England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT
His Honour Judge Richard Havery QC
[2004] EWHC 1017 (TCC)

		Royal Courts of Justice Strand, London, WC2A 2LL
		21 December 2004

Lord Justice Clarke:

Introduction

1. The dispute between the parties in this litigation and in this appeal arises out of what is known as the Dudley Hospitals PFI project. The appellant, Sir Robert McAlpine Limited ("SRM"), was the main contractor under a contract with Summit Healthcare (Dudley) Limited ("Summit") which provided for considerable construction and refurbishment work to existing hospital buildings and included the construction of new facilities. A significant part of the proposed works was work of a mechanical and engineering ("M&E") nature. The total value of the M&E works was about £34.25 million. It is common ground that the respondent, Emcor Drake & Skull Limited ("EDS"), had contracted with SRM to carry out the M&E works. SRM's case is that EDS agreed to carry out the whole of the M&E works for a price of £34.25 million, whereas it is the case for EDS that it agreed to carry out work only up to a maximum of £14 million.
2. This is an appeal from an order made by His Honour Judge Havery QC on 7 May 2004 determining a number of preliminary issues between the parties. The principal issue determined was which of those cases was correct. After a trial which lasted some seven days, during which the judge heard oral evidence for both parties, he gave a detailed judgment in which he determined that issue in favour of EDS. SRM now appeals against that determination pursuant to permission which I granted on 18 June.

The background

3. SRM and EDS were in discussion for the better part of a year before 13 June 2001 when the price of £34.25 million was agreed in principle between them for the M&E work. SRM had indicated to EDS six months earlier that it was likely to be the preferred bidder. It was intended throughout that the parties would enter into a formal sub-contract, although in the event they never did so. Notwithstanding the absence of such a contract, work began on 4 July 2001. It did so pursuant to an order issued by SRM on 3 July. Work continued until 18 December 2002 when SRM purported to accept what it said was a repudiatory breach by EDS of its contract to perform the whole of the M&E work. EDS left the site on the same day. During the period in which work continued there were a series of orders similar to that of 3 July 2003.

The appeal

4. The question in this appeal is whether the judge was correct to reject SRM's case that EDS was contractually bound to carry out the whole of the M&E works for a price of £34.25 million. The judge answered a number of preliminary questions. So far as relevant to the appeal the questions and answers were these:

"a Was the Claimant under an obligation to complete the whole of the mechanical and electrical works on the Dudley Hospitals PFI project?

No.

b …

c If not,

(1) What work was the claimant obliged to carry out?

To carry out design, procurement and site works for the M&E works for the project consistently with the Construction Contract but limited in value to £14 million.

(2) What were the terms and conditions concerning the quality of the work that the Claimant carried out?

Implied terms that the work would be carried out in a good and workmanlike manner.

(3) What were the payment terms or on what basis is the Claimant to be paid for the work it has done?

EDS were entitled to be paid a reasonable sum for the works carried out, up to a limit of £14 million."

5. SRM says that the judge should have answered the first question in the affirmative and that he should have held that EDS was under an obligation to complete the whole of the M&E works pursuant to the terms of a letter of 20 August 2001 sent by EDS to SRM. It invites the court, having so held, to remit the question whether EDS was in repudiatory breach of contract to the judge. SRM does not, however, as I understand it, challenge the answers which the judge gave to questions iii) (a), (b) and (c) above if he was right on the main point.
6. In order to determine whether the judge's conclusion on the main point was correct it is necessary to consider the exchanges between the parties in some detail. It is not however necessary to traverse the whole of the material which the judge considered. In particular it is not necessary to analyse much of the oral evidence discussed by the judge. There was a good deal of evidence before the judge as to the state of mind of the principal witnesses at various stages throughout the relevant period. That evidence seems to me to be almost entirely irrelevant to the question what, if any, contract or contracts was or were made between the parties. That depends upon what passed between the parties, not what the protagonists thought. What they thought can only be relevant if and to the extent that it helps to ascertain what passed between them. To my mind the solution to the appeal depends almost entirely upon the documents passing between the parties. The documents must of course be construed in their context and having regard to the surrounding circumstances.
7. The project agreement between Summit and the relevant hospital trust was signed on 17 May 2001 and at the same time SRM entered into a construction contract ("the main contract") with Summit to design and construct the project. Thus, as the judge observed in paragraph 5 of his judgment, at that stage SRM had committed itself without having secured a sub-contract for the M&E work. SRM had retained Hoare Lea and Partners ("HLP") to carry out design work for the M&E installations. It is not necessary to set out here the negotiations before 25 June 2001 except to note that it was always contemplated that a form or forms of sub-contract known as DOM 1 or DOM 2 would be used which would be amended in order to bring the relevant form into line with the main contract by the use of a document known as "Paper Apart 1", which would set out lists of amendments to the standard form.
8. In paragraphs 6 to 8 of his judgment the judge set out part of the evidence of Mr Michael Wallace, who was Regional Chief Quantity Surveyor of SRM, and of Mr Steven Taylor, who was Regional Director of EDS, as to what was said in a conversation during which each was using a mobile telephone on 21 June. The judge referred both to what was said and understood between them but, on the judge's findings, not everything that was said by Mr Wallace was received and understood by Mr Taylor. It was however agreed that SRM would send EDS a draft of a letter which SRM wanted EDS to sign and return. In paragraph 8 the judge set out Mr Wallace's reasons for wanting such a letter but I shall not refer to them here because the judge did not find that they were received and understood by Mr Taylor.
9. On 25 June EDS wrote to SRM in very similar terms to an earlier letter of 14 June. The letter expressed EDS' price for the works as £34,250,000. It stated that the bid was open for acceptance for a period of 30 days and was on a fixed price basis net of discounts and exclusive of VAT until 14 October 2004. Five appendices were attached, namely schedules of attendance, equipment, exclusions, technical clarifications and documentation. The offer set out a number of other details and included these paragraphs:

