Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2009] CSOH 41

CA/108/07

OPINION OF LORD GLENNIE

in the cause

KENT COUNTY COUNCIL, trading as KENT COUNTY SUPPLIES

Pursuers

against

ROBERTSON CONSTRUCTION NORTHERN LIMITED

Defenders

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

Defenders: Borland; Ledingham Chalmers

19 March 2009

Introduction

[1] The sub-contract works with which this action is concerned formed part of the Aberdeenshire Schools Phase II PPP Project. Aberdeenshire Council was the appointing authority and the ultimate end user in relation to that project.

[2] Aberdeenshire Council entered into an agreement ("the Project Agreement") with Robertson Education (Aberdeenshire 2) Limited ("REAL2") for the design, construction/ refurbishment, financing and operation of six schools and associated services. The six schools included Longside Primary ("LP"), Rosehearty Primary ("RHP") and Rothienorman Primary ("RNP").

[3] REAL2 sub-contracted that work under two separate contracts. It entered into a construction contract ("the Main Contract") with the defenders ("RCNL") for the design, construction and fitting out of new school buildings at those schools.

[4] At the same time, it entered into a contract ("the FM Contract") with Robertson Facilities Management Limited ("RFML") for the provision of services within those schools once they were in operation. I am not directly concerned with the FM contract, but its place within the overall structure of the contractual arrangements is important.

[5] The defenders, in their turn, sub-contracted to the pursuers inter alia the design, supply and installation of loose furniture at the schools. I shall refer to these sub-contracts, one in respect of each school, as "the Sub-Contracts". The Sub-Contracts were entered into on or about 25 January 2005. These are the Sub-Contracts with which this action is concerned.

[6] In addition, a further agreement ("the Interface Agreement") was entered into between REAL2, the defenders and RFML. The Interface Agreement was designed to regulate the relationship between those three parties as regards certain liabilities and payments and the recovery of certain sums.

[7] In this action, the pursuers conclude for payment for work carried out under the Sub-Contracts. The defenders have withheld certain payments. The sub-contract works included the supply by the pursuers of project tables. The defenders contend that the project tables supplied by the pursuers were non-conform to the contract specification and, indeed, that project tables in accordance with the contract specification have not in fact been delivered. They say that, in consequence, REAL2 has made deductions from sums due to them under the Main Contract. They claim that they are entitled to make the same deductions from sums otherwise due to the pursuers under the Sub-Contracts.

[8] The matter came before the court for debate at the instance of both parties. As the matter was originally pled, there was a dispute between the parties as to whether there was an error in the Sub-Contracts, in that they made reference not to the Main Contract conditions but to some other terms. In the event the parties were able to reach agreement that the Sub-Contracts should be rectified so that they did in fact refer to the Main Contract conditions. A Minute of Amendment reflecting this agreement was tendered by the defenders and, of consent, decree for rectification in terms thereof was granted. In referring to the Sub-Contracts, I shall refer to them as so rectified.

[9] Before dealing with the parties' respective submissions, it is necessary to set out the relevant terms of the various contracts at some length.

The Project Agreement

[10] The Project Agreement is between Aberdeenshire Council and REAL2. They are referred to in the Project Agreement respectively as "the Authority" and "the Contractor". The defenders are one of the "Building Contractors" referred to therein.

[11] The substantive obligations on REAL2 under the Project Agreement are contained in two parts: PART 3, which is headed "Transitional Arrangements" but in fact is concerned with the design and construction part of the contract; and PART 4, which is headed "The Services". The obligations under these Parts of the Project Agreement are separate and distinct, so much so that the scope of the Main Contract and the FM Contract, under which REAL2 sub-contracted parts of the work to the defenders and to RFML, reflects respectively the works covered by PART 3 and the provision of services covered by PART 4.

[12] PART 3 of the Project Agreement: The principal obligation on REAL2 under PART 3 of the Project Agreement is to carry out the Works and to do so by a certain time and in accordance with certain requirements. The "Works" are defined in clause 1.1 as:

"... all the works to be undertaken by the Contractor or procured by the Contractor for the Authority at each Site" [i.e. the site of each school] "as described in Part 1 of Schedule Part 2 (Authority's Requirements) and Part 1 of Schedule Part 3 (Contractor's Proposals)"

I was not referred to Part 1 of Schedule Part 3 (Contractor's Proposals) and I shall assume that there is nothing in it of relevance to the issues before me.

[13] Part 1 of Schedule Part 2 (Authority's Requirements) identifies the Works in detail. The relevant part of it provides as follows:

"1. BACKGROUND

1.1 THE PROJECT FACILITIES

The Contractor shall design, build, fund and operate the undernoted Project Schools (hereinafter referred to as 'the Facilities') to provide integrated accommodation and Services in accordance with the requirements outlined in this Schedule for each Project School included in Appendices A to F respectively."

The detailed accommodation requirements for each school are set out separately in Appendices A to F. Section 3 of this Part of the Schedule (i.e. Part 1 of Schedule Part 2), which is headed "Summary of Project Information", explains the organisation of the material in those Appendices. Para.3.4 deals with "Room Data Sheets". In relation to the furniture and equipment in the schools, para.3.4.2 provides as follows:

"3.4.2 The Loose Furniture and Equipment Room Data Sheets in Appendices A-F identify the requirements for the provision of loose furniture and equipment for each unit of accommodation. The Contractor shall provide all the loose furniture and equipment specified in these Data Sheets. New furniture and equipment is to be provided at all of the Project Facilities. The Loose Furniture and Equipment requirements have been developed by the Authority in consultation with users and a specialist supplier. The Contractor shall co-ordinate the provision of loose furniture and equipment with their design proposals. The Contractor shall identify for each unit every item of loose furniture by means of a specific product reference, illustration design and technical specification, and unit price and total price, which shall be subject to amendment prior to the relevant Services Commencement Date to reflect any Authority revisions to the Furniture and Equipment Room Data Sheets."

Para.7 deals with the Contractor's responsibility in respect of Loose Furniture and Equipment Requirements and provides as follows:

"7 Loose Furniture and Equipment Requirements

The Contractor shall be responsible for the design and procurement of all new Loose Furniture and Equipment detailed on the Room Data Sheets for all the Facilities and for developing these as the design progresses."

The Loose Furniture and Equipment includes the project tables. It is not necessary for present purposes to refer to other details of this Schedule.

[14] PART 3 of the Project Agreement runs from clauses 10 to 22. The obligation in respect of carrying out the Works is set out in clause 10, the first part of which is in the following terms:

"10. THE WORKS

10.1 Obligation to Carry Out

Subject to Clause 10.1.A, the Contractor shall (or shall procure that the Building Contractor shall) secure the Necessary Consents and carry out the Works in accordance with the Facilities Requirements, the Contractor's Proposals and Good Industry Practice so that:

10.1.1 as set out in the Construction Programme (subject only to the terms of this Agreement) each Phase shall achieve Service Availability on the Target Service Availability Date for that Phase, or, in the case of delay beyond the relevant Target Service Availability Date, as soon as reasonably practicable thereafter;

10.1.2 the Works fully comply (subject to Clause 10.1.A) with and meet all the requirements of the Necessary Consents, this Agreement, the Facilities Requirements, the Contractor's Proposals and all applicable Legislation."

Clause 10 contains a large number of defined expressions, the definitions being contained in clause 1.1. I have already referred to the definition of the Works. The Works have to be carried out inter alia in accordance with the "Facilities Requirements". The "Facilities Requirements" are defined as "that part of the Authority's Requirements relating to design and construction of the Works", to be found in Part 1 of Schedule Part 2. I have referred to the relevant parts of Part 1 of Schedule Part 2 in para.[13] above. The expression "each Phase" in clause 10.1.1 simply refers to the work at each primary school. "Service Availability" means, in relation to a particular school, satisfaction of the Service Availability Requirements, the requirements being those set out in Schedule Part 5. The "Service Availability Date" means "the date of issue of an Acceptance Certificate", and the "Target Service Availability Date" is a date set for achieving Service Availability for each school.

[15] The requirement in clause 10.1.1, therefore, is that the design and construction work at each school should be progressed so as to enable Service Availability to be achieved, and an Acceptance Certificate issued, by the target date set for that school.

[16] The test of when the Service Availability Requirements are satisfied is set out in Schedule Part 5, Service Availability and Additional Works Requirements, which provides:

"A. Tests to confirm completion of Phases

1. All the Operational Services are or are capable of being delivered in accordance with the Operational Services Specification.

2. That part of the Works are complete with the exception of minor defects, deficiencies or omissions of a snagging nature whose remediation cannot reasonably be expected to disrupt the use of the Project Facilities for their intended purpose which such matters shall be detailed in the Snagging List ("Snagging Works").

3. All Contractor Commissioning has been completed.

4. All Necessary Consents the implementation of which is required prior to the occupation or use of the Project Facility by the Authority have been implemented to the extent required."

The Schedule goes on to say that certain detailed requirements will apply. Amongst those requirements are the following relating to Loose Furniture and Equipment.

"Loose Furniture and Equipment

The loose furniture and equipment shall be complete and provided in accordance with the Furniture and Equipment Room Data Sheets forming part of the Authority's Requirements."

It should be noted that Schedule Part 5 deals not only with Service Availability but also with Additional Works, i.e. "works to be undertaken post-Service Availability". These Additional Works vary from school to school. They include, in the case of each school, the demolition of the existing school. They do not include any of the works in relation to the Loose Furniture and Equipment.

[17] The detailed provisions dealing with notification of Service Availability and the issue of an Acceptance Certificate are contained in clause 21, the relevant parts of which provide as follows:

"21. NOTIFICATION OF SERVICE AVAILABILITY

21.1 Inspection of a Project Facility

The Contractor shall give the Authority and the Technical Adviser not less than 5 Business Days notice of the date when it proposes to inspect a Phase with a view to issuing a Certificate of Service Availability in respect of it and representatives from the Authority and the Technical Adviser shall make a joint inspection with the Contractor."

The Technical Adviser is appointed jointly by the Authority and the Contractor to act as technical adviser/ independent certifier. The Certificate of Service Availability is a certificate issued by the Contractor stating that the Service Availability Requirements are satisfied in relation to a Phase (i.e. in relation to the works at one of the schools). The Service Availability Requirements are the requirements set out in Schedule Part 5 (see para.[16] above). Clause 21.3 requires the Contractor to have due and proper regard to representations made by the Authority or the Technical Adviser regarding the condition of the works at the school in respect of which it proposes to issue a Certificate of Service Availability. If the Contractor issues a Certificate of Service Availability, it must send a copy to the Authority and the Technical Adviser: clause 21.4. At that point the Technical Adviser has to decide whether or not to issue an Acceptance Certificate. This is dealt with by Clause 21.5 in the following way:

"21.5 Issue of Acceptance Certificate

21.5.1 Following receipt of the certified copy of a Certificate of Service Availability pursuant to Clause 21.4 and provided that the Technical Adviser (acting reasonably) is satisfied that:

21.5.1.1 in relation to the relevant Phase the Service Availability Requirements have been met; and

21.5.1.2 all outstanding Works detailed in the Snagging List are capable of being carried out within 20 Business Days of the issue of such Certificate of Service Availability in accordance with the terms of the Agreement,

then the Technical Adviser shall, within 5 Business Days issue an Acceptance Certificate in respect of the relevant Phase. If the Technical Adviser declines to issue an Acceptance Certificate, and unless the parties agree within a further 5 Business Days to repeat the procedure set out in Clause 21.5.1 and so advise the Technical Adviser, the matter shall be determined under the Dispute Resolution Procedure."

