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	Scottish Court of Session Decisions
You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> David Wilson Construction Ltd v Newbattle Properties Ltd [1998] ScotCS 68 (17 November 1998) URL: http://www.bailii.org/scot/cases/ScotCS/1998/68.html Cite as: [1998] ScotCS 68

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The primary issue in this case is the amount of the balance, if any, due to the pursuers in respect of the building work which they carried out for the defenders in converting a disused telephone exchange at 4 Newbattle Terrace, Edinburgh, into six residential flats. The first and second conclusions are closely similar in the amount sought, and reflect alternative bases of liability, namely contract and quantum meruit. The third conclusion relates to a separate project at St Stephen Street, Edinburgh. The dealings between the pursuer and defender companies, and their respective directors, David Wilson and Keith Stephen, were conducted with remarkable informality and, as a result, so far as the Newbattle Terrace project is concerned, there is dispute between the parties as to what, if anything, was agreed about the basis for payment for the work to be done. By interlocutor of 31 March 1998 a proof before answer was allowed on certain issues. In the course of the proof it became evident that it would be expedient to confine attention at this stage to some only of those issues, and the scope of the proof was accordingly, of consent, restricted further. The issues with which the proof was ultimately concerned were expressed in the interlocutor of 31 March in the following terms:

Before turning to the evidence which bears directly on those issues, it is convenient to note what the evidence disclosed about the background and experience of Mr Wilson and Mr Stephen respectively.

Mr Wilson was 44 years of age at the date of the proof. He began training as a quantity surveyor in 1972, but did not proceed to qualify for Associateship of the Royal Institution of Chartered Surveyors, abandoning the formal course of study after sitting Part I of the Institution's examinations at the end of his second year of training. He continued working in quantity surveying, however, for ten years. He then started a contracting business of his own, but was sequestrated after two and a half years. He was discharged in 1988. After the failure of his business he worked in the building industry in various supervisory capacities, for a time as East of Scotland contracts manager with Barratts, and latterly as a director of Ian Baird Limited. In 1994 the pursuers, of which Mr Wilson is the principal shareholder and sole director, commenced trading.

Mr Stephen, too, was 44 years of age at the date of the proof. He described himself as a property developer, and stated that he had engaged in property development for twenty five years. He began by buying flats, modernising them and re-selling them. His experience has mostly been in residential refurbishment, but he said that he had also done a little commercial development from time to time. He normally proceeded with redevelopment work by engaging someone to supervise the project, and contracting separately for each trade required for it. The defender company has been in existence for between fifteen and seventeen years, although its name has been changed a few times in that period. The former telephone exchange in Newbattle Terrace was purchased at auction about five or six years ago. The property in St Stephen Street was the site of a former nightclub which had been destroyed by fire. The subsequent insurance negotiations had been protracted. By May 1996, however, the redevelopment of the St Stephen Street site was under active consideration, and planning permission had been obtained for a development of eighty residential units there.

Mr Wilson was introduced to Mr Stephen by a mutual business acquaintance, George Gilbert, an architect. The initial introduction was in the context of the St Stephen Street project. The date of the introduction was probably about 22 May 1996 (see Mr Wilson's diary, No. 29/11 of process). Discussions took place between Mr Wilson and Mr Stephen about various projects in which their respective companies might become involved, and in particular the possibility of the pursuers undertaking the redevelopment of the Newbattle Terrace property was mooted. A proposal evolved that Mr Stephen should ultimately acquire an interest in the pursuers, with a view to future co-operation between the defenders as developers and the pursuers as building contractors. The involvement of the pursuers in the work at Newbattle Terrace was seen as in the nature of a trial project to assess whether such a link between the companies would be mutually satisfactory. George Gilbert was preparing drawings for the redevelopment of the Newbattle Terrace property, and dealing with the applications for planning permission and building warrant. Initially two of those drawings were passed to Mr Wilson to undertake some form of pricing of the work to be undertaken at Newbattle Terrace. The precise nature of the pricing exercise that was initially undertaken is one of the disputed issues in the case.

The task of pricing the redevelopment work at Newbattle Terrace was undertaken on the pursuers' behalf by Robin McAndie, a quantity surveyor and estimator of twenty six years experience who is now employed by the pursuers but was at that time working on a freelance basis. It is evident from the document dated July 1996 which he produced (No. 29/10 of process), and was confirmed by him in evidence, that he worked from two drawings only, No. 317: 13base, a ground floor and first floor plan, and No. 317: 14base Revision A, a second floor plan and section (Nos. 29/73 and 29/76 of process respectively). He estimated quantities by, as he put it, "taking a scale ruler to the drawings". He did not visit the site. The summary on page 59 of No. 29/10 of process brings out the total, including an allowance of 10% for preliminaries, of £277,973.85. A note highlights that no allowance has been taken for contingencies. Mr McAndie and Mr Wilson both described that as an estimate of probable cost. They emphasised the limited nature of the information available. Mr McAndie drew attention, by way of illustration of the point, to paragraph 3.06 of the Notes to No. 29/73 of process, which states: "All roof, wall, stair, basement constructions to be to the approval of the structural engineer. Further investigation to be made on site." Mr Wilson accepted that he knew that Mr Stephen wished the result of the conversion to be "luxury" flats, ready for occupation by the purchasers. The drawings, however, did not specify the detail of fittings and finishes. Mr McAndie described an estimate of probable cost as being a feasibility study to see if the cost was likely to be in the same "ball park" as the amount which the client wished to spend. His evidence (although he was alone in this) was that he had been given to understand that Mr Stephen had in mind expenditure of the order of £60,000 per flat, i.e. £300,000 in total. According to Mr Wilson, the probable cost document was shown to Mr Stephen when it was produced. At that stage, although he had a diary entry on 11 July noting "to go ahead with Newbattle Terrace", problems with planning permission and building warrant remained to be resolved. Mr McAndie, too, spoke to discussion of No. 29/10 with Mr Stephen in Mr Wilson's office in July or August.

