Inveresk plc v Tullis Russell Papermakers Limited (Scotland)

Where a commercial agreement prescribes expert determination to establish a payment, the mechanism must be construed objectively and applied to achieve its commercial purpose. Once a party has elected to invoke a broadly framed audit, it cannot withdraw that election merely to accept an earlier draft figure.

Under Scots law, contractual mutuality depends on reciprocal obligations, not the number of documents containing them. Agreements forming one transaction must be considered as a whole. Their obligations are treated as counterparts unless the transaction indicates otherwise. A party may therefore withhold payment against a material breach of reciprocal obligations contained in a related agreement.

Separately, a court has an equitable power, exercisable exceptionally, to postpone payment of a liquid debt while a closely connected illiquid claim is made liquid for compensation.

Inveresk sold intellectual property and related assets to Tullis Russell under an Asset Purchase Agreement and agreed, under a simultaneous Services Agreement, to preserve the assets’ value while manufacture and distribution were transferred. Inveresk claimed £909,395 as Additional Consideration. Tullis Russell disputed that the contractual tonnage-audit procedure had been completed and sought to withhold payment pending determination of a substantially larger damages claim for breaches of both agreements.

Lord Glennie granted decree for payment: [2008] CSOH 124. The Inner House refused Tullis Russell’s reclaiming motion: [2009] CSIH 56; 2009 SC 663. The Supreme Court considered whether the Additional Consideration had become payable and whether obligations contained in the two agreements were sufficiently reciprocal to support retention.

1. Appeal allowed unanimously. Lord Hope held that Inveresk’s claim for Additional Consideration remained unenforceable because the contractual procedure for establishing the tonnage and payment date had not been completed. Having elected to require a Tonnage Audit after adjustments could not be agreed, Inveresk could not withdraw that election and accept the draft accounts instead. Properly construed, the accountants were to ascertain the accurate tonnage from all relevant orders and invoices. Their task was not confined to checking the figures or adjustments previously advanced by the parties. The dispute about own-label products had first to be resolved by the commercial judge.
2. Lord Hope held that mutuality depends on the relationship between the obligations, rather than their inclusion in one contractual document. Separate agreements may form one transaction. The relevant question is whether their obligations are truly counterparts. The transaction’s unity should be respected, and its obligations should be regarded as counterparts unless a clear indication points the other way. A staged transaction may justify treating particular obligations separately, but the analysis must preserve its overall purpose.
3. The Asset Purchase Agreement and Services Agreement were expressly linked and formed one transaction. The services were intended to preserve the value of the acquired intellectual property. Tullis Russell’s obligation to pay the Initial and Additional Consideration was therefore reciprocal to Inveresk’s obligations under both agreements. The alleged breaches were material. Tullis Russell could withhold any Additional Consideration pending resolution of its damages claims.
4. Lord Rodger agreed with that reasoning. He further explained, obiter, that Scots law recognises a separate equitable form of retention related to compensation. The general rule remains that an illiquid claim does not postpone payment of a liquid debt. Exceptionally, however, a court may permit postponement where justice and equity require time for the counterclaim to become liquid. Relevant circumstances include the claims’ connection, the counterclaim’s apparent substance, its procedural progress and the likely delay. This is a discretionary judicial remedy, not an antecedent right.
5. Lord Collins added that English equitable set-off reaches a similar result where claim and cross-claim are inseparably connected, including across different contracts. The action was remitted to the commercial judge for further procedure.

1. United Kingdom Supreme Court: Allowed the appeal, recalled the Extra Division’s interlocutor, set aside Lord Glennie’s interlocutor and remitted the action to the commercial judge: [2010] UKSC 19.
2. Inner House of the Court of Session: Refused Tullis Russell’s reclaiming motion and adhered to Lord Glennie’s interlocutor: [2009] CSIH 56; 2009 SC 663.
3. Commercial Court, Court of Session: Lord Glennie granted decree for £909,395 after holding that no Tonnage Audit was required and that the plea of retention was irrelevant: [2008] CSOH 124.
4. Earlier proceedings: Lord Drummond Young had granted decree after debate: [2008] CSOH 26. The Inner House recalled that interlocutor, permitted amendment to introduce retention and remitted for a fresh debate.