England and Wales High Court (Technology and Construction Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		7th May 2004

Judge Richard Havery Q.C. :

Introduction

1. This claim arises out of a project ("the project") relating to Dudley Hospitals, West Midlands, carried out by Summit Healthcare (Dudley) Limited ("Summit") for the Dudley Group of Hospitals NHS Trust ("the Trust") under the private finance initiative. The project comprised new building and refurbishment of the existing Russells Hall Hospital and the construction of day centres at Corbett and Guest Hospitals, all in Dudley. It included the provision of mechanical and electrical services including public health services. The defendant ("SRM") was the main contractor for the project under a construction contract with Summit dated 17^th May 2001 ("the Construction Contract"). The claimant ("EDS") is a specialist in the provision of mechanical and electrical services. It carried out mechanical and electrical services ("M & E") work on the project as sub-contractor to SRM between July 2001 and December 2002. EDS left the site in that month before completion of the M & E works for the project. It is common ground that SRM required EDS to leave the site. The project has continued and is continuing with replacement M & E sub-contractors.
2. SRM required EDS to leave the site because they contended that EDS were in repudiatory breach of contract. EDS claim £1,105,160.65 as the price of work done that has not been paid for. SRM deny liability for any sum, and counterclaim recovery of an overpayment and a declaration that they are entitled to be indemnified for all losses caused by EDS's repudiatory breach of contract. The main dispute between the parties is whether there was a sub-contract that obliged EDS to carry out the whole of the M & E works for the project, or only a contract or series of contracts of limited value in anticipation of the conclusion of a full sub-contract. I have to decide a number of preliminary issues. Those issues are listed at the end of this judgment, where I state my decisions on them.
3. The witnesses who gave evidence before me and to whom I refer in this judgment were the following. Mr. Graham Bradburn was Group Commercial Director of the UK parent company of EDS. He was responsible for all commercial agreements entered into by the group. Mr. Steven Taylor was, at the material time, Regional Director of EDS. His level of contracting authority was limited to £5 million. Part of his role was to obtain invitations to tender and work opportunities, and, in relation to an opportunity, to arrive at price and scope of work. Mr. David O'Shea was General Manager for the Birmingham office of EDS. Mr. Bradburn, Mr. Taylor and Mr. O'Shea gave evidence for EDS. Mr. Michael Wallace was at the material time until 31^st October 2002 Regional Chief Quantity Surveyor of SRM responsible to the regional manager for the management of all the contractual and commercial issues within the relevant region. From November 2002 he was Company Commercial Manager of SRM, but continued to concern himself with the Dudley project to ensure continuity. Mr. Robert Mellor was Financial Manager for SRM for the Dudley hospitals project from April 2000 and for the duration of EDS's employment on the project. Mr. Wallace and Mr. Mellor gave evidence for SRM.
4. The background to this matter is this. From early 2000 SRM were involved in negotiations to become main contractor for the project. On 26^th June 2000, SRM invited EDS to submit a price for the design, manufacture, fabrication, supply, installation and commissioning of the mechanical and electrical installations. It was proposed that the sub-contract conditions would be DOM/2 amended to align with the main contract conditions. SRM had retained Hoare Lea and Partners ("HLP") to carry out design work for the M & E installations. EDS submitted cost plans on 24^th July and 5^th September 2000. At the end of 2000 or early in 2001, SRM informed EDS that EDS were the preferred bidder for the M & E works on the project. On 22^nd December 2000, SRM provided EDS with a draft pricing document stating that any sub-contract would be based on the DOM/1/DOM/2 forms amended in accordance with the terms of the main contract. On 30^th March 2001 EDS submitted a priced bid for a scope of works in the sum of £35,422,570. That bid was made on the basis of a proposed domestic sub-contract (DOM/2), amended to be brought in line with the main contract with a "Paper Apart 1". "Paper Apart 1" was the name used by SRM for a list of amendments to a standard form contract.
5. On 17^th May 2001 the project agreement between Summit and the relevant hospital trust was signed, and at the same time SRM entered into a construction contract with Summit to design and construct the project. Thus at that stage SRM had committed themselves without having secured a sub-contract for the M & E works. Thereafter Mr. Wallace asked EDS for a revised price to be provided within a few days. On 24^th May 2001, EDS issued a revised bid in the sum of £33,704,870. On or about 31^st May 2001, EDS were provided with an HLP document entitled "M & E services scope of works" for each hospital, in which it was stated that the engineering services design had been developed by HLP into "a complete and workable solution responding to the Dudley Group of Hospitals NHS Trust output specification". On 31^st May 2001 Mr. Mellor sent a message to EDS stating "Form of any sub-contract will be in the form of the construction contract with conditions stepped down and suitably amended to reflect a main contractor/sub-contractor agreement. This is currently being drafted". There was a meeting between the parties on 6^th June 2001. At that meeting, Mr. Brian Botting of SRM indicated willingness on the part of SRM to agree a price of £34.25 million. Mr. Taylor agreed to see if that price could be met. The price of £34.25 million was indeed settled upon at a further meeting between the parties held on 13^th June 2001. EDS formally quoted that price in a letter to SRM dated 14^th June 2001. That bid was stated to be open for acceptance for a period of 30 days. The letter included the following paragraph:

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.

The letter also included the following paragraph:

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 early week commencing 18^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.

The account that I have given above is substantially uncontroversial.

6. On 21^st June 2001 a conversation took place between Mr. Wallace and Mr. Taylor. Both gentlemen were in cars and were using mobile phones. Mr. Wallace's evidence relating to that call may be summarized as follows. Mr. Wallace said to Mr. Taylor that SRM could not authorize payment of one penny to EDS until complete agreement had been reached and recorded; that a letter was to be drafted to be sent back by EDS with a short order as a way of providing a temporary order number to allow EDS to be paid; that the letter would contain all the agreements that had been made and would identify all that would form the formal sub-contract order; and that EDS would be obliged to execute the formal order as soon as it was prepared, to take over from the letter. Mr. Taylor's evidence was that reception was poor. Mr. Wallace advised him that SRM wanted EDS to sign a letter, which Mr. Taylor took to be a letter of comfort to SRM. He did not recall the conversation as being particularly contractual. Mr. Taylor gave the following evidence about the conversation in the course of his cross-examination (transcript, Day 5, pages 55 to 58):

A…..I think it was a relatively low key conversation…..It was the first time I had ever spoken to Mike. We talked about social issues, where we were, and then he explained to me what was, I would have to say, an unusual request to actually have a letter, a draft letter, drafted by [SRM] and sent to us to sign and be returned. I would have to say I think I would have been more inquisitive if I had not been told about that process some time earlier by Brian Botting.

…..

Q. But in terms of the scheme, it was explained to you by Mr. Wallace that what he needed was a commitment in a binding form because the sub-contract conditions could not be prepared at the moment?

A. I am afraid I must disagree with that. I believe that if Mr. Wallace had used words like 'binding' and 'contract', or at least if I had heard them, which is another matter, being that we were mobile to mobile, they would have been trigger words for me to have enquired more in terms of what Mike was actually trying to solicit from the letter. The conversation was very low key, it was non-contractual…..

…..

Q. So that I understand, it may be that the word 'binding' was not used, but what was intended by Mr. Wallace, to take his words, was that it would set out everything that had been agreed and would identify everything that would form the formal sub-contract for the job?

A. I think it is fair to say that what I would have expected was some form of line in the sand which would have picked up on where we had reached in the discussions at that time.

