Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2012] CSOH 174
	OPINION OF LORD WOOLMAN in the Commercial Action GREATER GLASGOW & CLYDE HEALTH BOARD Pursuers; against GHI CONTRACTS LIMITED Defenders: ________________

Pursuers: Richardson; Pinsent Masons LLP

Defenders: Mure QC; Maclay Murray & Spens LLP

14 November 2012

Introduction

[1] In 2007, Greater Glasgow Health Board ("GGHB") sought tenders for works to be carried out at the Royal Alexandria Hospital, Paisley ("RAH"). The works involved the refurbishment of the maternity unit. GHI Contracts Limited ("GHI") tendered £3,846,710.64 for the works. On 4 December 2007, GGHB accepted the tender and appointed GHI as the main contractor. There was the usual extensive documentation for a contract of this nature and scope. It was based upon the Standard Building Contract With Quantities for use in Scotland, 2005 edition (Revised May 2006) and appendices I - IV, together with amendment 1: April 2007 ("the Contract").

[2] The labour ward, theatres and high dependency unit are located on the first floor level. Most of the works were to be carried out there. But they were also necessary in other parts of the building, including decant facilities on the third floor level. GGHB wished to ensure the continuity of obstetric services. The sequencing of the works was therefore important. There were a high number of variations during the course of the works. The contract period was 43 weeks, but practical completion only took place much later, in August 2009.

[3] At the conclusion of the works, GHI lodged two applications for payment. Application No. 19 sought payment of £5,968,232.70 for the period ending 28 July 2009. On 27 October 2009 GGHB issued an interim certificate for £4,572,701.66. GHI did not accept the certified sum and referred the claim for adjudication. Mr L C H Bunton of Bunton Consulting Partnership acted as the adjudicator. In December 2009, he decided that GHI was not entitled to any further sums in respect of application No. 19.

[4] Application No. 21 related to the period ending 5 March 2010. GHI sought payment of £6,220,777.46. On 26 April 2010 GGHB issued an interim certificate for £4,746,134.01. Again GHI referred the matter for adjudication. In his Award dated 10 September 2010, Mr Bunton determined that GGHB should pay GHI £544,943.64 plus VAT, together with interest of £37,821.92 ("the Award"). Subsequently GGHB satisfied the Award by paying those sums to GHI.

[5] Neither party agrees with the Award. GGHB argues that it is an overvaluation, while GHI maintains that it is an undervaluation. Hence this action. GGHB seeks to recover most of the sum it has already paid to GHI. The summons proceeds on the ground of unjust enrichment. For present purposes, the arithmetic is not important and it is sufficient to notice that GGHB concludes for payment of £776,723.61. In its counterclaim for £277,312.53, GHI seeks payment of higher sums than those awarded by Mr Bunton. It also seeks payment for (a) re-measurement of sanitary ware, and (b) overtime worked to mitigate delay. Neither of these items was included in application 21.

[6] The respective valuations of the heads of claim are as follows:

Head of Claim	Award	GGHB	GHI
Soil Vent Pipes, Building, M & E	£200,800.60	£91,355.77	£207,077.49
M & E Coordinator	£15,500.00	£0	£46,125.00
Mark-up on M & E variations	£110,146.03	£40,521.96	£110,146.03
Isolation Works	£43,747.26	£0.00	£32,263.86
Stainless Steel Works/Piping	£57,101.00	£18,857.64	£66,797.62
Extension of Time	42 wks	31 wks	43 wks 1 day
Additional Preliminaries	£138,222.00	£0.00	£153.509.88
M & E Extension of Time	£146,319.85	£0.00	£190,069.49
Additional Staff	£99,940.00	£0.00	£120,850.19
Re-measurement of Sanitary Ware	-	-	£52,154.11
Overtime to mitigate Delay	-	-	£87,914.75

There are four short points to make at this point. First, both in the table and throughout this opinion, I use "M & E" as shorthand for "mechanical and electrical". Secondly, all items in the table are listed exclusive of VAT. Thirdly, the extension of time period is included as it is the basis for certain heads of claim. Fourthly, during the hearing I granted Mr Mure's unopposed motion to amend the figure for additional preliminaries from £159,392.88 to £153,509.88.

