Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION
	[2013] CSOH 175
A167/12	OPINION OF LORD DOHERTY in the cause GORDON GEORGE ROSS Pursuer; against SEBASTIAN MORLEY First Defender; And PAUL WILLIAMSON Second Defender; ________________

Pursuer: McColl; Thorley Stephenson, Solicitors

Defender: Thomson; Harper MacLeod, Solicitors

8 November 2013

Introduction

[1] In this action the pursuer seeks an accounting from the defenders in respect of the sale of a 15% shareholding in a limited company, Vigilant Security (Scotland) Limited ("Vigilant"). He avers that when the defenders sold those shares they held them as trustees for him. Alternatively, he seeks damages for breach by the defenders of an agreement to transfer those shares to him. The matter came before me for a procedure roll hearing. Mr Thomson moved the court to sustain each defender's preliminary plea to the relevancy and specification of the pursuer's averments and to dismiss the action. Mr McColl submitted that I should allow a proof before answer.

[2] At the outset of his reply to Mr Thomson's submissions Mr McColl tendered a short Minute of Amendment (no. 19 of process) which added to the averments in article 6 of condescendence by inserting the sentence:

"The pursuer understood himself from May 2004 onwards to be a shareholder in Vigilant.";

and by adding after the existing averment to the effect that:

"Vigilant and the defenders represented the pursuer as a shareholder in Vigilant in marketing their services to third parties"

the following averments:

"They did so from the time the pursuer commenced employment with Vigilant. The pursuer was aware that the defenders and Vigilant were making such representations. The representations were consistent with his understanding of the position (which was that he was a shareholder in Vigilant)".

Mr Thomson did not oppose amendment of the record in terms of the Minute. I allowed the amendment, reserving all questions of expenses relating to it.

The pursuer's averments
[3] The pursuer avers that he and the defenders became friends when they were in the same army regiment. When the defenders left the army they worked in the security industry. In 1994 the first defender recruited the pursuer to work for Profile Security Services Limited. In 2000 Vigilant was incorporated. The defenders were the whole shareholders of Vigilant and the first defender was its controlling mind. In about May 2003 the first defender offered the pursuer the post of Operations Director with Vigilant. The offer was confirmed by letter dated 16 May 2003 on Vigilant headed notepaper. The letter went on to state: "In addition, on joining, 15% of the equity in Vigilant will be made over to you." The pursuer avers that in about May 2004 he took up that offer. He avers that from that date onwards he understood he was a shareholder in Vigilant, that the defenders and Vigilant treated him as if he were, and that they held him out to third parties as being a shareholder. Article 7 of condescendence is in the following terms:

"In early 2006 the pursuer and the defenders met at the first defender's home. The first defender informed the pursuer and the second defender that an offer had been made by Croma Group plc ("Croma") to buy Vigilant. Croma had offered to buy the issued share capital of Vigilant. The first defender asked that he, the pursuer and the second defender vote on the proposal, in their capacities as owners of Vigilant. In making this request (from which the second defender did not demur), the first defender acknowledged that the pursuer (as a person for whom 15% of the shares in Vigilant were held in trust) properly fell to be treated as a shareholder in Vigilant. The second defender, in not taking any exception to the pursuer's right to vote, also acknowledged that the pursuer properly fell to be treated as a shareholder in Vigilant. A vote took place; each of the pursuer and the first and second defenders voted in favour of the proposed purchase by Croma..."

[4] Vigilant was acquired by Croma. The purchase price was paid to the defenders in two tranches, one in about April 2006 and the second in about April 2007. The pursuer continued to work as Operations Director for Vigilant until about October 2011 when he was informed by the first defender that he was to be made redundant. It was only after that date that he discovered that he had in fact never become a shareholder in Vigilant.

[5] The pursuer's primary case is that from May 2004 the defenders held 15% of the shares in Vigilant in trust for him; and that when those shares were sold the proceeds of their sale were also held in trust for him. The defenders were obliged to account to him for those proceeds.

[6] His alternative case is that in failing to transfer the shares to him the defenders were in breach of contract. He is entitled to reparation from them for that breach of contract. For a substantial period after the date of that breach he had been unaware that a breach had occurred. He had been induced, by the defenders' actions and statements, to believe that he had in fact been made a shareholder in Vigilant. He had understood that to be the position from May 2004. He had also understood that to be the position at the meeting in early 2006. He had remained under that error until at least October 2011. The period he remained under that error fell to be disregarded for the purposes of computation of the prescriptive period (Prescription and Limitation (Scotland) Act 1973, s. 6(4)(a)(ii)). If that period was disregarded, as it ought to be, the defenders' obligation to make reparation to the pursuer for breach of contract had not prescribed.

