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SHERIFF APPEAL COURT
[2024] SAC (Civ) 46
PAI-A334-22
Sheriff Principal Murphy KC
OPINION OF THE COURT
delivered by Sheriff Principal S F Murphy KC
in appeal by
EDWARD ALEXANDER LEISHMAN
[Pursuer/Appellant]
in the cause
EDWARD ALEXANDER LEISHMAN
against
ALEXANDER ANTONY NOBLE
[Defender/Respondent]
Pursuer/Appellant: McAndrew, Advocate; Complete Clarity Solicitors & Simplicity Legal
Defender/Respondent: Hankinson; DHM Law
11 November 2024
Introduction
[1]
In June 2022 the parties discussed concluding a business deal whereby the pursuer
and appellant would sell his shares in a company ("EVC") to the defender and respondent.
A document titled "Heads of Terms" was executed by them on 26 August 2022 in which the
respondent agreed to pay £20,000 to the appellant for his shares at which point the appellant
would resign as a director of EVC. However, it also proposed that a formal share
2
purchase/sale agreement be drafted, to include the terms set out in the document. The
appellant averred that on the same day the respondent intimated to him that payment
of £20,000 had been made and in reliance on that he completed form TM01 to resign as a
director of EVC. Subsequently he discovered that only £1000 had been paid to him by the
respondent. He raised an action for payment of the balance of £19000. Following debate the
sheriff upheld the respondent's preliminary plea to the relevancy and dismissed the action,
in an interlocutor dated 20 December 2023. Appeal is taken against that decision.
Grounds of appeal
[2]
While the sheriff identified the correct legal principles, he erred in applying them to
the present case, in particular by finding that the parties had not intended to be bound by
the Heads of Terms document. He ought to have held that the parties had intended it to
have immediate effect so that the payment obligation was enforceable and he had erred by
refusing to fix proof before answer on the issue of supplementary oral agreement. Esto the
parties' intention to be bound had not been established by the Heads of Terms document,
the sheriff had erred by dismissing evidence of subsequent conduct as irrelevant to the issue
of the parties' prior intention to be bound by it.
Submissions for the appellant
[3]
The initial issue related to formation of contract. Whether two parties had reached a
binding agreement had to be assessed objectively through the lens of honest, sensible
businessmen and based upon events before and after the alleged conclusion of the bargain:
Baillie Estates Limited v Du Pont (UK) Limited 2009 CSOH 95. The performance of the
substantive obligations is a significant aspect of subsequent conduct which can be relevant
3
to that assessment: G Percy Trantham Limited v Archital Luxfer Limited [1993] 1 Lloyd's Rep 25
RTS Ltd v Molkerei Alois Muller GmbH [2010] 1 WLR 753. The bare fact that parties to
a completed agreement stipulate that it shall be embodied in a formal contract does not
necessarily indicate that they are still at the stage of negotiations: Stobo Limited v Morrison
(Gowns) Limited 1949 SC 184; Supaseal Glass Limited v Inverclyde Windows Manufacturing
Limited 2022 SCLR 380. Clear language is required where an agreement is to be conditional
upon a further, written contract, particularly where the essential elements of the agreement
have been provided for: Stobo; HT Van Laun and Co v Neilson 1904 SLT 86. In any event,
such a condition may be waived by subsequent conduct: RTS Limited. The phrase "Heads
of Terms" is not a term of art and cannot of itself exclude an inference that parties intended
to be bound immediately: Pretoria Energy Co (Chittering) Ltd v Blankney Estates Ltd
[4]
Parties may agree on the essential elements of their bargain while leaving other
aspects to be finalised later: RTS Ltd. A contract for the sale of shares will generally involve
agreement on the parties, subject matter and price: Macqueen and Thomson on Contract Law in
Scotland, 15th edition, at 2.15. Other necessary terms would fall to be implied: Stair Memorial
Encyclopaedia, Companies, at paragraphs 107-8; Supaseal.
[5]
The sheriff erred in deciding that the Heads of Terms document pointed against an
intention to be bound by its terms. His analysis focussed on the preamble and clause 5 of
the document which created a misleading interpretation. He failed to construe the
document as a whole.
[6]
Parties' subsequent conduct indicated their intention to be bound by the terms of the
Heads of Terms document. The averments relating to that conduct were capable of
4
supporting a submission (after evidence) that any condition requiring subsequent formality
had been waived.
[7]
The sheriff found that the expression "Heads of Terms" was commonly understood
to refer to a non-binding agreement without appropriate evidence of commercial practice;
accordingly he took account of an irrelevant consideration.
[8]
In all the circumstances the sheriff ought to have fixed proof before answer to
determine the questions between the parties.
Submissions for the respondent
[9]
The grounds of appeal do not address the sheriff's actual findings. He decided that
the Heads of Terms created an obligation to draft a formal share purchase agreement and
not an obligation to make payment. Its terms were clear and unambiguous and therefore
fell to be applied by the court: Rainy Sky v Kookmin Bank [2011] UKSC 50. In the absence of
an obligation for payment the appellant's case was irrelevant, as the sheriff held. The
grounds of appeal are irrelevant by failing to recognise the distinction between an
agreement to draft a share purchase agreement which would contain a payment obligation
and an agreement which creates a payment obligation which may be subject to further
contract or conditions before it becomes binding.
