Scottish Court of Session Decisions

Wescol are contractors specialising in the fabrication and erection of steel structures. Miller are a construction company with wide experience of major projects. In the late summer of 1994 the parties each became involved independently in negotiations with the professional advisers of Celtic Football Club in relation to proposals for the redevelopment of stadium buildings at Celtic Park. The intention of Celtic's advisers appears to have been that specialist sub-contract packages should be procured in advance of the appointment of the main contractor, but that following the appointment of the main contractor domestic sub-contracts should be entered into without nomination, and without the contractual structures which would be appropriate in a nominated sub-contract on standard industry forms. Whether that was a wise course for the present parties to follow may be open to question. Some at least of the difficulties which have arisen between them might have been avoided by direct negotiation of the sub-contact and an early determination of the terms and conditions of their relationship. As matters developed, direct contact between Wescol and Miller appears to have happened only on the eve of the commencement of work on the ground when, it may be, minds were concentrated on practical management of the project rather than on the formation of the sub-contract. In the result, parties proceeded with the work without resolving fully the terms of the sub-contract and, inevitably, difficulties have arisen. There are two problems which have to be dealt with at this stage, namely (a) whether Miller were entitled to deduct from interim payments made in the course of the works a "discount" at a rate of 2.5%; and (b) if they were not so entitled, whether they are liable to pay interest on the sums deducted from the dates on which they fell due.

At the invitation of Hutter Jennings & Titmarsh, Celtic's consulting structural engineers, Wescol quoted for a package of work in a letter sent to Celtic dated 30 August, 1994. The price quoted was £1,855,944.00 "nett". In the letter they stated:

A course of correspondence then ensued between Wescol and Bucknall Austin, Celtic's contract managers. In a letter dated 9 September, 1994, Bucknall Austin intimated that the sub-contract would require to be "back to back" with the main contract, without specification of the means by which that would be achieved, and that Wescol should identify any warranty issues identified in the written statement of the employers' requirements which caused them concern. It appears that Wescol interpreted that requirement broadly. On 14 September, 1994, they submitted a revised quotation for what had become a rather more substantial works package. The total "nett" quotation was in a sum of £4,891,691, to which was added a sum calculated at 1/39th of the nett quotation, and reference was made for the first time, expressly in relation to additional works, to a deduction for a "cash discount" of 2.5%. For all practical purposes the quotation was inflated to the extent necessary to ensure that the deduction of the "cash discount" brought the price back to the original "nett" quotation. In response to the requirement of 9 September, Wescol stated, inter alia,:

The provisions referred to, on page 15 of the section of the employers' requirements relating to the form of contract with the main contractor, modified the standard Scottish Building Contract form, and conditions of contract, relating to payment to the main contractor. The effect of the modifications as between the employers and the main contractor was not the subject of debate, but it is reasonably plain that Wescol's response to what they found was to assert, so far as they could in a question with Celtic's professional advisers, the basis of payment on which they were prepared to be engaged by the selected main contractor in due course.

Bucknall Austin wrote to Wescol on 20 September, 1994. They confirmed that it was Celtic's intention to "ask" the successful main contractor to enter into a sub-contract with Wescol for specified structural steelwork and precast concrete work, and authorised them to proceed with fabrication drawings and the pre-ordering of materials. With reference to the revised quotation, they stated, inter alia:

• Clause 30: it is confirmed that this job will progress on monthly valuations and with respect to payment terms, you will need to agree these with the successful Main Contractor."

Wescol responded on 21 September. Inter alia, they pointed out that there had been no discussions with the main contractor, and stated:

Bucknall Austin issued a revised letter of intent on 27 September, but the provisions which are material for present purposes are as quoted from the letter of 20 September. There was no response to the comments made by Wescol relative to the basis of their tender.

Wescol and Miller appear to have come into contact at about this time. Wescol wrote two letters to Miller on 28 September in terms which assume that Miller had been appointed or at least were to be appointed main contractor. They quoted for the whole works package, and for certain specified additional works, in one letter, and for savings in the other, but in similar terms. Each element of price and of saving in price was expressed as a sum of money qualified by the words "Less 2.5% cash discount". The principal letter, containing the quotation for the works, made no express reference to terms of payment, but incorporated values from the tender of 14 September, 1994. The letter setting out the savings bore to enclose the updated quotation, and stated:

1. Our work is carried out under a Standard DOM2, Form of Subcontract, unamended.
1. That payment and retention will be released in accordance with our previous correspondence..."

