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Construction Co (Denny) Ltd v. Bone Steel Ltd [2003] ScotCS 283 (29 October 2003)

OUTER HOUSE, COURT OF SESSION

CA250/01

OPINION OF LORD CLARKE

in the cause

ROBERTSON CONSTRUCTION COMPANY (DENNY) LIMITED

Pursuers;

against

(FIRST) BONE STEEL LIMITED; (SECOND) JOHN RAMAGE and JAMES YOUNG, being the whole partners of the firm RAMAGE YOUNG PARTNERSHIP

Defenders;

and

MDM DESIGN & MANAGEMENT LIMITED

Third Party:

________________

Pursuers: Tyre Q.C., Upton; Bennett & Robertson

Second Defenders: Smith Q.C., McCreadie Q.C.; Simpson & Marwick W.S.

29 October 2003

[1] In this commercial action the pursuers sue for payment of £501,571.25 together with interest thereon, in respect of loss and damage they allege they have suffered by reason of breach of contract on the part of the first and second defenders. The claim arises out of contracts in respect of the construction of an office block on a site at Laurelhill, Stirling. The pursuers were the main contractor in relation to the building works. The first defenders were employed as steel work subcontractors. The second defenders were employed as consulting engineers. The first defenders were allowed to convene MDM Design & Management Limited as a third party. The first defenders had subcontracted to the third party the production of certain drawings.

[2] An error in one of the drawings, produced by the third party, resulted in steel stanchions, which were constructed in accordance with the drawing, being too short so that the ceiling in the office block was too low by some nine inches. It is averred by the pursuers that once the error was discovered, a large part of the works had to be taken down and rebuilt, resulting in significant delay in the progress of the works beyond the agreed completion date. The pursuers aver that they have suffered loss and damage as a result of breaches of contract by the first and second defenders, whom they sue jointly and severally.

[3] The case came before me for a debate on the pursuers' plea to the relevancy of the second defenders' averments in relation to the contractual position that obtained between them. The pleadings, in this case, are prolix but for the present it is sufficient to note the following pleadings of the pursuers in relation to the contractual position as between themselves and the second defenders. In Article 2 of Condescendence the pursuers aver as follow:

"In terms of letters exchanged on 2^nd August and 10^th September, 1999 the Pursuers entered into a contract with Robertson Development Company (Denny) Ltd ("Development"), under which the Pursuers were engaged as design-&-build contractors to construct an office block on a site owned by Development at Laurelhill, Stirling. The development was known as Laurelhill Phase 3. The contract was to design, execute and complete the works in accordance with an enclosed drawing register. The contract sum, including fees, was £1,248,581."

In Article 3 the pursuers aver, inter alia, as follows:

"The pursuers entered into a further contract with the First Defenders, under which the latter were engaged as steel-work sub-contractors. They did so by exchange of tender and order on or about 1^st and 16^th June, 1999. In terms of those documents, the First Defenders agreed 'to carry out the steel work in accordance with [the] quotation dated 1^st June 1999', and accordingly 'to supply, fabricate, deliver and erect ... structural steelwork as indicated on drawing nos. ... 75 ...'"

In Article 6 of Condescendence it is averred by the pursuers, inter alia, as follows:

"The Pursuers also entered into a contract with the Second Defenders, under which the latter were engaged as the project engineers. It incorporated the terms of an Appointment executed by the Pursuers and the Second Defenders on 30^th October 1995. The Appointment provided at section 4 that the Second Defenders' 'service shall generally be in accordance with Agreement 3 of the A.C.E. Conditions of Engagement (1984)' as modified by the terms of the Appointment. The Appointment further provided at section 4 that the Second Defenders' services were to include 'Structural design of ... the building structure'. It further provided at section 7 that the Second Defenders would 'exercise reasonable skill, care and diligence in the performance of [their] services'. The Association of Consulting Engineers' said Agreement 3 provides at cl.5.1 that 'the Consulting Engineer shall exercise all reasonable skill, care and diligence in the discharge of the services agreed to be performed by him'."

