Sheriff Appeal Court recalls dismissal of father-son dispute over alleged malicious winding up of business

About this case:

• Citation:
  [2024] SAC (Civ) 47
• Judgment:
  External link
• Court:
  Sheriff Appeal Court
• Judge:
  Appeal Sheriff Gregor Murray

It was averred by Gerard Davis, who had managed an insurance brokerage with his father James Davis for over 30 years, that the parties had agreed in 2010 that he would acquire ownership of the business. He sought damages for breach of an implied term of the 2010 contract obliging the respondent not to do anything that would prevent him from inheriting the business.

The appeal was heard by Sheriff Principal Derek Pyle, with Appeal Sheriffs Gregor Murray and Patrick Mann. DM Thomson KC appeared for the appellant and Crawford KC for the respondent.

Effective without terms

For over 30 years, the appellant and his father managed James Davis (Insurance Brokers) Ltd and G.L. James Davis (Holdings) Limited. In August 2010, they verbally agreed terms by which the appellant would acquire ownership of the business in a tax-efficient manner. The averred agreement was that the appellant would transfer his shareholding in Brokers to the respondent, both companies would become group companies, and the respondent would make testamentary provision for the appellant to inherit the whole business.

The appellant transferred his shareholding to the respondent, which he averred he did in consequence of this agreement. A codicil to the respondent’s will was executed giving effect to the respondent’s part of the agreement. However, in 2019 he unilaterally removed the appellant as director of Holdings, appointed his sister in his place, arranged for administrators to be appointed to Holdings, and had Brokers wound up by the court.

It was argued before the sheriff that an implied term in the 2010 contract that the respondent would take no steps to prevent the pursuer from inheriting or enjoying the value of the business had been breached, thus obliging him take steps to wind up the business without proper cause. Such a term, the appellant averred, was necessary to give the contract such business efficacy that they intended it to have. The sheriff considered that the proposed term failed to meet the second through fourth conditions narrated by the Supreme Court in Marks and Spencer plc v BNP Paribas (2016) for a term to be implied into a contract.

The sheriff considered that the alleged contract was effective without the proposed terms because it had been fulfilled. That the appellant had not derived the benefit he had hoped for from it was an insufficient basis for the term to be implied, nor was the term sufficiently obvious to go without saying. Further, as the appellant averred that he planned to retire in December 2025 and sell the business then, he had not yet incurred any loss.

Before the SAC it was submitted that while the sheriff had considered the correct tests, he had erred in his application of them. The appellant’s case was that he contracted to inherit the business on his father’s death. He did not suggest the business would have a particular value on any given date, but instead offered to prove that the respondent was obliged not to harm it.

Dirty trick

Delivering the opinion of the court, Appeal Sheriff Murray said of the appellant’s case: “The appellant’s case, taken at its highest, avers the proposed implied term was necessary to give efficacy to a business contract. After the parties expressly agreed a mechanism by which he was to inherit the respondent’s interest in the Business, a mechanism which entailed him transferring his Brokers shares to the respondent, the respondent deliberately and without proper cause took steps which were designed to ensure there would no longer be any interest to inherit. In that context, as the proposed term seeks to give effect to the parties’ express contractual intention, its implication is necessary to give efficacy to the contract.”

He continued: “We accept the appellant’s submission that, if proved, the respondent’s conduct would exemplify the type of ‘dirty trick’ described in Barton v Morris (2023), one which obviously requires the implication of a term designed to prevent it. In that context, an implied term of the type proposed would be the only solution to the difficulty the respondent created for the appellant.”

Describing the sheriff’s focus on the value of the business as misplaced, Appeal Sheriff Murray said: “The sheriff concluded that the proposed term was incapable of clear expression as it raised issues over the meanings of ‘the value of the Business’ and ‘proper cause’. In addition, it did not clearly express how the value of the Business would be ascertained and at what date. On those points, we also accept the appellant’s submissions. The value of the Business is a jury question, to be determined with a broad axe at the date of the alleged breach after evidence is heard. Its meaning is sufficiently clear.”

He concluded: “The inclusion of ‘proper cause’ is a necessary proviso, the meaning of which is also clear in context. As the person who controlled the Business, the respondent had title and interest to take certain steps in relation to it, in this instance to competently wind up or place in administration its constituent parts before his death. The inclusion of ‘proper cause’ affords him an opportunity to justify any such actions, as of course he seeks to do in his answers.”

The court therefore recalled the interlocutor dismissing the action and allowed parties a proof before answer.