FIRST DIVISION, INNER HOUSE, COURT OF SESSION
Lord President Lord Eassie Lord Hodge	[2010] CSIH 01 CA108/08 OPINION OF THE LORD PRESIDENT in Reclaiming Motion by LUMINAR LAVA IGNITE LIMITED Pursuers and Reclaimers; against MAMA GROUP PLC AND MEAN FIDDLER HOLDINGS LIMITED Defenders and Respondents: _______

Act: Ellis, Q.C., McBrearty; McClure Naismith LLP

Alt: Anderson, Q.C.; McGrigors LLP

12 January 2010

[1] I have had the opportunity of reading Lord Hodge's Opinion in draft. I agree with him that, for the reasons he gives, the two items of evidence sought to be relied on from the parties' pre-contractual communings ought to be excluded from consideration when construing the contract. I also agree with him (para [39]) that it would be more difficult for parties to know where they stand on the respondents' construction than on the reclaimers'; but that this is not a pointer of any great weight in the construction of the restriction, as neither party's construction is unworkable.

[2] I am also in agreement with Lord Hodge that the most difficult issue is the correct construction of the critical phrase in clause 2.1, in the context of the clause as a whole and in the light of the surrounding circumstances. I have not found that issue easy to resolve.

[3] It is plain that the parties contemplated that there would be or might be some competition between the operations at their respective premises. That is sufficiently clear from the use in clause 2.1 of the phrase "in direct competition"; indirect competition was not prohibited. Both were in the same market for the attraction of persons looking for "late night entertainment". This is plainly a narrower class of business than that which seeks to attract those spending "the leisure pound" - which would include those interested in attending theatres or cinemas in the evening. The fact that, in the event, there might, as the Lord Ordinary found, be significant crossover in the customers who might go to different types of club nights does not, in my view, assist the reclaimers' contention. It simply means that the terms of the agreement which they entered into may not have been sufficiently tight to prevent crossover to that extent. The issue remains the objective construction of the words used, according to the standards of a reasonable third party who is aware of the commercial context in which the contract occurred (Emcor Drake & Skull Ltd v Edinburgh Royal Joint Venture 2005 SLT 1233, per Lord Drummond Young at page 1237I; see also Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989, per Lord Wilberforce at p.996; ICS Ltd v West Bromwich BS [1998] 1 WLR 896, per Lord Hoffmann at p.912).

[4] The ruling contractual provision is clause 2.1. Clause 2.2 opens with the phrase "Except only as provided in clause 2.1 ...". Accordingly, Mama and the Purchaser are prevented from use which is excluded by clause 2.1. It is not, however, irrelevant to notice that clause 2.2 contemplates the use of the Burdened Property, subject to clause 2.1, as "a music venue, including, without limitation, as a live music venue or as a bar at which music is played". "Music venue" is not defined but clearly is a wider expression than a "live music venue" or "a bar at which music is played". As a matter of language it might include some kind of discotheque.

[5] The critical phrase is the restriction on using the Burdened Property "for late night entertainment in direct competition on a like for like basis with the discotheque business of Luminar as carried on at the Benefited Property as at 1 March 2008". I agree with the Lord Ordinary (para [19]) that the words "direct competition on a like for like basis" should be read as a whole as an attempt to define the nature of the competition which is to be prohibited. Even if the two elements (viz.(1) "direct competition" and (2) "on a like for like basis") should be read distinctly, which I doubt, proper content requires to be given to element (2). The expression "on a like for like basis" imports some shared feature against which the subjects fall to be compared. The comparison is of how ("as carried on") the two premises are used - the Benefited Property as at 1 March 2008 and the Burdened Property when the issue arises. To give the expression "on a like for like basis" content, there must be features of the respective uses on the basis of which the comparison can be made. These may, no doubt, include the arrangements under which particular types of entertainment are available at different nights of the week; but I see no reason to restrict the examination to that feature. The nature, or style, of the entertainment provided would also, in my view, be an examinable feature. The expression "discotheque business as carried on" points in the context of the earlier expression "on a like for like basis" not simply to the carrying on of a discotheque business but to the carrying on of such a business in a particular way. If the Benefited Property was used as at the relevant time for a restricted, but identifiable, form of discotheque, then a comparison which demonstrated that in that respect the challenged use of the Burdened Property was different from the use of the Benefited Property as at that time would, in my view, lead to the conclusion that the contractual provision had not been infringed. The Lord Ordinary's findings of fact that distinctions can meaningfully be made among kinds of discotheque entertainment confirms that this is not a distinction without a foundation in reality.

[6] The final sentence in clause 2.1 was, it would appear, inserted to give some protection to the respondents by having Luminar confirm that it did not use the Benefited Property as at the relevant time as a music venue. It goes only so far. It does not exactly match the provisions of clause 2.2 - there is no declaration that the Benefited Property is not used as a bar at which music is played. But, however, that may be, I am not persuaded that the language of that sentence affects the construction of the earlier sentence which I favour.

[7] I find nothing in the admissible evidence of the circumstances surrounding the making of the contract which is of material assistance in resolving the issue of its construction. I am not persuaded that any difficulties in policing performance of the contract are such as to render the reclaimers' construction the only sensible result.

[8] Although I regard this as a narrow issue, I am of opinion that the Lord Ordinary's construction of the contract was correct. In these circumstances I would have refused the reclaiming motion. However, as I understand that both your Lordships are in favour of allowing it, I merely with diffidence record my dissent.

[9] I agree with and endorse Lord Hodge's observations in his postscript (paras [53] - [58]) on the matter of the use of transcripts and signed witness statements in commercial business.