[4] In their Answer 6 the second defenders aver as follows:

"Admitted that the pursuers entered into a contract with the Second Defenders for the provision of certain engineering services. The appointment is referred to for its whole terms. Quoad ultra denied. The second defenders were originally appointed by Robertson Development Company (Denny) Ltd as Consulting Engineers on the site in respect of phase 2 of the contract. At that time it was anticipated that, should the contract proceed to phase 3 with those employers, that the Second Defenders should be the consulting engineers on that part of the project. That contract was subject to the provisions of the 1984 A.C.E. Conditions of Engagement. The second defenders were appointed by Robertson Development Company (Denny) Ltd in respect of the earlier phases of the work. Phase 2 was completed and phase 3 (which is the subject of this action) was deferred. The second defenders were invited to provide service to the pursuers (viz. not Robertson Development Company (Denny) Ltd) in respect of phase 3 of the work. When appointed, at a meeting which took place on 22^nd April 1999, it was stated by W Robertson that the project was 'Design and Build led by the contractors', the 'contractors' being the pursuers. The said statement to the effect that the contract was 'Design and Build' was a material change to the type of contract that previously existed. At the date of the said meeting, the conditions that applied to phase 2 (i.e. the 1984 standard conditions) were no longer in use within the construction industry. They had been superseded by the 1995 Conditions hereinbefore referred to. The pursuers are called upon to state the purpose of the statement anent the contract being 'Design and Build' being made, unless it was made in an effort to redefine the terms of the contract to some extent. The alternation of this material factor would give rise to the respective obligations hereinbefore averred. As stated, the change was material. The contract which existed as between The Robertson Development Company (Denny) Limited and the second defenders and was subject to the 1984 Standard Conditions was materially different to that proposed by Mr Robertson on 22^nd April 1999. Following the meeting, the Pursuers wrote to the second defenders by letter dated 12^th May 1999. The letter sent asked for confirmation that the 'fee proposal' was 'as previously offered to our sister company'. By so stating, the Pursuers were recognising (i) that there was prior agreement which was at an end; (ii) that there were to be different parties to any agreement that could be reached; and (iii) that fees were subject to negotiation. That letter referred only to the fee proposal, and did not ask for confirmation that all other terms and conditions were to apply to the agreement. As stated, there had in any event been a material change to the basis of instruction by the statement that the contract was to be 'design and build led by the contractors'. The 1984 Conditions would thus have been inappropriate to such a contract. To the extent that any standard terms and conditions applied, they would have been the conditions applicable as at 1995, a fact well known to the pursuers; to Robertson Development; and to the Second Defenders."

Later on in the same Answer the second defenders aver as follow:

"The contract was not governed by the 1984 Conditions. Accordingly, to the extent that any standard terms and conditions were implied into the contract between the parties, the terms implied were those contained in the 1995 standard conditions. That these conditions would have been implied by custom of trade to govern the relationship between the Pursuers and the second defenders was known to both parties ..."

[5] The pursuers' case against the first defenders is based upon responsibilities which they aver these defenders had, as steel work subcontractors, responsible for the supply, fabrication and direction of the stanchions, which were, in the event, cut too short. The case against the second defenders, made by the pursuers, is that they should have, in terms of their contract, examined the drawing produced by the third party and should have picked up the error contained in it. The first defenders seek relief against the third party for any liability they may have in the matter on the footing that the third party was responsible for the production of the drawing in question.

[7] When the matter came before me for debate Mr Tyre, Q.C., senior counsel for the pursuers, advised me that there was common ground between the pursuers and the second defenders that the second defenders had not examined the relevant drawing and had consequently not picked up the error contained in it. The question was whether, in failing to do so, they were in breach of their contract with the pursuers. Again it was common ground between these parties that, if as averred by the pursuers, the contract between the parties was governed by Agreement 3 of the A.C.E. Conditions of Engagement (1984), hereinafter referred to as "Agreement 3", the second defenders, in failing to examine the drawing and pick up the error had been in breach of their obligations to the pursuers. If, on the other hand, as the second defenders appeared to aver, the contract between the parties was governed by the A.C.E. Conditions of Engagement (1995), Agreement c(1), hereinafter referred to as "the c(1) Agreement", it was common ground that there was no breach of any obligation owed by the second defenders to the pursuers in the circumstances. It was submitted, by senior counsel for the pursuers, that the second defenders had failed to aver a relevant case to support their contention that the contract was governed by the c(1) Agreement terms and conditions.