"Our offer currently excludes the cost associated with design. The ownership of the services design will remain with yourselves until such time as your designers, Hoare Lea & Partners, are 'passed' to ourselves, always allowing time for Hoare Lea and Drake & Scull to reach an understanding.

…

We understand the terms of our sub-contract will be a 'stepped-down' version of the Construction Contract and that the Sub-Contract details together with the Paper Apart One, if applicable, will be available for examination week commencing 25^th June 2001. We also understand that we will be given early access to your Mr. Brinley-Codd in order to expedite our understanding of the documents and the early resolution of any concerns appertaining thereto."

A striking feature of the position as at that time was that no details of a proposed sub-contract were yet available. As appears from the above quote, EDS understood that they would be available in the week beginning 25 June, although in the event they were not available during that week.

10. On the same day, 25 June, EDS received from SRM a draft of a letter which SRM had said on the telephone that it wanted EDS to sign. It ran to 16 pages. Thereafter some discussion took place between the parties as to the draft letter, which led to SRM sending a further letter to EDS on 27 June for EDS to sign on the basis that it would "accompany 'the letter'". It appears to have been drafted in order to allay some of EDS' concerns and to have been intended as a side letter. It included the statement that

"we [ie EDS] reserve our position since to-date we have not received the promised Sub-Contract although from your own information we believe that its issue is imminent. Once received we will review the document immediately and advise you of our acceptance or otherwise."

11. Representatives of the parties met on 3 July. The principal representatives were Mr Wallace for SRM and Mr Graham Bradburn, who was Group Commercial Director of its UK parent company, for EDS. The findings made by the judge with regard to the meeting are set out in paragraphs 10 and 11 of his judgment as follows:

"10. … The level of LAD (liquidated and ascertained damages) was discussed at that meeting. Mr. Bradburn gave evidence that he thought that the figure of £125,000 a week was agreed at that meeting. Mr Wallace's evidence was that £150,000 was agreed. Mr Wallace accepted (Day 6, p 127) that some of the documentation issued by both parties after 3^rd July tended to support Mr Bradburn's figure. Mr Wallace gave evidence that there was an error between himself and one of his colleagues, Mr Rodgers (the Deputy Head of Procurement at SRM). By the time he spotted the error the level of damages had been issued to EDS and therefore he could no longer further negotiate and he "swallowed [his] position". Nevertheless Mr Mellor continued, in communications with EDS, to use the figure of £150,000. Mr Wallace said that he would have conceded the point immediately if he had been asked. I am satisfied that an 18-month limit to the amount of LAD was agreed: the matter was mentioned in a letter of 4^th July from EDS to SRM commenting on the meeting.

11. I am also satisfied that at the meeting of 3^rd July Mr. Wallace told EDS that SRM would issue a short form order to enable the commencement of design and procurement; that SRM would send to EDS at the end of the week a set of sub-contract terms for EDS to review and conclude the formal sub-contract; and that the intention was that EDS would acknowledge the short form order by issuing a letter in the form attached to it. I accept evidence of Mr Wallace (Day 6, p 66) that in the light of what was said at the meeting he amended the letter intended to be returned by EDS to SRM and originally sent to EDS on 25^th June. The same day, 3^rd July, the short form order and the letter were faxed to EDS. I am satisfied that EDS started work on or about 4^th July 2001."

12. On the same day a further draft of the proposed letter was sent by SRM to EDS. Importantly, at the same time an order, entitled Order No 26790014 and dated 3 July, was prepared by SRM and sent to EDS. On the front of the order it states at the top "Please supply for contract 26790 DUDLEY HOSPITALS PFI" and the following important words then appear:

"CONFIRMATION

This Order is issued to allow the commencement of design and the procurement of long lead-in items

for

the above project to ensure compliance in every

respect with the contractor's programme for the

whole of the Works.

The value of this order shall be limited to the maximum amount of £1,000,000 (One Million

Pounds).

This Order shall be cancelled and superceded by

The issue of the formal Sub-Contract

Order/Agreement.

This order shall only be effective upon your signing and returning a copy of the attached letter to signify your acceptance of the terms contained therein.

Enc: Letter to Sir Robert McAlpine (in 16

no. pages)."

13. The letter referred to was the draft letter mentioned earlier. On the back of the order there are standard "Terms and Conditions" which include this provision:

"This purchase agreement shall be governed and construed in accordance with the Laws of England and the parties hereto irrevocably submit to the exclusive jurisdiction of the English Courts."

It is I think clear that the form of order was used by SRM to evidence a separate contract when ordering work or materials.