FIRST DIVISION, INNER HOUSE, COURT OF SESSION
Lord President Lord Eassie Lord Hodge	[2010] CSIH 01 CA108/08 OPINION OF LORD EASSIE in Reclaiming Motion by LUMINAR LAVA IGNITE LIMITED Pursuers and Reclaimers; against MAMA GROUP PLC AND MEAN FIDDLER HOLDINGS LIMITED Defenders and Respondents: _______

Act: Ellis, Q.C., McBrearty; McClure Naismith LLP

Alt: Anderson, Q.C.; McGrigors LLP

12 January 2010

[10] I have had the opportunity of reading in draft both the Opinion of your Lordship in the Chair and the Opinion of Lord Hodge.

[11] In common with both of your Lordships, I agree that the most difficult issue in this case is the correct construction of clause 2.1 of the "Non Compete Agreement". I too have found this a difficult issue to resolve, but I have ultimately come to the view that the construction for which the reclaimers contend is to be preferred and I agree with the views expressed on this matter by Lord Hodge. I agree also with the views which he expresses on the other issues in the reclaiming motion.

[12] One of the factors which inclines me to the reclaimers' construction is the terms of the final sentence of clause 2.1 of the agreement. If the undertaking not to use, or permit to be used, the Picture House "for late night entertainment in direct competition on a like for like basis with the discotheque business of Luminar..." had the meaning for which the respondents contend, it is difficult to see the reason for the inclusion of that final sentence. That sentence records what, to adopt the phrase used by Mr Ellis, is a "generic" feature of that business - namely the absence of live music - and thus gives to the preceding provisions of the clause a generic colour. It is the only attribute of the reclaimers' Tollcross business thus noted. The giving of such a colour is, I think, reinforced by the absence of any noting of any of the prevailing, more subjective features pertinent to the setting up of a basis for comparison in terms of style, ambiance and clientele, which one might reasonably have expected, were the clause to have the meaning for which the respondents contend. I join with Lord Hodge in being struck by the fact that, so far as demonstrated by the evidence led, neither party appears to have been particularly aware of what the other's business or intentions were. Had it been that the parties intended a subtle, nuanced agreement founded on style and ambiance, I would have expected at least some evidence of investigation and knowledge by the respondents of those aspects of the reclaimers' Tollcross venue.

[13] I also think that the terms of clause 2.2 reinforce that generic colour in respect that they in themselves are couched in similar generic terms and have nothing referable to style, selection of music, ambiance or the like.

[14] While I accept, of course, that the primary words of prohibition are in the earlier part of clause 2.1, which I have partially quoted above, I consider that, given their manifest lack of clarity, it is legitimate to look to the surrounding contractual provisions in an endeavour to resolve that lack of clarity. Having done so, I incline to the generic view of the prohibition.

[15] A further factor operating on my mind is the workability of the competing interpretations. I readily acknowledge that it cannot be said that the respondents' construction of the contract is wholly unworkable and must be excluded on that account. But the relative workability of the competing interpretations is, I think, a factor which the disinterested third party viewing the contractual provisions and expressing an objective view as to their meaning would be entitled to take into account. In those relative terms, the reclaimers, in my view, have the advantage of contending for a relatively clear, generic criterion as opposed to some relatively subjective, protean, and thus eminently disputable criterion.

[16] I would also add this. As was pointed out by counsel for the reclaimers, the prohibition was intended to endure for five years. It fixed however a comparison, or base, date respecting the Lava Ignite discothèque business of 1 March 2008; which happened to be a Saturday. No doubt in recognition of the obvious defects in the drafting, counsel for the respondents accepted that the particular format and offering of Lava Ignite on that Saturday could not be the ultimate determinant; something rather wider had to be understood, namely the general nature of the Lava Ignite business as around end February /early March 2008. But even so, during the five year period styles, ambience and atmosphere in discothèques are likely gradually to change and develop. While it is not a factor to which I would attach much weight, I think that the reasonable third party would be unlikely to read the clause as tying the reclaimers to the style formats which they had at that time, unless they elected to lose protection under the agreement. He would again be moved in the direction of a generic interpretation.

[17] Accordingly, while recognising again the difficulty in construing the terms of the agreement, I join with Lord Hodge in his motion that the reclaiming motion be allowed and that interdict be granted in the terms amended on the motion of counsel for the reclaimers made at the Bar.

FIRST DIVISION, INNER HOUSE, COURT OF SESSION
Lord President Lord Eassie Lord Hodge	[2010] CSIH 01 CA108/08 OPINION OF LORD HODGE in Reclaiming Motion by LUMINAR LAVA IGNITE LIMITED Pursuers and Reclaimers; against MAMA GROUP PLC AND MEAN FIDDLER HOLDINGS LIMITED Defenders and Respondents: _______

Act: Ellis, Q.C., McBrearty; McClure Naismith LLP

Alt: Anderson, Q.C.; McGrigors LLP

12 January 2010

[18] The reclaimers ("Luminar") are a company in a group of companies which operate discotheques. They operate a discotheque business known as "Lava Ignite" at 3 West Tollcross, Edinburgh. The respondents are associated companies. They also operate premises for late night entertainment, principally as live music venues. The first respondents ("Mama") contracted to purchase the premises at 31 Lothian Road from Luminar Liquid Limited ("Luminar Liquid"), an associated company of Luminar, in 2008. The respondents intended that the second respondents ("Mean Fiddler") would operate the premises as a live music venue.

[19] The two premises are close to each other. Until 2006 Luminar Liquid had operated a discotheque at the Lothian Road premises; thereafter they used them as a live music venue. When Luminar Liquid advertised the Lothian Road premises for sale in 2007, they stated in the sales particulars that they were not prepared to sell the premises to a nightclub or pub operator.

[20] In about January 2008 Mama expressed an interest in acquiring the Lothian Road premises and thereafter they and Luminar Liquid negotiated a contract of sale in which they included a clause to restrict the extent to which Mama could use the premises to compete with the discotheque business which Luminar operated at Tollcross. Counsel agreed not only that Luminar had departed in their contract with Mama from their initial position that they would not sell the premises to a nightclub operator but also that the agreed restriction on competition was a compromise between their competing interests. The principal issue in this action is the proper construction of the contractual restriction which the contract of sale imposed on Mama and Mean Fiddler.