Clause 21.5.2 is important. It provides:

"The issue of an Acceptance Certificate and any identification of any Snagging Works shall not relieve the Contractor of liability for Deductions in terms of Schedule Part 7 (Payment Mechanism) or otherwise diminish the obligations of the Contractor under this Agreement."

It goes on to say that the Authority shall not be entitled to require the rectification of any defect(s) in the Works under Clause 15.7 (Rectification of Contractor's Proposals) which should have been apparent from a visual inspection of the Works following the issue of the relevant Acceptance Certificate, unless the claim intimating the same is made prior to the third anniversary of the relevant Service Availability Date. The Contractor is required to attach to the Certificate of Service Availability a Snagging List. Clause 21.8 sets out the procedure for dealing with items on that List. It provides as follows:

"21.8 Completion of Works detailed in the Snagging List

21.8.1 The Contractor shall carry out all outstanding Works detailed in the Snagging List annexed to the relevant Certificate of Service Availability as the case may be to the reasonable satisfaction of the Technical Adviser (acting in accordance with the Technical Adviser's Deed of Appointment) within 20 Business Days of the date of the issue of any Certificate of Service Availability.

21.8.2 If 18 Business Days after the date of issue of any Certificate of Service Availability, the Contractor has not completed the Snagging Works, the Authority shall be entitled to give the Contractor notice in writing requiring the Contractor to complete the Snagging Works within 20 Business Days of the date of such notice. If the Contractor fails to complete the Snagging Works to the Technical Adviser's reasonable satisfaction within such time period the provisions of Clause 21.8.3 shall apply.

..."

The remaining sub-paragraphs of clause 21.8 deal in detail with what is to happen if the Contractor fails to do the Snagging Work. In short, upon giving notice of its intention to do so, the Authority can carry out the work and seek re-imbursement from the Contractor.

[18] PART 4 of the Project Agreement is headed "The Services" and sets out the Contractors' obligations to provide or procure the provision of "Operational Services" identified in the Project Agreement. PART 4 runs from clause 23 to clause 32 inclusive. Clause 23.1 is in the following terms:

"23.1 Provision of Services

From the Service Availability Date for a Phase the Contractor shall provide to the Authority or procure the provision to the Authority on the terms of this Agreement of the Operational Services relevant to that part of the Project Facility of which that Phase forms part. In respect of that part of the Additional Works the Contractor shall provide any of the Operational Services relevant to that part of the Project Facility of which those Works form part from the date such Works are completed in accordance Schedule Part 5."

The opening words must be noted. The obligation on the Contractor to provide the Operational Services comes into being "from the Service Availability Date", i.e. from the date of issue of an Acceptance Certificate in respect of the particular school.

[19] The "Operational Services" are the services required to satisfy the "Operational Services Specification" set out in Part 3 of Schedule Part 2. The scope of the services is defined in para.1:

"1. INTRODUCTION

1.1 SCOPE OF SERVICES

This Section sets out the Authority's output requirements for the Services that the Contractor shall provide for the Core Times and Additional Hours for the duration of the Contract Period at the Project Facilities [i.e. the schools]

The following Services shall be delivered in accordance with the detailed Availability Requirements and Performance Requirements and Standards set out in Appendices A and B hereof:

·       ...

·       FF&E Services"

"FF&E" stands for Furniture, Furnishings and Equipment.

[20] Para.1.2 specifies the requirements placed upon the Contractor in respect of the Availability and Performance Standards. It provides as follows:

"1.2 SERVICE REQUIREMENTS

The Services shall be provided by the Contractor in such a way as to ensure:

1.2.1 that the Project Facilities meet the Availability Requirements as detailed in Appendix A during the Core Times and Additional Hours.

1.2.2 that the Project Facilities meet the Performance requirements and Standards as detailed within Appendix B during the Core Times and Additional Hours.

1.3 SERVICE RESPONSE PRIORITIES

The Services shall be provided by the Contractor in such a way as to ensure that all the 'Requirements' and 'Standards' columns of Appendices A and B are satisfactorily discharged.

The Contractor shall rectify any Failure within the appropriate Rectification Period as set out below.

For Availability Failures the Rectification Period in every case is 1 hour. For Performance Failures, the Rectification Periods are as set out in the table below."

The "table below" referred to in para.1.3 grades the various levels of Service Response Priority on a scale of 1-9, with "1" signifying one hour and "9" signifying one month.

[21] Appendix A deals with the "Availability Requirements". It sets out in tabular form the services, the Availability Standard (e.g. in relation to the Building Fabric, that the external and internal structure is physically present and sufficiently sound to permit occupation without breach of statutory requirements), the Requirement (in the case of Building Fabric, a requirement of 100% availability to allow occupation) and the Service Response Priority in hours (in the case of the Building Fabric, one hour). So far as is relevant to the Furniture, Furnishings and Equipment (FF&E), with which this action is concerned, the Standards and Requirements are as follows:

COLUMN A: SERVICES	COLUMN B: AVAILABILITY STANDARD	COLUMN C: REQUIREMENT	COLUMN D: SERVICE RESPONSE PRIORITY
Furniture, Furnishings and Equipment (17) Unit(s)	The Furniture, Furnishings and Equipment are available, safe and operational in the Unit to enable the Unit to be used for the intended purpose in accordance with the Project Agreement Schedule Part 2 - Authority Requirements and Part 3 - Operational Services Specification and the Statutory Requirements.	100% Availability to allow occupation of the Unit(s)	Availability 1 Hour

[22] Appendix B sets out the Performance Requirements placed upon the Contractor. It identifies not only the obligation but also expected response times and priorities. There are two separate tables, and two entries concerning the Furniture and Equipment. The first is uninformative, providing simply as follows:

		SERVICE RESPONSE PRIORITY
14	Furniture and Equipment (INTERFACE AGREEMENT REQUIRED)
14.1	Furniture and Equipment	8/3/2, 8/3/3 * (R,R,L)

The figures in the right hand column indicate different response priorities. The number 8 denotes one week, whilst 3 and 2 indicate that a response is required within 4 and 2 hours respectively. In the next table, which is considerably fuller, there is the following:

COLUMN A: SERVICES	COLUMN B: STANDARDS	COLUMN C: REQUIREMENTS	COLUMN D: SERVICE RESPONSE PRIORITY
Loose Furniture and Equipment (13.1.1) Unit(S)	1.Contractor to maintain all Loose Furniture and Equipment operational, safe, and to replace and/or upgrade all in accordance with the Part 1 of Schedule Part 2 Authority's Requirements and Part 3 in the Operational Services Specification	The Contractor shall comply with the Performance Standards in Column B hereof, the Service Response Priorities set out in paragraph 1.3 of Part 3 of the Schedule Part 2 Operational Services Specification and Part 5 Monitoring of Schedule Part 7 Payment Mechanism in delivery of the Services.	8

[23] In general terms, it can be seen that the obligations placed upon the Contractor (REAL2) under the Project Agreement fall broadly into two consecutive stages. The first stage is the design and construction (and equipping) of the schools. The second stage is the provision of Operational Services to the schools once they have been designed, constructed and equipped.

[24] PART 5 of the Project Agreement deals with Payment. Clause 33 is headed "Payment Provisions" and provides, so far as is material, as follows:

"33.1 Payment of Unitary Charge

The Authority shall pay the Contractor an amount in respect of each Payment Period, calculated in accordance with Clause 33.2 below which they shall be entitled to pay using BACS or such similar method of payment as is appropriate from time to time.

33.2 Monthly Invoice

On or about the fifteenth day of each Payment Period the Contractor shall submit to the Authority an invoice (the "Monthly Invoice") aggregating the following:

33.2.1 the Monthly Unitary Charge for that Payment Period;

33.2.1 as a negative figure, any Required Deductions which fall to be made for the previous Payment Period; ..."

The expression "Required Deductions" is defined in clause 33.6.5 (see below). Clause 33.6 deals generally with Monthly Reconciliations. It requires the Contractor to provide to the Authority, with each monthly invoice rendered by it pursuant to clause 33.2, a Performance and Payment Report accompanied by work papers clearly setting out the derivation and calculation of all the entries on the Monthly Invoice, including the Required Deductions in respect of the previous Payment Period. That clause goes on to state what must be set out in the Performance and Payment Report in respect of the previous Payment Period in the following terms:

"33.6 Monthly Reconciliations

...

The Performance and Payment Report shall set out in respect of the previous Payment Period:

33.6.1 the details of each and the aggregate amount of any Availability Deductions for the relevant Payment Period, calculated in accordance with Part A of Schedule Part 7 (Payment Mechanism);

33.6.2 the details of each and the aggregate amount of any Performance Deductions for the relevant Payment Period, calculated in accordance with Part A of Schedule Part 7 (Payment Mechanism)

33.6.3 any Reporting Failure Deductions or Repeated Failure Deductions for the relevant Payment Period calculated in accordance with Part A of Schedule Part 7 (Payment Mechanism);

33.6.4 any adjustments to reflect previous over-payments and/or under-payments (each adjustment stated separately);

33.6.5 the total amount to be deducted from the Monthly Unitary Charge, being the aggregate of the matters set out in Clauses 33.6.1 to 33.6.4 (the "Required Deductions"); and ..."

Again, many of the expressions used are defined terms. The important ones for present purposes are Availability Deductions and Performance Deductions.

[25] Availability Deductions and Performance Deductions are defined in Schedule Part 7, Part A - Payment Mechanism, Part 1 Definitions. "Availability Deductions or AD" is defined as

"the deductions (if any) to be deducted from the second or any subsequent Monthly Unitary Charge(s) as a result of an Area being Unavailable or Unavailable but Used calculated in accordance with paragraph 2 of Part 4 of Part A of this Schedule Part 7."

"Unavailable" and "Unavailable but Used" are also defined terms. Reading short, an Area (i.e. an Area within a school, as identified in the Plans), is "Unavailable" if an Availability Failure - a failure to provide the Services in accordance with the Availability Standards - continues beyond the end of the Rectification Period (i.e. the period allowed for the rectification of any failure to meet the Availability Standards), subject to certain excepted causes. "Unavailable but Used" means that the Availability Failure is continuing, but the Area is being used by the school notwithstanding that continuing failure. The Availability Standards are the service standards set out in Appendix A to Part 3 of the Operational Services Specification to which I have referred in para.[21] above. That Appendix is headed "Availability Requirements", but it is clear that the term "Availability Requirements" simply means the requirement to meet the "Availability Standards", which are themselves set out under that heading in the table.

