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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> City Link Development Co Ltd v. Lanarkshire Housing Associated Ltd [2004] ScotCS 131 (04 June 2004)
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Cite as: [2004] ScotCS 131
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City Link Development Co Ltd v. Lanarkshire Housing Associated Ltd [2004] ScotCS 131 (04 June 2004)
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OUTER HOUSE, COURT OF SESSION |
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OPINION OF LORD MACKAY OF DRUMADOON in the cause CITY LINK DEVELOPMENT COMPANY LTD Pursuer; against LANARKSHIRE HOUSING ASSOCIATION LIMITED Defender:
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Pursuer: Keen, Q.C.; McGrigor Donald
Defender: Howie, Q.C.; MacRoberts
4 June 2004
Introduction
[1] The pursuer is a residential and commercial development company. During 1995 the pursuer became a party to a deferred purchase scheme arrangement, in terms of which the pursuer was able to purchase a site at Watling Street, Motherwell ("the Site") from Scottish Enterprise. One of the pursuer's directors identified the Site as suitable for the erection of social housing. The pursuer then approached the defender, which was (and remains) the local housing association for the area within which the Site lies. Discussions then ensued between representatives of the pursuer, Scottish Homes and the defender, with a view to reaching agreement to develop the Site for social housing. In due course, the pursuer prepared an outline development scheme for the Site. That scheme included details of an appropriate design and specification for the proposed housing units. It appears that during the period between 1995 and 1997 there was insufficient funding available from Scottish Homes, to allow development of the Site to proceed.[2] By late 1997, however, after further discussions between the parties and Scottish Homes, the position had changed and the parties reached agreement that development of the Site could commence. The pursuer, for its part, undertook to exercise its rights under the deferred purchase share arrangement and to acquire the Site. It agreed with the defender that the title to the Site should be transferred directly to the defender. In return the defender agreed to contract with the pursuer for the design and building of the housing units, which it was proposed should be erected on the Site. The pursuer avers that various other matters were also agreed during late 1997 and that, thereafter, the pursuer instructed its solicitors, McGrigor Donald, to draft a formal agreement reflecting the terms of the agreement that the parties had entered into. That resulted in a formal Minute of Agreement being executed by the pursuer on 24 March 1998 and by the defender on 27 March 1998 ('the Minute of Agreement').
[3] The Minute of Agreement, in which the pursuer is referred to as 'City Link' and the defender as 'Lanarkshire', contains the following provisions:
"WHEREAS City Link and Lanarkshire have reached agreement as to certain matters relating to the Project (as hereinafter defined) NOW THEREFORE it is hereby agreed between City Link and Lanarkshire as follows:-
1. Definitions
1.1 In this Agreement (including any Schedules) unless the context otherwise requires the following expressions shall have the following meanings:-
1.1.1 "Agreement" means this Agreement and any variation or amendment executed by the parties hereto;
1.1.2 "CBC" means Central Building Contractors having their Registered Office at 119 Whitefield Road, Govan, Glasgow;
1.1.3 "the Contract" means a Design and Build Contract or Contracts and based on the JCT (1981) Edition Standard Form of Building Contract with Contractors Design (July 1997 Revision) issued by the Scottish Building Contract Committee format to be entered into between Lanarkshire and either City Link, or CBC for the construction of the Project on the Site in three phases or otherwise as the parties may agree; which Contract or Contracts will comply with quality and cost parameters laid down by Scottish Homes or their successors as existing at the time or times of entering in to the Contract or Contracts. The Contract or Contracts will specify the terms and conditions applicable to the construction of the Project including, inter alia a mechanism or formula ("the pricing mechanism") under which the price payable by Lanarkshire can be calculated with certainty. The Contract or Contracts will further specify that the pricing mechanism will remain fixed for a period of two years from the date of conclusion of the Contract in respect of any works undertaken under the Contract or Contracts within such period of two years, whether in respect of Phases 1, 2 or 3 of the Project or otherwise. But the pricing mechanism will be adjusted in accordance with the Tender Prices Index, as published by the Building Cost Information Service of the Royal Institution of Chartered Surveyors conform to normal practice of the Construction Industry and taking the date of execution of the Contract as the base reference date, in respect of all and any works undertaken in respect of the Project after the expiry of the said two year period. For the avoidance of doubt, it is agreed that, for the purpose of the Contract, Phase 1 of the Project will include, completion, to base course level, of the access roadway serving the project and inter alia the development proposed for adjoining subjects as said roadway is delineated and marked as such on the Plan;
1.1.4 "the First Date" means 25th March 1998, or such other date as City Link and Lanarkshire may agree as at which date vacant possession of the subjects of offer shall be given to Lanarkshire;
1.1.5 "the First Payment" means Five hundred and Fifteen Thousand Pounds (£515,000) Sterling, which payment which (sic) does not attract any Value Added Tax payable by Lanarkshire;
1.1.6 "the Interest Rate" means four per centum per annum above the base lending rate from time to time of the Bank of Scotland;
1.1.7 "the Phases" mean the phases 1, 2 and 3 into which the Project will be subdivided as shown delineated and marked demonstratively as such on the plan annexed and signed as relative hereto;
1.18 "the Project" means the construction in accordance with detailed planning consent, roads construction consent, building warrant and other relevant statutory consents ("the consents") on the Site of 104 residential units (or such other number as may be agreed), with associated infrastructure works, landscaping and others;
1.1.9 "the Site" means that plot or area of land lying to the north of Watling Street, Motherwell outlined in red, blue and green on the plan annexed and subscribed as relative hereto being the subjects particularly described in the draft Feu Disposition annexed and signed as relative thereto.
