EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
Lord Carloway Lord Clarke Lord Emslie	[2010] CSIH 50 XA120/09 OPINION OF THE COURT delivered by LORD CARLOWAY in Appeal from the Sheriffdom of South Strathclyde Dumfries and Galloway at Ayr in the cause WATERTITE LTD., Pursuers and Respondents; against NORTH LANARKSHIRE COUNCIL, Defenders and Appellants: _______

Pursuers and Respondents: Di Rollo QC, S A Bell; Yuill & Kyle, Glasgow

Defenders and Appellants; J A Brown; Campbell Smith WS LLP

16 June 2010

1. The Contract

[1] The pursuers are water management consultants. On 1 June 2005, they entered into a contract with the defenders in relation to the sums which the defenders paid Scottish Water for supplies to their many and varied premises. The object was that the pursuers ("the Company") would identify savings which could be made and would ensure that the defenders ("the Client") were being properly billed. The contract was to run from 1 June 2005 to 31 May 2007, after which it could be terminated upon three months notice (clause 2.1). The contract works commenced with an "Initial Audit", whereby the defenders provided the pursuers with a detailed list of their accounts. The pursuers, having analysed those accounts, compiled "The Initial Benchmark Report", which was to be "used to demonstrate future savings and or refunds...". The Benchmark produced an annual "Baseline" (definition clause 1.1) of the defenders' expenditure. The Baseline was to be absolute and would not alter with variations in utility costs (clause 3.2). Essentially, therefore, what was created was an account of the situation as it existed at the commencement of the contract.

[2] Clause 4 is headed "Responsibilities of the Client". Apart from paying a flat rate of £35.00 per account, this states the Client's responsibility as:

"4.7 Agrees to pay the Company 35% per account of all confirmed ongoing savings, refunds and participation in a share of savings for the agreed contract period. Participation will commence once a saving has been agreed and or demonstrated by means of notification from the supplier and reflected against the agreed "The Initial Benchmark Report".

This clause appears to be setting out the defenders' obligation to pay the pursuers. It refers to three different areas: (i) "confirmed ongoing savings"; (ii) "refunds" and (iii) "participation in a share of savings for the agreed contract period". In order to understand what each refers to, it is necessary to look at certain definitions (clause 1.1). "Confirmed savings" consist of:

"The difference between the agreed Baseline and the actual annual cost, as agreed by the Client and the Company".

"Ongoing savings" are "Savings obtained that will continue annually, for instance a cost saving resulting from a consumption reduction". These are distinguished from "One off savings", which are "Savings obtained that can only be achieved once, for instance a refund". There is no separate definition of "confirmed ongoing savings". "Actual Annual Cost" is:

"The gross annual (£) expenditure on water for the Clients portfolio".

[3] Clause 3 is headed "Responsibilities and Service Levels of the Company". This clause also refers to the £35 per account charge (3.13) and continues:

"3.14 Participation in share of Savings and Refunds

3.14.1 35% of gross annual savings, Company will Invoice Client 35% of all confirmed savings and will not participate in any savings until it can be demonstrated on either a suppliers invoice, a form of notification from the supplier confirming a tariff adjustment, and or the installation of monitoring equipment to confirm a reduction in charges and reflected against "The Initial Benchmark Report".

3.14.2 35% Refunds per saving - Company will invoice Client 35% of all refunds negotiated and agreed with the supplier. Company will provide the Client with confirmation of a refund by either a cheque from the supplier for the full amount of the refund and or documentation confirming that a credit has been made to the account. This will also be reflected against "The Initial Benchmark Report".

3.15 Company will keep a log of implementation dates of savings and forward these to Client monthly, so that Client can update their records accordingly and monitor ongoing savings.

3.16 Confirmed savings - Company will submit their invoices monthly for all confirmed savings (including refunds) to Client. Client to confirm acceptance prior to authorisation of payment. Individual savings to be annually reconciled on or soon after the 1^st June 2006 against individual baselines. Overall annual saving to be summed from Individual savings/losses for comparison against target Baseline agreed from initial Baseline value".

