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OUTER HOUSE, COURT OF SESSION
[2007] CSOH 47
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A374/05
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OPINION OF LADY
CLARK OF CALTON
in the cause
FARLEYER HOUSE
HOTEL LIMITED
Pursuers;
against
WILLIAM SMART and
ROBERT ANDREWS
Defenders:
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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.