The defenders' submissions
[7] Mr Thomson submitted that the pursuer's averments relating to the creation of a trust were irrelevant and lacking in specification. The pursuer did not aver that an express trust had been constituted. He did not aver that a constructive trust arose by operation of law. He did not aver that at the time the obligation was entered into, or at the time it became enforceable, the defenders stood in a fiduciary relationship to the pursuer. He averred that there had been a contractual obligation to transfer the shares, but his averments did not disclose a relevant basis for maintaining that the defenders had held those shares in trust. Reference was made to Gloag and Henderson, Introduction to the Law of Scotland (13^th ed), paras. 3.03 and 41.06; Wilson and Duncan, Trusts, Trustees and Executors (2^nd ed), paras. 6.59 to 6.77; Stevenson v Wilson 1907 SC 445; National Bank of Scotland v Adamson 1932 SLT 492. The facts of Stevenson v Wilson had been very special and unusual. The decision in that case did not support the proposition that in the circumstances averred by the pursuer the defenders had held the shares in trust for him.

[8] The pursuer's alternative case - based on breach of contract - was irrelevant because it was plain from the pursuer's averments that any obligation on the defenders to make reparation for that breach must have prescribed before the action was raised: Prescription and Limitation (Scotland) 1973, s. 6 and sched. 1, para. 1(g). Any obligation to transfer the shares became enforceable in May 2004, and the defenders would have been in breach of that obligation from that date. The action had not been raised until early 2012. The pursuer had sought to rely upon the exception in s. 6(4)(a)(ii) of the Act. He averred that he had erroneously believed that he was a shareholder and that that error had been induced by the defenders' representations; that because of that error he had refrained from making a claim; and, accordingly, that the whole of the period that he was under such error fell to be disregarded when computing the prescriptive period. The problem for the pursuer was that he did not specify when that period began or when it ended. Mr Thomson conceded that the averments in article 7 of condescendence could provide a basis for arguing that the relevant period began in early 2006: he argued, however, that the period must have come to an end shortly thereafter when the pursuer became aware that the entire shareholding in Vigilant had been sold. Mr Thomson referred me to Johnston, Prescription and Limitation (2^nd ed.), paras. 6.104, 6.108, 6.109, 6.111, 6.114, 6.132-3; and to Adams v Thorntons 2005 1 SC 30 at para. 73.

The pursuer's submissions
[9] Mr McColl confirmed that he did not suggest that an express trust had been created by the defenders. The submission was that the pursuer had made relevant averments that a constructive trust had arisen by operation of law. The contention was that at the time the obligation to transfer shares to the pursuer had become enforceable the defenders had stood in a fiduciary relationship with the pursuer. In failing to transfer the shares they had acted in breach of their fiduciary duties to him. In such circumstances they had held the shares which they ought to have transferred as constructive trustees for the pursuer. Reference was made to Mackenzie Stuart, Trusts, pages 37-38; Wilson and Duncan, paras. 6-59 to 6-61; Sharp v Thomson 1995 SC 455, per Lord President Hope at page 479C-481B; Stevenson v Wilson; National Bank of Scotland v Adamson; Stair Encyclopaedia of the Laws of Scotland, Vol. 24 "Trusts" paras. 30, 170-172; Gloag and Henderson, para. 3-03; Jopp v Shiells (1904) 6F 1028; Black v Brown 1982 SLT (Sh Ct) 50 at pages 53-55. Mr McColl submitted that the defenders were in the position of fiduciaries at the material time. The agreement with the pursuer ought not to be treated as if it were an ordinary arm's length contract because the pursuer averred facts and circumstances from which it could be inferred that a fiduciary relationship involving mutual trust and confidence had arisen. The relevant facts were that there had been friendship for many years between the pursuer and the defenders; because of that the pursuer trusted the defenders; and that the defenders were directors of, and the shareholders of, Vigilant, the company which was to employ the pursuer. Three friends agreed to enter into an on-going relationship which, in some ways, was akin to the relationship which co-partners would have had. Stevenson v Wilson was the case which was most closely analogous on its facts to the present case. It was relied upon in support of the argument that a constructive trust could be created in the circumstances averred by the pursuer.

