Scottish Court of Session Decisions

Pursuers: Patterson, solicitor advocate; Dundas & Wilson, CS

Defenders: Borland; Ledingham Chalmers

5 August 2009

[1] On 19 March 2009 I issued an Opinion in this matter ([2009] CSOH 41) after hearing parties at debate. Thereafter the defenders initiated an amendment process with a view to meeting the criticisms of their pleadings which I had found to be justified. On 30 July 2009 the amendments were allowed, of consent, and I heard a further debate at the instance of the pursuers as to the relevancy of the defenders' pleadings as amended.

[2] The background to the dispute is set out in detail in my earlier Opinion. I do not propose to set it out again here. Suffice it to say that in their Defences and Counterclaim the defenders sought to pass on to the pursuers deductions which, they said, had been applied against them via the contractual chain. I summarised the way in which they put their argument in paras.[54] and [55] of my Opinion as follows:

"[54] The defenders' case in their Defences and Counterclaim is that they are entitled to pass down to the pursuers "the deductions which have been passed down the contractual chain to the defenders from the Council in relation to the pursuers' failures regarding the specified project tables": see Answer 4, at 4.3. In the Counterclaim the claim to deduct is explained in this way: the pursuers' failures have "triggered deductions ('Deductions') being applied in respect of these non-delivered and non-compliant items down the contractual chain to the defenders." The defenders claim to be entitled to recover the amount of such Deductions from the pursuers, and in effect to make deductions in the like amount from sums otherwise due from them to the pursuers. They rely upon clauses 4 and 9.7 of the Sub-Contract. But it is important to note that, as advanced in the Defences and Counterclaim, the claim originates in Deductions - i.e. Availability and Performance Deductions as defined in Schedule Part 7 of the Project Agreement - made by the Authority from REAL2 and passed on by REAL2 to the defenders under the Main Contract.

[55] In their further specification (No.21 of Process), the defenders maintain their case that the Authority has "applied" Deductions under the Project Agreement. However, in this formulation, they aver that REAL2 has applied corresponding deductions "down the contractual chain" by means of deductions against the FM Contractor, such deductions being permitted, so they say, under clause 3.3.1 of the Interface Agreement. They say that in terms of the Interface Agreement the defender is liable to reimburse the FM Contractor the amount of the deductions. This raises an issue of fact on which the defenders have pled two different and inconsistent cases. I shall return to this aspect in due course."

In the ensuing paragraphs I sought to analyse the various contractual provisions and ultimately held that the defenders had not pled a relevant case under either contractual route. My reason, in short (and this is only a summary of my more detailed reasons given at greater length in my Opinion), was that the defenders had not offered to prove that their failure to supply the project tables (either according to the required height adjustment specification or, in some cases, at all), a failure caused by the pursuers, had caused either the FM Contractor (RFML) or REAL2 to be in default of the Availability and/or Performance Requirements, thereby triggering the application of Deductions: see e.g. paras.[73], [79], [83], [86] and [87]. I note, incidentally, that in the fourth line of para.[83] I ought to have said "Availability and Performance Requirements" rather than "Availability and Performance Deductions".

[3] The defenders have sought to address this in their amendments. They no longer contend that REAL2 have applied deductions directly against them under the Main Contract (the route described in para.[54] quoted above). This had previously been their primary case. Instead they seek to improve their case summarised in para.[55] by averring: (i) that their failures in respect of the supply of the project tables (for which the pursuers were responsible) caused REAL2 and the FM Contractor (RFML) to be in breach of para.13.1.1 of the Performance Requirements, or, more accurately, prevented them from carrying out the services required thereunder; (ii) that REAL2, having had Deductions applied against them by Aberdeenshire Council, have passed those deductions on to RFML; and (iii) that RFML have sought to pass on to them under the Interface Agreement the amount of those Deductions.