14. It was on the basis of that order that EDS started work on the next day, 4 July 2001. It did not sign the draft letter or return it to SRM before doing so. It is legitimate to ask on what, if any, contractual basis work was started. There cannot to my mind be any doubt that both parties wanted work to begin and that both parties contemplated that EDS would be paid for the work carried out pursuant to the order. As I understand it, both Mr Thomas QC for EDS and Mr Streatfeild-James QC for SRM accept that work began pursuant to the order and that EDS would be entitled to be paid a reasonable sum for the work done up to a maximum of £1,000,000. The order was expressed to have been issued to allow the commencement of design and the procurement of long lead-in items for the project to ensure compliance in every respect with "the Contractor's programme for the whole of the Works". No-one appears to have been in any doubt as to what work should be done. It is I think accepted that it was an implied term of the agreement that the work would be carried out in a good and workmanlike manner.
15. It was not and could not have been suggested that before the draft letter was signed and returned by EDS to SRM, EDS had accepted the terms contained in it. Nor was it or could it have been suggested that by starting work on 4 July without signing and returning the letter EDS agreed to carry out the whole of the M&E works, since the order was only issued to allow the commencement of the works and the value of the works was expressly limited to a maximum of £1,000,000. I should perhaps also note that it was not suggested that it was orally agreed at the meeting of 3 July that EDS would carry out the whole of the M&E works.
16. The position outlined above is in my opinion consistent with a letter dated 4 July which Mr Bradburn wrote to Mr Wallace after receiving the order and the attached draft letter. In the letter of 4 July Mr Bradburn agreed to begin the work on the basis that there was a "clear enough appreciation between us as to the nature of the subcontract". The letter continued:

"The important issue in my view is to ensure that the work now proceeds as quickly as possible and we should allow the relevant documentation to catch up as soon as it can.

I would confirm my understanding that the process for achieving this will be for you to issue a short form order in a suitable format as you have already done, which would be followed at the end of this week by a set of subcontract terms for us to review and conclude the formal subcontract. The intention is that we would acknowledge this order by issuing a letter in the form also attached to your short-form order."

It is plain from that part of the letter of 4 July that it was accepted that the draft sub-contract terms would be reviewed before the sub-contract was agreed and incorporated in a formal contract. I would accept Mr Thomas' submission that there is no mention of any agreement (or even proposal by SRM) that the proposed letter to be attached to the short form order was to set out the agreement of all matters between the parties.

17. The letter of 4 July then referred to a number of particular points in the draft letter, including the necessity for the letter to make it clear that EDS' "subcontract appointment" would be governed by the sub-contract terms to be provided, a statement that it was not anticipated that the draft sub-contract terms would impose any greater obligations on EDS than the main contract imposed upon SRM, a point about LAD and a point about HLP. Mr Wallace replied on 5 July thanking Mr Bradburn for his letter, which he said set out all that had been agreed between them, and adding that it was important to SRM, as he put it, to get into a formal sub-contract with EDS quickly and asking Mr Bradburn to consider it a priority.
18. What happened next? EDS started work but did not return the letter. There was some correspondence about a document list. On 10 July SRM wrote to EDS saying that it had added the documents referred to by EDS to the document list and asking EDS to issue the letter in accordance with the requirements of the "short order" as a matter of some urgency. In the meantime, the draft sub-contract terms were received by SRM from its solicitors on 9 July and were issued to EDS on 17 July. At a meeting on 19 July it was agreed that SRM would retain responsibility for design of the M&E works carried out up to financial close on 17 May 2001 and that EDS would carry out all outstanding design work and would develop the design further to the extent required by the main contract.
19. In the meantime, on 18 July Mr Bradburn wrote to Mr Wallace saying that EDS would be returning a signed copy of the letter "with several small changes which I outlined the need for in my previous letter". He set out the changes in the letter. They included the addition of references to the terms of the sub-contract received on 17 July, the alteration of certain dates, the addition of a maximum period of 18 months delay for LAD and the addition of this statement:

"It is assumed that the existing drawings and documents referenced in Appendix A are in accordance with the Construction Contract requirements and are free from errors and omissions. Any costs associated with rectification of these materials/drawings/ designs has been excluded from our price …" (My emphasis)

The letter further proposed the deletion of two drawings. It ended by saying that Mr Bradburn trusted that "these slight amendments" better reflected the current situation, that EDS was amending the draft to reflect the changes and that it would be forwarded to SRM by first thing the next morning at the latest. In the event EDS did not forward the letter for over a month.

20. On 20 July Mr Wallace replied refusing to agree to the proposed alteration of the dates (which he said was SRM's final position), suggesting the addition of a reference to an SRM fax of 19 July 2001 and disagreeing with two of the other proposals in Mr Bradburn's letter of 18 July. The first was that Mr Wallace said that the words "and omissions" which I italicised above should be removed and the second was that Mr Bradburn's proposed deletion of the two drawings was unacceptable. The letter concluded by saying that SRM needed EDS' final position on the programme as a matter of urgency. On 27 July SRM sent an email to EDS asking it to advise as to the latest situation in the light of Mr Wallace's letter and saying that the order of 3 July was not effective until SRM received the signed letter "in an agreed format".
21. We were shown a number of EDS internal documents which give some indication of what EDS was doing in the month or so before 20 August but it does not seem to me to be necessary to refer to them because they did not cross the line between the parties and do not therefore show what was agreed between them.
22. The letter which was finally sent by EDS to SRM is dated 20 August. It is in similar form to that attached to the order of 3 July but there are differences between them. In paragraph 17 of his judgment the judge highlighted the differences as follows:

"The letter as sent by EDS on 20^th August 2001 consisted of eight pages. It included reference to a large number of documents. I set out below some important passages from both versions. The passages on the left are taken from Mr. Wallace's version, attached to the order; those on the right from the EDS version, sent on 20^th August 2001.

