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Ballast Plc v. Laurieston Properties Ltd [2005] ScotCS CSOH_16 (25 January 2005)

OUTER HOUSE, COURT OF SESSION

[2005] CSOH 16

A483/02

OPINION OF LADY PATON

in the cause

BALLAST PLC

Pursuers;

against

(First) LAURIESTON PROPERTIES LIMITED (in liquidation), (Second) LAURIESTON HOMES (STONELAW) LIMITED, (Third) LAURIESTON HOMES (HOWWOOD) LIMITED and (Fourth) AWG RESIDENTIAL LIMITED

Defenders:

________________

Pursuers: W.J. Wolffe, Advocate; Masons

First Defenders: No appearance

Second, Third and Fourth Defenders: Currie, Q.C., S.C. Smith, Advocate; Dundas &

Wilson, C.S.

25 January 2005

[1] In this action, a construction company Ballast plc ("Ballast") seeks payment of certain sums arising from a building management contract with Laurieston Properties Limited ("LPL"). Ballast sues not only LPL, but also two joint venture companies and a company AWG Residential Limited, formerly known as Morrison Homes Limited ("Morrison Homes"). Ballast claims that the latter three companies guaranteed payment of those sums.

[2] A proof before answer took place on 22-25, 29-30 June and 1 July 2004. LPL was in liquidation, and was not represented. On behalf of Ballast, by then in administration, evidence was led from a former surveying and managing director, Norman Burn (60) and a former project surveyor, Ian Teaz (35). On behalf of the two joint venture companies and Morrison Homes, evidence was led from the former general manager of Morrison Homes, Jonathan Law (34), and a former construction surveyor, Douglas Taylor (52). A joint minute number 34 of process was also relied upon.

[3] By the date of the proof, Mr Burn was a self-employed chartered quantity surveyor. He had a contract with the administrator of Ballast in terms of which he was to assist with the resolution of a number of former Ballast jobs. He was paid an hourly rate, and was in addition entitled to a percentage of any award made by the court in the present litigation. Mr Teaz was working as a quantity surveyor with a construction company; Mr Law was managing director of Prudential Residential Finance; and Mr Taylor was a contracts manager with a construction company. The latter three witnesses had no financial interest in the outcome of the litigation.

Outline of events

Property development: joint venture companies
[4] In about 1999 David Lang, a director of LPL, identified two sites as suitable for residential development. One was Stonelaw High School, Rutherglen. The school was to be converted into flats, with additional flats in surrounding ground. The other was Howwood in Renfrewshire, where new houses were to be built.

[5] LPL was a company with £100 issued share capital and few assets (6/466). LPL therefore required funding for both developments.

[6] Morrison Residential Investments Limited ("MRIL") was a wholly-owned subsidiary of Morrison Homes. MRIL offered funding facilities to developers who had land but insufficient funds. MRIL's practice was to set up a joint venture company, 50 per cent owned by the developer, and 50 per cent owned by MRIL. An agreement was entered into by the joint venture company, the developer, and MRIL. In terms of the agreement, the developer provided the land and carried out the development, having entered into a fixed price design and build contract with the joint venture company. MRIL (often using Morrison Homes' staff and facilities) arranged funding, and provided advice.

[7] A predicted cash-flow model formed part of the agreement. There was provision for draw-downs from a facility in the form of a bank account newly-opened for the joint venture company. Each draw-down required two authorising signatures, one from the developer, and one from MRIL. The amount of draw-down depended upon certification by quantity surveyors employed by the bank. The quantity surveyors inspected the works, then certified the value of the proportion of work done in terms of the design and build contract. After some time, additional income would be generated from sales of newly-built houses. On completion of the development, the bank would be repaid, and both the developer and MRIL would have made a profit.

[8] Mr Lang of LPL approached MRIL, who agreed to provide funding. Two joint venture companies were set up: Lauriston Homes (Stonelaw) Limited ("the Stonelaw joint venture company"); and Lauriston Homes (Howwood) Limited ("the Howwood joint venture company"). MRIL owned 50 per cent of each company, with LPL owning the remaining 50 per cent. Formal agreements dated March 2000 were entered into by each joint venture company, LPL, and MRIL (7/3 and 7/4). The agreements contained cash-flow projections based on assumptions that certain plots would be sold at certain dates.

[9] In implement of the agreements, each joint venture company acquired the relevant land. Each joint venture company entered into a fixed price design and build contract with LPL (7/1; 7/2). A funding bank was identified for each joint venture company, namely Lloyds TSB for the Stonelaw joint venture company, and the Bank of Scotland for the Howwood joint venture company. Each joint venture company granted two standard securities over the relevant land: one in favour of the funding bank, and one in favour of MRIL as security for its profit from the development.

[10] MRIL's interests in the developments were looked after by Jonathan Law, the general manager of Morrison Homes. Although his employment contract was with Morrison Homes, one of his duties was overseeing development projects in which MRIL was a joint venture partner. Morrison Homes' staff had a significant involvement with the joint ventures. They carried out the corporate creation and subsequent administration of the joint venture companies (6/426). They arranged and administered a bank facility for each joint venture company, including preparing the draw-down requests (6/305; 6/306; 6/326; 6/333; 6/382; 6/391; 7/40). They arranged collateral assurance and insurance (6/312; 6/340). Mr Law of Morrison Homes (or his subordinate Douglas Taylor) attended meetings relating to the joint venture projects. Much of the correspondence relating to the projects was copied to Mr Law. Mr Law's word carried considerable weight. When he made what might formally be described as suggestions (relating, for example, to the re-sequencing of construction work or to the content of missives of sale), his suggestions were often adopted. Mr Law accepted in evidence that as general manager of Morrison Homes, with responsibility for the joint venture projects in which Morrison Homes' subsidiary MRIL was involved, he had an interest in seeing that the Stonelaw and Howwood projects did not fail.

LPL's building management contracts with Ballast
[11] In order to carry out the development of the two sites, LPL entered into building management contracts dated 31 May 2000 with Ballast (6/453; 6/454; 6/455). Ballast was to provide services as management contractor, employing sub-contractors, and organising the works. The management contract was not a fixed price contract, but was based on "best price and profits". There was thus no ceiling figure, but rather an open-ended liability dependent upon work done. The provisional dates for completion were 3 June 2001 in respect of Stonelaw, and 11 May 2001 in respect of Howwood.

[12] In terms of Clause 4.3.1 of the building management contract, LPL was obliged to pay Ballast the amount certified each month as due to Ballast in terms of an architect's interim certificate. Ballast would make an application for payment; the quantity surveyor employed by LPL would assess the work done and advise architects employed by LPL; the architects would then issue an interim certificate. LPL was obliged to pay Ballast the sum contained in the interim certificate within 14 days. Failing payment, simple interest at a rate 5 per cent over bank base rate accrued.

[13] A notable feature of the LPL/Ballast building management contract was the fact that Ballast was not contractually bound to comply with the projected sequence of work in the joint venture agreement cash-flow model which formed the basis of the fixed price design and build contract between LPL and the joint venture companies. Ballast was not shown the joint venture agreements or the design and build contracts. Ballast was under no obligation to produce completed flats or houses for sale at dates predicted in the cash-flow projections underlying the fixed price design and build contracts.

[14] There was therefore potential for disparities in both the timing of construction and the sums which LPL could obtain from the joint venture companies compared with the sums which LPL had to pay Ballast.

Initial progress on both sites
[15] Work began on both sites. Initially, the contracts for each site (i.e. the LPL/Ballast building management contracts and the LPL/joint venture design and build contracts) ran reasonably well in tandem.

[16] In terms of the LPL/joint venture company design and build contract, quantity surveyors employed by the bank (the Mackenzie Partnership) regularly valued the work done. They measured the proportion of work completed and certified a sum due to LPL. On signature of the necessary draw-down application form by the two joint venture company signatories (one from LPL, David Lang, and one from MRIL, usually Jonathan Law) the bank released the draw-down amount to the joint venture company, who then paid LPL (and/or any payee nominated by LPL: see for example 7/57).

[17] In parallel, in terms of the LPL/Ballast building management contract, Ballast made regular monthly applications for payment. The quantity surveyor employed by LPL (Peter Imrie) valued the work done. He reported to the architects employed by LPL (McIntyre & Associates). The architects then issued an interim certificate. LPL made payments to Ballast of the sums certified as due in the interim certificates.

[18] Meantime Jonathan Law, as general manager of Morrison Homes, supervised the progress of both developments with a view to safeguarding MRIL's investment. When carrying out his duties, he kept in regular contact with Mr Lang of LPL.

LPL's cash-flow difficulties
[19] At the beginning of 2001, Mr Law and LPL correctly anticipated cash-flow problems (initially in relation to Howwood) in that the draw-down from the bank facility was going to be insufficient to meet costs. There were several contributing factors. As noted above, the different terms of the fixed price design and build contract and the open-ended building management contract contained the potential for sums due by LPL to Ballast being greater than sums recoverable by LPL from the joint venture companies. Furthermore, difficulties and additional costs in construction resulted in an increase in construction expenditure. Finally, both developments were falling behind schedule. For example, on the Stonelaw site, it was clear by January 2001 that there would be no sales (generating the expected sales income) until about March or April 2001, whereas the cash-flow projection had assumed sales income beginning in October 2000. The delay in achieving sales income meant that the projects were departing from the pattern of income upon which the draw-down facility in the fixed price design and build contract had been based.