The Scope of the Dispute

The Pleadings

[7] The matter came before me on the procedure roll at the instance of GGHB. Its note of argument contended that GHI's pleadings were irrelevant, inspecific, or both. At the outset of the hearing, Mr Mure moved to amend GHI's pleadings in terms of a minute of amendment that he lodged at the bar. It referred to several documents that (he said) demonstrated how GHI calculated several of the disputed heads of counterclaim. They had been lodged as tabs 10, 12, 13, 14 and 15 of the joint bundle of documents. Mr Richardson did not oppose the motion to amend, but invited me to reserve both GGHB's right to revise its own pleadings in response and the question of expenses. I allowed the amendment on that basis.

GHI's Position

[8] GHI adopts a straightforward position. It seeks a proof before answer. Mr Mure submitted that the claims require to be placed in context. At this stage the court does not have full information. It is being asked to proceed on the basis of the abbreviated pleadings suitable for a commercial action. Further, the joint bundle contains only a fraction of the relevant documents. If the matter is remitted to proof, the court will have the benefit of fuller material, including detailed witness statements and oral testimony. Mr Mure argued that it is important for the court to know what the professionals involved were thinking, doing and communicating at any given point during the course of the Contract. Absent that evidence, there is a limit to what the court can understand about the project.

GGHB's Position

[9] Mr Richardson accepted that the late minute of amendment cured certain points of specification. He indicated that GGHB might not have sought a debate if it had been lodged at an earlier stage. He also accepted that a proof would be required on a number of heads of claim. He insisted, however, that GHI's pleadings were deficient in a number of material respects.

The Effect of Adjudication

[10] Journalism is said to be the first rough draft of history. In my view, adjudication can be viewed in a similar light. It is only a provisional assessment. An adjudicator's award only binds the parties until the dispute is finally determined. That can occur through litigation, arbitration or agreement between the parties: Scheme for Construction Contracts (Scotland) Regulations 1998, Schedule Pt.1 para. 23(2). In this case, the adjudication was an important event for the parties. But it has no bearing on the issues in this litigation, other than to provide the basis for the arithmetic in calculating the various sums alleged to be due.

[11] I accept that the court should be careful about dealing with matters as a "desk top" exercise. But relevancy depends solely on the pleadings. Most of the disputed claims made by GHI relate to claims for loss and expense or variations. In some instances, they are pleaded in the alternative. The main thrust of Mr Richardson's submissions was that GHI's averments did not support its first plea-in-law, which states that the counterclaim is brought "under and in terms of the contract". He maintained that, as framed, the disputed elements did not comply with the terms of the Contract. The pleadings in respect of these items were therefore irrelevant and should not be remitted to probation.

[12] At proof the question of onus is not affected by the adjudicator's decision: City Inn Ltd v Shepherd Construction Ltd 2002 SLT 781, 794L per Lord Macfadyen. At debate GHI's pleadings must of course be taken pro veritate. But thinking about the burden of proof is not a wholly superfluous exercise. It assists in concentrating on the central question of relevancy: if GHI establishes all the matters it offers to prove, would it be entitled to succeed in the counterclaim?

The Contract

Loss and Expense

[13] Claims for loss and expense are governed by clause 4.23 of the Contract:

"If in the execution of this Contract the Contractor incurs or is likely to incur direct loss and/or expense for which he would not be reimbursed by a payment under any other provision in these Conditions due to a deferment of giving possession of the site or relevant part of it under clause 2.5 or because the regular progress of the Works or of any part of them has been or is likely to be materially affected by any of the Relevant Matters, the Contractor may make written application to the ... Contract Administrator. If the Contractor makes such application, ... then, if and as soon as the ... Contract Administrator is of the opinion that the regular progress has been or is likely to be materially affected as stated in the application or that direct loss and/or expense has been or is likely to be incurred due to such deferment, the ... Contract Administrator shall from time to time thereafter ascertain, or instruct the Quantity Surveyor to ascertain, the amount of the loss and/or expense which has been or is being incurred; provided always that the Contractor shall:

.1 make his application as soon as it has become, or should reasonably have become, apparent to him that the regular progress has been or is likely to be affected;

.2 in support of his application submit to the ... Contract Administrator upon request such information as should reasonably enable the ... Contract Administrator to form an opinion; and

.3 upon request submit to the ... Contract Administrator or to the Quantity Surveyor such details of the loss and/or expense as are reasonably necessary for such ascertainment."