1.10 "The Second Date" means the nearest business day falling eight months after the First Date.
1.1.11 "The Second and Subsequent Payments" means all further sums or payments due by Lanarkshire to City Link or CBC in respect of the Project.
2. As soon as reasonably possible after execution of this Agreement City Link and Lanarkshire shall enter into discussion with a view to agreeing by The Second Date (i) the detailed terms and conditions of the Contract and (ii) the pricing mechanism.
3. As at The First Date Lanarkshire will make the First Payment to City Link to account of Lanarkshire's obligations under the Agreement and the Contract;
3.1 Lanarkshire shall make the Second and Subsequent Payments in such manner as Lanarkshire and City Link or CBC shall agree.
....
6. Where Lanarkshire and City Link have not reached agreement conform to Clause 2 hereof as a result of Lanarkshire not receiving adequate funding from Scottish Homes by The Second Date then Lanarkshire or City Link shall be entitled to terminate this Agreement on the following terms and conditions:-
6.1 City Link shall repay to Lanarkshire the first payment together with interest thereon at the base rate of the Bank of Scotland from time to time from the first date until repayment in terms hereof.
6.2 Lanarkshire shall grant a valid marketable title, free of any Charges or incumbrances and conform to condition 4 hereof (mutatis mutandis) of the Site in favour of City Link; the Agreement shall thereafter be deemed to be terminated with no expenses being due to or by the parties except in respect of pre-existing breach.
....
8. It is a material condition of this agreement that The First Payment will be paid by Lanarkshire prior to 3.00 pm on the first date. Time shall be of the essence.
8.1 Notwithstanding consignation if Lanarkshire fails to make The First Payment prior to 3.00 pm on the First Date Lanarkshire shall pay City Link interest on the whole or any part of The First Payment outstanding at the Interest Rate from the First Date until payment thereof. The provisions of this clause shall not operate in respect of any period of delay attributable to City Link or its agents.
....
10. City Link will be responsible for obtaining all Planning Consents, Building Control Consents, Road Construction Consents and all other necessary Consents for the proposed development of the Site.
...."
It is to be noted that whilst the Minute of Agreement is drafted on the basis that it contains 'conditions' rather than 'clauses', the summons and the defences have been drafted on the reverse basis. For the purposes of this Opinion, I intend to follow the approach adopted by parties in their written pleadings.
[4] The plan referred to in Clause 1.1.9 of the Minute of Agreement indicated that Phase 1 would include 34 housing units, Phase 2 38 housing units and Phase 3 32 housing units.[5] The pursuer also avers that, during March and April 1998, further discussions took place between the parties in relation to the overall budget cost for the three phases of the development. It is averred that the budget cost was agreed as follows:
Phase I £1,508,537.00
Phase 2 £1,580,830.00
Phase 3 £1,479,594.00
Total £4,568,961.00
Details of the calculation of those budget cost figures were set out in a document entitled "Reconciliation of Agreed Tender Cost", which has been lodged as a production in the action (No. 6/9 of Process) and was referred to by both counsel, during the course of submissions.
[6] The parties subsequently entered into three building contracts in respect of the development of the Site. The first building contract between the pursuer and the defender related to Phase 1 of the development of the Site ("the Phase 1 Building Contract") and was constituted by a Form of Tender dated 23 February 1998 and an Acceptance of Tender dated 4 August 1998. In the Form of Tender, the contract sum is specified as being £1,609,301.00, whereas in the Acceptance of Tender, the tender sum is stated as being £1,703,721. The pleadings provide no explanation of these differing figures.[7] The second building contract between the pursuer and the defender related to Phase 2 of the development of the Site ("the Phase 2 Building Contract") and was entered into on 10 and 24 August 1999. A copy of that building contract has been lodged in process. The building contract, in which the defender is obviously referred to as 'the Employer' and the pursuer as 'the Contractor', is based on the Standard Form of Scottish Building Contract With Contractors Design (April 1998 Revision) issued by the Scottish Building Contract Committee. The contract sum in that building contract was £1,778,741.00. That building contract contains the following clauses:
"1. The Contractor will carry out and complete the Employer's Requirements in accordance with the Contractor's Proposals.