Mr Stephen presented a somewhat different picture. He said he told Mr Wilson he wanted the site converted to a luxury standard. He said that he gave Mr Wilson "a set" of plans and asked him for a price. "He came back and said he could do it for £250,000." When pressed he was vague as to the identity of the plans which were made available to Mr Wilson. He maintained that he did not see the document No. 29/10 in July 1996, or at all before proceedings were raised, did not at any time discuss it with Mr Wilson or Mr McAndie, and heard the expression "probable cost" only after proceedings had commenced (although he later accepted that those words appeared in the List of Variations (No. 29/48 of process) which he saw in June 1997). He maintained that Mr Wilson gave him the price of £250,000 verbally in July 1996. Although there is a passage in his pleadings which suggests that his position is otherwise, in evidence he accepted that if extra work was done, it would have to be paid for additionally.

Whatever passed between Mr Wilson and Mr Stephen in July or August 1997, the work could not start at that stage because of continuing problems with planning permission and building warrant. Further discussion relating to price took place in about October 1996. According to Mr Wilson, the context of those discussions was a desire on the part of Mr Stephen to obtain a written indication that the works would cost £250,000 for exhibition to his bank in connection with obtaining finance for the project. A number of productions were said to have been generated in the course of those discussions. One of these (No. 29/62B of process) is an unsigned and undated manuscript letter addressed to Mr Stephen referring to the refurbishment of 4 Newbattle Terrace to form six flats, identifying drawings 317/11, 12 and 13 and stating "For the amount of £275,850". Attached to that document is a "Trades Summary" which shows the breakdown of the figure quoted into separate categories. The items contained in it correspond in some cases with, but differ in others from, the sections contained in No. 29/10 of process. It incorporates a contingent sum of £15,000. Whatever its origins may have been, the trades summary bears a number of manuscript amendments, which Mr Wilson said were his. In particular, the alterations included the reduction of preliminaries from £19,500 to £9500, the reduction of the amount for heating installation by £800 and the reduction of the amount for electrical installation by £50. The net effect of these alterations was to bring the total down to precisely £250,000. The amended trades summary, in typed form and on a letterhead incorporating the words "Specification and Estimate", is appended to No. 29/62 of process, an undated letter on the pursuers' letterhead signed by Mr McAndie and addressed to Mr Stephen, which states:

An unsigned copy of that document (No. 29/62A of process) bears the annotation "file copy" and the date "31/10/96", but the date is not of independent evidential significance, since Mr Wilson accepted that he added it when going over the file in connection with this action. Mr Wilson's evidence about those documents was that at a meeting in Robin McAndie's office in October Mr Stephen, who already knew the figure which the pursuers had produced as a probable cost in July, was looking for a figure of £250,000 to show to his bank. The alterations on No. 29/62B of process were arbitrary reductions designed simply to produce the desired reduced total. The letter No. 29/62 and its enclosure were provided simply because Mr Stephen, who was prospectively a director of the pursuers, asked for it. It was clearly understood by Mr Stephen that, notwithstanding the apparently unqualified terms of the letter, the pursuers were not offering to complete the work for a fixed price of £250,000. No one, Mr Wilson said, does refurbishment work for a fixed price. Mr Wilson appeared to be somewhat taken aback when it was suggested to him that if the pursuers had supplied No. 29/62 of process to Mr Stephen on the basis that it was not in fact an offer to carry out the work at the price stated but was merely for exhibition to his bank, they had been providing Mr Stephen with material with which he might misrepresent the position to his bank. He maintained that the pursuers had had no involvement in the question of how finance for the project was to be raised, and that he had not applied his mind to considering for precisely what purpose Mr Stephen wished to be able to vouch to the bank a price of £250,000. In cross examination. Mr Wilson was challenged on the basis that it made no sense for a person seeking finance from his bank for a building project to understate the likely cost of the project. He was unable to offer an explanation, and said that he had never himself borrowed finance from a bank. A possible answer to the question came, however, in the evidence of Mr Alastair Christmas, a corporate banking manager with the Clydesdale Bank, who was the banker with whom Mr Stephen had dealt. He explained that a lender for such a project would be interested inter alia in being assured that the income from sale of the flats on completion of the project would suffice to enable the borrower to clear his debt to the lender. The point was reflected by Mr Christmas in a credit memorandum dated 3 April 1997 (No. 29/49/20 of process) where, under the heading Debt Servicing, he recorded that:

Mr McAndie in evidence confirmed to a substantial extent Mr Wilson's evidence about how it came about that No. 29/62 was written in the terms it was. He stated that it emanated from a round-table discussion involving himself, Mr Wilson and Mr Stephen. Mr Stephen wanted a figure in writing for his bank. No. 29/62B was an initial pencilled draft by Mr McAndie. The reference in it to drawings Nos. 317/11, 12 and 13 (carried through into No. 29/62) was explained by Mr McAndie as a mistake. The reference should have been to Nos. 317/12, 13 and 14 (the additional one being No. 317/12 - a site and basement plan). The trades summary attached to it derived from No. 29/10 (although he did not explain the differences in detail). Savings from the total in the trades summary were discussed. Mr McAndie said that one of the amended figures was in Mr Stephen's handwriting, but Mr Stephen denied that. Mr McAndie offered explanations of the basis for the manuscript alterations, but agreed that the object of the exercise was to bring the total down to £250,000. His view was that it would be possible to refurbish the building for that price, but that major changes in the specification would be required. He was not terribly happy with what he was being asked to do, but signed the letter No. 29/62 because it was requested by Mr Stephen, who had so far as he was concerned standing equal to that of a director. In addition he had sought reassurance from Mr Wilson, who said that it was all right to sign it because it was simply for bank purposes. He said that it was not Mr Stephen's understanding that the letter was an offer to carry the work out for a fixed price of £250,000. If the letter had been intended to constitute a fixed price contract, it would have been in very different, and much more elaborate, form. The letter was given to Mr Stephen on 31 October.

