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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> City Link Development Company Ltd v. Lanarkshire Housing Association Ltd [2005] ScotCS CSOH_76 (16 June 2005) URL: http://www.bailii.org/scot/cases/ScotCS/2005/CSOH_76.html Cite as: [2005] ScotCS CSOH_76, [2005] CSOH 76, 2005 SCLR 862 |
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City Link Development Company Ltd v. Lanarkshire Housing Association Ltd [2005] ScotCS CSOH_76 (16 June 2005)
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OUTER HOUSE, COURT OF SESSION [2005] CSOH 76 |
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CA40/03
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OPINION OF LORD REED in the cause CITY LINK DEVELOPMENT COMPANY LIMITED Pursuers; against LANARKSHIRE HOUSING ASSOCIATION LIMITED Defenders: ___________ |
Pursuers: Keen, Q.C., McGrigor Donald
Defenders: Howie, Q.C., MacRoberts
16 June 2005
INTRODUCTION
[1] This action concerns a building project, involving the design and construction of housing and associated works, which was carried out by the pursuers for the defenders. The parties entered into four contracts relating to the project:(i) a minute of agreement dated 24 and 27 March 1998 ("the minute of agreement");
(ii) a building contract in respect of Phase 1 of the project, which the parties have agreed, by joint minute, comprised a tender and acceptance dated 23 February and 4 August 1998 and a standard form of building contract executed on 9 and 15 December 1998 ("the Phase 1 contract");
(iii) a building contract in respect of Phase 2 of the project, dated 10 and 24 August 1999 ("the Phase 2 contract"); and
(iv) a building contract in respect of Phase 3 of the project, dated 14 and 22 February 2000 ("the Phase 3 contract").
The pursuers seek declarator that, by virtue of clause 1.1.3 of the minute of agreement, they are entitled to have the contract sum in terms of the Phase 2 contract and the Phase 3 contract adjusted in accordance with a tender prices index referred to in that clause, in respect of any works undertaken by them more than 2 years after the Phase 1 contract was entered into (i.e. after 4 August 2000). Alternatively, they seek rectification of the Phase 2 contract and the Phase 3 contract, in accordance with section 8(1)(a) of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985 ("the 1985 Act"), so that the definition of "the Contract Sum" in each of those contracts is amended by adding:
"which sum shall be adjusted in accordance with the tender prices index referred to in clause 1.1.3 of the Minute of Agreement entered into between the Employer and the Contractor, and executed on 24 and 27 March 1998, in respect of all and any works undertaken by the Contractor after 4 August 2000, being the expiry of a period of two years from the entering into of a building contract between the Employer and the Contractor dated 23 February and 4 August 1998 relative to Phase 1 of the building project at Watling Street, Motherwell, of which the present contract forms Phase 2 [or 3, as appropriate] thereof".
It is a matter of agreement that, in the event of either declarator or rectification being granted as concluded for, certain agreed sums are payable by the defenders to the pursuers.
[2] Evidence concerning the factual background to the minute of agreement, and also concerning other matters of little or no relevance to the construction of that agreement (such as the parties' negotiations, their intentions, and their conduct after the present dispute had arisen) was given by a number of witnesses. In the following section, I shall summarise the import of their evidence, without attempting to sift the relevant from the irrelevant (as to which no detailed submissions were made). [3] The witnesses' accounts were generally consistent with one another, and I found their evidence to be generally credible and reliable. One exception was Mrs Tracey Winters, who was the defenders' development manager. She gave her evidence in a defensive manner, and conveyed the impression that she was presenting a prepared account which included elements of which no notice had been given in the pleadings, and which had not been put to earlier witnesses. She accepted that her evidence had in some respects been influenced by legal advice which she had received after the present dispute had arisen. I formed the impression that her evidence was to some extent a rationalisation of events, ex post facto. In so far as it is inconsistent with other evidence, I prefer to accept the other evidence. That said, I should make it clear that I had no reservations as to her honesty: my reservations were rather as to the reliability of her recollection. I also found Mr David Robertson, of the defenders' quantity surveying consultants Armour Construction Consultants ("Armours"), to be somewhat dogmatic in his evidence, notably in relation to the likely attitude of Scottish Homes to the indexation of contract costs. In so far as his evidence conflicted with that of other witnesses, I have not accepted it. I have attached particular weight to the evidence of the witnesses from Scottish Homes, who were independent of the parties to the proceedings.THE FACTUAL BACKGROUND
[4] The pursuers are a property development and investment company. They have a subsidiary, Central Building Contractors Ltd ("CBC"), which is a construction company. [5] The defenders are a housing association, as defined by the Housing Associations Act 1985. Their function is to provide housing accommodation. They do not trade for profit. They receive grants from Scottish Homes, and borrow funds from commercial lenders. They generate resources by letting or selling the housing which they provide. Like other housing associations in Scotland, they were at the material time regulated by Scottish Homes, a statutory body established by the Housing (Scotland) Act 1988. Scottish Homes were also responsible for the provision of public finance to housing associations such as the defenders. The functions of Scottish Homes included promoting the provision of housing, and undertaking the improvement of the environment related to housing. [6] In early 1993 the pursuers entered into an agreement with Scottish Enterprise for the acquisition of an area of land, amounting altogether to 29 acres. The land, at Watling Street, Motherwell, had previously been in industrial use, and had been decontaminated by Scottish Enterprise so that it could be used for housing. Under the agreement, Scottish Enterprise agreed to sell the land to the pursuers as and when it was required for development as housing. [7] Part of the land was suitable for the type of housing provided by housing associations. In 1994 the pursuers' managing director, Mr Ronald McLetchie, initiated discussions with Scottish Homes's development manager for Lanarkshire, Mr Gary Malone. The land in question was categorised by Scottish Homes as a priority area. Mr Malone indicated that Scottish Homes would be willing to support a housing association scheme of about 100 houses on a site comprising about one-third of the total area of land, by providing grant to the defenders, for whom the pursuers would design and construct the housing development. The defenders would then let the houses or enter into shared ownership schemes. That proposal was acceptable to the pursuers, who intended to develop one-third of the land themselves as speculative house-builders, and to involve other house-builders in relation to the remaining one-third of the land. [8] Thereafter, in about the middle of 1994, Mr McLetchie became involved in discussions with the defenders' development manager, Mrs Winters. She indicated that the defenders were keen to proceed with a project of the kind which Scottish Homes had suggested. Further discussions took place involving Mr McLetchie, Mrs Winters, Mr Malone and Scottish Homes's operations director for Lanarkshire, Mr Thomas Gallacher. Mr Malone made it clear to the pursuers and the defenders from the outset that Scottish Homes could not provide sufficient grant to the defenders to support the entire project in a single financial year, because of budgetary constraints, and that the project would therefore have to be phased over a number of years, so as to fit in with Scottish Homes's budget. From an early stage, it was envisaged that the project would be carried out in three phases. This was the only Scottish Homes project in Mr Malone's area of responsibility (Lanarkshire, Ayrshire and Dumfries and Galloway) which was to be phased, reflecting the fact that it was the largest project in the area. [9] The pursuers were not aware in detail of the defenders' financial arrangements: in particular, of the extent to which their financing of the project depended on the receipt of grant, or might be derived from other sources. Nor were the pursuers aware of the requirements imposed by Scottish Homes upon housing associations, or of how (in detail) applications for grant were assessed. The pursuers were however aware that Scottish Homes had tables of costs which they were prepared to accept, for grant purposes, based (broadly speaking) on the amount and quality of