Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION

[2016] CSOH 17

CA61/15

OPINION OF LORD WOOLMAN

In the cause

KIER CONSTRUCTION LIMITED

Pursuer;

against

WM SAUNDERS PARTNERSHIP LLP

Defender:

Pursuer:  Walker;  Burness Paull LLP

Defender:  Buchanan;  Weightmans (Scotland) LLP

22 January 2016

Introduction

[1]        In 2006 Dumfries & Galloway Council (“the Council”) sought tenders for the construction of a new leisure centre in Dumfries.  It comprised a swimming complex, a multi-purpose sports hall, several health and fitness suites, and a car park.  The contract sum was over £12.6 million. 

[2]        The Council appointed Kier Construction Limited (“Kier”) as the principal contractor.  Under the main contract, Kier undertook to produce a collateral warranty in favour of the Council from all the design consultants and sub-contractors it employed on the project. 

[3]        Kier appointed WM Saunders Partnership LLP (“WMSP”) as a consultant.  The appointment contract is dated 31 October and 1 November 2006 (“the Appointment”).  WMSP was responsible for providing the services of architect, civil engineer and structural engineer during the construction of the leisure centre. 

[4]        Under the Appointment, WMSP acknowledged receipt of a copy of the main contract and agreed to perform its services so as not to cause a breach of that contract.  It also undertook to provide a signed collateral warranty in favour of the Council within 14 days of a formal request from Kier.  A style warranty was appended to the Appointment (“the Style”).  It replicated the style in the main contract.

[5]        The Style contained a net contribution clause (“NCC”).  It apportioned liability among the “relevant parties” in the event of any claim made by the Council.  No names were listed in the Style.  Instead footnote 10 stated: “insert full designation of consultants/building contractor who are sharing in the net contribution clause.”  The Style also left blank the amount of professional indemnity insurance cover to be obtained by WMSP. 

[6]        The leisure centre was completed in May 2008.  Subsequently, the Council found a number of defects in the building.  It shut the centre for a significant period while remedial works were carried out.  It has raised proceedings against Kier in respect of those defects.  In that action the Council seeks damages of £5.6 million for breach of contract.  Kier has lodged defences and convened WMSP as a third party.

[7]        For a significant period Kier did not ask WMSP for a collateral warranty.  The position changed in early 2015.  On 28 January Kier sent a draft warranty to WMSP (“the Draft”) and requested that it be signed and returned in terms of the Appointment. 

[8]        In the Draft Kier had completed the blank in respect of “relevant persons” in the NCC as follows:

“[It] means any one or more of the Client and/or the persons employed by the Client in relation to the Works whether as architect, site investigation engineer, civil and structural engineer, mechanical and electrical services engineer, public health engineer, landscape architect, planning supervisor, contractor or otherwise, having a design, co-ordination or advisory responsibility in relation to the Works.”

In respect of professional indemnity insurance, Kier had inserted a figure of £5 million. 

[9]        Subsequently there were a number of written communications between the parties’ respective solicitors.  Most were issued on behalf of Kier.  Unless the context requires otherwise, I shall narrate matters as if the parties had sent the correspondence themselves. 

[10]      WMSP did not reply to the formal request.  Accordingly, Kier wrote again on 2 March enquiring whether WMSP intended to comply with its obligation.  As it did not receive a response, Kier wrote for a third time on 11 March stating that it would raise proceedings if WMSP did not send a signed warranty. 

[11]      On 13 March WMSP broke its silence.  It expressly referred to the 28 January and 2 March letters and stated that Kier owed it £36,275 by way of outstanding fees.  WMSP continued:

“Upon receipt of [Kier’s] remittance in settlement of the outstanding fees the Collateral Warranty will be executed and returned to you.”

[12]      Kier’s solicitors replied on 19 March:

“My clients are agreeable to the requirement by [WMSP] for payment of the sum of £36,275 in exchange for production of the collateral warranty in the terms requested.  I should add that Kier’s position is that a sum of £178,685 is due to them from [WMSP] under the terms of the appointment rather than any fees being due to [WMSP].  However, notwithstanding [Kier’s position] and entirely without prejudice to their position, they are agreeable to the proposal. 