[14] Clauses of this type have been a familiar feature of the JCT family of contracts for many years. At their heart is the requirement that the contractor makes an application. It is a condition precedent to a claim: London Borough of Merton v Stanley Leach (1985) 32 BLR 51, 95-6 per Vinelott J. He continued:

"The contractor must act reasonably: his application must be framed with sufficient particularity to enable the architect to do what is required to do. He must make his application within a reasonable time: it must not be made so late that, for instance, the architect can no longer form a competent opinion on the matter on which he is required to form an opinion or satisfy himself that the contractor has suffered the loss or expense claimed. But in considering whether the contractor has acted reasonably and with reasonable expedition it must be borne in mind that the architect is not a stranger to the work and may in some cases have a very detailed knowledge of the progress of the work and other contractor's planning. Moreover, it is always open to the architect to call for further information either before or in the course of investigating a claim. It is possible to imagine circumstances where the briefest and most uninformative notification of a claim would suffice: a case, for instance, where the architect was well aware of the contractor's plans and of a delay in progress caused by a requirement that works be opened up for inspection the mirror dispute whether the contractor had suffered direct loss or expense in consequence of the delay had already emerged. In such case the contractor might give a purely formal notice solely in order to ensure that the issue would in due course be determined by an arbitrator when the discretion would be exercised by the arbitrator in the place of the architect." (at pp 97-8)

Akenhead J followed that approach in WW Gear Construction Ltd v McGee Group Ltd (2010) 131 Con LR 63, at p73.

Variations

[15] Clause 5 is a lengthy provision containing ten sub-clauses. I shall narrate the ones that are relevant for the purposes of this case.

Clause 5.2.1:

"the value of

.1 all Variations required by an Instruction of the ... Contract Administrator or subsequently sanctioned by him in writing ... shall be such amount as it is agreed by the Employer and the Contractor or, where not agreed, shall ... be valued by the quantity surveyor ... in accordance with clauses 5.6 to 5.10 ('the Valuation Rules')."

Clause 5.6 (Measurable Work):

".1 To the extent that a Valuation relates to the execution of additional of substituted work which can properly be valued by measurement ... such work shall be measured and shall be valued in accordance with the following rules:

.1 where the additional of substituted work is of similar character to, is executed under similar conditions as, and does not significantly change the quantity of, work set out in the Contract Bills, the rates and prices for the work so set out shall determine the valuation;

.2 where the additional of substituted work is of similar character to work set out in the Contract Bills, but is not executed under similar conditions thereto and/or significantly changes its quantity, the rates and prices for the work so set out shall be the basis for determining the valuation and the Valuation shall include a fair allowance for such differences in conditions and/or quantity;

.3 In any valuation of work under Clauses 5.6.1 and 5.6.2

measurement shall be in accordance with the same principles as those governing the preparations of the Contract Bills ...

.3 allowance, where appropriate, shall be made for any addition to or reduction of preliminary items of the type referred to in the Standard Method of Measurement, provided that no such allowance shall be made in respect of compliance with an Architect/Contract Administrator's instruction for the expenditure of a Provisional Sum for defined work."

Clause 5.9:

"If as a result of:

.1 compliance with any instruction requiring a variation;

.2 compliance with any instruction as to the expenditure of a Provisional Sum for undefined work;

.3 compliance with any instruction as to the expenditure of a Provisional Sum for defined work, to the extent that the instruction for the work differs from the description given for such work in the Contract Bills; or

.4 the execution of work for which an approximate quantity is included in the Contract Bills, to the extent that the quantity is more or less than the quantity described to that work in the Contract Bills,

there is a substantial change in the conditions under which any other work is executed (including CDP Works), then such work shall be treated as if it had been the subject of an instruction requiring a Variation and shall be valued in accordance with the provisions of this section 5."