[21] After the parties completed the sale, Mean Fiddler operated the Lothian Road premises under the name "The Picture House" primarily as a live music venue. But they also advertised their intention to operate the premises as a nightclub/discotheque, at which people would dance to recorded music, on Friday and Saturday evenings. Luminar considered that this proposed use infringed the contractual restriction which the parties had agreed.

[22] In their summons Luminar sought to interdict the use of the Lothian Road premises as a discotheque on the days and times when they operated their Tollcross premises, namely on Wednesday, Friday, Saturday and Sunday evenings between 10 p.m. and 3 a.m. An interim interdict dated 19 September 2008 and varied on 15 January 2009 preserved the status quo pending a proof. After hearing evidence at the proof, the Lord Ordinary assoilzied the respondents. This is a reclaiming motion against his decision.

The contractual provisions

[23] Luminar Liquid and Mama agreed missives of sale dated 5 March 2008. In accordance with the missives, Mama, Mean Fiddler and Luminar then entered into a "Non Compete Agreement" dated 17 and 27 March 2008 ("the Agreement"). Subject to the occurrence of certain events which are not relevant to this dispute, the Agreement provided that the restrictions on Mama and Mean Fiddler would remain in force for five years after 31 March 2008.

[24] The restriction is set out in clause 2 of the Agreement, which provided:

" 2.1 Considering that the Purchaser [i.e. Mean Fiddler] has purchased the Burdened Property from a Luminar Group company, subject to clause 2.2, with effect from the Effective Date until the date of termination of this agreement ... Mama and the Purchaser jointly and severally undertake to Luminar (as owner and operator of the discotheque business trading from the Benefited Property) not to (1) use the Burdened Property for late night entertainment in direct competition on a like for like basis with the discotheque business of Luminar as carried on at the Benefited Property as at 1^st March 2008 or otherwise permit the Burdened Property to be used for late night entertainment in direct competition on a like for like basis with the discotheque business of Luminar as carried out at the Benefited Property at at 1^st March 2008, and/or (2) trade (from the Burdened Property) in direct competition on a like for like basis with the discotheque business carried on by Luminar from the Benefited Property as at 1^st March 2008. Luminar hereby confirms that it does not use the Benefited Property, nor permit the Benefited Property to be used, nor trade the Benefited Property as a live music venue as at 1^st March 2008.

2.2 Except only as provided in clause 2.1 nothing in this Agreement shall or shall be deemed to prevent Mama, the Purchaser or any Associated Company from using the Burdened Property as a music venue, including, without limitation, as a live music venue or as a bar at which music is played or from trading from the Burdened Property as a music venue, including, without limitation, as a live music venue, or as a bar at which music is played and neither Mama nor the Purchaser gives any undertaking in this respect."

The decision of the Lord Ordinary

[25] The Lord Ordinary heard a proof before answer. Pursuant to his interlocutors dated 17 November and 8 December 2008 the Lord Ordinary had regard to affidavits which the parties lodged as part of the evidence in chief of each witness. The evidence which parties led at the proof included an examination of the prior communings which led to the missives and the Agreement and also a comparison of the types or styles of discotheque entertainment which Luminar offered and which Mama proposed to offer.

[26] In his opinion the Lord Ordinary ruled that the evidence of prior communings was inadmissible. He gave his provisional view of the meaning of the contractual restriction having regard only to the wording of the Agreement. That was that the restriction, which forbade direct competition on a like for like basis, only prevented the respondents from putting on discotheques which operated in a similar style and sought to appeal to a similar group of potential customers. He then considered the evidence of the differences in type or style of entertainment to see if that supported his provisional view. He concluded that those involved in the business of putting on club nights or discotheques would understand there to be a distinction between different styles of club nights at the two venues. That conclusion lent support to his provisional construction of the restriction.

The reclaimers' challenge

[27] Mr Ellis QC and Mr McBrearty for Luminar challenged the Lord Ordinary's decision on five grounds.

[28] First, they submitted that the Lord Ordinary erred in holding that the restriction was unambiguous. Having regard to what they submitted was the uncertainty as to the meaning of the restriction, the court required to look to the admissible evidence of the surrounding circumstances in order to interpret the restriction.

[29] Secondly, they argued that the Lord Ordinary also erred in rejecting as inadmissible all of the evidence of the parties' prior communings. They accepted that the court could not look at previous formulations of a prospective agreement in pre-contractual negotiations or at a party's subjective statements of intention. But, they submitted, the court could and should have regard to those negotiations for "legitimate background facts", which were facts which both parties had in mind when negotiating the agreement. In particular they submitted that the court should have regard to evidence about two statements made by or on behalf of the respondents.

[30] The first statement was contained in a facsimile message by the respondents' solicitor, Mr Meldrum, in the course of the negotiations. That message, dated 3 March 2008, was sent when the parties' solicitors were discussing the relationship between clause 2.1 and 2.2 and, so far as relevant, stated:

"MAMA need to be able to use the premises for their normal trade and are simply undertaking not to compete on a like for like basis with Luminar in relation to the other premises. MAMA are not in the business of what you and I would know as "discotheques" i.e. dancing to recorded music however the dictionary definition of "discotheque" is "nightclub for dancing to live or recorded music and often featuring sophisticated sound systems, elaborate lighting and other effects". Live music is MAMA's business but it could be caught under the definition of "discotheque" so we have tried to make it clear that MAMA are not to be prevented from playing live music at all."

This was, it was submitted, relevant either as a representation of fact or as a shared understanding of fact between the parties' solicitors who negotiated the terms of the restriction. The Lord Ordinary held that the respondents had not attempted to mislead Luminar in negotiating the contract. He also held that Mr Meldrum did not know that his clients not only presented live music but also operated club nights at which people danced to recorded music (Lord Ordinary's opinion, paragraphs 40 and 48). Nor did Luminar or their solicitor, Mr Nisbet. The shared understanding of the lawyers was a relevant background fact.