In order to effect this [agreement] I suggest that the duly executed collateral warranty is delivered to [Kier] by 25 March 2015 and that we hold it as undelivered, pending receipt by you of the sum of £36,275.  As soon as you are in receipt of cleared funds you will advise us and we will be entitled to treat the warranty as delivered.  Does this sound acceptable?

This email is written entirely without prejudice to Kier’s rights, remedies and pleas and may not be founded upon in any proceedings except at Kier’s sole instance.”

[13]      WMSP did not respond to that email.  On 29 April Kier’s solicitors wrote to WMSP’s solicitors enclosing a non-cancellable cheque for £36,275 and stating:

“We refer to … the agreement that [WMSP] will execute and return to us the collateral warranty upon receipt of our client’s remittance of the sum of £36,275. 

We therefore enclose a cheque for £36,275 in favour of your client which is to be held by you as undelivered and to our order until your receipt of our written confirmation that we have received (i) the duly executed collateral warranty and (ii) a VAT invoice.

We look forward to receiving the duly executed collateral warranty by no later than close of business on 1 May 2015.

This letter is written entirely without prejudice to [Kier’s] rights, remedies and pleas and may not be founded upon in any proceedings except at [Kier’s] sole instance.”

[14]      WMSP did not deliver the warranty and in early August its solicitors returned the cheque to Kier.  It did not indicate its reasons for doing so.  Kier then raised these proceedings for specific implement.

The issues

[15]      The matter came before me for debate at the instance of Kier.  It seeks decree de plano on the basis that there is no relevant defence to the action.  The first conclusion seeks an order requiring WMSP to provide a signed collateral warranty with the blanks completed as in the Draft.  There is the standard alternative conclusion for an order authorising the Deputy Principal Clerk of Session to sign the collateral warranty in place of WMSP if for any reason it does not do so.

[16]      Kier contended that WMSP’s obligation to provide a signed warranty has two separate bases: (i) the formal request made in the letter dated 28 January; and (ii) the binding agreement constituted by the letters of 13 and 19 March 2015. 

[17]      WMSP advanced an armada of arguments to resist decree.  It is possible to discern a number of central lines of defence: (a) WMSP had no obligation to sign the Draft until the blank terms had been agreed; (b) the Draft does not comply with the Appointment; (c) WMSP cannot now grant a warranty; (d) because Kier is in breach of contract, WMSP does not need to perform its obligations; and (e) the parties did not conclude a bargain in March 2015.

[18]      I shall begin with the discrete issue of whether the March letters constituted a binding agreement.

Did the parties reach agreement in March 2015?

[19]      WMSP conceded that its letter of 13 March constituted an offer.  It submitted, however, that the letter of 19 March did not amount to an unqualified acceptance.  Accordingly the parties did not conclude a bargain.  I reject that argument.  Accordingly, WMSP is obliged to deliver a signed collateral warranty to Kier. 

[20]      Lord Hodge set out the proper approach to a dispute about contract formation in Baillie Estates v DuPont [2009] CSOH 95, at paras 25 and 26.  The court must adopt an objective perspective.  Here, I hold that reasonable businessmen in the position of the parties and with their shared knowledge would have understood from the communications that they had reached consensus.  The correspondence related to a single issue – the provision of a collateral warranty by WMSP.  Faced with the threat of litigation, WMSP made a proposal.  Kier accepted that proposal.

[21]      In my view, the parties agreed all the essential elements of their bargain.  In particular, they agreed that the contents of the collateral warranty should be as set out in the Draft.  There is nothing in the factual matrix that suggests otherwise.  The parties' actings after March shed little light on matters.  All that can be said is that Kier did attempt to give effect to the bargain by sending a cheque to WSMP.  I do not regard its accompanying letter of 29 April as altering matters, because by then the parties had already made their agreement.

[22]      I arrive at my decision having taken into account the various features of the 19 March letter which, according to WMSP, demonstrate that it was a qualified acceptance.  I shall consider them in turn.

[23]      Kier used the term “agreeable” rather than”agreed” and asked if its proposal for effecting settlement was acceptable.  On a proper construction, I hold that this wording did not indicate that the parties were still at the stage of negotiation.  Looked at in the context of the whole letter, Kier unequivocally agreed to the proposal made by WMSP.  A discussion of the mechanics of settlement did not preclude agreement. 

