared a knowledge and understanding of certain background matters but a different meaning if entered into between other parties, one or both of whom did not have and could not reasonably have had that knowledge and understanding. Such cases, however, are likely to be rare. Usually, as in this case, the contract itself will contain sufficient references to extraneous matters to inform both parties (or at least put them on enquiry) as to the circumstances in which the contract came to be entered into and against the background of which it should be construed. In the present case, as I have sought to indicate, the Loan Agreement contains within it sufficient references to the Scheme of which it forms part, and to the other parts of that Scheme, to make an enquiry into the knowledge of the parties of the surrounding circumstances unnecessary.

[25] In some circumstances, of course, as Mr Richardson pointed out, the reference in a contract to the fact that the contracting party is a trustee is insufficient to relieve him of personal liability for the obligations undertaken therein. In Lumsden v Buchanan (1865) 3 M (HL) 89, the defenders were trustees of the marriage settlement of Mr and Mrs Brown. They were authorised to invest money assigned to them in the purchase of shares. They invested the trust funds in acquiring 60 shares in the Western Bank on the terms and conditions specified in a deed of accession to the Company's contract, which deed was subscribed by them under the designation, in the testing clause after their names and ordinary designations, "Trustees for Mrs E.B. ...". The Bank was wound up, and the liquidators of the Bank brought an action against the defenders for payment of calls made by them in respect of those shares. Lord Kinloch held that the defenders did not undertake any personal liability, and were therefore not liable personally on the calls being made against them, but only to such extent as they possessed funds belonging to the trust estate. The Inner House upheld the decision, but it was reversed in the House of Lords, it being held, taking the summary from the rubric, "that trustees entering into a trading partnership of this kind were personally liable in the obligations incumbent on the partners both towards creditors and also inter socios, unless their liability was expressly limited by special stipulation, and that in this case there was nothing to limit their responsibility." Lord Wrenbury LC began by identifying the nature of the obligation entered into by the defenders. By signing the deed of annexation, it was as if they had signed the original contract of partnership. He characterised the contention of the defenders as being "that they became parties to the deed of partnership, and therefore partners in the bank, as trustees only, without any personal liability", with no liability to contribute beyond the amount of money held by them on trust. He described that position is being "wholly at variance with the spirit and intent of the partnership contract". It would involve the creation of "two distinct classes of partners", one class being of partners with unlimited liability and the other of partners with limited liability. It was not in the power of the directors to enter into such a contract or to admit persons as shareholders upon those terms without the agreement of every other shareholder. In those circumstances, the argument that by designing themselves as trustees the defenders excluded their personal liability was inconsistent with the contract entered into. The designation of the defenders as trustees was not useless; it served a purpose of marking the property in the shares as belonging to the trust estate. That purpose was quite consistent with the personal liability of trustees. Addressing the argument for the defenders that trustees who enter into a contract on behalf of the trust estate are not personally answerable for the consequences of that contract, he held that there was "no such general rule". He went on to say this (at p.93):

"A trustee may, both in England and in Scotland, so limit and restrict any contract he may enter into, so as to exclude (as between himself and the other parties to such contract) personal liability. But this must be the result of express stipulation, and whether this be or be not the effect of any particular contract, is a question depending on the construction of the instrument, and the nature of the contract."

Lord Cranworth expressed himself in similar terms (at p.95):

"... trustees in dealing with third persons may so contract as to exempt themselves from personal responsibility, and to confine those with whom they are dealing to such as they can obtain from the trust funds; whether this is the true effect of any contract into which they are entering, must in every case be a question of construction ..."

Having identified many cases in which a trustee is personally responsible even though he may have contracted expressly as a trustee, such as a contract on a bill of exchange or a contract for work to be done on account of the trust, he went on to say this (at p.96):

"The nature of the contract in these cases shews, that the party contracting must have meant to bind himself personally. Ordinary transactions of buying and selling could not go on upon any other principle, and this is, therefore, in all such cases prima facie understood to have been the meaning of the persons engaged.

The true question to be resolved in every case is, whether the circumstances do fairly shew that the contracting parties were dealing only as trustees, and were not intending to incur liability beyond the amount of the trust funds."

Both the Lord Chancellor and Lord Cranworth emphasised the difficulties that would ensue if it were otherwise. Any tradesmen dealing with someone who contracted as trustee would, before entering into a contract, have to make enquiries as to the extent of the trust estate, and there would have to be arrangements put in place to ensure that the trust estate was not dealt with or disposed of until the sums due on the contract were ascertained and paid.

