Scottish Court of Session Decisions

You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Scottish Coal Company Ltd v. Kier Construction Ltd (t/a Kier Mining) [2005] ScotCS CSOH_74 (10 June 2005)
URL: http://www.bailii.org/scot/cases/ScotCS/2005/CSOH_74.html
Cite as: [2005] ScotCS CSOH_74, [2005] CSOH 74

[New search] [Help]

Scottish Coal Company Ltd v. Kier Construction Ltd (t/a Kier Mining) [2005] ScotCS CSOH_74 (10 June 2005

OUTER HOUSE, COURT OF SESSION

[2005] CSOH 74

A1109/03

OPINION OF LADY SMITH

in the cause

SCOTTISH COAL COMPANY LIMITED

Pursuers;

against

KIER CONSTRUCTION LIMITED t/a KIER MINING

Defenders:

________________

Pursuers: Moynihan QC; Davies; Harper Macleod

Defenders: Howie QC; Pinsent Masons

10 June 2005

INTRODUCTION
[1] The pursuers are a company involved in the coal supply business. They supply coal to power stations. As at 23 June 1998, they had a site known as Gasswater at Cronberry in Ayrshire for which they had obtained planning permission from the local authority for the extraction of coal by opencast methods. The defenders are a mining company and the pursuers entered into a contract with them on that date whereby they were to extract coal from the site and deliver it to the pursuers. The contract was entitled the "Gasswater O.C.C.S. Opencast Coaling Agreement" ("the Contract").

[2] The duration of the contract was from 29 June 1998 to 1 March 2003 . The defenders carried out works of coal extraction during that period. Broadly put, the pursuers' position was that when the defenders finished work at the site they had not extracted all the coal that, in terms of the contract, they should have done, causing the pursuers to suffer loss. They accordingly raised an action of damages which came before me on the procedure roll in respect of the defenders' plea to the relevancy.

THE CONTRACT:
[3] The Contract is a document of some complexity which contains detailed provisions regarding the arrangements between the parties whereby the defenders were to extract coal from the site for the pursuers, many of which need not be considered for present purposes. The pursuers are referred to as "Employer" and the defenders as "Contractor" .

[4] Clause 2.1 provides :

"The Contractor shall commence the Works on the Commencement Date and proceed with due diligence and in regular progression to execute and complete the Works in accordance with this Agreement ..."

and in terms of clause 2.1.4, the defenders were bound to complete the Works by the Completion date, 1 March 2003.

[5] "Works" are defined in clause 1.1 as being :

" ..the Works described in the Specification and Drawings to be executed and completed under and in terms of this Agreement which includes all temporary and permanent work executed or to be executed by the Contractor to extract all Coal (unless instructed not to be extracted by the Site Manager) from the Site the transportation of such Coal to the Coal Preparation Plant to operate and maintain the Coal Preparation Plant and the extraction and transportation of all Instructed Minerals to the Product side of the Coal and Instructed Minerals into transport provided by the Employer at the concrete apron on the Product side of the Coal Preparation Plant and the restoration and maintenance of the Site together with any Variation(s)"

[6] " Coal" is defined in the same clause as follows:

" ...combustible material comprising carbonaceous rock of sedimentary origin containing carbons and hydrocarbons with a minimum of Gj/t of 21.5."

where "Gj" is an abbreviation for Gigajoules.

[7] Clause 2.1.15 is one of the clauses which was central to the argument before me and , consequent upon the terms of clause 2.1 provides that the Contractor shall :

" deliver to the Employer not less than the minimum cumulative number of Gj specified in Column B by each of the dates specified in Column A of the Coal Delivery Schedule;"

[8] The Coal Delivery Schedule ("the delivery schedule") is set out in Schedule Part 9 and sets out a list in one column (Column A) of dates at three monthly intervals and in a second column (Column B), against those dates, amounts of Gigajoules, the requirement being that the defenders must, by each specified date, have delivered to the pursuers coal containing the Gigajoule value specified against that date. The first target is that by 26 December 1998, the defenders must have delivered coal containing 1,900,000 Gigajoules. The last one specified is that by 28 June 2003, a date later than the contract completion date, they must have delivered to the pursuers coal containing 73,013,124 Gigajoules.