the accommodation to be provided, with additions to reflect variables such as the nature of the site. As a consequence of that system of assessment, the pursuers undertook discussions with the defenders as to their proposals, in relation particularly to the nature and specification of the housing, then costed the defenders' initial proposals. The costed proposals were then submitted by the defenders to Scottish Homes, to ascertain whether the costs were acceptable. By September 1995, the defenders envisaged a project totalling 104 houses, divided into three phases, on a particular area of land ("the site"); and Scottish Homes had indicated their willingness to provide grant for a project whose cost fell within their cost yardstick. In that regard, their initial calculation of the maximum allowable cost brought out a sum of £4,533,456. Thereafter the pursuers worked with the defenders, and Armours, to arrive at costed proposals which would be acceptable to Scottish Homes. [10] In practice, Scottish Homes's contribution to the cost of developments by housing associations averaged 75 per cent, but varied from case to case. The balance of the cost would be raised by the housing association by borrowing from a commercial lender. It was the policy of the defenders that projects should be self-financing: that is to say, they expected their borrowings in respect of a project to be repaid out of their receipts (from lettings and sales) from the same project. Their procedure, in relation to the financing of developments, was therefore to begin by calculating the rental income and capital receipts they could expect. On the basis of that calculation, they could then assess how much private loan capital they could raise and repay out the proceeds of the development. They would then rely on Scottish Homes to cover the balance of the cost of the development by way of a grant. [11] In assessing applications for grant, Scottish Homes carried out a form of appraisal known as a GIC ("Gross Indicative Cost") assessment, designed to ensure that their payments of grant secured value for money. The GIC assessment was based on a circular issued on behalf of the Scottish Office to housing associations in October 1982. The circular contained standard tables for indicative costs in 1982. By applying the tables, the indicative cost of the number of units of housing to be provided (the "house erection sub-total") could be calculated. To that figure was added the "site development and servicing sub-total", calculated by multiplying the number of units of housing by a standard allowance for site development and servicing. The sum of the "house erection sub-total" and the "site development and servicing sub-total" was then adjusted to reflect a number of variables, in accordance with figures issued by the Scottish Office. One variable was the region where the development was to take place: developments were more expensive in some areas than in others. Another variable was whether the development was carried out under a fixed price contract, or under a contract which permitted fluctuations: fixed price contracts normally specified a higher contract sum, to allow for inflation over the period of the contract. A third variable was the increase in costs since 1982: cost update allowances were issued by the Scottish Office each quarter, based on information about increases in tender prices derived from a basket of indices. By making these adjustments, the "basic indicative cost for project" was calculated. An addition was then made for "ad hocs": for example, aspects of the specification of the housing which reflected changes in building regulations since 1982, and which were not therefore taken into account in the basic indicative cost. The "gross indicative cost for project" was thus calculated. The "maximum allowable cost yardstick" was 10 per cent above the gross indicative cost. Scottish Homes would not normally pay grant towards the cost of a project, to the extent that the cost exceeded the maximum allowable cost yardstick. In the event that that yardstick was exceeded, Scottish Homes would pay a grant based on the maximum allowable cost yardstick, and the housing association would have to make up the shortfall from their own resources. These were not matters of which the pursuers were aware in any detail. [12] A guidance note issued by Scottish Homes to housing associations in 1990 advised that compliance with certain of its provisions would attach as a condition to grant funding. One such provision stated:"The Association will commission all necessary works in accordance with the requirements regarding Contract Conditions in Clause 4.4.1 a, b and c".
Clause 4.4.1a stated:
"All contracts which do not exceed two years duration must be let on a firm price basis".
These were not matters of which the pursuers were aware
[13] Some years then passed without the project proceeding further. Scottish Homes's budget had been cut by the Scottish Office, and the project therefore had to be postponed. Towards the end of 1997, however, the pursuers were informed by the defenders that Scottish Homes had about £0.5m left in their budget for 1997/98 which they were willing to commit to the project. The money had to be used before the end of the financial year: if it were not used by then, it could not be carried forward to the following financial year. The pursuers' usual practice, when carrying out a development for a housing association, was to enter into a contract under which they would construct the development and then sell the land, with the houses on it, to the housing association. The pursuers were not, however, in a position to commence (let alone complete) the development before the end of the financial year: the project had not been finalised, and the planning application, and applications for building warrants, had not been prepared. In these circumstances, the defenders proposed that, to enable them to make use of the money which had unexpectedly become available from Scottish Homes, the pursuers should sell the site to the defenders at that stage, prior to the commencement of development, at the district valuer's valuation of £515,000. Scottish Homes would then use the £0.5m left in their budget to finance the defenders' acquisition of the site. [14] The defenders' proposal was not one which it made commercial sense for the pursuers to accept, unless a number of concerns were satisfactorily addressed. One such concern was that, if the pursuers sold the undeveloped site to the defenders at its then value, the project might not go ahead, or might not go ahead in its entirety. The pursuers needed to be able to be confident that the project would proceed, or that the site would otherwise be returned to them so that they could develop it themselves. They also needed to be able to be confident that the project would go ahead in its entirety: if only one phase were to proceed, that might compromise their ability to develop the remainder of the site. A second concern was that, if the pursuers sold the undeveloped site to the defenders, the defenders might then employ another firm to design and build the project. The pursuers needed a commitment from the defenders to employ themselves. A third concern was that the timing of the project was uncertain: Scottish Homes had made it clear that there was no guarantee of when finance would be available. The possibility of substantial delays before the work was carried out was something which had to be borne in mind in relation to the amount the pursuers were to be paid for carrying out the project. [15] Scottish Homes's position also gave rise to considerations which inter-related with those of the pursuers. They could not give an open-ended commitment to support the project through to completion, regardless of cost. Equally, there was from their perspective little point in approving a grant application even for Phase 1, unless the cost of the project as a whole was known to be acceptable. They also needed to know the cost of the project as a whole in order to be able to allow for it in their future financial planning, so that the project could be completed. They therefore required to assess the project as a whole, in order to ensure that it conformed to their GIC criteria (or "cost parameters", as the witnesses described them) irrespective of whether it was divided into phases. A GIC assessment of the project as a whole was also necessary because of a complication arising from the fact that Phase 1 of the project was to bear a disproportionate share of the infrastructure costs. If grant above normal levels were approved for Phase 1, so as to reflect the extent of the infrastructure works involved, it therefore followed that the grant for subsequent phases should be correspondingly reduced. The GIC method of assessment would not however readily enable the necessary adjustments to be made, if each individual phase were considered in isolation. It was accordingly agreed that the pursuers would provide costings of the entire project, and that Scottish Homes's assessment would be based on that overall cost in conjunction with the elements specific to each phase. The question that then arose was how the