[16] It is also important to notice Clause 5.10.2. It prevents claims for loss and expense from being treated as variations:

"No allowance shall be made under the Valuation Rules for any effect upon the regular progress of the Works or of any part of them or for any other direct loss and/or expense for which the Contractor would be reimbursed by payment under any other provision in these Conditions."

The Disputed Elements

[17] Mr Richardson challenged six elements of GHI's counterclaim: (a) the appointment of an M & E coordinator, (b) the isolation works, (c) additional preliminaries, (d) M & E extension of time, (e) additional staff, and (f) overtime worked to mitigate delay. He grouped (c) (d) and (e) together, on the basis that the same considerations applied to each of them.

(a) M & E Coordinator

[18] In this connection GHI avers:

"No provision was made in the tender documents for the defender to provide such a coordinator. As a result of the variations instructed on behalf of the pursuers the amount of M & E supervision required in relation to the works as a whole was far greater than provided for in the Bill of Quantities. The variations founded upon by the defender are listed in the schedule at Joint Bundle tab 12. As a result, it was necessary for the defenders to engage an M & E coordinator in respect of both the work contained in the variations and the work forming part of tender documents. The defenders are entitled to payment in respect of the engagement of the M & E coordinator. The valuation of the work required in this regard under and by virtue of the said variations, is valued under cl. 5.6.1.3 in the calculation at Joint Bundle 13 in the sum of £46,125. It is not possible to allocate this required work between the many individual variations listed in the Schedule at Joint bundle Tab 12. Reference is made to clauses 5.1.1.1, 5.6 and 5.9 of the Contract."

[19] The document at tab 12 is headed "M & E Variations demonstrating the increase in M & E coordination". It is sixteen pages long and consists of a table of the variations founded upon. The document at tab 13 is an invoice for £46,125, which is said to represent the cost of the M & E Coordinator working half time from 6 April 2008 to 16 February 2009. It shows his basic wage, bonus, car allowance and national insurance. Mr Mure submitted that there was a clear connection between the two documents. Taken together, they give GGHB fair notice of what is sought by GHI. To require GHI to recreate the valuation exercise in respect of each item would not assist the court and should not be required in terms of the contract provisions.

[20] Mr Richardson argued that it was illegitimate for GHI to approach the matter in this way. He suggested that it had only done so because it had failed to make an appropriate application for loss and expense. But clause 5.10.2 precluded a claim being dressed up as a variation. He referred to Emden, Building Contracts, which explains the reason for such clauses as follows:

"To guard against fair valuations compensating a contractor beyond the loss caused by a variation, standard forms commonly incorporate a provision that valuation of variations should not include losses reimbursable under any other contract provisions such as rights to claim for loss and expense ..." [para. 455]

[22] From the provisions that I have quoted above, it is clear that there is a comprehensive contractual regime that relates to variations. Clause 5.6 itself is headed "The Valuation Rules". No doubt its aim is to facilitate the resolution of any dispute that may arise. That is why it stipulates how claims for variations are to be valued. A significant degree of precision is involved. In consequence each party should be readily able to assess a variation claim by testing it against the contract provisions. In my view, GHI required to identify each variation and specify what extra work that individual variation necessitated. It has failed to do so. The documents at tabs 12 and 13 adopt an approach that does not square with the Contract. GHI acknowledge that to be the case by stating: "It is not possible to allocate this required work between the many individual variations ..." In my opinion that concession is fatal. It demonstrates that GHI has departed from the provisions of clause 5.6. In my view, GHI is not entitled to rely on clause 5.9, as there is no specification of the content of the other work undertaken. In my view this head of claim is irrelevant

[23] In light of my decision, it is strictly unnecessary for me to consider further the question of the M & E coordinator. But in case I am wrong on this point, I believe that I should provide my opinion on another argument mounted by Mr Richardson. He invited me to exclude from probation a document dated 10 September 2007 and issued by Buro Happold, the M & E engineer ("BS003 Rev T2"). It states that "the main contractor shall allow for the employment of an engineering services coordinator to provide a full-time service on site for the duration of the contract."