Q…..I can see in a car on a mobile you would have waited to see what the letter said when you got it?

A. Very much.

I am satisfied that Mr. Wallace's evidence was a correct account of what he had said to Mr. Taylor. But I am not satisfied that more was received and understood by Mr. Taylor than he said in his own evidence.

7. The execution of a formal order, to take over from the letter, was important to SRM. Mr. Wallace said this in evidence (Day 6, p.49):

The vital thing for us was to establish a sub-contract in what we call the McAlpine way, which was to have it – particularly as a deed that was important to us, sir, and that we had all of the documentation associated with it. That was what was important. So it would take over from the letter in that context, yes.

8. Mr. Wallace explained in his witness statement his reasons for sending the draft letter for return by EDS. I quote from his statement as follows:

…..by 18^th June 2001 we knew that we were likely to reach full agreement with [EDS] shortly…..[EDS] were now applying pressure requesting that they be released to commence procurement and design. For this they would require payment. Nevertheless, we had to establish complete agreement and I was determined that we would not commit to [EDS] until we had established the full content of a sub-contract.

…..because of the delays in producing the sub-contract conditions, documents could not be in place until July 2001 at the earliest and these needed to be executed before [EDS] could begin design and procurement work. [EDS] had also incurred a high level of costs and I knew that they would not be prepared to incur these additional costs before SRM committed to paying them for the work. I therefore decided that a letter would have to be drafted which would establish everything that had been agreed securely between the parties for all time, and be replaced by the formal SRM sub-contract order as soon as possible.

…..

To my mind, a letter was the only viable option available. I could not have said to the SRM regional manager that [EDS] could not start works at all until the formal sub-contract order was in place (which was likely to be some weeks away) whilst there was pressure being applied from the programme constraints to get the procurement process under way as soon as possible. Conversely, the risks inherent in the M & E works for the overall project in terms of time and costs were so significant that there needed to be clear unequivocal agreement from the outset between the parties as to their respective obligations to avoid later difficulties.

…..This was a huge job for [EDS] regionally and they had already expended significant amounts in the tender period. [EDS] therefore wanted to be paid and I felt that [they] would sign up to the obligations in such a letter of agreement in order to achieve such payment.

…..

…..it was SRM's express policy not to [issue any letter].

…..the solution [was] that [EDS] would issue a letter to us accepting all of the terms of the sub-contract and incorporating a formal undertaking to execute a complete sub-contract order as soon as all of the paper parts of that sub-contract order had been assembled. In addition, in order to allow payments to be processed until the full sub-contract order was in place we were to issue a short order to [EDS], as used for procurement and materials contracts, and this would be allocated an order number.

.....

My own view was that there would never be any need for any payment to be made to [EDS] using the order number obtained with the short order because I thought that the sub-contract order would be in place by the time that any payment was due. It never occurred to me at that time that it would take until December 2001 to produce the sub-contract documents.

I accept that evidence of Mr. Wallace as an accurate expression of his reasoning. An order number was needed for the purposes of the internal procedures of SRM in authorizing payment. The draft letter in question was sent to EDS on 25^th June 2001 with a request to prepare it and forward it to SRM as soon as possible. Neither party had seen the draft sub-contract conditions at that time.

9. Also on 25^th June 2001, EDS sent a letter to SRM containing a slightly amended bid, consequent upon discussions between the parties. The letter was in terms identical to those of the letter of 14^th June, save for the following differences:

(1) Whereas both letters adverted to the possible necessity of employing alternative suppliers or [sub]-sub-contractors and the use of modern construction techniques, which would require the agreement of the Trust, and expressed the expectation that the Trust's agreement would not be unreasonably withheld, a reference in the earlier letter to a dispute resolution procedure in connection with the withholding of such agreement was omitted in the later letter.

(2) The earlier letter provided that existing equipment being incorporated in the works would be upgraded to meet current legislation and contract requirements, and that the offer excluded upgrades of equipment and installations not interfered with as part of the contract works. That provision was absent from the later letter.

(3) The forecast date of availability of the sub-contract details was put back from 18^th June to 25^th June 2001.

10. On 3^rd July 2001 representatives of the parties met at SRM's offices at Hemel Hempstead. The principal representatives were Mr. Bradburn and Mr. Wallace. 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. The draft sub-contract conditions were received by SRM from their solicitors on 9^th July 2001. After consideration of the draft by SRM, the conditions were issued to EDS on 17^th July. It is clear that those conditions required further amendment: I revert to the point below. At a meeting held on 19^th July it was agreed that SRM would retain responsibility for design of the M & E works carried out up to financial close (17^th May 2001), and that EDS would carry out all outstanding design work and would develop the design further to the extent required by the contract.
13. EDS did not return to SRM a copy of the letter accompanying the short form order of 3^rd July. On 18^th July 2001, Mr. Bradburn wrote a letter to Mr. Wallace indicating his intention to return a signed copy of the requested letter "with several small changes which I outlined the need for in my previous letter". It was not until 20^th August 2001 that EDS sent to SRM a version of the requested letter, amended in accordance with the letter of 18^th July and further amended to reflect what had been agreed on 19^th July in relation to design.
14. SRM subsequently placed further limited orders on EDS up to a total value of £14 million as mentioned below.

The contractual position

15. On 3^rd July 2001 SRM issued an order to EDS (Order number 26790014). The material terms of that order were as follows:

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.

This order shall be cancelled and superseded 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).

16. EDS started design work on or about 4^th July. EDS did not return the letter. Eventually, on 20^th August 2001, it sent a letter to SRM in terms similar to, but different from, those of the letter enclosed with the order. Mr. Streatfeild-James submitted that a contract between the parties was concluded on 20^th August 2001 by the return of the letter. He submitted that that contract was a sub-contract to carry out the whole of the sub-contract works at a sub-contract price of £34,250,000. Mr. Thomas submitted that the letter was merely a letter of comfort describing the current state of the negotiations between the parties. And in any case, he submitted, it could be no more than a counter-offer since it was in terms significantly different from the terms of the draft attached to the order of 3^rd July. Moreover, it was not capable of acceptance to form a sub-contract. If SRM had written back immediately saying "we accept" that would only have shown agreement that the sub-contract would be based on the documents listed in the letter. The sub-contract conditions were yet to be agreed; as drafted they were incomplete and unworkable. I shall consider those arguments later in this judgment.
17. 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.	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 Ltd will appoint Hoare Lea to carry out the remaining items in the Hoare Lea and Partners Scope of Services.	Drake and Scull Engineering 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.	[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 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.	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.