[10]
The present case should be distinguished on its facts from Supaseal. The proposed
share purchase agreement in the present case was not a "bells and whistles" exercise but
was to be the only basis on which any payment obligation would arise. It was plain from
clause 5 of the Heads of Terms that the share purchase agreement which was to be prepared
was to be the final agreement. The issue between the parties was truly one of construction
and not a question of formation of contract. It followed that the cases of Supaseal, Baillie
5
Estates Limited, RTS and G Percy Trentham Limited were not in point. These cases were ones
in which a contract had come into existence not through offer and acceptance but through
performance.
[11]
The general rule is that a contract cannot be construed with reference to subsequent
actings: McBryde on Contract, paragraphs 8-30 to 8-33; L Schuler AG v Wickman Machine Tool
Sales Ltd [1973] 2 WLR 683.
[12]
Insofar as the appellant seek to rely on waiver, under reference to RTS, no such case
is pled on record in the present case. The only expression of a payment obligation would
have been contained within the share purchase agreement which was not executed. In its
absence there could be nothing to waive.
[13]
The present case is similar to Van Laun in that the share purchase agreement was to
include the only binding expression of a payment obligation. An agreement and a binding
agreement are not the same thing. Clauses 2 and 3 of the Heads of Terms document only
make practical sense if the expression "this agreement" refers to something subsequent to it.
[14]
The sheriff did not rely on the expression "heads of terms" in making his findings
but on the contents of the document.
[15]
The appeal should be refused as its basis was irrelevant.
Decision
[16]
Parties do not challenge the sheriff's summary of the governing legal principles in
this case, nor do I. These are:
(i)
a contract for the sale of shares and resignation as a director does not require
to be committed to writing;
6
(ii)
whether or not parties have reached a binding agreement must be assessed
by the court objectively;
(iii)
where parties agree not to be bound until a written agreement has been
completed, they will not be bound until that point;
(iv)
even if parties agree that either may withdraw until a formal written contract
has been executed, that does not necessarily mean that they are still at the stage of
negotiation; and
(v)
while agreement may be reached on the essentials of a contract, parties will
not be bound if they do not intend to be and what the essentials are may vary
according to the contract under consideration (Supaseal).
[17]
The sheriff's interpretation of the Heads of Terms is based upon its preamble which
states: "It is proposed that a formal Share Purchase/Sale agreement is drafted to include the
following terms ..." and clause 5, which states:
"Both parties acknowledge that they have been advised that it is open to them to take
independent legal advice before entering into a final share/purchase agreement."
He found that the unambiguous import of these two elements was that parties had agreed to
draft a formal share purchase agreement and that no obligation to pay the agreed value of
the shares would or could arise until the formal agreement was executed. It followed that
the appellant's case was irrelevant as he had not pled on record details of any concluded
bargain which could give rise to an obligation for payment.
[18]
Support for that position may be found in the case of Van Laun which has similarities
with the present one. The opinion of the Lord President describes the (unsigned)
memorandum of understanding on which the appellant relied in this way:
"This document quite recognises that there is to be a proper legal contract, and that
that legal contract is to contain the expression, and the only binding expression, of
7
the agreement, and in the ordinary case where it is arranged that a legal contract in
certain terms is to be entered into, an action ex contractu will not lie unless and until
that legal contract has been entered into."
Lord Kinnnear agreed:
"Therefore the pursuers' averment is that the terms of the contract between them and
the defenders are those expressly set out in this memorandum. Now, the first of
these terms is that the firms agree that that they will enter into a proper legal
contract, when prepared, with the pursuers for the purpose of placing in their hands
the conduct of the amalgamation of their businesses. That is the first term of their
contract, and it appears to me to follow of necessity that no binding obligation had
been contracted between the parties, or was intended to be contracted between the
parties, until a formal written contract should be executed."
Despite the apparent similarities between this case and the present one in my view Van Laun
may be distinguished on its facts for a number of reasons. In Van Laun the memorandum of
understanding on which the appellants relied, which is the equivalent of the Heads of Terms
document in the present case, was never signed, as Lord Adam and Lord Kinnear point out,
whereas in the present case there is no dispute that the Heads of Terms document was
executed on 26 August and the issue is its significance. The companies themselves in Van
Laun specifically intimated that they did not see their way to amalgamate in 1900 after
discussions with the appellants but did so three years later by themselves. There was
therefore no performance of any part of the memorandum on the part of the railway
companies established and there had been no relevant averment of rei interventus to render
the appellant's case relevant.
[19]
The sheriff's position is that where the language used is unambiguous the court must
apply it, as stated in Rainy Sky SA at paragraph 23 and in the body of authority quoted by
Lord Clarke in the preceding paragraphs. However, the Heads of Terms also included the
following:
"1.
Mr Noble will pay Mr Leishman £20, 000 for his share on EVC ...
7.