pursuers could arrive at a cost for the entire project, when there was a possibility of substantial delays before the project could be completed. [16] Since the defenders were reliant on Scottish Homes for the funding of the project, their position gave rise to similar considerations. They would have to undertake binding obligations towards the pursuers, in relation to the construction of the project, before the pursuers would sell them the site; but they could not enter into open-ended commitments regardless of cost and of the availability of funding from Scottish Homes. [17] Against this background, discussions took place between the pursuers, the defenders and Scottish Homes, in late 1997 and early 1998, as to the basis upon which the site could be acquired by the defenders. The individuals principally taking part in those discussions were Mr McLetchie of the pursuers, Mrs Winters of the defenders, and Mr Gallacher of Scottish Homes. One of the matters discussed was the nature of the works involved in the project. By February 1998 the project had evolved into the form in which it was eventually built. There were to be three phases, respectively of 34, 38 and 32 houses, producing a total of 104 houses. Each phase was to consist of specified numbers of standard house types, designed by the pursuers: for example, there were to be twelve Type A houses in Phase 1, eight in Phase 2, and none in Phase 3; six Type B houses in Phase 1, ten in Phase 2, and twelve in Phase 3; six Type C houses in Phase 1, seven in Phase 2 and twelve in Phase 3; and so on. The total cost of the various house types, plus the total cost of the various infrastructure works, would constitute the total cost of the project (exclusive of fees). [18] In order for the defenders to make use of the £0.5m available from Scottish Homes by acquiring the site, both the pursuers and the defenders required a formal agreement to be in place, regulating the future of the project. Both the pursuers and the defenders instructed solicitors in connection with the preparation of such an agreement. Mr Alan McCulloch of Wright & Co., who was instructed on behalf of the defenders, explained in evidence that the purpose of the minute of agreement (as it became) was to regulate the acquisition of the site and the subsequent development of the project. One purpose in particular was to protect the pursuers' interests in relation to that development. The pursuers needed the defenders to be under an obligation, if they proceeded with the development, to award the construction contract or contracts (depending on whether there was a single contract for the entire project, or separate contracts for each phase of the project) to the pursuers; and, if the defenders did not proceed with the development, they had to be under an obligation to reconvey the site to the pursuers, so that the latter could develop it themselves. The defenders were willing in principle to undertake such obligations. They could not however undertake an open-ended obligation to award contracts to the pursuers regardless of cost. Their position, as stated in a letter dated 11 February 1998 from their solicitors to the pursuers' solicitors, was as follows:"Our clients would require to insert into the missives a clause to the effect that the design and build contract will be awarded to your clients' subsidiary company subject to that company meeting the cost and quality parameters laid down by Scottish Homes at the time of the development of each section of the site ....
We further understand that because of the difficulties with projecting the time at which funding will be made available by Scottish Homes, no timescales can be supplied with regard to the development of phases 2 and 3 of the site, although it is proposed that phase 1 would start in May of this year approximately".
"WHEREAS City Link and Lanarkshire have reached agreement as to certain matters relating to the Project (as hereinafter defined) NOW THEREFORE it is hereby agreed between City Link and Lanarkshire as follows".
Clause 1 contained definitions, and began:
"1.1 In this Agreement (including any Schedules) unless the context otherwise requires the following expressions shall have the following meanings".
The subsequent provisions of clause 1, so far as material, stated:
"1.1.1 'Agreement' means this Agreement and any variation or amendment executed by the parties hereto;
.....
1.1.3 'the Contract' means a Design and Build Contract or Contracts and based on the JCT (1981) Edition Standard Form of Building Contract with Contractors Design (July 1997 Revision) issued by the Scottish Building Contract Committee format to be entered into between Lanarkshire and either City Link, or CBC for the construction of the Project on the Site in three phases or otherwise as the parties may agree; which Contract or Contracts will comply with quality and cost parameters laid down by Scottish Homes or their successors as existing at the time or times of entering in to the Contract or Contracts. The Contract or Contracts will specify the terms and conditions applicable to the construction of the Project including, inter alia, a mechanism or formula ('the pricing mechanism') under which the price payable by Lanarkshire can be calculated with certainty. The Contract or Contracts will further specify that the pricing mechanism will remain fixed for a period of two years from the date of conclusion of the Contract in respect of any works undertaken under the Contract or Contracts within such period of two years, whether in respect of Phases 1, 2 or 3 of the Project or otherwise. But the pricing mechanism will be adjusted in accordance with the Tender Prices Index, as published by the Building Cost Information Service of the Royal Institution of Chartered Surveyors conform to normal practice of the Construction Industry and taking the date of execution of the Contract as the base reference date, in respect of all and any works undertaken in respect of the Project after the expiry of the said two year period. For the avoidance of doubt, it is agreed that, for the purposes of the Contract, Phase 1 of the Project will include, completion, to base course level, of the access roadway serving the Project and inter alia the development proposed for adjoining subjects as said roadway is delineated and marked as such on the Plan;
1.1.4 'the First Date' means 25th March 1998, or such other date as City Link and Lanarkshire may agree as at which date vacant possession of the subjects of offer shall be given to Lanarkshire;
1.1.5 'the First Payment' means Five hundred and Fifteen Thousand Pounds (£515,000) Sterling ....
1.1.7 'the Phases' mean the phases 1, 2 and 3 into which the Project will be subdivided as shown delineated and marked demonstratively as such on the plan annexed and signed as relative hereto;
1.1.8 'the Project' means the construction in accordance with detailed planning consent, roads construction consent, building warrant and other relevant statutory consents ('the consents') on the Site of 104 residential units (or such other number as may be agreed), with associated infrastructure works, landscaping and others;
1.1.9 'the Site' means that plot or area of land lying to the north of Watling Street, Motherwell, outlined in red, blue and green on the plan annexed and subscribed as relative hereto being the subjects particularly described in the draft Feu Disposition annexed and signed as relative thereto.
1.1.10 'The Second Date' means the nearest business day falling eight months after the First Date.
1.1.11 'The Second and Subsequent Payments' means all further sums or payments due by Lanarkshire to City Link or CBC in respect of the Project;
2. As soon as reasonably possible after execution of this Agreement City Link and Lanarkshire shall enter into discussions with a view to agreeing by The Second Date (i) the detailed terms and conditions of the Contract and (ii) the pricing mechanism.
3. As at The First Date Lanarkshire will make the First Payment to City Link to account of Lanarkshire's obligations under the Agreement and the Contract;
3.1 Lanarkshire shall make the Second and Subsequent Payments in such manner as Lanarkshire and City Link or CBC shall agree.
4. As at the first date City Link will deliver a duly executed Feu Disposition of the Site conform to the draft thereof annexed and signed as relative hereto ...
6. Where Lanarkshire and City Link have not reached agreement conform to Condition 2 hereof as a result of Lanarkshire not receiving adequate funding from Scottish Homes by The Second Date then Lanarkshire or City Link shall be entitled to terminate this Agreement on the following terms and conditions:-
6.1 City Link shall repay to Lanarkshire the first payment together with interest thereon at the base rate of the Bank of Scotland from time to time from the first date until repayment in terms hereof.
6.2 Lanarkshire shall grant a valid marketable title, free of any Charges or incumbrances and conform to condition 4 hereof (mutatis mutandis) of the Site in favour of City Link; the Agreement shall thereafter be deemed to be terminated with no expenses being due to or by the parties except in respect of pre-existing breach".