2. The Sheriff Court Action

[4] The pursuers raised an action for payment against the defenders in Airdrie Sheriff Court. The issue on the pleadings before the Sheriff was a narrow one. The pursuers maintained, as was indeed the case, that they had identified a large number of errors in the billing of the defenders by Scottish Water. Some premises had been billed on both a measured and an unmeasured basis for years; Scottish Water invoicing two different departments in the defenders' organisation. This discovery resulted in substantial refunds. However, the pursuers maintained (Cond 4) that:

"In addition, the Pursuers are entitled to 35% of the ongoing savings enjoyed by the Defenders during the contract term by virtue of the closure of duplicate accounts".

The action sought payment of these amounts. The defenders countered (Ans 4) as follows:

"Refunds paid by Scottish Water resulting from the identification and closure of duplicate accounts are properly classed as one off savings within the meaning of the Agreement. On a proper construction of the Agreement the closure of such duplicate accounts cannot also give rise to an ongoing savings... The pursuers accordingly have no entitlement to payment in respect of ongoing savings".

The defence on the pleadings was therefore simply that there was no entitlement to payment for an ongoing saving, where a duplicate account had been cancelled, because it was properly classified as a "one off" saving only.

[5] The method adopted by the pursuers at the proof to prove their entitlement was to lead one of their directors in evidence to show that, in respect of certain specific premises, they had been able to identify duplicate accounts, which had then been cancelled. There was no counter to this approach. All that the defenders did was call a young employee who had been engaged to monitor water accounts from June 2006. In the event, in respect of the twelve individual premises selected, the Sheriff held that the pursuers had identified and proved ongoing savings within the two year contract period. In that context, ongoing savings, according to the Sheriff, included the situation where an unmeasured (or other) account had been cancelled and thus only one, measured, bill required to be paid in future years. The Sheriff calculated quantum of the ongoing savings by looking at the relative unmeasured invoices previously submitted for each of the premises (eg ff 14 - 23). In total, the pursuers had identified overcharging of around £1.6 million (ff 24). The proved ongoing savings for the twelve premises selected by the pursuers amounted to £121,440.34. Thirty five per cent of that figure, plus VAT, totals £49,942.34 (ff 25) and the Sheriff granted decree for that sum plus interest in his interlocutor dated 29 April 2009.

[6] However, during the course of submissions before him, the defenders submitted that, quite apart from the defence as it appeared on record, the pursuers had not proved their case. This argument was essentially that what the contract allowed the pursuers was not 35% of individual savings on particular accounts but only of the difference between the agreed baseline and the actual total annual costs. There had been no evidence of actual annual cost. Rather, the pursuers' case had assumed that, beyond the specific premises examined, all other things were equal. That was not necessarily so, since water consumption in some other premises might have increased. The Sheriff did not agree with this argument, holding that:

"[27]...paragraph 3.14 must be read with the section concerning the defenders' responsibilities under the agreement, namely paragraph 4.7. Although inelegantly phrased, the first phrase of the paragraph could not...be clearer. The defenders agree to pay the pursuers "35% per account of all confirmed ongoing savings, refunds and participation in a share of the savings for the agreed contract period". The responsibility is thus applicable to each account and for the agreed contract period, namely, the two year period ending on 31 May 2007. The responsibility to pay includes "confirmed ongoing savings". A commercially sensible interpretation of the contract requires one to look to the definition of "ongoing savings" in paragraph 1.1, namely savings obtained that will continue annually".

The Sheriff considered that the defenders' argument strained the language used and did not make commercial sense. He noted that the defenders' interpretation had not been put to the pursuers' director in cross-examination.

3. Submissions

[7] The defenders maintained the two lines of their argument which had been put before the Sheriff. First, on a proper construction of the contract, what the pursuers had sought did not amount to an "ongoing saving". Having regard to the definitions of the terms "one off saving" and "ongoing saving", no ongoing saving had been generated. Secondly, even if it had been, the pursuers had not proved their case by reference to the annual totals. What they had required to do was to prove the total level of all the accounts for the relevant annual period and ascertain the difference between that level and the agreed baseline figure. There was no failure to cross-examine the pursuers' director on this interpretation of the contract, since that interpretation was a matter of law for the Court to determine and not for the opinion of one of the parties.

