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CRIMOND ESTATES LTD AGAINST MILE END DEVELOPMENTS LTD [2021] ScotCS CSOH_26 (12 March 2021)
URL: http://www.bailii.org/scot/cases/ScotCS/2021/2021_CSOH_26.html
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[2021] CSOH 26,
[2021] ScotCS CSOH_26,
2021 GWD 11-141
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OUTER HOUSE, COURT OF SESSION
[2021] CSOH 26
CA159/19
OPINION OF LORD TYRE
In the cause
CRIMOND ESTATES LIMITED
Pursuer
against
MILE END DEVELOPMENTS LIMITED
Defender
Pursuer: Sandison QC, Reid; Lefevres
Defender: MacColl QC; Burness Paull LLP
12 March 2021
Introduction
[1]
The parties to this action are two single purpose vehicles formed in connection with
the development for housing of a former school known as Mile End School in Aberdeen.
The shareholders and directors of the pursuer ("CEL") are Mr David Suttie and Mr Charles
Ferrari. The shareholders and directors of the defender ("MEDL") are Mr Gareth Jones and
Mrs Suzanne Jones. In 2013 the parties entered into an agreement in terms of which CEL
agreed to provide specified "Management Services" to MEDL in exchange for an entitlement
to certain specified shares of the ultimate net sale proceeds. In November 2016 MEDL
terminated the agreement. The development has since been completed and the flats sold.
2
CEL contends that the termination of the agreement was unlawful, and sues for damages for
breach of contract or, alternatively, for remuneration for services supplied. MEDL contends
that the contract was lawfully terminated, and in any event denies that any sum is due to
CEL. The action came before me for proof before answer.
Background to the 2013 agreement
[2]
Mr Suttie is a former bank manager. He has been concerned in property
development for around 15 years, his principal area of expertise being in relation to
development funding. Mr Ferrari has been a property developer for 35 years, with expertise
in design. In 2010 Mr Ferrari identified the former Mile End School, still then owned by
Aberdeen City Council, as a development opportunity. He discussed the funding of such a
project with Mr Suttie, and CEL was incorporated with a view to progressing the project.
Mr Suttie and Mr Jones met at a social event. Mr Jones is a marine engineer who worked in
the offshore oil industry. He had recently retired and sold the shares in his service
company, and had funds to invest. Mrs Jones worked for many years in the oil industry as a
finance manager. Mr and Mrs Jones decided to invest in Mr Suttie and Mr Ferrari's
proposed Mile End School development project. They incorporated MEDL for this purpose.
Their intention was that they would fund the acquisition of the property, and that
construction costs would be funded by bank borrowing.
[3]
Mr Ferrari instructed Raymond Canale, an architectural technologist, to produce
plans for presentation to the planning authority and to Mr and Mrs Jones as potential
investors. The property having been placed on the market, MEDL submitted a successful
bid to purchase. Missives were concluded on 13 April 2012. An application prepared by
CEL for planning permission in principle and listed building consent for 37 residential units
3
in the main building and the former janitor's house was approved on 25 July 2012.
Conditional planning permission for the development was granted on 29 April 2013.
[4]
As regards the structure of the agreement among the parties, Mr Suttie and
Mr Ferrari had initially contemplated a form of joint venture agreement. However Mr Jones
did not wish to be in a business partnership and, on legal advice, insisted that the agreement
between MEDL and CEL take the form of a project management agreement. The two
companies accordingly entered into an agreement, entitled "Project Management
Agreement" dated 19 and 23 April 2012 ("the 2012 agreement"). It should be noted that
neither Mr Suttie nor Mr Ferrari holds any formal qualification in project management, nor
holds himself out as an expert in project management as opposed to project development.
[5]
The 2012 agreement contained a preliminary budget, which included an estimated
build cost provided by quantity surveyors. Mr Suttie and Mr Ferrari proceeded to conduct
negotiations with potential lenders and agreed a facility with the Royal Bank of Scotland. A
design team, including Mr Canale to provide architectural services and McLeod & Aitken,
quantity surveyors, were engaged. A demolition warrant was obtained and an asbestos
survey was carried out. A bill of quantities was prepared by McLeod & Aitken on CEL's
instructions, and tenders were invited. Unfortunately the tenders were significantly higher
than the estimated build cost in the budget annexed to the 2012 agreement (although
projected sales values also increased). This required the re-negotiation of the bank
borrowing and also an increased capital contribution by Mr and Mrs Jones who were
concerned by the discrepancy but agreed to increase their contribution, subject to certain
amendments to the parties' agreement. The effect of those amendments was:
to amend the profit share mechanism;
4
to introduce a requirement that CEL obtain MEDL's prior written
authorisation for any increase in development costs or any instruction which
could cause an increase in development costs; and
to insert a right of MEDL to terminate the agreement if the development
costs, or any estimate of these by a quantity surveyor, exceeded 5% of the
budget, unless the increase had been agreed in advance in writing by MEDL.
The amended agreement ("the 2013 agreement"), which was also entitled "Project
Management Agreement" was signed by the parties on 21 November 2013.
The 2013 agreement
[6]
The following provisions of the 2013 agreement are most relevant to the current
dispute. In the agreement MEDL is referred to as "the Company" and CEL as "the Project
Manager". In terms of clause 2.1, MEDL appointed CEL "... on an exclusive basis to provide
the Management Services set out in Part 1 of the Schedule upon the terms and conditions of
this Agreement". Clause 2.3 required CEL inter alia to
"2.3.1 properly and diligently perform the Management Services with all skill and
care as is reasonably to be expected of a competent and prudent project manager,
qualified and experienced in managing the development of a site of a comparable
nature, size, scope and complexity to the Development;
...
2.3.5
observe and comply with all resolutions, and all lawful orders and directions,
reasonably given to it from time to time by the Company."
[7]
The Management Services listed in Part 1 of the Schedule extend beyond the usual
scope of project management services. They include, for example, in addition to services
clearly concerned with project management:
5
co-ordinating and supporting negotiations with and applications to the local
planning authority and other relevant authorities to obtain planning
permission and other necessary statutory consents for the development;
liaising with banks to ensure the best deal on funding;
responsibility for the space planning of all internals of residential units in
terms of bedroom areas, bathrooms, kitchens and lounges;
involvement in selecting fixtures and fittings for bathrooms, bedrooms and
kitchens;
co-ordinating the marketing and sale of the completed development.
It can be seen that despite the title of the agreement and the designation of CEL as "the
Project Manager", this was not a standard project management agreement, but a bespoke
agreement in terms of which CEL undertook a range of obligations in exchange for a share
of the potential net sales proceeds.
[8]
Clause 2 contained a number of provisions intended to keep control of the project,
and in particular of costs, in MEDL's hands:
"...
2.6
All activities engaged in by the Project Manager under this Agreement shall
at all times be subject to the control of and review by the Company.
2.7
Subject to the provisions of clause , the Project Manager shall ensure that it
will provide the Management Services under the direction of the directors of the
Company or any of them.
2.8
It is a material and essential condition of this Agreement that the Project
Manager shall not incur or agree to incur directly or indirectly on its own behalf or
on behalf of the Company any Developments Costs without in each case prior
written authorisation from the Company other than in respect of any Permitted
Variation. Any Permitted Variation instruction shall be notified to the Company in
writing within 24 hours of being made (time being of the essence). The Company
shall be entitled at any time to withdraw its authority to allow Permitted
6
Variations by written intimation to that effect to the Project Manager. For the
removal of doubt any Permitted Variation shall not represent an increase to the
Budget unless and until approved in writing by the Company.
2.9
It is a material and essential condition of this Agreement that the Project
Manager shall not without the prior written authorisation of the Company on each
occasion issue any instruction to the Professional Team or the building contractor
other than in respect of a Permitted Variation , and shall not otherwise engage with,
communicate, instruct, represent or act in any manner of way with the Professional
Team or the building contractor which has or may have the effect of increasing the
Development Costs..."
"Permitted Variations" were defined in clause 1 as certain types of non-material variations
whose aggregate cost did not exceed £5,000 in any calendar month.
[9]
Clause 3 set out CEL's entitlement to payment, providing in clause 3.1 that the fee for
the Management Services was to be "the Project Manager's Profit Share". Clause 3.3 stated:
"The Company shall apply all gross sale receipts from the Development in
satisfaction of Development Costs in the first instance. The Company shall, after all
loans made to the Company in connection with the Development (including the
Initial Funding) have been fully repaid and otherwise all Development Costs have
been met or provision has been made for same, be entitled to payment of the Priority
Sum A from the Net Sale Proceeds as its own absolute beneficial payment as a
priority payment before any part of the Project Manager's Profit Share is paid to the
Project Manager. The Company shall thereafter be entitled to payment of the
Priority Sum B from the Net Sales Proceeds as its own absolute beneficial payment
following payment of any Profit Share A to the Development Manager, but before
any remaining part of the Project Manager's Profit Share is paid to the Project
Manager."
On the basis of this provision, and the relevant definitions in clause 1, the order of
application of gross sale proceeds was to be as follows:
(i)
Development Costs;
(ii)
Priority Sum A, defined as £1,500,000, payable to MEDL;
(iii)
Profit Share A, defined as the balance of the net sales proceeds up to a cap
of £250,000, payable to CEL;
(iv)
Priority Sum B, defined as £250,000, payable to MEDL;
7
(v)
Profit Share B, defined as the remaining balance of the net sales proceeds up
to a cap of £1,000,000, payable to CEL;
(vi)
Any balance remaining after payment of all of the above to be divided
equally between MEDL and CEL.