2. The Employer will pay to the Contractor the Contract Sum or such other sum or sums as shall become payable in accordance with Alternative B of Appendix III hereto and the Conditions referred to in clause 3 hereof.
3. The Works shall be completed in accordance with and the rights and duties of the Employer and the Contractor shall be regulated by:
3.1 The Conditions of the Standard Form of Building Contract With Contractor's Design 1981 Edition and the Supplemental Provisions known as the VAT Agreement thereto issued by the Joint Contracts Tribunal.
.... "
Clause 3.2 specifies which JCT amendments apply. Appendix II to the Phase 2 Building Contract defines the Base Date as being 2 December 1998, the Date of Possession as being 26 July 1999 and the Date for Completion as being 24 July 2000. It also provides that Clause 36 applies for the purposes of Fluctuations.
[8] The third building contract between the pursuer and the defender relates to Phase 3 of the development of the Site ("the Phase 3 Building Contract") and was entered into on 14 and 22 February 2000. A copy of that building contract was also lodged in process. It purports to having been based on the Scottish Building Contract with Contractors Design (May 1999 Edition). The contract sum specified in that contract was £1,680,635.00. Clause 3 of that contract was in the following terms:
"3 The Works shall be completed in accordance with and the rights and duties of the Employer and the Contractor shall be regulated by:
3.1 The Conditions of the Standard Form of Building Contract With Contractor's Design 1998 Edition and where so stated in Appendix II, upon and subject to the JCT Supplementary Provisions issued February 1988 which modify said Conditions and the Supplemental Provisions known as the VAT Agreement thereto issued by the Joint Contracts Tribunal Limited.
3.2 The Scottish Supplement forming Appendix I hereto.
3.3 The Abstract of the said Conditions forming Appendix II hereto.
3.4 Alternative Methods of Payment forming Appendix III hereto.
3.5 The Employer's Requirements, the Contractor's Proposals and the Contract Sum Analysis described in Appendix IV hereto,
all of which are held to be incorporated in and form part of this Contract.
.... "
In terms of Appendix II of that contract the Base Date was 13 August 1999, the Date of Possession 14 February 2000 and the Date of Completion 12 February 2001. That Appendix also provided that Fluctuations should be regulated in terms of Clause 36.
[9] It is self-evident that the definition of the "contract sum" in each of the Phase 2 and Phase 3 building contracts does not contain any provision reflecting the terms of Clause 1.1.3 of the Minute of Agreement, to the effect that the prices payable to the pursuer will be adjusted in accordance with the Tender Price Index, in respect of all or any works undertaken by the pursuer after the expiry of a period of 2 years from 'the date of execution of the Contract'. How that phrase should be construed is obviously a matter of dispute between the parties, although they are, of course, agreed that 4 August 2000 was two years from the date on which the Phase 1 Building Contract was concluded.
Dispute between the parties
[10] The dispute between the parties can be summarised in the following terms. The pursuer avers that the contract sums in the Phase 2 and Phase 3 Building Contracts were greater than the cost parameters originally agreed with Scottish Homes and the budget cost agreed between the parties, as outlined in the "Reconciliation of Agreed Tender Cost" (No. 6/9 of Process). This was due to various changes in the specification of the works which had been required by the defender. It is further averred, on behalf of the pursuer, that, those changes apart, the contract sums were in accordance with the budget cost and fell within the cost parameters that had been agreed with Scottish Homes in 1995.[11] The pursuer avers that the contract sum in each of the Phase 2 and Phase 3 Building Contracts was at the same level, as it would have been, had it been negotiated by the pursuer in 1995. The pursuer avers that the contract sums thus took no account of the passage of time since 1995. It may be significant to note that those averments relate to 1995 and not to 1998. In any event, what the pursuer contends is that on a proper construction of Clause 1.1.3 of the Minute of Agreement, it is entitled to have the contract sums in each of the Phase 2 and Phase 3 Building Contracts adjusted in accordance with the Tender Price Index in respect of all and any works undertaken by the pursuer after 4 August 2000, being the expiry of a period of 2 years from the conclusion of the Phase 1 Building Contract. The pursuer contends that the terms of the Minute of Agreement remain in force and should be given effect to in accordance with the agreement between the parties, which it reflects. The principal contention on the part of the pursuer is to the effect that the Minute of Agreement is a collateral agreement, collateral to each of the Phase 2 and the Phase 3 Building Contracts.
[12] The defender, for its part, contends that the contract sums to be paid under the Phase 2 and Phase 3 Building Contracts fall to be determined upon the terms of those contracts alone, without any reference to the provisions of the Minute of Agreement. It is argued that the Minute of Agreement is not collateral, that it was an agreement antecedent to the Phase 2 and Phase 3 Building Contracts and that quoad the matters within the province of those two building contracts the Minute of Amendment was superseded by the provisions of those building contracts.