18. Before considering the arguments of counsel I make the following observations. On the face of it, the letter of 20^th August 2001 contained an offer or undertaking on the part of EDS to enter into a sub-contract when called upon to do so. Assuming that that offer was accepted, or that the undertaking constituted a contract, the contract in question bound EDS to enter into a sub-contract when called upon to do so. It did not immediately bind EDS as though the sub-contract had been entered into. The distinction is important in this case, because both parties were anxious to enter into a proper, formal sub-contract to be executed as a deed. The obvious importance of having a formal sub-contract is to ensure that so far as possible the rights and obligations of the parties are made clear and unambiguous. No sub-contract that conformed with the letter of 20^th August 2001 in all important respects was ever offered to EDS for signature. In my judgment, it is clearly implicit in the first words of the letter that if SRM required EDS to honour their undertaking, SRM had to proffer a sub-contract that conformed, at least in all important respects, with the terms of the letter. EDS could not be in breach of the assumed contract unless SRM proffered such a sub-contract and EDS refused or failed to execute it. That never happened.
19. The facts relating to the proffering of a sub-contract are these. SRM sent to EDS a draft sub-contract dated 12^th December 2001 which EDS received on 18^th December 2001. There were substantial differences between the terms of that draft sub-contract and those of the draft sub-contract received by EDS on 17^th July 2001 and referred to in the letter of 20^th August. In particular: 1. the proffered sub-contract contained articles and an appendix which were not in the draft of 17^th July or contemplated by the letter of 20^th 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 programme no. PFI Rev: 6B4, specifically mentioned in the letter of 20^th August, provided for a period of 158 weeks. 2. 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 (see the table above). Mr. Streatfeild-James submitted, in effect, that that did not matter. The position was simple: the letter set out an agreed position, and the sub-contract terms were in error. But 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^th August. It is 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. EDS could not, in my judgment, reasonably have been expected to execute the proffered sub-contract. 3. In the proffered sub-contract there was no liquidated damages clause.
20. Mr Mellor gave evidence (Day 7, pages 65 and 66), which I accept, that it was by mistake that the wrong damages clause had been included in the proffered sub-contract dated 12^th December 2001. He notified EDS by telephone on 21^st December. He sent an amended version to EDS on 15^th January 2002 where, as he said in evidence, he had "put the damages clause right". In that amended version, although the list of documents was still present, the documents listed had been removed from the list of classes of documents expressed to be sub-contract documents. The matters mentioned in points 1. and 2. in paragraph 19 above remained. Liquidated damages in the correct weekly sum (£125,000: more precisely, £17,857 a day) were provided for in clause 22.1.1; but the cap was wrong. It was in the sum of £11,700,000, which represented 78 weeks' liquidated damages at the rate of £150,000 a week, not £125,000 a week. This document, again, clearly departed in important respects from the letter of 20^th August.
21. A third draft sub-contract was proffered to EDS in April 2002. The articles and appendix were no longer included. Clause 14.6 had been amended, but not in any respect relevant for present purposes. Clause 14.5 had been amended so as to impose liability on EDS for design carried out before financial close (17^th May 2001). That would impose liability on EDS for the drawings referred to in Appendix A to the letter of 20^th August, contrary to the terms of the letter (see the table above). Mr. Wallace readily, and rightly, admitted that that was patently wrong. In clause 22.1.1, the liquidated and ascertained damages had been amended to £21,429 a day (equivalent to approximately £150,000 a week). Mr. Wallace again accepted, rightly, that that figure was wrong. He said, and I accept, that he would have conceded that point immediately if he had been asked. But Mr. Mellor, if he had been asked, might well not have done so. He apparently thought that the correct figure was £150,000. The cap on LAD remained at £11,700,000.
22. Mr. Thomas's points (1) to (4) mentioned in paragraph 32 below also applied to the third draft sub-contract and to those proffered earlier.
23. A fourth draft sub-contract was proffered to EDS on 4^th October 2002. In that draft, the articles were reinstated with certain amendments. The listed documents were reinstated in the list of classes of documents expressed to be sub-contract documents. Mr. Thomas's points (1) and (2) mentioned in paragraph 32 below applied to that draft. But a right to the sub-contractor to suspend performance for non-payment and a right to payment for a change in the law were included. LAD remained at £21,429 a day, with a cap of £11.7 million.
24. No sub-contract complying or substantially complying with the letter of 20^th August 2001 was ever proffered to EDS.

Whether letter of 20.8.01 capable of constituting agreement for the whole of the M & E works.

25. Mr. Thomas submitted that the letter of 20^th August 2001 could not be a contract or an offer capable on acceptance of giving rise to a contract because it left some important points unspecified or unsettled. Those points were as follows.
26. First, the sub-contract terms of 17^th July 2001 left the estimated completion date blank. That point was important because the extension of time mechanism and the operation of the liquidated damages provisions depended upon it. I accept that that was an important point. But program PFI Rev: 6B4 gave a date of 17^th August 2004 for the completion of the mechanical and electrical services installations. Thus the relevant date was specified.
27. Second, the sub-contract specification was defined by reference to the documents identified in schedule 11 to the sub-contract; but no documents were identified in schedule 11 or otherwise identifiable in the sub-contract conditions as the sub-contract specification. This again I accept as an important point. But the numerous documents listed in the letter include specifications for at least parts of mechanical services, electrical services and engineering services. Also listed was a six-page document dated 16^th March 2001 entitled "M & E Services Specifications for the Dudley Group of Hospitals", together with 17 pages of scope of works, all prepared by Hoare Lea and Partners. It may be, though the matter has not been explored, that the six-page document referred to numerous other documents. Whether all those documents amount to a complete specification I cannot say; but any shortfall was evidently insufficient to prevent EDS from quoting the price of £34.25 million. That in my judgment is cogent evidence that there was a sufficient specification in the letter.
28. Third, the definition of sub-contract works was blank. I make the same comment as in the previous paragraph: that this did not prevent EDS from quoting.
29. Fourth, clause 14.9 provided that where the specification was wrong, EDS should at its own expense rectify it and any part of the works affected. By contrast, the letter provided that any costs associated with rectification of errors in or omissions from the design work and specifications prepared by HLP had been excluded from the price. In my judgment, a contract containing that discrepancy would not thereby be void for uncertainty, since the terms of the letter would be construed as modifying the sub-contract conditions received by EDS on 17^th July 2001. However, the discrepancy is objective support for evidence of Mr. Bradburn that the terms of the letter simply represented the extent of agreement that the negotiations had reached and was not intended as a contract. Moreover, it adds force to the reason why the parties should want to bind themselves only by a formal sub-contract properly drafted and duly executed.
30. Fifth, clause 16.1 of the sub-contract required completion in respect of each Phase by the Scheduled BOC [Building Occupation Certificate] date in respect of that Phase. The relevant schedule was schedule 9 to the main contract. That schedule consisted of a table which included a column heading for BOC dates to be shown for each of 26 phases of the work. However, the version of that schedule in the possession of EDS at the material time showed no BOC dates. Mr. Mellor gave evidence that the dates could be worked out from program 6B4, and he gave an indication how to do it. However, program 6B4 divides the whole works into only four phases. Since clause 16.1 refers to the scheduled BOC dates, it must surely be referring to the phases mentioned in schedule 9 to the main contract rather than those shown on the program. On the material before me, it is impossible in most cases to correlate the descriptions of the 26 phases in the schedule with the lines on program 6B4. No doubt a court would do its best not to hold a contract containing such a discrepancy void for uncertainty, but I cannot say what the construction of the contract, if any, would be held to be. This again is objective evidence in support of EDS's contention that the letter of 20^th August 2001 simply represented the extent of agreement and was not intended as a contract.
31. Sixth, clause 22.6 provided for a cap on liquidated damages of £11,700,000, whereas the letter provided for a cap of 18 months' worth of damages at £17,857 a day (say £125,000 a week for 78 weeks, i.e. £9,750,000). The letter would doubtless prevail. My comments under the fourth point apply here also.
32. The seventh point arises out of the wording relating to document number 20 in the letter of 20^th August ("…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 made a number of points in support of a submission that there were discrepancies between the terms of the draft sub-contract of 17^th July and those of the Construction Contract which were inconsistent with the wording in question:

(1) clause 9 of the Construction 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.

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

(3) Clause 34 of the Construction 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 (25) in the draft sub-contract, the sub-contract gave no right to the sub-contractor to suspend performance for non-payment.