[24]      Kier referred to a specific sum, rather than to the amount of outstanding fees.  I see no merit in this contention.  Kier undertook to pay the figure expressly stated by WMSP as being the outstanding fees. 

[25]      Kier made no mention of paying VAT.  As the offer was silent on this point and not accompanied by a VAT invoice, Kier was entitled to assume that VAT was included.  In any event, it would only be obliged to pay such a sum on receipt of a VAT invoice. 

[26]      WMSP intended to compromise the whole claim.  By referring to an outstanding claim of £176,000, Kier showed that it did not intend to reach a full and final settlement.  Whatever WMSP’s subjective intention may have been, it was neither explicit or implicit in its offer.  The correspondence discloses that the parties had reached agreement on the issue about which they were negotiating: the provision of a collateral warranty.

[27]      Kier’s communications were made “without prejudice”.  Such a tag does not prevent an agreement being reached: McBryde, The Law of Contract in Scotland (3^rd edition), para 6-20.  In this instance I do not construe it as negativing contractual intention on the part of Kier.

[28]      As I hold that the parties did conclude a binding agreement in March 2015, it will be necessary to discuss what sum Kier is to pay now, having regard to interest and expenses.

What was the legal effect of the letter of 28 January 2015?

[29]      In the light of my decision on the first argument, it is unnecessary for me to address Kier’s separate argument based on its letter of 28 January.  I think it right, however, to do so in light of the full submissions that counsel presented to me. 

[30]      Kier submitted that the terms of the Appointment are clear.  The parties intended to impose a binding obligation on WMSP to execute and deliver a signed collateral warranty in favour of the Council.  As Kier complied with the contractual requirements, WMSP must fulfil its obligation.

[31]      WMSP countered that submission with four principal arguments, which I shall now consider.

1. The parties required to make a further agreement

   [32]      WMSP submitted that the Appointment envisaged further negotiations.  It, Kier and the Council had to agree the insertions in respect of the NCC and the level of professional indemnity insurance cover.  Only then would WMSP be obliged to provide the collateral warranty.  The existence of the blanks and the reference to a “draft” document in clause 22 supports that analysis.

   [33]      I do not accept that submission.  In my view, Clause 22 sets out a simple procedure for the completion of the draft collateral warranty.  The parties had to complete the blank in the NCC to reflect the roster of consultants and sub-contractors that Kier assembled.  Necessarily that could only be done after the date of the Appointment.  The blank in the insurance clause was to be completed by inserting the figure agreed by the parties in respect of the professional indemnity cover to be maintained by WMSP.

   [34]      The use of the words “shall” in clause 22.1 and “default(s)” in clause 22.4 makes it clear that WMSP has an obligation to provide the warranty.  Further, that construction squares with commercial sense:  Arnold v Britton [2015] 2 WLR 1593.  On the approach of WMSP, the parties made an “agreement to agree”.  If that were correct, WMSP could refuse to agree the insertions.  As a result Kier would be in breach of the main contract.  The reference to a “draft” collateral warranty is simply a matter of description.  It does not carry the weight imputed to it by WMSP. 

    

2. The principle of mutuality precludes Kier from enforcing the Appointment

   [35]      WMSP submitted that Kier cannot enforce the clause 22 obligation because it has itself breached the Appointment.  The broad thrust of WMSP’s claim is that Kier prevented it from carrying out the Architect’s Services in accordance with Schedule 2.  In particular Kier failed (a) to provide reasonable instructions and (b) to arrange for WMSP to carry out the appropriate inspections.  That exposed WMSP to litigation at the instance of the Council.  Further, Kier failed to pay all of WMSP’s fees and wrongly deducted a sum for late delivery of drawings.

   [36]      I hold that the obligation to provide a warranty is a stand-alone requirement.  The duties relied on by WMSP are not the true counterpart.  If WMSP establishes any breach then it has both a sword and a shield.  The sword is its right to claim damages from Kier for any loss it has sustained.  The shield is its express right to resist any claim by the Council on the basis that the breach was caused by Kier. 