[10]
Development Costs were listed in Part 4 of the Schedule. In addition to costs of site
acquisition and planning approval, construction costs, professional fees, and sales and
marketing costs, there were included inter alia:
"... any interest and fees payable on and/or incurred in relation to any loan obtained
by the Company for the funding of the acquisition of the Site and the Development;
a facility fee representing the sum equivalent to the deemed cost of money of the
Initial Funding [ie loans to the Company] for the period that same is utilised
calculated at the same percentage as the interest payable in respect of the loan
obtained by the Company for the funding of the Development per annum from the
date of receipt of the Initial Funding by the Company until the date of repayment of
same;
...
any insurances, rates, outgoings and other taxes applicable to the Site and/or
Development during the Term;"
[11]
CEL's entitlement to receive any profit share was subject to clause 3.6, which stated:
"In the event of there being either (i) any Cost Overrun and/or (ii) any Warranty
Claims as at the Termination Date the total amount or value of same shall be
deducted from Profit Share A and (to the extent not satisfied) from Profit Share B,
and the Profit Share A Cap and/or the Profit Share B Cap shall then be reduced by a
corresponding amount (the amount of the Development Costs to the extent that it
includes Cost Overrun being increased accordingly for this purpose in calculating
Project Manager's Profit Share to avoid any double counting of same), and in the
event that the amount or value of the Cost Overrun and any Warranty Claims
exceed the sum of ONE MILLION TWO HUNDRED AND FIFTY THOUSAND
POUNDS(£1,250,000) STERLING (the amount of such excess not accordingly
deducted from Profit Share A and/or Profit Share B being hereinafter defined as `the
Shortfall') then the Shortfall shall be deducted from the Profit Share C or, if the Profit
Share C is nil or less than the Shortfall, the Project Manager shall pay the Shortfall to
the Company within 5 working days of agreement or determination of same by the
parties ...".
8
"Cost Overrun" was defined as the amount of any Development Costs incurred in relation
to the Development which were in excess of the provision made in the Budget for them or in
relation to which no provision had been made, and which resulted in a higher total amount
of Development Costs being incurred than provided for in the Budget. The Budget was in
turn defined as
"the budget in relation to the Development a copy of which is annexed as Part 2 of
the Schedule, as it may be supplemented, varied and/or updated subject always to
any supplementation, variation or updating being first approved in writing by the
Company (it being acknowledged that any supplementation, variation and/or
updating must be signed on behalf of the Company by a director for this purpose)."
[12]
CEL's entitlement to be paid its profit share was also subject to clause 3.9, which
provided:
"For the removal of doubt the Project Manager acknowledges that no Project
Manager's Profit Share shall be payable unless and until (i) all of the Development
Costs incurred or to be incurred relative to the Development have been fully
accounted or provided for (irrespective of the stage of progress of the Development
as at the Termination Date it being the express intention of the parties that where
insufficient Net Sale Proceeds have been generated at the Termination Date to cover
all Development Costs incurred or to be incurred and the Priority Sum A that no
Project Manager's Profit Share shall be payable) and (ii) the Company has received
payment of the Priority Sum A in full. Where at the Termination Date adequate
provision has not or cannot reasonably be made for all Development Costs incurred
or to be incurred in order to ascertain the Project Manager's Profit Share the
Company shall be entitled to defer determination of the Project Manager's Profit
Share until completion of the Development by the Company or such earlier date on
which adequate provision can reasonably be made for all Development Costs. At the
discretion of the Company, provided it is demonstrably prudent to do so, the
Company may make payments to account of the Priority Sum A, the Priority
Sum Band the Project Manager's Profit Share."
[13]
Clause 6, entitled "Term and Termination" provided that the agreement would last
until the earliest of (1) 1 July 2018, (2) the date when all residential units had been
constructed and sold and payment received, or (3) the date on which it was terminated
under clause 6.2. The circumstances in which the agreement could be terminated by either
party, on giving 30 days' written notice, included the following:
9
"6.2.1 the other party is in material breach of this Agreement and fails to rectify
such breach within ten working days after being required in writing so to do by the
other party;
...
6.2.7
if the Development Costs or any reasonable estimate of same prepared by the
Professional Team Quantity Surveyor for the Company from time to time exceed the
Budget by 5% or more, and such excess has not been previously approved in writing
by the Company;"
[14]
Returning to clause 3, the following provision was made in clause 3.12 for
remuneration of CEL in the event of the agreement being terminated under clause 6.2.1
or 6.2.7 without any profit share being payable to CEL:
"In the event of termination of this Agreement by the Project Manager in terms of
clause 6.2.1 or by the Company in terms of clause 6.2.7, the Project Manager shall, in
the event that no Project Manager's Profit Share is due to the Project Manager
following the application of any part of this clause 3, be entitled upon completion of
the Development. and subject always to the application of Clause 3.9, to such
reasonable remuneration for its services up to the Termination Date, such
remuneration to be based on the open market rate for a project manager carrying out
the management of a development similar to the Development (but which
remuneration shall not in any event exceed the amount of the Profit Share A Cap),
and failing agreement to be fixed by the Adjudicator."
[15]
Finally, in terms of clause 4, MEDL was entitled to appoint a project monitor at its
own cost to oversee the provision of Management Services by CEL.
Overview of progress of the development project
[16]
The development project did not run smoothly. Unforeseen problems were
encountered from the outset. Demolition works began in late 2013. This included asbestos
removal and it became apparent that the work required was more extensive than specialist
reports had indicated. Lead was stolen from the roof, resulting in water ingress and damage
to timber. Other unexpected problems were discovered as the building, a Victorian school,
was stripped back. As a result of the asbestos issue and inclement weather, the start of work
10
by the main contractor, Bancon Construction Ltd ("Bancon"), was delayed from
December 2013 until February 2014. At this time Mr Jones instructed McLeod & Aitken to
provide, in consideration of an additional fee, an enhanced service including fortnightly
rather than monthly cost reporting, and monthly client meetings to review progress and
cost. He also approved the appointment of Mr Derek Braidwood, a chartered quantity
surveyor employed at that time by McLeod & Aitken, to act as project monitor in relation to
the development.
[17]
Further delays ensued. Old ventilator shafts were discovered which needed to be
infilled. A brick chimney flue was discovered and had to be removed. Mr Canale granted
the contractor delays and the completion date was revised on several occasions. By
February 2015, the works were delayed by six months. By June 2015, all parties were aware
that there were substantial cost overruns. The first flats were sold and occupied in
November 2015, but large amounts of snagging remained to be addressed. At this time two
new and serious problems emerged. It was discovered that many of the slates on the roof
had been single-nailed instead of double-nailed. Extensive remedial works were required.
Manufacturing defects were found in large glazed units which had to be replaced. Although
sales and occupations proceeded, practical completion was not achieved until January 2017.
Even then a considerable amount of snagging, especially in relation to electrical works by
the subcontractor referred to below, remained to be remedied.
[18]
On 18 November 2016, a notice of termination was served by MEDL's solicitors on
CEL's solicitors, under reference to clause 6.2.7 of the 2013 agreement, on the ground that
Development Costs exceeded the Budget by 5% or more without such excess having been
previously approved in writing by MEDL. Despite the termination, Mr Suttie and, to a
11
lesser extent, Mr Ferrari, continued to carry out work in relation to snagging and sales, until
Mr Jones sent an email in April 2017 instructing CEL to stop all work.
[19]
Against that background, the first issue for determination is whether MEDL was
entitled to terminate the agreement. CEL contends:
that MEDL was not entitled to invoke clause 6.2.7 because, firstly, there were
no excess costs and no Cost Overrun as the Budget had been increased by
agreement from time to time and, secondly, any excess costs had been
approved in writing by MEDL;
if and to the extent that costs were not approved in writing by MEDL, the
conduct of the parties was such that it could only be explained as indicating
that approval in writing was not required;
alternatively, MEDL had waived its right to invoke the clause because it had
allowed CEL to continue to provide services under the contract for 17 months
after the Cost Overrun was identified.
Dependent upon the determination of these issues, further questions arise in relation to
CEL's entitlement to damages for breach of contract and the quantification of such damages;
CEL's alternative entitlement to reasonable remuneration and the quantification of such
remuneration; and CEL's entitlement to recompense for work done after termination and the
quantification of such recompense. I address these matters later in this opinion.
Assessment of evidence given at the proof
[20]
Evidence at the proof took the form of witness statements and oral evidence. On
behalf of CEL, factual evidence was given by:
David Suttie
12
Charles Ferrari
Nicholas Stewart, a chartered quantity surveyor employed by McLeod &
Aitken, who was the Mile End project quantity surveyor;
Peter Edgeler, a financial adviser formerly employed by the Royal Bank of
Scotland who was the bank's relationship manager with Mr Suttie and
Mr Jones between 2013 and 2016;
Scott Burness, a relationship director at RBS who at the material time was
Mr Edgeler's superior;
Ms Ray Baxter, a property manager with Peterkins, solicitors, who were
instructed to market the flats for sale; and
Stephen McKnight, a wealth manager with St James' Place, Aberdeen.
Expert evidence was given by Mr Douglas Garden, chartered surveyor, a partner in
Ryden LLP and head of its building consultancy department in Aberdeen. Mr Garden was
asked to provide an opinion as to reasonable remuneration for the services provided by CEL
both before and after the termination of the agreement.