[31] The second statement which Mr McBrearty sought to have admitted was contained in a letter dated 28 January 2008 from Mama to Luminar Leisure Limited in which Mr James, a co-CEO of Mama, set out Mama's proposed offer in eight short paragraphs. The seventh was in these terms:

"(e) We are willing to covenant that the property will be used as a live music venue and will not compete with your other venue in Edinburgh."

[32] In support of the submission, that it was well established in authority that the court could look at pre-contractual negotiations to identify background facts which both parties had in mind, counsel referred to the following authorities: Melville Dundas Ltd v Hotel Corporation of Edinburgh Ltd 2007 SC 12, Bank of Scotland v Dunedin Property Investment Co Ltd 1998 SC 657, City Wall Properties (Scotland) Ltd v Pearl Assurance PLC 2004 SC 214 and [2007] CSIH 79, Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101, Prenn v Simmonds [1971] 1 WLR 1381, and Inglis v Buttery & Co (1877) 5 R 58 and (1877) 5 R (HL) 87.

[33] The two statements which Luminar invited the court to consider were relevant and admissible either as factual statements by the respondents as to the nature of their business or, in the case of the solicitor's e-mail, as a shared understanding between the parties' solicitors. The statements were to be interpreted objectively. They revealed the "genesis and aim" of the Agreement and supported the view that both parties proceeded on the basis that the respondents were engaged only in the provision of live music at their venues and wished to acquire the Lothian Road property only for that purpose.

[34] Thirdly, counsel submitted that, while they did not challenge the Lord Ordinary's findings of fact, he had misapplied those findings in his construction of the contractual restriction. Having regard to the evidence that it was likely that there would be significant cross-over between the clientele of the two premises, which he accepted in paragraph 99 of his opinion, the Lord Ordinary had been wrong to conclude (in the following paragraph) that such a cross-over had no bearing on whether the two venues would compete on a like for like basis.

[35] Fourthly, counsel submitted that the construction which the Lord Ordinary favoured was not commercially sensible. It would be very difficult to police the restriction because it would depend to a large degree on subjective judgements about the similarity or otherwise of the offerings and the extent to which the same people would be attracted to the competing entertainments. The Lord Ordinary in his findings of fact recorded bona fide differences of view between witnesses, all of whom he found both credible and reliable on these issues. See paragraphs 60 - 62 of his opinion. The Lord Ordinary stated (in paragraph 94 of his opinion) that he did not propose to attempt any definition of the distinction. In his discussion of the evidence he referred to differences in the layout of the premises, the type of music played, the ambience created and the clientele who were likely to be attracted. He thought that, like the elephant of legal fiction, it could easily be recognised by those who attended with any regularity. But the evidence revealed that people involved in providing nightclub entertainment held clearly differing views on whether there was such a distinction and, if so, whether it affected competition between the venues.

[36] Fifthly and finally, they submitted that on a proper construction, the late night entertainment which was prohibited was that which was (i) in direct competition and (ii) on a like for like basis. The first phrase referred to having days and times of opening which were the same as or overlapped with Luminar's opening times. Thus Mama could use the Lothian Road property for otherwise prohibited activities at times when Luminar were not providing a discotheque in the Tollcross property. The second phrase referred to the playing of recorded music for dancing. Other uses were not prohibited. This construction had the commercial advantage that both parties could readily ascertain whether or not the activity in the Lothian Road property complied with the contractual restriction.

[37] I deal with the response by Mr Anderson QC on behalf of the respondents in relation to the first four grounds in my discussion below. In relation to the fifth ground his submission was that the relevant clause should not be read disjunctively. That was not the plain meaning of the words and would not be consistent with the manner in which a reasonable third party aware of the commercial context would construe the clause: Emcor Drake and Scull Ltd v Edinburgh Royal Joint Venture 2005 SLT 1233. The Lord Ordinary's construction of the clause was the correct one. It was strongly supported by the evidence which showed that the entertainment which the respondents proposed to provide at the Lothian Road property on club nights was radically different from that which Luminar provided in their Tollcross premises. While it might be more difficult to operate the clause on the respondents' construction than on Luminar's, both constructions would allow the contract to have effect. The respondents' construction fulfilled a clear commercial purpose and it was the task of the court to construe what the parties had agreed.

Discussion

[38] In relation to the first ground of challenge, it seems to me to be a matter of choice whether a judge in his reasoning first analyses the background facts before considering the relevant contractual provision or looks first at the provision before testing his view of it against those facts. I do not consider that the words "late night entertainment in direct competition on a like for like basis with the discotheque business of Luminar as carried out ...as at 1^st March 2008" have a clear meaning when considered in isolation and discuss this further when considering the reclaimers' fifth ground of challenge. But I see no error in law in the Lord Ordinary's approach of considering first the words in question and then reassessing his view of them after having regard to the relevant background circumstances. It is not part of our law of contract that the court can have regard to relevant background circumstances only if there is ambiguity in the words of an agreement. The Lord Ordinary is supported by Lord Mustill's view, which he quotes, that in most cases "the enquiry will start, and usually finish, by asking what is the ordinary meaning of the words used" - Charter Reinsurance Co Ltd v Fagan [1997] AC 313 at p.384B-C.

[39] The second ground of challenge relates to the admissibility of the two selected statements in the course of the prior negotiations. While there may be uncertainties as to the boundaries of the rule excluding the use of parties' negotiations as an aid to construction, as Lord Kingarth observed in City Wall Properties (Scotland) Ltd at paragraph 38, the law on this matter is well-established and the House of Lords recently upheld the general exclusionary rule in Chartbrook Ltd v Persimmon Homes Ltd. The general rule is that the court will not have regard to statements of parties or their agents in the course of the negotiation of a contract as an aid to the construction of the words which the parties use in the final version of the contract which alone expresses their consensus.