    

3. WMSP cannot now make the representation set out in the collateral warranty

   [37]      WMSP contended that it is impossible for it to represent that the Works have generally been carried out and concluded to the specified standard covered by his design”.  Essentially, WMSP founds this line on the same factors that it relies on in relation to mutuality: (a) Practical Completion has already been reached; (b) Kier did not call for inspections including the final inspection; and (c) Kier did not generally carry out the Works to the standard specified in WMSP’s design.  I see no force in this argument for the same reasons as I identified in relation to head B.  WMSP is protected from liability in respect of matters.

    

4. Kier is not entitled to an order for specific implement

[38]      WMSP founds this line of argument on clause 22.  It stipulates that in the event of default Kier can suspend fee payments.  WMSP contends that that is its sole remedy.  I disagree.  Clause 18.1 of the Appointment expressly preserves Kier’s common law rights.  It would need very clear language before inferring that a party had waived its right to specific implement: Gilbert-Ash (Northern) Limited v Modern Engineering (Bristol) Limited (1964) AC 689.  Clause 22.4 does not pass that hurdle.

Did the Draft comply with the Appointment?

[39]      Footnote 10 required Kier to insert the “full designation” of the relevant parties.  It did not do so.  Instead it inserted a generic description.  Kier maintained that it was not commercially sensible to name design consultants where to do so might frustrate the common aim of having the warranty delivered quickly.  In any event its formula embraced all design consultants and sub-contractors and therefore did not prejudice WMSP.  Even if it had inserted a specific list of names, it would still be necessary to plead and prove that they were both designers and to blame. 

[40]      I conclude, however, that the language is unambiguous and therefore should receive effect: Arnold v Britton at paragraphs 14 - 23.  It follows that the Draft does not comply with the Appointment.  The advantage of identifying each participant in the NCC by name is obvious.  Everyone then knows – at least presumptively – who is liable to contribute in the event of the Council establishing a claim.  It may avoid the necessity for a proof on who had design responsibility for a defect at the centre. 

[41]      It appears to me, however, that Kier made a technical mistake in the Draft.  I would be slow to hold that such an error defeated its rights.  If I had not decided that the March 2015 letters constituted a binding agreement, I would have been inclined to arrange a hearing to address two points.  First, whether the mistake could have been cured.  Second, which names should appear on the list.

[42]      In relation to the second point, I do not accept that the NCC should include all the persons whose work WMSP had to inspect in terms of the Architect’s Services.  WMSP stated that it wished to make enquiries to determine all the companies involved in the construction of the centre.  Provisionally, it believed that a number of companies which did not have a contractual nexus with Kier should be included.  They included various sub-sub-contractors and consultants.

[43]      WMSP singled out Euro Pools plc (“EPL”) to illustrate its submission.  EPL was appointed by one of Kier’s sub-contractors, Wm Taylor Pools Ltd.  Together, according to WMSP, they had joint design responsibility for floor construction in the pool area. 

[44]      I see no basis for this line of argument.  The function of the NCC is to avoid joint and several liability on the part of WMSP.  If for example the Council sues WMSP for a defect, it will be for WMSP to allege that someone else is liable as (i) having had design responsibility and (ii) being to blame for the defect.  If it establishes those matters, it will not incur joint and several liability.

[45]      In the case of EPL, it could never have been involved in joint and several liability with WMSP.  Accordingly this branch of the argument is misconceived

[46]      WMSP is also concerned that it might be held liable for any item being supplied for fixing, installation and/or integration.  That is because para 54 of the Architect’s Services requires it to review and comment on such items.  Again I see no warrant to include them in the NCC.  It is concerned with design matters.  Mr Walker informed me that insurers will provide cover against design problems, but not against bad workmanship.

Two further arguments

[47]      WMSP raised three other arguments in the defences and written note of argument.  The first related to the delay in seeking specific implement, but no prescription point was taken.  The second related to the form of the collateral warranty and whether the term “the contractor” related to the singular or the plural.  Finally, the defences state that if there is a concluded bargain it ought to be reduced ope exceptionis because of “error plus”.  In my view Mr Buchanan was right not to press these points in his oral submissions.  I see no force in any of them.

Conclusion

[48]      For the reasons given, I am satisfied that there is no defence to the action.  I shall fix a by order hearing to discuss the precise terms of the order for specific implement.  Meantime I reserve all questions of expenses.