[21]
On behalf of MEDL, factual evidence was given by:
Gareth Jones;
Suzanne Jones;
Richard Goodfellow, solicitor, a partner in Burness Paull and previously
Paull & Williamsons, whose clients included Mr Jones and also Mr Suttie and
Mr Ferrari;
Derek Braidwood; and
Raymond Canale.
13
Expert evidence was given by (i) Mr Keith Strutt, a chartered construction manager and
chartered quantity surveyor employed by the Driver Group, who provided an opinion as to
the standard of services reasonably to be expected of a project manager, and the reasonable
remuneration of CEL for the services that they carried out, both before and after termination
of the agreement; and (ii) Mr Jolyon Aldous, chartered accountant, a partner in Baker Tilly,
who provided an opinion as to whether the development costs, estimated at November 2016
and at January 2020, exceeded the budget by more than 5%, and as to CEL's profit share
based on the 2020 cost estimate.
[22]
Subject to what I have to say regarding Mr Suttie and Mr Jones, I found all of the
factual witnesses credible and generally reliable. I found the evidence of Mr Stewart and
Mr Canale helpful in providing a more objective perspective than that of the parties'
principals. As regards the expert witnesses, I am satisfied that they understood their duties
to the court and did their best to assist the court in relation to the matters referred to them
for their opinion. I comment further on their evidence below.
[23]
Mr Suttie's evidence presented difficulties because of his reluctance to answer
questions directly. Despite being asked more than once to answer the questions put to him,
he persisted in attempting to avoid giving direct answers if he thought that they might be
misconstrued as admissions against his interests. His approach was to attempt to identify
what he thought was the underlying purpose of each question and to address that instead of
the question put to him. His position, repeatedly stated, was that every decision that was
taken, including in particular every decision involving the incurring of cost, was taken by
Mr Jones, and that the provisions of the 2013 agreement regarding approval in writing were
entirely disregarded. The fact that he simply reiterated this position instead of giving direct
14
answers to questions about specific matters means that in some cases I have simply had to
interpret the absence of an answer as a negative response to that particular point.
[24]
Mr Jones's evidence appeared to me to be coloured by an attitude that whenever
anything did not go according to plan, someone (other than himself) must have been at
fault. In relation to the Mile End development he attributed most of the blame to CEL but
his criticism extended to the contractors, sub-contractors and professional team members.
Despite explaining that he had insisted on the agreement taking the form of a project
management agreement so that he could be his own boss, he refused to accept responsibility
for having made decisions that resulted in increased cost. On more than one occasion his
recollection was demonstrated to be inconsistent with contemporaneous evidence; an
example was his refusal to accept that RBS had made the involvement of Messrs Suttie and
Ferrari a condition of its funding, which was apparent from the documentation and
confirmed by the evidence of the RBS witnesses. He frequently expressed suspicions that
important matters had been concealed from him; there was no credible evidence to support
any of these assertions. His attitude to CEL had hardened as a consequence of having
formed the view that an electrical subcontractor, with family connections to Mr Suttie that
he considered had been concealed from him, had been appointed without going through a
proper tender process. The evidence as a whole does not suggest that there was anything
untoward about the process of appointment of this subcontractor. Having regard to
Mr Jones's dogmatic approach, I was unable to accept him as a wholly reliable witness and
have treated his testimony with caution where not supported by other evidence.
15
Was MEDL entitled to terminate the agreement in November 2016?
The Budget
[25]
In part 2 of the schedule to the 2013 agreement, the projected cost of the project,
including bank interest, was £11,710,383. It is a matter of agreement that certain variations
to the Budget were approved (by email dated 6 February 2015) by Mr Jones. These resulted
from a decision to amend the design to provide for four large penthouse apartments in place
of the six apartments originally planned. The total projected cost of the variations
was £402,290, which if added to the cost according to the Budget annexed to the
2013 agreement, gives a total of £12,112,453.
[26]
Mr Aldous produced a calculation of Cost Overrun, estimated as at November 2016,
based upon figures provided by Mrs Jones of actual costs incurred to November 2016 and
projected costs to completion. Mr Aldous's calculation produced a total project cost as at
January 2020 of £14,349,618, including corporation tax, which was £2,237,165, ie 18.5%,
higher than the Budget. Excluding corporation tax reduced Mr Aldous's total project cost
to £13,928,236 which was £1,815,783, ie 15%, higher than the Budget. CEL disputes some of
the figures in the calculation, but even when allowance is made for the disputed figures,
there appears to be no doubt that the total development cost, including projected costs to
completion, as at the date of termination of the agreement was more than 5% in excess of the
2013 Budget (as increased for the penthouse variations). The question, in determining
whether clause 6.2.7 was validly invoked by MEDL, is whether that is the correct
comparison to make.
16
Decision-making during the construction period
[27]
I have already noted that the projected cost of the development increased after the
2012 agreement was entered into. This was a matter of concern to Mr and Mrs Jones, and in
addition to insisting upon the changes embodied in the 2013 agreement, Mr Jones sent an
email on 18 October 2013 to Mr Canale and to Mr Duncan Moir (McLeod & Aitken's
director) which stated:
"Suzanne and I have carried out a review of all matters regarding this project and
have decided that we will take a greater hand in all its activities going forward.
Please therefore do not carry out any work without seeking our direct instructions
and ensure we are copied on all correspondence, including email correspondence
connected to this project."
Thereafter Mr Jones (and to a lesser extent Mrs Jones) became closely involved in the day-to-
day progression of the development. Mr Jones attended monthly site meetings with the
professional team and the contractor's representatives. At each of these meetings, the
contractor provided a report and progress towards completion was discussed. Decisions
were taken on technical and design matters with a view to their inclusion in architect's
instructions. On some occasions the CEL representatives put forward cost saving proposals.
Anything unexpected that had arisen was discussed and noted by Mr Stewart so that any
additional cost could be reflected in the next cost report. Those reports included a
breakdown of the financial position, showing inter alia the amount of overall net additions to
the contract sum. Their purpose was to give the client not only an account of costs incurred
but also the most accurate anticipated final account figure at that time. Once approved by
Mr Jones, they were forwarded to the bank's monitors. Mr Suttie also used the reports to
produce cash flow projections in the same format as the Budget annexed to the
2013 agreement.
17
[28]
It was the clear position in evidence of Mr Suttie, Mr Ferrari, Mr Stewart and
Mr Canale that decision-making authority rested with Mr Jones. Cost reports were sent for
approval to Mr Jones by Mr Stewart, accompanied by an email highlighting the major items
added or omitted. Mr Stewart held meetings with Mr Jones at which he was able to provide
any explanations sought by Mr Jones. The cost reports could not be issued unless approved
by Mr Jones. The increasing cost of the project could clearly be seen from these reports. By
the time of issue of cost report 17 dated 3 November 2015, overall net additions amounted to
over £1,000,000. The cost reports were not, of course, of themselves instructions by Mr Jones
to incur the costs reported in them, but they did, according to the evidence of Messrs Suttie,
Ferrari, Stewart and Canale, record decisions taken at meetings at which Mr Jones was
present and in respect of which he had had the final say.
[29]
Equally, any "value engineering" proposals by CEL or anyone else, ie suggestions of
ways to save money on the Budget, required Mr Jones's approval. Often such approval was
refused, in relation, for example, to omission of the repointing of a boundary wall in the car
park, the railings on the perimeter wall, and the omission of some high level kitchen units in
three apartments. In relation to one matter, namely the substitution of sarnafil for asphalt
roofing, Mr Jones was persuaded by CEL and Mr Canale to agree reluctantly to a change in
specification.
[30]
In his evidence to the court, Mr Jones denied that he had known of and approved
every material change, describing this as a "fantastic concept". He agreed that the cost
reports had made him aware of cost overruns, but considered that he was protected from
responsibility for them by the terms of the 2013 agreement. I reject Mr Jones's evidence that
he did not approve, whether in writing or otherwise, the carrying out of works which he
was or ought reasonably to have been aware would result in increased cost. It is clear from
18
the evidence of the other witnesses that that is indeed what happened, as a result of
Mr Jones's insistence that no decisions were to be taken, or architect's instructions issued,
without his agreement.
[31]
It is undoubtedly the case that Mr Jones continued to express his concern about the
cost overruns. In an email dated 16 February 2015, following upon a meeting at which
Messrs Suttie and Ferrari had drawn his attention to the rising costs, he noted that there
would be significant cost overruns "in addition to those already incurred", and stated his
view that in terms of the contract all of these extra costs, other than for the penthouse
upgrades, would be borne by CEL. He suggested the possibility of amending the contract to
share some of the burden of the extra costs but this was not taken further because CEL did
not agree with Mr Jones's interpretation of the contract. On 1 June 2015, a meeting took
place between Messrs Jones, Suttie and Ferrari with Mr Goodfellow present as an observer
at Mr Jones's invitation. According to Mr Goodfellow's account, Mr Jones expressed his
concern that the project was well over budget and emphasised that CEL's responsibility was
to deliver the project with the agreed specification on budget. He stated that whilst he
would support the project for the time being, he was reserving his position on how to deal
with the cost overruns and whether MEDL would in consequence terminate the agreement.
Did MEDL approve changes to the Budget?
[32]
On behalf of CEL, it was submitted that by means of the process described above,
MEDL approved changes to the Budget. It was clear from the definition of Budget in the
2013 agreement that parties had envisaged that it could be varied, provided that MEDL's
written approval was given. There was nothing to require that approval to be given prior to
the incurring of the costs: the Budget was concerned with the overall picture rather than the
19
costs themselves. The cash flow projections and schedules of professional fees maintained
by Mrs Jones, taken together with the cost reports, represented variations to the Budget as
the financial position of the project changed. In so far as this process did not amount to
approval "in writing" as specified in the agreement (including being signed on behalf of
MEDL by a director), the conduct of the parties was such as could only be explained by
approval being given otherwise than in accordance with the formalities in the agreement.