"(FIRST) The Feuars shall be bound so far as not already erected to erect upon the feu not les than One hundred and four dwelling houses with relative landscaping, access roads and services in accordance with the Plans already approved by the Superiors and to the reasonable satisfaction of the Superiors and that within a period of two years after the date of entry hereunder or such extended period as the Superiors may approve, which approval shall not be unreasonably withheld or delayed and which approval the Superiors shall be bound to grant to the extent of any period or periods of delay in constructing or completing the dwelling houses which is due to ....delays attributable to circumstances outwith the control of the Feuars including, without prejudice to the foregoing generality, the absence of suitable development funding from Scottish Homes ...."
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Phase 1 |
£1,508.537 |
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Phase 2 |
£1,580,830 |
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Phase 3 |
£1,479,594 |
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Total |
£4,568,961 |
Those figures (and the unit prices from which they were derived) were thereafter used as the basis of the tender amounts for Phases 1, 2 and 3. The agreed unit prices thus provided a pricing mechanism of the kind referred to in the minute of agreement: agreement on those prices provided a structure controlling the pricing of the works involved in each of the phases of the project.
[30] A contract sum analysis, bringing out a tender sum for Phase 1, was then prepared by Armours on the basis of the agreed unit prices for each element. It included preliminaries totalling £185,620, site development and servicing totalling £207,062, external works totalling £205,646, and flats/houses erection totalling £910,209, i.e. the agreed sum of £1,508,537 in toto. When account was taken of the cost of providing an access road to an adjacent site, at the request of Scottish Homes, and of fees, the total was £1,703,721. This document appears to have been signed by Mr McLetchie on behalf of the pursuers on 25 March 1998. On about 21 April 1998 the defenders submitted a grant application to Scottish Homes in respect of the tender. The pursuers' cost consultants, Unick, had also presented a detailed assessment of the cost of the entire project, prepared using the same pricing mechanism as the tender for Phase 1. Mr Gallacher then carried out a GIC assessment of the entire project. The projected costing prepared by Unick was found to be acceptable. A similar assessment in respect of Phase 1 alone confirmed that the tender price was also acceptable. In his report on these assessments, dated 8 June 1998, Mr Gallacher also noted:"The contractor has confirmed that all works within 24 months of Phase 1 acceptance will be fixed price, including any relevant Phase 2 elements, if that contract is placed within that time. In addition, he has agreed that subsequent works/phases after that period will be subject to cost increase only as relevant to Tender Price Index/Building Cost Index increases as detailed in Scottish Office Bulletin issued at appropriate date. It is accepted that this facilitates full control by the Association of the complete contract price, at this time".
The reference to the Scottish Office bulletin on TPI increases, rather than the equivalent RICS bulletin, was a mistake. The passage quoted however makes clear Mr Gallacher's understanding that works were to be carried out at a fixed price only if they were completed within two years of the date of acceptance of the Phase 1 tender, and were otherwise to be carried out at a price which was subject to indexation on the basis of the TPI. In his evidence, Mr Gallacher confirmed that he had understood that all works more than two years after the date of acceptance of the Phase 1 tender would be subject to indexation, but that he had not known that the agreed TPI index was that published by the RICS rather than that produced by the Scottish Office.
[31] The defenders' grant application in respect of Phase 1 was approved, and an offer of grant was made in June 1998. By letter dated 4 August 1998 Mrs Winters wrote to the pursuers, on behalf of the defenders, stating:"I refer to your tender submission of 24th February 1998 for the above project. On behalf of the Association I accept the tender sum of £1,703,721 in accordance with the attached breakdown".
Both parties treated that letter as concluding a contract for the construction of Phase 1. Work then commenced on Phase 1. In December 1998 the parties executed a standard form of building contract in respect of Phase 1. The construction period was specified as 52 weeks.
[32] During February and March 1999 discussions took place between Armours and Unick in relation to the tender amount for Phase 2. It was calculated using the same pricing formula as Phase 1, in accordance with the understanding that the agreement on unit prices provided a pricing mechanism which was to regulate the pricing of each phase of the project. The total, so calculated, was £1,580,830, in line with the overall budget calculated the previous year. The defenders requested an improvement to the specification of the houses, to reflect Scottish Homes's "Lifetime Homes Standards", resulting in an agreed additional cost of £50,887. When fees were added, the total amount was £1,778,741. A tender in that amount was prepared by Armours and was signed by Mr McLetchie on behalf of the pursuers. It incorporated a contract sum analysis, prepared on the basis of the agreed prices for each element. The contract sum analysis included preliminaries totalling £186,446, site development and servicing totalling £139,805, external works totalling £235,541, and flats/houses erection totalling £1,069,925, i.e. £1,631,717 (the previously agreed sum of £1,580,830 plus £50,887) in toto.The tender was submitted by the defenders to Scottish Homes as part of a grant application. Following a GIC assessment, the grant application was approved, and an offer of grant was made on 30 June 1999.
[33] A standard form of JCT contract in respect of Phase 2 was prepared by Armours on behalf of the defenders, and executed on behalf of the pursuers and the defenders on 10 and 24 August 1999. The preamble narrated:"AND WHEREAS the Contractor's Proposals incorporate an analysis of the sum which he requires to carry out and complete the Employer's Requirements (hereinafter referred to as 'the Contract Sum Analysis') which sum amounts to One million, seven hundred and seventy eight thousand, seven hundred and forty one pounds only (£1,778,741.00) and is acceptable to the Employer (hereinafter referred to as 'the Contract Sum') .....".
Clause 2 of the contract provided:
"The Employer will pay to the Contractor the Contract Sum or such other sum or sums as shall become payable in accordance with Alternative B of Appendix III hereto and the Conditions referred to in clause 3 hereof".
It is common ground that neither Alternative B of Appendix III, nor the conditions referred to in clause 3, provide for indexation.
Clause 3 provided:
"The Works shall be completed in accordance with and the rights and duties of the Employer and the Contractor shall be regulated by: .....".
There followed a list of documents, including standard JCT documents, and also the contract sum analysis, which was incorporated into the contract. No reference was made to the minute of agreement. The construction period was specified as 12 months. It would therefore extend beyond 4 August 2000, i.e. beyond the end of the two year period commencing on the date of acceptance of the Phase 1 tender.
[34] Armours, who prepared the contract, were not aware of the minute of agreement, and had not been asked to include an indexation provision. Mr McLetchie, who signed the contract on behalf of the pursuers, was not concerned that the contract contained no reference to indexation, as his understanding was that the minute of agreement itself conferred on the pursuers a right to indexation. The contract was signed on behalf of the defenders by their chairman and secretary, rather than by Mrs Winters. [35] In June 1999 Unick prepared costs for Phase 3, amounting to £1,479,594, in line with the overall budget calculated the previous year. The calculation was based on the same pricing formula as had been used for Phases 1 and 2. As in respect of Phase 2, the defenders requested an improvement to the specification of the houses to reflect "Lifetime Homes Standards", resulting in an agreed additional cost of £37,364. The defenders also requested that the design brief be altered in certain respects, and an agreed amount of £52,279 was added in respect of those alterations. When fees were added, the total amount was £1,708,659. A tender was prepared to reflect that agreement. The tender was submitted by the defenders to Scottish Homes as part of a grant application. Following a GIC assessment, the tender was found by Scottish Homes to be above the maximum allowable cost. The defenders then decided to forgo some of the changes to the design brief which they had wished to make. As a result, savings were made, so as to reduce the total amount to £1,680,635, comprising the original figure of £1,479,594, plus £37,364 for the Lifetime Homes Standards alterations, £26,331 for the design brief alterations as revised, and fees. A revised tender in that amount was prepared, incorporating a contract sum analysis prepared on the basis of the agreed prices for each element. The contract sum analysis included preliminaries totalling £172,077, site development and servicing totalling £169,429, external works totalling £196,727, and flats/houses erection totalling £1,005,056, i.e. £1,543,289 in toto (the previously agreed sum of £1,479,594 plus £37,364 plus £26,331). The revised tender fell within Scottish Homes's GIC criteria. An offer of grant was made on 24 December 1999. The revised tender was accepted by letter dated 20 January 2000. [36] A standard form of JCT contract in respect of Phase 3 was prepared by Armours on behalf of the defenders, and executed on behalf of the pursuers and the defenders on 14 and 22 February 2000. The preamble narrated:"AND WHEREAS the Contractor has submitted proposals for carrying out the Contract Works (hereinafter referred to as 'the Contractor's Proposals') which include the statement of the sum which he will require for carrying out that which is necessary for completing all such works in accordance with the Conditions (which is the Contract Sum stated in Clause 2 hereof), and has also submitted an analysis of that sum (hereinafter referred to as 'the Contract Sum Analysis') which is annexed to the Contractor's Proposals ....".