We undertake, when called upon to do so, to enter into a Sub Contract with you for the design and construction, testing and commissioning of the Mechanical and Electrical Engineering Services at the Dudley Hospitals Project. Our Sub Contract appointment will be governed on the basis [of] the following terms, conditions, programme, price, specification and ancillary documentation all in our possession as follows:-

We undertake, when called upon to do so, to enter into a Sub Contract with you for the design (in so far as we are to design) and construction, testing and commissioning of the Mechanical and Electrical Engineering Services at the Dudley Hospitals Project. Our Sub Contract appointment will be based on the Sub-Contract Conditions received 17th July 2001 [reference given] and schedules attached thereto [reference given] 16th July 2001 together with the documents listed below and SRM fax dated 19/07/2001 re Clause 22.

There follows in each case a list of documents. Those lists are similar, but not the same. Document number 20 is described as follows:

Construction Contract, Draft 14, dated 03/05/01 pages 1-140 inclusive (Note: draft number and date lined through), converted into a Sub Contract in which the entitlements liabilities and obligations of the Contractor under the Construction Agreement shall be converted to the entitlements liabilities and obligations of us the Sub Contractor under the Sub Contract. The Liquidated and Ascertained Damages levied by the Employer under the Construction Agreement of £28,715 per day or part thereof shall be adjusted in respect of the Sub Contract to Liquidated and Ascertained damages levied by the Employer at £17,857 per day

or part thereof in the Sub Contract.

or part thereof, in the Sub Contract, for a maximum period of 18 months.

Under the heading "Design work to be carried out by Hoare Lea and Partners" there are included the following passages:

This design work and the Specifications are contained in the following drawings and specifications which form part of the Sub Contract. Drake and Scull Ltd are required to comply with these drawings and specifications. Drake and Scull Ltd will appoint Hoare Lea to carry out the remaining items in the Hoare Lea and Partners Scope of Services. Nothing contained in the requirement that Drake and Scull Ltd shall use Hoare Lea and Partners to carry out the remaining items in the Hoare Lea and Partners Scope of Services shall in any way limit the comprehensive obligations of Drake and Scull Ltd to design the Works. The requirement that Hoare Lea and Partners carry out the balance of the Hoare Lea and Partners Scope of Services shall not be construed to be a nomination and Drake and Scull Ltd shall be liable for the balance of performance of Hoare Lea and Partners scope of Services as if they had selected Hoare Lea and Partners as their Consultant to do that work.

This design work and the Specifications are contained in the following drawings and specifications which form part of the Sub Contract. Drake and Scull Engineering Ltd are required to comply with these drawings and specifications. It is assumed that the existing drawings and documents referenced in Appendix A are in accordance with the Construction Contract requirements and are free from errors and omissions. Any costs associated with rectification of these materials/drawings/designs has been excluded from our price. Drake and Scull Engineering Ltd will appoint Hoare Lea to carry out the remaining items in the Hoare Lea and Partners Scope of Services. [Paragraph omitted]. The requirement that Hoare Lea and Partners carry out the balance of the Hoare Lea and Partners Scope of Services shall not be construed to be a nomination and Drake and Scull Engineering Ltd shall be liable for the balance of performance of Hoare Lea and Partners scope of Services as if they had selected Hoare Lea and Partners as their Consultant to do that work."

23. It is plain from the comparisons between the draft letter attached to the order of 3 July which are set out by the judge in the paragraph of his judgment just quoted that the letter of 20 August was not "a copy of the attached letter" which the order invited EDS to sign "to signify your acceptance of the terms contained therein". To my mind there was no contract on the terms contained in the letter by the mere sending and receipt of a letter in different terms from that attached to the order of 3 July. The letter of 20 August did not accept all the points made by Mr Wallace in his letter of 20 July. For example it retained the reference to "and omissions" which Mr Wallace wanted excluded from the terms proposed in EDS' letter of 18 July.
24. However, it does seem to me that there probably was a contract between the parties on the terms of the order and of the letter of 20 August which came into existence at some stage thereafter. SRM did not respond to the letter of 20 August but EDS continued to perform the work and indeed was in due course paid for it. No sub-contract was entered into. Indeed, on the judge's findings it was not until 12 December 2001 that SRM sent EDS a draft sub-contract which EDS received on 18 December.
25. In the meantime SRM issued a further order no 26790090 dated 6 December. It again says "Please supply for contract 26740" and continues:

"CONFIRMATION

This Order is issued as an addendum to our previous Order Number 26790014, to allow the commencement of design and the procurement of long lead-in items for the above project to ensure compliance in every respect with the Contractor's programme for the whole of the Works.