[20] Both Ballast and Mr Law of Morrison Homes took the view that cash-flow problems resulting in non-payment of Ballast's invoices would be detrimental to the projects. As Mr Burn pointed out in evidence, it was essential that Ballast received prompt payment in terms of the building management contract. Ballast had obligations to pay sub-contractors. If they were not paid, work would not proceed. Mr Law for his part viewed failure to make payments on the due dates as likely to affect work on site which would prejudice the profit which MRIL hoped to make.

[21] When the cash-flow problems emerged, David Lang of LPL requested Ballast by faxes dated 17 January 2001 (6/86) and 8 February 2001 (6/90) to fund the cash-flow shortfall relating to the Howwood project for a short period until sales income commenced. The suggestion was that Ballast would pay its sub-contractors, but would not in turn receive payment from LPL. Ballast would simply wait until funds were available, without enforcing either interest provisions or default/suspension rights. When making the request, Mr Lang initially assumed (wrongly) that MRIL would offer Ballast a guarantee.

[22] Mr Burn, on behalf of Ballast, considered the request. He made careful inquiries into the amount of the shortfall, the length of time requested for funding it, the security offered, and which company or person would provide the security. In the course of those inquiries, he was given clear written information identifying LPL's joint venture partner as MRIL (6/86; 6/90). He asked Mr Law of Morrison Homes to produce a more formal statement including some detail of the security offered, and told Mr Lang of LPL that he (Mr Burn) would have to discuss the projected funding of the shortfall with Ballast's main board (6/91).

[23] Mr Lang and Mr Law discussed the question of the guarantee. The outcome of their discussion was that the guarantee was to come from the joint venture company, not from MRIL. Ultimately, Mr Lang offered Ballast a security from the Howwood joint venture company (6/94). That was not acceptable to Mr Burn. On 19 February 2001 Mr Burn refused Mr Lang's request that Ballast fund the cash-flow shortfall (6/96).

[24] In order to combat that shortfall, consideration was given to re-sequencing the work at both sites, such that the projects would become more sales-driven. Ultimately LPL, having consulted Mr Law, instructed a re-phasing of the work in order to maximise sales and to accelerate and increase income from sale proceeds (6/87). However one consequence of the re-phasing was that the projects took longer. That made LPL's open-ended building management contracts with Ballast more costly.

[25] In early April 2001, LPL owed Ballast sums in respect of work done in February 2001 at the Stonelaw site. Not only were sums due, but by 4 April 2001 the relevant interim certificate (number 9) had not been issued. Mr Teaz, on behalf of Ballast, complained to LPL (6/103 and 6/102). On 11 April 2001, a payment of £446,550 was made directly to Ballast from the Stonelaw joint venture company account (6/105; 6/471). The interim certificate was not received by Ballast until 20 April 2001 (6/108; 6/29; 6/10).

[26] By late April 2001 interim certificate number 10 in respect of work done in March 2001 at the Stonelaw site was overdue. In correspondence (including a fax to LPL dated 30 April 2001: 6/113) Mr Teaz complained that no architect's certificate had been issued. By 2 May 2001 Ballast had received the certificate, but no payment (6/115).

[27] Certificate number 11 for Stonelaw also ran into difficulties. After some correspondence in April and May 2001, Mr Teaz learned that LPL's quantity surveyor Peter Imrie did not accept the figures in Ballast's application for payment.

[28] On 30 May 2001, Ballast submitted its application for payment number 12 in respect of Stonelaw (6/119). By that stage, valuation number 10 remained unpaid. Payment had stalled on valuation number 11.

[29] On 1 June 2001, Ballast received the architect's certificate number 11 for Stonelaw which was £168,734.69 less than Ballast's application for payment valuation number 11. By letter dated 1 June 2001 (6/121), Ballast warned LPL that it would be obliged to suspend the works at Stonelaw in terms of Clause 4.3.6 of the LPL/Ballast contract. Ballast also expressed its concern to McIntyre Associates (6/122).

[30] On 6 June 2001, Ballast learned that a cheque relating to Howwood had been dishonoured. Mr Teaz of Ballast wrote to LPL remonstrating about the situation (6/128). Mr Lang of LPL then made arrangements to transfer the funds electronically (6/129).

[31] By that stage, Ballast was concerned about the situation. Mr Burn of Ballast contacted Jonathan Law of Morrison Homes. He did so because he had by then concluded that Mr Law "controlled the payments". Mr Burn pointed out to Mr Law the shortfall in funding; the delay in issuing a certificate; the fact that there were three Ballast valuations outstanding, one reduced by £170,000 (a rounded-up version of £168,734.69). He mentioned that Ballast's confidence in LPL was not high, and that a threat of suspension in relation to Stonelaw was in place. Mr Burn stated that he was looking for assurances for the future.

[32] There is no dispute that Mr Law responded by undertaking to resolve matters. However the precise nature of his response is disputed.

[33] According to Mr Burn, Mr Law stated that the projects were viable, and that Morrison was committed to the projects and would not let them fail. As Ballast had had previous satisfactory dealings with Morrison (in Mr Burn's view, a "responsible, large, building contractor"), Mr Burn found comfort in Mr Law's words, and was happy to accept that he would resolve matters. In cross-examination Mr Burn went further, and affirmed that he (and Ballast) understood Mr Law to have given an assurance that all future payments due to Ballast would be made, not merely an assurance that he would endeavour to assist in resolving difficulties with payment. Mr Burn added that Mr Law subsequently wrote to him, confirming their discussion. That was a reference to the letter dated 12 June 2001 (see paragraph [35] below). Mr Burn stated that he ultimately decided not to suspend the works at Stonelaw.

[34] By contrast, Mr Law stated in evidence that he had received no request for a guarantee. No-one had asked that the joint venture companies or Morrison Homes should guarantee what LPL owed to Ballast. Mr Law denied giving Mr Burn any assurance, but accepted that he had agreed to endeavour to assist in resolving matters.

Mr Law's letter dated 12 June 2001
[35] Subsequently, by faxed letter dated 12 June 2001 (6/130), Mr Law wrote on Morrison Homes' headed notepaper to Mr Burn in the following terms:

"Dear Norman,

Outstanding Valuation

We write to confirm that payment of the outstanding sum of £168,734.69 will be paid directly into your account on Wednesday 13 June 2001.

All future payments will be paid directly from the JV account and therefore to assist this process I would appreciate it if a summary of each monthly valuation could be sent directly to me at the same time as the detailed valuation is sent to Laurieston Properties.

Many thanks for your assistance and patience whilst we dealt with this unfortunate problem.

Yours sincerely,

Jonathan Law

General Manager"

[36] According to Mr Law, David Lang of LPL had advised him that day (12 June 2001) that Mr Burn was "fed up waiting". Mr Law then ascertained from the Mackenzie Partnership that their estimate of the work carried out by Ballast was well in excess of £168,734.69, but the necessary valuation and certification formalities had not been carried out. Mr Law felt that the sum could and should be paid to Ballast. He was going on holiday to California the next day, and wanted matters settled before he left. There was insufficient time to complete the certification and draw-down formalities. Accordingly Mr Law decided to resort to payment from Morrison Homes' bank account.

[37] Mr Law telephoned Mr Burn to give him the information contained in the letter dated 12 June 2001 (quoted above). Mr Burn requested him to "put it in writing". Mr Law then faxed him the letter of 12 June 2001.

[38] The sum of £168,734.69 was paid from Morrison Homes' bank account into Ballast's bank account the next day, 13 June 2001 (6/473). Mr Law stated in evidence that Morrison Homes would recover that amount from the Stonelaw joint venture company in due course.

[39] The payment of £168,734.69 in practical terms resolved the matter over which suspension of the works at Stonelaw had been threatened.

Payments made directly from the joint venture accounts
[40] Prior to the letter of 12 June 2001, payments of sums owed by LPL to Ballast had on occasions been made directly to Ballast from a joint venture company account without passing through LPL. Mr Law explained that sometimes, at the request of LPL, the draw-down payment was paid directly to Ballast (March 2001: 6/470; April 2001: 6/471). This usually occurred because someone - for example, David Lang - was going on holiday and would not be available to consider and sign the necessary documents. Mr Lang was the only authorised signatory for LPL, which had caused problems. Also the authorised signatories for MRIL were sometimes unavailable. On occasions therefore, prior to the letter of 12 June 2001, payments had been made by a joint venture company account to Ballast, by-passing LPL.

[41] Mr Law explained in evidence that, at the time of the letter of 12 June 2001, he considered that it would be better to make it the norm to have payments made direct to Ballast from the joint venture accounts, by-passing LPL, for two reasons: (i) payments to Ballast were thereby speeded up; (ii) Mr Law wanted to ensure that monies intended for construction work in fact reached Ballast. Mr Law was beginning to be concerned that LPL's profits were being eroded by escalating construction costs, and that Mr Lang might fail to apply the construction monies to their correct destination.

[42] Mr Law had to discuss the question of direct payments in respect of the Stonelaw project with David Lang before writing the letter dated 12 June 2001. In that discussion, Mr Law diplomatically referred only to the first reason for the proposed change in payment mechanism.