[10] Mr McColl submitted that enquiry was also apposite in respect of the alternative case. The pursuer averred that his understanding between about May 2004 and about October 2011 was that 15% of the shares in Vigilant had been transferred to him at about the time he took up his appointment; and that that erroneous understanding was induced and sustained by the representations and actings of the defenders which the pursuer described. In any event, Mr Thomson accepted that the averments in article 7 of condescendence provided a basis for arguing that from early 2006 the pursuer believed he had a 15% shareholding, and that that error was induced by the defenders. The pursuer had, of course, subsequently been aware of the sale of all the shares in Vigilant to a third party in 2006/7; naturally, he had assumed he would receive that part of the sale proceeds which was attributable to the sale of his shares. Whether the pursuer established that the error was induced in May 2004 or in early 2006, he offered to prove that the error had not been dispelled until at least October 2011. That meant that there was a period of over seven years which fell to be disregarded in the computation of the prescriptive period if the error was induced in May 2004; or a period of over five years which fell to be disregarded for such purposes if the error was not induced until early 2006. On either basis, the present action had been raised within the prescriptive period.

[11] Both the primary case and the alternative case were suitable for enquiry. It could not be said that the pursuer must necessarily fail even if all the pursuer's averments are established: Jamieson v Jamieson 1952 SC (HL) 44, per Lord Normand at p. 50.

Discussion
Constructive trust
[12] The pursuer's primary case is perilled on his establishing that a constructive trust arose by operation of law when the defenders' obligation under the agreement to transfer a 15% shareholding became enforceable.

[13] Mr McColl accepted that the punctum temporis was May 2004. As at that date, on the pursuer's averments, there was a binding contractual agreement between the pursuer on the one hand and the defenders on the other hand in terms of which the pursuer agreed to take up a position with Vigilant and the defenders agreed to make over 15% of the equity in the company on his doing so. If a constructive trust was created at that time, the shares were trust assets when they were sold. The defenders were liable to account to the pursuer for the proceeds of sale.

[14] It is plain on the authorities that in the case of an ordinary arm's length agreement to transfer property the person contractually obliged to transfer it does not hold the property as a constructive trustee for the other contracting party. Mr McColl contended that the circumstances here were special; that at the material time the defenders stood in a fiduciary relationship with the pursuer; and that in failing to transfer the shares to the pursuer they had derived personal benefit from their fiduciary positions, to the pursuer's detriment.

[15] In Sharp v Thomson Lord President Hope observed at pp. 479C-481B:

"Constructive trust

It was submitted that ... the flat was ... outwith the scope of the floating charge by virtue of its being impressed with a constructive trust in favour of the first defenders. It was accepted, for the purposes of this branch of the argument, that the feudal title to the flat remained with Albyn, but the effect of the delivery of the disposition to the purchaser and the receipt of the purchase price was said to give rise to a fiduciary duty upon Albyn to hold the feudal title for behoof of the purchaser. Reference was made to Stevenson v Wilson in order to show that it was possible for a contract of sale to give rise to a situation where there was a constructive trust. Thus, if an asset had been sold and transferred to the purchaser but further steps were needed for the purchaser to complete title to it, the holder of the title was to be regarded as holding the property subject to a constructive trust in favour of the purchaser until the transfer of title to the purchaser had been achieved. Counsel recognised that this was a broad proposition which did not depend upon circumstances which were special to this case and that, if the proposition was sound, its result would have to be that the asset was to be regarded as held by the vendor in trust for all purposes in the event of the vendor's insolvency.

In Gibson v Hunter Home Designs Ltd it was held that entry to the subjects and payment of the price, referable to the terms of missives, did not instruct the existence of a trust pending delivery of the disposition to the purchaser. That decision, which no one suggested was unsound in any respect, was based on the observations in Heritable Reversionary Co Ltd v Millar by Lord Herschell at p. 44 and Lord Watson at p. 51 that a mere personal contract, or personal obligation, to convey heritable estate did not confer on the purchaser either the character or rights of a trust beneficiary, and on observations to the same effect in Bank of Scotland v Liquidators of Hutchison Main & Co Ltd by Lord Kinnear at p. 7 and Lord Shaw of Dunfermline at p. 17 that a contractual obligation with regard to property is not of itself the foundation of a trust which attaches to that property and excludes it from distribution in the event of insolvency. Senior counsel for the second defenders submitted however that the decision in Gibson, and all these dicta, were concerned only with stage (1) of the Gibson analysis. He maintained that nothing was said in any of the cases which excluded the possibility of a constructive trust arising at stage (2). There was no reason in principle, once the vendor had implemented his part of the contract by the irrevocable act of delivery to the purchaser, why he should not be regarded as holding his title to the property in trust in the meantime. He accepted that this argument would not prevail in a question with an adjudger who obtained a prior infeftment, standing the decision in Mitchell v Ferguson. But he submitted that, as no argument based on constructive trust was advanced there and the doctrine had been developed subsequently, the decision in that case might be open to reconsideration on this point.