[9] Clause 2.1.16 was also central to the argument and it provides that the Contractor shall:

" except where otherwise Instructed by the Site Manager recover from within the Site and deliver to the Employer all of the Coal to be recovered as described in the Specification and Drawings."

[10] As regards the reference to Site Manager's instructions, there are provisions in the contract whereby certain matters must be reported to him, such as any concern about stability (see: clause F(xi) of the Specification) and he has the power to give instructions which could, for instance, extend to ceasing work in part of the site if safety required it.

[11] The Specification provides, at part G:

" (i) Coaling Agreement

The Contractor shall submit his proposals for the recovery of such total anticipated tonnage of coal and quality together with a detailed programme of works.
The Contractor shall (in accordance with Schedule Part 9 ) deliver and the Employer will accept in each accounting period the available prepared product save that the Contractor shall advise the Site Manager , in advance, with notice of no less than 2 working days , of the subsequent week's anticipated tonnage and quality.
The Contractor shall excavate load transport prepare temporarily stock and load into vehicles supplied by the Employer all prepared coal from within the Coal Excavation Area(s) and shall maximise the recovery of all such coal."

[12] The Contract contains a clause in which provision is made for liquidate and ascertained damages ("liquidated damages") and it includes the following provisions which were referred to in the course of the debate:

" 7.9.1 In the event that the Contractor shall fail to execute and complete the Works by the Completion Date or such extended period as may be determined under Clause 5 the Employer may deduct from any payment or payments due or falling due to the Contractor under Clause 6 as liquidated damages and not as a penalty a sum of £5,000 per day for every day which shall elapse between after the Completion Date or such extended period as may be determined under Clause 5 and the date on which the Works are completed to the satisfaction of the Site Manager.

7.9.2 In addition and notwithstanding the provisions of Clause 7.9.1 if the Contractor fails to produce the minimum cumulative Gj's of Coal specified in Schedule Part 9 for any three consecutive Accounting Periods the Employer may deduct from payment any payment or payments falling due to the Contractor under Clause 6 a sum by way of liquidated damages and not as a penalty calculated by multiplying the difference between the cumulative Gj of Coal produced and the minimum cumulative Gj specified in Schedule Part 9 for the last of such Accounting Period by 0.04p per Gj. The Employer may deduct such damages on each and every occasion when default occurs."

THE ISSUES :
[13] Shortly stated, the issue between the parties was whether or not the pursuers' case, which was based on the proposition that the defenders' primary obligation under the contract was to maximise the recovery of coal from the site, breach of which would give rise to the pursuers being entitled to seek damages at common law, was relevant. The pursuers contended that it was. The defenders contended that the pursuers' construction of the contract was a misconstruction since the defenders were only obliged to deliver a minimum quantity of Gigajoules as set out in Schedule 9 and in the event of breach of the obligation to do so, the pursuers were entitled only to liquidated damages as provided for in clause 7.9.2. As a fallback, the defenders contended that even if they were obliged to remove all the coal, the pursuers were only entitled to claim damages under that clause. Further, in any event, the pursuers' averments of loss were, according to the defenders, irrelevant because they took no account of retained coal and included, unjustifiably, a sum in respect of a shortfall in recovery of fixed costs and lump sum payments.

Submissions for the Defenders:
[14] Senior counsel for the defenders submitted that the contract was about Gigajoules, not about tonnes of coal and was about delivering to the pursuers only enough coal to meet their onward sale obligations. Anything else recovered from the ground, whilst bound to be delivered to the pursuers under the contract, was simply a bonus. Against that background, the contract required to be construed as a whole, avoiding overlaps and contradictions and that when that was done, the conclusion that fell to be drawn was that the defenders were only obliged to deliver the minimum quantity of coal, measured in Gigajoules, an amount which could be found by looking at the delivery schedules. He referred, in support of that submission, to Bayoil SA v Seawind Tankers Corporation (The "Leonidas") [2001] 2 Lloyd's Rep 563, Stirling v Norwest Holst [1997] SLT 973, and Bank of Scotland v Dunedin Property Investment Co Ltd [1998] SC 973.