Although the position adopted in the defenders' pleadings is that No. 29/62 of process was not supplied by the pursuers to Mr Stephen until February or March 1997, and Mr Wilson and Mr McAndie were both cross examined on that basis, when Mr Stephen came to give evidence he said that he was given a copy of No. 29/62 (which he called an "estimate") in November 1996. He said that he required "written confirmation" of the earlier verbal price for his bank. He stated, however, that on his return from holiday early in the new year he could not find the document provided in November, and asked for a further copy which was supplied in February 1997 and which he gave to his bank. A copy of No. 29/62 does indeed appear as part of the bank file at No. 29/49/26 of process. It was not explained why, having obtained a document for the bank in November, Mr Stephen had done nothing with it before going off on holiday. At one stage in his evidence Mr Stephen said that he had first approached the bank before the turn of the year, but the bank file did not bear that out. Once No. 29/62 was shown to the bank, however, it is clear that Mr Stephen led or allowed Mr Christmas to understand that there was in place a fixed-price contract for the works at £250,000 - see the credit memorandum dated 3 April 1997 (No. 29/49/17 of process).

By the time No. 29/62 of process was shown to Mr Christmas, however, there had been a development which meant that, even if £250,000 had been agreed as a fixed price, there was at least one major additional item not included in that price. The development related to the cost of steelwork. That work had been designed by the structural engineers. It had not been included in the probable cost (No. 29/10 of process) or in the trades summary attached to No. 29/62 of process. It was priced by a steelwork contractor, McDonald & Ross Ltd, at £22,885.55 (No. 29/15 of process). Both Mr Wilson and Mr Stephen expressed the view that the steelwork had been over-designed. For reasons which were not made entirely clear and which related in part to a dispute with them in connection with the St Stephen Street project, the original structural engineers were dismissed, and new structural engineers were engaged. They revised the steelwork design. Mr Stephen's evidence was that he had not at any stage seen the steelwork drawings, and had assumed that the steelwork was included in the price. He maintained that after the problem with the steelwork design had been resolved, Mr Wilson informed him that the extra cost in respect of steelwork would be £10,000. Mr Wilson's evidence was that there had been no mention of £10,000, and certainly no commitment on his part to securing the steelwork for an extra charge of only £10,000. McDonald & Ross's invoice dated 6 March 1997 (No. 29/13 of process) shows steelwork costs, net of main contractor's discount and excluding VAT, of about £21,400.

The work at Newbattle Terrace had finally begun on 6 January 1997. Although in the summons it is averred that "Mr Wilson undertook to finance the cost of renovations during January as Mr Stephen had cash restraints", Mr Wilson's evidence was that it was understood that payments would be made by the defenders monthly. There is no record of agreement to that effect, and Mr Wilson's understanding may have had no surer foundation than the fact that monthly payments are common in the building industry. His evidence was that he made verbal requests for payment in early February and early March, neither of which was met. He was becoming very concerned, and Mr Stephen was elusive. No doubt the reason for the non-payment was that, as Mr Christmas's file shows (and despite Mr Stephen's initial evidence to the contrary), the approach to the bank for funding was not made until late March. A payment was eventually made on 25 April, after Mr Christmas, on sight of a letter from the architects indicating that having regard to the proportion of the work completed £125,000 would be a reasonable payment, authorised the defenders to draw down that amount.

In these circumstances Mr Wilson wrote to Mr Stephen on 29 April (No. 29/16 of process) proposing that the arrangement be formalised by the execution of an SBCC building contract. The proposed contract was enclosed (No. 29/17 of process). The form "with quantities" was used, despite the fact that there had never been a bill of quantities. The price entered by the pursuers in the form was £275,850. That was the figure that had appeared in No. 29/62B of process, although Mr Stephen tendered the alternative explanation that it was the £250,000 from No. 29/62 plus £10,000 for steelwork plus £15,000 for contingencies. The relationship to No. 29/62B seems more plausible. At all events, the contract was not signed.

In No. 29/16 of process Mr Wilson also announced that the pursuers were preparing a "Bill of Variations" of all costs to date. He observed that "As the project has changed somewhat from our meeting on 31st October 1996 we expect the costs to rise significantly". A manuscript Bill of Variations dated 14 May 1997 is produced (No. 29/20 of process). It too took as its starting point the figure of £275,850 brought out in No. 29/62 of process, which it misdescribed as an "accepted quotation". According to Mr Wilson, No. 29/20 was passed to Mr Stephen, and discussed with him. Mr Stephen denied ever seeing it before it was lodged in process. It does not seem to me that anything of significance turns on No. 29/20, because shortly afterwards Mr Wilson produced a revised version dated 12 June 1997 (No. 29/48 of process). Once again the starting point was the figure of £275,850, which it erroneously attributed to "Probable Cost July 1997" (sic; sc. 1996). Mr Wilson handed that document to Mr Stephen on 14 June 1997 at Edinburgh Airport as Mr Stephen was about to leave for Jersey. There was no discussion of it at that time. According to Mr Wilson, Mr Stephen was, on his return from Jersey, again elusive, but a meeting was arranged and took place on 2 July at Mr Stephen's flat in Lauriston Gardens. By that time, Mr Stephen had made two further payments, of £50,000 on 16 May (No. 29/3 of process) and £30,000 on 16 June (No. 29/4 of process), making a total to account of £205,000. One of Mr Wilson's objectives at the meeting on 2 July was to obtain a further payment to account. He asked for, and received, £50,000 (No. 29/5 of process), although Mr Stephen's evidence was that the payment was made a few days later rather than at the meeting. Mr Wilson's other objective was to explain to Mr Stephen the escalation of costs, which he maintained was due to additional work and changes of instruction. On Mr Wilson's account, when he attempted to do so there was a "huge row", a "real set to". In that light, Mr Wilson said, he decided that the best way forward was to price the work on a "cost plus" basis, i.e. to charge the defenders the cost incurred by the pursuers in providing the labour and materials, plus a mark-up to cover overheads and profit. He explained that the pursuers' records of costs incurred - timesheets and invoices - were available to Mr Stephen, and that he would therefore be well placed to monitor them. According to Mr Wilson, Mr Stephen's reaction to the suggestion of a "cost plus" price was to ask, "Plus what?", and he responded by indicating that the mark-up would be between 10% and 20%. In the defences it is averred that Mr Stephen rejected the cost plus suggestion with the words "No way!", but Mr Wilson denied that those words were used. He described the suggestion that those words were used as "utter nonsense", and asked why, if that had been the reaction, he would have gone on to discuss within the pursuers' office the percentage mark-up to be adopted, and to send the confirmatory letter which he said he sent on 7 July. But while he was clear on that, he was much less clear as to the basis for his understanding that the cost plus approach was in principle acceptable to Mr Stephen. At its highest, his evidence was that his "interpretation at the time" was that Mr Stephen agreed, but said that he would need to know what the "plus" was. Under cross examination he said that he could not remember what Mr Stephen had said to signify his agreement in principle, but he never said he was not accepting cost plus.