Conclusions of summons
[13] The conclusions in the summons are in the following terms:
"1 For declarator that, by virtue of clause 1.1.3 of a minute of agreement between the pursuer and the defender, executed on 24th and 27th March 1998 ("the Minute of Agreement"), the pursuer is entitled to have the "Contract Sum" in terms of
(i) a building contract between the pursuer and the defender, executed on 10th and 24th August 1999, in respect of phase 2 of a building project at Watling Street, Motherwell ("the Phase 2 Building Contract"), and
(ii) a building contract between the pursuer and the defender, executed on 14th and 22nd February 2000, in respect of phase 3 of the said building project ("the Phase 2 Building Contract")
adjusted in accordance with the Tender Prices Index referred to in clause 1.1.3 of the Minute of Agreement, in respect of all and any works undertaken by the pursuer in respect of the said building project after 4th August 2000, being the expiry of a period of two years from the entering into of a building contract between the pursuer and the defender dated 23rd February and 4th August 1998 relative to phase 1 of the said building project.
2. For payment by the defender to the pursuer of the sum of ONE HUNDRED AND SEVENTY-FOUR THOUSAND SEVEN HUNDRED AND SEVENTY-SIXTY POUNDS (£174,776) STERLING together with interest at the rate of 5% over the Base Rate of the Bank of England per year from the date of citation, or at such other rate and from such other date as the court sees fit, until payment.
3. For payment by the defender to the pursuer of the sum of THIRTY-SEVEN THOUSAND NINE HUNDRED AND FIFTY-THREE POUNDS (£37,953) STERLING.
4. In the alternative, for rectification, in terms of section 8(1)(a) of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985, of
(i) the definition of "the Contract Sum" contained in the Phase 2 Building Contract so that there is added, at the end of the said definition, the following:
', which sum shall be adjusted in accordance with the Tender Prices Index referred to in clause 1.1.3 of the Minute of Agreement entered into between the Employer and the Contractor, and executed on 24th and 27th March 1998, in respect of all and any works undertaken by the Contractor after 4th August 2000, being the expiry of a period of two years from the entering into of a building contract between the Employer and the Contractor dated 23rd February and 4th August 1998 relative to phase 1 of the building project at Watling Street, Motherwell, of which the present contract forms phase 2 thereof.'; and
(ii) the definition of "the Contract Sum" contained in the Phase 3 Building Contract so that there is added, at the end of the said definition, the following:
',which sum shall be adjusted in accordance with the Tender Prices Index referred to in clause 1.1.3 of the Minute of Agreement entered into between the Employer and the Contractor, and executed on 24th and 27th March 1998, in respect of all and any works undertaken by the Contractor after 4th August 2000, being the expiry of a period of two years from the entering into of a building contract between the Employer and the Contractor dated 23rd February and 4th August 1998 relative to phase 1 of the building project at Watling Street, Motherwell, of which the present contract forms phase 3 thereof.' "
[15] Conclusion 4, which proceeds as an alternative to Conclusion 1, seeks rectification of the Phase 2 and Phase 3 Building Contracts in terms of Section 8(1)(a) of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985. It is based on the contention that, if the pursuer's principal contention is not well founded, then the provisions of Clause 1.1.3 of the Minute of Agreement provide a factual basis for rectifying the provisions of both the Phase 2 and the Phase 3 Building Contracts.
Scope of debate
[16] The action proceeded to debate before me. I was invited by senior counsel for the defender to dismiss the action, failing which to exclude from probation certain averments in Articles 2 and 3 of condescendence, which deal with discussions between the pursuer and the defender and Scottish Homes that preceded the signing of the Minute of Agreement in March 1998. The pursuer, for its part, sought a proof before answer, it being accepted by senior counsel for the pursuer that whilst, as a matter of relevancy, it might be open to me to accept certain of the arguments being advanced on behalf of the pursuer, this was not a situation in which the pursuer could invite the Court to grant decree de plano in terms of the conclusions of the Summons.[17] In opening his submissions, senior counsel for the defender submitted that, if the correct construction of Clause 1.1.3 of the Minute of Agreement is that the two year price "standstill", in respect of each of the Phase 2 and Phase 3 Building Contracts, should apply separately and independently from the dates on which the Phase 2 and Phase 3 Building Contracts were respectively entered into, then the pursuer's case would fail and the action should be dismissed. In that event, both the declaratory conclusion and the conclusion for rectification would be ill-founded. The two monetary conclusions, being dependent on the success of one or other of the declaratory and rectification conclusions, would then fall to be regarded as being unsupported by relevant averments and likewise would fall to be dismissed as being irrelevant. At this point, senior counsel for the pursuer intervened to accept that general proposition.