The value of this order shall be limited to the maximum amount of £2,000,000 (Two Million Pounds), (ie £1,000,000 on Order Number 26790014, and £2,000,000 on this Order). Aggregate total of £3,000,000 (Three Million Pounds) for both Orders.

This Order shall be cancelled and superceded by the issue of the formal Sub-Contract Order/Agreement."

26. It appears to me that the contractual position between the parties can be tested as at the time that second order was issued and before a draft sub-contract was sent to EDS by SRM a few days later. The judge held in effect that the parties had made two successive contracts, one on the terms of the order of 3 July and the second on the terms of the order of 6 December. There was no dispute between them as to the work to be carried out or as to the implied term that the work would be carried out in a good and workmanlike manner. The orders were each limited in value, the first to £1,000,000 and the second to a maximum of £2,000,000, making a total (inclusive of the first order) of £3,000,000. The judge held in effect that, absent a further order or agreement, EDS had no right or duty to carry out work which would entitle it to more than £3,000,000.
27. Mr Streatfeild-James submits that he was wrong so to hold and that he should have held that on or after 20 August the parties agreed that EDS would carry out the whole of the M&E works for a total price of £34,250,000. The judge rejected that submission on two distinct bases. The first was that the letter of 20 August did not bind EDS as though a sub-contract had been entered into. At its highest it contained an undertaking on the part of EDS to enter into a sub-contract when called upon to do so. It was implicit, if not explicit, in the letter that SRM would proffer a sub-contract which conformed with the terms of the letter, which it never did. The second was that the terms of the letter were not capable of constituting agreement for the whole of the M&E work.
28. Those conclusions seem to me to be closely related. In any event I have reached the clear conclusion that they are both correct. It is convenient to consider the second point first. As I see it, the crucial point is that, however clear the terms of the letter are, they have to be read with the order of 3 July (and later with the order of 6 December). So read, they cannot in my opinion fairly be construed as leading to the conclusion that, on the assumption that the terms of the 20 August letter were agreed, the parties agreed that EDS would carry out the whole of the M&E work and that they would do so for £34,250,000.
29. To my mind the key points are these. The opening words of the letter of 20 August are set out in the first part of paragraph 17 of the judge's judgment quoted above. I set them out again with what I regard as important words put in italics:

"We undertake, when called upon to do so, to enter into a Sub Contract with you for the design (in so far as we are to design) and construction, testing and commissioning of the Mechanical and Electrical Engineering Services at the Dudley Hospitals Project.

Our Sub Contract appointment will be based on the Sub-Contract Conditions received 17^th July 2001 [reference given] and schedules attached thereto [reference given] 16^th July 2001 together with the documents listed below and SRM fax dated 19/07/2001 re Clause 22.

…

Construction Contract, Draft 14, dated 03/05/01 pages 1-140 inclusive (Note: draft number and date lined through), converted into a Sub Contract in which the entitlements liabilities and obligations of the Contractor under the Construction Agreement shall be converted to the entitlements liabilities and obligations of us the Sub Contractor under the Sub Contract. The Liquidated and Ascertained Damages levied by the Employer under the Construction Agreement of £28,715 per day or part thereof shall be adjusted in respect of the Sub Contract to Liquidated and Ascertained damages levied by the Employer at £17,857 per day ....

We also accept that such appointment [ie of HLP] will include the following arrangements: …."