[8] Senior counsel for the pursuers drew my attention to the following averment of the second defenders in Answer 2:

"As main contractors, the Pursuers were responsible for setting out the contract work and for establishing that the position, levels, lines, dimensions and alignment of all parts of the contract were correct. 'Design and Build' contracts were recognised by the Association of Consulting Engineers in the early 1990s, as a developing entity in the profession, in which the Design and Build Contractor assumed responsibility for all technical aspects of the contract including the responsibility for the matters set out in the immediately preceding sentence. It was as a result of that recognition that in 1995 new standard form contracts were devised which included particular terms and conditions applicable when a Consulting Engineer is engaged to provide design services for Design and Build (stated on the standard contract to be a 'Design and Construct') Contractor. As hereinafter stated, the contract as between the Pursuers and the Second Defenders was governed by those terms (Agreement c(1) of 1995) and no other." (my emphasis)

Senior counsel for the pursuers then referred to me to the averments of the second defenders in Answer 6 which I have set out above. He drew particular attention to the sentence beginning "To the extent that any standard terms and conditions applied, they would have been the conditions applicable as at 1995". He also drew attention to the averments later on, which are to the following effect:

"The contract was not governed by the 1984 standard conditions. Accordingly, to the extent that any standard terms and conditions were implied in to the contract between the parties, the terms implied were those contained in the 1995 standard conditions. That these conditions would have been implied by custom of trade to govern the relationship between the Pursuers and the second defenders was known to both parties."

I was then referred by senior counsel for the pursuers to certain averments of the second defenders in Answer 7 which are to the following effect:

"As hereinbefore stated, the contract between the parties was not governed by the 1984 conditions. Prior to the commencement of phase 3, the parties to this action had no contract between them. As at the time of engagement of the second defenders by the pursuers, the standard conditions dated 1984 were no longer utilised within the industry. At the meeting at which the second defenders were invited to provide services, it was made clear by William Robertson, a director of the pursuers, that the pursuers were now engaged on a 'Design and Build' contract. That meeting took place on 22^nd April 1999. It was made clear to all those present that the pursuers would have all responsibility for the design and construction of the project. The limit of the second defenders involvement was to provide design expertise."

[9] Senior counsel for the pursuers pointed out nowhere in the second defenders' averments is it averred that the terms and conditions of the c(1) Agreement were expressly incorporated into the parties' contract or that they were even expressly referred to in communings between, or meetings of, the parties in 1999. That being so, there was no case pled of these terms and conditions being incorporated by reference into the parties' contract. The second defenders case that the c(1) Agreement terms and conditions applied must, therefore, be based on some kind of implication. There was, however, simply no basis, in averment, for supporting a case that the c(1) Agreement terms and conditions required to be incorporated, by necessary implication, to provide for "business efficacy". That left the possibility of a case of implication by reason of custom of trade, to which reference was made at one point in the second defenders' averments. It was common ground between the parties that the second defenders had been employed in phase 2 of the development, of which the works to which the present proceedings relate was phase 3, albeit that the main contractor in respect of phase 2 was not the pursuers but an associated company of the pursuers. It was also common ground that the contractual conditions applicable to the second defenders' engagement for phase 2 had been the Agreement 3 terms and conditions. That was the background to the present case. The pursuers had made detailed averments as to why the Agreement 3 terms and conditions applied to the parties' contract in relation to phase 3 as they had done in relation to phase 2, notwithstanding that there had been a change in the identity of the main contractor. Against all of that what the second defenders seemed to be saying was that because of some change of circumstances obtaining in the construction industry between the completion of the phase 2 contract and the commencement of the phase 3 contract, the Agreement 3 terms and conditions had become inappropriate or redundant. In respect of the kind of contractual arrangement to which the present proceedings related, it was apparently said that by custom of trade, the c(1) Agreement terms and conditions fell to be applied. If that was what the second defenders were endeavouring to contend, their averments were once again simply inadequate.

