Case Comments: Farstad v Enviroco  UKSC 18 and Inveresk v Tullis Russell  UKSC 19
14 Friday May 2010
Last week the UK Supreme Court handed down judgment in its first two Scots private law cases. In both cases it reversed the Inner House of the Court of Session (the Scottish equivalent to the Court of Appeal in England & Wales). From a Scottish perspective the decisions make a compelling case for keeping the right of appeal to the UK Supreme Court, for the benefit of Scots Law and for the good of Scottish business.
Farstad Supply AS v Enviroco Limited and Asco UK Limited  UKSC 18
The first case was that of Farstad v Enviroco. It was a dispute about who should pay for damage done to a ship when a fire broke out on board. The pursuer (Farstad), the owner of the ship, alleged that the defender (Enviroco), a contractor on board carrying out cleaning works, had caused the fire. The contractor, in turn, blamed the charterer (Asco), and joined it in the action as a third party, claiming (i) contributory negligence and (ii) that the charterer should pay a contribution (under section 3(2) of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1940. The charterer argued that it should not be found liable to make a contribution under s 3(2), even if it had caused the accident by its negligence.
The charterer succeeded at first instance before the Lord Ordinary in the Outer House of the Court of Session, who held that the contractor was not entitled to a contribution, but that decision was reversed by a 2-1 majority in the Inner House. The issue for the Supreme Court to determine was essentially one of statutory interpretation. S.3(2) states that a defendant who has been found liable has the right to seek a contribution from “any other party who, if sued, might also have been held liable in respect of the loss or damage on which the action was founded” (emphasis added). The charterer had the benefit of a clause in the charterparty (clause 33(5)), whereby the owner had undertaken to “indemnify and hold harmless” the charterer. Hence, the question was whether this defence could be taken into account for the purposes of s.3(2)?
The Supreme Court unanimously agreed with the Lord Ordinary and the dissenting appeal judge (Lord Osborne). Lord Clarke gave the leading judgment, with which Lord Phillips agreed. S.3(2) meant that a defender who was found liable for wrongful acts could recover a contribution from a third party if that third party, in the event that it had been sued “relevantly, competently and timeously” by the pursuer, would have been found liable. So the real question in this case was whether, on a true construction of the charterparty, clause 33(5) was effective or not to exclude liability, i.e. if the owner had sued the charterer for negligence, would the charterer have been liable?
Lord Clarke held that the clause was an exclusion clause, and that it would have been effective to avoid liability in any proceedings between the owner and the charterter. Therefore, the exclusion clause was also effective under the Act to exclude liability for a contribution. This was so even though the contractor was not involved in the charterparty. And it made no difference that the charterer may have been far more to blame for the fire than the contractor. It should be noted that for the purposes of the appeal the averred facts were assumed to be true.
Lords Hope, Rodger and Mance gave separate judgments, but in substance agreed with Lord Clarke, and the tone of their judgments indicate that none of the Justices seemed to think that it was a very hard case. Lord Hope commented that s.3(2) had “puzzled generations of Scots lawyers”, before demonstrating there was never any need for puzzlement. Lord Mance displayed a certain weariness at having to put right obvious errors by the Inner House. He though the Lord Ordinary, the Court of Session commercial judge, had got it spectacularly right in a “lucid and compelling” judgment.
In a case of this kind the Supreme Court has the advantage over the Inner House in that many of its judges, like Lord Mance and Lord Clarke, have a particular expertise in commercial law. The Inner House judges, like most Scots counsel, are generalists. It was commercial awareness that allowed Lord Clarke to dispose of the suggestion that there was an unfairness in allowing a clause in a contract to which the person sued was not a party to defeat its claim for contribution from a perhaps more blameworthy party. Lord Clarke said (at para 17):
“[The third party] carried out its work pursuant to a contract with the [charterer] and must have known there was charterparty governing the relationship between the owner and [charterer]. It could of course have refused to contract with the [charterer] without obtaining and considering the terms of the charterparty. Moreover, if the [third party] wished to recover a contribution or indemnity on facts such as these, the way to do it was to make provision for it in its contract with the [charterer].”