30. The words italicised show that the terms of the letter contemplated future events. It is clear that no sub-contract was being entered into by the letter. The terms of the sub-contract, although foreshadowed in the letter, were a matter for future agreement. The purpose of the letter was not, as I see it, intended to set out the terms of a present agreement to carry out the whole works. That was to be contained in a future sub-contract. The purpose of the letter was to set out the broad terms of the arrangement for the future. Its status is in my opinion clear from the express terms of the order of 3 July, which expressly provided that "the order shall only be effective upon you [ie EDS] signing the letter attached to the order".
31. The order was expressly limited to works up to a maximum amount of £1,000,000. It follows that what was contemplated was agreement by SRM to EDS carrying out those limited works in return for signing the letter attached to the order. For my part, I would reject the submission that the order was simply an administrative necessity in order to ensure, for example, that EDS would be paid for the work it did as it went along. It is plain from the express words at the beginning of the order that it was issued to allow commencement of the work and the procurement of long lead-in items. It is true that the purpose of the commencement and procurement was, as the order states, to ensure compliance with "the Contractor's programme for the whole of the Works" but it was not intended as an agreement that EDS should carry out the whole of the works in return for signing the letter. If it had been there would have been no need for the provision that the value of the order was limited to a maximum of £1,000,000. It was contemplated that the order would be cancelled and superseded by a formal sub-contract, which at the time was thought to be capable of agreement in a comparatively short space of time.
32. In the event EDS did not sign the letter attached to the order but subsequently sent the letter dated 20 August. The work had nevertheless begun in the meantime. It did so, as I see it, on the basis set out in paragraph 14 above. It seems to me that, when the letter of 20 August was sent, it cannot have had any immediate contractual effect by its mere sending or receipt but it probably did have contractual effect so at some stage thereafter, perhaps when SRM accepted the work as performed and/or when it paid or continued to pay EDS for the work that it was doing pursuant to the order. It is not however necessary, in order to determine the issues in this appeal, to reach a final conclusion on the question when, or indeed whether, the parties reached agreement on the terms of the 20 August letter. If they never reached such agreement, the essential basis of SRM's case that EDS agreed to perform the whole of the M&E works must fail, and with it the appeal, because SRM's case depends upon the letter. As it is put in paragraph 7 of SRM's skeleton argument prepared for this appeal, the preliminary issues turn upon two documents, namely the order of 3 July and the letter of 20 August. If agreement was reached on the terms of the letter, precisely when and how that agreement was reached does not affect the determination of the central issue in the appeal, which depends to a large extent (if not entirely) upon the true construction of the order and the letter.
33. Thus, on the footing that agreement was at some stage reached on the terms of the letter (as seems to me to have been the position), the contractual position thereafter depends upon a consideration of both the order and the letter. It was, in my opinion, as contemplated by the order of 3 July, namely that the order would be effective, or more accurately continue to be effective, on the acceptance by both parties of the terms of the letter. The letter did not however amount to an agreement that EDS would carry out the whole of the M&E works. As I see it, that was to be the role of the sub-contract.
34. That conclusion is reinforced by the second order for a further £2,000,000 worth of work dated 6 December. That order was simply an addendum to the order of 3 July and had the effect of increasing the limit by a further £2,000,000 to a total of £3,000,000. The position thus remained the same. No agreement had been made for the whole works but SRM agreed to EDS performing work up to a maximum value of £3,000,000 altogether. Work continued as before and was paid for in due course.
35. The next event which occurred was that SRM sent EDS a draft sub-contract. The judge described the facts relating to the proffering of a sub-contract in paragraph 19 of his judgment. He held that there were substantial differences between the terms of that draft sub-contract and those of the draft sub-contract received by EDS on 17 July 2001 and referred to in the letter of 20 August. The judge identified these differences. First, the proffered sub-contract contained articles and an appendix which were not in the draft of 17 July or contemplated by the letter of 20 August. The appendix, in section D part 4, provided in clause (2) that the period for completion of the main works of the sub-contract works was to be 167 weeks, whereas the programme specifically mentioned in the letter of 20 August provided for a period of 158 weeks. Secondly, clause 14.6 of the proffered sub-contract provided for the imposition on EDS of all responsibility and risk for the design of the sub-contract works, thus negating the provision in the letter that any costs associated with rectification of the existing drawings and documents referenced in Appendix A to the letter had been excluded from the price. The judge rejected a submission advanced by Mr Streatfeild-James that that did not matter because the letter set out the agreed position and the sub-contract terms were in error. The judge observed that the proffered sub-contract, although it contained a list of 91 documents which were expressed to be sub-contract documents, did not include reference to the letter of 20 August. He concluded that in those circumstances it was difficult to see how, if the proffered sub-contract had been executed, EDS could have put forward Mr. Streatfeild-James's submission in the event of litigation, in the absence of rectification. In these circumstances the judge, in my opinion correctly, held that EDS could not reasonably have been expected to execute the proffered sub-contract.
36. Thirdly, there was no LAD clause in the proffered sub-contract. The judge accepted evidence that the wrong damages clause had been included by mistake and that an amended version was proffered on 15 January 2002. In that version the correct weekly sum of £125,000 (or strictly £17,857 a day) was included but the cap was wrong. The cap was £11,700,000 based on 78 weeks at £150,000 a week, whereas according to the letter it should have been £9,750,000 based on 18 months. The judge held, to my mind correctly, that this draft clearly departed in important respects from the letter of 20 August.
37. He held in paragraph 21 that, in spite of some changes, the same was true of the third draft proffered in April 2002 and of a fourth draft proffered on 4 October 2002. The judge's conclusion in paragraph 24 was that no sub-contract complying or substantially complying with the letter of 20 August was ever proffered to EDS before the contract came to an end in December 2002. I agree.
38. The judge summarised his conclusions in this regard in the course of paragraph 50 of his judgment as follows:

"… The parties had long been negotiating, no doubt originally in the hope, and later in the expectation, of reaching agreement and entering into a sub-contract. They both intended that sub-contract to be made by the execution of a formal document. I shall assume for the purposes of this [part of the] argument that all important points had been agreed by the time that the letter of 20^th August was signed and sent to SRM. It was intended, as stated by the terms of the order of 3^rd July 2001, that the order would be cancelled and superseded by the issue of the formal "Sub-Contract Order/Agreement". It was intended that the order of 3^rd July would not be cancelled, but on the contrary would become effective, by the signing and returning of the letter. Thus it is clear that the order was intended to be and to remain in force pending the preparation and execution of the formal sub-contract. The importance of having a formal sub-contract is surely borne out by the fact that SRM seems to have been unable, in spite of its best endeavours, to proffer such a document in compliance with the letter of 20^th August before the relationship between the parties came to an end in December 2002."

I entirely agree.

39. During 2002 EDS continued performing work as before but pursuant to two further orders. The basis upon which the work was being carried out was the same as before. It can I think be seen from an email dated 20 March 2002 sent by SRM to EDS. SRM first complained about EDS' failure to comment timeously on the latest draft of the sub-contract and added:

"We are also concerned that the order that you are currently working against is to a value of £3m and we have just signed off a gross to the end of February of circa £2.8 million. The clock unfortunately is now ticking and we need to have this matter resolved very quickly if it is not to affect payments etc."