[43] By a subsequent fax to Morrison Homes dated 24 July 2001 (6/404), David Lang of LPL confirmed that sums due by LPL to Ballast in respect of both the Howwood project and the Stonelaw project were to be paid directly from the joint venture accounts.

[44] Following the letter of 12 June 2001, with only a few exceptions, Ballast received sums of money directly from the joint venture company accounts in satisfaction sums due to Ballast by LPL. However the sums paid did not match the sums contained in the architects' certificates issued under the LPL/Ballast building management contract, as the Mackenzie Partnership valuations were carried out in terms of the LPL/joint venture company fixed priced design and build contracts, whereas the sums due to Ballast were certified by architects McIntyre & Associates under the LPL/Ballast building management contracts. There were therefore problems of identification, reconciliation, and allocation. Ballast repeatedly demanded that the full amount of sums due by LPL should be paid. Those demands were copied to Mr Law. Mr Burn and Mr Teaz also complained about the difficulty in identifying and allocating payments.

[45] Mr Teaz, as Ballast's project surveyor with responsibility for monitoring and pursuing sums owed to Ballast, tended to regard Morrison Homes as the funder of the projects, and to treat all payments following upon the letter of 12 June 2001 as emanating from "Morrisons", or "Morrison Homes" or "the Morrison Accounts". Thus in a fax dated 20 August 2001 (6/173) he referred to two payments as having come from "Morrison Homes" when in fact one came from the Stonelaw joint venture account, and one from the Howwood joint venture account (6/477).

Arrestments, and meeting on 7 August 2001
[46] Difficulties with certification and payment continued. On 14 June 2001, arrestments (relating to a matter quite unconnected with the present litigation) were placed on the joint venture company accounts (7/5; 7/6; 7/7). As a result, sums certified as due by LPL to Ballast could not be paid.

[47] Mr Burn learned of the arrestments on his return from holiday on 2 July 2001. He spoke to Mr Law. According to Mr Burn, Mr Law assured him that there was no real basis for the arrestments, and that matters would be resolved. Mr Burn was keen to have a meeting, as the pattern of certification and payment was being disturbed. On 30 July 2001 Ballast threatened suspension of the works (6/160; 6/161).

[48] A meeting was arranged for 7 August 2001. It was attended by Ronnie Irvine and possibly David Lang of LPL; Norman Burn and his superior Michael Middlemiss of Ballast; Jonathan Law and Douglas Taylor of Morrison Homes; Peter Imrie, quantity surveyor; the project managers for both sites; and possibly others. According to Mr Law, the purpose of the meeting was to agree hand-over dates for completed houses. According to Mr Burn, one of the purposes of the meeting was the possibility of resolving problems with funding and income-stream by selling properties early. No minutes were kept. However Mr Burn's senior, Mr Middlemiss, made a manuscript note shortly after the meeting (6/167).

[49] According to Mr Burn, he, on behalf of Ballast, pointed out that a sum of about £250,000 was owed to Ballast. There was a loss of confidence in LPL as a result of the arrestments, the sum of a quarter of a million outstanding, and the dishonoured cheque. Mr Burn wanted assurances about payment of the outstanding sum and future sums. Otherwise he would suspend the works. Mr Burn said in evidence that he was given to understand that the £250,000 could not be paid until the arrestments had been lifted or restricted. He responded that if Ballast was to be forced to fund £250,000, interest should run on that outstanding amount. Invoices would be sent for the financing charges. Full payment of the sum outstanding was to be made by 14 August 2001. Mr Burn understood that Jonathan Law had given him further assurances.

[50] Mr Law for his part stated initially in evidence that no-one said anything about a guarantee at the meeting (an assertion which contradicted the defenders' own pleadings at page 20B-C of the Record). He later said in evidence that Ballast had asked LPL for a guarantee of payment. LPL had replied that there were no guarantees in the projects. Mr Law denied having been asked personally for a guarantee, or having been asked about interest. He for his part had spoken at the meeting about payments being made directly from the joint venture companies to Ballast, and had asked Peter Imrie to co-ordinate with the Mackenzie Partnership over the valuations in order to expedite procedures for certification and payment. Mr Law gave an assurance that once he received the Mackenzie valuation, he would deal with it timeously.

[51] The manuscript notes of Mr Middlemiss of Ballast did not record any mention of assurances or guarantees on behalf of Morrison Homes or the joint venture companies. Nor did the notes mention interest.

[52] On 20 August 2001, Ballast received payments of £215,017 and £138,897 directly from the joint venture company accounts (6/173; 6/477).

Continuing problems and termination of LPL/Ballast contracts
[53] Certification and payment continued to be unsatisfactory. Mr Burn stated that he often had to speak directly to Mr Law to ensure that payments were made. Mr Teaz confirmed that payments arrived only after requests were made to Morrison Homes. Demands for payment were copied to Mr Law of Morrison Homes.

[54] Payments emanating from the joint venture company accounts were difficult to identify, reconcile, and allocate (see paragraph [44] above). An occasional payment came from Morrison Homes, for example, the sum of £370,041 (6/485 page 13), paid on 27 November 2001 immediately following a meeting on 26 November 2001 at which Mr Burn complained of non-payment and delivered a notice of intention to terminate (6/207 - notes made by Mr Burn after the meeting, not approved by others, said by him to record his understanding of what had been discussed). There was also a payment of £56,025 from Morrison Homes in February 2002 (6/484). Mr Law explained that payment as "a commercial decision ... relating to something on site".

[55] In late January/early February 2002, considerable sums remained outstanding. Mr Burn consulted solicitors.

[56] Mr Burn stated in evidence that he had been under the impression that written demands for payment of outstanding sums based on an obligation contained in the letter of 12 June 2001 had been sent by Ballast to Morrison Homes prior to his having consulted those solicitors. However no such written demands were produced in evidence.

[57] Following upon his consultation with solicitors, Mr Burn wrote to Mr Law of Morrison Homes by letter dated 7 February 2002 (6/250) in the following terms:

"Dear Jonathan,

PAYMENTS - STONELAW HIGH SCHOOL, RUTHERGLEN AND HOWWOOD

I write to record my concern at the comments you made in our conversation this morning. You intimated that it was not Morrison's intention to honour outstanding certificates in respect of the above projects. We remind you that these are overdue and require to be paid in full. We are disappointed that having proceeded on the basis of the assurances which you have given in respect of the obligations of [LPL], your joint venture partner, that you appear to be indicating that it is not now your intention to continue to honour this commitment.

We would urge that you reconsider this and make the payment in full as required."

[58] On 18 February 2002 Ballast raised the present action for payment, initially directed against LPL and the joint venture companies (but not Morrison Homes).

[59] In early March 2002, Ballast suspended the works in respect of both sites on the basis of failures to pay sums due and resting owing (6/261; 6/262).

[60] On 8 May 2002, Ballast terminated the LPL/Ballast building management contracts due to non-payment of sums due (6/267-9; 6/461). MRIL called up the standard securities, and took over the sites.

[61] All sums owed by the joint venture companies to LPL were paid in full. However substantial sums owed by LPL to Ballast remained unpaid. In particular, payment was due in respect of interim certificates numbers 18 and 19 relating to Stonelaw, interim certificate number 19 relating to Howwood, and cumulative retention monies in respect of both sites.

[62] In June 2002, Ballast added Morrison Homes as fourth defenders in the present litigation.

The sums claimed by Ballast in the present action
[63] The fourth conclusion of the summons was amended, and a new conclusion (conclusion 8A) inserted. Ballast's motion for decree, as subsequently restricted at a By Order on 15 October 2004, was as follows:

[64] For payment by LPL, the Stonelaw joint venture company, and Morrison Homes (now AWG Residential Limited) jointly and severally of:

£321,034, being the net sum due under interim certificate number 18 relating to Stonelaw (Conclusion 2)

£100,498, being the net sum due under interim certificate number 19 relating to Stonelaw (Conclusion 3)

£26,092.68, being the VAT element in the above two certificates (Conclusion 4)

£128,647, being the cumulative retention monies relating to Stonelaw recorded in the last interim certificate and payable on the termination of the contract in terms of Clause 7.11.2 (Conclusion 5).

[65] For payment by LPL, the Howwood joint venture company, and Morrison Homes (now AWG Residential Limited) jointly and severally of:

£376,361, being the net sum due under interim certificate number 19 relating to Howwood (Conclusion 8)

£1,091.07, being the VAT element in the above certificate (Conclusion 8A)

£95,959, being the cumulative retention monies relating to Howwood recorded in the last interim certificate and payable on the termination of the contract in terms of Clause 7.11.2 (Conclusion 9).

[66] In Conclusions 2, 3, and 8, interest was sought at 9 per cent, being a rate 5 per cent above the bank base rate in terms of Clause 4.3.1 of the building management contract. Interest was sought from the final date for payment in respect of each sum, in terms of that clause.

[67] In Conclusions 4, 5, 8A, and 9, interest was sought at the normal judicial rate from the date of citation.

[68] Counsel did not ultimately move for decree in terms of Conclusions 1, 6, 7 or 10 against any of the defenders.