[26] "Performance Deduction" or PD" means the deduction (if any) from the Monthly Unitary Charge for the second or any subsequent Payment Period as a result of a Performance Failure, calculated in accordance with Paragraph 3 or Part 4 of Part A of this Schedule Part 7. A Performance Failure is a failure which continues after the expiry of the relevant Rectification Period (i.e. the period allowed for rectification of any failure to meet the Performance Standards) to provide the Services in accordance with the Performance Standards, other than as a result of certain excepted causes. "Performance Standards" (or "Performance Requirements" as they are referred to in the text of the Operational Services Specification) means "the service standards set out in Appendix B to Part 3 of the Operational Services Specifications in the column headed 'Performance Standards'".

[27] Under the heading "Monitoring", Schedule Part 7, Part A - Payment Mechanism, Part 5 contains provision for monitoring of services. The initial obligation of monitoring and reporting is placed on the Contractor. He is required to assess whether the services provided meet the requirements of the Operational Services Specification and to check whether the Availability and Performance Standards are being met. It is only necessary to refer to a small part of these provisions:

"8. Monitoring of Performance Standards

8.1 The monitoring and reporting procedures set out in or derived under this Part 5 of Part A of Schedule Part 7 shall constitute the mechanism by which attainment of the standards of performance required for each of the Services is measured

9. Notification of breach of Availability Standards and/or Performance Standards

If any of the Authority's Representative, the School Representative, a teacher employed at the School, a Community Use Representative, any Authority Employee in an emergency, the Contractor, the FM Contractor and any sub-contractor of the Contractor or FM Contractor believes that a breach of an Availability Standard and/or of a Performance Standard has occurred it shall inform the Helpdesk immediately of the breach of the breach of an Availability Standard and/or of a Performance Standard and the Areas that are affected by the breach of an Availability Standard and/or Performance Standard by email, fax or telephone.

When a breach of an Availability Standard and/or of a Performance Standard has been rectified, the Contractor shall immediately inform the Helpdesk and such time shall be logged as the Logged Rectification Time and the Helpdesk shall promptly notify the School Representative or the Community Use Representative (as applicable) of such rectification."

The Main Contract

[28] The Main Contract is between REAL2 and the defenders. Its full title is "Aberdeenshire Schools Phase II Construction Agreement". In the Main Contract itself it is referred to as "the Construction Agreement". Elsewhere it is referred to as "the Building Contract". I shall in general refer to it, as parties did in their submissions, as the Main Contract. The preamble reads as follows:

"WHEREAS the Employer is desirous of obtaining the design construction fitting out completion and commissioning of new school buildings and associated infrastructure and the refurbishment of existing schools buildings and other works ("the Works" as after defined) more particularly described in the Employer's Requirements) at Schedule 3 Part 1 of this Agreement for which works he has issued to the Contractor his requirements (hereinafter referred to as "the Employer's Requirements"); ..."

The bracket after the first mention of the word "Requirements" is an error. So also is the reference to Schedule 3 Part 1. The Main Contract does not have a Schedule 3 Part 1. The Employer's Requirements are in fact set out at Part A of Part 3 of the Schedule to the Main Contract. I did not understand it to be disputed that the reference in the preamble was intended as a reference to this document. This provides as follows:

"PART A - Employer's Requirements

The Employer's Requirements are the documents located at Part 1 of Part 2 [of] the Schedule to the Project Agreement"

Part 1 of Part 2 of the Schedule to the Project Agreement (more usually written Part 1 of Schedule Part 2) sets out the Authority's Requirements as regards the design, construction and operation of the project schools (see para.[13] above). However, in my opinion, for reasons which I set out later, it is clear that the subject matter of the Main Contract is, as its title suggests, only the design and construction (and equipping) stage covered by PART 3 of the Project Agreement rather than the provision of the services covered by PART 4.

[29] Clause 10 of the Main Agreement is headed "The Works". Clause 10.1 is concerned with the "Obligation to Carry Out" and provides as follows:

"10.1 Obligation to Carry Out

Subject to Clause 10.1.A the Contractor shall obtain the Necessary Consents and carry out the design and the Works in accordance with the Employer's Requirements, the Contractor's Proposals and Good Industry Practice so that:

10.1.1 as set out in the Construction Programme (subject only to the terms of this Agreement) each Phase shall achieve Service Availability on the Target Service Availability Date for that Phase or, in the case of delay as soon as reasonable practicable thereafter;

10.1.2 the Works fully comply (subject to Clause 10.1A) with and meet all the requirements of the Necessary Consents, this Agreement, the Employer's Requirements, the Contractor's Proposals and all applicable Legislation; ..."

Clauses 11-20 deal with Construction, Design, Extensions of Time, and access to and use of the sites, as well as other ancillary matters.

[30] Clause 21 deals with Notification of Service Availability. Some of the provisions of this clause are material to the dispute.

"21. NOTIFICATION OF SERVICE AVAILABILITY

21.1 Inspection of a Project Facility

The Contractor shall give the Employer and the Technical Adviser not less than 7 Business Days notice of the date when it proposes to inspect a Phase with a view to issuing a Certificate of Service Availability in respect of it and representatives from the Employer and the Technical Adviser shall make a joint inspection with the Contractor. ..."

This reflects what is said in the Project Agreement, with the exception that, under the Main Contract, 7 Business Days notice is required, rather than 5. This, no doubt, was to allow time for the forwarding of such notice under the Project Agreement within the time stipulated therein. Clause 21.5 deals with the issue of an Acceptance Certificate.

"21.5 Issue of an Acceptance Certificate

21.5.1 Following receipt of the certified copy of a Certificate of Service Availability pursuant to Clause 21.4 and provided that the Technical Adviser (acting reasonably) is satisfied that:

25.1.1.1 in relation to the relevant Phase the Service Availability Requirements have been met; and

25.1.1.2 all outstanding Works detailed in the Snagging List are capable of being carried out within 20 Business Days of the issue of such Certificate of Service Availability in accordance with the terms of this Agreement,

then the Technical Adviser shall, within 5 Business Days issue an Acceptance Certificate in respect of the relevant Phase. If the Technical Adviser declines to issue an Acceptance Certificate, and unless the Contractor and Employer agree within a further 5 Business Days to repeat the procedure set out in Clause 21.5.1 and so advise the Technical Adviser, the matter shall be determined under the Dispute Resolution Procedure.

21.5.2 The issue of an Acceptance Certificate and any identification of any Snagging Works shall not relieve the Contractor of liability for Deductions or Availability Deductions under this Agreement or otherwise diminish the obligations of the Contractor under this Agreement. The Employer shall not be entitled to require the Contractor to rectify any defects in the Works under Clause 15.7 which should have been apparent from a visual inspection of the Works following the issue of an Acceptance Certificate unless the claim intimating the same is made prior to the issue of the Notice of Making Good Defects for the relevant Service Availability Date."

The terms "Deductions" and "Availability Deductions" have the terms given to them in the Project Agreement. Clause 21.8 deals with the obligation to carry out Snagging Works mutatis mutandis in the same terms (apart from timing, 15 days instead of 20) as in the Project Agreement.

[31] In the course of submissions, reference was made to a number of other clauses in the Main Contract. Clause 7 was referred to as forming a basis for the claim that the defenders were liable to indemnify REAL2 in respect of REAL2's liabilities to the Council under the Project Agreement, in particular its liability to suffer Deductions from payments otherwise due to it. Clause 7 provides as follows:

"7. Ancillary Documents

...

7.3 The Contractor shall not act or omit to act where the relevant act or omission would cause, contribute to or otherwise give rise to any breach by the Employer of any of its obligations pursuant to the Project Agreement.

7.4 The Contractor shall perform its obligations hereunder, or ensure that its obligations hereunder are performed, in accordance with the obligations and liabilities of the Employer under the Project Agreement insofar as those obligations are relevant to the carrying out and completion of Works. In the event of any conflict between the provisions of this Agreement and the Project Agreement, the relevant provisions of the Project Agreement shall apply.

7.5 The Contractor shall be deemed to have full knowledge of the provisions of and the Employer's duties and liabilities under the Project Agreement and the Senior Funding Agreements. In the event that the Contractor causes any breach by the Employer of any of the foregoing agreements then the Contractor shall indemnify the Employer for any losses suffered or costs or Deductions incurred by the Employer under and in terms of the foregoing agreements."

[32] Clause 22 was also relied upon. It provides as follows:

"22. Defects

22.1 Notwithstanding the obligations on the Contractor under clauses 21 and 20, the Contractor shall in relation to the Works, make good all defects, faults and/or omissions which are apparent at the date of the issue of any Certificate of Service Availability relative to the Works, or become apparent during the relevant Defects Liability Period (unless otherwise notified by the Employer) to the reasonable satisfaction of the Employer within such reasonable period and in accordance with such reasonable instructions as shall be specified by the Employer of the Contractor and in every case at the expense of the Contractor. Notwithstanding the foregoing the Employer may, if the Contractor has previously failed to carry out such remedial works to the satisfaction of the Employer or in a time period required by the Employer, by notice to the Contractor, appoint or instruct the FM Contractor or any other third party contractor to execute and complete any remedial, repair or other works as may be necessary to make good any such defects, faults and/or omissions, in which event the Contractor shall indemnify the Employer in respect of the whole costs and losses incurred by the Employer in relation thereto. For the avoidance of doubt the FM Contractor and/or the Employer or any party the Employer instructs shall be under an obligation to mitigate any costs incurred making good any such defects, faults and/or omissions.

...

22.6 The Contractor shall indemnify the Employer from and against all Deductions suffered or incurred by the Employer as a consequence of Unavailability arising respect of the Services by virtue of the Contractor rectifying any Snagging Matters, or remedying any Defects in relation to Works, to the extent that the Contractor is responsible for such Snagging or Defects in accordance with this Agreement.

22.7 If at any time within 12 months after the date of issue of a Certificate of Service Availability for the Works it is found that any Project Facility does not comply with the terms of this Agreement, the Contractor shall carry out such works, as may be required to ensure such compliance or such provision of the Services, failing which the Contractor shall, without prejudice to clauses 22.1 and 22.2, indemnify the Employer in respect of all costs, losses and/or liability whatsoever suffered or incurred by the Employer in connection with such non-compliance and/or carrying out such modifications. The Contractor shall have no obligation where such non-compliance is immaterial unless the Authority can reasonable demonstrate to the Employer that such non-compliances is prejudicial to the Authority.

Unavailability Deductions

22.8 Notwithstanding the commencement of the Services (as defined in the Project Agreement) following the Services Availability Date any Project Facility becomes Unavailable and the Employer suffers Deductions or Availability Deductions without prejudice to clause 22.4, and such Unavailability was caused by or was attributed to any defect, fault or omission in the Works, the Contractor shall pay or allow to the Employer liquidated damages ("Unavailability Damages") in respect of such reduction in the Unitary Charge which Availability Damages shall in respect of each contract month (a) be a sum equivalent to the sum of the Deductions (if any) relative to the Project Facilities made by the Authority pursuant to the Project Agreement for Unavailability which was caused by or was attributable to such defect, fault or omission in the Works, (b) be paid by the Contractor to the Employer (or be deducted by the Employer from any sums at that time remaining due to the Contractor under this Agreement) within a period of 10 Business Days following the issue of a written demand therefor from the Employer together with a written statement as to how the relevant sum demanded as Unavailability Damages was arrived at by the Employer."

