Scottish Court of Session Decisions

EXTRA DIVISION, INNER HOUSE, COURT OF SESSION

[2015] CSIH 42

P522/14

 

Lord Menzies

Lady Smith

Lord Bracadale

OPINION OF THE COURT

delivered by LADY SMITH

in the Petition of

GLOBAL PORT SERVICES (SCOTLAND) LIMITED

Petitioners and Respondents;

against

GLOBAL ENERGY (HOLDINGS) LIMITED AND OTHERS

Respondents and Reclaimers:

Petitioners and Respondents:  Sandison QC; Harper Macleod LLP

Respondents and Reclaimers:  Dunlop QC; Davidson Chalmers LLP (for Stronachs LLP, Aberdeen)

 

29 May 2015

Introduction

[1]        This reclaiming motion arises from a petition for an order for production of documents under section 1 of the Administration of Justice (Scotland) Act 1972 (“the 1972 Act”) and the issue is about the proper construction of a clause in a contract between nine parties, including a number of the shareholders in Global Port Services Limited (“GPS”) and, also, GPS itself.  The contract is entitled “Shareholders’ Agreement” and it was signed by all parties on 4 October 2013.

[2]        Moray Firth Services Company Limited (“MFS”) is a shareholder in GPS and was a party to the Shareholders’ Agreement.  Although GPS is named in the petition as being the petitioner, it is not disputed that these proceedings have not been raised by GPS. They have in fact been raised by MFS.

[3]        MFS say that they are entitled to raise proceedings in the name of GPS, relying on the terms of clause 5.2 of the Shareholders’ Agreement; the Temporary Lord Ordinary agreed. The respondents say that they have no such right; properly interpreted, clause 5.2 cannot, they say, be read as conferring it.

 

Background

[4]        Port Services (Invergordon) Limited (“PSI”) and Global Logistics Services Limited (“GLS”) were both in the business of providing logistics services but they decided to merge their logistics businesses and formed GPS; it was incorporated on 14 August 2013.  MFS is the successor to PSI.  GLS was part of the Global Energy Group of which the first respondent is the holding company. Its interests are now represented by the fifth respondents (“GMOL”).  We were advised that all of the respondents are ‘Global’ companies.

[5]        MFS owns 38,000 issued A ordinary shares of £0.01 each in GPS.  GMOL owns 51,000 issued B ordinary shares of £0.01 each in GPS.  A shares and B shares rank parri passu in all respects (see: clause 13.1 of the Articles of Association).  There are other shareholders. 

[6]        The respondents entered into a 5 year “Logistics Contract” with GPS in terms of which they all agreed to purchase certain logistics services exclusively from GPS during that period.  MFS allege that some or all of them are in breach of that contract and say that they intend to raise proceedings against them seeking damages and/or interdict. To that end, they wish to recover various documents from the respondents which, they say, will show that some or all of them have been purchasing logistics services covered by the Logistics Contract from suppliers other than GPS. 

 

Letter from MFS to GPS

[7]        By letter dated 28 March 2014, entitled:

“Global Port Services (Scotland) Limited

  Action for breach of the Logistics Contract”

 

MFS wrote to GPS referring to the Shareholders’ Agreement and stating:

“Pursuant to the terms of inter alia clause 5.2 of the Shareholders’ Agreement, we MFS, being the only party required to give written approval to GPS raising any action or demand against GEHL and any Customer ( as defined in the Logistics Contract) in respect of breaches of the Logistics Contract, hereby direct and instruct GPS to raise an application against GEHL and all Customers to the Logistics Contract in terms of Section 1 of the Administration of Justice (Scotland) Act 1972 with a view to recovering all documents within the possession of GEHL and the said Customers which show the extent to which Logistics Services ( as defined in the Logistics Contract) have been purchased from other suppliers in breach of the Logistics Contract as the first step in the formal enforcement of the Company’s rights under the Logistics Contract.”