[69] Counsel invited the court to sustain the pursuers' pleas-in-law numbers 1, 2, 3, 4, 8, 9, 10, and 11, and to pronounce decree in terms of the conclusions as indicated above. He also invited the court to repel the pursuers' pleas-in-law numbers 5, 6, 7, 12, 13, and 14, which related to claims based on (i) an alleged undertaking to pay interest, and (ii) alleged interference by Morrison Homes in the performance of the contract between Ballast and LPL (claims which, in the light of the evidence, were not being advanced further).

Parties' submissions
[70] Counsel for Ballast contended that the sole issue in the case was the meaning and effect of the letter from Mr Law to Mr Burn dated 12 June 2001 number 6/130 of process, quoted in paragraph [35] above.

[71] Ballast's position was that on a fair reading of the letter, the joint venture companies and Morrison Homes had given an undertaking or guarantee that any sums due to Ballast under certificates issued by the architects McIntyre & Associates (on the basis of Peter Imrie's valuation) in terms of the LPL/Ballast open-ended building management contracts would be paid. The construction contended for by Ballast was the natural and ordinary meaning of the words. There was nothing in the factual context to deprive the words of their natural and ordinary meaning. There were features of the evidence which supported that construction.

[72] By contrast, the defenders' position was that the letter did not amount to such a contractually binding undertaking. The defenders contended that the letter merely explained an alteration in the payment mechanism. Payments would be made directly from the joint venture company account, by-passing LPL.

Submissions on behalf of Ballast
[73] Counsel for Ballast put forward three propositions governing construction (set out in paragraph [142] below). Those propositions were not disputed by counsel for the defenders. Reference was made to Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, Lord Hoffmann at page 912H et seq.; Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251, Lord Hoffmann at paragraphs [39] and [49]; Bank of Scotland v Dunedin Property Investment Co. Ltd, 1998 SC 657, Lord President Rodger at page 661D.

[74] The subjective intention of either writer or recipient was irrelevant. What was required was an objective assessment of the understanding of a reasonable recipient in the circumstances. The rationale from start to finish was the natural and ordinary meaning of the words. It was not for the court to make the parties' bargain, or to rescue Mr Law from a bad bargain. Reference was made to Mannai Investment Co. Ltd v Eagle Star Life Assurance Co. [1997] AC 749, Lord Steyn at page 767G et seq.; Lord President Rodger at page 661D in Bank of Scotland v Dunedin Property Investment Company, 1998 SC 657; Bank of Scotland v Junior, 1999 SCLR 284, at page 291D; City Wall Properties (Scotland) Ltd v Pearl Assurance plc, 25 July 2003, Lord Clarke at paragraph [23] et seq.

[75] Applying those principles to the evidence, counsel rehearsed some of the circumstances leading to the letter dated 12 June 2001. He submitted that Ballast had little knowledge of the joint venture contractual arrangements, or of any potential for discrepancies in funding and timing. So far as Mr Burn and Mr Teaz were concerned, they were dealing with a Morrison Homes project, or with "Morrisons", in a generic sense. That impression was reinforced by correspondence such as a fax dated 26 October 2000 (7/63; 6/83), when Hamish Sheppard, an accountant for Morrison Homes, made reference to LPL as "our partners". Morrison Homes made payments directly to Ballast. On the evidence therefore, Morrison Homes quite consistently tended to treat the joint venture companies and Morrison Homes "as one".

[76] Events in early 2001 provided relevant background to the letter. Although correspondence relating to a possible guarantor referred to "MRIL" (for example, the fax to Mr Burn dated 17 January 2001: 6/86), Mr Burn understood that a "Morrison" guarantee was being offered. Furthermore, Mr Law of Morrison Homes had in effect led the re-sequencing of the work and controlled the work thereafter as shown, for example, in a fax dated 20 March 2001 (6/378), and site minutes (6/299 paragraph 1.6).

[77] Events during March to June 2001 were also relevant in construing the letter. Ballast's confidence in LPL was not high. Mr Burn was threatening to suspend the works at Stonelaw, which Mr Law acknowledged would have serious financial implications. Mr Burn spoke to Mr Law personally, as Mr Burn had by then concluded that Mr Law effectively controlled payments for the projects. Mr Burn was looking for assurances in respect of future payments as well as payment of the amount currently outstanding. Mr Law responded by telling Mr Burn that Morrison Homes would not let the projects fail. Standing Morrison's reputation, Mr Burn decided not to suspend the works.

[78] Counsel summarised the circumstances as at 12 June 2001 (the date of the letter). The planned date of completion (3 June 2001) had passed, yet most of the plots were incomplete. As a result of the re-sequencing of work, progress on some of the plots had been suspended, while other plots were nearing completion. Demands for payment of £168,734.69 in relation to Stonelaw had required to be met by Morrison Homes, from a Morrison account. Ballast was expressing serious concern about certification and payment. The matter was of concern to Morrison Homes, as there could be adverse effects on progress on site. Mr Law was also worried that funds ear-marked for Ballast might not find their way to Ballast, as Mr Lang might simply use them for some other purpose. There was the outstanding threat to suspend the works - a threat which Mr Law must have taken seriously, despite his denials, because he was driven to arrange payment. Mr Law made it quite clear in evidence that he, on behalf of Morrison Homes, would only give a guarantee on behalf of that company if forced to, just as he would only pay out company funds if forced to. He had been so forced. Finally, it had to be remembered that the re-sequencing of works entailed a potentially longer time on site, which increased Ballast's costs while sales (which should have generated income) were delayed.

[79] Having rehearsed the evidence leading to the writing of the letter dated 12 June 2001, counsel submitted that the court might find it unnecessary to make any finding about any verbal assurances given, because the end of the whole process was the sending of the letter. It was that letter which fell to be construed.

[80] Counsel accordingly turned to the terms of the letter dated 12 June 2001. He submitted that the letter was from Morrison Homes, but was also written on behalf of the joint venture companies.

[81] Paragraph 1 of the letter stated that the outstanding sum of £168,734.69 would be paid directly into Ballast's account. That in fact happened.

[82] Paragraph 2 addressed something different, namely the question of future payments. The recipient was told was that "future payments will be paid directly from the joint venture account". Two questions arose: (a) whether those words comprised an obligation or undertaking; and (b) which payments were being referred to.

[83] (a) Whether an obligation or undertaking: Counsel submitted that the words were plainly words of obligation or undertaking. Reference was made to Kleinwort Benson Ltd v Malaysia Mining Corporation Berhad [1989] 1 W.L.R. 379, concerning the meaning and effect of a comfort letter, particularly the observations of Ralph Gibson L.J. at pages 383C, 385H, 387, 388A, 390E (a passage relating to the word "will"). The contention that the words were words of obligation or undertaking accorded with Lord McCluskey's view when he allowed a proof before answer in the present case: paragraph [7] of Ballast plc v Laurieston Properties Limited and others, 21 May 2003, unreported.

[84] (b) What payments were being referred to: The letter referred to "all future payments". Counsel submitted that the ordinary and natural reading of the letter was "all future payments due to Ballast". In making that submission, counsel founded on reasons relating to the terms of the letter, and in addition reasons arising from the context.

[85] Referring to the terms of the letter, the first paragraph related to a sum due to Ballast, a sum to be paid to Ballast. Then came the operative or key provision (relating to direct payment of all future payments from the joint venture account) with a request to Ballast to send each monthly valuation directly to Mr Law at the same time as one was sent to LPL. In evidence, Mr Law said that he made that request to enable him to have a view about the timing of payments. A summary only was to be sent (which counsel interpreted as Ballast's application for payment, rather than Peter Imrie's valuation).

[86] Counsel submitted that the first paragraph concentrated upon payment of what was due to Ballast. The reference in the second paragraph to "all future payments" was a reference to all sums due to Ballast. The valuations referred to were valuations under the contract between Ballast and LPL. The recipient had concerns about monies payable to him, and had raised the question with Mr Law. The recipient's concern focused on payments due to him. Counsel submitted that the natural and ordinary meaning of the words in context was that Morrison Homes was undertaking to procure that future payments due to Ballast would be paid.

[87] That was the plain meaning of the words. The matter stopped there. The background or context to the letter was wholly consistent with that plain meaning. That context did not give rise to any reason to believe that the ordinary meaning of the words could not be given effect to. Just because the giving of such an undertaking might be disadvantageous was not a reason for not giving effect to the undertaking according to its terms.

[88] One question counsel had not yet addressed was whether the letter referred to the Stonelaw project alone, or to both the Stonelaw and the Howwood projects. Counsel submitted that the reasonable recipient would take the second paragraph as entirely general. It was accepted that the first paragraph related to Stonelaw. But the letter had to be read against the background of the relationship between the parties. Difficulties had started in January and February with concerns about cash-flow in relation to Howwood, and had ended with a cheque relating to Howwood being dishonoured on 6 June 2001. In that context, the phrase "all future payments" related to both the Stonelaw and the Howwood projects.

[89] Counsel then turned to a fourth proposition in law (which the defenders disputed), namely that events following upon the letter dated 12 June 2001 did not affect the proper construction of that letter. Reference was made to Lord Hoffman at page 912H of Investors Compensation Scheme Ltd v West Bromwich Building Society, cit. sup.