[40] That rule is justified on two grounds. First, the consideration and interpretation of previous formulations of what one or other party was seeking in the negotiations may be irrelevant to the construction of the words which they eventually adopt to express their consensus. Secondly, even if the words which parties used in the negotiations are not irrelevant, they are excluded on pragmatic grounds. In Prenn v Simmonds Lord Wilberforce (at pp.1384G-1385A) discussed the basis of the exclusionary rule and stated that the reason for excluding evidence of the exchanges in negotiations was that such evidence was "unhelpful." He stated:

"...where negotiations are difficult, the parties' positions, with each passing letter, are changing and until the final agreement, though converging, still divergent. It is only the final document which records a consensus. If the previous documents use different expressions, how does construction of those expressions, itself a doubtful process, help on the construction of the contractual words? If the same expressions are used, nothing is gained by looking back; indeed something may be lost since the relevant surrounding circumstances may be different."

The pragmatism, which underlies the exclusionary rule, is concerned with predictability and economy. There is considerable scope for dispute about the meaning of the statements, whether oral or in writing, which parties make in their negotiations. This may distract attention from the construction of the words which parties eventually used to express their consensus and cause greater uncertainty of outcome in contractual disputes. Admission of evidence of the negotiations will in any event, as Lord Hoffmann observed in Chartbrook Ltd v Persimmon Homes Ltd (at para 35), "add to the cost of advice, litigation or arbitration."

[41] But the exclusion of evidence of the prior negotiations is not absolute. The court's task in construing a contract is to ascertain what a reasonable person, having all the background knowledge which would have been available to the parties, would have understood them to be using the words in the contract to mean: Chartbrook Ltd v Persimmon Homes Ltd, Lord Hoffmann at para 14. As a result the court has for a long time looked at what Lord Ormidale called "the surrounding circumstances" when construing the words of the contract: Inglis v Buttery, Lord Ormidale at pp.67-68, Lord Blackburn at (HL) pp.102-103. In some cases things said and done in the process of negotiation may be part of "the surrounding circumstances."

[42] Evidence of the factual background to the contract is relevant where the facts are known to both parties and those facts can cast light on either (i) the commercial purpose or purposes of the transaction objectively considered or (ii) the meaning of the words which the parties used in their contract. The two cases very often overlap as the ascertained commercial purpose gives meaning to particular words or phrases.

[43] In the former case, the surrounding circumstances may disclose the commercial object of the intended transaction. If an interpretation of the contract frustrated that object, the court would prefer an alternative interpretation. The contract should make commercial sense. In order to understand the commercial purpose of the contract the court may need to know "the genesis of the transaction, the background, the context, the market in which the parties are operating": Reardon Smith Line v Hansen-Tangen [1976] 1 WLR 989, Lord Wilberforce at p.995H.

[44] In the latter case the court is looking for the meaning of particular words or phrases. The context may give the words a formal or a popular and looser meaning. The surrounding facts are relevant "to establish the parties' knowledge of the circumstances with reference to which they used the words in the contract": Bank of Scotland v Dunedin Property Investment Ltd, Lord President (Rodger) at p.665G. Thus in that case the court, in interpreting the meaning of the phrase, "costs ... incurred ... in connection with the stock", looked to the fact that Dunedin was aware (a) that the Bank would borrow money to fund the purchase of its long term fixed interest loan stock and would hedge the transaction and (b) that the Bank would incur costs in relation to the hedging if Dunedin repaid the loan and purchased the loan stock early. It was in this context that Cardozo J used the phrase "genesis and aim" on which counsel for Luminar relied: Utica City National Bank v Gunn (1918) 118 N.E. 307, at p.308.

[45] Facts which are known only to one party are not admissible as part of the surrounding circumstances. For such circumstances to be available to the court in its task of ascertaining how a reasonable person would interpret the words of the contract, the circumstances must have been known to both parties or at least such knowledge must have been reasonably available to both of them: The Howgate Shopping Centre Ltd v Catercraft Services Ltd 2004 SLT 231, Lord Macfadyen at para 36. In that case he referred to the judgment of Lord Wilberforce in Reardon Smith Line v Hansen-Tangen, in which he stated (at p.996E-F):

"It is often said that, in order to be admissible in aid of construction, these extrinsic facts must be within the knowledge of both parties to the contract, but this requirement must not be stated in too narrow a sense. When one speaks of the intention of the parties to the contract, one is speaking objectively - the parties cannot themselves give direct evidence of what their intention was - and what must be ascertained is what is to be taken as the intention which reasonable people would have had if placed in the situation of the parties. Similarly when one is speaking of aim, or object, or commercial purpose, one is speaking objectively of what reasonable persons would have in mind in the situation of the parties. It is in this sense and not in the sense of constructive notice or of estopping fact that judges are found using words like 'knew or must be taken to have known' (see for example, the well-known judgment of Brett L.J. in Lewis v Great Western Railway Co (1877) 3 Q.B.D. 195."

Knowledge which was reasonably available only to one party would not form part of the factual matrix which could assist the court in the construction of the contract. See also Emcor Drake and Scull, Lord Drummond Young at para [14]. Facts of which both parties were aware but which were not at the forefront of their minds may still form part of the objective setting of the contract or, in Lord Drummond Young's words, "the commercial context in which the contract occurs" (para [13]). In most cases involving the construction of a contract there is no need for a detailed enquiry into which of the parties knew what. Most background facts which are relevant to the written contract in a particular case are, in Brett LJ's words in Lewis v GWR (at p.208), "things which must be taken to have been known by both parties to the contract." But there is, as Lord Macfadyen stated in the paragraph referred to above, a need for particular care where the respective parties to a contract had differing degrees of knowledge about certain of the background circumstances.