Clause 2 of the contract provided:
"The Employer will pay to the Contractor the sum of One Million Six Hundred and Eighty Thousand, Six Hundred and Thirty Five Pounds only (£1,680,635.00) (hereinafter referred to as 'the Contract Sum') or such other sum as shall become payable hereunder at the times and in the manner specified in the Conditions".
Clause 3 provided:
"The Works shall be completed in accordance with and the rights and duties of the Employer and the Contractor shall be regulated by....."
There followed a list of documents, including standard JCT documents, and also the contract sum analysis, which was incorporated into the contract. No reference was made to the minute of agreement. The construction period was specified as 12 months, the completion date being specified as 12 February 2001. As in the case of the Phase 2 contract, Armours were unaware of the minute of agreement, and had not been asked to include an indexation provision. Mr McLetchie, who signed the contract on behalf of the pursuers, was content with its terms, for the same reason as in the case of the Phase 2 contract. The contract was signed on behalf of the defenders by their chairman and another authorised signatory, and not by Mrs Winters.
[37] In the case of the Phase 3 contract, it was obvious by the time it was executed that the works construction period would include a substantial period after 4 August 2000. It was not however possible to predict the value of the work which would be done after that date, or what the movement in the TPI index might be between that date and the date when any particular item of work was done. [38] At about the time the Phase 3 contract was executed, Mr McLetchie reminded Mrs Winters that the cost of works carried out after 4 August 2000 would be subject to indexation. Mrs Winters raised this matter with Mr Robertson of Armours by telephone and then in a fax dated 20 March 2000:"The Association is scheduled to meet with Scottish Homes on 30th March 2000 in order to discuss its HAG [i.e. grant] requirements for the new financial year 2000/2001.
I should be obliged if you will provide me with an estimate of the likely additional cost which the Association should request to cover the increase which I understand may come into place from August 2000 (i.e. as a result of a two year time lapse from date of acquisition as previously discussed)".
Armours then requested the pursuers to provide such an estimate, and the pursuers did so in May 2000. The purpose of obtaining the estimate, as Mrs Winters had indicated in her fax, was to enable the defenders to apply to Scottish Homes for additional grant. It was not unusual for such applications to be made where additional costs were incurred during a contract. In the event, however, as explained below, no such application was made by the defenders in the present case. Mrs Winters also sought legal advice about the minute of agreement, which she regarded as continuing to be relevant to the parties' rights and obligations. In her evidence, she maintained that her understanding was that indexation applied once two years had elapsed from the date of acceptance of the Phase 1 tender (i.e. 4 August 1998), but only in the event that a contract was entered into after that two year period had elapsed.
[39] From August 2000, when work under Phase 2 or Phase 3 was valued so that interim payments were due, the pursuers also applied for an additional payment representing the indexation of the certified amount from August 1998, according to the TPI published by the RICS. The additional payments were not made. Armours, who were the employer's agent under the JCT contracts, pointed out that those contracts provided no mechanism for the payment of the indexation element. At subsequent meetings, the defenders adopted the position that the pursuers, having failed to include an indexation provision in the JCT contracts as envisaged in the minute of agreement, had missed their opportunity. In his evidence, Mr Robertson of Armours explained that the indexation provision in the minute of agreement could have been reflected in the terms of the JCT contracts, but that he had been unaware of the minute of agreement at the time when the JCT contracts were prepared. If the JCT contracts had given effect to the indexation provision in the minute of agreement, then the amount due to be paid in respect of the indexation could have been calculated at the end of the contract. [40] At a meeting in March 2001 between Mr McLetchie of the pursuers, Mr James Stevenson, the director of the defenders, and Mr Malone of Scottish Homes, Mr Malone said that he would consider making an additional grant in respect of the cost of the indexation, if the defenders submitted an application for such a grant. In relation to this matter, Mr Malone said in evidence that Scottish Homes could entertain an application based on special circumstances, even if the GIC criteria were exceeded. The defenders accordingly requested the pursuers to provide them with a submission which could form the basis of such an application. The pursuers provided the submission as requested. In the event, however, the defenders did not make any application for additional grant, seemingly on the view that the JCT contracts did not require them to make any additional payments.
SUBMISSIONS
1. The Submissions for the Pursuers
[41] On behalf of the pursuers, counsel invited me at the outset to sustain an objection, which I had reserved at the time, to a line of evidence which had appeared to be directed towards establishing that indexation, as sought by the pursuers, might not have been compatible with the cost parameters referred to in clause 1.1.3 of the minute of agreement, in that the GIC criteria might have been exceeded. No prior notice had been given of such a line of evidence, and it had not in the event been developed. That motion was not opposed on behalf of the defenders. I shall accordingly sustain the objection.