A constructive trust is created, as Wilson and Duncan, Trusts, Trustees and Executors point out at p. 77, by circumstances. The mere fact that a person has come under a contractual obligation to convey property to another is not, of itself, sufficient to create a trust over it. What are required are other circumstances, which are not referable to the parties' contract, sufficient to create fiduciary duties in favour of the party to whom the property is to be conveyed. The position is different in England where, as can be seen from various dicta mentioned by Russell J in Musselwhite v C H Musselwhite & Son Ltd at pp. 985 - 986, the vendor becomes, from the moment the contract is entered into, a trustee of the property for the purchaser. That doctrine is not part of Scots law, as is plain from the decision in Gibson. But a constructive trust was held to exist in Stevenson v Wilson, where shares in a company had been sold to a purchaser and the purchaser had paid the price and received a transfer of the shares from the vendor, but the directors of the company had refused to register the purchaser as proprietor of the shares or to pay him the dividends accruing on those shares. The question is whether an analogy can be drawn from that case which applies to the situation which arises where the disposition of subjects has been delivered to the purchaser but he has not yet obtained a title to, and thus a real right in, the property.

In National Bank of Scotland Glasgow Nominees Ltd v Adamson at p. 495 Lord Moncrieff rejected an argument based on Stevenson v Wilson that the debtor by contracting to sell shares had become a trustee for the purchasers with a duty thereafter to hold the shares for their sole interest and behoof. He acknowledged that a seller of shares may, in very special circumstances, by the operation of the sale itself find that he has incurred a duty of quasi-trust administration for behoof of the purchaser. But he said that any such duty would necessarily arise as a consequence, and not as a medium, of a transfer of the property rights in the shares. Here again a contrast is drawn between the personal obligations of the seller which are referable to the contract and circumstances which arise from the operation of the contract and have not been provided for by it. It is the circumstances, not the personal obligations, which can be relied upon as having created, by the operation of a constructive trust, fiduciary duties in favour of the purchaser. It may not be helpful to say that a constructive trust can arise only in very special circumstances, but the use of that phrase is a reminder of the essential point that it is the circumstances and not the obligations under the contract which must be relied upon to show that there is a constructive trust.

The circumstances in Stevenson v Wilson were undoubtedly special, in that a situation arose which the parties had not provided for in their contract by reason of which, after it had been performed on both sides, it proved to be impossible to complete the transaction by registering the transfer with the company. ...The sole reason for the decision seems to be, as stated by Lord President Dunedin at p. 456, the impossible position resulting from the vendor's attitude by which he was insisting on keeping the money and yet not putting himself to the trouble of giving over the dividends. The circumstances were special to that case, not circumstances which arise in transactions for the purchase and sale of shares generally. In my opinion the case cannot be regarded as authority for the view that a constructive trust arises in all cases of sale following delivery or constructive delivery of the property to the purchaser, pending the completion of the steps which are required to transfer the real right. Where, as in this case, the transaction has proceeded upon the ordinary course provided for by the contract, the matter rests throughout entirely upon personal obligation and there is no room for holding that there is, by implication, a constructive trust."

[16] In the present case nothing was done by the defenders to implement the obligation to transfer the shares. There was no execution of a transfer, no delivery, and no registration.

[17] The pursuer does not aver in terms that there was a fiduciary relationship between him and the defenders. He does not aver the nature and attributes of any such relationship. He does not aver specifically that a constructive trust was created, or how it came to be created (nor, indeed, does he aver specifically the date when such a trust was created) (cf. National Bank of Scotland Glasgow Nominees Ltd. v Adamson, per Lord Moncrieff at p. 495).

[18] In my opinion the pursuer ought to have made such averments. In their absence I agree with Mr Thomson that the pursuer's averments on this aspect of the case are irrelevant and lacking in specification.

[19] However, the pursuer's problems are not restricted to the matters just mentioned. In my view his averments do not provide an adequate foundation for maintaining that at the material time there was a fiduciary relationship between the defenders and the pursuer. They do not afford a sufficient basis for concluding that a constructive trust was created. In essence, all that the pursuer avers is that the parties had become friends when they served in the same regiment and had remained friends after their army service; that the defenders were directors of, and the shareholders in, Vigilant at the relevant time; and that he trusted them to fulfil their part of the bargain.