(4) The right to payment for a change in the law affecting the works (clause 39 of the Construction Contract) was simply not passed on to EDS at all, who by clause 29 of the draft sub-contract 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 their part to pay that money down the line to EDS, who would have borne the cost.

33. I accept those four points (1) to (4) made by Mr. Thomas. As to point (2), clause 9.6 of the copy of the Construction Contract that has been placed before me does not show the amount of the cap. However, in the absence of a dispute about the point, I shall assume that Mr. Thomas is correct. All those four respects in which the draft sub-contract failed to accord with the wording of the letter of 20^th August in relation to document 20 are of major importance. In my judgment, if a court had to construe a sub-contract for the whole M & E works said to arise from the letter of 20^th August, it might well be unable to reach a definite conclusion on those four points. If so, the alleged sub-contract would be void for uncertainty. In that case, Mr. Thomas is right in his submission that the letter of 20^th August is not an offer capable on acceptance of giving rise to an enforceable contract. But even if I am wrong on that point, Mr. Thomas's fourth, fifth, sixth and seventh points are 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 clearly might involve further negotiation on those points.
34. Mr. Thomas cited Chitty on Contracts, 28^th ed., vol. 1, paragraph 2-002 for the proposition that an offer is an expression of willingness to contract made with the intention (actual or apparent) that it is to become binding on the person making it as soon as it is accepted by the person to whom it is addressed. The question of actual intention remains.
35. Mr. Streatfeild-James relied on EDS's own conduct in relation to the return of the letter drafted by SRM. On 4^th July 2001 Mr. Bradburn of EDS sent a letter to Mr. Wallace of SRM. That letter and an earlier draft of it were before the court. Mr. Streatfeild-James pointed to the differences between the two. I set out below the material terms of the letter. Where the two versions differ, the draft appears in the left-hand part of the box, and the letter as sent appears in the right-hand half.

First of all I would like to thank you for the business-like atmosphere of the meeting yesterday and the frank discussions we were able to have regarding each other's current positions.

We are in receipt of Chris Rodger's fax containing the short order to enable the commencement of design and procurement and we would confirm that we are consequently proceeding with the work on the basis of the understanding reached in our meeting.

As explained yesterday, we will not make commitments where we are not in possession of the full details as a matter of good commercial practice and to avoid any misunderstanding which could have detrimental effects upon the project execution at a later date.

Whilst the full documentation is not yet in our possession,

I am happy however that there is a clear enough appreciation between us as to the nature of the sub-contract and the key issues contained in it, that we can proceed with confidence on the basis of our discussions.

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 sub-contract terms for us to review and conclude the formal sub-contract. The intention is that we would acknowledge this order by issuing a letter in the form also attached to your short-form order.

The draft letter appears only to need a slight adjustment to the second paragraph to reflect our discussions yesterday in that our sub-contract appointment will of course be also governed by the sub-contract terms, which you will be able to provide to us later in the week.

The schedule attached to the draft letter appears to be comprehensive although we do need to check the listings in order to ensure that we are in possession of all the relevant documentation and that they are complete. This exercise will be complete by the end of this week at which time we will be able to issue a letter to that effect. We would confirm that we will be proceeding with the work meanwhile in order to ensure that there is no delay as a result.

The basis of the sub-contract terms will be a [mutatis] mutandis version of the project agreement draft 14, which is currently in our possession. The form of sub-contract is being prepared by Nabarro Nathansons. It is not anticipated by either of us that the draft sub-contract terms will impose any greater obligations upon us than the project agreement imposes on you. In addition the sub-contract document would include suitable provisions and timescales to provide normal and adequate obligations and protections for both parties, and enable you to fulfil your main contract obligations in a timely manner.

I would confirm that paragraph 20 of your draft letter attached to the fax is an adequate representation of what we agreed with regard to the rate of liquidated damages,

although I note that it makes no mention of the 18-month backstop date after which liquidated damages would not apply.

although I note that it makes no mention of the 18-month backstop date after which liquidated damages would not apply and should be amended to reflect this.

We can also confirm at this time that we have a clear understanding of our responsibilities in respect of design work and we can confirm that we agree with the section of your letter headed up 'Design work to be carried out by Hoare Lea & Partners' as set out on pages 10 and 11 of your draft.

We also discussed the position regarding the relationship with Hoare Lea and the existing design. We need to have further dialogue with Hoare Lea in order to clarify these interfaces and previous dialogues have been hampered by our non-award status. We will now pursue this and would be grateful if you could advise Hoare Lea to commence the discussions. The programme was the final issue discussed and we raised the need to develop the programme on from that submitted previously as the projected start dates were well behind us now. We expressed the view that we believe the programme can be adjusted to accommodate these changes but the dialogue with the project team had yet to occur. We will again instigate this process.

I trust that this provides you with adequate commitment on my part that the project is proceeding without further delay and sufficient comfort that the commercial necessities associated with the sub-contract can proceed in parallel on more appropriate timescales.

36. Mr. Streatfeild-James relied on the fact that the statement in the draft that EDS would not make commitments where it was not in possession of the full details was omitted in the version as sent. He submitted that EDS, knowing that SRM required the draft letter to be signed and returned as a condition of the order which they had provided, did not clearly set out any reservations which they might have had to doing that, but instead wrote a letter designed to keep SRM happy by giving the strong impression that the draft letter would be signed imminently.
37. It is unnecessary for me to rehearse in detail the submissions of counsel on the exchanges that took place between the parties before 20^th August 2001. Mr. Streatfeild-James invited me to make the following principal findings of fact:

(1) EDS knew that the draft of the Letter (sc. of 20^th August 2001) was intended to be binding.

(2) EDS debated sending a side letter but ultimately chose not to do so. EDS also chose not to send a letter making clear they would not give a commitment. In corresponding about the Letter they were careful not to give the impression that they were not prepared to be bound.

(3) EDS knew that SRM wanted a commitment. They knew that that was important to SRM.

(4) EDS were prepared to provide the commitment that SRM wanted, provided that minor amendments were made to the draft letter. They were prepared to be bound.

(5) EDS had to sign and send the Letter to SRM. EDS knew that to be unusual.

(6) EDS took their time in signing the Letter and did so only after significant consideration, legal advice and approval from the very highest level, Norman Critchlow, the group chief executive.

(7) The language of the letter was itself contractual. It required EDS to 'undertake' an obligation.

(8) EDS later referred to the agreement that was in place.

Mr. Streatfeild-James concluded that on the evidence there could be no real doubt that EDS understood that SRM wanted them to commit to a contractual relationship, and that they intended to and did so.

38. I shall consider those points in turn. As to point (1), both parties wished and intended to enter into a sub-contract for the whole of the M & E works. Both parties intended that that contract should be a written contract duly executed. I am not satisfied that SRM intended the letter of 20^th August 2001 to create a sub-contract for the whole of the M & E works. That is especially so, since SRM's own terms provided that the letter should make effective the order expressly limited to £1 million. Moreover, SRM well knew that EDS would not willingly enter into a sub-contract for the whole of the M & E works without meticulously checking it. Mr. Mellor said in his witness statement (paragraph 207), in relation to the letter of 20^th August, that

It was now clear that once and for all we had complete agreement on everything that had gone before over the previous twelve months or so, and that all of the documentation making up that agreement was contained in the letter. In fact, everything that Drake and Scull had done was what I expected – I knew from past experience at Leicester and Walsall that they would have completed a painstaking review and check of the letter before signing it.