[15] It was submitted for the defenders that support for their construction of the contract could be drawn not only from the application of the principles to be deduced from the authorities referred to but also from: (a) the fact that because of the provisions of clause 2.1.10 and 2.1.12, extraction might be stopped, (b) the fact that the commercial objective of the contract was to provide the pursuers with enough coal to meet their onward sale obligations in circumstances where the defenders accepted the risk that it might not be possible to extract from the site the quantity required for the pursuers to do so (see: clause 7.2 of the contract), (c) the fact that, properly construed, clause 2.1.16 was purely mechanistic so as to allow for the achievement of the result provided for in what was the principal clause, namely clause 2.1.15, (d) the fact that the contract made specific provision for the pursuers' requirements in Gigajoule terms, something which would not, it was submitted, have been required if the obligation was simply to get all the coal out of the ground and finally, (e) the fact that clause 2.1.15 was fenced with a liquidated damages clause, one which made commercial sense in a situation where the defenders wanted to fix a limit to their liability in circumstances where they were taking commercial risks. The last submission was one which did not seem to sit entirely comfortably with the reliance also placed by senior counsel on those authorities, such as Suisse Atlantique Societe d'Armement Maritime S.A v N.V. Rotterdamsche Kolen Centrale [1967] AC 361, which state that an agreed damages clause is always for the benefit of both parties.

[16] Separately, senior counsel submitted that even if the defenders' obligation under the contract was to extract all the coal, the liquidated damages clause applied in the event that they failed to do so. It was a valid and sound liquidated damages clause and there was ample authority for the proposition that it was not open to the pursuers to go behind it and claim common law damages as well: Clydebank Engineering and Shipbuilding Co.Ltd v Don Jose Ramos Yzquierdoy Castaneda [1905] AC 6, Suisse Atlantique Societe d'Armement Maritime SA v NV Rotterdamesche Kolen Centrale, Emden's Construction Law, Issue 94, February 2005, paras 173 -179, Temloc Ltd v Erroll Properties Ltd (1967) 39 BLR 30 , and John Maxwell & Sons (Builders ) Ltd v Neil Simpson [1990] SCLR 92.

[17] Finally, it was submitted on behalf of the defenders that in calculating damages, the pursuers were obliged to make a deduction to allow for the value of the coal that was left in the ground. They had not done so and, accordingly, their averments of loss were irrelevant. Further, they were not entitled to be compensated in respect of the failure to recover fixed costs since to do so amounted to double counting; they were seeking to recover their loss of profit which would be reached by taking the price that would have been secured in onward sales to the electricity industry and deducting therefrom the cost of winning the coal, which cost must already include something to allow for fixed costs. They could not recover those costs separately in the way that their averments sought to do.

Submissions for Pursuers:
[18] Senior counsel for the pursuers submitted that if the structure of the whole contract was properly examined, it was clear that the defenders' obligation was not simply to extract the minimum quantities specified but to extract all the coal, whilst recognising that tolerances would be applied, minor faults would be allowed for and that it was within the discretion of the site manager to instruct that recovery not be continued or carried out for, for example, health and safety reasons.

[19] The defenders' obligations could, it was submitted, be seen to fall into three parts, firstly to extract all the coal within the excavation area unless instructed by the site manager to do otherwise, secondly, to complete extraction by the completion date in the contract and thirdly, to meet the periodic minimum productivity targets that were provided for. The liquidated damages clauses in the contract, which were clauses 7.9.1 and 7.9.2, applied only in the event of the second and third of these. It would have been very difficult to draft a commercially sensible liquidated damages clause to cover breach of the first of these obligations, namely in the event of the defenders not completing the contract at all. It was only logical and reasonable that there was no liquidated damages clause to provide for that event. There was, it was submitted, no question of clause 7.9.2 being comprehensive and exhausting all the pursuers' available remedies. The existence of clause 7.9.1 alone showed that that was incorrect. The combination of 7.9.1 and 7.9.2 showed that, for liquidated damages to arise, parties were proceeding on the basis that the defenders would work until the work was completed. What, however, they did not cover, was what had happened in this case, namely that the defenders did not work on to completion at all.