Following Mr Noble's purchase of Mr Leishman's share, Mr Leishman will
resign as Director of EVC ..."
8
The sheriff erred in my view by focussing too narrowly on the question of the strict
construction of the Heads of Terms document. He stated, at paragraph [24] of his judgment,
that: "`Heads of Terms' is commonly understood to refer to a non-binding agreement, with
a view to a contract subsequently being concluded." However, in the English Court of
Appeal decision in Pretoria Energy Co (Chittering) Limited it was said (within paragraph 28):
"Nor is the label `Heads of Terms' conclusive: a document labelled `heads of terms'
may be intended to be a non-binding record of the broad principle of an agreement
to be made in formal written documents subsequently negotiated, or may be
intended, in whole or in part, to be a binding contract governing the parties' relations
until a more detailed agreement is drawn up ..."
[20]
The sheriff noted, within paragraph [30] of his judgment, that the respondent had
paid a sum of money to the appellant who had resigned as a director of the company
conform to Form TMO1 which he had completed on 26 August 2022. While the general rule
is that a contract should not be construed by reference to the parties' subsequent actings,
that is not absolute. Paragraph 8-30 of McBryde on Contract (3rd edn) begins:
"Although in some cases a contract has been construed with reference to what
happened after the contract was made, it is thought that as a general rule a contract
should not be construed with reference to the subsequent conduct of parties or a
change in circumstances."
The case of L Schuler AG contains similar reasoning, while in RTS Ltd the court stated, at
paragraph 35:
"Even if certain terms of economic or other significance to the parties have not been
finalised, an objective appraisal of their words and conduct may lead to the
conclusion that they did not intend agreement of such terms to be a precondition to a
concluded and legally binding agreement."
In the present case the appellant pled within article of condescendence 2 the following:
"Thereafter the parties intended to implement the terms of the document (i.e. the
Heads of Terms) and the Defender confirmed to the Pursuer that he had transferred
the Pursuer the sum due in clause 1 of the document (£20, 000) by bank transfer.
Thereafter, the Pursuer completed the TM01 form (Termination of Appointment as
Director). The Defender then scanned a copy of the executed (sic) and TM01
9
Pursuer's agent under cover of an email confirming agreement had been reached and
implemented."
In answer 2 the respondent states: "The Heads of Terms as produced by the Pursuer do not
comprise the entire agreement between the parties." There follow averments relating to
funds from EVC which are said to have been in the possession of the parties, including a
sum of £19,000 said to have been held by the appellant, before the conclusion:
"On 26 August 2022, at 94 Hope Street, Glasgow the parties agreed that payment of
the Consideration would be discharged by payment by the Defender to the Pursuer
of £1, 000 and retention by the Pursuer of the Funds. The Defender subsequently
paid the Pursuer £1,000.00"
[21]
These answers are in turn denied by the appellant. However, in their pleadings both
parties aver that significant steps were taken by both sides on or about 26 August 2022 in
relation to the transfer of ownership of EVC. Performance on both sides "will often make it
unrealistic to argue that that there was no intention to enter into legal relations" (G Percy
Trentham Limited, RTS Ltd). Both parties aver that the steps they took were taken in
furtherance of an agreement reached at a meeting in 94 Hope Street on that date. They
diverge on the terms of the bargain which each avers was made. Neither party claims that
any formal share purchase/sale agreement was executed. The appellant's pleadings state
that parties intended to implement the terms of the "Heads of Terms" document. The
respondent's pleadings state that the "Heads of Terms" document did not comprise the
entire agreement between the parties. In support of that position it is averred that a specific
arrangement for payment of the consideration was agreed at that meeting.
[22]
It is significant in my view that both parties aver that they proceeded in furtherance
of what they perceived the agreement to be without producing or executing any more
formal document than the "Heads of Terms". Accordingly in my view it is not possible to
determine what the contractual basis, if any, of the actions taken by either party was,
10
without hearing evidence of what occurred at the meeting on 26 August 2022. It follows that
I consider this to be a classic case for proof before answer to have been fixed. What is clear
from their pleadings concerning their actions is that both parties obviously thought that an
agreement had been reached at the meeting on 26 August: the respondent transferred funds
to the appellant; and the appellant resigned as director of EVC. While these subsequent
actings may not serve to identify the terms of the bargain in any detail, they clearly allow an
inference that each party believed that agreement had been reached and one which was
based on terms contained within the "Heads of Terms" document executed on that day.
The sheriff erred in my view in failing to take account of these considerations and in basing
his decision exclusively on a strict interpretation of the preamble and paragraph 5 of the
Heads of Terms document.
[23]
I shall therefore allow this appeal and recall the judgment of the sheriff in terms of
the interlocutors dated 20 December 2023 and 19 February 2024; and I shall remit the case to
the sheriff at Paisley with a direction to fix proof before answer in relation to whether a
binding contract was agreed by parties on or about 26 August 2022.
[24]
I grant sanction for the use of junior counsel in this appeal and shall invite written
submissions of the question of expenses to be received within 21 days of the date of the
interlocutor accompanying this opinion.
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