As to point (2), in my judgment the letter of 4^th July as sent fairly represents the position. EDS were indeed prepared, and expected, to be bound in due course to execute the whole M & E works, and in the meantime were proceeding with a limited order in that expectation. My comments on points (1) and (2) apply equally to points (3) and (4). As to point (5), I accept that EDS knew that signature of the letter was necessary to give effect to the order of 3^rd July, and that they must have known that that was unusual. I accept point (6) as a fact. As to point (7), I consider the effect of the letter of 20^th August elsewhere in this judgment.

39. Mr. Streatfeild-James's point (8) appears to refer to a letter dated 5^th March 2002 from Mr. Taylor to Mr. Mellor. That letter does not refer in terms to an agreement that was in place. The relevant part reads as follows:

I have spoken with our Contracts department and have ascertained the current status of the proposed contract. We received what we understand to be the final draft of the contract from your good self on 15 January 2002. Subsequent to this, one or two other items of documentation have been issued and/or have been requested. Notwithstanding this we have forwarded all information to our advisers and are expecting their response by the end of this week. Allowing a short period of time for us to digest their comments we would suggest that a meeting be held with all interested parties week commencing 25 March. This time frame is in part driven by our adviser being on leave in the interim period.

Without wishing to pre-judge the outcome of our proposed meeting, the initial response would indicate that there is a disconnect between your head contract and our sub-contract, i.e. it does not appear to be back to back as we had agreed. So to minimize any further delay I propose to bring our adviser to the meeting and would suggest that it would be appropriate for you to do likewise so that the outcome of the meeting will be a joint agreement as to how we finally settle on mutually agreeable wording and content.

I remain committed to agree an order with yourselves in the soonest possible time. However, you will agree that it is important that the order truly reflects our earlier agreements. Subject to the outcome of our proposed meeting at the end of March we would hope and expect that the sub-contract be agreed by the end of April.

(Emphasis added). The expression that I have italicized is the expression that I take to have been relied on by Mr. Streatfeild-James.

40. Mr. Taylor was cross-examined about that expression. He said that he meant 'our earlier principles'. In fact, much had been agreed in the course of negotiations before 20^th August 2001. In my judgment, the expression clearly refers to that. The complaint in the letter was that the sub-contract document proffered on 15^th January was not in accordance with what had been agreed.
41. Mr. Streatfeild-James further submitted that in 2002 EDS had had second thoughts about the economics of the terms that had been agreed, and sought to re-negotiate what had already been agreed. I accept that EDS did seek to re-negotiate matters that had already been agreed. But that is irrelevant to the questions I have to decide.
42. Mr. Bradburn, in his witness statement at paragraph 6.29, said this:

In summary, as far as I was concerned, there was never any intention to enter into a form of sub-contract by the terms of the letter of 20^th August 2001. If we were in a position to have entered into a sub-contract, we would have. But the simple truth is that we were not. We had a basic and rather poor first draft of the sub-contract at that stage and the onus was very much on SRM to produce a better draft on which we could negotiate. We were all (SRM and ourselves) aware that to move from the stage it was at, to a firm, comprehensively defined sub-contract, would take a couple of months and this was time which the project program did not, and could not, accommodate. The letter of 20^th August drew a "line in the sand". It was put in place to facilitate an ongoing negotiation process by which sub-contract conditions could be agreed between ourselves and SRM. I fully expected such negotiations to deal with the issues of domestic variations, scope, program and the design issues. It was also at that stage my anticipation that formal terms of sub-contract would be negotiated relatively quickly, within say a month or two of the letter of 20^th August. I was certainly not anticipating any lengthy delay in SRM proceeding with the issue of sub-contract conditions for negotiation.

Mr. Bradburn indicated in his oral evidence (Day 4, page 34) that that was also his understanding of SRM's position. I accept the above evidence of Mr. Bradburn, which is entirely consistent with the conclusion I have reached in paragraph 33 above from consideration of the documents themselves. Thus there was neither actual nor apparent intention of immediately contracting at that stage. There was neither offer nor contract in relation to the whole M & E works on 20^th August 2001, since important matters remained to be negotiated.

The Defendants' Argument

43. Mr. Streatfeild-James's positive case, in outline, was this. It was common ground that a contract (whatever it was) was concluded on 20^th August 2001. It followed that the case was concerned first with a relatively short and self-contained issue: given that the parties both contended that a contract was concluded by reason of the Order [i.e. the order of 3^rd July 2001] and the Letter [of 20^th August 2001] taken together, on 20^th August 2001, what was the nature and scope of the obligations of that contract? SRM's primary contention was that the Letter and the Order amounted together to a complete contract, which was synallagmatic: EDS became obliged to do the work, and SRM obliged to pay for it. All important terms had been agreed and all that remained was the compiling of the documents which were to form the written agreement. By "the work", Mr. Streatfeild-James clearly meant the whole of the work for which the price of £34,250,000 had been quoted, and not merely work limited to the value of £1 million mentioned in the order.
44. In its defence, SRM pleaded that the contract was made partly orally and partly in writing and was contained in and/or evidenced by EDS's signed letter to SRM of 20^th August 2001. I have heard oral evidence on the progress of negotiations between the parties and the extent of agreement reached between them before 20^th August 2001. But Mr. Streatfeild-James has not argued that there was a concluded binding agreement before the letter was sent. Quite the contrary: it was his case that it was the signing and sending of the letter that brought the contract into existence. He relied on the terms of the order of 3^rd July 2001 that "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".
45. SRM pleaded further or alternatively in their defence that the contract was formed when SRM provided the contract documents and called upon EDS to sign the contract in December 2001 and/or February 2002. Mr. Streatfeild-James stated SRM's alternative case that the letter of 20^th August 2001 contained a certain obligation to enter into a formal contract when called upon to do so, which [contrary to the case of EDS] did not lapse after a reasonable time or 30 days.
46. I consider here the former argument: that there was a synallagmatic contract where all important terms had been agreed and all that remained was the compiling of the documents which were to form the written agreement. Mr. Streatfeild-James treated the question as one of construction. He submitted the following points:

(1) The essence of the EDS case was that all that was achieved by the Order and the Letter was a unilateral contract which gave EDS the option of performing some work without any corresponding obligation to complete any particular part, without any terms save those to be implied; or alternatively

(2) if the Letter had any effect at all, all SRM was given in effect was an option to ask EDS to continue provided that that option was exercised within 30 days.

(3) That would be a surprising result in a commercial relationship such as the present, in particular having regard to the following points:

(4) The parties had been in a prolonged negotiation for a period of over a year.

(5) EDS had been told that they were or were to be the preferred subcontractor by about the end of 2000.

(6) By June 2001 there were lists of points which remained to be agreed on a commercial basis. They were discussed and then agreed one by one.

(7) The Order and the letter were clearly linked and understood to be linked, and the importance attached by SRM to having the Letter was made plain to EDS.

(8) The Letter underwent a series of drafts and revisions at the instance of EDS, and was considered by EDS's legal advisers. After that, and after a considerable delay, EDS sent the letter.

(9) SRM, as EDS knew, had an obligation to carry out the whole of the M & E work. EDS knew that SRM wished to pass that obligation on to them. There was no alternative subcontractor in the background, and SRM did not have the specialist knowledge or skills to carry out the M & E works itself.