[4] This new case is fully articulated in Answer 4 of the Amended Defences. I quote the relevant part of Answer 4.3:

"4.3 Following a further review process, the defenders issued revised and updated draft final accounts to the pursuers on or about 29 November 2007 ("the 2007 final accounts"). ... The 2007 final accounts ... reflect the deductions which have been passed down, via the contractual structures condescended upon below, to the defenders, this ultimately having been caused as a result of the pursuers' failures regarding the specified project tables and other items previously condescended upon. In respect of the said project tables and other items, REAL2 was under an obligation to provide such items in terms of the Project Agreement. As at the achievement of Service Availability in respect of each of the three relevant phases (equating to the three schools at issue), said tables and other items were noted as being snagging items. REAL2 was under an obligation to carry out and complete the works in respect of said snagging items (Project Agreement, clause 21.8.1). It required to do so no later than the expiry of 20 Business Days from the issuance of the relevant Certificate of Service Availability (Project Agreement, clause 21.8.1). That timescale applied in the absence of any contrary indication, and there was no such indication relative to the items at issue in the present proceedings. REAL2 was unable to carry out and complete those works in that timescale, and continued to be unable to do so. That state of affairs arose as a consequence of the defender being unable to carry out and complete those works. The defender was obliged to do so by the Main Contract, clause 21.8.1. In turn, that was caused by the pursuer's failure to provide said items in full, or in a compliant manner, as required by the Sub-Contracts. On account of the continuing existence of said snagging items, the Council held that the services being provided by REAL2 (the provision of which REAL2 had sub-contracted to RFM by means of the FM Agreement) after Service Availability were not being provided in accordance with the Project Agreement. In particular, the Council held that REAL2 was in breach of its obligation to provide the Operational Services (Project Agreement, clause 23.1), being the services required to satisfy the Operational Services Specification ("OSS") (see also clause 23.2.1.2). The OSS required (at paragraph 1.2.2 thereof) that the said services be provided such that the relevant facilities met the performance requirements and standards detailed within appendix B to the OSS. Paragraph 13.1.1 of said appendix B provided that the relevant furniture and equipment required to be maintained and operational in accordance with the Authority's Requirements. On account of the ongoing existence of said snagging items, REAL2 was unable, and failed, to maintain and keep operational the relevant furniture and equipment in accordance with the Authority's Requirements, as aforesaid, and nor was it able to rectify the said failure within the timescale prescribed by the OSS (see appendix B thereto, at paragraph 13.1.1, and the OSS, at paragraph 1.3). Accordingly, there was a Performance Failure for the purposes of the Project Agreement, schedule part 7, part A. Following Service Availability being achieved, the Council levied Performance Deductions against REAL2 on account of the services not being provided in accordance with the OSS, as the tables and other items did not comply with the said requirements. The Council did so from March 2006 onwards. It followed from the foregoing that RFM was also in breach of its obligations under the FM Agreement in that it was not providing the Operational Services in a compliant manner (FM Agreement, clauses 23.1 and 23.2.1.2). Accordingly, REAL2 levied corresponding deductions from RFM's monthly fee, pursuant to the terms of the Interface Agreement, clause 3.3.1. As condescended upon above, the defender was in breach (and continued to be so) of its obligations under the Main Contract by virtue of its ongoing failure to carry out and complete the works in respect of the said snagging items. That caused RFM to be in breach of the FM Agreement. It was as a consequence of the defender's said breach of the Main Contract and the operation of the Interface Agreement that RFM suffered the said deductions from its monthly fee (Interface Agreement, clause 4.2). RFM provided the necessary notification in accordance with clause 6 of the Interface Agreement. Accordingly, the defender was liable to pay RFM the equivalent amount of the deductions levied against RFM by REAL2 (the latter having had corresponding deductions levied against it by the Council). Reference is made to clauses 4.2 and 7 of the Interface Agreement. The defender's said liability arises as a consequence of the pursuer's breaches of the Sub-Contracts in failing to provide the said items in full, or in a compliant manner. By the pursuer's said breaches, the pursuer put the defender in continuing breach of the latter's obligations under the Main Contract, as aforesaid. As a result of this, the defender has suffered loss in the form of the amounts payable to RFM. The defender's loss was caused by the pursuer's said breaches. ..." [emphasis added]

It was the italicised part of this passage (the preceding sentences being taken pro veritate for the purpose of the debate), which was the focus of the pursuers' renewed attack on the relevancy of the defenders' pleadings; though it was agreed that, if the pursuers' arguments are correct, other passages in the Defences and in the Counterclaim will also require to be deleted.