[33] Clause 24 deals with damages for delay. It provides as follows:

"24. DAMAGES FOR DELAY

24.1 Where the Contractor fails to complete the relevant Phase of the Works by the relevant Target Service Availability Date the provisions of this clause 24 shall apply.

24.2 The Contractor shall pay or allow to the Employer, liquidated and ascertained damages in respect of each Phase respectively the sums set out in Part 10 of the Schedule for each Phase (as the case may be) from the relevant Target Service Availability Date until the Service Availability Date;

...

24.5 The Parties hereby acknowledge that the liquidated and ascertained damages and Deductions in clauses 24.2 and 24.3 represent a genuine and reasonable pre-estimate of likely losses, damages, expenses and costs that the Employer will incur in connection with the Contractor's failure to meet the Services Availability for a Phase respectively by the relevant Target Service Availability Date."

[34] Finally, I should mention clause 82, which provides as follows:

"82. EXCLUSIVE REMEDIES

The Employer and the Contractor intend that the Contractor's rights, obligations and liabilities as provided for in this Agreement shall be exhaustive of the rights, obligations and liabilities of the Contractor to the Employer arising out of, under or in connection with this Agreement or the works, whether such rights, obligations and liabilities arise in respect or in consequence of a breach of contract or of statutory duty or a delictuous or negligent act or omission which gives rise to a remedy at common law. Accordingly, except as expressly provided for in this Agreement, the Employer shall not be obligated or liable to the Contractor in respect of any damages or losses suffered by the Contractor which arise out of, under or in connection with this Agreement of (sic) the Works, whether by reason or in consequence of any breach of contract or of any statutory duty or any delictual or negligent act or omission.

The FM Contract

[35] The FM Contract is between REAL2 and RFML. I was not shown a copy and it is unnecessary to refer to its terms. It is sufficient to note that just as the Main Contract related to the Work which was the subject of PART 3 of the Project Agreement, the FM Contract related to the Services which were the subject of PART 4 of the Project Agreement.

The Sub-Contracts

[36] The Sub-Contracts are between the defenders (described in the sub-contract documentation as "RC NL") and the pursuers (referred to as "the Sub-Contractor"). In fact, the-Contract Agreement to which I have been referred (6/1 of Process) is addressed to the KCS Group, which I take to be the group of which the pursuers are part. In any event, no issue was taken as to the identity of the Sub-Contractor.

[37] Each Sub-Contract relates to an individual school within the Aberdeenshire Schools Project. That lodged in process related to Longside Primary. In each case, the Sub-Contract Works are described as: "Design and supply of loose furniture". In the Sub-Contract Conditions, under the heading "General", clause 1.2 deals with the Conditions applicable to the Sub-Contract and the order of precedence as follows:

"1.2 The Sub-Contract Conditions, the Sub-Contract Agreement and the provisions of the Main Contract, shall govern the Sub-Contract to the exclusion of any conditions proposed by the Sub-Contractor. In the event of a conflict between the provisions of the Main Contract and the Sub-Contract Conditions and Sub-Contract Agreement, the Sub-Contract Conditions and Sub-Contract Agreement shall take precedence. ..."

Clause 3 is entitled "Main Contract and Other Conditions". It provides, so far as material, as follows:

"3.1 The Sub-Contractor is deemed to have full knowledge of, and agrees to observe perform and comply with, all the provisions of the Main Contract (a copy of which, excluding commercially confidential information, can be inspected, by prior appointment, ...) on the part of RCNL to be observed performed and complied with, in so far as they relate and apply to the Sub-Contract Works, to the extent that: (1) such provisions can be applied to the Sub-Contract (or any portion of the same), mutatis mutandis, without extensive amendment or alterations; and (2) they cover matters not already covered by the Sub-Contract Conditions or Sub-Contract Agreement: as though the same were incorporated herein and RCNL and the Sub-Contractor were named as the appropriate parties thereunder.

...

3.3 The Sub-Contractor shall not by any act, omission, breach of this Sub-Contract or negligence put RCNL in breach of its obligations under, or in connection with, the Main Contract and/or any other sub-contract in respect of the Works. The Sub-Contractor acknowledges that any loss suffered by RCNL, because of such a breach of its obligations caused by any such act, omission, breach or negligence on the part of the Sub-Contractor, is a direct and foreseeable result of such act, omission, breach or negligence."

Clause 4 is entitled "Progress and Completion". It provides as follows:

"The Sub-Contract Works are to be commenced when the Sub-Contractor is instructed by RCNL to proceed and are to be completed within the period or periods specified in the Sub-Contract Agreement (or as provided for in clause 14.4) (" Sub-Contract Period or Periods") subject to the provisions of this clause 4 and to such fair and reasonable extension of time as RCNL shall allow where, and to the extent that, the Sub-Contract Works are delayed by the acts or omissions of RCNL (all those for whom they are responsible other than the Sub-Contractor and those for whom the Sub-Contractor is responsible) in breach of the provisions of this Sub-Contract, provided that, where such delay also gives rise to an extension of time under the Main Contract, the extension of time under this Sub-Contract shall not exceed that under the Main Contract. Notwithstanding the foregoing the Sub-Contract Works are to be carried out regularly and diligently, and in such order, manner and time has RCNL, or their staff on Site, may reasonably direct, so as to ensure completion of the whole or any section, element or part, of the Works, (as shown in the programme issued under the Main Contract), by the appropriate completion date or dates, has adjusted from time to time, under the Main Contract. If the Sub-Contractor is in breach of the foregoing it shall, without prejudice to and pending the final ascertainment by RCNL, or agreement between the parties as to the amount of loss or damage suffered or which may be suffered by RCNL in consequence thereof (which loss or damage to include, without limitation, the liquidated and ascertainment damages levied against RCNL under the Main Contract attributable to such breach), subject to clause 9.9, forthwith pay or allow to RCNL such sum as RCNL shall bona fide estimate as the amount of such loss or damage, such estimate to the binding and conclusive upon the Sub-Contractor until such final ascertainment or agreement."

Clause 9 deals with Payment. Only clause 9.7 need be set out in full:

"9.7 Further, and in addition to the provisions of clauses 4 and 8 and RCNL's statutory and common law rights of set off, compensation and retention, if: (1) the Sub-Contractor shall cause RCNL loss by reasons of any breach of this or any other contract between the parties or any act or omission or any breach of statutory duty giving rise to a claim by RCNL, for damages or indemnity or contribution, against the Sub-Contractor; or (2) RCNL shall become entitled to payment from the Sub-Contractor under this or any other contract between the parties: then, without prejudice to and pending the final ascertainment by RCNL or agreement between the parties as to the amount of such loss, damages, indemnity, contribution or payment, the Sub-Contractor shall pay or allow to RCNL such a sum as RCNL shall bona fide estimate as the amount of such loss, damages, indemnity, contribution or payment such sum being due upon issue of such estimate and the final date for payment shall be 15 days thereafter with such estimate to be binding upon the Sub-Contractor until such final ascertainment or agreement."

I was referred to certain other parts of clause 9 but do not need to set them out.

The Interface Agreement

[38] The Interface Agreement is between REAL2 (referred to therein as "Project Co."), the defenders (RCNL, referred to as the "Building Contractor") and RFML (the "FM Contractor").

[39] The Recitals to the Agreement make it clear in what relation the three parties stand to the Aberdeenshire Schools Project. They provide as follows:

"(A) Project Co has agreed to provide certain services to the Council, including inter alia the construction of and the provision of certain services to schools in an agreement of even date herewith between Project Co and the Council (the "Project Agreement").

(B) The FM Contractor has entered into the FM Agreement with a view to providing inter alia the Services to Project Co to enable Project Co to fulfil certain of its obligations arising under the Project Agreement

(C) The Building Contractor has entered into the Building Contract with Project Co to carry out inter alia the Works for Project Co to fulfil certain of its obligations arising under the Project Agreement."

The Recitals go on to narrate the circumstances in which the Interface Agreement is thought to be necessary:

(D) Where the FM Contractor it is in breach of its obligations or is otherwise obliged to make payments to Project Co under the FM Agreement, Project Co may, in accordance with the terms of the FM Agreement make deductions from the payments due under the FM Agreement and/or require other deductions or payments to be made in accordance with the FM Agreement and/or the FM Contractor may otherwise be liable to Project Co.

(E) Where the Building Contractor is in breach of its obligations under the Building Contract the Building Contractor may be obliged to make payments to Project Co and/or undertake action as required by the Building Contract.

(F) The FM Contractor and the Building Contractor have entered into this Agreement for the purpose inter alia of allowing the Contractors to recover from each other certain sums defined in this Agreement and Project Co is a party to this Agreement for the purposes set out herein."

[40] In terms of clause 2, "Mutual Covenants", both the FM Contractor and the Building Contractor contracts with the other that it will perform the terms of its own contract with Project Co (i.e. REAL2). The critical parts of the Interface Agreement for present purposes are those contained in clauses 3 and 4. It is necessary to set those clauses out in full:

"3. Project Co Pass Down Of Deductions

3.1 The FM Contractor acknowledges a breach by the FM Contractor of its obligations under the FM Agreement may result in Project Co incurring a liability to the Council or the Council being entitled to levy deductions under the Project Agreement (including, but not limited to Deductions).

3.2 The Building Contractor acknowledges that a breach by the Building Contractor of its obligations under the Building Contract may result in Project Co incurring a liability to the Council or the Council being entitled to levy deductions under the Project Agreement (including, but not limited to Deductions).

3.3 Without prejudice to Clause 3.4 and notwithstanding the provisions of the Building Contract and the FM Agreement:

3.3.1 Project Co shall be entitled to claim or deduct or claim an amount equal to any such Deductions or other claim (as referred to in Clauses 3.1 and 3.2) from the FM Contractor and/or Building Contractor as appropriate whether by deduction from monies due or from any retention under the FM Agreement or Building Contract; and/or

3.3.2 The FM Contractor and/or the Building Contractor shall pay or allow within 10 Business Days of a written demand issued by Project Co in respect of the same an amount equal to the said deduction or claim;

and the amount of such deductions and/or sum demanded shall be deemed to be a demand for a liquidated sum allowable and/or payable as a debt due to Project Co and the same shall not be subject to any right of set-offs or counter claim.

3.4 If having suffered a deduction or paid a sum in either case pursuant to Clause 3.3 either the FM Contractor or the Building Contractor dispute that Project Co was entitled to make the deduction or claim then each of them hereby undertakes to Project Co and to each other it shall not contend that Project Co was not entitled to make the disputed deduction or claim (as applicable) but that Party shall be entitled subsequently to seek recovery or reimbursement of the same amount in question under the provisions of the FM Agreement or the Building Contract (as appropriate) or to seek recovery or reimbursement of the amount in question in accordance with this Agreement

4. LIABILITY

4.1 If the FM Contractor is in breach of its obligations under the FM Agreement and as a consequence of that breach:

4.1.1 The Service Availability Date for a Phase occurs after its Target Service Availability Date or any item of the Additional Works occurs after its programmed date for completion; and/or

4.1.2 The Building Contractor commits a breach of the Building Contract; and/or

4.1.3 The Service Availability Date for a Phase, would (had it not been for the action taken by the Building Contractor) have occurred after, its Target Service Availability Date; and/or

4.1.4 The programmed date for completion of any item of the Additional Works would (had it not been for the action taken by the Building Contractor have occurred by the date programmed for its completion)

Then the FM Contractor shall be obliged to make payment to the Building Contractor that payment stipulated in Clause 7.