 

[8]        The same day, Stephen Clark, who is a director of both MFS and GPS, called a meeting of the directors of GPS and gave notice of an agenda to include discussion of the breaches of the Logistics Contract, the steps that GPS required to take to enforce and protect its rights under that contract and a proposed resolution that the company should raise proceedings under the 1972 Act.  The meeting took place but that resolution was not passed.  Nor has the board of GPS passed any resolution authorising MFS to raise such proceedings in its name or ratifying MFS having done so.

 

The Shareholders’ Agreement
[9]        The parties to the Shareholders’ Agreement are not, in fact, all shareholders in GPS but nothing turns on that.  It is sufficient, for present purposes, to note that the parties include GPS, MFS, GMOL and the first respondents.

[10]      Clause 5 – in which GPS is referred to as “the Company” - is in the following terms:

“5.1 Each party shall procure that the Company shall not, without the prior written approval of GMOL and MFS, carry out any of the Reserved Matters.

 

5.2   Any action or demand by the Company against any or all of : GMOL, MHM, GEHL, GLS, HSL or RJM or any Customer (as defined in the Logistics Contract) in respect of (i) the acquisition by the Company of the entire issued share capital of GLS; (ii) the acquisition by the Company of the business and assets of GLS and/or HSL on or after Completion; and/or (iii) any breach or termination of the Logistics Contract  and/or (iv) any breach of the MacGregor Family Restrictive Covenant Letter, shall require the prior written approval of MFS only.

 

5.3 Any action or demand by the Company against PSI in respect of the acquisition by the Company of the business and assets of PSI shall require the prior written approval of GMOL only.

 

5.4 MFS shall be entitled at any time to appoint directors to the board of GLS without the consent of the other Shareholders (subject to the following proviso) or the Company: provided that the same restrictions that apply to the appointment of a director by MFS pursuant to clause 6.4, shall apply equally in respect of the appointment by MFS or directors to the Board of GLS.

 

5.5 Each party hereby consents, for the purposes of this Agreement, to the Company entering into the Hive- Up Agreement ( as defined in the Share Swap Agreement) upon satisfaction of the Trigger Event (as defined in the Share Swap Agreement.”

 

[11]      The “Reserved Matters” referred to in clause 5.1 are set out in Part 1 of the Schedule to the Agreement. They are 23 in number and cover important powers including the issuing of shares, the declaration of a dividend, altering the Articles of Association, selling or disposing of the whole of the business of GPS, the incurring of capital expenditure in excess of £1m, and the alteration or waiver of the Logistics Contract “in any respect”.

[12]      The chairman of GPS requires to be a “GMOL Director” (clause 6.3) and the first and, we understand, current, chairman (Roderick James MacGregor) is a member of the “MacGregor Family” referred to in part (iv) of clause 5.2.

[13]      The board of GPS must be a minimum of two and no more than four persons and must be made up of an equal number of GMOL and MFS directors (clause 6.2).  Each of GMOL and MFS are entitled to appoint a director but any appointment of a director by MFS, other than in the case of three named individuals, “shall require the prior written approval of GMOL” and any appointment of a director by GMOL “shall require the prior written approval of MFS”( clause 6.4). In either case, such approval is not to be unreasonably withheld or delayed (clause 6.4).  Mr Sandison did not suggest that MFS had any right to appoint their chosen director if GMOL did not provide such approval.  The chairman has a casting vote in the event of an equality of votes at any meeting (clause 6.3).  

[14]      Clause 6.1 of the Shareholders’ Agreement provides for the supervision and management of GPS by its board of directors but subject to a proviso:

“6.1 The Board has responsibility for the supervision and management of the Company and its Business, subject to clause 5.”

 

[15]      That means that it is not enough that the board of GPS resolves to carry out any of the activities detailed as reserved matters in part 1 to the Schedule; clause 5.1 provides that it must, before implementing any such resolution, obtain the prior written approval of both GMOL and MFS.  Clause 5.1 goes no further than that.  It does not, for instance, empower GMOL and MFS to declare a dividend, to sell or dispose of GPS’s business or to waive the Logistics Contract – all of which are reserved matters - in any respect.  It confers no rights on GMOL or MFS beyond the right to veto certain activities which the board would otherwise be minded to carry out. Senior counsel instructed by MFS, Mr Sandison QC, did not demur from that.  However, in his submission, clause 5.2 requires to be construed differently.