Mr. Streatfeild-James submitted that taking those points together, it was clear that it would have been commercially nonsensical for the cumulative effect of the Letter and the Order to be simply that EDS could at their option and without obligation do some work. Furthermore, the Letter must be given some effect. It was nonsensical to suggest that SRM would have wanted to keep open the possibility of not retaining EDS given that EDS was the only M & E subcontractor on the scene at the time, and that agreement had been reached on all material terms over long weeks of negotiation. Conversely, there was no commercial reason for SRM and EDS not to commit to each other in respect of the entire contract at that stage, all matters which either of them had chosen to raise having been resolved. The only difficulty was in documenting those agreements, and that was achieved by the exchange of the Order and the Letter, it being contemplated that the agreement would be formally documented in due course. Finally, it would be a bizarre commercial intention to enter into two linked unilateral contracts, the Order meaning that EDS could undertake work if they chose, but were not obliged to do so, and the Letter meaning that SRM could employ EDS if they chose but were not obliged to do so. A more natural reading of two linked unilateral obligations in the circumstances of this case was as a single bilateral (synallagmatic) contract.

47. Mr. Streatfeild-James also relied on the evidence of Mr. Wallace to the effect that before the issue of the order of 3^rd July 2001, he explained to EDS that a short order would be issued which provided an administrative mechanism to allow payment applications to be made and processed pending signature of the letter, and that EDS would not be paid a single penny until the letter evidencing all that had been agreed was received. For the purpose of considering Mr. Streatfeild-James's argument, I shall assume that that evidence of Mr. Wallace is correct. But in my judgment it adds little, if anything, to the express terms of the order.
48. I turn to consider the individual points made by Mr. Streatfeild-James. As to point (1) in paragraph 46 above, the evidence of EDS was that EDS had started work on 4^th July 2001. Thus on their case the sending of the letter may have given them the entitlement to be paid for the work, but they had at any rate perforce lost the option not to do the work they had already done. As to point (2), I reject the submission of EDS that the option of SRM expired within 30 days. The letter purported to give to SRM the option, not merely to ask, but to require, EDS to enter into a formal sub-contract once it had been proffered to EDS: the synallagmatic contract was indeed contemplated and intended by both parties. But it was never made. The remaining points, (3) to (9), are entirely consistent with the view of the matter that I express in paragraph 50 below.
49. Further in support of his argument that the terms that had been agreed were sufficiently certain to support a binding contract, Mr. Streatfeild-James relied on Mr. Bradburn's letter to Mr. Wallace of 18^th July 2001. He submitted that by writing that letter acknowledging receipt of the sub-contract conditions Mr. Bradburn signalled unqualified acceptance of those terms and conditions. If there had been a real issue over the conditions, SRM were entitled to have it raised at that stage. Given that EDS knew what SRM were expecting, and Mr. Bradburn knew he was being asked to make a binding commitment, to have continued in that way would have been highly misleading had it in fact been intended to reserve EDS's position. The truth was that it was not so intended. In my judgment, that argument fails to reflect one of the paragraphs of the letter, which reads:

I trust that you find these slight amendments better reflect the current situation than the original draft and provide you with sufficient certainty for you to move forward.

50. I reject the argument of Mr. Streatfeild-James. The documents taken at their face value in my judgment give full effect to the intentions of the parties. 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 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.
51. Mr. Streatfeild-James further submitted that EDS were estopped, by the doctrines of promissory estoppel and estoppel by convention, from denying that a contract existed between them and SRM, or from denying that they had an obligation to carry out the whole of the M & E works. It was clear, he submitted, from the negotiations leading up to the letter of 20^th August 2001, that EDS knew that SRM were relying upon the promise contained within it. In my judgment, that begs the question whether the promise, if such it was (and I consider elsewhere in this judgment the argument of EDS that the letter did not constitute an offer or a promise), was a promise to carry out the whole of the M & E works. Mr. Streatfeild-James went on to say that SRM wanted a binding commitment from EDS (by which he clearly meant a binding commitment to carry out the whole of the M & E works), as EDS well knew. SRM relied upon the letter, to its detriment, by paying EDS for the work that it was doing, and by SRM going forward with EDS rather than seeking out other sub-contractors. The representation and detriment were made clearest by considering what would have happened if EDS had not sent the letter. SRM had made it clear that in those circumstances the relationship could not continue. EDS acted to avoid that by softening draft letters and by being careful not to suggest that it was not making a commitment. Putting that in the language of estoppel by convention, SRM then acted under the assumption, which EDS shared or at least acquiesced in, that the parties had a binding agreement that EDS would carry out all of the work. The sending of the letter and SRM's actions upon it therefore founded an estoppel.
52. I cannot accept Mr. Streatfeild-James's argument. Both parties wanted the relationship to continue. The assumption on the part of SRM upon which Mr. Streatfeild-James relied is a matter of inference from overt conduct. But the conduct of SRM was consistent with an intention or expectation on its part that a sub-contract would be entered into. SRM urgently required the work to be done and benefited from having it carried out when it was.
53. The original order of 3^rd July was supplemented by further orders. The cumulative purchase order value was increased to £3 million on 6^th December 2001; to £8 million on 14^th May 2002; and to £14 million on 15^th August 2002. The order of 6^th December 2001 (number 26790090) stated:

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), (i.e. £1,000,000 on Order Number 26790014, and £2,000,000 on this Order). Aggregate total £3,000,000 (Three Million Pounds) for both Orders.

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

The order of 14^th May 2002 (number 26790/H/05248) for £5 million, raising the total to £8 million, was in similar terms, though the expression "commencement of design" was replaced by "continuance of design" and the words "the issue of" in the last paragraph were omitted. The order of 15^th August 2002 (number 26790/H/05490) for £6 million, raising the total to £14 million, was in terms similar to those of the order of 14^th May, save that it was expressed to allow "the continuance of site works, design and the procurement of long lead-in items" (emphasis added).

54. Mr. Streatfeild-James submitted that the following actions illustrated or evidenced an assumption common to the parties that a contract existed requiring EDS to complete all of the works, and that it was not merely working to the orders.

(1) EDS carried out work beyond the value of the orders. EDS were applying for payment of over £4 million of work while the order limit was £3 million, and were applying for over £16½ million of work while the order limit was £14 million.

(2) The applications for payment were based on the total value of a specific section (not an order or its value). From April 2002 the applications were based on the agreed contract sum for the whole M & E works of £34.25 million.

(3) The applications for payment were based on the contract payment schedule that had been agreed.

(4) EDS provided a number of programs for the works. Those programs related to all of the M & E works for specific sections. Collectively, all of the programs submitted related to the whole of the works, not elements of the works which related to a particular order or combination of orders.

(5) The value of the works programmed by EDS exceeded the value of the orders. By August 2002 EDS were programming over £30 million worth of work when (on its case) the order value in place was less than half of that amount.

(6) EDS made sub-sub-contract commitments in excess of the value of the orders, signalling that it was committed to the whole of the works.

(7) EDS's applications for payment included claims for "variations". If the orders stood alone, there could be no varied work, only work pursuant to the orders.

(8) EDS's applications for payment included "claims". If the orders stood alone, there could be no "claims", only work pursuant to the orders.

(9) EDS's applications for payment allowed for retention. That was consistent with an obligation to complete all or at least a part of the works.

(10) The first three orders referred to design and procurement work only. Site work was also being carried out by EDS during the time that those orders were in place. EDS's memorandum of 5^th August 2002 made that clear. EDS could not therefore have been working pursuant to the orders at that time.