4.2 If the Building Contractor is in breach of any of its obligations under the Building Contract and as a consequence of that breach and the operation of this agreement:

4.2.1 the FM Contractor suffers a deduction from its Monthly Fee under the FM Agreement or any other liability under the FM Agreement or this Agreement; and/or

4.2.2 the FM Contractor would (had it not been for the action taken by the FM Contractor) have suffered a deduction from its Monthly fee under the FM Agreement; and/or

4.2.3 the FM Contractor is required by Project Co under the terms of the FM Agreement to repair defects in a Project Facility which arose as a result of that breach by the Building Contractor of its obligations under the Building Contract (provided that the Building Contractor is first offered the opportunity to make good and repair such defects),

Then the Building Contractor shall be obliged to make payment to the FM Contractor of that amount stipulated in Clause 7."

[41] Finally I should set out part of clause 7, which deals with re-imbursement:

"7. Reimbursement

7.1 Where the provisions of Clause 4.2 apply and the provisions of Clause 6 have been complied with the Building Contractor shall be liable to make any or all of the following payments (but no other) to the FM Contractor as agreed under Clause 6.3 or determined under 9 (and the liability of the Building Contractor shall be limited accordingly):

7.1.1 The deductions made by Project Co from or other claims made by Project Co against the FM Contractor which are not attributable to a failure of the FM Contractor to use its reasonable endeavours to mitigate all consequences of the Building Contractor's breach; and/or ..."

The pleadings

[42] In the Summons, the pursuers refer to the Sub-Contracts and, in Article 3, explain that the sub-contract works included the supply by them of project tables of a certain description. They aver that there was a variation, in terms of which they were required to accept instructions as to the specification of the tables from Aberdeenshire Council as the ultimate user of the schools. They aver that, on or about 13 September 2005, whilst the specification of the project tables was still under discussion, they provided alternative tables at two schools as a temporary solution and placed them in individual classrooms as required; that the revised specification of the project tables was only resolved on about 13 October 2006; and that, apart from the project tables (in respect of which the specification was still to be finalised), they completed their works in each of the schools in or about October 2005. They go on to say that project tables conform to the changed requirements of Aberdeenshire Council were delivered and installed at the schools in December 2006, in each case following handover and occupation of the schools by the Council.

[43] The defenders, for their part, aver that the issue of the specification of the project tables was resolved much earlier, not in October 2006 but towards the end of June 2005. There is a dispute as to the precise extent to which the tables were required to be height adjustable. The defenders aver that work commenced under the Sub-Contracts on various dates in June and July 2005 and that "practical completion" of the works under each of the Sub-Contracts was "signed off" on or about 4 October 2005 in respect of two of the schools and on or about 9 December 2005 in relation to the third, in each case subject to identified snagging works and undelivered items including the project tables. They contend that the pursuers delivered project tables to two of the schools in September 2005; and that those tables did not conform to the specified height adjustability requirement and were initially rejected by the Council. They further aver that the tables later delivered to all three schools in December 2006 "also failed to conform to the specification but were accepted by the Council as a compromise (but without prejudice to its right to levy deductions up until that point)".

[44] In Article 4 of Condescendence the pursuers refer to the payment provisions of the Sub-Contracts and to the applications for payment made by them. They say this:

"As at the date of issue of the "Draft Final Account -- Payment No 2" for each school on 6 April 2006 the Defenders advised that the sums withheld included sums which the Defenders had allegedly had deducted from them under their main contract [i.e. the Main Contract] for [the three schools] in respect of alleged late delivery of the varied project tables"

In Answer 4, the defenders admit they have withheld certain sums. In particular they make the following averment:

"Admitted that the sums withheld include sums which the defenders have had deducted from them under the Main Contract under explanation that the deductions relate to failures on the part of the pursuers in terms of the Sub-Contracts ..."

The defenders set out their case more fully in a series of numbered sub-paragraphs within Answer 4. In particular, in para.4.3, they explain that their revisions of the pursuers' draft final accounts no longer include certain deductions relating to the administrative costs. However, they go on to say the following:

"Otherwise, they reflect 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 and other items previously condescended upon. They also include the contra-charges referred to in Answer 4 and more fully described in the Statements of Fact in the Counterclaim, which are referred to for their terms which are incorporated herein brevitatis causa. In respect of the LP Sub-Contract, the deductions included amount to £80,703.54, leaving a balance due and payable by the pursuers to the defenders of £7,228.03. In respect of the RHP Sub-Contract, the deductions included amount to £167,580.12, leaving a balance due and payable by the pursuers to the defenders of £84,939.54. In respect of the RNP Sub-Contract, the deductions included amount to £119,950.54, leaving a balance due and payable by the pursuers to the defenders of £60,820.85. These are the sums sought by the defenders from the pursuers in terms of the counterclaim. Negotiations in relation to the deductions levied are still ongoing between REAL2 and the Council, in which REAL2 is seeking to minimize the financial consequences of the pursuers' failures to itself, and to those to whom the deductions are passed down the contractual chain."

I am here concerned only with the deductions and not the contra-charges.

[45] The averments relating to the deductions made by the defenders are taken further in the Counterclaim. In Statement 4, the defenders refer to the averments made by them in Answer 3 and continue as follows:

"the pursuers have to date failed to deliver the project tables specified and have failed to supply in full, or in a compliant manner, other items required in terms of each of the Sub-Contracts. As a result of these breaches of contract on the part of the pursuers, the works to be delivered up the contractual chain have not been completed which has triggered deductions ("Deductions") being applied in respect of these non-delivered and non-compliant items down the contractual chain to the defenders. Accordingly, the defenders have suffered loss and damage and, in terms of clauses 4 and 9.7, are entitled to payment or allowance from the pursuers of sums representing the defenders' bona fide estimate of the loss and damage relating to the Deductions. ..."

In Statement 5, the defenders aver that:

"In terms of clause 9.5 of the conditions [i.e. the conditions of the Sub-Contracts], the final payment due to the pursuers in terms of each of the Sub-Contracts is subject to deduction of amounts which the defenders are entitled to make in terms of the Sub-Contracts, including the defenders' bona fide estimates ('the estimates') relating to the Deductions and the Contra-Charges referred to at Statement 4 above. The estimates in relation to the Deductions and Contra-Charges are set out in the payment notices attached to the defenders' letters of 29 November 2007 ('the payment notices') and are vouched in the documents and appendices attached to those letters, all of which are produced in the principal action and are referred to for their terms which are incorporated herein brevitatis causa. The Deductions are referred to as 'Unavailability Damages' in the payment notices. Negotiations in relation to the Deductions are still ongoing between the defenders and those above them in the contractual chain and efforts are being made to seek to minimise the financial consequences of the pursuers' failures. Reference is also made to the averments at Answer 4.3 to the Defences."

In this and the previous paragraphs, I have underlined the passages in the defenders' pleadings which the pursuers seek to have deleted if their arguments at debate are successful.

[46] In Statement 6, the defenders quantify the Deductions referred to in the foregoing parts of the Counterclaim. The values given for the Deductions for the three schools are £80,703.54 for LP, £167,580.12 for RHP and £119,950.54 for RNP, a total of £368,234.20. These Deductions form by far the largest part of the sums sued for in the counterclaim. This part of the Counterclaim was similarly the subject of attack by the pursuers at debate and is sought to be deleted if their arguments are successful.

[47] In the course of earlier procedure in the case, the defenders lodged a document (No.21 of Process) containing further specification of the deductions made against them, and originating further up the contractual chain, and which they seek to pass on to the pursuers. In paras 6.2 and 6.3 of that document, as adjusted, the defenders make the following averments:

"6.2 The pursuer did not supply project tables of the relevant specification. Project tables of the proper specification have never been made available by the pursuer. The tables initially supplied by the pursuer in 2005 did not operate in accordance with the specified height requirement. Accordingly, deductions were applied by the Authority on the basis that the Authority's Requirements had not been met in full. Reference is made to Schedule Part 7 to the Project Agreement. The pursuers did not replace or upgrade the tables initially supplied until December 2006. As narrated above, those tables also failed to conform to the specification but were accepted by the authority as a compromise (but without prejudice to its right to levy deductions up until that point).

6.3 In turn, the deductions levied to date by the Authority against the Project Company in respect of the project tables and other items have been applied, down the contractual chain, by means of corresponding deductions by the Project Company against the FM Contractor. This is permitted by way of clause 3.3.1 of the Interface Agreement.

In terms of clause 7.1 and 7.1.1 of the Interface Agreement, the FM Contractor is entitled to levy corresponding deductions from the defender, namely, deductions applied by the Project Company against the FM Contractor which relate to breaches of the Main Contract. The relevant clauses within the Interface Agreement are clauses 3.2, 4.2, 6.1, 6.3 and 7.1.

The FM Contractor has notified the defender of the application of these deductions and the defender is liable to pay the FM the equivalent amount of these deductions pending a resolution of the matter. ..."

This passage brings into play, for the first time, a claim to pass on the Deductions by means of an alleged liability of the defender to the FM under the Interface Agreement. It also, as the pursuers point out, in so doing, makes averments of fact which are contradictory to those made in Answer 4 of the Defences, which proceed on the basis that Deductions have been passed down from REAL2 to the defenders under the Main Contract rather than from REAL2 to RFML under the FM Contract.

Submissions

[48] For the pursuers, Ms Patterson invited the court to sustain the pursuers' second plea-in-law in the Summons and their first plea-in-law in the Counterclaim, both of which are pleas to the relevancy of the defenders' averments, and in consequence to delete (a) the passages which I have underlined in Answers 4 and 4.3 of the Defences (see para.[44] above), (b) the passages underlined in Statements 4 and 5 of the Counterclaim (see para.[45] above), (c) the averments in statement 6 of the Counterclaim anent the Deductions, to which I have referred in para.[46] above and (d) the passages in the document No.21 of Process which I have set out in para.[47] above. The defenders' case is that their employers, REAL2, had made certain Deductions from sums otherwise due to them under the Main Contract in respect of the problems which had arisen regarding the supply of the project tables, those Deductions being the same as Deductions made against REAL2 under the Project Agreement. The defenders sought to pass on those Deductions to the pursuers under the Sub-Contracts. Ms Patterson submitted that the defenders had pled a relevant case justifying that position. There was no link, she submitted, between the pursuers' alleged breaches of contract and the amounts which the defenders sought to deduct from the Draft Final Account in respect of each of the schools.