[90] Subsequent events might be relevant for a plea of personal bar, or to instruct a variation of a contract entered into (if the pleadings and evidence advanced such a case). But subsequent events were not relevant to the question of interpreting a document: cf. James Miller & Partners Ltd v Whitworth Street Estates (Manchester) Ltd [1970] A.C. 583, at page 603B-C; Schuler AG v Wickman Machine Tools Sales Ltd [1974] AC 235, Lord Reid at page 252C-F, Lord Morris of Borth-y-Gest at page 260C, Lord Simon of Glaisdale at page 268; Cameron (Scotland) Ltd v Melville Dundas Ltd, 2001 S.C.L.R. 691, Lord Hamilton at paragraphs [27] to [31]. It was well-settled as a point of principle that parties' actions following upon a contract might reflect their own subjective views; but in the context of the proper construction of the contract, the subjective interpretation of the parties was not relevant.

[91] Although contending that events subsequent to the letter of 12 June 2001 were irrelevant to the question of construction, counsel made a short submission on those events on an esto basis, for completeness. In fact, those events were consistent with the construction contended for by Ballast. Subsequent payments were, with one or two exceptions, made from the joint venture accounts. So far as the meeting on 7 August 2001 was concerned, while counsel for the defenders might suggest that it was odd that Mr Burn did not rely on the letter dated 12 June 2001 (if it contained the guarantee contended for), counsel submitted that Mr Burn's subjective view was irrelevant, and might not reflect the true legal position.

[92] Counsel added that the contra proferentem doctrine could not assist the defenders. There was no ambiguity or real doubt about the letter: cf. the observations of Lord Hamilton at paragraph [19] of Waydale Ltd v DHL Holdings (UK) Ltd(No.2), 2001 S.L.T. 224. However, if the doctrine were to be applied, the letter (a business letter written by the general manager of Morrison Homes) should be construed against Mr Law.

[93] Counsel's final motion, as restricted at the By Order on 15 October 2004, was:

For decree in absence against the first defenders (LPL) in terms of Conclusions 2, 3, 4, 5, 8, 8A, and 9.
For decree against the second and fourth defenders (the Stonelaw joint venture company and Morrison Homes, now known as AWG Residential Limited) in terms of Conclusions 2, 3, 4, and 5.
For decree against the third and fourth defenders (the Howwood joint venture company and Morrison Homes) in terms of Conclusions 8, 8A and 9.

Submissions on behalf of the second, third, and fourth defenders
[94] Senior counsel for the second, third and fourth defenders invited the court to sustain the third and sixth pleas-in-law for the second defenders, and the fifth and sixth pleas-in-law for the third defenders; to repel the second and ninth pleas-in-law for the pursuers; and to grant absolvitor to the second and third defenders (the joint venture companies). In relation to Morrison Homes (the fourth defenders) counsel invited the court to sustain the fourth defenders' third and fourth pleas-in-law, to repel the pursuer's third plea-in-law, and to grant absolvitor to the fourth defenders.

Quantum
[95] Senior counsel for the defenders advised that the figures contended for by counsel for the pursuers were not in dispute. The only issue was liability.

Liability
[96] Senior counsel accepted the three general propositions advanced by Mr Wolffe (and set out in paragraph [142] below). The question for the court was: "How would a reasonable person in Ballast's position, informed with the knowledge which Ballast had as at 12 June 2001, understand the letter dated 12 June 2001".

[97] A letter giving rise to a unilateral obligation must, on an objective construction, disclose an intention expressed in clear words to be legally bound by an enforceable obligation: Lord Advocate v City of Glasgow District Council, 1990 S.L.T. 721, at pages 724B-D and 724H-725G. A legally binding promise had to be distinguished from an expression of intention: hence the need for clear wording.

[98] Not all statements that one "will" do some specified act were enforceable in law. Reference was made to Gloag, Contract (2^nd ed.), pages 16-17; McBryde, Contract (2^nd ed.) page 18, paragraph 2-07. In order to ascertain whether a statement that someone would do a specified thing was enforceable in law, the court should look for clear words to that effect.

[99] Against that background, counsel examined the evidence. The significant period was 1 June 2001 until 12 June 2001. One of the critical facts was that there was a notice to suspend in respect of Stonelaw, but none in respect of Howwood. The threat of suspension was removable by payment. In those circumstances it was highly unlikely that Mr Law would feel obliged to offer guarantees in respect of both Stonelaw and Howwood on behalf of Morrison Homes and the joint venture companies, especially bearing in mind the open-ended nature of the LPL/Ballast building management contract.

[100] Mr Burn's evidence was inconsistent with someone obtaining a legally binding undertaking, but wholly consistent with someone trusting a reputable building contractor not to let the projects fail.

[101] Turning to the letter itself, counsel drew attention to the yawning gulf between the terms of the letter and the gloss placed on it in Article 7 of Condescendence. The averments in Article 7 demonstrated just how much had to be read into the letter in order to give Ballast's argument any viability. The natural and ordinary meaning of the letter was an explanation about a future payment mechanism, not an undertaking of a legal liability.

[102] Ballast had suggested that the use of the word "will" entailed a legally binding obligation, but that was not invariably the case. Kleinwort Benson Ltd v Malaysia Mining Corporation Berhad [1989] 1 W.L.R. 379 contained an express concession at page 385H that the defenders acknowledged that a certain paragraph was intended to have legal effect. The dicta of Ralph Gibson L.J. at page 390E reflected that concession. Accordingly the matter had not been argued.

[103] Contrary to Mr Wolffe's submissions, the letter clearly related to Stonelaw alone, not to both Stonelaw and Howwood. The heading referred to "Outstanding Valuation" (singular). The second paragraph referred to "JV Account" (singular). Each joint venture company had its own bank account, the Stonelaw company at Lloyds TSB, the Howwood company at the Bank of Scotland. In order to achieve the construction for which Ballast contended, one had to read in a reference to the joint venture accounts (plural).

[104] Nor was there any mention in the letter that Morrison Homes "undertook to procure" that the joint venture companies paid the sums due to Ballast under the Stonelaw and Howwood contracts; or that Morrison Homes

"undertook to procure (a) that funds would be available in the [joint venture companies'] accounts to meet payments due to [Ballast] under the Stonelaw and Howwood contracts; and (b) that [the joint venture companies] would pay [Ballast] in respect thereof"

as suggested in Article 7 of Condescendence. Again therefore those words and concepts had to be written in.

[105] Quite simply, a reasonable reader would not find the obligations contended for by Ballast in the letter dated 12 June 2001. It was a letter advising of a mechanism of payment. As Lord President Rodger pointed out in Bank of Scotland v Dunedin Property Investment Co. Ltd, cit. sup., usually the enquiry into the proper construction of a document started and finished with the language itself. One was looking for a commercially sensible construction.

[106] The circumstances known to parties at the time the letter was written did not put a different complexion on how a reasonable reader would understand the plain terms of the letter. It was highly implausible that someone who was not obliged to offer any guarantee would offer such a guarantee in respect of unknown, unlimited sums. Mr Law was not in an intractable situation where there was no other way out: the threat of suspension had been got rid of, by payment of the sum due. If Mr Law had been offering a guarantee, he would want to know in advance the implications of such an offer. He would want to know the sums which the architects in the Ballast/LPL contract would have certified as the final figure. By contrast, it was entirely understandable that, if Mr Law wanted to address the problem of delays in payment, he could do so without much enquiry, by changing the payment mechanism.

[107] Counsel accordingly submitted that the surrounding circumstances were not consistent with the issuing of an unlimited legally binding undertaking. The surrounding circumstances were consistent with Mr Law outlining a proposal for a mechanism to expedite payment.

[108] Counsel further submitted that it was unnecessary to proceed to consider the question of any actings following upon the letter, because the terms of the letter were clear and unambiguous. Also when the letter was viewed together with the circumstances surrounding it, it was clear that Ballast's construction was wrong.

[109] However, in case the court was in any doubt about the construction of the letter, counsel made submissions about post-letter actings. Counsel contended, contrary to Mr Wolffe's fourth general proposition noted in paragraph [89] above, that where a written contract was open to construction (or ambiguous), the consistent actings of the parties after the date of the written contract might be a legitimate guide to the meaning to be given to the contract. While two English House of Lords cases appeared to have placed a complete embargo on post-contract actings, Scots law was different, and had been different for about a hundred years.

[110] Lord Hamilton's decision in Cameron (Scotland) Ltd v Melville Dundas Ltd, 2001 S.C.L.R. 691 was not authority for the proposition that Scots law held post-contract actings inadmissible as an aid to construction, because his decision had proceeded upon a concession by the defenders' counsel (noted in paragraph [19] of the judgement) that the law was as set out in James Miller & Partners and Schuler AG, both cit. sup. But on the contrary, a line of Scottish authority established that post-contract actings could be taken into account when construing a written contract.