Discussion on the sub-contract continued but on 9 May EDS wrote to SRM saying that its costs had exceeded the £3,000,000 less retention which it had been paid and asking for a further order of £5,000,000 by return, failing which it threatened a suspension of work. A meeting then took place on 10 May. The threat was lifted after SRM said that it found the letter distasteful and the letter was withdrawn. SRM promised a further order. As the judge held in paragraph 57 of his judgment, the principle that EDS was working to the orders was not questioned.

40. As agreed at the meeting, on 14 May SRM issued a third order, no 26790/H/05248, in very similar terms to the order of 6 December 2001 as follows:

"CONFIRMATION

This Order is issued as an addendum to our previous Order Numbers 26790014 and 26790090, to allow the continuance of design and the procurement of long lead-in items for the above project to ensure compliance in every respect with the Contractor's programme for the whole of the Works.

The value of this order shall be limited to the maximum amount of £5,000,000 (Five Million Pounds), (ie £1,000,000 on Order Number 26790014, £2,000,000 on Order Number 26790090 and £5,000,000 on this Order). Aggregate total of £8,000,000 (Eight Million Pounds) for three Orders.

This Order shall be cancelled and superceded by the issue of the formal Sub-Contract Order/Agreement."

41. On 15 August SRM issued its fourth and last effective order, no 26790/H/05940, which was in all material respects the same as the order of 14 May, so that (unlike the first two orders) it referred to the continuance, not the commencement, of the works, except that the value of the order was £6,000,000 making an aggregate of £14,000,000.
42. On 15 October 2002 SRM issued a further order in the same form as the previous two orders except that the value of the order was £20,285,000, making an aggregate of £34,285,000, which represented the full price of £34,250,000 plus a figure of £35,000 which had been agreed along the way for a particular piece of work. EDS rejected that order on the basis that agreement had not been reached. Between paragraphs 59 and 65 of his judgment the judge set out the events which led to EDS leaving the site, which it is not necessary to recount for the purposes of determining this appeal.
43. Although I recognise that the commercial circumstances may have changed to some extent as the work progressed, I agree with the judge that the issuing of the third and fourth orders is consistent with the view that throughout that period the parties proceeded on a basis which is consistent with the view that the work was carried out pursuant to a series of agreements for work limited to particular sums and not pursuant to an agreement that EDS would carry out the whole of the M&E works.
44. I return to the question whether the letter of 20 August was itself capable of constituting agreement for the whole of the M&E works. The view which I expressed earlier that it did not have that effect depends upon a consideration of the letter in conjunction with the order of 3 July. That would be my view even if, taken by itself, the letter would be capable of amounting to such an agreement if viewed on its own. However, I agree with the judge's analysis in paragraphs 25 of his judgment and following that it left some important points unspecified or unsettled. It is only necessary to mention some of the key points.
45. A particular point which struck the judge (in paragraph 32 of his judgment) arose out of the wording relating to document no 20, which I have quoted above, to the effect that the main contract would be

"converted into a Sub Contract in which the entitlements liabilities and obligations of the Contractor under the Construction Agreement shall be converted to the entitlements liabilities and obligations of us the Sub Contractor under the Sub Contract."

Mr Thomas submitted to the judge, as he submits to us, that there were discrepancies between the terms of the draft sub-contract of 17 July and those of the main contract which were inconsistent with the wording in question as follows:

i) Clause 9 of the main contract provided that there would be no right to claim damages for loss of profits or other consequential or indirect losses of any nature. There was no similar provision in the sub-contract drafts. Indeed, there was a wide definition of "Loss" in the draft sub-contract which allowed for recovery by SRM of their consequential and indirect losses against EDS.

ii) Clause 9.6 of the main contract provided an overall cap on liability of just under £80 million. There was no overall cap on liability in the draft sub-contract.

iii) Clause 34 of the main contract dealt with suspension of the progress of the works. Clause 34.5 gave a right to the contractor to suspend performance for non-payment. Although there was a suspension clause (clause 25) in the draft sub-contract, the sub-contract gave no right to the sub-contractor to suspend performance for non-payment.

iv) The right to payment for a change in the law affecting the works (clause 39 of the main contract) was not passed on to EDS at all, although by clause 29 of the draft sub-contract EDS would bear the cost arising from any change in the law. That mismatch would have allowed SRM to receive money for a change in the law affecting the M&E works without any obligation on its part to pay that money down the line to EDS, which would have borne the cost.