[26] The case of Muir v City of Glasgow Bank (1879) 6 R (HL) 21 is to the like effect. The facts can be stated shortly. John Murdoch held shares in the City of Glasgow Bank, which was registered as an unlimited company. He had made a deed of trust-disposition and settlement. The petitioners were the trustees. Upon the death of Mr Murdoch, some question arose as to whether the shares in the bank would pass under that trust-disposition, and his daughters, as executrices-dative, executed a supplementary deed of trust making over to the petitioners, as trustees, the whole estate of their father, including those shares. A transfer of the shares was executed to complete their legal title. The transfer described the petitioners as "trust-disponees"; and in the stock ledger of the Bank the petitioners were entered by their names and addresses followed by the words "as trust-disponees ...". A share certificate was issued identifying the petitioners as holders of shares "as trust-disponees". The Bank went into liquidation and the liquidators entered the petitioners in the list of contributories, in effect making them personally answerable for calls. It was held both in the Court of Session and in the House of Lords that, as a result of the transfer and the entry in the register of members, the petitioners became, as individuals, partners of the Company and were subject to calls as contributories in their own right. The Lord Chancellor (Lord Cairns) said this (at p.22):

"Whether in a particular case the contract of an executor or trustee is one which binds himself personally, or is to be satisfied only out of the estate of which he is the representative, is, as it seems to me, a question of construction, to be decided with reference to all the circumstances of the case, the nature of the contract, the subject-matter on which it is to operate, and the capacity and duty of the parties to make the contract in the one form or in the other. I know of no reason why an executor ... entering into a contract for payment of money with a person who is free to make the contract in any form he pleases, should not stipulate by apt words that he will make the payment, not personally, but out of the assets of the testator."

He gave, as an instance of how this might be done, the use of the expression "as executor only". At p.43, Lord Blackburn, having referred to the decision in Lumsden v Buchanan, said this:

"I have carefully considered the judgments in that case, and I think this much at least must be considered as decided and settled, viz., that trustees (not created by a statute) are by the law of Scotland a body corporate, or, as it has been loosely said, a quasi corporation. I have myself no doubt that if individuals enter into a contract because they are trustees and for the benefit of trust it would be prudent in them to stipulate that though they bind themselves to see that the trust-funds are properly applied to fulfil the contract their contract shall extend no further, and that they will not be personally liable to make good the deficiency, if any; and if they express such a limitation with sufficient clearness, and the other contracting party ... accepts such a limited engagement, he cannot call on the trustees to do more than to fulfil that limited engagement. There was an opinion entertained by many Scotch lawyers, and to some extent countenanced by the decision in this House of Gordon v Campbell (1 Bell's Appeals, 428), that by the law of Scotland a mere statement on the face of the contract that the contractors were trustees and entered into the contract because they were trustees, was, as a matter of law, enough to express that the engagement was of this limited kind. I do not (speaking for myself) doubt that it is an important element to be taken into consideration in construing the contract, but I think the decision of Lumsden v Buchanan determines that it is not by itself enough to give any contract this limited effect, and certainly that it is not enough to do so when the contract is a contract of copartnership, the nature of which would make such a limited engagement, to say the least, very inconvenient."

Another case along the same lines, to which I was referred, is Brown v Sutherland 1875 2 R 615 in which, again, it was emphasised that if a party wished to bind another and not himself "he should take care to say so". It was "never to be implied". It is not generally sufficient to add words such as "as agent" or "as trustee".

[27] Mr Richardson argued that, even if the Loan Agreement was to be construed so as to show that the defenders entered into it as Trustee for the Trust, that would not restrict their liability in the manner sought. I do not think that the position is as simple as that. Lord Blackburn in Muir v City of Glasgow Bank said that it was not always enough of itself; but it was an important element to be taken into account in construing the contract. The nature of the contract was important. Lord Cairns LC clearly thought that it was a question to be determined having regard to all the circumstances, including the nature and the subject matter of the contract. So too did Lord Wrenbury LC and Lord Cranworth in Lumsden v Buchanan. The contracts in those cases were contracts of copartnership. In such contracts there are obvious difficulties, highlighted in the speech of Lord Wrenbury LC, in one party seeking to limit his liability. So too in many, possibly most, everyday contracts. The circumstances of the present case are, however, very special. They point clearly to the defenders having contracted as trustees only. That was the nature of the Scheme. The Trust was making the loan available to the employee. Why would the defender advance the loan at all if it were not acting as Trustee? On what basis could be thought that the defender, though advancing the loan as Trustee, was assuming personal liability for the tax consequences of waiving repayment of that loan?