[49] Ms Patterson referred first to the Project Agreement. She argued that the right of the Authority (the Aberdeenshire Council) to make Performance or Availability Deductions arose only in respect of the Performance and Availability Requirements, which were matters entirely within the ambit of the Operational Services Specification set out in Part 3 of Schedule Part 2. These matters were the subject of PART 4 of the Project Agreement, which dealt with the Services to be provided as from the Service Availability Date. Whilst the Authority might be justified in making such Deductions against REAL2 under the Project Agreement, REAL2 had no justification for passing on those Deductions to the defenders, since their contract with the defenders ("the Main Contract") only covered the work set out in PART 3 of the Project Agreement and not that covered by PART 4. The latter was subcontracted to RFML in terms of the FM Contract. Put short, Ms Patterson's argument was that the Deductions imposed by the Authority against REAL2 could only be passed on by REAL2 to RFML under the FM Contract and not to the defenders under the Main Contract. The right to make Deductions did not relate to the design and construction aspect of the project.

[50] In summary, Ms Patterson put forward four propositions. First, she submitted that the failure or delay in supplying the project tables and other items of which the defenders complained was not a breach of the Service Availability Requirements or the Employers Requirements. An Acceptance Certificate had been issued in respect of the construction works for each school. The failures or delays in respect of the tables had been treated as Snagging Works, and the mechanism in clause 21.8 of the Project Agreement, which dealt with the completion of works detailed in the Snagging List, applied. Those provisions, which it is unnecessary to quote here, did not lead to any right to make Deductions. Secondly, she submitted that even if a failure in respect of the supply of the project tables were a breach of the Authority's Requirements, and therefore a breach of an obligation under PART 3 of the Project Agreement, still it did not give rise to the Deductions which the defenders claimed to be entitled to pass on, since it had nothing to do with the Performance Standard - the provisions concerning a Performance Failure, which give rise to a right to apply Performance Deductions, are found in Schedule Part 7, which relates to the services to be made available and provided under PART 4 of the Project Agreement, and not to the construction part of the project covered by PART 3. Thirdly, Ms Patterson submitted that the defenders' reliance on clause 21.5.2 of the Main Contract did not assist their argument. That clause, in similar terms to clause 21.5.2 of the Project Agreement, provided that the issue of an Acceptance Certificate and the identification of Snagging Works did not relieve the Contractor of liability for Deductions or Availability Deductions under the Main Contract. Since REAL2 had no right to make these deductions under the Main Contract, this point did not arise. Fourthly, Ms Patterson submitted that the defenders' reliance upon the Interface Agreement did not help them. That route could only be relevant if REAL2 had levied the deductions against RFML under the FM Contract. In so far as this was alleged, as to which see the averments in No.21 of Process quoted in para.[47] above, such a case was inconsistent with the averments made by the defenders in Answer 4. In any event, the Interface Agreement could not apply since the defenders were not in breach of the Main Contract.

[51] For the defenders, Mr Borland invited me to refuse the pursuers' motion and to allow a proof before answer of both parties' averments in the principal action and in the counterclaim. He referred me to clause 10.1 of the Project Agreement which defined the obligation placed upon REAL2 to carry out the Works. In terms thereof, REAL2 was required to procure Service Availability and to carry out the Works so as to meet all the requirements of inter alia the Facilities Requirements. The Service Availability Requirements were set out in Schedule Part 5. All the Operational Services had to be, or had to be capable of being, delivered in accordance with the Operational Services Specification. This was part of the construction phase of the project. The defenders' case did not depend upon the Operational Services Specification being incorporated into the Main Contract. However, in any case, reference to the Operational Services Specification took one back to the Works under PART 3 of the Project Agreement, and hence to the Main Contract. The requirement in Schedule Part 5 that the Loose Furniture and Equipment must be completed and provided in accordance with the Data Sheets had nothing to do with the Operational Services Specification. It was part of the obligation placed on REAL2 in respect of the Works under the Project Agreement. The central obligation on REAL2 was to supply in compliance with the Data Sheets. That obligation on REAL2 under the Project Agreement was in turn an obligation placed on the defenders under the Main Contract by reason of the provisions of clauses 10.1.1 and 10.1.2 thereof. Mr Borland also referred to clauses 7.4, 7.5 and 22.7 of the Main Contract in terms of which the defenders were required to carry out their obligations in accordance with the obligations of REAL2 under the Project Agreement and, in the event of breach, were obliged to indemnify REAL2 in respect inter alia of any Deductions made by the Authority as a result.

[52] In the course of his submissions, Mr Borland identified three routes, as he described them, through the Project Agreement. The first he called "the non-Operational Services Specification route". The starting point was clause 10.1 of the Project Agreement. REAL2 were required to achieve Service Availability. That meant satisfying the Service Availability Requirements set out in Schedule Part 5. In terms thereof, the loose furniture had to be provided in accordance with the Data Sheets forming part of the Authority's Requirements set out in Part 1 of Schedule Part 2 and in particular the obligations set out in para 3.4.2 and para 7 thereof. Route 2 he called "the Operational Services Specification route". This again started with clause 10.1 and the requirement to achieve Service Availability, in other words to satisfy the Service Availability Requirements in Schedule Part 5. Para A1 of Schedule Part 5 provided that, in order to achieve completion of the construction phase of the Project Agreement, all Operational Services had to be, or had to be capable of being, delivered in accordance with the Operational Services Specification. That took one to Part 2 of Schedule 3, and in particular item 13.1.1 in Appendix B thereto. In turn that directed one to the Authority's Requirements in Part 1 of Schedule Part 2 and from there, again, to paras 3.4.2 and 7 thereof. Route 3, another non-Operational Services Specification route, was not dependent on the general provisions of clause 10.1 of the Project Agreement. This route started under reference to clause 10.1.2 of the Project Agreement, which provided that the Works were to comply fully with and meet all the requirements of the Facilities Requirements in Part 1 of Schedule Part 2. This again directed one to the Data Sheets and to paras 3.4.2 and 7. Accordingly, Mr Borland submitted, even if it achieved Service Availability - which could be achieved even with Snagging Works outstanding - the Contractor (REAL2) was still under an obligation by virtue of clause 10.1.2 fully to comply with the Facilities Requirements. In other words, the obligation remained on the Contractor to provide the furniture in compliance with the Data Sheets, notwithstanding the achievement of Service Availability and the issue of an Acceptance Certificate.

[53] Mr Borland also relied on the Interface Agreement. Clause 3 dealt with the passing down of Deductions suffered by Project Co, i.e. REAL2. He relied upon the terms of clause 3.3.1. In the event of a breach by the FM Contractor or the defenders (the Building Contractor) resulting in REAL2 incurring a liability or suffering Deductions being made against it under the Project Agreement, REAL2 was entitled to pass on such liabilities or Deductions to the FM Contractor or the defenders "as appropriate". Mr Borland submitted that for REAL2 to pass on a Deduction to the defenders, they did not have to show that the defenders were in breach and that that breach resulted in the Deduction being made. It was enough that either the defenders or the FM Contractor were in breach, causing REAL2 to suffer the Deduction.

Discussion

[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.

[56] I consider first the case pled in the Defences and Counterclaim, namely that, because of the pursuers' failures in the supply of the project tables, the Authority has applied Deductions against REAL2 under the Project Agreement which REAL2 has passed down to the defenders under the Main Contract.

[57] In considering the pursuers' challenge to the relevancy of this case advanced by the defenders, I must, of course, take the defenders' averments pro veritate. I must therefore proceed on the basis that the Authority has applied such Deductions against REAL2 and that REAL2 has passed on such Deductions against the defenders. The relevancy issue raised by the pursuers goes to causation. Ms Patterson accepted that such questions usually required an investigation into the facts. However, she submitted that, in the present case, in the circumstances averred, it could be demonstrated clearly that no right to pass on Deductions arose from the pursuers' failures in the provision of the project tables, so that REAL2 had no right to apply such Deductions against the defenders, and the defenders had no right to deduct from sums otherwise due to the pursuers the amount of any such Deductions. Her point was essentially quite a simple one. Availability and Performance Deductions fell to be applied under the Project Agreement only for Availability and Performance Failures, i.e. failures to provide the Services to meet the Availability and Performance Standards within the specified response time. The provision of those Services within the required times was covered by PART 4 of the Project Agreement. It was not part of the design and construction work sub-contracted to the defenders under the Main Contract. It was probably part of the work sub-contracted to RFML under the FM Contract, but that did not matter for present purposes. What did matter was that the obligations placed on the defenders under the Main Contract - and, in turn, placed on the pursuers under the Sub-Contracts - did not include the provision of these Services; so that a failure on the part of the defenders (and the pursuers), though it might give rise to other claims, could not trigger the application of Availability or Performance Deductions.

[58] This attack on the relevancy of the defenders' pleadings, therefore, requires an analysis of which obligations on REAL2 under the Project Agreement were or were not passed down the contractual chain to the defenders under the Main Contract (and, in turn, to the pursuers under the Sub-Contracts).

[59] It is necessary to start by considering the Project Agreement. In terms of the Project Agreement, Aberdeenshire Council contracted with REAL2 for the whole package of design, construction and refurbishment, financing and operation of the six schools and associated services. That whole package involved essentially two stages, namely (a) the design and construction stage and (b) the provision of the Operational Services. These are the stages covered respectively by PART 3 and PART 4 of the Project Agreement.

[60] This analysis of the Project Agreement requires a little bit of elaboration. I have already observed that PART 3 of the Project Agreement is headed "Transitional Arrangements". This in itself is not a defined term. Its meaning, however, is, I think, apparent from the nature of the schools project. The schools which were the subject of the project were existing schools. The design and building work was work to be carried out to upgrade the existing schools. To that extent, the design and construction work was work in effecting a transition between the existing state of the schools and their new and refurbished state. In light of this, the heading of PART 3 of the Project Agreement, "Transitional Arrangements", does not cause any difficulty. The subject matter of PART 3 is the obligation to carry out the design and construction works.

[61] "The Works" is a term defined in s.1.1, the definitions section. It means "all the works to be undertaken by the Contractor or procured by the Contractor for the Authority at each Site as described in Part 1 of Schedule Part 2 (Authority's Requirements)". There is also reference, within the definition, to the Contractor's Requirements in Part 1 of Schedule Part 3, but, as I have already indicated, I was not referred to this and must assume that it does not add anything of relevance to the present question. The Authority's Requirements in Part 1 of Schedule Part 2 require the Contractor to design and build, fund and operate the schools "to provide integrated accommodation and Services in accordance with the requirements outlined in [the Schedule]".

[62] This definition of the Works at first sight gives rise to some ambiguity. It includes not only the design and build of the schools but also their "operation". It requires the Contractor to provide not only integrated accommodation but also "Services". It might be argued that, since the Contractor's obligation under PART 3 is to carry out the Works, and the Works includes such operation and Services, the scope of PART 3 extends well beyond the design and construction stage. However, on a proper reading of the Project Agreement, it is clear that this is not the case. Clause 10, which is the introductory (and operative) clause in PART 3, requires the Contractor to carry out the Works in accordance with the Facilities Requirements so that each Phase (or school) achieves Service Availability by a particular date. This is important for two reasons. First, the expression "Facilities Requirements" is also a defined term and means "... that part of the Authority's Requirements relating to design and construction of the Works." This therefore limits the Contractor's obligations under PART 3 of the Project Agreement to carrying out the design and construction aspects of the Works. Secondly, the obligation in clause 10 is linked to the achievement of Service Availability or, as is explained in the definition section, the satisfaction of the Service Availability Requirements, namely the requirements set out in Schedule Part 5. Those Service Availability Requirements are met when inter alia all the Operational Services are or are capable of being delivered in accordance with the Operational Services Specification and the particular Phase (or work at the particular school) is complete with the exception of minor defects, deficiencies or omissions of a snagging nature. More practically, Service Availability is achieved when an Acceptance Certificate is issued. It is clear, therefore, that the obligations on the Contractor under PART 3 of the Project Agreement are to take matters to the end of the design and construction stage. That includes the provision of furniture and equipment. Once this work is complete and an Acceptance Certificate is issued, then subject to a continuing obligation to carry out Snagging Works and Additional Works, the Contractor's primary obligations under PART 3 are completed.