[111] Counsel for the defenders then referred to McBryde, Contract (2^nd ed.), paragraph 8-14 et seq. and in particular paragraph 8-16; Macgill v Park (1899) 2 F. 272, the Lord President at the foot of page 275; Lord Adam; and Lord McLaren at the foot of page 276; Boyle & Co. v Morton & Sons (1903) 5 F. 416, Lord Trayner at page 422; Lord Moncrieff at page 423; the Lord Justice-Clerk at page 421; and Lord Young at page 422. There was Inner House authority consistent with a course of correspondence and actings being used to construe a contract: Hunter v Barron's Trs. (1886) 13R. 883, the Lord Justice-Clerk at page 890; Lord Young at page 892; and Lord Craighill. If therefore there was consistent post-contract conduct on the part of the recipient of an alleged unilateral obligation, the court was entitled to look at that conduct.

[112] Further, it was always competent for one party to prove that the intention of the parties was what he averred it to be by reference to the writ of the opposing party, provided that the writ was subsequent to the date of the contract: Gloag, Contract (2^nd ed.), pages 376 et seq.; Turner v MacMillan-Douglas, 1989 S.L.T. 293, at pages 294L - 295G (a decision which senior counsel suggested was wrong in that there had been no ambiguity in the missives, but nevertheless the court had correctly recognised the existence of Gloag's principle, and the fact that it was competent to look at the subsequent writings of the parties in cases of ambiguity).

[113] Counsel accordingly submitted that the court could have regard to the actings of the parties following the letter of 12 June 2001. Those actings did not support Ballast's contention. In particular, there was no evidence that anyone acted on the basis that the letter comprised an open-ended guarantee binding Morrison Homes and the joint venture companies, as submitted by Ballast. There was no evidence that Ballast or Mr Burn relied upon the letter of 12 June 2001 as containing a guarantee from Morrison Homes and the joint venture companies. The high point for the pursuers was that any demands made to LPL were copied to Mr Law of Morrison Homes.

[114] It was highly significant that when arrestments were served on the joint venture companies, Ballast accepted that the arrestments were a valid reason for non-payment (6/141,6/160-161). Had Ballast considered that it had separate undertakings from Morrison Homes and the joint venture companies, Ballast would have relied upon the letter dated 12 June 2001 and stated that the arrestments were irrelevant as Morrison Homes had a direct obligation to Ballast. But in fact, the parties' reactions to the arrestments had been entirely consistent with a situation where it had been agreed that the joint venture companies would pay directly to Ballast what they owed to LPL.

[115] Further significant points included the following: The first time that Mr Burn referred to "assurances" was in the letter dated 7 February 2002, number 6/250 of process (quoted in paragraph [57] above) written after he had consulted solicitors. Furthermore, Morrison Homes had not been brought into the present action as fourth defenders until June 2002, some four months after the summons had been signetted. Also Mr Law had given evidence that Mr Burn regularly telephoned to ask if the Mackenzie Partnership had carried out their valuation, and when would Ballast be paid. That demonstrated a clear understanding that Ballast would receive what the joint venture companies owed LPL on certification of the sums due by the joint venture companies to LPL.

[116] It was not challenged that the joint venture companies had paid everything which they owed to LPL: but nevertheless it was now claimed that LPL, the joint venture companies and Morrison Homes owed considerable sums of money, including retention monies. It was a remarkably onerous obligation which Ballast invited the court to hold had been entered into.

[117] Finally counsel disagreed with Mr Wolffe's submissions relating to the contra proferentem principle. If the court found the language of the letter dated 12 June 2001 ambiguous, the letter should be construed narrowly in favour of the author. While there was a specific rule of construction contra proferentem relating to cautionary obligations (and thus many reported cases related to cautionary obligations) that did not detract from the fact that there was a more general proposition that documents should be construed contra proferentem. Thus if there were any real ambiguity, the letter should be construed narrowly against the interests of the person relying upon the letter.

Opinion

Credibility and reliability
[118] I found Mr Taylor and Mr Teaz credible and reliable witnesses, doing their best in the context of busy professional lives to remember past events which were not at the time marked out as particularly significant or important.

[119] Mr Law was in my view generally credible and reliable, although he understated (a) the dominant role played by Morrison Homes in the two projects; (b) Morrison Homes' anxiety about the unsatisfactory pattern of certification and payment, and Ballast's threats of suspension and termination; and (c) Morrison Homes' desire to see the projects reach a successful and profitable conclusion - a desire so strong that Morrison Homes was prepared to make payments when under no legal obligation to do so in order to placate Ballast and to keep the projects viable. In relation to passages in evidence where Mr Law denied giving Mr Burn any assurances, I accept his evidence insofar as he was referring to legally binding obligations; however as the weight of the evidence demonstrated (and as Mr Law himself accepted at a later stage in his evidence), Mr Law worked hard to keep the projects viable, and in so doing gave Mr Burn words of comfort and reassurance, for example, that he (Mr Law) would try to resolve matters.

[120] In relation to Mr Burn, I was unable to accept certain parts of his evidence. In particular:

[121] I did not accept Mr Burn's evidence that Mr Law said anything which amounted to a legally binding undertaking or guarantee on the part of Morrison Homes and the two joint venture companies that all sums due to Ballast under the LPL/Ballast building management contract would be paid. Mr Burn's evidence in chief established no more than reassurances from Mr Law that Morrison was committed to the projects and would not let them fail, and that Mr Law would endeavour to resolve matters. When pressed in cross-examination (to the effect that Mr Law had never given a legally binding obligation), Mr Burn responded by going further and affirming that he had understood Mr Law to have given assurances that all future payments due to Ballast would be paid, not merely that he would endeavour to assist in resolving difficulties. I found Mr Burn's evidence on this issue wholly unconvincing.

[122] Nor did I accept Mr Burn's evidence that, on receipt of the letter of 12 June 2001, he genuinely believed during the period 12 June 2001 until late January/early February 2002 (i.e. prior to consulting solicitors) that Ballast had received in that letter a legally binding undertaking on behalf of Morrison Homes and the two joint venture companies that all sums due to Ballast under the LPL/Ballast building management contract would be paid. Mr Burn was a senior businessman experienced in the construction industry. He had on at least one previous occasion in January 2001 made careful inquiries into the nature and source of a guarantee being offered, including asking for a more formal statement, and speaking of his intention to place the matter before Ballast's board, all as outlined in paragraphs [21] to [23] above. Against that background, I found it difficult to accept that Mr Burn considered the letter dated 12 June 2001 to amount to a legally binding obligation or guarantee. Moreover while I ultimately conclude that post-contract actings are irrelevant when construing the letter of 12 June 2001 (see paragraph [159] below), such actings may nevertheless be of relevance when assessing Mr Burn's credibility and reliability. Had Mr Burn truly believed during June 2001 to late January/early February 2002 that the letter dated 12 June 2001 constituted a guarantee legally binding on Morrison Homes and the two joint venture companies (as Mr Burn asserted in evidence), he would in my view have attempted to enforce that written obligation to achieve immediate and direct payment from Morrison Homes, for example at the meetings on 7 August 2001 and 26 November 2001. No doubt he would also have shared the significance of the letter with Mr Teaz. Weighing up all the evidence, therefore, I was unable to accept Mr Burn's evidence that he had, prior to his consultation with solicitors in late January/early February 2002, truly believed that the letter of 12 June 2001 constituted a legally binding guarantee on behalf of Morrison Homes and the two joint venture companies.

[123] Next, I did not accept Mr Burn's evidence that Ballast, following receipt of the letter dated 12 June 2001, made written requests for payment to Morrison Homes based upon the legally binding undertaking said to be contained in the letter dated 12 June 2001. No such written requests were produced in evidence. Had such written requests existed, they would have been lodged as productions.

[124] Nor did I accept that Mr Burn was, at any time after his careful inquiries into a possible security in January 2001, under the impression that Morrison (in the generic sense) or Morrison Homes was LPL's joint venture partner, rather than MRIL. I did not accept that he thought that a Morrison guarantee had been offered by Mr Lang. The guarantee offered was clearly from MRIL. The written information which Mr Burn received during his inquiries in January 2001 made it clear beyond any doubt which company was LPL's joint venture partner. Thus the reference in Mr Burn's letter dated 7 February 2002 (6/250: quoted in paragraph [57] above) to Morrison Homes being LPL's joint venture partner was at best careless, at worst misleading.

[125] Although the question of "stretching payments" and interference by Morrison Homes in the contract between LPL and Ballast is no longer in issue (that part of the case having been departed from by counsel for Ballast: see paragraph [69] above), I did not in any event accept Mr Burn's evidence that Mr Law made a concession about Morrison's board deciding to "stretch payments" (i.e. actively and deliberately slowing down the certification and payment process). Mr Law firmly denied both the allegation and also having made any admission or concession about it. Furthermore, the weight of the evidence showed that Mr Law and Morrison Homes used every effort to assist in achieving prompt payment of sums due to Ballast.

[126] To the extent outlined above therefore I was unable to find Mr Burn a wholly credible and reliable witness.

[127] I should add that it was unfortunate that in terms of Mr Burn's contract with the administrator of Ballast some of his remuneration was directly linked to success in the present litigation. Nevertheless I was not ultimately influenced by that factor when assessing credibility and reliability.