[42] In relation to the conclusion for declarator, counsel submitted that the minute of agreement had to be interpreted in the context of the "factual matrix". In that regard, counsel acknowledged that the evidence led ranged beyond what could properly be taken into consideration. It was apparent from the relevant evidence, of all the witnesses, that the parties' principal interest was in the project as a whole. No-one wanted only 34 houses. The pursuers, the defenders and Scottish Homes all wanted 104 units. Their interest was not in any individual phase, but in the entire project. Mr Malone, who was the senior official of Scottish Homes, regarded the project as being "the contract" for Scottish Homes's purposes. The pursuers were aware that the project had to be funded, in order to proceed, but there was no evidence that the pursuers were privy to the way in which financing would be worked out between the defenders and Scottish Homes, or that they knew the extent to which the project would be grant-aided or self-financing. Although it appeared that Scottish Homes would normally grant-aid a contract of less than two years' duration only if it was at a fixed price, it also appeared that there was scope for them to make exceptional payments. It was not known whether an exceptional payment would have been made in the present case, as the defenders had never applied for one, but it was clear that Mr Malone would have been willing to entertain such an application. At the end of the day, however, the pursuers had no interest in how the project was funded. [43] It was clear from the evidence of Mr Malone and Mr Gallacher that this was an exceptional project, in terms of its size and its importance. Scottish Homes wanted to see it carried through. They and the defenders realised that, for budgetary reasons, the project would have to be divided up. They also realised that, although the pursuers were willing to provide a means of calculating a fixed price for the project, they would not be willing to hold that price indefinitely. The evidence was all to the effect that the pursuers were prepared to hold their price for two years, but no longer. To accommodate that, a system of indexation had to be introduced. It was apparent from Mr Gallacher's evidence that that had been understood and accepted before the minute of agreement was executed. [44] If, as the defenders maintained, the minute of agreement had been superseded by the JCT contracts, when had that occurred? Presumably when the Phase 1 JCT contract was executed. If so, the defenders would have been free to award the contracts for the subsequent phases to whatever developer they pleased. That was clearly not the intention of the parties. It could not have been intended that the minute of agreement would be superseded by any individual JCT contract. It was apparent from the evidence of Mrs Winters and Mr McLetchie that neither the defenders nor their legal advisers regarded the minute of agreement as redundant once the JCT contracts had been concluded. [45] Against this background, it appeared that the parties intended the minute of agreement to operate in terms of the project as a whole, knowing that the project would be divided into phases and that each phase would be the subject of a JCT contract. The minute of agreement was thus, in a sense, an over-arching agreement. It was not however the most distinguished piece of drafting. In particular, it sought to introduce substantial provisions within a definitions clause. [46] The preamble indicated that the minute of agreement concerned the project as a whole. Clause 1.1.1 implied that the minute of agreement was a stand-alone contract which could be the subject of amendment. Clause 2 envisaged that standard terms would be agreed within a period of months, but not that all the contracts would be executed within that period. Given the factual context, that was highly improbable. In relation to clause 2, the parties did agree the pricing mechanism. They used that pricing mechanism to agree budget costs. The figures were incorporated into each JCT contract in the form of the contract sum analysis. The practical result was the same as the incorporation of the pricing mechanism itself, as envisaged in clause 1.1.3, although the form in which the information was presented was different. The parties had thus arrived at the objective of a fixed price, although they had not adhered strictly to the terms of the minute of agreement. The next stage was to address the question: what happens if some of the works are carried out more than two years after the first acceptance of tender? The answer was given by the indexation provision in clause 1.1.3. That provision ("But the pricing mechanism will be adjusted....") did not require that the JCT contracts should themselves provide for indexation. It could be contrasted with the two preceding sentences ("The Contract or Contracts will specify ..."; "The Contract or Contracts will further specify ...."). The provision in question was itself a clear statement of the parties' intention that there should be indexation of the cost of any works undertaken in respect of the project after the two year period. That period had been understood to run from 4 August 1998. Clause 1.1.3 did not say that indexation would apply only in respect of a JCT contract entered into more than two years later (a position adopted in evidence by Mrs Winters, but by no-one else). Nor did it say that indexation would apply only in the event that a JCT contract ran for more than two years: a construction which made no commercial sense, given that no-one thought that any individual contract would take more than two years to complete. [47] The application of the indexation provision was not inconsistent with the terms of the JCT contracts. They remained fixed price contracts, based on an identifiable pricing mechanism. The minute of agreement provided an over-arching mechanism, ensuring that the price remained fixed in real terms as well as in nominal terms. An analogy might be drawn with an agreement as to an exchange rate mechanism, to be applied to a fixed price contract. [48] The fact that no reference was made to the minute of agreement in clause 3 of the JCT contracts did not entail that the minute of agreement was superseded. The contrary argument was circular: it was only if the minute of agreement was not an over-arching or collateral agreement that it would require to be mentioned in clause 3. The indexation agreement fell outside the intended province of the JCT contracts. Whether a later deed superseded an earlier one must depend on what the parties intended. [49] If, however, decree of declarator were refused, then the JCT contract should be rectified so as to provide for indexation. Either the parties had intended that the minute of agreement would itself allow indexation, or they had intended that an indexation provision should be inserted into each JCT contract. There was no indication that they had ever agreed to depart from their agreement that the costs should be subject to indexation. [50] The relevant principles were stated in McBryde, The Law of Contract in Scotland (2nd edition), paragraph 8-104. The Phase 2 and Phase 3 contracts were each intended to give effect to the minute of agreement: that much was common ground, and formed the basis of the defenders' contention that the JCT contracts had superseded the minute of agreement. The common intention of the parties to the minute of agreement was to be assessed on an objective basis. The minute of agreement, objectively construed, expressed a consensus. The common intention could be broadly expressed and capable of being achieved by a number of means: Norwich Union Life Insurance Society v Tanap Investments UK Ltd, 2000 S.C.515, at paragraph 13. The Phase 2 and Phase 3 contracts should each be rectified by inserting, after the contract price (£1,778,741 and £1,680,635 respectively), the indexation provision set out in the conclusion for rectification. The court should also, in that event, grant decree for payment of the agreed sums. It was also a matter of agreement that the sum payable in respect of the Phase 3 contract should bear interest at the judicial rate from the date of decree.2. The Submissions for the Defenders
[51] On behalf of the defenders, counsel submitted that the pursuers' case in support of the declaratory conclusions was based on the proposition that the minute of agreement was a collateral contract. It was not. It had been drafted in a rush. Its drafting was in some respects less than impressive. The parties had not worked out the phasing of the project, the prices, or the other contractual terms. They needed something which would enable the defenders to acquire the land before the end of the financial year. The minute of agreement met that need, and looked forward to the coming into existence of detailed building contracts. In clause 1.1.3, it was said:"The Contract or Contracts will specify the terms and conditions applicable to the construction of the Project ....".
That meant all the terms and conditions. The two following sentences, including the sentence concerning indexation, related to particular matters which were to be specified in the JCT contracts. The distinction drawn in clause 2(ii) between "the detailed terms and conditions of the Contract" and "the pricing mechanism" was inept. If clause 1.1.3 had been implemented, all the terms and conditions would have been set out in the JCT contracts. There would be no role for the minute of agreement to play in relation to the terms and conditions applicable to the project, once the JCT contracts had been concluded. That must have been the intention of the parties at the time the minute of agreement was concluded. The minute of agreement became progressively superseded, pro tanto, as each JCT contract was executed, and was completely superseded once the final such contract had been executed. The minute of agreement was never intended to regulate disputes arising in relation to the construction works, including the price payable.