Wescol continued in correspondence with Celtic's professional advisers. On 29 September they wrote to Bucknall Austin in response to their letter of 27 September, referring inter alia to the status of prior correspondence as contract documents, and their stipulations as to the form of contract which would be acceptable. Bucknall Austin responded on 30 September by sending a revised letter of intent. Paragraph 8 of that letter repeated their earlier statements that the sub-contract terms would be 'back to back' with the main contract, and that with respect to payment terms Wescol would require to agree these with the successful main contractor.

In correspondence with Miller, Wescol quoted revised prices for particular items in a series of letters each of which quoted prices 'Less 2.5% cash discount'. On 10 October, Wescol wrote to Miller with a revised quotation for the works package in the sum of £4,959,672.00 'Less 2.5% cash discount'. The quotation included the sentence:

On 14 November, 1994, Miller issued a letter of intent to Wescol. They stated:

The list which followed included all of the correspondence between Wescol and Celtic's professional advisers and between Wescol and Miller which has already been mentioned. The contract sum was set out 'Less 2 1/2 % cash discount'. The letter concluded with the sentence:

Wescol responded on 23 December intimating that the contents of the letter were being checked against their records of the agreement reached and that they would comment on completion of that task. They looked forward to receipt of the sub-contract documents. On 9 February, Wescol responded:

1. Out work is carried out under a Standard Dom 2 form of Sub Contract, amended.
1. That payment and retention will be released in accordance with our previous correspondence...'

They again looked forward to receiving the sub-contract documents 'which should be in accordance with the above'. On 17 February, 1995, Wescol wrote again, referring to the lack of sub-contract documents, and correcting paragraph 1 of the earlier letter to 'Standard DOM 2 Form of Sub-Contract, unamended'.

By March, 1995, the parties were in dispute as to the timing of interim payments. The DOM 2 sub-contract form was not executed. The parties had a pre-commencement site meeting on 15 December, 1994, and Wescol commenced work on site on 17 December. It has been conceded by Miller that the DOM conditions of contract, which are identical so far as material in the two editions, apply.

The material provisions of the DOM form of sub-contract are contained in clause 21 which provides:

Clause 21.4 provided that the valuations by reference to which the sums payable fell to be determined should be completed 'up to and including a date not more than 7 days before the date when the first and each interim payment is due'.

The parties' contentions were foreshadowed in notes of argument. Briefly, for Wescol, Miss Paterson contended that, on a sound construction of the documents which were exchanged between and incorporated into the correspondence of the parties, the cash discount was a discount for prompt payment, that is payment within seventeen days from the date on which the payment was due, and that in each case payment fell due on the valuation date. Clause 21 did not necessarily determine the date of payment. It stated the last possible date, leaving parties free to follow normal trade practice and fix a date by reference to the valuation and payments cycle applicable under the main contract. Wescol had stated the relevant date in their letter of 14 September. In correspondence following the commencement of the works, a schedule of valuation dates had been agreed in accordance with ordinary practice. Miller had not paid timeously, and were not entitled to deduct and retain the cash discount. For Miller, Mr Cormack argued that on a sound construction of the documents the cash discount was a straightforward price reduction which was not conditional on prompt payment. DOM 2 had not been effectively incorporated into the sub-contract at the date of the first relevant payment. The incorporation of those conditions had to be understood as a variation of the contract. There was at the end of 1994 no provision regulating the dates of payment. Alternatively, Miller had paid within the periods permitted by clause 21 until prevented by arrestment. Even if deduction of the discount had been conditional on prompt payment, clause 21 provided the only measure of Miller's obligation, and there had been no failure in timeous payment.