According to Mr Stephen, he did not accept what Mr Wilson told him at the meeting about increased costs, and proposed that they should "call it a day". At that, Mr Wilson confessed that he had been "trying it on", and that the total costs would be about £320,000. It was then that the cost plus proposal was made. No percentage mark-up or range was mentioned. The "No way!" response was given, and there the matter rested.

After the meeting Mr Wilson pursued the cost plus approach. He discussed the matter with Mr McAndie and with his office manager, Mr Alastair Ferguson, who had long experience in the civil service, latterly with the Property Services Agency. Mr Ferguson was responsible for the maintenance of business records for the pursuers, including their computerised records, and was therefore the person who would calculate what the "cost" was to which the mark-up was to be applied. He was also involved in discussion designed to identify what the mark-up should be. The decision was that a mark-up of 18% should be proposed.

There is produced a letter from Mr Wilson to Mr Stephen dated 7 July (No. 29/21 of process) which contains inter alia the following passage:

Attached to that letter were the three documents mentioned in it, which (in the order in which they are so mentioned) are Nos. 29/23, 29/22/4 and 29/22/2 and 3 of process respectively.

There is a dispute as to what became of that letter. Mr Stephen maintained that he did not receive it until after the summons in this action was served on 20 August, at which time it reached him in a large brown envelope also containing a number of other items. The letter was addressed to Mr Stephen c/o 81 Portland Street, Leith, which is the pursuers' office. He had been given a room there when his acquiring an interest in the pursuers was mooted. He was not, however, by inclination very enthusiastic about office work, and spent little time there. There was, however, a system of leaving mail for him in a tray in the Portland Street office. According to Mr Wilson, if mail was not collected from the tray in Portland Street after two days, it would be sent to Newbattle Terrace for collection from site. He was not prepared to accept that it was possible that the letter of 7 July had gone undelivered until late August. Mr McAndie also spoke to that system for dealing with mail for Mr Stephen, and said that there was no question of mail lying uncollected for weeks on end.

The only other evidence bearing on the adoption of the cost plus 18% basis for payment came from Hugh Paton who was brought in by the pursuers to supervise the Newbattle Terrace contract in about May. He said that he was told about that arrangement some time in July. He said that he was told by Mr Wilson that if Mr Stephen gave any further instructions he was to be told that they would be charged for at cost plus 18%, and that he did on occasions so advise Mr Stephen. By that stage he was reducing any new instructions to writing. He gave one specific example of discussing the application of the cost plus approach with Mr Stephen, and thought that he did not understand it properly. He said too that he was present with both Mr Wilson and Mr Stephen when there was discussion that "henceforward" work would be charged at cost plus 18%. Mr Wilson, however, did not give evidence about any such occasion.

A further meeting took place at the pursuers' Dunfermline office on 22 July, attended by Mr Wilson, Mr Stephen and, for part of the time, Mr Ferguson. For that meeting, there was obtained a substantial computer print-out showing all the costs incurred on the job. Invoices were also prepared for the St Stephen Street project and for various other jobs on which the pursuers were engaged for the defenders. The intention, according to Mr Wilson, was to go through the costs with Mr Stephen and explain to him how they were built up. The pursuers were looking for a further payment of £75,000 in respect of Newbattle Terrace, and payments in respect of the other jobs which would have brought the total to about £110,000 or £120,000. According to Mr Wilson, discussion began with the invoice for St Stephen Street (No. 29/56 of process), and it was agreed to lay it aside for later discussion. The other jobs were then discussed and agreed. They then turned to the Newbattle Terrace costs data. Mr Wilson and Mr Ferguson attempted repeatedly to explain the material to Mr Stephen, but according to Mr Wilson's perception he was simply being awkward in refusing to understand. Mr Ferguson said that Mr Stephen would not take time to look at the print-out properly. According to both Mr Wilson and Mr Ferguson he did not challenge either the cost plus basis as such nor (according to Mr Wilson) the 18% uplift, but kept asking how he was to know whether a particular item of cost had been incurred. Mr Ferguson said that Mr Stephen became very offensive. Mr Wilson thought he was being "called a liar", and lost his temper. Matters became heated, to the point that Mr Ferguson deemed it prudent to withdraw to the adjoining kitchen. According to Mr Wilson, Mr Stephen eventually agreed to pay the £75,000 which the pursuers were at that stage seeking in respect of Newbattle Terrace, together with the amounts agreed for the other jobs, but asked for help in presenting his need for further funds to the bank. They shook hands and went through to the kitchen to join Mr Ferguson. A reconciliatory game of golf was proposed, but it was found that the course was closed for a competition. Mr Ferguson confirmed that after the meeting Mr Wilson told him about Mr Stephen's agreement to pay a further £75,000 for Newbattle Terrace and the invoices in respect of the other jobs, and about the request for assistance with the bank.

