Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2011] CSOH 112
CA86/08	OPINION OF LORD HODGE in the cause MORGAN UTILITIES LIMITED Pursuers; against SCOTTISH WATER SOLUTIONS LIMITED Defenders: ­­­­­­­­­­­­­­­­­________________

Pursuer: Howie Q.C.; Pinsent Masons LLP

Defender: Borland; Dundas and Wilson CS LLP

28 June 2011

[1] The pursuer ("MUL") is part of the group of companies ultimately controlled by Morgan Sindall plc and provides utility services. The defender ("SWS"), as described in paragraph [8] below, was established by a consortium of companies to provide infrastructure and other works to the water industry in Scotland.

[2] MUL asserts that it and SWS entered into an oral agreement, which was to govern the terms on which it was to carry out work for SWS, at a meeting on 3 or 4 September 2003. Unfortunately for the parties, no one took a minute of the meeting or agreed in writing what, if anything, had been decided. As a result for some time the parties have been at odds as to the basis on which MUL carried out work in Lothian and Borders. MUL carried out most of the work at a time when there was significant uncertainty on this issue. In this action MUL claims payment of £3,520,255.50 from SWS, which it asserts is the differential between what it has been paid and the sum to which it is entitled under the alleged agreement.

[3] The proof which I heard was confined to the question of liability. To understand the circumstances in which the meeting took place, it is necessary to consider both the prior contractual arrangements between MUL and Scottish Water ("SW") and the circumstances in which SW and other parties set up SWS. SW is a body corporate established under section 20 of the Water Industry (Scotland) Act 2002.

Factual background
(i) MUL's prior contractual arrangements

[4] From 1999 MUL carried out civil engineering works in Lothian and Borders for East of Scotland Water, one of the statutory predecessors of SW, under a contract which was governed by the standard terms contained in the Conditions of Contract for use in connection with Works of Civil Engineering Construction, Sixth Edition (January 1991) ("ICE 6") as amended by the parties' contract. That work involved site investigation and the design, construction, repair, renewal and refurbishment of clean water pipes. In 2001 MUL entered into a contract on similar terms with West of Scotland Water, of which SW is the statutory successor, to provide services of a similar nature in Dumfriesshire and Galloway. In each case MUL contracted to undertake such works as might be ordered by the employing utility company from time to time during the term of each contract.

[5] In early 2003 the parties entered into negotiations to extend the two contracts. By this time, the rates which MUL was entitled to charge for work in Lothian and Borders had become increasingly unprofitable as the majority of the work which remained to be carried out was located within towns rather than in the countryside and urban works were more complex and expensive to perform than rural works. MUL therefore needed to procure an arrangement with SW which allowed it to carry out works in both Lothian and Borders and also in Dumfriesshire and Galloway at rates which would enable the combination of the works in the two areas to be profitable.

[6] In the summer of 2003 MUL and SW negotiated a new amalgamated contract which covered works in both areas and involved more favourable rates than had previously been allowed in Lothian and Borders. It also held out the prospect to MUL that predominantly rural works in Dumfriesshire and Galloway would make up for the more expensive works in Lothian and Borders and thereby allow the amalgamated contract to be profitable. The amalgamated contract, which extended and revised the previous contract governing works in the East of Scotland and incorporated within it the works to be carried out in Dumfriesshire and Galloway, was agreed in letters dated 25 June and 1, 22 and 28 July 2003. It took effect from 1 July 2003.