[52] In terms of clause 1.1.3, the parties agreed to contract using a standard form of contract. Clause 2 of that form of contract provided for the payment of a contract sum: only the figure required to be inserted. Clause 3 provided for particular documents to be the measure of the parties' rights and obligations. The implication was that the parties had never intended the minute of agreement itself to be the source of additional rights and obligations. [53] The minute of agreement could not be a collateral contract concerning the price payable, since the JCT contracts dealt with the same subject-matter. Reference was made in that connection to authorities concerned with the meaning of the expression "collateral agreement" in the context of the common law rule of the law of evidence, now modified by statute, excluding extrinsic evidence of an agreement where the parties had entered into a written contract, unless the agreement in question was collateral to the written contract: Perdikou v Pattison, 1958 S.L.T.153; William Masson Ltd v Scottish Brewers Ltd, 1966 S.C.9. [54] In relation to rectification, counsel accepted that the JCT contracts were intended to give effect to the minute of agreement, and that the common intention of the parties at the time of that agreement had to be determined objectively by construing the minute of agreement in accordance with the usual canons of construction. Accordingly, it was accepted that rectification was in principle appropriate if the JCT contracts had failed to give effect to the minute of agreement. In counsel's submission, however, the JCT contracts gave effect to the minute of agreement, correctly construed. Each JCT contract was for a period of one year or less. The question of indexation therefore did not arise. [55] In construing the minute of agreement, evidence about the negotiations was irrelevant. So was evidence about the parties' subjective intentions. So also was evidence about their subsequent actings and statements. [56] The pursuers knew that the greater part of the funding for the project was going to have to come from Scottish Homes. They knew that Scottish Homes had rules about funding, although they did not know the details of those rules. In those circumstances the minute of agreement had to be construed on the basis of those rules, whatever they proved to be. Clause 1.1.3 referred to the quality and cost parameters laid down by Scottish Homes "as existing at the time or times of entering in to the Contract or Contracts". Clause 1.1.3 was therefore concerned with a cost per contract. The industry practice was for a price to be held for two years from the date of contracting. The indexation provision was therefore applicable only if an individual contract ran for more than two years. It had no application to the one year contracts which were subsequently executed. If that was a bad deal for the pursuers, that was too bad. [57] Mr Malone of Scottish Homes did not seem able to distinguish between "contracts" and the project as a whole. He might not have been alone in that. Scottish Homes's guidelines however required a contract of less than two years duration to be at a fixed price. The indexation provision in clause 1.1.3 could only be compatible with that requirement if it applied only where an individual contract was of more than two years duration. Time ran from "the date of execution of the Contract". That must refer to the date of execution of the particular contract in question.DISCUSSION
[58] It is necessary to begin by considering the effect of the minute of agreement. That depends on the terms of the minute of agreement, interpreted in the light of the evidence, so far as the evidence is admissible as an aid to interpretation. [59] The principal features of the factual background to the minute of agreement can be summarised as follows:1. It was in the defenders' interests to take advantage of the availability of £0.5m from Scottish Homes, that sum being roughly equivalent to the value of the site.
2. In order to make use of the £0.5m, the pursuers had to sell the site to the defenders before 31 March 1998.
3. The parties could not be certain, at that time, that the project would proceed, or as to the timing of the phases of the project.
4. The pursuers could not sensibly sell the site to the defenders except on the basis that it would be returned to them unless, within a specified time, the defenders committed themselves to proceeding with the project and employing the pursuers to carry out the project.
5. In order so to commit themselves, the defenders had to know that the funding they required in order to proceed with the project would be available, sooner or later, from Scottish Homes.
6. In order for the defenders to obtain such funding from Scottish Homes, the cost of the project had to comply with Scottish Homes's financial requirements as at the time when funding was sought for each phase.
7. The pursuers could not sensibly commit themselves to carrying out the project at a cost which was fixed for the indefinite future.
8. It was normal commercial practice for a fixed price contract to be entered into for a period of up to two years, but no longer.
[60] Against that background, Clause 3 of the minute of agreement obliged the defenders to pay £515,000 to the pursuers on 25 March 1998. Clause 4 obliged the pursuers, in return, to convey the site to the defenders. The obligation to negotiate with a view to reaching an agreement within a specified time as to the terms on which the project would proceed, failing which agreement either party would be entitled to undo the conveyance, arose from clauses 2 and 6. Clause 2 provided:"As soon as reasonably possible after execution of this agreement City Link and Lanarkshire shall enter into discussions with a view to agreeing by The Second Date (i) the detailed terms and conditions of the Contract and (ii) the pricing mechanism".
The specific reference to the pricing mechanism was superfluous, given that the term "Contract" was defined by clause 1.1.3 so as to incorporate the pricing mechanism, as discussed below. The obligation imposed by clause 2 was therefore to enter into discussions with a view to agreeing the detailed terms and conditions of "the Contract" within a period of eight months (the expression "The Second Date" being defined by clause 1.1.10 to mean the nearest business day falling eight months after 25 March 1998). Clause 6 provided:
"Where Lanarkshire and City Link have not reached agreement conform to Condition 2 hereof as a result of Lanarkshire not receiving adequate funding from Scottish Homes by The Second Date then Lanarkshire or City Link shall be entitled to terminate this Agreement on the following terms and conditions".
Those conditions included the reconveyance of the site to the pursuers, and the return of the £515,000 to the defenders.
[61] The definition of "the Contract" in clause 1.1.3 is complex. The first point which requires to be noted is that "the Contract" could take the form of a single contract, based on a JCT form, or a number of such contracts:"'the Contract' means a ....Contract or Contracts....based on the JCT ...Standard form ....for the construction of the Project on the Site in three phases or otherwise as the parties may agree.....".
When that part of clause 1.1.3 is read together with clause 2, therefore, it appears that the parties envisaged that contractual arrangements would be agreed within the next eight months for the construction of the entire project, those arrangements taking the form of one or more contracts based on a JCT standard form. In the event, the contracts for Phase 2 and 3 were not entered into within that period.
[62] In relation to the contents of the JCT contract or contracts, one requirement imposed by clause 1.1.3 was that they must comply with Scottish Homes's GIC criteria:"....which Contract or Contracts will comply with quality and cost parameters laid down by Scottish Homes or their successors as existing at the time or times of entering in to the Contract or Contracts".
The effect of that provision was to protect the defenders against the risk that Scottish Homes might limit their funding by reason of the cost of the project.
[63] In relation to the contract price, clause 1.1.3 provided, in the first place:"The Contract or Contracts will specify ....a mechanism or formula ('the pricing mechanism') under which the price payable by Lanarkshire can be calculated with certainty".
The pricing mechanism was therefore to be specified in the JCT contract or contracts. Since the pricing mechanism was to enable the price payable by Lanarkshire to be calculated with certainty, it appears that the price payable under the JCT contract or contracts was not to be a fixed amount of money specified in the contract. Against the factual background, it appears that what the parties envisaged was an agreement on prices for standard elements (an internal door, a metre of fencing, and so forth), as in fact eventuated, and which would then be applied as a formula to calculate the price of the elements contained in a tender. Such an agreement would constitute a pricing mechanism under which the price payable could be calculated with certainty. Given that the contract or contracts in respect of the entire project were intended to be agreed within eight months, however, one might wonder why there was any need for the total price to be broken down into its constituent elements. The explanation lies in the agreement that the price should be subject to indexation.
[64] In relation to indexation, clause 1.1.3 (read short) provided:"The Contract or Contracts will further specify that the pricing mechanism will remain fixed for a period of two years from the date of conclusion of the Contract in respect of any works undertaken ....within such period of two years....But the pricing mechanism will be adjusted in accordance with the Tender Prices Index...taking the date of execution of the Contract as the base reference date, in respect of ....works undertaken...after the expiry of the said two year period".
It appears to me to be implicit in this provision that the indexation requirement was to be specified in the contract or contracts. It appears from the first sentence in the passage last quoted that the contract (or contracts) was to specify that the pricing mechanism would be fixed in respect of works undertaken within the relevant two year period. It is true, as counsel for the pursuers pointed out, that the subsequent sentence does not begin with the words "The Contract or Contracts will further specify.....". That however appears to me to be implicit. It would be surprising if the contract had to specify that the pricing mechanism was fixed in respect of works undertaken within the relevant two year period, but could be silent as to the treatment of the price of works undertaken thereafter. Moreover, an earlier provision of clause 1.1.3 indicates that all conditions relative to pricing were to be specified in the contract or contracts:
"The Contract or Contracts will specify the terms and conditions applicable to the construction of the Project including, inter alia, a mechanism or formula ('the pricing mechanism') under which the price payable by Lanarkshire can be calculated with certainty".