[46] In the light of these comments, I can deal very shortly with Mr James's statement in his letter of 28 January 2008 (paragraph [31] above). It was not an accurate statement of the scope of the respondents' business which, being known to both parties, might be part of the surrounding circumstances; it was a statement of one side's pre-contractual intention at an early stage in discussions, approximately five weeks before the parties agreed the terms of the restriction and concluded the missives. Recognising this, Mr Ellis did not press strongly the submission for the admission of this statement.

[47] The e-mail by Mr Meldrum dated 3 March 2008 (paragraph [30] above) raises more complex issues. Luminar argue that the statement is admissible on two separate bases. The first is that it is evidence of a representation on behalf of the respondents which should be construed objectively and on which Luminar were entitled to rely. Mr Meldrum was unaware that the respondents not only provided live music events but also ran club nights at which people danced to recorded music. His representation was not accurate in the light of Mr James's evidence. While Luminar may understandably be aggrieved if they relied on the representation as the reason why the respondents proposed the words used in the clause and they accepted those words on that basis, the issue for the court is not misrepresentation or personal bar but the meaning of the contractual provision which the parties eventually agreed. In my opinion the making of this representation does not fall within the shared knowledge of the parties of the factual background which is available to the court in construing the contract.

[48] Secondly, Luminar's counsel also touched on but did not develop arguments on the issue of whether an inaccurate understanding which was shared by solicitors who negotiated the terms of the relevant provision could be part of the admissible surrounding circumstances, although one of the principals would have known, if informed of that understanding, that it was incorrect. The submission was that Luminar and their solicitor on the one hand and the respondents' solicitor on the other had a shared understanding which informed the eventual agreement. Parties did not cite any authority on extent to which a shared understanding of solicitors, who negotiated the detailed terms of an agreement, could be imputed to their principals in this context. In the absence of a more detailed citation of authority I do not think that it is appropriate to express any view on that issue.

[49] It is in any event unnecessary to deal with the point in this case. In my opinion the Lord Ordinary was correct in excluding the evidence of Mr Meldrum's email because, as Mr Anderson submitted, it and the other emails did not assist the determination of the question in this case. Even if respondents did not provide discotheques at which recorded music was played, as Mr Meldrum stated, that fact would not answer the question whether the clause prevented them from doing so in future. There is also a danger of taking one communication out of its context in the negotiation. That context was a discussion of why the respondents would not accept a complete ban on all discotheques. No such ban was eventually agreed as Luminar accept that the restriction does not prevent the respondents from providing discotheques on nights when they do not do so. Another email which Mr Meldrum sent on the same day would, if admissible and taken out of context, support the respondents' position. See the Lord Ordinary's opinion at paragraph 46. In context the emails are principally statements of subjective intention. As Lord Wilberforce warned in Prenn v Simmonds (at p.1385C) it is dangerous to admit evidence of one party's objective even if this is known to the other party. The statements fall to be excluded either as irrelevant or on the pragmatic grounds discussed above.

[50] It is not necessary to dwell on the third ground of challenge. The market research evidence which Luminar presented suggested that between thirty and sixty five per cent of their customers who were shown Mama's flyers might visit the Picture House to dance to recorded music. Unsurprisingly, the Lord Ordinary concluded that there was a significant body of potential customers who might be attracted to different types of nightclub. But he interpreted this as simply competition for the leisure pound, which, on his construction, the clause did not prevent.

[51] Mr Anderson criticised Luminar's submission for "cherry-picking" and taking the findings out of their context. The evidence of other witnesses, such as the DJs, Andy Wilson and Kevin Mellotte, and Mama's Mr James supported the view that there was a distinction in the types of music to be played. Luminar offered principally mainstream music while the respondents proposed to play alternative music genres, such as rock, indie, grunge or gothic. Professor Frith, the Tovey Professor of Music at the University of Edinburgh, spoke of his work in classifying different kinds of musical event. He drew a distinction between a dance club, such as Luminar's provision at Tollcross premises, and a music club, into which category he placed the Picture House.

[52] In my opinion there was evidence which entitled the Lord Ordinary to conclude that people in the music industry would appreciate that there were distinctions between what Luminar provided at Tollcross on Friday and Saturday nights and what Mama proposed to provide at the Picture House. The evidence of substantial crossover certainly calls into question Mr James's assertion that the Picture House would not compete with Luminar's venue and similar assertions by Professor Frith. The flyers for the Picture House, such as Pro 6/12 which portrayed what the Lord Ordinary correctly described as "a seductively clad girl dancing against a background of hi-fi speakers," and which stated drinks prices, may not have supported the assertions that young people went to one venue to listen to music and to the other to meet members of the other gender or to get drunk. But if the Lord Ordinary were correct in his construction of the contractual words as focusing on the nature of the provision of recorded music for dancing at the respective premises in terms of style of music, ambience et cetera, I do not see his conclusion, viz. that the extent of crossover was a separate question from "like for like" provision, to be a misapplication of his factual findings.

[53] I have more difficulty with the idea that such evidence of substantial crossover is simply showing competition for the leisure pound, for which theatres and cinemas also might compete. It is important in my view to recall that one is dealing with late night entertainment in clubs, rather than theatres, cinemas and restaurants which function earlier in the evening. If accurate, the market research which Luminar commissioned suggested that there would be significant competition between their venue at Tollcross as operated on Friday and Saturday nights and the Picture House on its club nights. But that is of limited relevance as none of this market research was available to the parties when they contracted and thus does not form part of the surrounding circumstances which are available to assist construction of the agreement.

[54] Luminar's fourth ground of challenge rested on the well-established proposition that a contract should if possible be given a commercially sensible construction: Bank of Scotland v Dunedin Property Investment Co Ltd at p.661D-F. Mr Anderson did not dispute that proposition but submitted that each party's construction was commercially sensible and that, in considering what meaning was more likely to be intended by reasonable businessmen, the court had to be alive to the likelihood that the restriction was a compromise between competing interests.