[20] Accordingly, whilst senior counsel for the pursuers did not dispute the principles applicable when considering the application of liquidated damages clauses, as could be gleaned from the authorities referred to, he did not accept that the liquidated damages clauses in the Contract applied to the event in respect of which the pursuers claimed damages in the present case.

[21] Regarding the criticisms of the averments in support of the pursuers' quantification of the claim, senior counsel for the pursuers dealt firstly with the matter of coal retained within the site. He explained that the pursuers' position was that the retained coal was, in effect, sterilised. The pursuers' planning consent was for a limited period of eight years. If they determined upon trying to extract the remaining coal, they would need to start afresh. However, what the defenders in truth were seeking to argue, it seemed, was that the pursuers had failed to mitigate their loss. It was open to them to do so but the onus was on them to raise the issue and the defences were silent on the matter.

[22] Regarding the matter of the fixed costs referred to, senior counsel relied on the Schedule of Damages that is referred to in the pleadings. As was plain from that Schedule, the pursuers had not, he said, engaged in double counting. In short, the pursuers' position was that they were left with a liability for certain costs that would have been defrayed out of the sale price of the unrecovered coal and that, in calculating the figure for loss of profit, a deduction had been made to allow for that cost. Making that deduction in that calculation did not, however, mean that the pursuers had not been left with the cost liability, something which they were offering to prove. Reliance was placed on the case of Smith v Lindsay & Kirk 1998 SLT 1096 where Lord Philip had been satisfied that it was enough for the allowance of probation that the pursuer's pleadings in a solicitors' negligence case contained all the information necessary for the calculation of the loss sustained by them provided that information did not give rise to the conclusion that the pursuer would not recover any damages at all.

Relevant Legal Principles:
[23] I am satisfied that it is appropriate, when approaching the task of construing this contract, to consider the Contract as a whole. In doing so, its overall structure requires to be taken into account and, if possible, it should be construed in a way that produces reasonable commercial sense, giving ordinary words their ordinary meanings. I did not understand parties to be other than in agreement that that was the correct approach and it is certainly one which is endorsed by authorities such as those referred to by senior counsel for the defenders.

[25] As regards rules of pleading, as the pursuers submitted, the onus of raising a failure to mitigate loss is clearly on the party who seeks to rely upon it. So far as averments of loss are concerned, the applicable principle is that the party claiming loss is obliged to give fair notice in the pleadings of the nature of that loss and no head of damage will normally be struck out in advance of proof unless it is clearly irrelevant.

Decision :
[26] In this contract, the parties set out the terms and conditions under which the defenders were to extract coal from the pursuers' site and deliver it to them. Many details are set out which do not assist in the determination of the issue in this case. There is though, a thread running through the contract which enables its core purpose to be identified. At page 6, in the opening clause of the Contract, which sets out the requisite definitions, "Works" is defined in such a way as to indicate that the work to be done under the contract is the work of extracting "all" the coal except any that the defenders are instructed by the site manager not to instruct. On the next page, clause 2.1 provides that the defenders will commence the Works on the commencement date and complete them. Clause 2.1.16 specifically provides that they are obliged to "recover from within the Site and deliver to the Employer all of the coal" except where otherwise instructed by the site manager. Recovery is to be as described in the "Specification and Drawings". The Specification provides, at G(i)(c) that the defenders will excavate "all prepared coal" and "maximise the recovery of all such coal". Whilst the reference to "prepared" coal may appear somewhat confusing at first blush, it seems obvious that it is the product of clumsy drafting rather than anything else. The drafter clearly intended to provide, at the same time, for the defenders' obligations in respect of storage and delivery of any coal that had been prepared and was ready for sale and the use of the word "prepared" whilst inapposite does not detract from the sensible meaning being that the clause also provides that the defenders are obliged to maximise the recovery of the coal. The clause in the Specification has to be read in conjunction with the main contractual provisions on the matter, the effect of which is as I have already stated.