[8] The pursuers maintained that the only issue properly before the Sheriff was whether the closure of the duplicate accounts gave rise to an ongoing saving. That was what he had been called upon to determine. There had been no foreshadowing in the pleadings of the secondary argument concerning a comparison of total annual figures. But, in that regard, the defenders did not maintain that the carrying out of that exercise would have resulted in a different figure being produced. Had that been maintained, the point ought to have been put during the evidence. The point taken by the defenders was a theoretical one only. The obligation under the contract was, in any event, to pay 35% per account. The Sheriff reached what was the only realistic decision on the evidence.

4. Decision

[9] The phraseology in the contract, and in particular the apparent partial duplication of provisions in clauses 4.7 and 3.14, makes its terms difficult to interpret, at least by giving the words their ordinary or natural meaning within the context of the contract as a whole. On the one hand, as the pursuers contend and the Sheriff accepted, the use of the words "per account" in clause 4.7 supports the idea that each supply account was to be treated separately and that 35% was due therefore in respect of any savings achieved in relation to each account. On the other hand, there is force in the defenders' submission, made at the close of the proof and before this Court, that the definition of "Confirmed savings", which refers to "Actual Annual Cost" (i.e."gross annual (£) expenditure for the Clients portfolio"), suggests that what was to be payable ultimately involved a calculation of gross annual expenditure, over the whole portfolio, less the Baseline figures.

[10] Whichever is the correct interpretation, the reality is that the parties joined issue on record not on that matter but on whether the pursuers were entitled to 35% of what they contended were "ongoing savings" created by virtue of the cessation of duplicate accounts. The defenders maintained that these were "One off savings" created once the error had been spotted and any refund paid. That was the issue identified in the written pleadings and the one which, therefore, the pursuers directed themselves to at the proof. The Court agrees with the pursuers' interpretation that if, for example, in the first year of the contract duplicate accounts were discontinued and refunds paid, that would potentially also create "ongoing savings" in the following year, since the duplicate accounts would not be rendered in that year either. The defenders' contention in that regard is accordingly rejected.

[11] The manner in which the pursuers set about proving the level of ongoing savings was to take their director to those accounts where duplication had been identified. Standing the state of the record, and the absence of any contention that some other method ought to have been employed, that was a legitimate exercise. It would bring out the correct level of savings, whichever of the two constructions of the contractual terms were employed, provided that all other things were equal (i.e. that there had been no action, of the defenders or otherwise, which had increased the level of invoices on other accounts). The defenders did not contend in the course of the appeal, or at any time during the course of the proof, that, if there were to be a calculation of their gross annual expenditure across the portfolio, from which there was deducted the total of the baseline, this would produce a different figure from that which the pursuers had sought to attain by using specific accounts rather than the totals. In these circumstances, the construction contended for by the defenders may, as the pursuers submitted, have only a theoretical value.

[12] It is no doubt correct to say that the defenders did not require to put a particular construction of the contract to the pursuers' director in cross-examination. But if the defenders were to contend that the correct construction brought out a different figure from that which the pursuers pled on record and sought to establish at the proof, this ought to have been at least averred as a matter of fair notice. Such notice would have enabled the pursuers to refute any contention that the defenders' construction created a material difference in the ultimate sum due by the simple expedient of putting the issue of other accounts to their director. Alternatively, they may have sought to demonstrate that the manner of billing adopted by the parties in reliance of the contractual terms was that for which they contended.

[13] In short, the Court has no reason to suppose that the defenders' construction, even if it were the correct one, would have made any material difference to the pursuers' claim. In those circumstances, it will refuse this appeal and adhere to the interlocutor of the Sheriff, thereby affirming also his findings-in-fact. It was not disputed that the expenses of the action and the appeal should follow success and these will therefore be awarded to the pursuers.