In the same vein Lord Mance (at paragraph 57), disagreeing with Lady Paton’s opinion below, pointed out that there was nothing at all odd about an exclusion cause in a charterparty preventing the shipowner suing the charterer for damage to the vessel caused by the charterer’s negligence. He observed that the owner would go into the market and obtain insurance against loss or damage to the vessel.
The right of appeal to the UK Supreme Court means that domestic and overseas businesses can contract in Scotland under Scots law safe in the knowledge that, if things go wrong, their case can be litigated before a one of the world’s pre-eminent commercial courts. This alone is a good reason for having a right of appeal to the Court.
Inveresk plc v Tullis Russell Papermakers Limited  UKSC 19
The second case, Inveresk v Tullis Russell provided a canvas for Lord Rodger to paint a comprehensive picture of the operation of the principles of retention and compensation in Scots contract law.
A purchaser (Tullis Russell) had bought assets (the Gemini brand of paper) from a vendor (Inveresk) by way of an asset purchase agreement and a separate service agreement. The asset purchase agreement provided for deferred consideration in addition to a cash payment up front. The vendor claimed that the conditions for the deferred payment had been met, and £900k was due and payable as a result. The purchaser argued in reply that the vendor was in breach of the asset purchase agreement and the service agreement (for example, by failing to maintain product quality standards and dealing with customers so as to damage the goodwill of the business). The purchaser raised an action for damages against the vendor, claiming £4.5m, and in the action at the vendor’s instance pled (i) that the deferred consideration was not due and payable, and (ii) if it was held to be due and payable, the purchaser should have a right of retention, such that it could retain the deferred consideration against the damages being claimed, pending resolution of that claim.
The Inner House of the Court of Session found for the vendor, holding that the deferred consideration was due and payable, and the purchaser had no right of retention. However, the Supreme Court disagreed on both points, Lord Hope and Lord Rodger giving the leading judgments, with which Lords Saville, Collins and Clarke agreed.
Lord Rodger traced the Scots law of retention back to the venerable Compensation Act 1592 and, by using a selection of cases, tracked the developments over the succeeding 418 years. He made reference to the academic discussions of the principles and cleared up misunderstandings. The right of retention could, his Lordship confirmed, arise notwithstanding the fact that the obligations existed in two separate agreements. The key test was whether the relevant obligations could truly be said to be counterparts of one another, and the starting point was that they should be unless there was a clear indication to the contrary.
In this case, the asset purchase agreement and the service agreement were properly to be considered as two parts of the same transaction, and the unity of that transaction should be respected. On a true construction of the asset purchase agreement, the deferred consideration claimed by the vendor was not yet due and payable. But if any consideration did become payable, the purchaser would in principle be entitled to retain it against the sums claimed for damages.
This case too showed the benefit to Scotland and Scots law of unrestricted appeal to the Supreme Court where the best and brightest, standing back from the daily grind of the Inner House, can provide an overview of the law. The cases in which the Inner House has to decide controversial points are few. Where the controversial point can be avoided and the case decided on narrow grounds it usually is. This is not a criticism of the Inner House. Its judges have a heavy burden. Litigants want decisions and want them promptly. The Court is not there to satisfy academics. Part of what gives the Supreme Court the chance to take an overview is the fact that before a case is heard the arguments have been distilled in the lower courts. The fact that a great deal of time is spent on preparing the written case for the Supreme Court gives the Justices material and arguments that have not been presented below. In Inveresk Lord Rodger pointed out that the arguments had developed since the hearing in the Inner House.
On this evidence, if Scotland is to have a vibrant legal system it needs more, and not fewer, cases going South.
Bryan Heaney is an advocate with Westwater Advocates. He has a special interest in Property Law (http://www.westwateradvocates.co.uk/). He is one of the Scottish Government’s Standing Junior Counsel.