 

Submissions on construction of clause 5.2 of the Shareholders’ Agreement

[16]      As Mr Dunlop QC, senior counsel for the respondents explained, they read clause 5.2 in the same way as clause 5.1.  That being so clause 5.2 cannot, they say, be read as conferring on MFS any right to raise an action in the name of GPS or to, thereafter, control and direct the litigation.  That would, he submitted, be an extreme and odd proposition.  It would mean that MFS could ignore the will of GPS entirely irrespective of a contrary resolution by the board, that MFS could proceed in the face of direct opposition by GPS to the use of its name, that GPS would be obliged to cede all control of the litigation to MFS, that GPS would become liable to meet any award of expenses in favour of other parties and that MFS could, irrespective of the views of GMOL, waive the Logistics Contract in some respect if minded to do so when, for instance, reaching an accommodation with any of the respondents in any litigation.  Regarding such an award of expenses, that would be the position even although elsewhere, the Shareholders’ Agreement stated expressly what was to happen if GMOL or MFS caused the GPS to incur liability in relation to the removal of a director (e.g. clause 6.4) but was silent as to what would happen if MFS caused litigation expenses to be awarded against it.   

[17]      Turning to another aspect of clause 5.2, Mr Dunlop submitted that if it were to be interpreted as conferring entitlement on MFS to act in the name of the company, that would also mean that it could, without board resolution, acquire the entire issued share capital of GLS in the name of GPS, rendering GPS wholly liable for that transaction even if there were good reasons for not entering into it.

[18]      Whilst Mr Dunlop accepted that a contract could stipulate that such powers were conferred on a single shareholder, this contract did not, he submitted, do so.  An example of how a contract might confer power was provided by clause 5.4. It used different, express, wording; similar wording could have been used in clause 5.2 if entitlement was what was intended.   If that was what was meant, the drafter could have said so and it was of particular significance that he had not: Multi-Link Leisure Developments Ltd v North Lanarkshire Council 2011 SC (UKSC) 53; The Procter & Gamble Company v Svenska Cellulosa Aktiebolaget [2012] EWHC 498;  Park’s of Hamilton (Holdings) Ltd v Holmes Mackillop LLP [2015] CSOH 6.  To confer an entitlement to litigate in the name of GPS in circumstances such as the present would be a plain inversion of the normal rules applicable to companies (Mitchell & Hobbs (UK) Ltd v Mill [1996] 2 BCLC 102) and for that reason also, one could expect it to be clearly stated:  Grove Investments Ltd v Cape Building Products Ltd 2014 Hous. LR 35.

[19]      Mr Dunlop also submitted that the use of the concept of prior written approval being given showed that what was being referred to was a condition precedent to something being done by someone else, not by MFS.  A company could not give prior approval to itself nor could it issue prior written approval to itself. That simply did not make sense.  The construction being urged on the court on behalf of MFS had nothing prior about it at all.  It was, on that construction, a matter of entitlement from beginning to end and that was wrong.

[20]      Mr Dunlop submitted that, in all the circumstances, it was not possible to interpret clause 5.2 as entitling MFS to raise the present litigation and, accordingly, questions of what construction would accord with business commonsense did not arise : Rainy Sky SA v Kookmin  Bank [2011] 1 WLR 2900.  In any event, an interpretation which involved MFS being entitled to litigate in GPS’s name, whilst undoubtedly favourable to MFS, lacked commercial sense.

[21]      Mr Sandison submitted that the commercial purpose of clause 5.2 was clear and it was to provide for a foreseeable conflict of interest namely where the GMOL directors and the MFS directors on the board did not agree that GPS should take action in one of the ways contemplated by clause 5.2, those being things which it was unlikely that the GMOL interest would want to happen.  The purpose of clause 5.2 was to enable them, nonetheless, to take place.  Likewise, clause 5.3 identified something which it was unlikely that MFS would want to happen.  In the case of clause 5.2, it would be enough that MFS wanted the thing to happen and in the case of clause 5.3, it would be enough that GMOL wanted it to happen.   He did, however, observe that it was, perhaps, more limited in the case of 5.3, given that the GMOL chairman would still have a casting vote.