[33]
On behalf of MEDL, it was submitted that as at 18 November 2016 the only written
authorisation for costs beyond the Budget provided by MEDL was the email approving the
cost of the enhanced penthouses. In relation to all other costs, knowledge of Mr Jones that
the Budget was being exceeded did not amount to written or indeed any approval or
authorisation of those costs.
[34]
In my opinion a distinction falls to be drawn between approval of additional costs
and variation of the Budget. I agree with CEL's submission that the Budget, which was of
course a defined term in the agreement, is concerned with the overall picture rather than the
costs themselves. I do not, however, agree that approval of an unbudgeted cost implies
agreement to variation of the Budget. It is simply a Cost Overrun which, as has been seen, is
recognised and has consequences in terms of the agreement. In my view approval by MEDL
of a cost report disclosing net additions to the contract sum amounted to no more than an
acknowledgement that Cost Overruns had occurred. It is relevant in this connection to
observe that the only admitted variations (in relation to penthouse enhancements) were
expressly authorised and acknowledged by Mr Jones to constitute variations to the Budget.
If all that was required to constitute approval of a variation was agreement of a cash flow
statement showing additions to the contract sum, it is difficult to see how there could ever
have been a Cost Overrun.
20
[35]
CEL drew attention to two matters in particular where cost was incurred as a
consequence of decisions of Mr Jones, made in the knowledge that the cost was not in the
Budget. The first of these was the engagement of Mr Braidwood which, although expressly
permitted in the agreement, was not provided for in the Budget. This was done solely at
MEDL's initiative, and although Mr Jones considered that it ought to have been budgeted
for, he was aware that it had not. The second was the engagement of a solicitor with
Burness Paull to address issues related to Bancon. In my opinion neither of these matters
constituted an approved variation of the Budget. Both fell within the definition of
Development Costs in the agreement, and the definition of Cost Overrun envisaged that
Development Costs might not have been provided for in the Budget. I do not therefore
consider that the mere fact that MEDL incurred these costs in the knowledge that they were
unbudgeted constituted approved variations.
Were the excess costs approved for the purposes of clause 6.2.7?
[36]
Clause 6.2.7 requires a comparison to be made between the Budget on the one hand
and, on the other, total actual and estimated Development Costs except in so far as
"previously" approved in writing by MEDL. Clearly this comparison envisages the
possibility that costs will have been approved otherwise than by variation of the Budget.
Senior counsel for CEL submitted that the word "previously" qualified the general right to
terminate at the beginning of clause 6.2: in other words it applied to costs approved prior to
the date of termination as opposed to approved prior to having been incurred. I agree with
this interpretation which, as senior counsel submitted, would prevent MEDL from relying
upon a cost increase that they had approved as a reason for termination.
21
[37]
As regards the requirement in clause 6.2.7 for approval in writing, CEL submitted
that this should be read in the context of ensuring that consent was given by MEDL to
increased costs, rather than imposing a requirement purely of form, against the background
of Mr Jones becoming closely involved in the day to day administration of the contract. The
approach set out in Mr Jones' email of 18 October 2013, ie that all instructions for work were
to be approved by him, was that which was followed throughout the project, and was a
significantly greater level of control and involvement than had been envisioned in the
provisions of the 2013 agreement. The process for approval of costs (described above)
satisfied the requirement of clause 6.2.7 that there had been approval of the excess costs
prior to termination. Insofar as that process did not constitute approval "in writing", the
present case was one where the facts and circumstances of the implementation of the
contract were "explicable only on the basis that there was an express or implied agreement"
that the requirement for writing had been dispensed with. Reference was made to the
observations of Lord Justice-Clerk Cullen in Minevco Ltd v Barratt Southern Ltd 2000 SLT 90.
It was clear that every cost was being approved, irrespective of the mechanism set out in the
2013 agreement.
[38]
On behalf of MEDL it was submitted that none of the actings relied upon amounted
to approval of the excess costs, far less written approval. With the exception of the
penthouse enhancements, no written authorisation was provided by or on behalf of MEDL
for costs beyond those contained in the Budget forming part of the 2013 agreement. The
quantity surveyors' cost reports were snapshots of the development position from time to
time, and the receipt and subsequent forwarding of those reports to the bank monitors was
not and could not be regarded as the provision of written approval of excess costs for the
purposes of clause 6.2.7. At no stage did MEDL give any indication to CEL that it was
22
giving up any contractual rights that might have arisen as a result of the cost increases. The
2013 agreement did not impose any timescale within which the clause 6.2.7 right was to be
exercised. The trigger for the service of a termination notice had been met as at
18 November 2016.
[39]
In my judgment there is overwhelming evidence that MEDL, principally via
Mr Jones, gave its agreement to the incurring of the expenditure that caused the Budget to
be exceeded. Prior to and throughout the construction period, Mr Jones made it clear that
no decisions with cost implications were to be taken without his approval. Matters giving
rise to increased costs were discussed at site meetings and recorded in minutes and in email
correspondence. Proposals by CEL for cost savings were also discussed, and in some
instances rejected by Mr Jones on the ground that the design specification was not to be
compromised. None of the witnesses spoke to any occasion upon which Mr Jones's view
was overruled. Mr Canale confirmed that architect's instructions were issued only
following upon agreements reached at site meetings. It is accepted on behalf of MEDL that
Mr Jones was aware throughout the construction period that costs were increasing as a
result of delays and unforeseen difficulties. It may be that when presented with the
circumstances as they developed Mr Jones had little choice but to agree to courses of action
that resulted in further cost increases, but it cannot in my view be said that he did not agree
to them.
[40]
As regards the reference in clause 6.2.7 to previous approval in writing (and the
reference in clause 2.8 to prior written authorisation), I reject CEL's submission that the
process that was followed (decisions at site meetings or in email correspondence reflected in
cost reports and cash flow statements approved in due course by MEDL) amounted in effect
to approval in writing. I am, however, satisfied that this is indeed a situation in which the
23
contractual requirement was varied by the actings of the parties. As Lord Justice-Clerk
Cullen observed in Minevco Ltd v Barratt Southern Ltd (above):
"It is not in question that a clause of a written contract cannot be varied or altered by
verbal agreement. However, the position may be different if there are facts and
circumstances which are explicable only on the basis that there was an express or
implied agreement. As Lord Robertson observed in Baillie v Fraser (1853) 15 D 747
at p 750: 'It is a delicate thing to infringe on the terms of a written contract, but when
the parties have been acting so as to alter it by their conduct, then we must give effect
to the change'."
The evidence in the present case was of a consistent practice in relation to the taking of
decisions with consequences for the overall cost of the project. There was no evidence of
any contemporaneous insistence by MEDL that only written approval would permit the
matter discussed to proceed, nor of anyone, whether it be CEL or Mr Canale, requesting
written approval in order that an instruction could be issued to the contractor. In these
circumstances it is in my view quite clear, in Lord Robertson's words, that the parties acted
so as to alter the terms of the 2013 agreement in relation to clause 2.8 by removing the
requirement for written authorisation of the incurring of Development Costs. That being so,
it follows that the reference in clause 6.2.7 to previous approval in writing was also departed
from. If it were otherwise, then it would be open to MEDL to found upon costs that they
had agreed to be incurred as a reason for terminating the agreement, which would not
accord with commercial common sense. The agreement provided MEDL with other
protections.
[41]
I do not regard the fact that written authorisation was given of the costs relating to
the penthouse enhancements as casting doubt on what I have said. I have already expressed
my view that the effect of that authorisation was to vary the Budget, and for that reason the
cost increase was excluded from the clause 6.2.7 calculation. In that regard the parties
24
adhered to the terms of the agreement, but they did not do so in relation to the incurring of
Development Costs more generally.
[42]
In these circumstances I hold that MEDL was not entitled to terminate the contract
on 18 November 2016, and was in breach of contract in so doing.
[43]
Senior counsel for CEL presented an alternative argument that even if every cost was
not approved, and the Budget was not varied, the costs relied upon by MEDL did not
produce an overrun of 5% of the Budget (ie 5% of £12,112,453, or £602,622.65). It was
submitted that the following amounts should be excluded from the calculation of overrun:
(i)
construction cost overrun of £700,982, on the ground that there was no
overrun in the sense used in the 2013 agreement because the costs were approved by
MEDL;
(ii)
corporation tax of £530,708, on the ground that corporation tax was not a
Development Cost in terms of the agreement;
(iii)
professional and site agent fees overrun of £203,311, and council tax and
factoring costs of £54,911, again on the ground that these costs were approved by
MEDL;
(iv)
security costs of £32,616, on the ground that the correct figure was £20,760;
and
(v)
interest overrun of £847,940 on shareholders' loans by Mr and Mrs Jones, on
the ground that this expenditure was authorised and in any event because the
interest had been compounded without justification, the correct figure being £586,608
as calculated by Mr Suttie.