[18] As far as the declaratory conclusion of the summons is concerned, senior counsel for the defender submitted that the pursuer's case depended on the proposition that the Minute of Agreement remains in force and is a collateral agreement. He submitted that the Minute of Agreement is not and never was intended to be collateral, as far as the Phase 2 and 3 Building Contracts are concerned. The two Building Contracts had been intended to supersede the Minute of Agreement, at least in relation to building and construction matters. As far as such matters were concerned, the provisions of the Building Contracts were intended to be the sole measure of the parties' rights and duties towards each other. He submitted that was clear from the language of Clause 1.1.3, which looked forward to the conclusion of the building contracts. Such language was inconsistent with it being intended that the Minute of Agreement should be a collateral agreement in respect of such further contracts. In any event, the style of contract adopted, when the Phase 2 and Phase 3 Building Contracts were concluded, was inconsistent with the Minute of Agreement having been treated as a collateral agreement. Collateral agreements entrench on the same areas as the main contracts to which they relate. They cannot be contradictory of the provisions of those main contracts. The Building Contracts for Phases 2 and 3 were in the standard form that the parties had envisaged, when the Minute of Agreement had been entered into. The provisions of Clause 3 in each of the Phase 2 and Phase 3 Building Contracts were inconsistent with the contention that the Minute of Agreement was intended to be a collateral agreement, as far as the subject matter of those Building Contracts was concerned. The provisions of those two Building Contracts could not be cut down by another document. The provisions of the two Building Contracts covered the whole rights and duties of the parties in relation to the building of Phases 2 and 3 of the Project. In these circumstances the pursuer's averments seeking decree in terms of the declaratory conclusion were irrelevant.
[19] Turning to the issue of rectification, senior counsel for the defender pointed out that it was important to recognise that what was being sought was the alteration of certain provisions of the Phase 2 and Phase 3 Building Contracts, so as to reflect what the pursuer contended to be the correct construction of Clause 1.1.3. If the Court is satisfied that a document, which is intended to express or to give effect to an agreement, fails to express accurately the common intention of the parties to that agreement, at the date when it was made, the provisions of the Section 8(1)(a) of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985 permit the Court to order that the document be rectified in any manner that it may specify, in order to give effect to that intention. Senior counsel submitted that as the pursuer contended that the common intention of the parties was set out in the terms of the Minute of Agreement, it was first necessary for the Court to construe the provisions of the Minute of Agreement. That involved looking again at the provisions of Clause 1.1.3, not to re-write the terms of that Clause, but to construe the Clause, together with Clause 2, with a view to determining on what the parties had been agreed at the time that the Minute of Agreement was entered into. In carrying out that exercise, it was important to have regard to the guidance to be found in Bank of Credit and Commerce International SA (in liquidation) v Ali and Others [2002] 1 A.C. 251 and, in particular, in the speech of Lord Hoffman at paragraphs [37]-[39]
"[37] I agree with my noble and learned friend that the first issue raises an ordinary question of construction. What would a reasonable person have understood the parties to mean by using the language of the document against all the background which would reasonably have been available to them at the time? But I regret that I cannot agree with his answer. It appears to me to give too little weight to the actual language and background and to rely unduly upon the expression of judges used in other cases dealing with different documents.
[38] The language of the document is very wide. The impression it conveys is that the draftsman meant business. He has gone to some trouble to avoid leaving anything out. He uses traditional style: pairs of words like 'full and final settlement', 'all or any claims', 'that exists or may exist' and phrases like 'whether under statute, Common law or in Equity' and 'of whatsoever nature'. Admittedly he could have gone further .... The modern English tradition, while still erring on the side of caution, is to avoid the grosser excesses of verbiage and trust to the judges to use common sense to get the message. I think that this tendency should be encouraged. So I think that anyone who was simply reading the document without preconceptions would accept that the draftsman was not leaving deliberate gaps. It does not however follow that the language was to be read completely literally. There may be limitations in scope to be inferred from the background, limitations from context which the draftsmen may have thought to obvious to mention. But that is a different matter from saying that he did not use enough words.[39] The background is however very important. I should in passing say that when, in Investors Compensation Scheme Ltd v West Bromwich Building Society, Investors Compensation Ltd v Hopkins & Sons (a firm), Alford v West Bromwich Building Society, Armitage v West Bromwich Building Society [1998]1 All.E.R. 98 at 114, [1998] 1 W.L.R. 896 at 913, I said that the admissible background included 'absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man', I did not think it necessary to emphasise that I meant anything which a reasonable man would have regarded as relevant. I was merely saying that there is no conceptual limit as to what can be regarded as background. It is not, for example, confined to the factual background but can include the state of the law (as in cases in which one takes into account that the parties are unlikely to have intended to agree to something unlawful or legally ineffective) or proved common assumptions which were in fact quite mistaken. But the primary source for understanding what the parties meant is their language interpreted in accordance with conventional usage: '... We do not easily accept that people have made linguistic mistakes, particularly in formal documents.' I was certainly not encouraging a trawl through 'background' which could not have made a reasonable person think that the parties must have departed from conventional usage."
