Neilson v Stewart

Key legal principles and decision:

The House of Lords held that the typewritten document dated 20 October 1985 constituted a single, enforceable agreement for the sale of the pursuer's 50% shareholding and the attendant loan-back arrangement. The clause providing that repayment after one year would be "negotiated to our mutual agreement and satisfaction" did not render the whole contract void for uncertainty because repayment was fixed as deferred for one year and, in the absence of later agreement, the law supplies the consequences of a loan (repayment on demand and the legal rate of interest). The provisions about interest and security were not essential to the formation of the contract and could be supplied by legal implication or severed if ancillary and for the defendant's exclusive benefit.

Background and facts:

The pursuer (Neilson), a 50% shareholder and director of Jatako Ltd (owner/operator of the discotheque "Maxims"), alleged a verbal and later signed written agreement with the defender (Stewart) under which the defender was to buy the pursuer's shares for £50,000 and assume half of the company's liabilities; the pursuer would lend the purchase price back to the directors (including Mr Reilly). The typewritten document of 20 October 1985, prepared by the pursuer and signed by the parties, included the phrase that repayment after one year "shall be negotiated to our mutual agreement and satisfaction."

Procedural posture:

• The sheriff initially repelled the defender's pleas and limited proof to damages (30 November 1988).
• The sheriff principal allowed the defender's appeal and dismissed the action (13 January 1989).
• The First Division reversed the sheriff principal, recalled that interlocutor and affirmed the sheriff (1 December 1989).
• The defender appealed to the House of Lords; judgment was delivered 21 March 1991.

Nature of the claim and issues:

• Claim: damages of £50,000 for breach of contract (failure to transfer shares / complete transaction).
• Main issues: whether the document was a single or separable agreement; whether the clause deferring negotiation after one year made the whole agreement too uncertain to be enforceable; and whether any part was illegal under Companies Act 1985 (secs. 151, 152, 330).

Court's reasoning:

The House of Lords construed the document as a single agreement in which the loan-back arrangements were integrally connected to the share sale. However, the clause deferring negotiation after one year was interpreted as postponing determination of post-year repayment terms rather than making repayment itself indeterminate; repayment was fixed as deferred for one year and, absent later agreement, repayable on demand at that point. Interest and security were not essential terms preventing formation: interest may be implied by law and security is not essential to a loan. The court also preferred a construction avoiding illegality, holding the document reasonably susceptible to being a loan to the company (secured on company assets) rather than an unlawful personal loan secured on company property; and, in any event, ancillary illegal provisions for the defendant's sole benefit could be severed. Applying these principles the House dismissed the appeal and affirmed that the written agreement was enforceable.

Appeal dismissed. The House of Lords held that the 20 October 1985 document embodied a single, enforceable agreement for the sale of the shares and related loan-back arrangement; the clause deferring negotiation after one year did not render the contract void for uncertainty because repayment was deferred for one year and, if no later agreement were reached, legal rules (repayment on demand and statutory/judicial interest) would apply. Any ancillary provision susceptible of illegality could be severed or the document construed to avoid illegality.

Sheriff (Dundee): interlocutor of 30 November 1988 repelled defences except as to damages. Sheriff Principal: allowed defender's appeal and dismissed action (13 January 1989). First Division (Scotland): allowed pursuer's appeal, recalled interlocutor of sheriff principal and affirmed sheriff (1 December 1989). House of Lords: appeal heard 21 February 1991; judgment delivered 21 March 1991 (Neilson v Stewart [1991] SC(HL) 22 / [1991] UKHL 13).