[5] What the defenders are saying in this passage is that by virtue of the project tables being disconform to specification or not supplied at all, REAL2 and RFML were unable to supply the services required of them by the Performance Requirements in para.13.1.1 of Appendix B to the Operational Services Specification ("the OSS"), and were thereby in breach respectively of the Project Agreement and the FM Contract. If that is correct, then the defenders will have averred a relevant case, because they will have relevantly averred: (i) that the Council were entitled to make Performance Deductions against REAL2 under the Project Agreement; (ii) that REAL2 were entitled to pass on those Performance Deductions against RFML under the FM Contract; (iii) that RFML were entitled to pass on those Performance Deductions against the defenders under the Interface Agreement; and (iv) that it was the pursuers' breach of the Sub-Contracts by failing to supply project tables conform to specification which caused the defenders to have incurred that liability to RFML.

[6] As the argument developed, it became clear that the dispute was a narrow one. It concerned the scope of the Performance Requirements in para.13.1.1 of Appendix B to the OSS. Para.13.1.1 needs to be seen in the context of the OSS as a whole. I set out the relevant provisions relating to the OSS in paras.[19]-[22] of my earlier Opinion and shall not repeat them verbatim here. The OSS describes the Operational Services which the Contractor has to provide in accordance with PART 4 of the Project Agreement. The Services are to be delivered in accordance with the detailed Availability Requirements (Appendix A) and Performance Requirements and Standards (Appendix B), so that the Project Facilities meet those Requirements and Standards, and so that any Availability and Performance Failures are rectified within one hour in the case of Availability Failures and a variable time in the case of Performance Failures. I am not here concerned with Availability Requirements. Performance Requirements and Standards are set out in Appendix B, which identifies not only the obligation but also expected response times and priorities. Para.13.1.1 is in the following terms:

The figure 8 in the right hand column indicates a response time of one week

[7] Mr Borland, for the defenders, argued that if, during the construction stage covered by PART 3 of the Project Agreement, the project tables had been supplied disconform to specification, para.13.1.1 imposed an obligation on the Contractor as part of the Performance Requirements under PART 4 to correct that disconformity, whether by replacing the tables or otherwise. Similarly, if no or insufficient project tables were supplied during the construction stage covered by PART 3 of the Project Agreement, para.13.1.1 imposed an obligation on the Contractor as part of the Performance Requirements under PART 4 to make good that deficiency. Accordingly, the absence of the requisite number of tables, and the faults with those tables that were supplied, unless corrected by the Contractor within the period of one week (signified by the figure "8" in the right hand column) automatically meant that the Contractor had failed to provide the Services in accordance with the Performance Standards, was guilty of a Performance Failure and was liable to have Performance Deductions made from sums otherwise due to it.

[8] I do not accept this argument. The obligation set out under the heading "Standards" in para.13.1.1 is, in essence, a maintenance obligation. Under that paragraph, the Contractor is required "to maintain ... operational [and] safe" the Loose Furniture and Equipment. That means the loose furniture and equipment supplied under PART 3 of the Project Agreement in accordance with the Data Sheets. The Contractor has to maintain the furniture and equipment which has been supplied. But the wording of that paragraph is not apt to impose on the Contractor an obligation to supply furniture and equipment which has not been supplied, even if it ought to have been supplied under PART 3; and to change the design and specification of furniture and equipment which has been supplied. The Contractor is also required "to replace and/or upgrade" the Loose Furniture and Equipment. It seems to me that this requirement is to be read as part of that same maintenance obligation. If there is deterioration in the condition of the furniture and equipment such that the particular item or items need replacing, that obligation is placed upon the Contractor under para.13.1.1. And it may be that over the lifetime of the service part of the contract, covered by PART 4 of the Project Agreement, there will be a need as part of this maintenance obligation to upgrade certain items. But it seems to me that the obligation to replace or upgrade goes no further than this. I do not consider that this paragraph can properly be construed as imposing upon the contractor under PART 4 an obligation to complete such part of the PART 3 obligations as have not yet been completed by the time that Service Availability is achieved.