[44]
I return below, in the context of calculation of net profit, to the questions of
(a) allowability of corporation tax as a Development Cost, and (b) the appropriate method of
25
calculation of interest on Mr and Mrs Jones's loan. For the purposes of the present
argument, however, it is sufficient to say that I reject the proposition that the construction
cost overrun, the professional fees overrun and the council tax and factoring costs should be
excluded from Cost Overrun because they were approved. As I have explained, it does not
in my view follow from the fact that a particular cost was approved that it does not form an
ingredient of the overall Cost Overrun. Aggregating these three figures, together with the
lower figure for security costs, produces a total of £979,964, which is already well above 5%
of the Budget. That is sufficient for this argument to be rejected.
Did MEDL waive its right to terminate under clause 6.2.7?
[45]
In the light of my decision that MEDL's termination of the contract was unlawful,
this question becomes academic. I shall, however, briefly express my view upon it.
[46]
On behalf of CEL it was submitted that MEDL's actions constituted an implied
waiver of their right to rely on unapproved excess costs as a reason for termination under
clause 6.2.7. Reference was made to the observations of Lord Keith of Kinkel in Armia Ltd v
Daejan Developments Ltd 1979 SC (HL) 56. It was not necessary to identify a specific instance
of waiver; the whole circumstances had to be looked at. On MEDL's hypothesis, the right to
terminate had arisen by, at the latest, June 2015, when a cost report disclosed over £700,000
additional costs (in addition to the penthouse enhancements). There was then a period of
17 months before notice of termination was given. During that time, as MEDL was well
aware, CEL continued to provide the services that it had contracted to provide. MEDL
continued to authorise and approve works and further costs. When MEDL terminated the
agreement, it sought to rely upon increased costs which it had approved, having informed
CEL and others concerned with the project that its system for approvals had to be followed,
26
and having allowed CEL to rely on and to work to that system for a period of three years.
This was to CEL's clear prejudice on termination: it put CEL at risk of committing very
significant time to the project and receiving no payment.
[47]
On behalf of MEDL, it was submitted that CEL had not established the abandonment
by MEDL of its right to serve a notice of termination at any time when the circumstances in
clause 6.2.7 subsisted. Waiver required the clear abandonment of a right by the party
entitled to it. All that CEL offered to prove was that MEDL could have exercised its
contractual termination right earlier. That did not amount to a waiver of MEDL's
entitlement to exercise the right when it did.
[48]
I have to consider the issue of waiver on a factual hypothesis, contrary to my
findings above, that the excess cost over Budget was not approved by MEDL. On that
hypothesis I would not have been persuaded that the circumstances amounted to implied
waiver. In Armia Ltd v Daejan Developments Ltd, Lord Fraser of Tullybelton quoted with
approval (at page 69) the observation of Lord Hailsham LC in Banning v Wright [1972] 1
WLR 972 at 979 that: "... the primary meaning of the word `waiver' in legal parlance is the
abandonment of a right in such a way that the other party is entitled to plead the
abandonment by way of confession and avoidance if the right is thereafter asserted".
Lord Fraser continued:
"In the present case the reason why the plea of waiver fails is not that the
respondents suffered no prejudice (although in my opinion that is true) but that the
appellants never abandoned their right to refuse the title offered, and the
respondents never conducted their affairs on the basis that they had. The
respondents' position all along was that the appellants did not have the rights which
they claimed."
The situation in the present case appears to me to be analogous: since at least February 2015,
Mr Suttie and Mr Ferrari had disputed Mr Jones's assertion that all Cost Overruns were to
27
be laid at the door of CEL. There is nothing in the evidence to suggest that they acted at any
time during the 17 months between June 2015 and November 2016 on the basis that MEDL
had had a right under clause 6.2.7 which they had subsequently abandoned.
CEL's claim for damages
[49]
Mr Suttie's calculation of CEL's claim is based upon the difference between (a) total
income, including future sales estimated as at the date of termination and (b) total
Development Costs. It takes as its starting point a figure of £3,071,870 for "closing bank
balance" contained in the cash flow schedule and sales projections produced in
January 2017, being the closest available to the date of termination. To this figure Mr Suttie
added (i) £96,500 in respect of loss claimed to have been sustained to the project as a
consequence of Mr and Mrs Jones and their family having initially concluded missives to
purchase three flats but later having decided not to proceed with the purchases, (ii) £100,000
in respect of a payment believed by Mr Suttie (though not by Mrs Jones) to be due by
Bancon as a consequence of its time overrun, and (iii) £50,000 in respect of the cost of
employing Mr Broadwood, on the ground that this was not a Development Cost, producing
a total of £3,318,370. From this amount, Mr Suttie deducted (i) £586,608 in respect of
outstanding interest on Mr and Mrs Jones's shareholders' loan, (ii) MEDL's Priority Sum A
amounting to £1,500,000, and (iii) MEDL's Priority Sum B amounting to £250,000. That
leaves (i) CEL's Profit Share A amounting to £250,000 and the balance of the profit
amounting to £731,562 payable as CEL's Profit Share B. The total sum due to CEL in respect
of damages for MEDL's breach of contract, according to Mr Suttie's calculation, is
therefore £981,562.
28
[50]
MEDL's calculation is very different. The most important difference is that it uses
actual sales figures instead of figures projected as at November 2016. Because the oil
industry was undergoing a downturn during 2017 and 2018, the sales figures actually
achieved were lower than the November 2016 projections. Mr Aldous produced a
calculation based on Mrs Jones's computation of sales achieved and costs incurred both
before and after November 2016, and of a small amount of estimated costs to completion as
at January 2020. He noted that the definition of "Net Sales Proceeds" in the 2013 agreement
appeared to envisage that only sales proceeds received prior to the termination date would
be taken into the calculation, yet the whole Development Costs incurred or to be incurred
would be taken into account. In the circumstances of the present case, that would produce
no net profit at all. Mr Aldous considered that this did not represent a like-for-like
comparison, and so he also produced a calculation using total gross sales and total project
costs. In so doing, he largely accepted the figures supplied to him by Mrs Jones, although he
removed from her computation a sum of £200,000 included in the Budget as additional
development contingency costs. Mr Aldous's calculation used total gross sales proceeds
of £15,069,955, and total project costs of £14,349,618 (including corporation tax in
Development Costs) or £13,928,236 (excluding corporation tax). These figures give a net
development profit of £720,337 if corporation tax is included, and £1,141,719 if it is not. On
either calculation the profit does not exceed MEDL's Priority Sum A, and there is no profit
share for CEL.
[51]
The question whether damages should be valued at the date of the breach of
contract, without reference to actual outcome, is one of law. On behalf of CEL, it was
submitted that the normal rule, where a contract is terminated unlawfully, is for parties'
rights to be valued as at the time of termination. In Golden Strait Corpn v Nippon Yusen
29
Kubishika Kaisha (The Golden Victory) [2007] 2 AC 353, Lord Bingham (dissenting) stated,
under reference to a number of authorities, at paragraph 11 that it was "a general, but not an
invariable, rule of English law that damages for breach of contract are assessed as at the date
of breach". Reference was also made to a recent summary of the law by Blair J in The Hut
which Blair J stated that:
"(t)he normal rule is to make that comparison [in that case a comparison between the
warranted value of shares and their actual value] as at the date of the breach, which
is the date of the contract, taking account only of events up to that date".
No circumstances had been identified in the present case to justify departure from the
breach date rule. The damages sought by CEL related to the profits which were projected to
be made had the project continued under their management after November 2016. MEDL's
approach sought to substitute a figure derived from the proceeds of sale achieved under
their supervision between 2016 and 2020. Such an approach did not compare like with like,
nor place CEL in the position in which it would have found itself had there been no breach.
Following termination, CEL was no longer in a position to work to maximise the profits on
the development: the ability to do this, together with the risk (or reward) of decreased or
increased profits was with MEDL.
[52]
In response, senior counsel for MEDL submitted that assessment of damages should
be approached in the traditional Scottish way, applying "but for" causation rather than an
English rule-based approach. The assessment should be grounded in the real world. There
was no evidence that sale prices would have been higher if the agreement had not been
terminated.
[53]
I am not persuaded that the authorities relied upon by CEL require me to value its
claim under reference to sales values estimated as at the date of the breach. In The Golden
30
Victory, Lord Bingham went on, immediately after the statement quoted above, to observe
(at paragraph 12):
"While not, I think, challenging the general correctness of the principles last stated,
the charterers dispute their applicability to the present case. Their first ground for
doing so is in reliance on what, from the name of the case in which this principle has
been most clearly articulated, has sometimes been called `the Bwllfa principle': Bwllfa
and Merthyr Dare Steam Collieries (1891) Ltd v Pontypridd Waterworks Co [1903] AC 426.
It is that where the court making an assessment of damages has knowledge of what
actually happened it need not speculate about what might have happened but
should base itself on the known facts. In non-judicial discourse the point has been
made that you need not gaze into the crystal ball when you can read the book. I
have, for my part, no doubt that this is in many contexts a sound approach in law as
in life, and it is true that the principle has been judicially invoked in a number of
cases ..."
Lord Bingham went on to cite a number of cases in which the Bwllfa principle had been
applied. He observed that "none of them involved repudiation of a commercial contract
where there was an available market", but that is not the situation with which the present
case is concerned.
[54]
Delivering one of the majority judgments, Lord Brown of Eaton-under-Heywood
observed (paragraph 78):
"Must the judge really shut his eyes to the known facts and speculate how matters
might have looked at some earlier date? Again, not without compelling reason and
none appears to me. Lord Bingham, at para 12, and Lord Carswell, at para 65, have
already explained the `Bwllfa principle'... There is no need to repeat it. Suffice it to
say that I see no good reason to depart from it here."