[20] The present case appears to me to be readily distinguishable from Stevenson v Wilson. There, the circumstances were very special. The shares had been transferred and only the formal title remained in the defender's name. The defender was content to retain the purchase price but was not prepared to receive the dividends from the company and pay them to the purchaser (notwithstanding that the defender was the only person to whom the company would pay the dividends). Here, unlike the position in Stevenson, the only obligation which the defenders had was personal and contractual. Adopting Lord President Hope's terminology in Sharp v Thomson, the defenders' obligation was referable to the agreement rather than to circumstances which arose from the operation of the agreement (but which had not been provided for by it) as in Stevenson. Using the language of Lord Moncrieff in National Bank of Scotland Glasgow Nominees Ltd v Adamson, there was no transfer of property rights in the shares which had as its consequence the creation of a trust: upholding a trust here would mean that the trust had, in effect, been the medium of transfer of the beneficial interest in the shares.

Reparation for breach of contract
[21] The Prescription and Limitation (Scotland) Act 1973 provides:

"6. Extinction of obligations by prescriptive periods of five years. S

(1) If, after the appropriate date, an obligation to which this section applies has subsisted for a continuous period of five years-

....

then as from the expiration of that period the obligation shall be extinguished:

....

(2) Schedule 1 to this Act shall have effect for defining the obligations to which this section applies.

(3) In subsection (1) above the reference to the appropriate date ... is a reference to the date when the obligation became enforceable.

(4) In the computation of a prescriptive period in relation to any obligation for the purposes of this section-

(a) any period during which by reason of-

...

(ii) error induced by words or conduct of the debtor or any person acting on his behalf,

the creditor was induced to refrain from making a relevant claim in relation to the obligation,

...

shall not be reckoned as, or as part of, the prescriptive period:

Provided that any period such as is mentioned in paragraph (a) of this subsection shall not include any time occurring after the creditor could with reasonable diligence have discovered the fraud or error, as the case may be, referred to in that paragraph.

(5) Any period such as is mentioned in paragraph (a) or (b) of subsection (4) of this section shall not be regarded as separating the time immediately before it from the time immediately after it.

...

11. Obligations to make reparation.S

(1) Subject to subsections (2) and (3) below, any obligation (whether arising from any enactment, or from any rule of law or from, or by reason of any breach of, a contract or promise) to make reparation for loss, injury or damage caused by an act, neglect or default shall be regarded for the purposes of section 6 of this Act as having become enforceable on the date when the loss, injury or damage occurred.

...

SCHEDULE 1S

Obligations Affected by Prescriptive Periods of Five Years under Section 6

1. Subject to paragraph 2 below, section 6 of this Act applies-

...

(g) to any obligation arising from, or by reason of any breach of, a contract or promise, not being an obligation falling within any other provision of this paragraph."

[22] Both counsel approached matters on the basis that the obligation to make reparation founded upon by the pursuer became enforceable in May 2004, and that the proviso to s. 6(4)(ii) did not apply.

[23] In my opinion the pursuer is entitled to a proof before answer on this branch of the case. His averments anent breach of contract, and anent error having been induced by the defenders, are suitable for enquiry.

[24] Those averments, as amended, specify that the induced error commenced about the time he took up employment with Vigilant in May 2004 and persisted until about October 2011. On that basis only a few months of the five year prescriptive period would have run at the time the action was raised. Even if the error had not been induced until the meeting in early 2006, the period between then and October 2011 would not be reckoned as part of the prescriptive period: the upshot on that scenario would be that only just over two years of the prescriptive period had run when the action was raised. The pursuer's averments that in 2006/2007 all shares in Vigilant were sold to Croma are not inconsistent with his averments that he continued to believe until October 2011 that he had become a shareholder in Vigilant in May 2004. His position is that he did not know in 2006/2007 that he was not in fact a shareholder. He did not know then that the defenders had failed to transfer the shares to him and were in breach of contract. He did not discover that until October 2011. Until then he had proceeded on the basis that all of the shares in Vigilant - including his - were sold to Croma.

Conclusions and disposal
[25] The pursuer's trust case is irrelevant and lacking in specification. In my opinion, that case must necessarily fail even if all the pursuer's averments are established. On the other hand, his breach of contract case is suitable for enquiry.

[26] Since an enquiry is going to be necessary, I have considered whether I should simply allow a proof before answer on all matters (on the trust case as well as on the breach of contract case). I have concluded that, standing my decision on the trust aspect of the case, it would be wrong to do so. It would not be just in the present case to deviate, on grounds of mere pragmatism, from the course which I believe to be correct.

[27] I propose to sustain each defender's first plea-in-law to the extent of excluding from probation the averments anent trust, and quoad ultra to allow a proof before answer. I shall put the case out by order to give parties an opportunity to identify the averments which ought to be excluded from probation, and to make any further submissions they consider appropriate in relation to the precise terms of the interlocutor which I ought to pronounce to give effect to my decision.