[9] Mr Borland emphasised that in para.13.1.1 the obligation to maintain, replace and/or upgrade is all qualified by the words "in accordance with the requirements set out in Part 1 of Schedule Part 2 Authority's Requirements and Part 3 in the Operational Services Specification." So it is, but I do not accept his argument that this imposes an obligation on the Contractor under this paragraph to make good the failure to supply the furniture and equipment under PART 3 of the Project Agreement. Rather, so it seems to me, these words are descriptive of the standard to which the items of furniture and equipment, which have been supplied under PART 3 of the Project Agreement in accordance with the requirements set out in Part 1 of Schedule Part 2 Authority's Requirements and Part 3 in the Operational Services Specification, have to be maintained under this paragraph.

[10] The obligation to provide project tables was an obligation imposed upon the Contractor under PART 3. The project tables were included among the Snagging Works which, in terms of clause 21 of the Project Agreement, the Contractor was allowed a period of 20 days to complete (the equivalent period under the Main Agreement was 15 days). Notwithstanding the issue of a Certificate of Service Availability, followed by an Acceptance Certificate, the Contractor remains under an obligation under PART 3 to supply the tables conform to specification. There is therefore no need to give a strained and extended meaning to para.13.1.1 of the Performance Requirements so as to require the Contractor under that paragraph to provide the tables, and to penalise him for a failure at the earlier (PART 3) stage. Indeed it would only serve to confuse if that paragraph was so construed. It is, I believe, common ground between the parties that under this PPP contract it was always envisaged that REAL 2 would sub-contract the design and construction obligations (PART 3 of the Project Agreement) and the service obligations (PART 4) to separate companies. In the event, the design and construction phase was sub-contracted to the defenders under the Main Contract whereas the service phase was sub-contracted to RFML under the FM Contract. Mr Borland's construction of para.13.1.1, if correct, would mean that RFML was under an obligation to supply the tables notwithstanding that the defenders, as sub-contractors of the PART 3 obligations, were also under an obligation to supply them.

[11] Mr Borland emphasised also that clause 21.5.2, the terms of which are set out in para.[17] of my earlier Opinion, provides that the issue of an Acceptance Certificate, and the identification of Snagging Works, does not relieve the Contractor of liability for Deductions (i.e. Availability and Performance Deductions for Availability and Performance Failures) or otherwise diminish the obligations of the Contractor. There are a number of terms in the FM Contract, to which Mr Borland referred me, making it clear that RFML cannot seek to hold REAL2 responsible for defects in the performance of the Works performed by it (or the defenders) during the design and construction stage. In particular, clause 22A places on RFML the risk that the Works and Equipment provided under PART 3 of the Project Agreement (and the Main Contract) may suffer from defects in design or workmanship and that such matters may prevent RFML from performing the services under the FM Contract (including those set out in the OSS) and may cause events giving rise to Availability and/or Performance Deductions being applied against REAL2 and RFML. But such provisions do not go so far as to make REAL2 and RFML liable for such Deductions unless they are guilty of Availability or Performance Failures - and that question has to be answered by reference to the terms of the particular paragraph of the OSS relied on. It may well be that a failure at the PART 3 stage can cause an Availability or Performance at the PART 4 stage. Ms Patterson did not dispute this. However, I am satisfied that, on the wording of para.13.1.1, it does not do so in this particular case.

[12] For these reasons, I am satisfied that the averments to which I have referred, which seek to plead a relevant case for passing Deductions through the various contracts to the defenders and hence to the pursuers, are irrelevant. As agreed, I shall put the case out By Order so that parties can consider what deletions from the Defences and Counterclaim are required to give effect to my decision.