Supreme Court and Scots private law – at last

The Supreme Court got some relief from its customary diet of human rights with its first real case on a Scots private law topic, Inveresk plc v Tullis Russell Papermakers Ltd [2010] UKSC 19, issued on 5 May 2010.

The case was about the right of retention in contract.  In June 2005 Inveresk sold to Tullis Russell property rights in the Gemini brand of paper, along with a transfer of customer information and connections.  Part of the price was a royalty, known as the “Additional Consideration”, on sales of the product made by Tullis Russell between November 2005 and November 2006.  A further agreement executed at the same time in June 2005 provided that Inveresk would continue to manufacture, sell and distribute Gemini paper until November 2005 as the product was integrated into Tullis Russell processes.  Inveresk sought payment of the Additional Consideration; Tullis Russell refused that, or retained it, on the basis that Inveresk were in breach of the second agreement by failing to produce goods of the quality needed to maintain the value of the assets during the period of the agreement.  Tullis Russell had raised a separate action for damages for breach of contract In respect of that alleged breach; as the Supreme Court published its judgment, Lord Drummond Young was settling down for the second part of a lengthy proof in that Tullis Russell action.

The key question was therefore whether Tullis could retain payment due under one contract in respect of the creditor’s breach of another contract.  Reversing the Court of Session, the Supreme Court held that such retention is possible where the two contracts are really part of one transaction – which, it was held, was the situation in this case.  Mutuality, or reciprocity, could therefore apply across the contracts: Claddagh Steamship Co Ltd v Steven & Co 1919 SC (HL) 132 applied. 

Lord Hope offers some further general remarks on retention:  the analysis of mutuality should start from the basis that all the obligations in the transaction are mutual unless there is clear indication to the contrary; the breach giving rise to the right to retain should be material, although not necessarily of the materiality needed to justify rescission; and a contract may operate in stages, with mutuality only applying within each stage.

Lord Rodger follows Lord Hope’s analysis but brings out more fully a distinction between a right of retention, arising where a party says goods supplied to it are materially defective, requiring the supplier to prove the goods are conform to contract, and the court allowing a party to retain a payment admittedly due until some unliquidated claim (e.g. to damages) against the other party is resolved, so that, if successful, the now liquidated damages can be set off against the liquid payment due in the other direction.  It is in this latter case, says Lord Rodger, that the court exercises equitable powers of control.  He gives a very full review of the authorities in order to make out this distinction; and from this commentator’s perspective it is a very useful explanation of what had previously been the rather mystifying role of equity in retention.  The general rule is that payment of a liquid debt is not to be postponed simply because the debtor has an illiquid claim against the creditor, but it is subject to equitable exceptions, of which this case provided an example.

Worryingly, Lords Saville, Collins and Clarke all think the result would have been the same under the English law of set-off.