Pleadings and evidence
[128] Counsel for Ballast sought to rely upon certain averments made by the second, third, and fourth defenders in the Closed Record number 33 of process, particularly passages at pages 20C-D, and 21A. He submitted that those averments could and should be construed as (i) an acceptance by the defenders that the letter dated 12 June 2001 was written by Mr Law on behalf of Morrison Homes and the two joint venture companies, with the approval and authority of LPL; and (ii) an acceptance by the defenders that the letter dated 12 June 2001 was indeed an undertaking or guarantee of payment to Ballast, but restricted in quantum to payments certified as due to LPL by the Mackenzie Partnership under the design and build contract.

[129] Counsel accepted that it was a matter for the court whether the pleadings could so be construed, and whether, having heard the evidence, the pleadings had any weight.

[130] In my view, the evidence heard in this particular case supersedes those averments. I accept that there may be cases where an averment on record constitutes such a clear admission that the court could and should be invited to accept it. But in this case, involving subtle issues of fact, law and construction, I am not prepared to be restricted by the averments. It seems to me that one averment at page 20C-D ("The letter of 12 June was written on behalf of the second and third defenders [italics added] with the approval and authority of the first defenders.") may not be strictly accurate so far as the italicised phrase is concerned: see paragraph [145] below. So far as the averments at page 21A are concerned, they are in my view capable of more than one construction, at least one of which would not amount to a legally binding guarantee.

[131] Accordingly I now turn to deal with the substantive issues in the case on the basis of the evidence.

Morrison Homes' role in the projects
[132] Ballast had contracts with LPL, and with no-one else. However MRIL, contractually bound with LPL in the joint ventures, was a wholly-owned subsidiary of Morrison Homes. Morrison Homes therefore had an obvious interest to see that the projects succeeded. Thus both the Stonelaw project and the Howwood project had Morrison Homes' supervision, assistance, and support.

[133] The assistance given was not minor. Staff at Morrison Homes helped to set up the joint venture companies and to arrange their respective bank accounts with draw-down facilities. Staff at Morrison Homes made insurance arrangements. They arranged road bonds (6/357). The general manager of Morrison Homes, Jonathan Law (or his subordinate Douglas Taylor), attended project meetings. Mr Law received copies of project correspondence, monthly cash-flow statements for each joint venture company, and gave significant guidance and supervision in the course of construction. Mr Law was one of the joint venture signatories whose signature authorised release of a draw-down amount. Any valuation by the quantity surveyors in terms of the LPL/joint venture company fixed price design and build contract (i.e. a valuation by the Mackenzie Partnership) had to be sent first to Mr Law for his approval (6/384; 6/386). On occasions Mr Law did not approve the valuation (see for example, the fax dated 10 February 2001, 6/367; and the fax dated 8 February 2002, 6/253). Mr Law was instrumental in LPL's decision to re-sequence the work in an attempt to achieve sales income. He continued to have considerable input in the pattern of work adopted thereafter. References in the correspondence and site minutes reflect just how influential Mr Law was. For example, by fax dated 20 March 2001, 6/378, Mr Law stated:

"I would not be in a position to release any further construction until we had converted the existing reservations into missives and obtained a further 3 missives on the houses currently under construction ..."

Similarly in the minutes of a site meeting on 8 August 2001, 6/299, paragraph 1.6 noted:

"J. Law of Morrison Homes to confirm today (8 August) which of blocks 2 and 3 are to be re-commenced".

[134] Mr Law approved the content of missives of sale (6/388). He approved sales prices. He listened to complaints from Mr Burn of Ballast about late certification and late payment in the context of the LPL/Ballast building management contract, responding with words of reassurance, and taking steps to resolve problems with late payment and certification. On several occasions, outstanding debts due by LPL to Ballast were paid in the first instance by funds from Morrison Homes, with necessary recoveries being made later. Further, Mr Law was instrumental in arranging payment of monies direct from the joint venture companies to Ballast, by-passing LPL, partly to accelerate payment to Ballast, and partly to avoid a perceived risk that Mr Lang of LPL might be tempted to use the funds for other purposes, failing to pass them to Ballast as he should.

[135] With such a degree of organisation, support and supervision from Morrison Homes, it was not surprising that some employees at more subordinate positions in the corporate hierarchies (for example, Mr Teaz of Ballast, and accountant Hamish Sheppard of Morrison Homes) tended to regard LPL's partner in the joint venture, or LPL's funder, as "Morrisons" or "Morrison Homes", without drawing any fine distinctions namely that LPL's joint venture partner was in fact the corporate body MRIL, a wholly-owned subsidiary of Morrison Homes.

[136] However that level of support, intervention, and direction, combined with practical day-to-day blurring of demarcation lines by employees actively involved in the projects, would not necessarily create any obligation legally binding Morrison Homes or indeed the joint venture companies as guarantor of payment of all sums due by LPL to Ballast in terms of the open-ended LPL/Ballast building management contract. Such a legally binding obligation would in my view require proof of clear terms of undertaking by or on behalf of the alleged guarantor.

[137] In relation to the verbal exchanges which took place between Mr Law of Morrison Homes and Mr Burn of Ballast, whether at meetings, or by telephone, or during conversations, I was not satisfied that anything said by Mr Law amounted to a unilateral obligation binding Morrison Homes, or either of the joint venture companies, to underwrite and if necessary pay all sums due by LPL to Ballast. All that can in my view properly be taken from Mr Law's statements were words of comfort and assurance that something would be done to resolve matters, and that Morrison Homes were committed to the projects and would not see them fail. Morrison Homes did in fact do much to keep the projects viable, in particular producing funds to pay debts outstanding by LPL to Ballast when Morrison Homes was under no legal obligation to do so. Accordingly such assurances and related actions might well assist a contractor when deciding whether or not to continue, and what steps to take in the future. But nothing in the evidence satisfied me that Mr Law had at any time given a verbal undertaking or undertakings clearly binding Morrison Homes and the joint venture companies in law as guarantors of sums owed by LPL to Ballast.

[138] I am confirmed in that conclusion by the letter dated 12 June 2001, the proper construction of which I deal with below. As will be seen, I find that the letter simply advises of an imminent payment, and a future payment mechanism. Had there been any verbal undertaking in the days preceding that letter amounting to an obligation legally binding upon Morrison Homes and/or the joint venture companies to ensure that all sums due to Ballast by LPL would be paid, it would be highly unlikely that there would be no reference to that undertaking in the letter.

The letter of 12 June 2001
[139] In my opinion, the plain meaning of the letter of 12 June 2001 was that the sum outstanding due to Ballast in respect of the Stonelaw project (namely £168,734.69) would be paid the next day (13 June 2001), and that all future payments of sums due by LPL to Ballast in respect of the Stonelaw project would be paid directly to Ballast out of the Stonelaw joint venture company account (by-passing LPL), rather than such sums being paid to Ballast by LPL. In other words, there was to be a significant change in the payment mechanism.

[140] I have reached that conclusion for the following reasons:

[141] I accept that where a party intends to be legally bound by a unilateral obligation, clear words must be used: Lord Advocate v City of Glasgow District Council, 1990 S.L.T. 721 at page 724B-D and pages 724H-725G.
[142] I also accept the following principles of construction (agreed by both counsel):

(i) Interpretation is the ascertainment of the meaning which the document would

convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract: Investors Compensation Scheme Ltd v West Bromwich Building Society, cit. sup., Lord Hoffmann at page 912H et seq. and Bank of Credit and Commerce International SA v Ali, cit. sup., Lord Hoffmann at paragraphs [39] and [49]; Bank of Scotland v Dunedin Property Investment Co. Ltd, 1998 SC 657, Lord President Rodger at page 661D. The question is an objective one, comprising an inquiry into what the words used meant, rather than what the parties meant by the words they used.

(ii) The inquiry will start and usually finish by asking what is the ordinary

meaning of the words used: Bank of Scotland v Dunedin Property Investment Co. Ltd, cit. sup., Lord President Rodger (quoting Lord Mustill) at page 661D. Words should normally be taken to have been used according to their ordinary meaning.

(iii) The relevant factual context is only that which was known or should

reasonably have been known to both parties at the time when the document was written: Bank of Credit and Commerce International SA, cit. sup., Lord Hoffmann at paragraphs [39] and [49]. In the context of a unilateral document, the appropriate perspective is the meaning which the words would convey to a reasonable person in the position of the recipient.

[143] I further accept that the question of construction must be approached objectively, the issue being how a reasonable recipient with the background knowledge referred to above would have understood the letter dated 12 June 2001: cf. Lord Steyn in Mannai Investment Co. Ltd v Eagle Star Life Assurance Co. Ltd [1997] AC 749 at page 767G. So far as background knowledge is concerned in the present case, I do not regard the events leading up to the writing of the letter as "prior negotiations" (struck at by proposition (3) outlined by Lord Hoffmann at page 913A-B in Investors Compensation Scheme Ltd, cit. sup.) but rather as the factual context or background in which the letter came to be written.

[144] Applying all of the above propositions in the present case, the reasonable recipient would in my view regard the letter as a letter from Mr Law in his capacity as general manager of Morrison Homes. The letter is headed "Outstanding Valuation" (in the singular) and in the first paragraph refers to an outstanding sum of £168,734.69. As both the writer and the reasonable recipient (with the background knowledge available to Mr Law and Mr Burn) were aware, the sum of £168,734.69 represented the amount outstanding in connection with the Stonelaw site certificate number 11. Accordingly the proper construction of the letter so far, on the ordinary meaning of the words used, with the background knowledge reasonably available to both parties, was intimation of an intervention on the part of Morrison Homes such that a sum due by LPL to Ballast relating to certificate number 11 for the Stonelaw site would be paid on 13 June 2001. The source of payment was unspecified, but the reasonable recipient might well in all the circumstances assume that Morrison Homes intended to make the payment from its own funds in order to achieve payment by 13 June 2001.

