The Supreme Court recently unanimously overturned the decision of the Inner House of the Court of Session, the highest civil court in Scotland, in Inveresk plc v Tullis Russell Papermakers Limited, which reviewed the Scots law of retention.
Retention is an exception to the general rule that a person cannot avoid making a payment on the basis that they are owed an, as yet, undetermined amount of money from the party requesting payment. Retention only applies where the two obligations are mutual obligations and are, therefore, regarded as counterparts of one another.
The decision in this case confirms that if an individual contract sufficiently indicates that it is part of a larger transaction then the obligations contained within each document should be recognised as mutual obligations. It is advisable for transactional documentation to expressly state that each document forms part of a larger transaction for the purpose of retention and ensure that all "entire agreement" clauses within such documentation indicate the wider scope of the transaction, if that is the intention.
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Tullis Russell ("TR") entered into an acquisition agreement to acquire a paper brand from Inveresk. An initial purchase price was paid and provision was made for additional consideration to be paid if TR achieved a minimum threshold sale level in the year following the purchase. Also, Inveresk entered into a services agreement to provide certain services during an agreed handover period.
The relationship between the parties deteriorated: TR commenced an action against Inveresk for damages for breaching its obligations under the acquisition agreement and the services agreement leading to damage to the goodwill of the business and reduced overall sales. Inveresk commenced an action seeking payment of additional consideration. TR contended that the payment was not due and that even if it was they had the right to retain the sum sought pending resolution of their action for damages.
Each action arose out of the alternative contracts: the acquisition agreement and the services agreement. The Court of Session had held that a right of retention could not exist as the obligations could not be considered mutual unless they were contained within the same contract. The fact that the obligations were contained within separate documents was considered fatal to the case.
On appeal the Supreme Court found that the unity of the underlying transaction is of central importance when considering whether or not obligations are mutual. To consider each agreement within the transaction as a set of sub-units or compartments was unrealistic and inequitable and did not give regard to the greater commercial purpose of the transaction. Parties should not be obliged to contain an entire transaction within one document when multiple documents would create a clearer understanding.
It was held that TR is entitled to retain any additional consideration that becomes due pending the outcome of its claims for damages.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
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The original publication date for this article was 22/06/2010.