[63] The test of when Service Availability is achieved is set out in clause 21 at the end of PART 3 of the Project Agreement. That lays down the machinery pursuant to which the Contractor may obtain an Acceptance Certificate in respect of the design and construction work at a particular school. It is not in dispute that, in the case of the schools in question, the machinery in clause 21 of the Project Agreement was operated and Acceptance Certificates were issued. Nor is it in dispute that the obligation to provide the project tables forms part of the Contractor's obligations in respect of Loose Furniture and Equipment dealt with in Schedule Part 5 and Part 1 of Schedule Part 2. The project tables were required to be provided in accordance with the Data Sheets by the Target Service Availability Date for each school. They were not provided, or at least were not provided in accordance with the required specification, by the relevant date for each school. Nonetheless, Acceptance Certificates were issued and the problem with the project tables was expressly treated as a snagging item.

[64] By contrast, as is made clear in clause 23.1, the Contractors' obligations in respect of the Provision of Services commence "from the Service Availability Date" in respect of each school, in other words, from the date when the Acceptance Certificate is issued in respect of the design and construction work at that school. This is not surprising. The provision of Operational Services, to which PART 4 of the Project Agreement relates, can only have any content once the design and construction work is substantially complete and the equipment, including the loose furniture such as the project tables (or their temporary replacements), is installed. At risk of oversimplification, the Operational Services covered by PART 4 of the Project Agreement are essentially maintenance and management services. The definition of Operational Services is "the services required to satisfy the Operational Services Specification", i.e. the specification in Part 3 of Schedule Part 2 (Authority's Requirements). In para [19] above, I have quoted from paragraph 1 of Part 3 of Schedule Part 2. In addition to FF&E Services, the following other Services are listed: Facilities Management, Environmental Services, Caretaking, Janitorial and Portering Services, Public Health Systems and Services, Cleaning Services, Waste Management, Building Fabric Maintenance, Information and Communication Technology (Cabling & Infrastructure), Security Services and Access Control, Fire Alarm Systems, Grounds/Landscape Services, FF&E Services and Relocation Services. All of those Services are to be provided so that the Project Facilities meet the Availability Requirements and the Performance Requirements and Standards, as detailed in Appendix A and Appendix B, during certain specified periods. It seems to me that the obligation to provide the Operational Services as thus defined pre-supposes that the design and construction work has been substantially completed.

[65] The Availability Standards in Appendix A, in so far as they relate to Furniture, Furnishings and Equipment, simply require the Furniture, Furnishings and Equipment to be "available, safe and operational" so as to enable the Unit to be used for the intended purpose. The Availability Requirement is for "100% Availability", to allow occupation of the Unit. The response priority is that Availability must be achieved within one hour. In other words, as is made clear in para.1.3 of Part 3 of Schedule Part 2, in respect of a failure concerning the Furniture, Furnishings or Equipment, the Contractor is obliged to rectify that failure within one hour of it being reported.

[66] Similarly, as regards the Performance Standards in Appendix B, insofar as they relate to Loose Furniture and Equipment, the obligation on the Contractor is to maintain it operational and safe, and to replace or upgrade it in accordance with the Authority's Requirements and the Operational Services Specification. The Performance Requirement in respect of Loose Furniture and Equipment is to comply with the Performance Standard within the time set down. The Service Response Priority is "8". That allows a period of one week for the requisite work to be done.

[67] This analysis of the Availability and Performance Standards and Requirements is consistent with the notion that these obligations only come into play once the design and construction work is substantially complete and the equipment has been substantially installed. The Contractor, of course, remains responsible for completing the outstanding Works detailed in the Snagging List. However, that responsibility arises from the obligations placed upon the Contractor in PART 3 of the Project Agreement. It is not a separate responsibility arising under PART 4.

[68] There is of course a potential overlap between the provisions of PART 3 and PART 4, at least in so far as there are Snagging Works outstanding at the date of issue of the Acceptance Certificate. This is made clear by clause 21.5.2, which provides that the issue of the Acceptance Certificate and the identification of Snagging Works still to be completed "shall not relieve the Contractor of liability for Deductions in terms of Schedule Part 7 (Payment Mechanism)". It is therefore necessary to look to that Payment Mechanism to see to what extent it affects the issues presently under consideration.

[69] The Payment Mechanism in Schedule Part 7 provides for Availability Deductions and Performance Deductions. The former are deductions as a result of an Area being Unavailable or Unavailable but Used. The latter are deductions as a result of the Performance Failure. The test of whether an Area is Unavailable or Unavailable but Used depends upon whether the Rectification Period for that Area has expired. It therefore relates to the obligations as regards Availability set out in Appendix A to Part 3 of Schedule Part 2. A Performance Failure is a failure which continues after the relevant Rectification Period, that is to say the period allowed for responding to the defect. It too relates to the obligations as regards Performance in Appendix B to Part 3 of Schedule Part 2.

[70] It follows that the right to make Availability and Performance Deductions is a right arising out of the obligations in PART 4 of the Project Agreement. It does not arise out of the obligations in respect of design and construction in PART 3. Because of clause 21.5.2, the Contractor is not relieved from liability for Deductions simply because an Acceptance Certificate has been issued and unfinished items have been formally treated as Snagging Works. So, for example, if the Contractor is guilty of an Availability or Performance Failure, he would not be able to avoid liability for the appropriate Deduction by arguing that that Failure arose from the non-completion of the particular item of work, it having been treated as a Snagging Item and an Acceptance Certificate having been issued. But it would remain the case that the Deduction would be applied because of the Performance Failure, the failure to provide Services under PART 4, and not because of the fact that the Contractor had failed to complete the Works under PART 3.

[71] None of this, of course, matters in terms of the contractual relationship between the Authority and the Contractor (REAL2) under the Project Agreement itself. It only begins to assume any importance when, as here, the Contractor (REAL2) subcontracts the work under the Project Agreement to more than one sub-contractor. It then becomes essential to identify which parts of the Contractor's obligations under the Project Agreement are "allocated" to which sub-contract.

[72] The preamble to the Main Contract makes it clear that the subject matter of that contract is "the design and construction fitting out completion and commissioning of new school buildings and associated infrastructure and the refurbishment of existing schools buildings and other works". Those are said to be the Works more particularly described in the Employer's Requirements, identified in Part 3 of the Schedule to the Main Contract as Part 1 of Schedule Part 2 to the Project Agreement. In my view it is plain that this is intended to include within the Main Contract only the works covered by PART 3 of the Project Agreement, since it is under reference to PART 3 of the Project Agreement that the obligations in Part 1 of Schedule Part 2 (Authority's Requirements) arise. It is true that, in PART 3 of the Project Agreement, the obligation on the Contractor is limited to carrying out that part of the Authority's Requirements which relate to the design and construction of the Works, and that this limitation on the scope of the work covered by PART 3 is not repeated in terms in the Main Contract. Nonetheless, the Main Contract makes it clear in clause 10 that the obligation placed upon the defenders, as the Contractor under the Main Contract, is to achieve Service Availability by the target date, and Service Availability is achieved when the Service Availability Requirements as set out in Schedule Part 5 of the Project Agreement are met. In other words, subject to a residual obligation to carry out the Snagging Works (which is dealt with comprehensively in clause 21.8 of the Main Contract), the obligation of the Contractor under the Main Contract is satisfied when the design and construction stage of the Works encompassed within PART 3 of the Project Agreement is completed and an Acceptance Certificate is issued.

[73] In those circumstances, any action or inaction by the defenders as Contractors under the Main Contract can only have any direct effect on the position of REAL2 as Contractor under the Project Agreement insofar as it affects the performance by REAL2 of its obligations under the Project Agreement in respect of the design and construction part of the project. It is, in my view, difficult to see how any failure by the defenders as Contractors under the Main Contract can have any direct bearing upon the liability of REAL2 to the Authority under PART 4 of the Project Agreement. In particular, it is difficult to see how any failures on the part of the defenders in the design and construction part of the project, as Contractors under the Main Contract, can result directly in REAL2 suffering Availability or Performance Deductions, since those Deductions relate to failures in the provision of the Operational Services under PART 4 of the Project Agreement.

[74] If there are failures in the provision of the Operational Services which give rise to the possibility of Availability or Performance Deductions, these are likely to be the result of failures by the FM Contractor, who was (I assume) the subcontractor in respect of the provision of those Services. That is not to say that the failures by the FM Contractor may not themselves be caused by some failure on the part of the defenders in terms of the Main Contract - and I shall return to this issue later in this Opinion - but in the first instance at least the natural course would be for deductions made by the Authority under the Project Agreement to be passed down through the FM Contract and not through the Main Contract.

[75] A number of clauses in the Main Contract were relied on by Mr Borland in the course of his argument. He pointed out that clause 10.1.2 required the defenders to carry out the Works so that they fully complied with the Employer's Requirements (i.e. the Authority's Requirements). In respect of the project tables, that does not go any further than requiring the defenders to furnish project tables in accordance with the requirements of the Project Agreement. In so far as there was a failure in that respect they will be liable for that failure - in the present case that liability is to make good the failure in accordance with the provisions dealing with Snagging Items. But that does not, in my opinion, make the defenders liable to have Availability or Performance Deductions passed down to them when those Deductions are triggered not by that failure but by the Availability and Performance Failures under PART 4 of the Project Agreement.

[76] Mr Borland also relied on clause 7 of the Main Contract. Clause 7.3 provides that the defenders shall not act or fail to act where that would give rise to a breach by REAL2 of its obligations under the Project Agreement. This does not assist the defenders in showing that Deductions arising from an Availability or Performance Failure can properly be passed down to them. Clause 7.5 provides that if the defenders cause REAL2 to be in breach of the Project Agreement, then the defenders will indemnify REAL2 against inter alia any Deductions incurred by REAL2 under the Project Agreement. This at least addresses the question of Deductions, but it does not help on the question of causation. REAL2's failure to supply the project tables to the required specification and in time, albeit caused by the defenders (and in turn by the pursuers), is not the Availability or Performance Failure which gives rise to Deductions being applied against it. Whilst it might be possible to argue - and I express no opinion on the merits of such an argument - that the failure to supply the tables in accordance with the agreed specification caused a failure by REAL2 to meet the Availability and Performance Standards, and therefore entitled the defenders to say that they had caused REAL2 to act in breach of the Project Agreement in such a way that it suffered Availability or Performance Deductions, no such case is advanced. If such a case were to be advanced, there would need to be averments of fact in support of it, and no such averments are made by the defenders. In those circumstances, the defenders do not aver a relevant case that they are required to indemnify REAL2 against such Deductions in terms of clause 3.7.

