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Cite as: [2005] CSIH 89, [2005] ScotCS CSIH_89

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Robertson Group (Construction) Ltd v. Amey-Miller (Edinburgh) Joint Venture & Ors [2005] ScotCS CSIH_89 (22 December 2005)

INNER HOUSE, COURT OF SESSION

Lord President

Lord Reed

Lord Mackay of Drumadoon

[2005CSIH89]

A393/05

OPINION OF THE COURT

delivered by THE LORD PRESIDENT

RECLAIMING MOTION

in the cause

ROBERTSON GROUP (CONSTRUCTION) LIMITED

Pursuer and Respondent;

against

(FIRST) AMEY-MILLER (EDINBURGH) JOINT VENTURE, (SECOND) AMEY PROGRAMME MANAGEMENT LIMITED and (THIRD) MILLER CONSTRUCTION (UK) LIMITED

Defenders and Reclaimers:

_______

Act: Howie, Q.C.; Pinsent Masons (Pursuers and Respondents)

Alt: Davidson, Q.C., Thomson; MacRoberts (Defenders and Reclaimers)

22 December 2005

The contractual arrangements
[1] In July 2001 the pursuer and respondent ("Robertson") submitted to the first defender and reclaimer ("Amey-Miller") a tender to carry out certain works at the Royal High School, Edinburgh. Amey-Miller was a joint venture of which the second and third defenders and reclaimers were the partners. Negotiations then ensued with a view to concluding a formal contract for these works. It was intended that that contract would be for a specific lump sum and be subject to certain JCT conditions. It was necessary that work on site begin in mid-October 2001. By that date the formal contract had not been entered into, for reasons connected with delays in the finalisation of the financial arrangements between Amey-Miller and its employer (Edinburgh Schools Partnership). To allow work to commence on site a contractual arrangement, intended to be of a temporary nature, was entered into between Robertson and Amey-Miller. The terms of that arrangement were contained in a letter dated 12 October 2001 from Amey-Miller to Robertson, which terms were accepted by the latter commencing work in furtherance of the authorisation and request contained in the letter. In the event no formal contract was ever entered into.

[2] The opening two paragraphs of the letter were in the following terms:

"We confirm that we intend to enter into a contract with you for the refurbishment, remodelling and construction works at the Royal High

School.

The contract shall be placed on the amended JCT 98 Conditions previously sent to yourselves, with a number of further amendments required to bring this document into line with the contract that we are concluding with Edinburgh Schools Partnership. The acceptance of these conditions is a condition precedent to this letter's authority".

The immediately succeeding paragraphs were concerned with the terms of the anticipated formal contract.

[3] The final paragraphs of the letter were as follows:

"We would state that whilst it is our intention to enter into a contract with you for the entire Works at Royal High, that in view of the delays in reaching Financial Close, that we are obliged to limit the spending to a notional figure of £500,000 at this time and the authority of this letter is restricted to such. In the event that Financial Close cannot be reached, for whatever reason, then any losses incurred, including but not restricted to loss of profit, shall be related to the spending limit of £500,000 and not the entire Contract

Sum.

The foregoing restriction upon spending and authority, shall be lifted as soon as we can obtain Financial Close and we trust you shall appreciate the temporary difficulty that forces this situation.

The Contract Sum applicable to the entire Contract Works shall be £7,836,569.97, as per the appended summary sheet.

We would request that you proceed with the Works forthwith upon the basis of this letter as your authority. Should a formal contract fail to be entered into for any reason other than the default or negligence of Robertson Construction, then all direct costs and directly incurred losses shall be underwritten and reimbursed by the Joint Venture. We would state that the Joint Venture Partners shall be held liable Jointly and Severally for the commitments incurred by the Joint Venture under this agreement.

The contents of this letter shall be held as taking precedence over foregoing correspondence, where there is any conflict, discrepancy or divergence".

[4] The spending limit of £500,000 was subsequently increased on a number of occasions, the last authorisation, contained in a letter of 12 September 2002 from Amey-Miller to Robertson, specifying a limit of £5m. As the work proceeded interim payments were made to Robertson by Amey-Miller. By October 2002 it became apparent that the parties would be unable to reach agreement on the terms of a formal contract. By that time the spending limit of £5m had been reached. Towards the end of October 2002 work on site ceased.