It was a matter of agreement between Miss Paterson and Mr Cormack that a sub-contract was concluded by Miller's letter of 14 November, 1994, and Wescol's entering on the sub-contract works on 17 December, 1994. It is appropriate in the circumstances to take the letter of 14 November as the starting point in attempting to resolve issues, and to proceed thereafter to consider later events so far as necessary. The letter is in some respects a confusing document, considered simply as a matter of language. The incorporation into the letter of prior correspondence, to which Miller had not been party, was for the express purpose of defining the terms on which the order for the works was then intended to be placed. There is difficulty with the expression: 'The order will be placed on the contract conditions..' followed by a reference to the prior correspondence. There had been no prior agreement on 'the' contract conditions as between Wescol and Miller. In prior correspondence Wescol had clearly stipulated for DOM conditions of sub-contract. Bucknall Austin had referred to 'back to back' conditions without specification of the sub-contract conditions envisaged. Miller's letter confused the issue by ending with the stipulation: 'The conditions of contract to be as main contract'. It must have been clear to Miller that simple incorporation of the conditions of the main contract was impossible as between them and a domestic sub-contractor. The notion is totally without sense. Incorporation of main contract conditions is notoriously problematical in any event. Wholesale incorporation without modification would confuse lines of contractual obligation and right, and would be fundamentally at odds with any notion of privity of contract at different levels of the contractual hierarchy or of mutuality as between Miller and Wescol. Mr Cormack contended that whatever the sentence meant it was inconsistent with the application of DOM 1 or 2 conditions of sub-contract. However, if that were correct, the letter would be self-contradictory since there can be no doubt that the incorporation of Wescol's letters of 30 August, 14 September, 28 September, 29 September and 10 October carried explicit references to the DOM conditions as conditions of any contract Wescol were prepared to enter into. Wescol's stipulations for incorporation of these conditions was never challenged in correspondence, and was conceded by Miller in March, 1995, when payment terms became contentious. There is no qualification by Miller of the basis on which these and other letters were incorporated into the letter of intent. It was not suggested to me that the DOM sub-contract conditions were in any way incompatible with the main contract conditions as amended in this case. The modifications of the standard form conditions proposed for the main contract were contained in the pre-tender particulars circulated by Celtic's engineers. None of the correspondence suggested difficulty in achieving both 'back to back' compatibility and regulation of the sub-contract by DOM conditions. In undertaking to place a works order on the terms of the prior correspondence listed, in my opinion, Miller were undertaking to enter into a sub-contract on unamended DOM conditions, in one or other of the two editions mentioned, each of which contained clause 21 in identical terms. In my view, the DOM conditions therefore formed part of the contract from its inception. Miller's express oral acceptance of the application of the conditions, in about March, 1995, was, on this approach, an acceptance of existing reality rather than a variation of the sub-contract.

The incorporation of the prior correspondence into the letter of 14 November enables one to relate Wescol's price structure to the conditions. The prices quoted in the letter of 30 August, 1994 were 'nett' prices. There was a stipulation for DOM/1 or DOM/2 conditions to apply. A sub-contract was therefore anticipated at that stage with an unknown main contractor. In the revised quotation of 14 September, 1994, provision was made for a discount of 2.5% which could only be a discount as between Wescol and the successful main contractor. But the price was adjusted so that Wescol received the same net payment. Thus the main quotation can be analysed as follows:

+ 1/39th cash discount 122,292.00

£4,891,691.00

less 2.5% cash discount 122,292.00

£4,769,399.00

Wescol adjusted the quotation upwards to provide for the anticipated cash discount. The same pattern can be seen in other parts of the document. It would appear to follow that, if Miss Paterson's argument were to succeed, late payment would give Wescol the benefit of the uplift for the cash discount built into the revised price, but relieve them of the consequences of deduction by Miller. However, if that be the result of what parties agreed, there was no suggestion that the arrangement could not have effect. This is the practical context for the stipulation in the letter of 14 September that:

Bucknall Austin's response to this stipulation, also incorporated into Miller's letter, specifically referred it for agreement between Wescol and the successful main contractor. It is not possible to read the prior correspondence as incorporating or implying an agreement that this term should form part of any sub-contract entered into. However, in incorporating the terms of the prior correspondence without qualification, Miller must be taken, in my view, to have indicated their intent to incorporate the term in the proposed contract between themselves and Wescol. The letter of intent provided precisely the opportunity required for stating the basis on which Miller were prepared to engage Wescol. If it had been intended that that basis should be different from the basis stipulated by Wescol in prior correspondence, the letter might reasonably have been expected to set out the basis on which Miller did intend to instruct Wescol.