Mr Stephen's account of the meeting in some respects accorded reasonably well with the evidence of Mr Wilson and Mr Ferguson, and in other respects was radically different. He said that he understood that its purpose was "to get the extras bill sorted out", and get the job finished. There was, he said, no discussion of cost plus, but Mr Wilson and Mr Ferguson brought out "a load of goobly-gook (sic) from the computer". He agreed that he thought that they were trying to show him the costs to date, and when asked what he thought the point of their doing that was, said that he did not know and did not ask. Mr Stephen went on to say that, referring back to the meeting on 2 July, he reminded Mr Wilson that they had "done a deal at £320,000". Mr Wilson "started to haggle", beginning at £400,000. They eventually agreed £350,000 as the total payment for the Newbattle Terrace job to completion, plus £25,000 for the work done in respect of St Stephen Street. It was on that agreement that they shook hands. He accepted that he agreed to pay a further £75,000 to account at that stage, but in fact paid only £50,000. He agreed that he had told Mr Wilson that he would need paperwork to persuade the bank to increase his overdraft. Mr Wilson was cross examined to the effect that a total price of £320,000 was agreed, but wholly rejected the suggestion.

Following the meeting, the pursuers rendered an invoice dated 24 July for £75,000 under cover of a letter dated 25 July (No. 29/6 of process), but the amount paid on 4 August was only £50,000.

The documents which the pursuers provided to Mr Stephen for exhibition to his bank were prepared by Mr Ferguson, and sent to Mr Stephen under cover of a letter of 29 July (No. 29/45 of process). The documents took the form of spreadsheets headed "Explanation of Cost Escalations Associated with Project". Three versions were provided, showing what bore to be "Current Assessment [of costs] to Completion" at £390,000 (No. 29/46/2 of process), £400,000 (No. 29/46/1) and £420,000 (No. 29/46/3). In his letter, Mr Ferguson wrote:

Again the pursuers appeared to be arming Mr Stephen to make, if he chose, a misrepresentation to his bank. Mr Ferguson said in evidence that, as may be inferred from the fact that the lower figures are obtained by simply omitting items from the spreadsheet, that the highest of the three figures was the correct one. Mr Stephen said that he found the spreadsheets "a bit strange"; what he had wanted was a voucher for the agreed total figure of £375,000 (£350,000 + £25,000); but he accepted that Mr Ferguson "could have been trying to be helpful". Any reservations he may have had about the spreadsheets did not, however, dissuade him from making use of them in seeking further funds from his bank.

Mr Stephen had a meeting with Mr Christmas on 31 July 1997. Mr Christmas's file contains a copy of one of the spreadsheets, namely the lowest one (No. 29/49/33 of process, which is a copy of No. 29/46/2), and Mr Christmas's note of the meeting (No. 29/49/34 and 35). That note contains the following passage:

The figure of "£112k" is a rounded version of the £112,350 which appears as the variation total in No. 29/49/33. The note goes on to record Mr Christmas's suggestion that the question of increasing the overdraft limit be deferred for a few days to await settlement of the sale by Mr Stephen of property belonging to him in Glenfinlas Street. It is then recorded that the bank would at that stage be prepared to "accommodate an excess of £20k to enable him to pay £50k to David Wilson". That is no doubt the explanation for the payment of £50,000 rather than the agreed £75,000 on 4 August. Mr Christmas explained in evidence that Mr Stephen asked for an increase in the overdraft of £100,000, that he asked for vouching, and that the spreadsheet referring to about £112,000 worth of additional work was handed in later in the day. He also said that his understanding was that £50,000 was the payment requested by the pursuers. He expressed the view that if he had been told by Mr Stephen at that stage that agreement had been reached on an over-all fixed price of £350,000, he would have been interested in that, and would have recorded it.

The next item in Mr Christmas's file is an internal memorandum dated 4 September 1997 addressed by him to his District Credit Manager (No. 29/49/36-38 of process). In it he sought approval for an increase of the defenders' overdraft limit to £550,000. A history of the project was set out which included the following passage:

Reference was then made to the raising of the present action, the inhibition used on the dependence of it, and the fact that the claim was being vigorously contested. Mr Christmas, while recognising that the request to increase the overdraft limit while the inhibition was in force was "a little unusual", recommended approval of the increase, expressing the opinion that:

Mr Christmas said in evidence that he understood the agreed total of £375,000 to be in respect of Newbattle Terrace alone. He had no knowledge of when such agreement had been reached. His impression was that it was subsequent to his meeting with Mr Stephen on 31 July.

Mr Stephen's evidence about his dealings with Mr Christmas in July and August was rather different. He began by saying that when he saw Mr Christmas on 31 July (a) he told him about the agreement to pay a total of £350,000 in respect of Newbattle Terrace and £25,000 in respect of St Stephen Street, and (b) asked at that stage for the defenders' overdraft limit to be increased to £550,000. He initially said that the overdraft limit was increased to £550,000 within a couple of days. When shown No. 29/49/35 containing the reference to the accommodation of an excess of £20,000 to enable £50,000 to be paid to the pursuers, he said:

He then said that he had no clear recollection of when the overdraft limit was increased, other than that it was after 22 July. The increase in the overdraft, he said, was not in any way related to the inhibition which was laid on when this action was raised. He explained that he just used the lowest of Mr Ferguson's spreadsheets because it was "the figure nearest the one we had agreed on". He said that he had informed Mr Christmas about the agreement on £350,000 plus £25,000 on 31 July. At first he said he was "quite sure", then that he could not recall, then that he would have done so, then finally (after being warned to be careful) that he did not recall. In cross examination, he said that his memory of the meeting on 31 July was not good, and that he would rely on Mr Christmas's records.