[7] Under the amalgamated contract, which subject to further extension was to last until 30 June 2004, there was no guarantee that SW would give a particular amount of work to MUL. But it was the shared understanding of the parties that the contract would enable MUL to receive not less than £5.5 million in the year to 30 June 2004 and it was MUL's understanding that it would carry out any work which SW instructed in Lothian and Borders outside Edinburgh or in Dumfriesshire and Galloway. Mr Howie QC for MUL submitted that that understanding was correct. The amalgamated contract incorporated the terms of ICE 6. He submitted, and it was not disputed, that under ICE 6 the employer was not empowered to give any part of the contract works to another contractor once a contract was awarded: Carr v J. A. Berriman Pty Ltd [1953] 89 CLR 327; Commissioner for Main Roads v Reed and Stuart Pty Ltd 1974 12 BLR 58. In May 2003 SW had instructed MUL to carry out works in Dumfriesshire and Galloway and by 28 July 2003 had brought those works under the amalgamated contract during the period of that contract. Thereafter SW had no right unilaterally to alter that arrangement.

(ii) The establishment of SWS

[8] While MUL was securing the viability of its future works in Scotland by negotiating the amalgamated contract, SW was involved in a radical reorganisation of the way in which it would deliver parts of its capital investment programme in future. This involved the creation of a new company, SWS, whose shareholders were (i) SW, (ii) Stirling Water (2003) Ltd ("Stirling") and (iii) UUGM Ltd ("UUGM"). Stirling and UUGM were consortia of utility companies. UUGM comprised (i) United Utilities Contract Solutions Ltd, (ii) Morgan Est plc and (iii) Galliford (UK) Ltd. Morgan Est plc was an associated company of MUL. Stirling comprised (i) Thames Water Services Ltd, (ii) Alfred McAlpine Utility Services Ltd, (iii) M J Gleeson Group plc and (iv) Kellogg Brown and Root Ltd.

[9] In an attempt to set up SWS in an orderly manner SW in about May 2003 issued a Letter of Intent to the companies which comprised Stirling and UUGM. The letter set out transitional arrangements for the funding and carrying out of activities by a transition team to establish SWS. Under that arrangement the chief operating officer required to obtain the approval of the interim transition board before the transition team incurred costs in excess of £10,000 and the transition team required to obtain the written consent of the chief operating officer to activities which cost less than that sum. The interim transition board had no authority to instruct works on behalf of SWS. The interim arrangements took effect from about March 2003 and the interim transition board met from around that time until 9 September 2003 when SWS commenced its operations.

[10] Under the transitional arrangements, Mr Martin Bradbury was appointed chief operating officer, Mr Nick Sumption was head of commercial services and Mr George Sloss was head of project delivery. Mr Sumption's responsibility included the negotiation and agreement of commercial contracts. Mr Sloss's responsibilities included the coordination of the project management activities which SWS staff were to undertake through area delivery managers and project managers. It was not envisaged that he would have responsibility within SWS for the negotiation and conclusion of commercial contracts.

[11] The participants in SWS entered into a Shareholders Agreement on 9 September 2003 which governed their relationship and on that date shares in SWS were allocated or transferred to its participants. Until 9 September 2003 SWS was not trading and had no employees.

[12] The entities involved in the creation of SWS spent several months in 2003 in the negotiation of a Services Agreement which, among other things, identified the projects which SW was to retain and those which it transferred to the responsibility of SWS. While it was envisaged that SWS would take over responsibility for all of SW's capital programme, there were projects which were in the course of execution and which SW was managing. The parties had to negotiate between themselves and with the Water Industry Commissioner for Scotland ("WICS"), among other things, which projects were to be transferred to SWS and which were to remain the responsibility of SW. It had initially been envisaged that the parties would sign the Services Agreement in March 2003 but repeated delays in the completion of the negotiation forced the parties to operate under the Letter of Intent until the Services Agreement was signed on 9 September 2003.

[13] The Services Agreement provided for three categories of contract, namely allocated contracts, managed contracts and legacy contracts. Allocated contracts were contracts which SWS would place with a contractor which was a member of one of the consortia involved in SWS. The contract was a generic self-delivery contract which contained a target price and provided for a management fee. Managed contracts were contracts which SW had already placed and for which SWS took over responsibility for administration. SW remained the employer of the contractor under such a contract and paid SWS a fee for its administration. Legacy contracts were contracts which SW had placed and for which it retained responsibility without any involvement on the part of SWS.