The contentions of parties
[5] Thereafter the present commercial action was raised by Robertson, in which it advances certain claims on certain bases. These claims are disputed by Amey-Miller which has also lodged a counter-claim. A number of legal issues were discussed before the Lord Ordinary at debate. Included among these was an issue as to the meaning of the expression "all direct costs and directly incurred losses" as it is used in the penultimate paragraph of the letter of 12 October 2001. Robertson contended that that expression entitled it to recover not only the costs of labour and materials expended on the High School contract, together with the cost of plant and sums paid to sub-contractors, but also an appropriate sum to cover head office overheads and an appropriate element of profit; sums in respect of the latter elements are sought by Robertson as being within "[t]he total of direct costs and losses and losses incur[r]ed by [it] in furtherance of the authority given it under the letter of 12 October ... " (Record page 14B). Amey-Miller, while accepting that the quoted expression was apt to include the cost of labour, plant and materials used on the particular contract, contended that it excluded head office overheads and any element of profit. In the course of his Opinion the Lord Ordinary referred to Hadley v Baxendale (1854) 9 Ex 341, F.G. Minter Limited v Welsh Health Technical Services Organisation (1980) 13 BLR 1, Rees & Kirby Limited v Swansea City Council (1985) 30 BLR 1, Ogilvie Builders Limited v City of Glasgow District Council 1995 S.L.T. 15 and Chiemgauer Membran Und Zeltbau GmbH v New Millennium Experience Company Limited, 15 December 2000, an unreported decision of Geoffrey Vos, Q.C., sitting as a deputy judge of the Chancery Division of the High Court. The Lord Ordinary accepted Robertson's contention and in due course allowed a proof before answer, so permitting its contention to proceed to probation. Against that interlocutor Amey-Miller has reclaimed.

[6] At the hearing of the reclaiming motion counsel for Amey-Miller did not dispute the correctness of the decisions cited. They emphasised, however, that in each of the four most recent of them the context in which the adjective "direct" fell to be construed was different. In those cases the causal relationship of the claimed loss to the relevant event had already been identified by phrases such as "because the regular progress of the works ... has been materially affected by" or "caused ... by the determination"; accordingly, the court in construing "direct" in such a context was necessarily pointed to an issue of remoteness of damage. In the present case the context was different. There was no such identification. The contract, constituted by the letter of 12 October and its acceptance by actings, was a "stop-gap" arrangement in the context of on-going negotiations towards a formal contract. The first of the final paragraphs quoted was concerned with the situation until Financial Close (i.e. the finalisation of the financial arrangements between Amey-Miller and its employer). It was of little assistance in construing the phrase "all direct costs and directly incurred losses shall be underwritten and reimbursed by the Joint Venture" in the penultimate paragraph. The bringing about of Financial Close was outwith the control of Robertson; it was unsurprising that in that situation Robertson should be protected against loss of profit. The expression under construction was, however, concerned with a different situation - where the present parties had not reached agreement on the terms of the formal contract between them. On the Lord Ordinary's construction there would be a disincentive for Robertson ever to enter into a formal contract. On the Lord Ordinary's approach Robertson was being given a guarantee in respect of loss of profits and of overheads. That was inconsistent with the language used. The verb "reimbursed" was of particular significance; the word "underwritten", while capable of a wider meaning than the word "reimbursed", was controlled by its association with the latter word. The expression did not extend to loss of profit or to general overheads. These were indirect, not direct costs. The intention of the provision was to assure Robertson that, if it commenced work under this temporary arrangement, it would not be out of pocket. The Lord Ordinary had erred by approaching the critical phrase as if it were part of a direct loss and expense clause in a JCT contract. Further, his conclusion had been that the letter of 12 October permitted Robertson to receive "reasonable" sums by way of corporate overheads and profit (para. [17]). That was also objectionable as being unduly vague.

[7] Counsel for Robertson submitted that the Lord Ordinary had reached the correct conclusion for the correct reasons. He had adopted a reasonable commercial construction. While "reimbursed" if read in the narrowest sense and in isolation might indicate a restriction to actual outlays, it was here found in association with the wider expression "underwritten", the former verb being related to "costs" and the latter to "losses". Underwriting could readily cover a loss of profit. The object of these provisions was to avoid prejudice to either party during the "stop-gap" period before conclusion of a formal contract and to encourage Robertson to commence building work, albeit it did not have the protection of that formal contract. The provisions in the penultimate paragraph had a relationship with those in the earlier paragraph concerned with Financial Close. The latter was, in effect, a sub-set of the former. The reference to "losses incurred, including but not restricted to loss of profit" was accordingly instructive for the purposes of construing the critical passage. The Lord Ordinary had correctly recognised that the expression used here was not, in terms, that used in the JCT forms. But there was, in the context of an arrangement made by parties in the construction industry, a strong reminiscence of the familiar phrase "direct loss and/or expense" found in these forms. Ogilvie and Chiemgauer were in point. There was no sound basis for distinction on the ground that words such as "because" or "caused" were there expressly used. Here the relevant causal event was plainly Amey-Miller's instruction to proceed. There was nothing here to suggest that the words "direct" or "directly" were concerned with proximity of causation.