[21] In the alternative, senior counsel for the defender argued that at the time the Minute of Agreement had been entered into, the Project had been at an embryonic stage. He suggested that all things were possible: the number of houses might have been 104, it might not have been; there might have been one or more building contracts; there might have been one, two or three phases; and building contracts could have been concluded at different times, albeit that there was a clear expectation, if not indeed intention, that the Project would take longer than two years. Senior counsel suggested that all such factors placed constraints on the correct construction of Clause 1.1.3. It was not possible to point to any immediate drafting failure, albeit that the term 'contract' had been used rather 'promiscuously', in that sometimes the word 'contract' began with a capital letter 'C' and on other occasions with a small 'c'. Senior counsel submitted that if one looked at the language of Clause 1.1.3, there were a number of indicators that the standstill arrangements referred to therein, the fixing of the price for 2 years from the date of the conclusion of the contract, were to apply separately and independently to each building contract. That was particularly so when regard was had to the first sentence of Clause 1.1.3, where there was a requirement for the "Contract or Contracts (to) comply with quality and cost parameters laid down by Scottish Homes or their successors as existing at the time or times of entering into the Contract or Contracts". Senior counsel for the defender argued that if Scottish Homes' parameters altered, as the years went by, the pursuer would have the opportunity to alter his tender price for an individual building contract, in light of the current parameters laid down by Scottish Homes. The standstill provision would kick in from the date of conclusion of the building contract in question. The contractor would have two years at the standstill price and thereafter his rates would be uprated after two years had expired. Such a pricing arrangement would not involve any breach of Scottish Homes' cost and quality parameters.
[22] If, on the other hand, the pursuer's construction was correct and one required to take account of Scottish Homes' cost parameters at the date the first building contract was concluded, it was possible that Scottish Homes' parameters would have been tightened by the date of the Phase 3 Building Contract. If that occurred, a provision in the Phase 3 Building Contract allowing the pursuer an increase in rates, two years after the date of conclusion of the Phase 1 Building Contract, would mean that the parties could not comply with Scottish Homes' cost parameters as at the date of the conclusion of the Phase 3 Building Contract. Senior counsel argued that the construction he sought to place on Clause 1.1.3 made commercial sense. It offered the pursuer protection against there being only one building contract, which lasted for more than two years. It took account of the possibility that Scottish Homes' parameters might change. On the other hand, the defender wished some security on the issue of cost. Subject to the issue of fluctuations covered by Clause 36, the defender wanted the prices for the individual building contracts to be set in stone, at the dates on which each of the building contracts were concluded, with up-rating of the prices being permitted, in the event that the work of a particular building contract extended over a period of more than two years.
[23] Senior counsel for the defender argued that the common intention of the parties in relation to a price mechanism, as set out in Clause 1.1.3, was directed to a set of events that in the event had not occurred. In his submission there was nothing wrong with the Phase 2 and Phase 3 Building Contracts that required to be rectified. In the particular circumstances of this case, it was open to the Court to hold, without hearing any evidence, that it was satisfied the common intention of the parties had not been that to which the conclusion for rectification is directed. If the Court reached such a view, that would mean that the Court had not been persuaded that the Phase 2 and Phase 3 Building Contracts had failed to accurately express the common intention of the parties at the time those contracts were entered into. In such circumstances, the pursuer would not have established that rectification was necessary.
[24] In concluding his submissions, senior counsel for the defender argued, by way of a subsidiary point, that certain averments in Articles 2 and 3 of Condescendence, which deal with the negotiations leading up to the Minute of Agreement and, indeed, the conclusion of an agreement antecedent to the preparation of the Minute of Agreement, should not be admitted to probation. It was submitted that those averments dealt with prior negotiations, which were irrelevant to the construction of the Minute of Agreement. It was stressed that in the present action the pursuer was not seeking to rectify the Minute of Agreement or any agreement antecedent to the Minute of Agreement.
Submissions for pursuer
[25] In responding to those submissions, senior counsel for the pursuer invited me to refuse the defender's motion for dismissal of the action and to allow a proof before answer. The pursuer sought a proof in relation to all issues between the parties in respect of the remedies sought, including those relating to quantum. Decree de plano was not being sought.[26] Senior counsel for the pursuer stressed that the defender could only succeed at debate if the Court was satisfied, without enquiry, (a) that the defender was correct in characterising the Minute of Agreement as it not being a collateral agreement and (b) that the defender's construction of Clause 1.1.3 must be correct. Indeed, senior counsel for the pursuer acknowledged that the critical issue was whether the defender's construction of Clause 1.1.3 was correct, because if it was, there would be no relevant basis for seeking rectification of the Phase 2 and Phase 3 Building Contracts. On the defender's construction of Clause 1.1.3, even if the Minute of Agreement is a collateral agreement, that would not support the claims for payment set out in the summons.