It is common ground that the pursuers were asked in June or July 1996 to address the cost of carrying out works at Newbattle Terrace. There are two versions of what was done. Mr Wilson and Mr McAndie are in agreement that two plans (one of the ground and first floors and one of the second floor) were made available, that Mr McAndie carried out an assessment of probable cost to the extent that he was able to do so on the basis of that limited information, that the result was the document No. 29/10 of process bringing out a probable cost of £277,973.85 which was produced in July, and that that document was discussed with Mr Stephen in July or August. The other version comes from Mr Stephen, and is to the effect that he asked for, and was given a firm price for the work, and that that price was £250,000. On this matter I prefer the evidence of the pursuer's witnesses. I accept their evidence that only two plans were in their hands when the assessment of cost was made. That is consistent with the terms of No. 29/10 of process. The contrary suggestion by Mr Stephen that more plans were made available became extremely vague when challenged. I accept, further, that on the basis of the two plans in question, it was impracticable to go further than to produce a probable cost. The available plans did not cover all parts of the building which were to be the subject of works. The plans were subject to the requirements of the structural engineer. They contained no detail about finishes and fittings. Planning and building control issues remained unresolved. No building contractor would, in my view, have been prepared to commit himself to a fixed price on the basis of such incomplete information, and without further discussion with the client. The quotation of a fixed price of £250,000 in July 1996 is also inconsistent with the production at that stage of the document No. 29/10 of process, in which the probable cost was assessed at £277,973.85. While, as the evidence showed, it would have been possible to reduce the price below the initial estimate of probable cost by reducing the content or specification of the works, Mr Stephen's evidence did not suggest that in July there was any discussion about such reduction. On the contrary, I accept the evidence of Mr Wilson and Mr McAndie that the document No. 29/10 was discussed with Mr Stephen in July or August. That was entirely consistent with the nature of the document, which was essentially a discussion document the purpose of which was to see broadly what the cost of the proposed works was likely to be, with a view to discussion of whether the project could be taken forward within the intended budget. I do not believe that Mr Stephen was so naive or so unconcerned about detail as to believe that a contractor would offer him a price without some discussion of how the total was made up. I reject Mr Stephen's denial that there were any such discussions, and his denial that he ever saw No. 29/10 before its was lodged in process in this action. I reject, likewise, his evidence that he was given in July a firm verbal offer to carry out the work for a fixed price of £250,000.

It seems to me to be reasonably clear that the figure of £250,000 first emerged in October 1996. It was ultimately not disputed that it was at the end of that month that the letter No. 29/62 was issued by the pursuers. Mr McAndie was clear in his evidence that the letter was issued on 31 October. Mr Wilson's evidence, although less precise, was consistent with that. The defenders' position in their pleadings, that it was not issued until February or March 1997, which was maintained in the course of cross examination of the pursuers' witnesses, was abandoned by Mr Stephen in his evidence. Although I did not find that his explanation that he got the letter in November, then could not find it on his return from holiday, so got a fresh copy in February, was convincing, there was in the end no material dispute about the date of the letter. Nor was it ultimately a matter of dispute that the purpose for which Mr Stephen wished to have the letter was for exhibition to his bank in connection with raising the funds required to finance the project. Mr Stephen's version was that the letter was simply written confirmation of a verbal offer made in July. Since I do not accept that there was such an offer, I reject that version. Mr Wilson and Mr McAndie gave broadly consistent accounts of the course of discussion with Mr Stephen by which the figure of £250,000 was reached, and those accounts are consistent with the documents which are produced. The relationship between the figure of £275,850 mentioned in No. 29/62B of process and the original probable cost of £277,973.85 was not fully explained in evidence, but the variation of the one from the other tends, to my mind, to suggest that there had been further discussions between July and October. Be that as it may, the annotations on No. 29/62B seem to me to be consistent with the evidence of the pursuers' witnesses that the object of the discussions in October was to bring the cost down to £250,000, so that that cost could be presented to the defenders' bank, and that arbitrary deductions were made to achieve that result. The exercise of producing an artificially low figure for the bank was, in cross examination of the pursuers' witnesses, attacked as being pointless, but in light of Mr Christmas's evidence that the lender would be interested in the existence of an adequate margin between the cost of the works and the sale price of the completed flats, that attack in my view fails. The vouching of an artificially low figure remains plainly irregular. Mr McAndie seemed to be aware of that, and uneasy about what he was being asked to do. He gave in partly to Mr Stephen's authority as a proposed director of the company, and partly to Mr Wilson's reassurances. Mr Wilson himself claimed not to have appreciated that there was anything untoward in providing an artificially low figure for exhibition to the bank. Although he did seem to be genuinely taken aback when the point was drawn to his attention, and pointed to his non-involvement in the raising of finance for the project and his own lack of experience of raising development funding, it seems to me that there was probably an admixture of wilful blindness in his attitude, fuelled by his desire not to prejudice the potentially profitable long term relationship between the pursuers and the defenders which was then in contemplation. Irregular though it may have been, however, I accept that the figure of £250,000 emerged because that was the figure which Mr Stephen wished to present to the bank, rather than because it was anyone's genuine assessment of the likely cost of the projected works. I therefore accept that, despite the fact that it reads as a simple offer to carry out identified work for a price of £250,000, the letter No 29/62 of process was not intended by the pursuers or the defenders as a contractual document.

A concession made by Mr Stephen seems to me to reinforce that conclusion. Notwithstanding the averment in answer 2 of the defences that "the contractual arrangement ... was the work would be carried out by the Pursuers in exchange for payment of the agreed price of £250,000", Mr Stephen accepted that the defenders would require to pay additionally for any additional work or variations. If he had adhered to the proposition, improbable as it might have been, that the pursuers agreed to carry out the entire works, whatever they might be, for a fixed price, the letter No. 29/62 might have been pointed to as evidencing that agreement. Once his contention came to be that the agreement was that the price of £250,000 was subject to variation if the content of the works was altered, No. 29/62 ceased to be capable of being an adequate expression of the agreement. If variations of the work were to attract variations of the price, it was necessary for the initial price to be related to identifiable initial work content, and for there to be an agreed basis for valuation of variations. For those purposes No. 29/62 was in my opinion clearly inadequate. The reference in it to three drawings was not sufficient to define the work for which the price of £250,000 had been fixed. There was therefore no base line from which to measure what constituted a variation. Likewise there was nothing in No. 29/62 to provide a basis for the valuation of variations.

I am therefore of opinion for these reasons that there was no binding agreement that the work involved in the redevelopment of 4 Newbattle Terrace was to be undertaken by the pursuers, either for an entirely fixed price of £250,000, or for that price subject to variation in the event of variation of the content of the work.