[14] Even in early September 2003 there was considerable uncertainty as to the categorisation of particular contracts within the Services Agreement. That uncertainty appears to have continued after the signature of that agreement. There was also considerable uncertainty as to which hats certain officials were wearing as several SW officials found themselves dealing with outside bodies, including MUL, both in their capacity as representatives of SW and also as representatives of SWS. The failure of those who organised and implemented the transfer of responsibility to SWS adequately to address and inform MUL of its position provides the backdrop to the unfortunate circumstances of this case.

(iii) Comments on the credibility and reliability of witnesses
[15] Before turning to MUL's response to the emergence of SWS it is appropriate that I comment on the credibility and reliability of the principal witnesses in relation to disputed matters of fact. Most of the witnesses were no longer involved with the companies which employed them in 2003 and 2004 and had no commercial or financial interest in this action. I formed the view that the witnesses were doing their best to recall events truthfully. Inevitably there was a measure of retrospective rationalisation in the evidence of several witnesses. While that did not militate against their credibility, it did affect their reliability.

[16] I accept the evidence of Mr Charles Brien, who was at the material time a senior commercial solicitor in SW, about the interim arrangements to establish SWS. His evidence about the transitional arrangements and the eventual execution of the Services Agreement was not contested. It was helpful in clarifying the circumstances and timing of the transfer of responsibility from SW to SWS. But matters which were known to those within SW and SWS but not to MUL do not form part of the shared knowledge which provides the factual matrix to the alleged contract.

[17] Mr Graham Carr, who was operations director and acting managing director of MUL, was a credible witness. He was straightforward in his evidence and answered questions in an open manner. He clearly believed that he had reached a deal with Mr Sloss on about 3 September 2003 and correspondence from MUL in the months following the contested meeting supports the conclusion that he held that belief at that time. Some of his detailed evidence of events leading up to the meeting with Mr Sloss was less accurate and appeared to have been derived from reviewing the documents much later. It was not clear from the evidence as a whole whether Mr Carr attended a meeting with Mr Sloss in mid August 2003 or whether they were briefly introduced when he met other people who were seconded to SWS. But nothing turns on that. Mr Bill Leach, who was a regional director of Morgan Est plc and was working for MUL, accompanied him to the meeting with Mr Sloss on 3 or 4 September 2003. Mr Leach also was a credible witness. He understood that Mr Carr had reached an understanding with Mr Sloss at the meeting but that the agreement was more of an agreement in principle rather than a legally binding contract.

[18] Mr George Sloss also did his best to tell the truth. He was clear in his evidence that he had understood the meeting with Mr Carr and Mr Leach to be an informal "chat" about future arrangements and that he was aware at the time that he had no power to bind SWS. I accept that he was not aware of the structure of the amalgamated contract between SW and MUL and of the problems which MUL had with the Lothian and Borders work other than what Mr Carr told him at that meeting. In his evidence he said that he had made it clear that MUL should raise any problems concerning the Lothian and Borders work with SW and that he had no authority to make any offers in that regard on behalf of SWS. He also said that he was very clear that he could not make any commitment on behalf of SWS. While I do not question Mr Sloss's credibility, I am not satisfied that he is reliable in his recollection of what he made clear to Mr Carr and Mr Leach. As I have said, correspondence which officials of MUL wrote shortly after the meeting support the view that there was an understanding within MUL that the parties had reached an understanding or deal at the meeting of which MUL then sought confirmation from SWS. Had Mr Sloss made his position as clear as he suggested, it is not likely that employees of MUL would have written the letters in the terms which they did. Nonetheless, I accept that at the time he did not think that he had entered into any binding agreement. I accept the evidence of Mr Bradbury and Mr Michael Beirne that Mr Sloss never told them that he had done any deal with MUL in relation to work in Lothian and Borders.