[145] Moving to the second paragraph, and applying the principles of construction outlined above, one finds the words "the joint venture account" (singular). Those words, in my view, on a plain and ordinary meaning of the words in their context, and construing the letter as a whole (thus bearing in mind the heading and the reference in the first paragraph to the amount of £168,734.69 which both parties knew related to Stonelaw) refers to the Stonelaw joint venture company bank account, and to future sums due by LPL to Ballast in respect of Stonelaw. Accordingly the letter advises the recipient that in future all such payments will be sourced from the Stonelaw joint venture company bank account "directly" to Ballast (i.e. without the intervention of LPL). Applying the principles of construction outlined above, I am unable to read into the words used any reference to the Howwood project or the Howwood joint venture account.

[146] The reasonable recipient would in my view assume that the writer (the general manager of Morrison Homes) had authority to speak on behalf of both LPL and the Stonelaw joint venture company.

[147] I am unable to accept the proposition that the word "will" necessarily connotes the undertaking of a legally enforceable obligation. It may do, depending on the context and the circumstances: cf. Gloag, Contract (2^nd ed.) pages 16-17; McBryde, Contract (2^nd ed.) paragraph 2-07; Kleinwort Benson Ltd v Malaysia Mining Corporation Berhad [1989] 1 W.L.R. 379. But having heard all the evidence in the present case I am not persuaded that the use of the future tense in relation to a description of the source of future payments has a legally binding effect.

[148] Thereafter the writer requests the recipient to send a summary of each monthly valuation directly to him at the same time as the detailed valuation is sent to LPL. In my view, applying the principles of construction outlined above, the plain meaning of the language taken in the context of the background knowledge reasonably available to the parties is as follows:

[149] A summary of the valuation prepared in terms of the open-ended LPL/Ballast building management contract was to be sent to Mr Law at the same time as the full valuation was sent to LPL. That would assist Mr Law and Morrison Homes in their continuing endeavours to ensure that the design and build contract worked in step with the building management contract, and that payments to Ballast were made timeously.

[150] It will be seen therefore that the plain or ordinary meaning of the words in the context of the background reasonably known to both parties does not in my view record the undertaking of a legally binding obligation on the part of Morrison Homes, the joint venture companies, or any of them, in the terms contended for by counsel for Ballast. I agree with senior counsel for the second, third, and fourth defenders that in order to achieve the construction advanced by Ballast, it is necessary to read too much into the letter, contrary to accepted principles of construction: cf. Bank of Scotland v Junior, 1999 SCLR 284; City Wall Properties (Scotland) Ltd v Pearl Assurance plc, 25 July 2003, Lord Clarke at paragraph [23].

Circumstances surrounding the letter dated 12 June 2001
[151] Having found the terms of the letter to be clear and unambiguous, it is unnecessary to consider other circumstances surrounding the writing of the letter.

[152] For completeness however, I record that at least two surrounding circumstances struck me as being consistent with the defenders' contention that the letter simply advised of imminent payment of £168,734.69 in respect of the Stonelaw site, and a change in the future payment mechanism in relation to that site.

[153] First, the threat to suspend the works related solely to Stonelaw. That threat could be (and in my view was) neutralised by payment of the sum of £168,734.69. In those circumstances there was no pressing need for Mr Law to offer, on behalf of Morrison Homes and the joint venture projects, an open-ended guarantee in relation to both the Stonelaw and the Howwood projects.

[154] Secondly, as mentioned above, the guarantee contended for by Ballast was entirely open-ended, without limit. It would be unlikely that someone such as Mr Law would offer such a guarantee without some preliminary inquiries about the size of the potential liability involved.

Actings following upon the letter dated 12 June 2001
[155] As there is in my view no ambiguity about the meaning of the letter dated 12 June 2001, there is no need to consider the issue of post-letter actings. However for completeness, and purely obiter, I give a view on the matter.

[156] Counsel for Ballast contended that events following upon the letter dated 12 June 2001 did not affect the proper construction of that letter. He argued that events arising after the contract had been entered into were irrelevant to the question of interpretation. He placed particular reliance upon two House of Lords authorities James Miller & Partners Ltd v Whitworth Street Estates (Manchester) Ltd [1970] A.C. 583, at page 603B-C, and Schuler A.G. v Wickman Machine Tool Sales Ltd [1974] AC 235, at pages 252C-F, 260C, and 268, all as set out in paragraphs [89] and [90] above. Reference was also made to Cameron (Scotland) Ltd v Melville Dundas Ltd, 2001 S.C.L.R. 691.

[157] By contrast, counsel for Morrison Homes and the joint venture companies submitted that while those two English House of Lords cases appeared to have placed a complete embargo on post-contract actings, Scots law was different, and had been different for about a hundred years. Counsel submitted that where a written contract was open to construction (or ambiguous), the consistent actings of the parties after the date of the written contract might be a legitimate guide to the meaning to be given to the contract. He relied upon Cameron (Scotland) Ltd v Melville Dundas Ltd, 2001 S.C.L.R. 691, at paragraph [19]; McBryde, Contract (2^nd ed.), paragraph 8-14 et seq. and in particular paragraph 8-16; Macgill v Park (1899) 2 F. 272; Boyle & Co. v Morton & Sons (1903) 5 F. 416; Hunter v Barron's Trs. (1886) 13R. 883; Gloag, Contract (2^nd ed.) pages 386 et seq.; and Turner v MacMillan-Douglas, 1989 S.L.T. 293: see paragraphs [109] to [112] above.

[158] In my view, Scots law is not different from English law on this important principle of construction. I accept that the House of Lords cases James Miller & Partners v Whitworth Street Estates (Manchester) Ltd, cit. sup., and Schuler A.G. v Wickman Machine Tool Sales Ltd, cit. sup., apply in Scotland. As counsel for Ballast pointed out, in Macgill v Park, and Hunter v Barron's Trs., cit. sup., the facts did not support the defenders' proposition. In Boyle & Co. v Morton & Sons, the question of the competency of referring to post-contract actings was not questioned or discussed. The authoritative work Gloag on Contract questioned and impliedly criticised attempts to rely on post-contract actings of parties. The case of Turner v MacMillan-Douglas, cit. sup., has been adversely commented on in two subsequent cases namely Baird v Drumpellier, 2000 S.C. 103 (Lord Hamilton at page 109E), and Miller Construction Ltd v Trent Concrete Cladding Ltd, 4 August 1995, unreported (Lord Penrose at pages 22-24). In those circumstances I do not accept that there is a well-argued, well-established line of Scottish authority as contended for by senior counsel for the defenders. In my view the authoritative reasoning expounded in the two House of Lords cases cited above properly expresses the law in Scotland.

[159] In my opinion therefore it is not legitimate, when construing the letter dated 12 June 2001, to have regard to the actings of the parties following upon that letter. I sustain Mr Wolffe's objection to the line of evidence to that extent. That is not to say that some evidence led from Mr Burn in cross-examination (objected to by Mr Wolffe) is rendered inadmissible, as that evidence had a bearing on his credibility and reliability.

[160] Esto it is proper to have regard to post-letter actings, in my view they support the conclusion I have already reached in paragraphs paragraph [139] above. To give two examples:

(i) The fax from Mr Lang of LPL to Morrison Homes dated 21 July 2001 (6/404, confirming that payments were to be made to Ballast directly from each joint venture company account, the arrangement having by then been extended to both joint venture companies) was entirely consistent with the construction of the letter dated 12 June 2001 contended for by the defenders.

(ii) At the meeting on 7 August 2001, Mr Burn did not rely upon the letter dated 12 June 2001. He did not demand payment from Morrison Homes in terms of the legally binding obligation said to be contained in the letter.

Construction contra proferentem
[161] As I found no ambiguity in the terms of the letter dated 12 June 2001, it is unnecessary to consider whether the contra proferentem principle might have relevance in the present case.

Conclusion
[162] I sustain the pursuers' first plea-in-law (restricted to conclusions 2, 3, 4 and 5) and grant decree in absence against the first defenders (LPL) in terms of Conclusions 2, 3, 4 and 5. I further sustain the pursuers' eighth plea-in-law (restricted to Conclusions 8, 8A and 9) and grant decree in absence against the first defenders (LPL) in terms of Conclusions 8, 8A and 9. I repel the pursuers' pleas-in-law numbers 2, 3, 4, 5, 6, 7, 9, 10, 11, 12, 13 and 14.

[163] I sustain the second defenders' third and sixth pleas-in-law and grant absolvitor to the second defenders, the Stonelaw joint venture company.

[164] I sustain the third defenders' fifth and sixth pleas-in-law and grant absolvitor to the third defenders, the Howwood joint venture company.

[165] I sustain the fourth defenders' third and fourth pleas-in-law and grant absolvitor to the fourth defenders, Morrison Homes now known as AWG Residential Limited.

[166] I reserve the question of expenses.