In my opinion, there was nothing inconsistent in the application of clause 21 and Wescol's stipulation as to payment. Clause 21 stipulates a period within which there must be initial payment, but not the point within that period at which payment is to be made. The flexibility which the clause provides allows the parties to select a date which will fit into the pattern of valuation and interim payment adopted for the main contract, and support the efficient working of the project as a whole. On Miller's approach, the clause entitles the contractor to delay payment to the sub-contractor to a date fixed by reference to the expiry of the permitted period, irrespective of any agreed programme for valuation. That is, in my opinion, inconsistent with the scheme of clause 21. Sub-clause 21.4 relates valuation dates to the initial and each subsequent monthly payment. The valuation date must be not earlier than seven days before the payment falls due. Accordingly, if the sub-contract valuation date is not brought into line with the valuation date for the main contract parties will be obliged to provide for the valuation of the sub-contract works independently of the main contract valuation. Inevitably there would be scope for difference, and one would hardly achieve an arrangement which could, in respect of payment at least, be described as "back to back" with the main contract. Failing agreement on a scheme of valuation and payment it would be a consequence of the limiting provisions of clause 21.2.1. that there would be incompatible valuation dates. But the primary question is whether there was an agreed regime, and the fall back provisions of the sub-clause do not assist one to determine that question. That depends on the terms of the correspondence. It is difficult to express any enthusiasm for the approach the parties adopted. The correspondence is not a model of clarity, and the accumulation of references to prior communings involving third parties is a prescription for confusion. But taking the matter as a whole, I consider that the terms of Wescol's letter of 14 September do form part of the contract, and, in the absence of any relevant counter-stipulation by Miller, must be taken to have been agreed by the incorporation of the letter into the letter of intent dated 14 November, 1994.

The incorporation of the terms for payment is determinative of the right of Miller to deduct the discount. In Team Services plc v Kier Management and Design Limited [1993] 63 BLR 76, the majority of the Court of Appeal construed the particular contract under consideration as providing for a price reduction irrespective of prompt payment. There are aspects of the correspondence in this case which might have been thought to point in the same direction. Wescol's original pricing structure was 'nett' and the arithmetical adjustments made to inflate the quotations to provide for the anticipated 'cash discount' might have suggested that Wescol's interests would have been fully served by payment net of discount without any particular stipulation as to time of payment, so long as the DOM 1 or 2 payment provisions were applied. But that would have ignored the specific references back to monthly valuations and to payment seventeen days thereafter in the letter of 14 September for example. From the outset Wescol stipulated both for the application of DOM conditions and for a specified relationship between valuation and payment. Those stipulations were compatible, and were consistent with what was agreed to be the ordinary business practice of correlating valuation dates. Miller's approach would have involved a departure from a uniform scheme of valuation and payment.

There was continuing correspondence in this case after work began. I have ignored it so far, on the view that one must consider the position at the date a contract was clearly entered into, and treat later stipulations with some care in determining what parties' contractual intent was. The position was confused. Wescol disputed receipt of Miller's letter of intent at or about the time it was dated. In a letter dated 23 December, 1994, they stated that the letter was handed to them on 15 December, 1994, at the pre-commencement site meeting. It was 9 February, 1995 before Wescol responded formally to the terms of the letter of intent. At that time they repeated their stipulations that the price had been quoted on DOM conditions, and that payment and retention would be released in accordance with previous correspondence. By March, the timing of payments had become contentious. It is at least unfortunate that these two experienced contractors did not make efforts to clarify the position when conflict emerged. But they did not. They never entered into the DOM sub-contract envisaged. They never formalised their relationship. They did agree valuation dates. But it is not appropriate to pray in aid what they did at that time without enquiry, even if in the circumstances of this case it had been accepted that evidence of implement of the contract was competent. In my opinion the question debated falls to be determined on the correspondence down to the date of commencement on site, and in the way I have set out.

It is not disputed that Miller did not meet the payment terms which formed part of the agreement so construed. They made interim payments broadly on the view of clause 21 which was pressed in argument, at least until arrestment prevented them from so doing. Since they failed to make payment timeously, on the view I have formed of the contract, they were not entitled to deduct and retain the discount, and decree falls now to be granted for payment of the sums retained.

The second issue debated was Wescol's entitlement to interest. I refer to my opinion in Ferguson v Duncan , unreported, 14 January, 1998, for a discussion of the basis on which interest might fall to be paid on a simple contract debt from a date prior to the commencement of litigation. The principle is that interest runs from citation unless the principal sum has been wrongfully withheld. In the event, I have held that Miller were wrong in law in retaining payment until the last date which might have been permitted under the DOM conditions of contract. But that is the fate of every party who fails in a litigation in which the scope of rights and obligations has been contentious. Wescol could have sought the views of the court on their rights as soon as this dispute arose in March, 1995. It would have been as easily resolved then as now, and I can see no basis for finding that Miller's position, though erroneous, was wrongful in any sense. Interest shall run from the date of citation.

I shall put the case out By Order on Monday 8 June 1998 at 2pm for discussion of the orders to be made in the light of this opinion.