[27] Senior counsel for the pursuer submitted that it was appropriate that the issue as to the correct construction of Clause 1.3 be determined after hearing evidence. Whilst it might be possible for the Court to resolve that issue of construction in favour of the pursuer, as a question of relevance, that would depend on the Court accepting pro veritate the pursuer's averments of fact. It was sensible that there should be an enquiry as to the facts, because the actual commercial purpose of the Minute of Agreement was relevant to the issue of its correct construction. He argued that the correctness of that approach had been illustrated by the extent to which senior counsel for the defender had himself relied on factual assertions throughout his submissions.
[28] Senior counsel for the pursuer also referred to the case of Bank of Credit and Commerce International SA (in liquidation) v Ali and Others. In addition to the paragraphs to which senior counsel for the defender had referred, he drew attention to a sentence in paragraph 51 of his speech in which Lord Hoffman said 'If interpretation is the quest to discover what a reasonable man would have understood specific parties to have meant by the use of specific language in a specific situation at a specific time and place, how can that be affected by authority?' He submitted that the history of events, as averred in Articles 2 and 3 of the summons, could be relevant to establishing the context and commercial purpose of the agreement incorporated in the Minute of Agreement, as opposed to being evidence relating to prior negotiations. He suggested that where there is room for doubt, difficulty and double meaning in construing contractual provisions, it may be necessary to have regard to what the parties meant in the particular circumstances of the contract containing those conditions. Senior counsel for the pursuer submitted that the whole background to the Project was of relevance to the construction of the terms of Clause 1.1.3 of the Minute of Agreement. The Minute of Agreement did not merely deal with the building of houses. Amongst the factors that might be of relevance were (i) that the pursuer had identified the Site and had purchased it, (ii) that the pursuer had conceived that the Site would be appropriate for social housing, (iii) that the pursuer had approached the defender, who had been keen that social housing should be erected on the Site, but was faced with budgetary constraints, (iv) that the pursuer was prepared to allow the defender to purchase the Site, if it was to be employed to erect the housing on the Site, (iv) that the Project had been delayed for 2 years because of funding problems, (v) that funds had become available, (vi) that the sum to be paid for the land had been fixed by the District Valuer and (vii) that it had been known that the housing would be erected in three phases. It was suggested that one of the pursuer's concerns had been that it should not part with the land to the defender and then find that the defender entered into a building contract with another builder. That had been one of the reasons for the Minute of Agreement. Equally the defender had not wanted to buy the land and then find the pursuer saying that it would not develop the Site after all. The defender obviously wished to ensure that it could oblige the pursuer to carry out the building of all three phases of the Project. All of that was relevant to the correct construction of Clause 1.1.3 and to the issue of whether the Minute of Agreement had been superseded by the Building Contracts. A further issue of relevance was that to enable the defender to secure the funds required for the Project, there required to be in place a pricing mechanism, under which the price payable by the defender could be calculated with certainty, because of the way in which the defender sourced its finance for development. The defender had to be in a position to say that it would require £5,000,000 to develop 104 houses on the Site. Such an approach had attractions for the defender, but in certain respects, that approach was unattractive to the pursuer, who knew that the defender was subject to budgetary restraints, which could lead to delays. For that reason a pricing mechanism was built into the Minute of Agreement, to the effect that, although the price was going to be calculated with certainty, the price would, after two years, be subject to indexation.
[29] Senior counsel for the pursuer argued that it was clear that the parties had agreed on the need for a pricing mechanism so that the price payable could be calculated with certainty. It was essential that there would be a pricing mechanism applicable to the whole Project, as opposed to one for any or each of the Building Contracts. The parties had agreed that the pursuer was obliged to proceed in accordance with the price mechanism. When tendering for the individual building contracts, the pursuer could not tender prices, which protected it against inflation. Whilst conceding that the drafting of Clause 1.1.3 left something to be desired, senior counsel for the pursuer argued that what was important was that the clause was talking about the pricing mechanism, not the price. The Minute of Agreement contemplated that two things would be agreed (1) the detailed terms of the individual building contracts and (2) the pricing mechanism. It would be the pricing mechanism that would be adjusted by the Trade Price Index, not the price. In responding to the question of how that was going to be done, senior counsel for the pursuer indicated that the answer lay in the details of the budget costs that the parties did in fact agree, which were to be found set out in a document entitled "Reconciliation of Agreed Tender Costs" (No. 6/9 of process).
[30] The price mechanism had not been expressly referred to in any of the building contracts. That was where there was a lacuna. The pricing mechanism was in the Minute of Agreement. That existed as a collateral agreement. If the Minute of Agreement did not exist as a collateral agreement, then the provisions of Clause 1.1.3 constituted a factual basis for seeking rectification of the Phase 2 and Phase 3 Building Contracts. That was why the pursuer's claims were expressed in the way that they were. Once the parties had identified and agreed on a pricing mechanism, they could wait and see what happened. As each phase of the Project was delayed, fixed prices became out of date. The purpose of Clause 1.1.3 and Clause 2 of the Minute of Agreement, the pricing mechanism and the adjustment of the pricing mechanism, was to ensure that if those fixed prices require to be applied after more than two years, there would be some method of adjustment to allow for the passage of time. The two year period referred to any works undertaken more than two years after the Phase 1 Building Contract was entered into. Against that background, it was submitted that the construction placed upon Clause 1.1.3 of the Minute of Agreement, by senior counsel for the defender, did not conform to any identifiable commercial purpose. In all the circumstances, whether the action was approached as one concerned with whether the Minute of Agreement was a collateral agreement or as one seeking rectification of the Building Contracts, it would be premature to decide the case against the pursuer without hearing proof.