[24] GHI founds upon it as evidence disclosing that it was always envisaged that an M & E coordinator was required. GHI only became aware of this document when it was produced in the course of the second adjudication. It accepts that BS003 Rev T2 does not form part of the Contract.

[25] Mr Richardson queried how a document that predated the Contract by three months could predict the need for an M & E coordinator. He said that would be "an astonishing act of prophecy". Accordingly it should be excluded from probation.

[26] In my view, however, if there had been an enquiry into the question of whether GHI was entitled to appoint an M & E coordinator, BS003 Rev T2 would have been an adminicle of evidence. Its weight (if any) could only be properly assessed in the context of a proof.

(b) Isolation Works

[27] Despite its heading, GHI avers that "this part of the claim does not relate to carrying out isolation works." Instead it concerns "work done in tracing of existing services within the hospital building which the contract required be isolated constituted variation to the scope of the Works for which the defenders are entitled to be paid."

[28] GHI accepts that the Contract imposed certain obligations upon it in this connection. Prior to tender, it was required to make a site visit to "ascertain the nature of the site, access to all local conditions and restrictions likely to affect the execution of the Works": Contract Bill A-preliminaries page A/4, Clause A12, item D 250. GHI contends, however, that it had (a) no design liability for the existing services; (b) no liability for identifying redundant services which were to be removed; and (c) no obligations in relation to services which were not underground.

[29] GHI also states that although its employees did make the appropriate site visit, problems subsequently developed for two reasons. First, the labelling of existing switches and cables was non-existent, inadequate, or incorrect. Secondly, the "as built" drawings and design information did not adequately show how the various cables related to services. Further, during the course of the works, GHI avers that it received oral instructions to identify the isolation works, to which GGHB did not object to the vouching that GHI presented in respect of the sums claimed during the period of the Contract.

[29] GGHB submits that the isolation works formed part of the Contract Works. It follows that no further payment is due to GHI. GGHB points out that GHI was obliged prior to tender and undertaking the works: (i) to ascertain the nature of the site and all local conditions and restrictions that were likely to affect the execution of the works; (ii) to examine all available drawings of the site and site services; and (iii) to carry out an examination and full (and if appropriate intrusive) survey of the site, buildings, structure and services affected by the works. GHI was then required to ensure that any existing utility services were identified and only redundant services removed. As well as Contract Bill A, GGHB relies on A510: "Identification: Before starting work, check and mark positions of names/services. Where positions are not shown on drawings obtaining relevant details from service authorities, statutory undertakers or other owners."

[30] In my view, this is a matter to be properly determined after evidence has been led. GHI's averments raise mixed questions of fact and law which make it unsuitable to determine at this stage. It will be necessary to hear evidence to determine the scope of the work that GHI had to carry out to determine the local conditions and restrictions likely to affect the execution of the works.

(c) (d) and (e) Additional Preliminaries, M & E Extension of Time, and Additional Staff

[31] Under these three heads, GHI claims payment to reflect time-related preliminaries, supervision, additional staff and for the extra costs incurred by its M & E sub-contractor (from whom it has already received a loss and expense claim). GHI state that these matters arise of out 700 variations instructed by GGHB, which increased the scope of the works by thirty per cent. GHI also relies upon the extra period taken for the contract works.

[32] In each of these three cases, GHI presents the claim as a variation under clause 5.6.3.3, which provides that "allowances where appropriate shall be made for any addition to or reduction of preliminary items ..." In the alternative, it makes a claim for loss and expense. GHI contends that its method of calculation is in accordance with the contractual provisions and that it was followed without difficulty during the course of the works. It relies on three documents to provide adequate specification for the claim.

