In the recent Scottish case of Inveresk plc-v-Tullis Russell Papermakers Ltd [2010] UKSC 19, the Supreme Court considered the remedy of retention and its application to separate but related contracts.
Background
In June 2005, Tullis Russell entered into an Asset Purchase Agreement ("APA") and separate related Services Agreement with Inveresk for the acquisition of the property rights to the Gemini paper brand. The transaction provided for various payments to be made to Inveresk. In terms of the asset purchase agreement, Tullis Russell were to pay Inveresk an "initial consideration" of £5 million, which they duly did.
However, a dispute arose when Tullis Russell declined to pay the "additional consideration" arguing (1) no sum was payable until the procedures for determining the sum due as set out in the Schedule to the APA had been followed; and (2) Inveresk had breached its obligations under both agreements and consequently Tullis Russell were entitled to retain any sums that may be due to Inveresk, pending determination of their claim for damages against them.
Right of Retention
The general rule is that payment of a debt which is found to be due and payable cannot be withheld on a plea of retention in respect of a claim which is still "illiquid" (e.g. an unresolved damages claim). However, there is an exception to that rule, where the illiquid claim arises directly out of the same contract.
Inveresk argued that retention was not available to Tullis Russell as their respective obligations did not arise under a single contract. This argument succeeded in the Court of Session, however, Tullis Russell appealed the decision.
Decision
The Supreme Court overturned the decision of that lower court. It decided that a contractual right of retention can arise notwithstanding the fact the relevant obligations are not recorded in a single agreement. The agreements were expressly linked. There was a clause in both the APA and the Services Agreement recording the parties' agreement that both documents formed a single indivisible transaction. Mutuality or reciprocity could apply across the contracts. Accordingly, Tullis Russell were entitled to withhold payment of any sums due to Inveresk as "additional consideration", pending determination of their claim for damages against them.
This is a very interesting decision, and there will no doubt be further cases developing the "equitable exceptions" to the usual retention rule. Watch this space.
Disclaimer
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