[55] He submitted that in the light of the Lord Ordinary's clear findings of fact in support of his conclusions that the two venues sought to project different images and about the different manners in which the dance music was played, there would not be any difficulty in policing the restriction. Luminar did not challenge those findings of fact. I can readily see the force of that submission in the context of a comparison between what the Picture House proposed to provide and what Luminar provided on Friday and Saturday nights. Where there is likely to be considerably more difficulty is in a comparison between what Luminar provide on Wednesday and Sunday nights, which are student nights, and the respondents' proposed offer. Both parties accepted that the use in the restriction of the date of 1 March 2008 was not intended to have only Luminar's provision on that Saturday evening as a comparator but that it was a reference to their provision at or around 1 March 2008. It therefore seems to me that there would be more delicate issues of judgement in any attempt to enforce the restriction on the Lord Ordinary's construction than on the reclaimers' construction. It was not suggested that Luminar would be deprived of the protection of the restriction if at any time in the five-year period they chose to have a student night on a Friday or Saturday night. If so, the differences in provision would be much less clear and more delicate questions of subjective judgement would arise.

[56] I consider therefore that it would be more difficult for parties to know where they stood in relation to the restriction on the respondents' construction than on the reclaimers' and that delicate questions of subjective judgement would arise. But that is not a pointer of any great weight in the construction of the restriction as neither party's construction is unworkable.

[57] The most difficult issue, in my opinion, is raised to in Luminar's first and fifth ground of challenge: what is the correct construction of the phrase in the context of the clause as a whole and in the light of the surrounding circumstances? The phrase which the parties used seems to me to be a recipe for litigation. As I consider that those words of restriction, taken by themselves, are capable of bearing the meaning which each party suggests, it is only after some hesitation that I have reached a concluded view.

[58] I have respectfully found myself differing from the Lord Ordinary in the construction of the provision. I have reached the view that Luminar are correct in their assertion that the provision prohibited Mama from putting on any discotheque at which recorded music was played for dancing at the times when Luminar were providing such entertainment at their Tollcross venue. I have reached this view principally for three reasons, which I examine in turn. They are, first, on considering the clause as a whole I am left with the impression that the intended restriction was of a more generic nature than that for which the respondents argued. I do not share Luminar's view that the phrase which contains the restriction should be interpreted disjunctively; but that does not affect my conclusion. Secondly, when I consider the surrounding circumstances, I am struck by how little the parties appear to have known about each other's provision or intended provision in the venues in Edinburgh. Thirdly, I consider that, on the respondents' construction, the parties would have significantly more difficulty in determining whether or not a particular provision by the respondents would breach the restriction than on that of Luminar.

[59] In construing the words of restriction it is necessary to consider their place in the context of the clause as a whole. The clause is awkwardly drafted as clause 2.1 is expressly subject to clause 2.2 but clause 2.2 states that clause 2.1 defines the extent of the restriction. The clause as a whole does not lend itself to precise semantic analysis. But that does not matter because in construing a commercial contract the court seeks to discern what a reasonable businessman would understand to be the commercial intention of the parties.

[60] An analysis of the words themselves does not lead to a clear conclusion. The words of restriction have as comparators on the one hand "late night entertainment" and on the other "the discotheque business of Luminar" as carried out around the time of the agreement. I agree with the Lord Ordinary that if the reclaimers' construction of the restriction were correct the parties could have stated that intention more easily by prohibiting the use of the Lothian Road premises as a discotheque whenever the Tollcross premises were in use. But that does not assist very much; a similar point can be made in relation to the respondents' construction. Rather than use as a comparator "late night entertainment" which competed directly and on a like for like basis, the parties could have referred to the use of the Lothian Road premises as a discotheque, which by virtue of the music played, the ambience created and the target clientele, competed directly with Luminar's premises at Tollcross. They did not do so. The court's task is to construe the words which the parties have used. The comparator was not a discotheque; it was simply late night entertainment. The question is: what form of late night entertainment is prohibited because it is provided in a similar manner and competes directly with Luminar's provision? I am left with the impression that the words used in the context of the clause as a whole were a negotiated compromise which might have meant different things to each party.

[61] Thus it is in looking at the clause as a whole that one gets an impression of what the parties are to be taken to have intended. On doing so I have an impression that the restriction was intended to be generic rather than specific. In particular, in the closing words of clause 2.1, the parties made it clear that the restriction did not prevent Mama from using the Lothian Road premises as a live music venue. Clause 2.2 seems to have been intended principally to confirm that the restriction does not cover a live music venue or the use of the Tollcross premises as a bar at which music is played. There may be other undefined forms of music venue which were to be excluded but there is nothing which suggests that the parties contemplated drawing distinctions between different types of late night discotheque at which recorded music was played for dancing. If the reasonable businessman on looking at the words of restriction which parties used were to detect a shared understanding on the lines of the respondents' construction, he might wonder why parties bothered to exclude music played at a bar in clause 2.2 and in both parts of the clause excluded the playing of live music. He might ask why parties included clause 2.2 at all.

[62] In my opinion the words of restriction in the first part of clause 2, when viewed in the context of the clause as a whole, impose a generic restriction. The restriction on late night entertainment which competes directly with and is in a similar manner to what Luminar provided at the Tollcross premises appears to me to prohibit the provision of the Lothian Road premises for dancing to recorded music at the times when Luminar provide such entertainment. The stipulation that the other comparator was how Luminar operated their discotheque in the Tollcross premises at about March 2008 is explained by the understandable wish to have a baseline for comparison in order to prevent Luminar from moving the goalposts by altering radically their provision during the five-year period of the restriction.

[63] I turn to the knowledge of the surrounding circumstances which would be available to the reasonable businessman when he interprets the words which the parties used. The admissible surrounding circumstances include the shared knowledge of the geographical proximity of the competing premises and also of Luminar's initial marketing particulars. But those facts reveal little about the meaning of the restriction to which the parties agreed after negotiation.