Discussion
[8] The contractual arrangement under construction was entered into against the background that the present parties were negotiating towards, but had not yet reached, agreement on the terms of a formal contract; nor had Amey-Miller (and its partners) settled with its employer the financial arrangements between them. On the face of the pleadings there is no agreement as to when, if at all, Financial Close took place between the latter parties. In any event, the contractual arrangement between Robertson and Amey-Miller must be interpreted as a whole and as at the date when it was made.

[9] It is plain that that arrangement was envisaged as being temporary in character, pending conclusion between the parties of a building contract incorporating JCT conditions. A building contract of the latter type would be expected to include a condition entitling the contractor in certain circumstances to payment from the employer of "direct loss and/or expense". That phrase is familiar and has been the subject of judicial interpretation and application in the cases cited. In particular the adjective "direct" in that context has been interpreted as being concerned with remoteness of damage. Loss of profit and head office overheads could, in appropriate circumstances, be recovered under such a condition; recovery would not be restricted to outlays.

[10] Robertson offers to prove that loss of profit and head office overheads were incurred by it "in furtherance of the authority given it under the letter of 12 October". Thus, as the Lord Ordinary held (para. [12]), it seems clear that in the present contract the relevant causal event is an instruction from Amey-Miller to Robertson to carry out the work at the High School. Although the letter of 12 October does not expressly identify the relevant causal event, that identification is implicit; and it is the causal event relied on by Robertson. The order of the sentence links the limitation ("direct"/"directly incurred") to the costs and losses themselves rather than to their causation. The broad distinction urged by counsel between the present circumstances and those of the cases cited accordingly appears to be ill-founded. The Lord Ordinary's conclusion that in a commercial context the failure of a contractor to make a profit and his failure to earn a contribution to general corporate overheads may be accounted a "loss" (para. [9]) was not challenged.

[11] Parties prospectively entering into a contract subject to JCT conditions can be expected to be familiar with the traditional loss and expense clause and the interpretation judicially placed on it. The phraseology used in the present arrangement is different but similar. The adjective "direct" qualifies the word "costs" and the phrase "directly incurred" the word "losses". In the event (which occurred) of a formal contract not being entered into for any reason other than the default or negligence of Robertson (and there is no suggestion of any such default or negligence), Amey-Miller and its partners undertook that "all direct costs and directly incurred losses" would be "underwritten and reimbursed". The first of the two verbs used ("underwritten") is, in its familiar sense of "guaranteed", clearly wide enough to embrace elements beyond actual outlays. While the second verb ("reimbursed") might tend to suggest the making good of something expended, the phrase read as a whole does not, in our view, have that restricted sense.

[12] Moreover, the critical phrase has to be read in the wider context of the whole letter of instruction, including the provisions directed to the period prior to "Financial Close" These provisions are primarily related to the setting of a spending limit but clearly envisage that Amey-Miller (and its partners) will, subject to that limit, meet "any losses incurred", such losses expressly including "loss of profit". We are not persuaded that these provisions can be divorced from the critical phrase, such that they provide no assistance in its construction. Although they involve a third party, they likewise are concerned with making provision which will allow work to commence when final arrangements are not in place. These provisions tend to support the view that "directly incurred losses" in the critical passage were intended to extend beyond actual outlays. There seems no commercial logic in restricting the scope of entitlement to any period during which Financial Close had not been reached. Both provisions are in the context of an expressed intention to enter into a formal contract for the works in question and were designed to enable the works to be undertaken by Robertson without waiting for the conclusion of that contract. Once Robertson had commenced work on the basis of the letter, it was contractually

obliged to proceed with the works, subject to the spending limit in force from time to time. If the critical passage did not entitle it to recover for any loss of profit, Robertson would be obliged to carry out the works in return only for the reimbursement of its outlays, unless Amey-Miller elected to enter into a formal contract with it. A construction of the critical passage which had that consequence would hardly make commercial sense, and cannot in our opinion have been intended.

[13] In the course of the hearing there was some discussion of the question whether Robertson was entitled under the letter of 12 October 2001 to recover "reasonable sums by way of general corporate overheads and profit", as the Lord Ordinary held at para. [17], or, under these heads, to sums calculated by reference to the putative formal contract. We consider that that question is best left to be resolved after proof.

[14] In the whole circumstances we shall refuse the reclaiming motion, adhere to the Lord Ordinary's interlocutor and remit the cause to him to proceed as accords.