55. As to Mr. Streatfeild-James's point (1), the relevant facts are set out in the table below. The figures in each of the last three columns are cumulative.

Date of application	Value limit of current order	Gross amount of application	Gross amount certified after retention and before VAT	Gross payment after retention and before VAT
26. 3.2002	£3 million	£3,390,171	£2,956,092	£2,956,092
25. 4.2002	£3 million	£4,038,201	£3,605,426	£3,605,426
20.11.2002	£14 million	£15,561,596	£10,679,757	£9,574,597
13.12.2002	£14 million	£17,417,023	£10,605,393	£9,574,597

Thus it is true that EDS went beyond the limits of the values of the orders. That led them to apply for the further orders that were issued, and to a further order beyond the £14 million limit, which I shall mention. Points (2) to (5) show that EDS was anticipating the making of the sub-contract, but they are not in my judgment inconsistent with its working under the orders. As to point (6), Mr. Taylor gave evidence (Day 5, pages 138 to 140) which was not contradicted and I accept it, that he had asked one of his colleagues to put a break clause into the sub-sub-contract so that if SRM decided not to proceed EDS could terminate the sub-sub-contract. The point was not further pursued. I accept that points (7) to (9) are some evidence of a common assumption that a full sub-contract existed. As to point (10), the memorandum of EDS dated 5^th August 2002 and sent to SRM states:

Following our telephone conversation on Friday 2^nd August 2002 re an extension to our short order, I am writing to request the following:

Could we please see a draft version before it is officially issued because [at] present the wording does not reflect the activities that we are undertaking on site. Also the conditions written on the back of the order do not allow it to be varied. To this end could you please include the following in the wording:

1. A clause to cover us for ALL site works that we are carrying out.

2. A clause that 'backdates' the above so that the other orders cover us for site works.

3. A clause that covers us to be paid for all the site instructions issued to date.

I confirm that the cumulative figure for all short orders will now be £14 million.

It is true that the work done before the fourth order was placed went beyond the terms of the first three orders, which were for design and procurement. The fourth order seems to have been designed by both parties to rectify that situation, i.e. to bring the work actually done within the orders.

56. In my judgment, Mr. Streatfeild-James's points (1) to (10) are wholly insufficient to give rise to an inference of the common assumption on which he relies in support of an estoppel.
57. Moreover, there are points militating against such an inference. First, there is a letter of 9^th May 2002 from EDS to SRM which is not consistent with the existence of a sub-contract for all the works. The relevant part of the letter reads as follows:

Whilst we appreciate that your payment to us, to date, less retention, is just under the £3,000,000, our works and prime cost have now considerably exceeded this amount. We are therefore carrying out works at risk, which is unacceptable to us as a company.

We therefore reiterate our request for a further order of £5,000,000, by return, to cover ongoing works.

Should we not receive this, we will have [no] alternative than to suspend our works pending resolution of this issue.

That letter appears to have caused offence. The minutes of a meeting held between the parties the following day record that Mr. Paul Legget, Regional Director of SRM, requested that the letter be withdrawn "as he found it distasteful". Mr. Lee Compton, Managing Director of EDS, is recorded as having apologized on behalf of EDS and explained the company's need for an enhanced short order value. The minutes record that after some debate a further "5 million" was agreed. As stated above, the order was placed on 14^th May. Thus the principle underlying the letter, that EDS was working to the orders, was not questioned.

58. Second, the very existence of the orders and their terms limiting the value of the work to be carried out under them militates against the inference of a common assumption or an assumption on the part of SRM that a full sub-contract was already in existence.

The end of the relationship between the parties.

59. The relationship between the parties came to an end in the following circumstances. On 15^th October 2002, negotiation of the terms of a sub-contract for execution not having reached a successful conclusion, SRM placed upon EDS order number 26790/H/05612 limited to the maximum amount of £20,285,000 as an addendum to the previous orders totalling £14 million. The aggregate total was expressed as £34,285,000. As before, the order stated "These Orders shall be cancelled and superseded by the formal sub-contract order/agreement". (The extra £35,000 over and above the quotation of £34,250,000 arose from matters discussed at a meeting between the parties held on 17^th August 2001. The £35,000 was agreed as a payment for the supply of extra resources to HLP, payment to be made only against the conclusion and signing of the sub-contract documentation). EDS replied to SRM by letter of 25^th October 2001. The material terms of the letter are these:

Thank you for your further purchase order up to the increased value of £34,285,000. Unfortunately we are unable to accept the same as we believe it is inappropriate at this moment in time, given our position with respect to the negotiations on terms which are currently ongoing, and the possibility that we may not reach accord over scope and programme issues and hence price.

Whilst I would emphasize that it is very much our intention to enter into an acceptable arrangement with yourselves which truly reflects our view on current scope, programme and price we believe that having us work to an open ended purchase order which does not reflect the true value of the works that is required by you is not in either of our best interests.

As an interim measure we would propose that the current accumulative purchase order could be uplifted by a further £3M to £17M which would be our projection of commitment to the end of January 2003, and set this as a deadline for the agreement of all matters between us, particularly scope, programme and price and the definition of the designer's responsibilities and duties.

We forecast that the £14M current purchase order value will be fully expended/committed by the end of November 2002 and it is important to both parties that we do not go beyond this value without having a further arrangement in place…..

60. After further correspondence between the parties, EDS wrote to SRM on 27^th November 2002 referring to their letter of 25^th October and stating, among other things:

We are shortly due to commence works to Block B part phase 17 and would require an uplift on the present order, as stated, if we are to proceed. In the absence of this we will have no alternative but to cease work.