[33] The first is a letter dated 1 March 2010 sent by GHI to the project consultants acting on behalf of GGHB. In the letter GHI sought an extension of 43 weeks and 1 day, together with "reimbursement of associated loss and expense under 4.24.1 and 4.24.5" (tab 10). The second document is a short table headed "variations which led to delay and extension of time" (tab 14). The third document comprises valuation spreadsheets (tab 15). Mr Mure submitted that, taken together, they provide fair notice to GGHB of how GHI value these elements. GHI challenges the quantity surveyor's decision to value the 'allowance' element in clause 5.6.3 at nil. Mr Mure reiterated two points: (i) that the matter could only properly be understood at proof, when the commercial context of both sides' positions could be fully understood; and (ii) that in the context of such a high number of variations, it should not be necessary to itemise the work for each one.

[34] Mr Richardson submitted that these three heads were irrelevant, whether presented as a claim for variations, or a claim for loss and expense. So far as it was a claim in relation to variations, he took the same point - GHI had not complied with the valuation rules. In particular, contrary to clause 5.2 and 5.6, it did not offer to prove the value of the work which the variations are said to have necessitated. As he put it, the assessment "appears to be time-driven, rather than work-driven". In other words, the sums are based on the delays caused by the work, not on the work itself. So far as the case is based upon loss and expense, Mr Richardson argued that GHI had failed to notify GGHB of the relevant matters upon which it now relies.

[35] For the reasons given above in relation to the M & E Coordinator, I hold that the claims so far as being ones based on variations are irrelevant. The decision on the alternative argument centres on five letters that GHI sent to the Contract Administrator between January and November 2008.

1.    On 29 January GHI wrote in the following terms: "we would advise that to try to limit further delay and disruption to the works that we accelerate the works by working to 6:30 pm Monday to Thursday and Sunday all day, for which we would look to recover costs. We will advise separately of the costs to cover same."

2.    On 6 April GHI stated that it aimed to recover "our associated extension costs".

3.    On 12 May, under reference to changes to the contract, GHI stated "These items should then be dealt with as an out of Phase works package and valued separately."

4.    Finally on 11 November GHI sent two letters, one of which stated: "we await your award of a prolongation with costs to the overall Contract as well as the sectional dates."

[36] In my view, these letters are capable of being read as complying with the terms of clause 4.23. It will be a matter for proof to determine whether in the whole circumstances GHI gave adequate notice to the contract administrator of the relevant matters at the appropriate time.

(f) Overtime

[37] This head of claim is based on the following averment:

"The defender submitted notices under clause 2.27 of the contract seeking extensions of time. The Contract Administrator has failed to respond to these. ... in the absence of response from the Contract Administrator, as he was required to do within 12 weeks of receipt under and in terms of clause 2.28 of the contract, the defender elected to mitigate their (sic) exposure to additional preliminaries by introducing substantial overtime working."

[38] Clause 2.28 requires GHI to "constantly use his best endeavours to prevent delay in the progress of the works or any section, however caused, and prevent the completion of the works or section being delayed or further delayed beyond the relevant completion date". Mr Mure submitted that GHI is entitled to recover in respect of the costs of non-productive overtime, on the basis that it had acted responsibly in terms of that provision. It had sought to mitigate any loss.

[39] GGHB argued that this head of claim is irrelevant, because the Contract states that out of hours working requires to be "specifically requested": Bill No. B - PC & Provisional Sums page B/6. The bill of quantities is to similar effect. GHI must "prior to overtime being worked, submit details of times, types and locations of work to be done": clause E 530. By failing to aver that it complied with these provisions, the claim is irrelevant. The alternative claim is fundamentally lacking in specification as to be irrelevant.

[40] In my view, there is sufficient specification to allow this head of claim to proceed so far as it is founded upon clause 2.28. But there is no fair notice of what is meant by "...the overtime costs are claimed by the defender as part of the cost of variations." Accordingly, that averment falls to be deleted.

Conclusion

[41] For the reasons I have given, I shall delete the averments I have identified. Both counsel agreed that I should put the case out by order to determine further procedure in the light of this opinion.