[64] Beyond those matters, I am struck by how little each party seems to have known about what the other was doing or was intending to do. The parties appear to have led very little evidence about what was common knowledge which might form the factual matrix. I recognise that both parties were national business organisations and may have had some knowledge of each other's general business, but that, on the Lord Ordinary's findings of fact, does not amount to much. Both parties knew that Luminar provided late night discotheque entertainment. It may be possible to infer that Mama knew from information available within the industry that generally Luminar played mainly "mainstream" music at its Tollcross venue as the market research which the respondents later commissioned from Progressive Partnership suggested. But there is no evidence that Mama made any enquiry into the nature of the musical provision in the three rooms of the Tollcross venue on the different nights of the week in early 2008 to inform themselves of the comparator for its interpretation of the restriction. Unlike the Lord Ordinary (in paragraph 21 of his opinion), I do not infer from the words of the clause that parties had an appreciation that Luminar carried on a discotheque business at Tollcross of a particular kind or style and which appealed to a certain group of potential customers. And the admissible evidence of the surrounding circumstances does not support such an appreciation.

[65] Both parties knew that Mama provided live music venues but the Lord Ordinary has held by reference to Mr Marks's evidence, and that finding has not been challenged, that Luminar were not aware that the respondents always provided club nights for dancing to recorded music at their live music venues or that it was their intention to do so in the Lothian Road premises. Thus a shared knowledge that the respondents invariably or normally provided such club nights is not part of the surrounding circumstances.

[66] Further, while many people in the industry would be aware of distinctions between different types of clubs and discotheques which, as the Lord Ordinary has found, may not be capable of precise definition, there was no shared understanding that those distinctions would prevent significant competition in the form of crossover of clientele. The witnesses from Luminar and Mama had radically opposing views on this issue.

[67] In short, there is nothing in the admissible surrounding circumstances which in my view points clearly towards the respondents' construction of the restriction.

[68] Finally, I think that absent any investigation of Luminar's provision at Tollcross in about February 2008 the parties would find it considerably more difficult to ascertain whether Mama were complying with the restriction, if it were construed as the respondents submitted it should be. That problem would not arise if the clause created the generic restriction. But for the reasons which I set out in paragraphs [53]-[56] above, I do not attach significant weight to that consideration.

[69] I conclude that the restriction entitles Luminar to the interdict which it has sought. I would therefore allow the reclaiming motion, sustain the reclaimers' first plea in law and repel the respondents' pleas in law. I would also reserve all questions of expenses.

Postscript: the use of affidavits and signed witness statements

[70] The Lord Ordinary in a postscript to his opinion discussed the proper approach for the court which has authorised parties to present evidence in the form of affidavits in a commercial action under Rules 47.11 or 47.12. This court invited counsel to address it on the issues raised. Counsel agreed with the Lord Ordinary's approach but suggested that the court and parties had to exercise some care in selecting the cases in which affidavits or signed witness statements would be appropriate. Where there were sharp issues of credibility and reliability in relation to the evidence of particular witnesses, that evidence should be taken orally. There was always a danger that the text of the written statement would be far removed from the words which the witness would use unprompted. Counsel recognised that the use of such statements saved considerable court time. They expressed the view that it was very important that a witness should have signed off his affidavit or statement before he saw the affidavits or statements which the other party had tendered or which other witnesses of the party calling them had given.

[71] It is the practice of the commercial judges in an appropriate case to order parties to lodge affidavits or signed witness statements in advance of a proof with the intention that they will form the bulk of each witness's evidence in chief. Once the witness appears in court counsel asks him to identify and (if the witness statement is not an affidavit) confirm the truthfulness of the statement. The witness is given the opportunity to correct anything said in the statement or to amplify matters in the light of the other evidence and may also be asked supplementary questions. When counsel use the first witness to introduce the case to the court it is common for counsel to show the witness, and thereby the court, the relevant documentary evidence. In each case the witness may be cross-examined and re-examined in the ordinary way.

[72] If parties produce such affidavits or witness statements at different times in advance of the proof there is a risk that, if a later witness is shown the statements of other witnesses, his evidence might be altered from what it would otherwise have been. In Watson v Student LoanS Co Ltd [2005] CSOH 134, Lord Hardie criticised the briefing of an oral witness when a solicitor had shown the witness the evidence of another witness which had been taken on commission. I agree with the Lord Ordinary in his endorsement of Lord Hardie's view that in our legal system it is not permitted to brief or coach a witness with a view to his altering his evidence.

[73] When parties are ordered to exchange affidavits or witness statements on the same day there is no risk of one party having seen the other party's statements in advance. When taking a witness statement or preparing an affidavit, a party's solicitor can precognosce the witness in the normal manner, which includes asking questions in the light of what the solicitor knows from other statements which he has obtained. But it would not in my view be appropriate for the solicitor to show the witness the statements or draft statements of other witnesses at this stage. Once the parties had exchanged statements it would be perfectly acceptable for a witness, whose statement had been exchanged, to be shown the other statements which were relevant to his evidence and for him to be given an opportunity to modify his evidence in the light of that evidence. Where a witness wished to modify his evidence, this could be done by lodging a supplementary affidavit or statement explaining the change and the reason for it. Alternatively, he could do the same in oral evidence at the proof. The change would thus be made openly. It is sometimes the practice of the commercial judges when fixing a timetable for the exchange of witness statements to specify also a later date by which parties may produce supplementary affidavits or statements to make transparent any change of position and to narrow down the issues in dispute.

[74] As the Lord Ordinary has stated, the use of such written statements is a move away from "trial by ambush" and allows a witness to give a considered response to points which may be made against him and the evidence given by others. I have no difficulty with this approach. But I consider that where a party proffers an initial affidavit or witness statement of a witness after the exchange of the statements of other witnesses, the solicitor tendering the statement should certify by letter to the court that the witness has not seen or been informed of the evidence of others or, if he has, specify the statements which the witness has seen or been told about and the circumstances in which that has occurred.

[75] In my opinion this approach would be consistent with our traditions in relation to the giving of evidence in court.