[27] It is also of note that clause 2.1.15, which was strongly relied on by the defenders in support of their argument, in referring to delivery of "not less than the minimum", uses language which clearly envisages the defenders delivering more than the minimum specified in the delivery schedule.

[28] An interpretation which is to the effect that the defenders were obliged to recover all the coal (subject to any site manager's contrary instructions) is, I consider, one which arises naturally from considering the contract as a whole and it results in it being afforded ordinary commercial sense. There is, for example, no hint of the purpose of the contract having been solely to enable the pursuers to meet their existing onward contractual obligations in respect of the provision of coal to the electricity industry, albeit that the fact of those obligations were, no doubt, borne in mind in the drafting of the delivery schedule. Nor, I observe, would it have made any apparent commercial sense for the pursuers to have contracted in such a way as would not have entitled them to require the defenders to extract all the coal from the site in the course of the clearly substantial works that were to take place once planning consent had been obtained. I do not consider that they did so.

[29] I reject, accordingly, the defenders' submission to the effect that they had no obligation under this contract to extract more than the minimum amount of Gigajoules set out in the productivity schedule.

[30] I turn then to the central issue between the parties, namely that of whether or not the pursuers are only entitled to claim liquidated damages. The key to resolving this issue lies in, firstly, identifying the event in respect of which the pursuers claim that they are entitled to recover damages and, secondly, the event or events for which the contract makes provision by way of agreement to liquidated damages. To adopt the approach of Lord Wilberforce in Suisse Atlantique Societe at p.435: "First it is necessary to decide what is the legal nature of the ...clause : is it a clause by which damages for breach of contract are agreed in advance .....?". Following that approach involves determining what breach or breaches are covered by the clause, the problem for the plaintiffs in Suisse Atlantique Societe having been that the breach founded on was, on a proper analysis, a failure which was covered by the demurrage clause in the charterparty.

[31] The event in respect of which the pursuers seek to claim damages is, clearly, the defenders having failed to complete the requisite extraction of coal from the site.

I am, in particular, satisfied that it is not a matter of the pursuers' complaint being that completion was delayed to a date beyond the completion date in March 2003 nor is it a matter of the complaint being that they were late in meeting the targets set out in the delivery schedule although that is something which, no doubt, may also have arisen. The pursuers' complaint is a separate and fundamental one namely that the defenders did not complete the contract by fulfilling their obligation to extract all coal other than any that they were instructed by the site manager not to extract.

[32] Turning then to the contract, I do not consider that either clause 7.9.1 or clause 7.9.2 make provision for the event upon which the pursuers found. Both clauses proceed on the assumption that the defenders will work until the extraction of the coal is complete. They do not address at all the question of what is to happen if, as is said to have happened here, the defenders simply do not complete the job, leaving the pursuers with the problems associated not with late delivery or late completion of the contract but with the complete absence of delivery, coal being left in the ground from which, had it been extracted, they could have made a profit.
[33] As regards the pursuers' averments of loss, dealing firstly with the matter of retained coal, I agree with senior counsel for the pursuers that if the defenders seek to rely on the lack of allowance therefor, that would, in the circumstances of this case, amount to a complaint of failure to mitigate loss and it is, accordingly, for the defenders to raise it in their pleadings, if so advised.

[34] As regards the averments in support of the recovery of certain fixed costs incurred, I am satisfied, on the basis of what is set out in the Schedule of Damages which is referred to in the pursuers' pleadings, that they have pled a relevant case. In short, they offer to prove that they carried on incurring certain fixed costs which would have been defrayed out of sales of coal which were they were not able to make on account of the defenders' failure to extract all the coal. The need to incur those costs has also been taken into account in the calculation of loss of profit and there is no double counting.

[35] In these circumstances I will repel the defenders' first and second pleas in law and allow a proof before answer.