[28] For those reasons I am satisfied that on a proper construction of the Loan Agreement the defenders did not assume any personal liability. To adapt the expression used by Lord Cairns LC in Muir v City of Glasgow Bank, they entered into the Loan Agreement and undertook obligations thereunder as trustee only.

[29] The construction argument only surfaced at Debate. The defender's case is pled in the Defences on the basis of an implied term. In argument before me, however, Ms Ross adopted as her primary position that there was no need to imply such a term; the Loan Agreement on its proper construction had that effect. I was referred to a number of the usual authorities on construing contracts, including Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101 and Aberdeen City Council v Stewart Milne Group Limited [2011] CSIH 81 in which Lord Drummond Young noted that the "modern" approach to construction is not new in Scotland. I am satisfied that the Loan Agreement can properly be construed in this manner without the need to resort to any process of implication.

[30] Lest I be wrong about that, however, I should say that I would, had it been necessary, have been prepared to imply a term to this effect. In his Note of Argument, Mr Richardson argued that an implication of the sort contended for would contradict the express terms of the Loan Agreement, because without such a term the Loan Agreement, construed in a manner which would make implication of a term necessary, imposed personal liability on the defender. That argument is circular. Having considered the terms of the Loan Agreement in the context of the other arrangements of which it forms part, and in light of the knowledge of both parties as to the fact that the loan was being advanced as part of the scheme administered by the Trust, the question, to my mind, is how to give effect to this. The need to imply a term only arises here if the clear intention of the parties cannot be given effect without such implication. In such a case, the term is needed to give effect to the intention of the parties, to produce the result that both parties to the contract must have intended (Rockcliffe Estates plc v Co-Operative Wholesale Society Ltd 1994 SLT 592, 594J-L), to give the contract such efficacy as the parties must both have intended it to have (Morton v Muir Bros 1907 SC 1211, 1224); and see also Scottish Power v Kvaerner 1999 SLT 721, 725F-H.

[31] Under reference to Lumsden, Muir, Brown v Sutherland and Lord Advocate v Chung 1995 SC 32, Mr Richardson argued that any restriction of liability must be made clear in the contract. I do not dispute this, but in my opinion the circumstances of the present case make it clear that neither party could have intended the Loan Agreement to impose personal liability upon the defender.

[32] In view of the conclusions which I have reached on the construction of the Loan Agreement, and, if necessary, on the possibility of implying a term into it, it is not necessary for me to reach a concluded view on the defender's counterclaim for rectification. However, in case the matter should go further, I should briefly set out my opinion on the point.

[33] The power of the court to rectify a document, typically but not exclusively a contract, is contained in s.8 of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985. So far as material, this provides as follows:

"8(1) Subject to section 9 of this Act, where the court is satisfied, on an application made to it, that - (a) a document intended to express or to give effect to an agreement fails to express accurately the common intention of the parties to the agreement at the date when it was made; or (b) a document intended to create, transfer, vary or renounce a right, not being a document falling within paragraph (a) above, fails to express accurately the intention of the grantor of the document at the date when it was executed, it may order the document to be rectified in any manner that it may specify in order to give effect to that intention."

Although that section is expressed in apparently simple terms, it has nonetheless given rise to some controversy. I was referred to a number of decided cases on the section, viz. Angus v Bryden 1992 SLT 884, Rehman v Ahmad 1993 SLT 741, Delikes Ltd v Scottish & Newcastle plc 2000 SLT (Sh.Ct) 67, and Renyana-Stahl Anstalt v MacGregor 2002 SLT 1247. In the last mentioned case, at para.[35], Lord Macfadyen analysed the section in the following way, though emphasising that the language was no doubt capable of being analysed in a number of ways and that it would be a matter of circumstances which aspects of the language would be important in the individual case. He said this:

"For the purposes of the present case, I would analyse s.8(1)(a) in the following way: (1) there must be a "document" which the petitioner seeks to have rectified by order of the court; (2) there must be an earlier "agreement"; (3) that agreement must disclose that "at the date when it was made" the parties to it possessed a "common intention"; (4) the document must have been "intended to express or give effect to" the agreement; and (5) rectification will be available if it is shown that the document fails to express accurately the common intention mentioned in (3) above."