The expression "the terms and conditions" appears to cover all the contractual terms and conditions: any reductive reading of the phrase "applicable to the construction of the Project", so as to limit it to matters relating to construction in a narrow sense, is inconsistent with the inclusion, within the ambit of that phrase, of the pricing mechanism. In addition, in order for the price payable by Lanarkshire to be calculated with certainty, it would be necessary (in the event that the works continued beyond the relevant two year period) to apply the indexation provision as well as the pricing mechanism: in a context where the contract (or contracts) for the entire project was to be agreed within eight months, the purpose of having a pricing mechanism (rather than simply a price) specified in the contract was to enable the indexation provision to be applied when appropriate. For all these reasons, therefore, clause 1.1.3 should in my opinion be interpreted as meaning that the agreement as to indexation in accordance with the TPI was to be specified in the contract or contracts.
[65] As to the two year period, clause 1.1.3 provided that that was "a period of two years from the date of conclusion of the Contract", and that the TPI was to be applied "taking the date of execution of the Contract as the base reference date". The meaning of those words is not however obvious. Clause 1.1.3 envisaged that there might be one contract or a number of contracts. Although it was envisaged by clause 2 that "the Contract" would be agreed within a period of eight months, there was no requirement that, in the event that "the Contract" comprised a number of individual contracts, they must all be concluded on the same date. A question therefore arises whether the expression "the date of conclusion of the Contract" referred to the date of conclusion of each individual contract, so that there would be a separate two year period applicable in relation to each contract, or whether it referred to some other date, so as to produce a single two year period in respect of the entire project. [66] A number of factors appear to me to indicate that the latter construction is to be preferred. The first provision concerning indexation provided:"The Contract or Contracts will further specify that the pricing mechanism will remain fixed for a period of two years from the date of conclusion of the Contract in respect of any works undertaken under the Contract or Contracts within such period of two years, whether in respect of Phases 1, 2 or 3 of the Project or otherwise".
It is to be noted that that provision twice used the words "the Contract or Contracts" when it was clearly referring to the individual contracts, whereas it used the words "the Contract" in relation to the date from which the two year period ran. Clause 1.1.3 purports to be a definition of the expression "the Contract", as encompassing, in its entirety, the contract or contracts for the construction of the project as a whole. The reference to "any works undertaken under the Contract or Contracts ....whether in respect of Phases 1, 2 or 3 of the Project or otherwise" appears to emphasise that the two year period is a single period applicable in respect of the project as a whole.
[67] The same features appear in the second provision concerning indexation:"But the pricing mechanism will be adjusted ....conform to normal practice of the Construction Industry and taking the date of execution of the Contract as the base reference date, in respect of all and any works undertaken in respect of the Project after the expiry of the said two year period".
Again, the reference is to the date of execution of "the Contract". The only other uses of those words in clause 1.1.3 are in the opening words, where, as mentioned above, they are defined as meaning the contract or contracts for the construction of the project as a whole, and in the final sentence, where they appear to be used in the same sense:
"...for the purposes of the Contract, Phase 1 of the Project will include ....".
The implication of the second provision concerning indexation appears to be that there is a single two year period, with a single "base reference date", in respect of "all and any works undertaken in respect of the Project".
[68] Although the textual pointers towards meaning which I have mentioned so far are not conclusive, a stronger indication is given by the statement that the adjustment of the pricing mechanism is "conform to normal practice of the Construction Industry". It appears from the evidence that the normal practice is that a price is held fixed for no more than two years from the date of conclusion of the contract. The implication is therefore that the prices set by the pricing mechanism would be held fixed for only two years. It was envisaged that the pricing mechanism would be incorporated into each individual contract. In the event that there was more than one contract, the two year period in respect of the first contract would run from the date when that contract was concluded. If the second contract was executed six months later, and the two year period in relation to that contract ran from the date of its execution, there would then be two distinct periods of two years: the pricing mechanism would be adjusted in respect of some works after two years had passed from the date when the mechanism was accepted, but would remain unadjusted in respect of other works for a further six months; and the pursuers would in substance be holding their price for a period of two and half years, contrary to normal practice of the construction industry. All these consequences appear to me to be inconsistent with the most natural reading of clause 1.1.3. [69] The matter is in my opinion put beyond real doubt by the factual background to the agreement. It was never envisaged that any individual phase of the contract would take as long as two years, but it was expected that the project as a whole would take more than two years. In those circumstances, one would expect that the two year period, after which indexation was to operate, would apply in respect of the project as a whole, rather than in respect of the individual contracts into which the project might be divided up. That such was the intention appears to me to be the explanation for the reiterated statement that the two year period during which works were at a price calculated on the basis of the pricing mechanism, but after which the pricing mechanism was to be indexed, applied to works "whether in respect of Phases 1, 2 or 3 of the Project or otherwise", and to "all and any works undertaken in respect of the Project". [70] I interpret clause 1.1.3, therefore, as meaning that the pricing mechanism was to be adjusted, in accordance with the TPI referred to in that clause, in respect of all works undertaken after the expiry of a period of two years after the conclusion of the contract (or the first contract, in the event that there was more than one) for the construction of the project, and that a provision to that effect was to be incorporated into any such contract. [71] It follows from the foregoing that I cannot grant decree of declarator as sought by the pursuers. Clause 1.1.3 did not in my opinion confer an enforceable right to indexation which was intended to remain in force after the individual contracts had been concluded. It was, rather, an agreement as to one of the terms which any such contract was to contain. The question remains, however, whether the contracts which were in fact entered into, and which omitted any provision for indexation, should be rectified so as to insert such a provision. [72] It was accepted by counsel for the defenders in his submissions that each of the individual JCT contracts was intended to give effect to the minute of agreement: he opposed the conclusions for rectification solely on the basis, which I have rejected, that the indexation provision which the minute of agreement called for was one which applied only where an individual contract lasted for more than two years. As I have explained, no party to the minute of agreement could have envisaged that any individual contract would last for more than two years: it was the project as a whole which was expected to take that long. Insofar as counsel for the defenders founded on the reference in clause 1.1.3 to "quality and cost parameters laid down by Scottish Homes", and prayed in aid the statement in Scottish Homes's guidance note that "contracts which do not exceed two years duration must be let on a firm price basis", I do not accept that the implication is that the indexation envisaged by clause 1.1.3 could not apply to works carried out under a JCT contract of less than two years duration. The "quality and cost parameters" to which clause 1.1.3 referred were, in my opinion, what I have described as the GIC criteria (which the witnesses almost invariably referred to as Scottish Homes's "cost parameters"). It is in any event far from clear on the evidence, as counsel for the defenders acknowledged, whether Scottish Homes would have regarded the relevant "contract", for their purposes, as being the project as a whole or each of the individual phases. [73] In the circumstances, it is appropriate that I should grant decree for rectification of the Phase 2 and Phase 3 contracts as alternatively concluded for. It is common ground that, in that event, I should also grant decree for payment to the pursuers of the sums which are agreed, on that basis, to be due to them.