[22]      Mr Sandison’s position was that the words used in clause 5.2 were capable of more than one interpretation and accepted that ordinary use of the English  language did not support his argument although even if the respondents’ approach was to be followed, their construction was erroneous because it failed to give effect to the words of clause 5.2; they stated that any of the actions referred to required the “prior written approval of MFS only” (our emphasis) and did not also require that there be a relevant board resolution.

[23]      Further, in the modern era, the words had to be read in the context of the contract as a whole and the wider background to entering into this contractual arrangement.  When business commonsense was applied, an interpretation conferring on MFS the right to litigate in the name of GPS ought to be preferred and the Temporary Lord Ordinary was right to have done so. He relied on passages from Rainy Sky SA v Kookmin Bank.  The contract had been entered into by parties for their mutual benefit and required to be construed in a way which secured for them the benefits they might reasonably have expected to accrue from it:  Grove Investments Ltd v Cape Building Products Ltd [2014] CSIH 43.  Here, MFS were entitled to expect that they could proceed in this way rather than having to have recourse to section 994 of the Companies Act 2006 in the event that the GMOL interests on the board blocked their desire to act.  Further, the contract did provide that the board’s exercise of its powers would be constrained since their responsibility for supervision and management was to be subject to clause 5.  That showed that there was no need for a resolution of the board in the present circumstances.

 

Discussion and Decision

[24]      The Temporary Lord Ordinary was persuaded to interpret clause 5.2 so as to find that MFS were entitled to litigate in the name of GPS.  His approach was, essentially, to consider whether or not the respondents’ construction was commercially sensible.  He concluded that, against the whole commercial background involving the merger to form GPS, the Logistics Contract and the Shareholders’ Agreement, to construe clause 5.2 as conferring only a power of veto, was not viable.  He could not think of any reason, given the commercial background, why MFS would want to veto GPS litigating against one of the Global companies; that did not make business commonsense.  In those circumstances, he was persuaded that the contention that the litigation had been raised without lawful authority was ill founded. 

[25]      We conclude that the Lord Ordinary erred.  We find the language of clause 5.2 to be unambiguous – this is not a case where, on a plain reading, two possible constructions arise. The language is straightforward. GPS cannot carry out any of the listed activities without first obtaining the  ”written approval of MFS only”. We agree that the concept of giving approval relates to where something is to be done by someone else, not by the person who is giving the approval.  There is nothing ambiguous about the language used; one does not, as Mr Dunlop submitted, give prior approval to oneself let alone issue prior written approval to oneself.  That, interestingly, was the approach of MFS in their letter of 28 March 2014 and when tabling the proposal that GPS raise these proceedings (see: paragraph 7 above); their words and actions, at that stage, seem indicative of acceptance that the Shareholder’s Agreement did not empower them to litigate. Rather, they needed GPS to do so. 

[26]      The context of the clause is, obviously, where GPS has determined that it wishes to carry out one or more of the listed activities.  In terms of this contract, it has agreed that it will not do so unless it first obtains written consent from MFS. The use of the word “only” arises linguistically because, in clause 5.1, GPS is directed that it cannot carry out any of the activities described in the list of “Reserved Matters” without first obtaining the “written approval” of not just MFS but also GMOL.  When it comes to clause 5.2, however, GPS does not require such approval from both of those shareholders; it is only the prior written approval of MFS that is required. A distinction is thus drawn between needing to look to “GMOL and MFS” in the circumstances set out in clause 5.1 but to “MFS” alone in the circumstances detailed in clause 5.2.  We should add that we are not persuaded that “only” can possibly be read as indicating that GPS need do nothing. It is clearly used to denote that, when it comes to clause 5.2, it is not necessary to obtain the prior consent of both the shareholders mentioned in clause 5.1 but “only” one of them.