In the present case, applying this analysis, the "document" which the defender seeks to have rectified by the court is the Loan Agreement. That is a document which is intended to express or give effect to an "agreement", namely the agreement to advance to the pursuer by way of loan a sum (г750,000) sufficient to enable him to purchase the shares in the Company. That is the agreement which is referred to in points (2), (3) and (4) of the passage quoted above. It is referred to at point (2) as an "earlier 'agreement'", but I do not see why the agreement which the document is intended to express or give effect to cannot be concurrent with, rather than necessarily prior to, the execution of the document.

[34] There was some discussion at Debate as to what this earlier agreement was. Mr Richardson argued that the only agreements showing some clear common intention prior to the execution of the Loan Agreement were (a) the agreement reached at the board meeting of the Company on 20 March 2007, (b) the Trust Deed and (c) the agreements between the Company and the defender, as Trustee, putting into effect the Share Scheme in terms of which employees were to be given loans for the purchase of shares in the Company. The problem with these agreements, he submitted, was that they were not agreements between the pursuer and the defender, and therefore could not be relied upon in support of a claim for rectification under the section. I accept, of course, that the prior agreement must be between the same parties. But this submission seems to me to reveal the danger of compartmentalising the requirements of the section. I consider that sub-section (1)(a), taken as a whole, is directed to a case where the document executed by the parties fails to achieve what they were both in agreement it was meant to achieve. It is not necessary to look elsewhere for some perfected agreement, prior to the execution of the document, which sets out their common intention. All that is required is that the document does not achieve what they were both agreed that it was meant to achieve. There must be agreement - mere knowledge of what the other party wants to achieve will not do. But their agreement as to what it was meant to achieve can be discerned by looking at the document itself and all the surrounding circumstances, including any other contractual or other arrangement to which they may have intended to adhere; and including in the case of rectification (though not in the case of construing the contract) the negotiations, if any, between the parties leading to the drafting and execution of the document and any expression of intent by one party to the other. That latter consideration is not relevant here. But the Share Scheme as a whole is relevant. It can be looked at if it was something to which these parties sought by the Loan Agreement to adhere and give effect. The common intention of the parties to the Loan Agreement was plainly, so it seems to me, to take part in the Share Scheme. Their common intention was that the pursuer would acquire shares in the Company from the Trust, which had itself acquired such shares, and that the Trust would lend the pursuer г750,000 for the purchase of such shares. The Loan Agreement, read in conjunction with the Award Agreement, was designed simply to give effect to the Share Scheme. The Loan Agreement could not, of course, be entered into by the Trust as a party to it - the Lender had to be the defender as Trustee of the Trust - but there was never any intention that the defender should be personally liable. His only liability was as Trustee.

[35] Mr Richardson took a separate point. He argued that there was no error in drawing up the Loan Agreement. The terms of the Loan Agreement were agreed as part of the overall documentation under the Scheme. Further, the Award Agreement provided for the pursuer and the defender to enter into the Loan Agreement on terms which were already agreed (the Loan Agreement was in "Agreed Form"). That may be so, but I do not think that assists the pursuer in this case. As I have said, it seems to me that in entering into the Loan Agreement, the pursuer and the defender were intending to implement the Scheme as it applied to the pursuer. If the Loan Agreement did not give effect to that intention, it can be rectified even if the precise wording was that which the parties had agreed upon. Rectification is not limited to a case where there has been an error in drawing up the document in the narrow sense of mistakenly inserting the wrong word. In Chartbrook, at para.46, Lord Hoffmann said that it was generally accepted "that rectification is available not only when the parties intended to use different words but also when they mistakenly thought their words bore a different meaning." That was said, of course, about rectification under English law. But it appears to me to apply equally to rectification in Scotland under the 1985 Act.

[36] For those reasons, had it been necessary to do so to give effect to the intention of the parties, I would have held that rectification was available as claimed in the counterclaim.

Disposal
[37] In the course of her Reply, Ms Ross applied for leave to amend the Defences to include a plea to the relevancy of the pursuer's averments in the Summons. The absence of such a plea had been overlooked. That amendment was not opposed and leave was granted. My conclusion on the question of construction means, I think, that I should sustain that plea, and dismiss the action, rather then sustain the defender's third plea which seeks absolvitor on the basis of an implied term. No submissions were made to me as to what I should do about the counterclaim in these circumstances. Accordingly, it seems to me that the appropriate course is to put the case out By Order to discuss the precise form of interlocutor to follow from this Opinion. If parties are able to agree the terms of the interlocutor, as well as questions of expenses, the need for a further hearing can be dispensed with.

[38] Finally I should record my indebtedness to both counsel for their clear and helpful submissions.


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