46. The judge accepted those points, which he described in paragraph 33 of his judgment as of major importance. He held that, together with three other points, they were strong objective evidence that the letter was intended, not as an offer immediately to enter into a sub-contract for the whole of the M & E works, but as an indication of the extent of agreement that had been reached, coupled with an undertaking to enter into a sub-contract drafted so as to remove the uncertainties and obscurities. That might clearly involve further negotiation on those points. Two of the three other points were these. The first was the argument as to whether EDS should rectify any errors and omissions in the design work and specification prepared by HLP at its expense or whether such rectification was excluded from the price: see the judgment paragraph 29. The second related to the LAD cap: see judgment paragraph 31.
47. I agree with the judge. It seems to me, as it seemed to him, that these differences are all reasons why the parties would want to bind themselves only by a formal sub-contract properly drafted and duly executed. I recognise that, as Mr Streatfeild-James submits, the letter and its list and appendices contain a vast amount of information about the detail of the M&E work and responsibility for it which was not in dispute between the parties but that does not seem to me to lead to the conclusion that they at any time agreed that EDS would carry out the whole of the works at an agreed price other than pursuant to a formal sub-contract.
48. In short, however the question is tested, I arrive at the same conclusion, namely that at no stage did the parties agree that EDS would carry out all the M&E work.

Conclusion

49. In all the circumstances I have reached the conclusion that the judge was right. My reasons may be summarised as follows:

i) Before the letter of 20 August was sent, EDS was performing work pursuant to the order of 3 July for which it would be paid a reasonable sum up to a maximum of £1,000,000. It was an implied term of the agreement that the work would be carried out in a good and workmanlike manner. (Paragraph 14)

ii) The mere signing and returning of the letter of 20 August did not create a contract subject to the terms of the letter. (Paragraphs 23 and 32)

iii) At some stage thereafter the letter probably became of contractual effect, whereafter the contractual position was as contemplated in the order of 3 July, namely that the order continued to be effective on the acceptance by both parties of the terms of the letter. (Paragraphs 24, 32 and 33)

iv) Construed together (as they should be), the order and the letter do not on their true construction evidence an agreement that EDS would carry out the whole of the M&E works or that it would do so for £34,250,000 or any other sum. (Paragraphs 28 to 31)

v) If regard is had only to the letter, no such agreement was reached because SRM never proffered a sub-contract which conformed to the terms of the letter (paragraphs 27 and 35 to 38) and because the letter left a number of important points unspecified or unsettled (paragraphs 27, 33 and 44 to 47).

vi) The work was carried out pursuant to a series of limited orders (paragraphs 26, 34 and 39 to 43).

vii) I agree with the answers given by the judge to the preliminary questions he was asked to determine as set out in paragraph 4 above.

50. I have reached these conclusions having regard to the communications between the parties and without regard to the subjective intentions of the parties' representatives not communicated to the other side, although I would add, if only for completeness, that I have not been persuaded that a consideration of actual intention on the part of either SRM or EDS leads to any other conclusion. In the circumstances I would dismiss the appeal and answer the preliminary questions set out in paragraph 4 above in the same way as the judge did.

Costs

51. SRM also seeks permission to appeal against the order made by the judge as to costs, in which he ordered SRM to pay EDS' costs of the preliminary issues. The judge refused permission to appeal against that order. I adjourned the renewed application for permission to appeal to be heard by the court hearing the substantive appeal. At the hearing of the appeal it was agreed between the parties that this issue should be determined by the court by reference to the parties' written submissions.
52. SRM submits that the judge should not have ordered it to pay the costs but have reserved the costs because there remain issues for determination in the action and that it does not follow from EDS' success on the preliminary issues that it will succeed in the action. It is said that there remain issues over the work performed by EDS and its value. I shall assume for present purposes that that is so. The question remains whether SRM has a real prospect of persuading the court that the judge exercised his discretion in a way that was wrong in principle or in such a way as to be outside the ordinary ambit of his discretion.
53. A trial judge has a wide discretion as to what orders to make on costs, although it must of course be exercised judicially. SRM submits that a question of general principle arises, namely, where issues are directed to be heard as a matter of case management, whether the costs should be determined by reference simply to success or failure on those issues. For my part, I would not accept that any such question of general principle rises. All depends upon the circumstances of the particular case.
54. The court has a wide discretion under CPR Part 44.3. That discretion includes a power to make an order for costs relating to a distinct part of the proceedings under rule 44.3(6)(f). Although there may be cases in which it would be just to make some other order, it will often be appropriate for a judge to order the costs of preliminary issues to be paid by the party which has lost on those preliminary issues. The judge took the view that this was such a case. The preliminary issues upon which EDS succeeded may not resolve all the issues between the parties but they were very important because their resolution has disposed of the question whether EDS was under an obligation to carry out the whole of the M&E work. That was a crucial issue because success on that issue was a vital step in SRM's case that EDS was in repudiatory breach of the contract and that SRM accepted that repudiatory breach and was entitled to substantial damages. As the judge expressly held in answer to one of the questions I have not set out in paragraph 4, in the light of his answers to the other questions, the question whether EDS was in repudiatory breach was not applicable. Moreover the basis on which EDS was to be paid was established by the answers given to the questions which I have set out in paragraph 4.
55. In all these circumstances I have reached the clear conclusion that the judge was entitled to reach the conclusion which he did on costs and order SRM to pay the costs of the preliminary issues. I see no arguable basis upon which this court might interfere with his decision. In these circumstances I would refuse the application for permission to appeal against the judge's order as to costs.

Lord Justice Keene:

56. I agree.

Lord Justice Peter Gibson:

57. I also agree.

ORDER: Appeal dismissed; Appellant to pay Respondent's costs in the sum of £38,000 within 14 days. Application for permission to appeal; order for costs refused

(Order does not form part of approved Judgment)