[10] Senior counsel for the pursuers referred me to a copy of the A.C.E. Conditions of Engagement (1995) c(1). It was clear, he submitted from their content, that they were simply a style of terms and conditions which parties to a contract were free to decide to use or not. They were not properly described, as the pleader of the second defenders' averments described them, as "standard conditions". They were simply published by the Association of Consulting Engineers as model forms which members of the profession may seek to use or not. The document made it clear, in any event, that it would be necessary to tailor them to suit any particular contract. Having regard to their status, therefore, it could not be said that they were implied into all contractual arrangements of the kind to which the present proceedings relate, as a matter of course, arising from custom of trade. The second defenders appeared to be maintaining, in Answer 6, that because at a meeting on 22 April 1999 phase 3 of the project was described by representative of the pursuers to be a "design and build contract", that resulted in the inference that the parties had agreed that their contract would not be subject to the Agreement 3 terms and conditions, which had applied in respect of the second defenders' involvement in phase 2, but that the c(1) terms and conditions, apparently without any modification, automatically applied. But the second defenders would require to go much further than simply referring to that remark, which is alleged to have been made by one of the pursuers' representatives at the meeting, whatever it might mean, and to set out a relevant case that as a matter of agreement the c(1) terms and conditions became part of the contract between the parties.

[11] Insofar as the second defenders relied on the law in relation to terms imported into a contract by custom of trade, their averments completely failed to meet the requirements for any such case to be made out. Senior counsel referred me to McBryde on Contract (Second Ed.) at para. 9.61 where it is stated:

"In order that a custom or a commercial usage may be binding upon parties to a contract, it is essential that it should be certain, that it should be uniform, that it should be reasonable and that it should be notorious."

At para. 9.62 it is further stated, inter alia,

"There must be a uniform adherence in a trade or locality. A few examples of acceptance in the past are not enough ... nor should many instances of a general practice (which may spring from express contract) be confused with a settled and established practice which amounts to the acceptance of a binding obligation in accordance with a custom apart from a particular bargain."

Reference was also made to the case of "Strathlorne" Steam Ship Co. v Baird & Sons 1916 SC (HL) 134 and the speech of the Lord Chancellor at page 134 and that Lord Shaw at pages 140-141, from which the statements of law in McBryde appear, to a large extent, to derive. Senior counsel for the pursuers submitted that the second defenders had failed to aver, in the present case, any custom that was notorious, uniform or certain. The existence of a model set of conditions, circulating in a particular profession, trade or industry for use by members of such profession, trade or industry, if they wished, and which required to be adapted to meet particular circumstances, could not amount to a custom of trade which imposed in all contracts, of a particular kind, the terms and conditions. For the foregoing reasons the entire basis of the second defenders' case regarding the terms and conditions which govern the parties' contract was irrelevant. Their averments in relation thereto should be deleted and not admitted to probation.

[12] In reply senior counsel for the second defenders, Mr Smith Q.C., sought a proof before answer on the whole issues between the parties. He accepted, however, that the second defenders' averments in relation to custom of trade were irrelevant and had to be deleted. He attempted to persuade the court that there were relevant averments on behalf of the second defenders that the c(1) contract terms and conditions had, in some way, been incorporated into the parties' contract, by implication, because of circumstances such as the remark, allegedly made by a representative of the pursuers at a meeting between the parties, that the phase 3 work would be "a design and build contract", but he did so, ultimately, somewhat faintly. His position was, however, that even if the second defenders' averments regarding what the terms and conditions of the parties' contract were, were held to be irrelevant, the second defenders were, nevertheless, entitled to put the pursuers to their proof that the contract was governed by the Agreement 3 terms and conditions.

[13] In reply to that last point made on behalf of the second defenders, senior counsel for the pursuers reminded me that initially, in their defences, the second defenders had accepted that the Agreement 3 terms and conditions applied to the parties' contract. They then altered their position to say that the parties' contract was governed by the c(1) contract terms and conditions. Their averments were then changed again and they reverted to averring that the Agreement 3 terms and conditions governed the position. Thereafter they, once again, changed their position and the case now founded in their pleadings was that the c(1) contract terms and conditions applied. At no stage, in all of this, had they ever suggested that there was a third possibility. If the second defenders' averments to effect that the parties' contract was governed by the c(1) Agreement terms and conditions fell to be deleted, as being irrelevant, they were left only with a bare general denial in relation to the pursuers' detailed averments that the Agreement 3 terms and conditions applied, and why that was so. There was simply no basis for entitling them, in that situation, to put the pursuers to the proof of those averments. Reference was made by senior counsel to the case of Ellon Castle Estates Co. Ltd v Macdonald 1975 S.L.T. (Notes) 66.