61. On 2^nd December SRM replied to the effect that the order had been increased to some £34 million, that Block B phase 17 was due to commence that day, that any failure to commence work would be a repudiatory breach of contract even on EDS's construction of its terms, and inviting EDS to withdraw their letter. On the same day EDS replied setting out their interpretation of the legal position.
62. After further correspondence and a meeting between the parties, EDS wrote to SRM on 10^th December 2002 a letter in which they stated that they had exceeded the £14 million order and required SRM's amendment order by return.
63. On 12^th December 2002 EDS wrote a further letter to SRM. The gist of it was this. EDS did not believe that a contract existed between the parties as a result of the letter of 20^th August 2001. The expiry of orders to the value of £14 million was impending. EDS were not prepared to expose themselves further to SRM by undertaking work not covered by an accepted order. EDS were not prepared to work under the order for £34.285 million for reasons already indicated. EDS did not consider that extending the order value without resolution of the underlying issues was in the best interests of either party. The process of issuing orders had commenced on the basis that they would be cancelled and superseded by the issue of the formal sub-contract. EDS were not prepared to move to a situation of rising order values without resolution of the issues whether contractual terms could in fact be agreed. It was necessary urgently to establish whether, given SRM's lack of serious attention to reaching agreement on a sub-contract between the parties, there was any desire on the part of SRM for EDS to continue to work on the project, on reasonable terms, beyond the current level of accepted order cover. EDS's view was that the only viable option was for EDS to step down, under SRM's orders, and allow SRM to take over and complete the works themselves. EDS proposed that, to minimize disruption to the project, EDS should work with SRM for a period of three months in order to hand the project back to them, including the novation of sub-contractors, plant and equipment as appropriate. During that period EDS would provide every assistance to make the break as clean and as amicable as possible, and would continue to work under SRM's orders. EDS would expect to have their works fairly valued, certified and paid in full on a month by month basis. EDS estimated that that required the value of the order to be extended from £14 million to about £20 million. In the event that SRM felt unable to proceed in that manner, EDS would have to commence the process of evacuating the Dudley site, which it was anticipated could be concluded during the Christmas break. EDS suggested a further meeting between the parties to determine the process to be followed.
64. On 18^th December SRM replied stating that they accepted EDS's repudiation of their sub-contract at the Dudley Hospital project. That message was sent to EDS at 11.12 a.m. according to the print-out of the message. The following account comes from the unchallenged evidence of Mr. O'Shea. Mr. Mellor and Mr. Hadlow of SRM visited Mr. Blagg, Mr. Joannou and Mr. O'Shea of EDS on site at about 1.10 p.m. on 18^th December 2002. Mr. Hadlow told them that at 1.45 p.m. the fire alarm would be sounded on site and that all SRM's employees including themselves were to evacuate the site and take only their personal possessions. Mr. Joannou of EDS asked about their computer and other equipment. Mr. Hadlow said it was not to be taken from the site. After some argument, Mr. Mellor agreed to extend the time by half an hour. At about 2.30 p.m., SRM having started to flood the entrances and exits to EDS's office with security personnel, many of them SRM's own staff, Mr. Joannou instructed all of the female and junior staff of EDS to leave the site, which they did with only their personal belongings. During the course of the afternoon, the remaining staff of EDS (senior male employees) emptied as much of the offices as possible into employees' cars and a van. At about 3 p.m. Mr. Hadlow told Mr. Blagg that if EDS had not vacated the site by 5.30 p.m. he would call the police to have them removed.
65. At 1.30 p.m. that day Mr. James Bessey, the solicitor acting for EDS, had telephoned Mr. Peter Brinley-Codd of SRM's legal department complaining that EDS had been advised that a fire alarm would be sounded, EDS staff would be rounded up and then asked to leave with personal belongings only. He reserved the right to contact the police or seek an injunction. He also made a suggestion, on which he would take instructions, that an extension of time to the close of business on 20^th December for EDS to leave the site should be granted. In response, Mr. Brinley-Codd confirmed, without prejudice to both parties' rights, SRM's verbal instruction to leave the site. EDS left the site that day. The time does not appear. There is no evidence that the police were called by either party.

Notice of intention to withhold payment.

66. On 11^th December 2002 SRM sent to EDS a certificate stating the gross valuation of the work done up to 24^th November 2002 to be £11,241,850, retention £562,093, nett valuation £10,679,757, previous payments £9,574,597, and payment due (excluding VAT) £1,105,160. The certificate said that payment was to be made no later than 3^rd January 2003. On 20^th December 2002 SRM sent a letter to EDS which read as follows:

We attach a withholding notice issued pursuant to the Housing Grants, Construction and Regeneration Act 1996. We make it clear that such a notice is issued for protective purposes only and is not intended to detract from our contention that the contract between our companies has been determined by the acts of repudiation referred to in our letter dated 18^th December 2002.

The enclosed notice stated that it was given pursuant to section 111 of that act ("the Act"), and continued:

We intend to withhold the sum of £1,105,160.65, (excluding VAT), on the grounds that you have renounced your contract and committed a repudiatory breach of it which we have accepted. As a result of your actions we have sustained loss and damage in excess of £3,000,000 and we are exercising our equitable rights of set off accordingly.

67. I have to decide whether the withholding notice was necessary; if so, whether it was effective; and whether EDS is entitled to an order for payment of £1,105,160.65 plus interest from 3^rd January 2003. That last question is the essential question. The earlier questions are simply steps on the way.
68. The contract under which EDS was working was the order of 15^th August 2002, accepted by performance. The terms were net monthly account. The parties had since August 2001 adopted an ad hoc a system whereby EDS made monthly applications for payment for work done and materials supplied, and SRM certified the gross and net valuations and the amount of the payment due at the end of the month.
69. Mr. Thomas submitted that the certificate of 11^th December 2002 was a notice pursuant to section 110 of the Act, specifying the amount of the payment proposed to be made and the basis on which that amount was calculated. I am content to assume that it was. Mr. Thomas submitted that the sum stated in a section 110 notice was the amount due under the contract, and that sums cannot be withheld from the amount due without a section 111 withholding notice. There were no matters within the section 111 notice that could be taken into account to reduce the payment.
70. It was common ground that if SRM's allegations as to repudiation of the contract failed, then substantive justification for the withholding notice was removed. There remains the question whether the sum stated in the certificate was the amount due.
71. I reject Mr. Thomas's submission that the amount of the proposed payment stated in a paying party's notice under section 110 is ipso facto the amount due under the contract. Mr. Thomas further submitted that the certification by SRM made the amount due. I was referred to the recent case of Rupert Morgan Building Services (LLC) Limited v. David Jervis and Harriet Jervis [2004] BLR 18, CA. In that case Jacob L.J. (with whom Sedley and Schiemann L.JJ. agreed), approving the reasoning of Sheriff Taylor in Clark Contracts v. The Burrell Co. [2002] SLT 103, drew the distinction between the case where it was the certificate that made the sum due, and the case where it was the doing of the work that made the sum due. In the case in question, Jacob L.J. referred (ib., paragraph 11, p.21) to clause 6.33 of the relevant contract, which provided that the employer should pay to the contractor the amount certified within 14 days of the date of the certificate, subject to any deductions and set-offs due under the contract. Notwithstanding that that contract provided that no certificate should be taken as conclusive evidence that the work, materials or goods to which it related were in accordance with the contract, the sum was due and the clients had to pay the builder "for the present" (ib., paragraph 16, p.22). The point is brought out most clearly in Jacob L.J's. quotation from Sheriff Taylor's analysis (ib., paragraph 12, p.21). Sheriff Taylor distinguished a case where "there had been no calculation of the sum sued for by reference to a contractual mechanism ….. which gave rise to an obligation under the contract to make payment" (my emphasis). Jacob L.J., referring to the case distinguished by Sheriff Taylor, said

The contract there had no architect or system of certificates. The builder simply presented his bill for payment. The bill in itself did not make any sums due. What, under that contract, would make the sums due is just the fact of the work having been done.

(Emphasis added).

72. I conclude that the question I have to decide is whether there was a contractual obligation on SRM to pay the amount of the certificate, by virtue of its having been certified. Apart from documentary evidence of the procedure adopted, there was scarcely any evidence before me of the contractual status of the system of certification that had been adopted. Mr. Mellor was cross-examined about it (Day 7, p.94). He said that the relevant person in SRM certified whatever he thought right as being due to EDS. In my judgment, that is insufficient to show any legal obligation on SRM to pay an amount certified by virtue of its certification. It was the fact of the work having been done (assuming that it was) that made any sum due. Notwithstanding the certificate, there is a dispute about that. I cannot resolve that dispute at this stage. Such resolution must await the quantum hearing.

Answers to preliminary issues.

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

Answer: No.

b. If so,

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

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

(3) What were the payment terms or on what basis was the claimant to be paid for the work it had done?

(4) Was the Claimant in repudiatory breach of contract?

Answer: Not applicable.

c. If not,

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

Answer: 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?

Answer: 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?

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

(4) Was the withholding notice dated 20^th December 2002 necessary?

Answer: No.

(5) If so, was the withholding notice effective?

Answer: Not applicable.

(6) Is the claimant entitled to an order for payment of £1,105,160.65 plus interest from 3^rd January 2003?

Answer: Not at present. Whether it will be entitled to an order for payment of that sum in whole or in part remains to be determined.