[77] Clause 21 of the Main Contract deals with the question of an Acceptance Certificate in the same way as this question is dealt with in the Project Agreement. Thus clause 21.5.2 provides that the issue of an Acceptance Certificate and the identification of Snagging Works "shall not relieve the [defenders] of liability for Deductions or Availability Deductions under this Agreement ...". Ms Patterson made the point that there is no liability for Deductions "under this Agreement", i.e. under the Main Contract. To my mind, this is too literal a reading of the clause. However, the terms of clause 21.5.2 are not apt to create a liability for Deductions where such a liability does not otherwise exist. I have already explained why, in my opinion, the failures in the provision of the project tables do not trigger a liability for Deductions. Clause 21.5.2 does not, therefore, assist the defenders' argument.

[78] In terms of clause 22.6 of the Main Contract, the Contractor (the defenders) is required to indemnify the Employer (REAL2) against all Deductions suffered or incurred by it as a consequence of Unavailability arising in the Services by virtue of the Contractor rectifying any Snagging Matters. This too was relied on by Mr Borland. I do not think that it assists his arguments. It contemplates that the carrying out of the Snagging Works may result, for the period of the work, in certain of the Services being interrupted and Unavailability arising. But, on the averments in the pleadings, this is not what the claim is about. It is not suggested that the Availability Deductions have been applied by the Authority because of Unavailability arising out of work being done to complete the Snagging Works. Rather, it is suggested that the non-provision of compliant project tables itself triggers the Deductions. The wording of clause 22.6 tends to suggest that the non-provision of compliant tables is not regarded of itself as giving rise to a situation of Unavailability, with the consequent application of Availability Deductions; the Unavailability and the application of Availability Deductions only arises, if at all, from the carrying out of the outstanding work.

[79] Mr Borland also placed reliance on clause 29 of the Main Contract. Its terms are set out in full in para.[32] above. There is clearly an error in the first line or two: the word "if" should be inserted either at the beginning or after the first reference to "Services Availability Date", with commas added as necessary. The effect of the first part of the clause is that if, after (and notwithstanding) commencement of the Services, any Project Facility becomes Unavailable and the Employer (REAL2) suffers Deductions or Availability Deductions,

"and such Unavailability was caused by or was attributed to any defect, fault or omission in the Works"

then the Contractor (the defenders) must pay or allow to the Employer (REAL2) liquidated damages (or "Unavailability Damages") in the like amount. This clause again brings in the possibility that, although the failure in the initial provision of the project tables is not in itself an Availability or Performance Failure which triggers the application of Deductions, nonetheless it may cause such an Availability or Performance Failure by REAL2 (or by REAL2's sub-contractor for the provision of the Services). I emphasise the words "the possibility". It is not obvious that a failure in the initial provision of the project tables will necessarily lead to such Availability or Performance Failures or the application of Deductions. But it may do so. In those circumstances, as I have already made clear in respect of clause 3.7 (see para.[76] above), the defenders would need to plead a relevant case on causation and make all necessary averments of fact in support of that case. There are no such averments at present, and on that basis the defenders have not averred a relevant case in terms of clause 22.8.

[80] I need say little at this stage about the Sub-Contracts between the Defenders and the Pursuers. The ambit of the Sub-Contracts can obviously be no more extensive than that of the Main Contract. In other words, a failure by the pursuers under one of the Sub-Contracts will give rise to a failure of the defenders under the Main Contract and, in turn, a failure of REAL2 under PART 3 of the Project Agreement. But it will not result directly in any entitlement on the part of the Authority to effect Availability or Performance Deductions, since that right arises, if at all, from a failure in respect of the Availability or Performance Requirements under PART 4, which Requirements form no part of the package of obligations subcontracted to the defenders under the Main Contract and to the pursuers under the Sub-Contracts. In those circumstances I do not propose to consider in detail each clause relied upon in the Sub-Contracts. The defenders get no assistance from them, both because the pursuers' failures in respect of the provision of the project tables are not failures which translate into Availability or Performance Failures under either the Main Contract or the Project Agreement, and because the defenders have not pled a case that those failures by the pursuers caused the sub-contractor (presumably the FM Contractor) responsible for the provision of the Services covered by PART 4 of the Project Agreement to be in breach of the Availability or Performance Requirements.

[81] In light of the above, I turn to consider the three "routes" suggested by Mr Borland (see para [52]). The first route began by referring to clause 10.1 of the Project Agreement, in terms of which REAL2 were required to achieve Service Availability and to satisfy the Service Availability Requirements in Schedule Part 5. This led to the obligation to supply the loose furniture in accordance with the Data Sheets. I accept the first stage of this analysis, namely that the first route points to an obligation on REAL2 to provide the loose furniture, including the project tables, in accordance with the Data Sheets, and that that obligation on REAL2 passes down the contractual chain to the defenders under the Main Contract and to the pursuers under the Sub-Contracts for each school. But this is as far as it goes. If there is a breach, it will sound in damages or, as in this case, an obligation to deal with the default as a Snagging Item. But there is no direct link, so it seems to me, between, on the one hand, the obligation to supply the project tables in accordance with a particular specification, and, on the other, the right of the Authority to make Availability and Performance Deductions from sums due to REAL2 under the Project Agreement (and the corresponding right of REAL2 to pass on such Deductions down the contractual chain to the defenders, and for the defenders to pass them on down to the pursuers). The right to make Deductions arises only from a failure under PART 4 of the Project Agreement to comply with the Availability and Performance Requirements, which Requirements only come into being once the design and construction stage has been completed. The supply of the project tables is part of the design and construction stage; and a failure to supply the project tables is a failure which has whatever effect it has before the Availability and Performance Requirements come into play.

[82] Mr Borland's second and third routes do not, in my opinion, take one any further. They too lead to the conclusion that REAL2, and, in turn, those to whom it subcontracted those obligations, were under an obligation to provide the project tables in accordance with the Authority's Requirements. But they do not come any closer to establishing that the Authority is entitled to make Availability or Performance Deductions from REAL2 because of a failure in respect of that obligation. The entitlement to make Deductions stems from the failure by REAL2 to meet the Availability and Performance Requirements. The obligation to meet those Requirements is an obligation under PART 4 of the Project Agreement. In terms of the contractual chain, REAL2 subcontracted that obligation to the FM Contractor under the FM Contract, not to the defenders. The contractual chain does not, therefore, result in that obligation being placed upon the defenders under the Main Contract or upon the pursuers under the Sub-Contracts.

[83] Again, and for the avoidance of doubt, I emphasise that it might be possible for the defenders to make a case to the effect that the failure in the supply of the project tables caused the FM Contractor (and therefore REAL2) to be in default of the Availability and Performance Deductions, thereby triggering the application of Deductions. But that is not a case that they have sought to make so far.

[84] I turn finally to the Interface Agreement. I have already noted that the case based on the Interface Agreement involves the defenders making averments of fact which are inconsistent with their primary case. The primary case is that the Deductions applied by the authority against REAL2 were passed down the contractual chain by REAL2 against the defenders, and were sought to be passed on by the defenders against the pursuers. In para.6.3 of the further specification document (No.21 of Process), the defenders aver that the Project Company (REAL2) has applied the Deductions not against the defenders but against the FM Contractor; and that it is the FM Contractor which has claimed against the defenders. This is an inconsistency which is fundamental to the defenders' position; and it must be within their power to clarify. If the claim by this route were otherwise relevant, I would only allow it to proceed on the basis that the defenders make their position clear.

[85] However, even assuming that the defenders can make out a factual case that the Project Company (REAL2) have applied the Deductions against the FM Contractor and that the FM Contractor has claimed against the defenders, it does not seem to me that they have yet articulated a relevant case by this route. The purpose of the Interface Agreement is clear. Both the defenders and RFML are sub-contractors to REAL2. If either of them is in breach of their obligations under their respective sub-contracts (the Main Contract and the FM Contract), that may result in REAL2 itself incurring a liability to the Authority and/or the Authority being entitled to apply Deductions against it: see clauses 3.1 and 3.2. In such circumstances, REAL2 is entitled to claim a like amount from the defenders or RFML "as appropriate": see clause 3.3.1. That must mean that REAL2 may claim a like amount from whichever party, by its breach of sub-contract, has caused it to incur that liability or deduction. Mr Borland suggested that the words "as appropriate" left it open to REAL2 to pass on the liability or deduction to either of its two sub-contractors as it thought fit. I cannot accept this. It would make no commercial sense. Nor would it give any effect to the concept of appropriateness to which the language of the clause refers. It is impossible to see how it could be appropriate, in circumstances where it is the breach by sub-contractor A that has caused REAL2 to incur a liability, for REAL2 to pass that liability to sub-contractor B.

[86] Clause 4 then deals with the liability of the defenders and RFML inter se. Again, the purpose is clear. If RFML is in breach of the FM Contract, and thereby delays the completion of the construction work, or causes the defenders to be in breach of the Main Contract (the Building Contract), then RFML is obliged to make payment to the defenders in the amount stipulated in clause 7 (which contains detailed provisions for assessing the loss suffered by the defenders which RFML should pay in such circumstances): see clause 4.1. Similarly, if the defenders are in breach of the Main Contract, and that causes RFML inter alia to suffer Deductions under the FM Contract, then the defenders are obliged to make the payment to RFML stipulated in clause 7. In terms of clause 7.1.1, that means that the defenders would have to pay RFML the amount of the Deductions applied against it which are not attributable to a failure of RFML to mitigate the consequences of the defenders' breach. I have emphasised the word "causes". The wording used in clause 4.2 of the Interface Agreement is:

"If the Building Contractor [the defenders] is in breach of any of its obligations under the Building Contract [the Main Contract] and as a consequence of that breach and the operation of this agreement: ..." (emphasis added)

Mr Borland suggested that the reference to the "operation of this agreement" meant that it was not necessary for him to prove that the defenders' failures in respect of the provision of the project tables had caused RFML to suffer Deductions under the FM Contract. That is not correct. That wording is simply a reference back to the fact that RFML may suffer the Deductions as a result of the operation of clause 3.3.1 of the Interface Agreement (see para.[85] above) if its breach has caused REAL2 to have Deductions applied against it. It may be unnecessary to say this, and it may be that the FM Contract itself makes provision for such a consequence in any event, but that does not render nugatory the specific requirement that the suffering of a Deduction under the FM Contract must be "as a consequence" of the defenders' breach.

[87] The defenders have not sought to plead a case to the effect that the defenders' failures have caused RFML to be in breach of the FM Contract and to suffer Deductions as a result. I do not know whether they will be able to make out such a case.

Disposal

[88] In my opinion, for the reasons expressed above, the defenders have not pled a relevant case for being able to pass on to the pursuers any Deductions which may have been applied against them. The consequence, on the pleadings as they presently stand, is that I would be minded to accede to Ms Patterson's motion to delete the passages identified in para.[48] above. However, I was asked in the course of the debate to put the case out By Order before pronouncing an interlocutor to that effect, and I shall do so.