Lord Brown went on at paragraph 79 to explain the true ambit of the breach date rule:
"Essentially it applies whenever there is an available market for whatever has been
lost and its explanation is that the injured party should ordinarily go out into that
market to make a substitute contract to mitigate (and generally thereby crystallise)
his loss. Market prices move, both up and down. If the injured party delays
unjustifiably in re-entering the market, he does so at his own risk: future speculation
is to his account `the buyer's decision is (in the vernacular) down to him': per
Bingham LJ in Kaines (UK) Ltd v sterreichische Warrenhandelsgesellschaft [1993] 2
Lloyd's Rep 1, 11."
31
No question arises in the present case of there being an available market for what CEL lost,
ie their entitlement to share in the profits of the Mile End project. In my opinion there is no
reason to apply the rule to circumstances in which the breach consists of depriving the
claimant of an opportunity to share profits yet to be crystallised.
[55]
I prefer to find guidance in the familiar observations of Lord President Emslie in
Haberstich v McCormick & Nicholson 1975 SC 1. Having noted at page 6-7 that:
"At the hearing of the appeal before us the appellants and the respondents were at
one in informing us that the law as to damages for breach of contract was clear.
When damages are claimed for breach of contract it is the aim of the law to ensure
that a person whose contract has been broken shall be placed as near as possible in
the same position as if it had not (Gloag on Contract, 2
nd
ed, 690; Chaplin v
Hicks [1911] 2 KB 786). In particular it was accepted that, as was stated in the case of
which one of them has broken, the damages which the other party ought to receive
in respect of such breach of contract should be either such as may fairly and
reasonably be considered arising naturally, i.e. according to the usual course of
things, from such breach of contract itself, or such as may reasonably be supposed to
have been in the contemplation of both parties at the time they made the contract, as
the probable result of the breach of it'",
Lord President Emslie concluded at page 10:
"In my opinion each case must be considered on its own facts and circumstances,
and in each the question of damages which remains a question of fact, must be
resolved upon the proper application of the well-known general principles which
both parties to this appeal accepted as the starting points of their separate
arguments."
[56]
In the circumstances of the present case, it seems to me that the most appropriate
method of assessment of damages is to apply the Bwllfa principle and have regard to the
known outcome of the property sales. There appeared to be consensus among the witnesses
that the reason why the flats did not realise as much as had been estimated was because of
what was described by Ms Baxter as "the property crash" in Aberdeen in 2018 caused by an
oil industry downturn. There was no evidence to suggest that the sale prices would have
been affected in any way if CEL had remained involved throughout the process of
32
realisation of the final properties to sell. As a matter of fact they did continue to provide
services for some time after the date of termination, mainly in relation to snagging.
Marketing and sale of the flats was the responsibility of Peterkins. In my opinion the aim of
the law to place CEL in as near as possible to the same position as if the agreement had not
been broken is best achieved by using actual sale prices rather than relying on the parties'
forecast at the time of termination.
[57]
For these reasons, I hold that the method of quantification of loss adopted by
Mr Aldous is the correct one. It is necessary next to look at certain figures in that
quantification which were challenged by CEL. I have already noted that Mr Aldous used
figures supplied to him by Mrs Jones. He was also, however, provided with invoices in
respect of most of the costs which satisfied him that they should properly be included in the
calculation. With one exception he was not challenged on the accuracy of the figures, and I
accept his calculation. The exception was the figure of £32,616 in respect of security costs.
Mr Suttie stated that this was an error and that the correct figure was £20,760. Mrs Jones
agreed. Project costs are accordingly overstated in Mr Aldous's calculation by the difference
of £11,856.
[58]
CEL also challenged the amount (£847,940) included by way of interest on Mr and
Mrs Jones's shareholder loans. Again this figure was provided by Mrs Jones. In terms of
paragraph 6 of part 4 of the schedule to the 2013 agreement, "Development Costs" included
"a facility fee representing the sum equivalent to the deemed cost of money of the
Initial Funding for the period that same is utilised calculated at the same percentage
as the interest payable in respect of the loan obtained by the Company for the
funding of the Development per annum from the date of receipt of the Initial
Funding by the Company until the date of repayment of same".
Mrs Jones calculated the interest on the shareholder loans by applying the rate at which RBS
lent to MEDL, namely RBS base rate plus 3.5% per annum. It was not disputed that
33
allowance had to be made for interest on the shareholder loans; however, it was contended
that there was no basis in the agreement for applying the compounding that Mrs Jones had
applied in her calculation. Mr Suttie's calculation, without compounding, produced (as
already mentioned) a figure of £586,608 and therefore a difference of £261,332. The point is
not ultimately of critical importance, but in my opinion the agreement, properly construed,
did provide for compounding in that it included the words "per annum" as well as
specifying the percentage by reference to the bank funding. I therefore find that the figure
of £847,940 was properly included.
[59]
MEDL's inclusion of corporation tax in the calculation of net sales proceeds is
founded upon the inclusion within Development Costs, by paragraph 10 of part 4 of the
schedule to the 2013 agreement, of "any insurances, rates, outgoings and other taxes
applicable to the Site and/or Development during the Term". "Site" is defined in the
agreement as "the subjects known as Mile End School, Midstocket Road, Aberdeen
registered in the Land Register of Scotland under Title Number ABNl14950".
"Development" means "the acquisition and development of the Site to comprise flatted
residential units and the sale of such flatted residential units". On behalf of CEL it was
submitted that corporation tax ought not to be included as it falls to be regarded as a liability
of MEDL rather than a cost applicable to the Site or the Development. I agree. In my view
paragraph 10 is concerned with incidental costs incurred during the course of the
development, including local taxes applicable to the site. MEDL's liability to corporation
tax, if any, will have emerged after the realisation of profits and not as an outgoing during
the development period. It is not analogous to the other items in the paragraph and is not
properly to be included in the calculation.
34
[60]
The result of this analysis is that only £11,856 falls to be added to Mr Aldous's
calculation of net development profit under exclusion of corporation tax, producing a net
profit figure of £1,153,575. Unfortunately for CEL, this means that as a result of the property
downturn that occurred before most of the flats had been sold, the profit from the
development project is absorbed entirely by MEDL's entitlement to Priority Sum A, and
there would have remained no profit share for CEL if the agreement had not been
terminated. Even if the difference calculated by Mr Suttie as caused by compounding of
interest on the shareholder's loans were added back, the total would still not
reach £1,500,000. I hold therefore that no damages are payable in respect of MEDL's
wrongful termination of the agreement.
[61]
Finally in this chapter it is necessary to consider the effect, if any, of clause 3.6, set
out at paragraph 11 above. The matter is not entirely academic because, although I have
held that CEL would not have received any profit share, clause 3.6 envisages certain
circumstances in which a payment would have to be made by CEL to MEDL. No claim for
payment has been made by MEDL. I have found clause 3.6 somewhat difficult to
understand and have concluded that this is because it contains a drafting error. The
purpose of the sub-clause appears to have been to ensure that the amount of any Cost
Overrun would deplete each of CEL's profit shares in turn before having any effect on
MEDL's entitlements, regardless of the order of division of profits that would otherwise
apply in terms of clause 3.3. The difficulty arises with the words in parentheses, ie
"(the amount of the Development Costs to the extent that it includes Cost Overrun
being increased accordingly for this purpose in calculating Project Manager's Profit
Share to avoid any double counting of same)".
It seems to me that if the aim of these words was to prevent double counting of the Cost
Overrun, they would in fact have the opposite effect because the overrun would be included
35
three times: once in the Development Costs as calculated, again as a Cost Overrun, and
again as an increase in the amount of the Development Costs by the Cost Overrun. In order
for the aim of avoiding double counting to be achieved, the word "increased" requires to be
amended to "decreased". Read thus, the agreement provides for the Cost Overrun to enter
the calculation once only, while achieving the goal of allocating the risk of Cost Overrun
entirely to CEL. Such a reading accords with commercial common sense. I noted above
(paragraph 44) that there was a Cost Overrun of at least £979,964. There was, however, no
evidence that there was a total Cost Overrun of more than £1,250,000, and therefore no
evidence to support any claim for payment by MEDL. I therefore conclude that, clause 3.6,
correctly construed, does not affect the outcome of the case.
CEL's alternative claim for reasonable remuneration
[62]
CEL's alternative claim, for reasonable remuneration for its services, is founded upon
clause 3.12, set out at paragraph 14 above. A claim under clause 3.12 may be made "in the
event of termination of this Agreement by [CEL] in terms of clause 6.2.1 or by [MEDL] in
terms of clause 6.2.7". MEDL terminated the agreement in reliance upon clause 6.2.7.
Although I have held that that termination was unlawful, it was not contended that a
finding to that effect would preclude a claim by CEL for reasonable remuneration. It would
indeed be somewhat odd, and contrary to commercial common sense, to interpret the
agreement as providing for a claim to be made where the termination was lawful, but not
where it was unlawful. In my opinion the clause is sufficiently wide to apply to a
termination of the agreement by MEDL under clause 6.2.1 whether that termination was
lawful or not.
36
[63]
Read short, clause 6.2.1 applies where (as I have held) no profit share is found to be
due to CEL following the application of any part of clause 3. It entitles CEL, on completion
of the development, and subject to clause 3.9 (which qualification I address below), to "such
[sic] reasonable remuneration for its services up to the Termination Date, such remuneration
to be based on the open market rate for a project manager carrying out the management of a
development similar to the Development". The entitlement is subject to a cap of £250,000.
Neither party has sought to have the matter determined by adjudication.