Once he formed the view, in the context of the instruction of a material number of variations and difficulties and delay in securing payment, that the work was proceeding on an inadequate contractual basis, Mr Wilson's first attempt to put it on a proper footing was made by proposing the execution of an SBCC building contract. That attempt did not succeed, and even if the defenders had signed the contract it would have been unsatisfactory, because the form proposed was the "with quantities" form, yet there was no bill of quantities. The successive "bills of variations" (Nos. 29/20 and 29/48 of process) also seem to me to have been a flawed solution to the problem, because they were not truly concerned with variations in the ordinary sense. They involved simply deleting items drawn from the trades summary in No. 29/62B (which itself had no contractual significance) and substituting other amounts for which there was no foundation in any contractual provision, whatever merit they may have had as fair measures of the work which the pursuers had carried out. What Mr Wilson was seeking to do was simply to persuade Mr Stephen to make payments which were acceptable to the pursuers as remuneration for their work. The further attempt to achieve that objective which Mr Wilson made in the course of the meeting on 2 July by seeking to persuade Mr Stephen that the sums brought out in the later version of the bill of variations were appropriate resulted in acrimonious failure. It was at that stage that Mr Wilson sought to propose that payment should be on the basis of "cost plus".

It is common ground that payment on a "cost plus" basis was proposed by Mr Wilson in the course of the meeting on 2 July 1997. In the circumstances that had developed, that seems to me to have been a sensible suggestion, although it is not clear to me that Mr Wilson fully appreciated why that was so. In my view in the absence of any attempt at the outset to prepare and price a bill of quantities, there was no practical basis for assessment of the price on the basis of measurement and valuation. Cost plus, if it could be agreed, represented a sound practical solution.

It is indicative of the fact that the proposal to proceed on a cost plus basis seems only to have occurred to Mr Wilson in the course of the meeting that even on his own account he was unable to go further than make a general proposal. He was not in a position to indicate, except by reference to a broad band of percentages, what mark-up he sought. I do accept, however, that Mr Stephen asked him something like "Plus what?", and that he gave the broad indication of between 10% and 20%. I also prefer the evidence of Mr Wilson that Mr Stephen did not reject the suggestion outright and at once with the words "No way". Mr Wilson's subsequent actings in pursuing with his colleagues the identification of a suitable percentage mark-up, and in preparing the substantial computer print-out to demonstrate to Mr Stephen the costs actually incurred, seem to me to be less likely to have followed an unequivocal rejection of the suggestion by Mr Stephen. But my rejection of Mr Stephen's account of his response to the proposal does not carry me to the conclusion that Mr Stephen actually agreed that the whole contract would be priced on a cost plus basis. Mr Wilson's own evidence about the basis for his understanding that Mr Stephen had agreed was very weak. He was unable to identify anything that Mr Stephen had actually said to indicate his agreement. He relied on his own interpretation of the situation, founding in part on the absence of a categorical statement from Mr Stephen rejecting the proposal. I regard it as highly unlikely that Mr Stephen would have accepted in principle that the defenders should pay on a cost plus basis without knowing what the proposed mark-up was to be. The conclusion which I reach on the events of the meeting on 2 July is that Mr Wilson proposed payment on the cost plus basis, was asked what he meant by that, indicated the broad band of possible mark-up, and received neither unequivocal rejection of the proposal nor acceptance of it. I accept that Mr Wilson probably thought in good faith that he had Mr Stephen's agreement in principle. The terms of his letter of 7 July (No. 29/21 of process) lend support to that conclusion. Although it was maintained by Mr Stephen that that letter did not reach him until late August, I did not understand it to be suggested that Mr Wilson did not write it at about its date. It is therefore in my view legitimate to regard its terms as supportive of Mr Wilson's evidence about the meeting. But Mr Wilson's understanding of the position is of no avail to set up agreement on the point, if his understanding was mistaken. In my view Mr Wilson's understanding was coloured by his desire to reach a basis for settlement. In effect, he was, in my view, indulging in wishful thinking. I am unable to find objectively that agreement to the principle of payment on a cost plus basis, with the amount of the mark-up reserved as a matter for future agreement, was expressed at the meeting or could properly be inferred from Mr Stephen's actings at it.

Beyond what transpired at the meeting on 2 July, the pursuers found on certain subsequent events as supporting the conclusion that Mr Stephen agreed to pay on the cost plus basis. In chronological order, the next event was the sending of the letter of 7 July (No. 29/21 of process). If there had been satisfactory evidence that that letter had been received by Mr Stephen shortly after it was sent, an inference as to his acceptance of its terms might have been drawn from his subsequent behaviour. His evidence, however, was categorically to the effect that he did not receive the letter until after this action had been raised in August 1997. He spoke of its arrival in a large brown envelope with miscellaneous other mail at that stage. While there are various aspects of Mr Stephen's evidence which I found unsatisfactory, and have rejected in view of preferable evidence to the contrary, I do not consider that there is an adequate basis for rejecting his evidence on this point. I find the evidence given by the pursuers' witnesses about the system for delivery of mail to Mr Stephen less than conclusive. He plainly by the material time was spending little time at the Portland Street office. Mail which had not been collected by him there was supposed to be sent to him at Newbattle Terrace, but Newbattle Terrace was at that stage a building site. I am not satisfied that it has been proved that the system was sufficiently reliable to found an inference that in denying receipt of the letter before late August, Mr Stephen was lying. I take into account, too, the fact that there is no evidence that at the meeting in Dunfermline on 22 July anything was said about the 18% mark-up. It seems to me to be probable that if he had been aware that that specific figure had been proposed, he would, as part of his admittedly hostile reaction to the attempts to explain the costs data to him, have disputed the percentage proposed. I therefore conclude that it has not been proved that Mr Stephen received the letter of 7 July before late August.

Another branch of evidence on which the pursuers found in support of the contention that cost plus 18% was agreed is that of Hugh Paton. I accept that he was led to believe by Mr Wilson that there had been agreement on cost plus, although his understanding appears to have been that that pricing basis was only for additional items instructed after July. He spoke of attempting to explain the cost plus approach to Mr Stephen, apparently without much success. I would be slow, however, to infer, from the fact that there may have been a discussion of cost plus in the context of an instructed variation, acceptance on the part of Mr Stephen that the whole contract was to be priced on a cost plus basis. Cost plus as a way of explaining why the price of a particular extra or variation is a particular amount is one thing; an inference from such particular discussion that Mr Stephen had accepted cost plus as the basis for the whole contract price is another. I find little assistance in the evidence of Hugh Paton that cost plus was discussed by Mr Wilson and Mr Stephen in his presence, when no evidence of such a discussion was given by Mr Wilson himself.