[31] As the submissions for senior counsel for the pursuer proceeded it became more obvious that they were in the nature of a "jury speech", which it would be appropriate to deliver following a hearing of evidence. Senior counsel for the pursuer did not demur to such a description, which he suggested illustrated why the correct construction of Clause 1.1.3 fell to be determined once the surrounding facts and circumstances were established by evidence.
Discussion
[32] Having considered the submissions made by senior counsel for both parties, in the light of the various documents to which I was referred, I am quite satisfied that the correct course of action for me to take is to allow a proof before answer. There are a number of reasons for my reaching that conclusion.[33] In the first place there can be little argument that the provisions of Clause 1.1.3 of the Minute of Agreement are extremely badly framed. Apart from the random use of "C" and "c" as the first letter in the word "contract" or "contracts", there are a number of points in that clause in which the drafting leaves a great deal to be desired.
[34] In the second place, there can, in my opinion, be little doubt that the factual context in which the Minute of Agreement was concluded may be of relevance in determining the correct construction of its terms. That is particularly so standing the fact that the contractual relationship between the parties is of an unusual and complex nature. Such an approach to construction follows the guidance given by Lord Hoffman, to which I have referred. It also finds support in a passage from the Opinion of Lord President Rodger in Bank of Scotland v Dunedin Property Investment Co Ltd 1998 SC 657, which was a case in which the Inner House was construing a condition in a loan stock deed. At p. 665D - G in his Opinion, Lord President Rodger said:
"I have reached this view as to the construction of Condition 3 by asking what is the ordinary meaning of the words used by the parties and without considering the background of the matrix of facts, known to the parties, in which the loan stock agreement was set. It is, however, trite that in interpreting a provision in a contract the court may enquire beyond the language and see what the circumstances were with reference to which the words were used, and the object, appearing from those circumstances, which the person using them had in view: Prenn v Simmonds at p 1384 per Lord Wilberforce, citing the speech of Lord Blackburn in Macdonald v Longbottom. See also Inglis v Buttery & Co at pp 102-103 and Bovis Construction (Scotland) Ltd v Whatlings Construction Ltd at p 357 per Lord President Hope. It would therefore be open to the court to consider the surrounding circumstances in which the words of Condition 3 were used; indeed we were urged to do so by counsel for the Bank.
[35] As these authorities demonstrate, the rule which excludes evidence of prior communings as an aid to interpretation of a concluded contract is well-established and salutary. The rationale of the rule shows, however, that it has no application when the evidence of the parties' discussions is being considered, not in order to provide a gloss on the terms of the contract, but rather to establish the parties' knowledge of the circumstances with reference to which they used the words in the contract. For that reason I am satisfied that it was proper for the Lord Ordinary to take account of the evidence about what was said at the meeting on 8 June in order to establish the relevant circumstances in which the words of Condition 3 were used."
[37] Thirdly, it is, in my opinion, of considerable significance that in presenting their submissions to me, both counsel sought to rely on the factual background to the conclusion of the Minute of Agreement and all three of the Building Contracts. In doing so counsel quoted from certain of the documents which are lodged as productions. They also sought to draw certain factual inferences from the contents of such documents, factual inferences upon which they sought to rely. To some extent, indeed, both counsel also offered ex parte elaborations as to the facts and circumstances that may lie behind the documentary productions that were before me. Having reviewed the submissions that senior counsel made, it is quite clear that the competing constructions of Clause 1.3.1 that they advanced were in each instance dependent, to some extent at least, on the factual circumstances relating to the Project to develop the Site.
[38] Both senior counsel were agreed that the crucial issue in this case is how the provisions of Clause 1.1.3 fall to be construed. Once that issue is determined it is quite possible that the dispute between the parties will be resolved. Either the pursuer's case will fail, in its various branches, or the pursuer will be entitled to payment of the additional sums concluded, which I imagine could well be the subject of agreement between the parties' respective experts. There is, I suppose, a further alternative, namely that whatever the parties may have agreed about a price mechanism prior to entering into the Minute of Agreement, they departed from such agreement, after they had prepared the Budget Cost and whilst they were concluding the three building contracts, in particular those for Phases 2 and 3 of the Project. Whether that happened, could only be established after proof. In all these circumstances, I am quite satisfied that I should allow a proof before answer on all matters. The case will be put out By Order to discuss procedural matters relating to such a proof.