[14] I am entirely satisfied that the second defenders have completely failed to set out a relevant case that the c(1) Agreement terms and conditions governed the parties' contract. As has been noted, senior counsel for the second defenders, not surprisingly, conceded that the case averred on the basis of custom of trade was irrelevant and required to be deleted. As for the rest, I am entirely satisfied that there is a complete lack of sufficient averment to support a case that, by some means or other, the c(1) Agreement terms and conditions were incorporated into the parties' contract by implication (no case of express incorporation having been averred). The test of "business efficacy" as referred to in the authorities dealing with implication of contractual terms, is not met and, in any event, no submissions were made on behalf of the second defenders that it had been met by reference to authority. No other basis in law for implying the c(1) Agreement terms and conditions has, in my judgment, been relevantly averred. I am, accordingly, satisfied that all the second defenders' averments relating to the c(1) terms and conditions governing the parties' contract should not be permitted to probation. Having regard to the structure of the pleadings in this case, and their length, it was agreed, that in the event of the court accepting the pursuers' submissions in relation to these matters, a by order hearing should be fixed so that there could be discussion as to what precisely fell to be deleted from the second defenders' pleadings, as a consequence.

[15] With regard to the second defenders' submission that, in any event, the pursuers should be put to their proof, as to what were the terms and conditions which did govern the parties' contract in this case, I reject it. This is a commercial action. The parties in such procedure are expected to make clear, from the earliest possible stage, what their respective positions truly are in relation to the dispute between them and are expected not, ultimately, to seek to shelter behind some technical and arcane pleading point. Procedure in a commercial action, if it is to be applied properly in the spirit of what it is designed to achieve, demands a considerable measure of candour and co-operation between the parties. It, furthermore, demands that the commercial judge, if he is to be able to carry out his case management function under the procedure, receives the co-operation of parties and candid information from them as to what the issues between them may be, so that extent and nature of the procedure to be adopted, can be most effectively determined. In the present case, as senior counsel for the pursuers reminded the court, the second defenders, at no stage, until the debate, gave any indication, at any of the preliminary or procedural hearings that have taken place in this case, when they were being enjoined to make clear their position as to what they said were the terms of their contract with the pursuers, suggested that there could be a third possibility, as to the terms and conditions which governed the contract. They, themselves, as has been noted, veered back and forth from averring that the Agreement 3 terms and conditions governed the position to saying that the c(1) Agreement terms and conditions were, in fact, what ruled. In that situation I am entirely satisfied that they are not entitled to shelter now behind a general denial and to put the pursuers to the proof of their averments on the position being that the Agreement 3 terms and conditions applied. In a contract case, like the present, it is, in my judgment, simply not sufficient for one of the parties to a contract, when admitting that there was a contract between the parties, to refrain from saying what the terms of the contract were and simply to sit back and put the other party to the proof of the terms of the contract which they aver. While the case of Ellon Castle Estates, which was cited to me, is not directly in point, the observations of Lord Stewart in that case fall to be applied to the present case. At column 2, page 66 of his Opinion in that case Lord Stewart said this:

"The unreality of strict adherence to rules of construction of pleadings in this case was emphasised by the fact that it was not suggested in the course of the argument addressed to me by counsel for the defender that there really was any stateable defence at all. Our whole system of pleading and of disposal of cases upon preliminary pleas must depend upon each party stating with candour what are the material facts on which he relies and admitting the facts stated by his opponent which he knows to be true."

That dictum was pronounced in a case involving a contractual dispute and as I have already indicated, the observations contained therein seem to me entirely apt to the present case. In any event, the submission made by senior counsel for the second defenders on this aspect of the case is, in my judgment, completely undermined by the second defenders' own averment in Answer 2 that "as hereinafter stated, the contract as between the pursuers and the second defenders was governed by those terms (Agreement c(1) of 1995) and no other" (my emphasis).

[16] I shall, in the circumstances, accede to the suggestion made by senior counsel for the pursuers that the case should be put out by order so there can be discussion as to the appropriate order that should be pronounced in the light of the decision contained in this Opinion.