The next aspect of the evidence on cost plus is that relating to what transpired at the meeting in Dunfermline on 22 July. What is clear is that at that meeting Mr Wilson with Mr Ferguson's help attempted to explain to Mr Stephen how the costs incurred on the contract were drawn together in the computer print-out. Mr Stephen admitted that he knew that they were trying to explain costs to him. I do not accept his evidence that he did not know why they were trying to do so. I do, on the other hand, accept his evidence that he did not ask why they were trying to do so. I have a clear impression that Mr Stephen knew only too well that Mr Wilson was trying to justify the payments which he was seeking by reference to the costs that the pursuers had incurred. But it is equally clear that Mr Stephen was doing his best to thwart that attempt. I have no doubt that he was being deliberately obtuse, and irrationally dismissive of the computer print-out, and that his behaviour was intensely irritating to Mr Wilson. I am not at all surprised that Mr Wilson lost his temper. But none of that seems to me to support the conclusion that Mr Stephen had already agreed to the cost plus basis; still less that he had agreed to cost plus 18%.

Finally, I note that when the pursuers came to provide Mr Stephen with vouchers to justify to the bank his need for additional borrowing, the documents provided were expressed not in terms of costs incurred plus a mark-up of 18%, but in terms of the figure of £260,000 (derived I think, via No. 29/48 of process, from No. 29/62B of process), plus amounts assessed for various categories of additional works. That approach seems odd if, by that time, it was agreed that the whole works would be paid for on the basis of cost plus 18%. It seems to me to be more consistent with realisation on the pursuers' part that the attempt to get Mr Stephen to agree to cost plus 18% had failed.

My conclusion on this issue, therefore, is that it has not been proved that there was agreement in July 1997 that the pursuers would be paid for the contract works on the basis of the costs which they incurred plus a fixed mark-up of 18%.

The origin of this contention lies in Mr Stephen's evidence that at the meeting on 2 July, when he declined to accept what Mr Wilson was telling him about increased costs and suggested that they should "call it a day", i.e. terminate the pursuers' work on the project before conclusion of the work, Mr Wilson confessed that he had been "trying it on" and said that the total costs would be £320,000. Mr Wilson denied saying that. My impression is that at that meeting various figures were probably bandied about, and that one of them may have been £320,000. I do not accept, however, that Mr Wilson agreed to that as the total price for the completed job. From that beginning, however, Mr Stephen's evidence went on to suggest that at the meeting on 22 July he referred back to the earlier meeting and claimed that they had "done a deal at £320,000", and that haggling ensued which resulted in agreement that £350,000 would be paid for the completed Newbattle Terrace job, plus £25,000 for the St Stephen Street work. Mr Wilson under cross examination denied that there had been any such agreement.

The documents produced by Mr Ferguson for production by Mr Stephen to the bank afford no support for Mr Stephen's contention on this point. If there had been agreement in the terms contended for, it seems strange that the pursuers would not simply have provided written confirmation that they had agreed a fixed price of £350,000. It was no doubt in recognition of that that Mr Stephen said that he found the spreadsheets "a bit strange". But the fact remains that the documents provided referred back to an "original estimate" of £260,000, then added on various figures as "assessment of additional work", and made no mention of an agreed total figure.

The principal material, however, which leads me to reject outright Mr Stephen's evidence about an agreement at a total figure of £350,000 reached on 22 July 1997 is the evidence of Mr Christmas and his contemporaneous records. I have no hesitation in accepting Mr Christmas's evidence as truthful and reliable. It is quite clear that if Mr Stephen had told him at their meeting on 31 July about an agreement concluded a few days before that the total price for the completed works would be £350,000, Mr Christmas would have made reference to that development in his note of the meeting (No. 29/49/34-5 of process). There is no such reference. I am satisfied that Mr Stephen said nothing about such an agreement on that occasion. Instead he produced the least accurate of the three documents provided by Mr Ferguson, explaining his action in doing so by reference to its being "the figure nearest the one we had agreed on". I found the whole of Mr Stephen's evidence about his dealings with Mr Christmas in July and August quite unacceptable. It is clear that he sought initially an increase in his overdraft limit by £100,000, and that his evidence that he sought an increase to £550,000 then rather than in the context of the inhibition used by the pursuers was inaccurate. I am left with the impression that in his dealings with Mr Christmas and in his evidence about those dealings Mr Stephen was prepared to say whatever seemed to suit him at the time, irrespective of its truth or accuracy. Mr Stephen did mention an agreement with the pursuers to pay them a fixed price for the work at Newbattle Terrace to Mr Christmas at some stage (not precisely indentified) after 31 July. The figure mentioned was £375,000, which is the aggregate, on Mr Stephen's evidence, of what was agreed for Newbattle Terrace and St Stephen Street. But that does not, in my view, alter the adverse impact on Mr Stephen's credibility of the fact that he mentioned no such agreement on 31 July.

The absence of any reference in his dealings with Mr Christmas on 31 July to an agreement with the pursuers that the total price for the Newbattle Terrace works would be £350,000, together with the other evidence that suggests that there was no such agreement, leads me to conclude that Mr Stephen's evidence that there was such an agreement should be rejected.

In the result, therefore, I find that none of the three contractual bases for payment of the pursuers for their work on the Newbattle Terrace project contended for by the parties has been proved. Thus, while undoubtedly the pursuers have performed a substantial amount of work on the defenders' instructions, there is no contractual agreement as to the basis for assessment of the remuneration to which they are entitled. In these circumstances, it will be necessary to turn to the alternative basis of the pursuers' claim and address the assessment of remuneration on a quantum meruit basis.

I shall accordingly put the case out By Order for the purpose of discussing future procedure.