[64]
Expert evidence in relation to reasonable remuneration was given on behalf of CEL
by Mr Garden and on behalf of MEDL by Mr Strutt. The two experts had held a discussion
by video conference and produced a helpful joint note setting out matters upon which they
agreed, and summarising their differences of opinion. It is worth highlighting one
particular matter of agreement, namely that the normal approach to valuing normal project
management services in circumstances such as those found here is to apply a fee percentage
to the project value.
Mr Garden's evidence
[65]
In his written report, Mr Garden confirmed that the services that CEL had
undertaken to provide did not follow the typical pattern of services prepared by a regulating
body such as the Royal Institution of Chartered Surveyors. Mr Garden noted the wide range
of activities performed by CEL between July 2011 and November 2016, much of the work
having been done before either of the 2012 and 2013 agreements had been entered into. He
considered that a time estimate in the region of 6,000 hours spent on the project during that
period was a reasonable one in view of the scope and duration of CEL's involvement.
37
[66]
Mr Garden based his opinion as to a reasonable rate of remuneration on fee rates
applied by his firm across a variety of sectors in recent years. He found an average project
management fee rate of 2%, but this rate applied to projects of a value of around £20 million.
He considered that 3.25% was a more realistic rate to charge for a project of the value of the
Mile End development. To that percentage he added a further 1.95% by way of reasonable
remuneration for the services provided by CEL in addition to project management, in terms
of the 2013 agreement. The figure of 1.95% was made up as follows:
0.5% for liaising with banks to secure funding. This figure was obtained from
a financial consultant.
0.15% for selection of fittings and fixtures. This figure was obtained from an
interior designer.
0.75% for internal space planning. This figure was based upon the difference
between Canale Architects' fee for the project and the typical fee rate for a full
architectural design service.
1.25% (applied only to site purchase cost) for initial site finding and
development consultancy work. This was based upon information from
another Rydens partner regarding finding and introduction work, uplifted
by 0.25% because CEL had done more than mere introduction.
Applying these percentages to the project costs (or, in the case of the finding and
introduction fee, to site purchase cost), Mr Garden's calculation produced a fee
of £383,422.58. Although useful as a cross-check, the number of hours said to have been
spent on the project did not form part of his calculation. Mr Garden was not asked to, and
did not, undertake any consideration of the standard or quality of the project management
38
services supplied by CEL. He did not disagree with the general observations of Mr Strutt
(below) in relation to the standard of service of a competent project manager.
[67]
In cross-examination, Mr Garden accepted that the total project costs might have
included costs incurred after November 2016, but he understood that the work carried out
thereafter was not construction-related. He was unable, due to client confidentiality, to
provide details of any of the projects used as comparators, and he accepted that as they were
larger projects they were not exactly comparable. He accepted that the figure of 3.25% was
probably one that he had had in mind, that it was not based upon personal experience of a
comparable project, and that there was no comparator evidence for it. As regards the
additional services, he saw nothing wrong with applying the percentages to the total cost of
the project even though the services identified related only to a specific part of it. The
percentages used for securing finance, fixtures and fittings, and finding and introduction
were based entirely on information obtained from the individuals whom he had consulted.
He accepted that there was no comparator evidence for the percentage of 0.75% used for
internal space planning, and that Canale Architects had not in fact charged on a percentage
basis.
Mr Strutt's evidence
[68]
Mr Strutt was asked to provide his opinion on:
(i)
the services expected of a project manager appointed under the
2013 agreement;
(ii)
whether the services carried out by CEL up to the date of termination aligned
with the level of service expected under the agreement; and
39
(iii)
the reasonable remuneration that a project manager might properly and
reasonably be expected to be paid for those services, considering open market rate
and the level of service provided.
It will be apparent that this was a different remit from that of Mr Garden, because it took
account of the quality of the project management service actually provided by CEL.
[69]
In relation to standard of service, Mr Strutt made the following general observations:
For a project manager, as opposed to someone who is generally involved in
project development, delivering a project requires a systematic approach.
Being an experienced project developer is not the same as being an
experienced project manager.
The general requirement for a competent project manager is one who
identifies objectives and plans to deliver these to the budget set, by the time
required and at the quality defined.
The plan for this has to be developed by the project team under the direction
of the project manager, approved by the client, and effectively communicated
to the project team. The project is then tracked against these objectives and
regularly reported on. Corrective action should then be taken when the
reports indicate that the project is deviating from the plan.
To deliver a project cost and time effectively without writing the plans down
is, essentially, impossible for all but the simplest of projects. The
development in question here did not fall into the category of the simplest of
projects.
A set of drawings and a specification is not a design brief. A quantity
surveyor's construction cost report is not a project budget cost plan. A
40
contractor's works programme is not a project master programme for the
development. Not preparing any assessment of risk and having no
systematic process for identifying and reducing risk, is not the conduct of a
reasonably competent project manager.
[70]
In Mr Strutt's opinion, CEL had provided a very low standard of delivery of project
management services. His rating for the most critical activities cost plan and budget;
programme and progress tracking; monitoring the team was either "low" or "none".
There had been an apparent lack of identification of, or attempt to control, project risks
generally. Carrying out tasks ad hoc with no defined plan or delivery strategy was not
sufficient to constitute project management, and was not efficient or risk free. Project
management was systematic: it was the identification of objectives, then planning to deliver
them, tracking the delivery, adapting to circumstances to control cost, quality and delivery.
It was the identification of risk, taking steps to avoid, transfer, insure, or allow for the
consequences of risk. CEL had not provided a systematic service. There was no overall
project cost reporting, no project-wide risk register and minimal reporting or identification
of risks, no project programme, no adequate cost control procedures, no project quality plan,
and no matrix of reports and meeting records.
[71]
As regards the rate of remuneration for project management services, there was little
published guidance. Mr Strutt's own experience suggested a fee of 2% to 3% of
development cost for a small development. In his view, the Mile End development would
attract more than the basic level of time to deliver, and therefore the fee percentage was
likely to be around 2.5%. Mr Strutt calculated the development cost to be £8,473,265.12. A
fee of 2.5% would amount to £211,831.63. Having regard, however, to his assessment that
the quality of the service delivered by CEL was on average no more than 10% of what was
41
required, he considered that reasonable remuneration would be £21,183.16. Alternatively, if
the level of delivery were to be calculated by reference to the reporting in contemporaneous
documents of tasks undertaken, the average level of delivery would be 34%, producing a
fee (34% of £211,831.63) of £72,022.75. In Mr Strutt's view, that would overvalue the project
management services supplied.
[72]
In cross-examination, Mr Strutt confirmed that he had sought to identify services
usually regarded as project management. The Mile End project had been sufficiently large
and complex to require all of the critical project management activities that he had
identified. He acknowledged that CEL had had a more substantial role than that typically
performed by a project manager, but only to a limited extent. His selection of a percentage
fee of 2.5% took account of those additional functions. In order to arrive at his "middle"
figure, ie the one using a 34% level of delivery, he had gone through the minutes and other
documents looking for work to value. This basis of valuation was done without reference to
the effectiveness of the work done. He was unable to identify any particular problem that
was directly caused by a failure by CEL to perform a particular project management
function, but the probability was that if there had been no system in place there would have
been adverse consequences.
Decision
[73]
Dealing firstly with the evidence of Mr Strutt, I find no reason to reject his view that
the quality of CEL's project management services failed to meet the standard ordinarily to
be expected of a project manager. His opinion is fully explained and vouched by reference
to the contemporaneous documentation. Senior counsel for CEL submitted that the opinion
was unfounded in fact because Mr Strutt had only seen a small proportion of the project
42
documentation, as supplied to him by MEDL's agents. Although Mr Strutt acknowledged
(as is obvious) that sight of more documents could impact upon his opinion, I accept his
view that he saw enough to enable him to conclude that there was an absence of the
systematic approach to project management that he (and indeed Mr Garden) regarded as
appropriate for a project such as the Mile End development. It was not submitted that one
might have found, among documents not made available to Mr Strutt, the project cost
reports, risk register, project quality plan or other analytical documents that he considered
critical to such a project. Although I readily accept that this was a complex project involving
an old building whose renovation and refurbishment threw up many unforeseen difficulties,
I must accept Mr Strutt's view that the resolution of those difficulties was not assisted by the
lack of systematic project management.
[74]
Having said all of that, I am of the view that none of it is relevant to the assessment
of CEL's entitlement under clause 3.12. There is, quite simply, nothing in that sub-clause
that requires or permits the standard or quality of the project management services to be
taken into account. It is common ground, confirmed by the joint view of the expert
witnesses, that project management services are normally remunerated by applying a fee
percentage to the project value. It was not suggested that the normal method of
remuneration required an assessment of the standard of service delivered. In my opinion, it
accords with commercial common sense to construe the word "reasonable" in clause 3.12 as
a reference to the rate to be applied, ie to the reference to "the open market rate for a project
manager carrying out the management of a development similar to the Development". If
the parties had intended that, contrary to the usual method of calculation of remuneration,
the standard or quality of the project management service provision was to be taken into
account in determining CEL's fee, then in my opinion the agreement would have had to
43
make that clear and to provide a methodology by which it was to be done. As CEL
submitted, assessment of quality would be an enormously laborious exercise with almost
unlimited scope for disagreement. It would introduce unacceptable uncertainty as well as a
need for the application of subjective judgment in relation to every aspect of the service
provision. The task faced by an adjudicator appointed to fix the remuneration in absence of
agreement would, in the absence of an agreed methodology, be an extremely difficult and
controversial one. In order to avoid all of this and the concomitant expense the
agreement adopted the objective measure of an open market rate.