[27]      Turning to the context of the contract as a whole, we agree that it is significant that the drafter of clauses 5.1 and 5.2 did not use the language of entitlement when he could easily have done so had that been the intention of the parties: Multi–Link Leisure Developments Ltd v North Lanarkshire Council per Lord Hope of Craighead at paragraph 16, recently applied by Lord Doherty in the commercial court, in Park’s of Hamilton (Holdings) Ltd v Holmes Mackillop LLP at paragraph 27.  On that basis alone, the conclusion that parties did not intend clause 5.2 (or 5.1) to confer on MFS (and MFS alone) anything beyond a power of veto, is readily drawn. The fact that the drafter did use such language when providing in clause 5.4 for MFS’s right to appoint a director irrespective of the wishes of GPS and the other shareholders, reinforces that conclusion.

[28]      We also consider that there is no distinction to be drawn between the use of the phrase “without the prior written approval of” in clauses 5.1, 5.2 and 5.3.  It is the language of veto not the language of entitlement. The variations in the identity of the persons whose approval must be obtained does not alter that.  We cannot find any indication in the contract as a whole that parties intended the phrase to mean different things in different subclauses of the same clause.   If the construction of clause 5.2 urged on us by Mr Sandison were to be applied to clause 5.1, that would mean that MFS and GMOL – who are not the only shareholders – would be entitled and able to carry out any or all of the reserved matters irrespective of the wishes of GPS or resolutions of its board; simply because the action was a reserved matter, those two shareholders would be able to make it happen.  We consider that that would fly in the face of commonsense and, furthermore, in the face of the intention that, principally, GPS is to be managed by its board (clause 6.1). 

[29]      Accordingly, neither the clause nor the contract as a whole provide a context for affording the words of clause 5.2 anything other than their ordinary meaning.

[30]      The wording of the clause not being ambiguous nor being open to more than one interpretation, it is not open to the court to construe it in a manner contrary to its natural meaning.  It must apply that meaning, even if the result is a commercial outcome which could be considered to be improbable.  There is a consistent body of authority to that effect (Rainy Sky SA v Kookmin Bank per Lord Clarke of Stone-cum- Ebony at paragraphs 21–23;

29-30).

[31]      The Temporary Lord Ordinary’s approach appears to have involved ignoring the natural meaning of clause 5.2 because it did not seem to him to make commercial sense looking at matters from the perspective of MFS.  He did not do so on the basis that the need to look at considerations of the wider commercial context arose from there being two possible constructions.  On the contrary, he states, in terms, that the respondents’ construction is impossible (see paragraph 19).  But the reason that it is not, according to the Temporary Lord Ordinary, a possible interpretation, is that a mere power of veto would not be sufficient for MFS’s commercial purposes.   That is not, we consider, a legitimate approach, particularly in circumstances where he did not consider whether his construction could be detrimental to the interests of other parties (and, therefore, not a likely one at all). He did not, for instance, have regard to the following:  (i) on his construction, MFS would have power to render GPS vulnerable to an award of expenses being made against it in circumstances where MFS could have run the litigation without having regard to GPS’s views as to how it ought best to be conducted; (ii) on his construction , MFS would be entitled to subject GPS to onerous obligations in a share purchase agreement negotiated by MFS without reference to GPS at all; (iii) on his construction, MFS would be entitled to put GPS in the position of being obliged to perform purchasers’ obligations in a contract to acquire a business and assets of a company irrespective of whether GPS wished to make the acquisition. Nor did he have regard to the fact that on his construction, an irreconcilable contradiction would arise whereby, under clause 5.2, MFS could, by itself, waive a breach of the Logistics Contract despite such an act being a reserved matter under clause 5.1 and, accordingly, under that clause, only able to be done by GPS and only if both GMOL and MFS consent.

[32]      It may be that MFS did not make for itself the bargain that it desired or even that it intended, not that we feel able, on the material before us, to draw such a conclusion.  That, however, would not come near to affording sufficient justification for the bargain to be judicially rewritten.  As has been said so often in so many different ways, the court can construe a contract but cannot write it anew.  In the end of the day, that is, we consider, precisely what MFS is seeking.  There is no proper basis on which it can do so and in these circumstances, this reclaiming motion must succeed.

[33]      We will, accordingly, grant the reclaiming motion and recall the interlocutor of the Temporary Lord Ordinary, repel the first plea in law for the petitioners, sustain the first two pleas in law for the respondents, and dismiss the petition.