[75]
It was further submitted on behalf of CEL that the approach adopted by MEDL was
wrong in law. A distinction fell to be drawn between a claim for remuneration for services
on the one hand, and any counterclaim for defective performance which might be set off
against such remuneration on the other: Ballantyne v East of Scotland Farmers 1970 SLT
(Notes) 50, and the authorities there cited. I agree that that approach would be appropriate
here, and that if it were to be adopted, MEDL would require to identify the loss said to have
been caused by the defective performance. Mr Strutt's view was that that would be an
impossible exercise because the defective performance of itself removed the evidence of the
link to any specific loss. While I see the force of that observation, it appears to me to add
further weight to the conclusion that parties could not have intended that the fixing of
remuneration would necessitate inquiry into standard of performance.
[76]
On the basis of Mr Strutt's calculation, it follows that the remuneration due to CEL in
terms of clause 3.12, properly construed, for work carried out prior to the termination date
would be £211,831.63, ie 2.5% of project cost, without any percentage discount for quality.
For the sake of completeness, I should add that if I had accepted that the agreement
provided for the remuneration percentage to be discounted for quality of delivery of service,
44
I would have seen no reason to reject Mr Strutt's opinion that CEL's project management
services were properly valued at 10% of the above figure.
[77]
Turning to Mr Garden's opinion, senior counsel for MEDL submitted, under
reference to the observations of Lord Reed and Lord Hodge in Kennedy v Cordia (Services)
LLP 2016 SC (UKSC) 59 at paragraphs 52 and 53, that I should treat Mr Garden's evidence as
inadmissible on the ground that he failed to act as an independent expert. His evidence as
to remuneration rates was no more than assertion. He had relied upon unvouched
statements by the directors of CEL. I accept that Kennedy v Cordia makes clear that
independence and impartiality are to be regarded as issues of admissibility and not merely
weight, but I did not consider that Mr Garden's evidence demonstrated a lack of either of
those requirements. It was also stressed in Kennedy v Cordia (at paragraph 48) that
unsubstantiated ipse dixit evidence is worthless: I do not understand the court to go so far as
to say that it is inadmissible, although in Scottish procedure where rulings on admissibility
are not usually given prior to the proof, the point may often be academic.
[78]
In my judgment, Mr Garden's view as to the appropriate rate of remuneration for
CEL's services falls to be rejected. In the first place, I do not consider that there is any
contractual basis for his addition of 1.95% in respect of services provided by CEL in addition
to project management. Again, that is not what clause 3.12 provides. As I have already
observed, the 2013 agreement was a bespoke contract with a number of unusual features. It
was entitled a project management agreement, and CEL were designated as "the Project
Manager", even though (a) it was common ground, and known to all parties at the time of
contracting, that neither Mr Suttie nor Mr Ferrari professed expertise in project management
as opposed to project development; and (b) the list of Management Services in part 1 of the
schedule to the agreement extended beyond what are generally regarded as the services of a
45
project manager. Clause 3.12 must be applied according to its terms, and it is specific in
conferring an entitlement to remuneration at the open market rate for a project manager
carrying out the management of a development similar to Mile End. It does not, for
example, provide for remuneration at a rate appropriate for carrying out "the Management
Services", and I see no basis for reading into it that CEL are entitled to an elevated
percentage because their duties encompassed matters other than project management.
[79]
I also reject Mr Garden's evidence that 3.25% was an appropriate percentage to apply
for project management. This evidence did seem to me to fall within the ipse dixit category.
Mr Garden's purported comparators were not true comparators, being much larger projects,
and in any event did not support his 3.25% rate. In the end my impression was that that
figure was no more than one that felt right to him, and he produced no reasoning or
evidence to support it. It was further unclear from Mr Garden's evidence what the source
was of the figures for construction costs that he had used in his calculation.
[80]
Finally in this chapter it is necessary to consider the effect, if any, of the phrase
"subject always to the application of clause 3.9" which appears in clause 3.12. Clause 3.9 is
set out at paragraph 12 above. It was submitted on behalf of MEDL that, applying both
commercial common sense and an approach which gave content to the phrase, the proper
construction of those words was that any claim for reasonable remuneration under
clause 3.12 would only be paid once the Development Costs have been provided for and
MEDL had been paid its Priority Sum A in full. I agree that the court should give content to
the phrase if it can. It is important to note, however, that clause 3.9 bears to apply
specifically to CEL's Project Manager's Profit Shares, as defined in the agreement.
Reasonable remuneration under clause 3.12 is not within the definition of the Project
Manager's Profit Share, and for that reason I reject MEDL's interpretation of the phrase. It
46
seems to me to be much more likely that parties intended the phrase to refer to the second
part of clause 3.9 which provided for the deferral of any payment to CEL until all
Development Costs had been ascertained and paid or provided for. That, in my view,
would accord with commercial common sense and gives content to the phrase. As it was
not suggested that the total Development Costs remained unascertained or unprovided for
at the date of the proof, it follows that, in the circumstances, the phrase has no practical
consequence.
[81]
For these reasons, I hold that CEL is entitled in terms of clause 3.12 to payment
of £211,831.63 by way of remuneration for its services up to the termination date.
Work done after termination
[82]
I have already noted that, following upon the service of notice of termination in
November 2016, CEL continued to carry out work in relation to the project. In his witness
statement, Mr Suttie described this as "continuing to work as normal" under the instruction
of MEDL, including liaising with purchasers, dealing with snagging, and negotiating the
sale of an apartment. He calculated that during this period he and Mr Ferrari had spent a
total of 734 hours on the project. In his oral evidence he was vague about how CEL had
been instructed to continue to work, insisting that everything just went on as before. For his
part, Mr Jones asserted that he did not see CEL doing very much. He had told Mr Suttie that
no further work by CEL was needed. Mr Canale was dealing with snagging.
[83]
Mr Garden proceeded in his report on the basis that CEL was entitled to be
remunerated on the basis of an hourly rate for 734 hours work. He considered that a rate
of £100 per hour, being the commercial rate for a "senior surveyor" in the property
47
consultancy arena in the Aberdeen area, was conservative. That produced a figure for post-
termination remuneration of £73,400.
[84]
Mr Strutt continued his approach of assessing CEL's entitlement to remuneration by
reference to the level of its delivery of effective project management services. He found very
little, if anything, being reported upon during the post-termination period. He considered
that a period of 4-6 weeks rather than 20 (full time equivalent) weeks would have been
enough for project management. He then discounted, in the same way as before, for what
he considered to have been a low level of delivery of service. Finally, he considered that an
hourly rate of £100 was too high, applying instead (after a correction intimated in the note of
the joint meeting) a rate of £85 per hour. After all of these adjustments, he calculated that
CEL's project management services after the termination date were properly valued at a
maximum of £1,269.93.
Decision
[85]
CEL's claim for payment for work carried out post-termination is based on
recompense: in other words it is made under the law of unjustified enrichment and not the
law of contract. The measure of a claim for recompense is the extent to which the other
party has been enriched (quantum lucratus). I have had considerable difficulty identifying
evidence of the extent, if any, to which MEDL was enriched by work carried out post-
termination by Messrs Suttie and Ferrari. I accept that, as a matter of fact, some work
continued to be carried out, and I am also satisfied that Mr Jones was aware that this was
happening. It seems likely that Messrs Suttie and Ferrari were proceeding on an assumption
that, regardless of the notice of termination having been served, they would still, at the end
of the day, receive a profit share. On any view they were not providing services
48
gratuitously. I consider that CEL's claim for recompense can relevantly be made, but
assessing the extent, if any, of MEDL's enrichment is another matter.
[86]
Mr Garden's quantification falls to be rejected. Apart from the fact that it is based
upon the unvouched figure of 734 hours' work, it is in essence a quantum meruit claim that
would be appropriate for implied contract, but not for recompense. It does not address the
issue of enrichment at all.
[87]
As regards Mr Strutt's calculation, I make two observations. Firstly, in contrast to
the assessment of pre-termination remuneration under clause 3.12 of the agreement, there is
no reason why, in relation to the post-termination period, the level and quality of the service
provided should not be taken into account as he has done. The concept of enrichment
requires consideration of whether the services provided were indeed such as to leave MEDL
better off. Secondly, however, there is no justification in principle for restricting the
assessment of enrichment to the provision of property management services alone. The
description by Mr Suttie of work carried out post-termination suggests that project
management was by then of lesser importance: it is sales and snagging that are said to have
taken up CEL's time. The problem for the court is that I have been provided with no
evidence of the benefit to MEDL from CEL's continued involvement in these matters. It is
not admitted by Mr Jones that MEDL derived any benefit at all. The point has been made
that Mr Canale was dealing with snagging and Peterkins were responsible for marketing
and sales. In the absence of any evidence of enrichment of MEDL arising out of the carrying
out by CEL, post-termination, of activities other than project management, I am unable to
find CEL entitled to any payment at all in respect of such activities.
[88]
That leaves Mr Strutt's assessment of the value to MEDL of CEL's post-termination
project management activities. I am satisfied that the methodology is sound and, in the
49
absence of any contrary evidence, I accept his figure of £1,269.93 as the measure by which
MEDL was enriched.
Disposal
[89]
I shall sustain CEL's third plea in law and grant decree for payment of £211,831.63. I
shall also sustain CEL's fifth plea-in-law and grant decree for payment of £1,269.93. Quoad
ultra I shall repel both parties' pleas. I shall put the case out by order for submissions on
interest and expenses.