[19] Mr Martin Bradbury also was a credible witness. He spoke to the genesis of SWS and the transitional arrangements. I consider that his evidence in that regard was both credible and generally reliable. He recalled meeting Mr Carr with Mr Sumption and Mr Sloss in August 2003 to discuss how the establishment of SWS would affect MUL's existing contract with SW and saw it as a simply a meeting to explore possibilities. He had no recollection of inviting Mr Carr to speak to Mr Sloss. I am satisfied from the evidence of Mr Carr and Mr Sloss that, contrary to Mr Bradbury's recollection, Mr Sloss did not attend that meeting in August. At most he may have met Mr Carr briefly when he entered the room in which a meeting was taking place. I did not hear from Mr Nick Sumption, who could have cast considerable light on this matter and on the circumstances in which Mr Carr and Mr Leach came to meet Mr Sloss. While Mr Bradbury had no recollection of it, I am prepared to accept Mr Carr's evidence that Mr Bradbury did invite him to speak to Mr Sloss and that it was because of that invitation that Mr Carr arranged to meet Mr Sloss. Mr Bradbury's lack of recollection on this matter did not however affect my generally favourable assessment of his credibility and reliability on other matters of fact.

(iv) MUL's response to the emergence of SWS
[20] In about August 2003 Mr Graham Carr became increasingly concerned to establish how MUL's contractual arrangements would fit in with SW's proposals that its infrastructure works would be provided through SWS. MUL was not involved in the discussions concerning the establishment of SWS which SW was having with, among others, its associated company Morgan Est plc. At some stage in mid to late August 2003 he had a meeting with Mr Martin Bradbury and Mr Nick Sumption to discuss the work which MUL was undertaking for SW and ultimately to ascertain MUL's position when the contracts were to be with SWS. Mr Bradbury advised him to speak to Mr Sloss.

[21] After a regular progress meeting on about 22 August 2003, Mr Carr wrote to Mr Fraser Purves of SW on 26 August 2003 seeking to clarify the rates at which MUL would undertake feasibility studies and the design and construction of water main rehabilitation schemes in Dumfriesshire and Galloway. After summarising correspondence between MUL and SW he stated:

"MUL consider that negotiations between SW and MUL in respect of the amalgamation of the WOSW and EOSW contracts, by way of an agreed extension to the EOSW contract up to 30 June 2004, clearly envisaged and linked the undertaking of feasibility, design and construction works in the Dumfriesshire and Galloway areas, with the agreement of rates for the existing works in the Lothian and Borders areas, which provided SW with a tangible saving."

He referred to a variation order number 143801-39 dated 21 May 2003 and asked for confirmation that the works which MUL was to undertake in Dumfriesshire and Galloway would be valued at the rates agreed in the amalgamated contract.

[22] Mr Carr and his colleagues in MUL had very limited knowledge of the status of SWS or of the programme for the transfer of responsibility from SW to SWS. They were aware that SWS was to manage SW's capital programmes and had seen organograms showing the intended management structure of SWS. While the consortia of contractors, including MUL's associated company Morgan Est plc, were negotiating with SW, Mr Carr was concerned that MUL might be disadvantaged by the establishment of SWS and might lose work to companies directly involved in the consortia. He had spoken to his colleagues, Mr James Tyson and Mr Bill Leach, in July 2003 and had understood that MUL would receive all of the clean water rehabilitation work in Dumfriesshire and Galloway. He had learned from Mr Fraser Purves that SWS was managing "everything" and needed to ensure that MUL was allowed to carry out the work in that area and in Lothian and Borders in a way which was economically viable for it. He considered that it was not viable that MUL should be paid on what he understood as a "cost plus" basis for work in Dumfriesshire and Galloway while working in Lothian and Borders for the rates agreed in the amalgamated contract. He discussed this with Mr Bill Leach before the meeting on 3 or 4 September. The possible solutions for MUL were either that all works were to be paid on a "cost plus" basis or that all works would remain governed by the rates in the amalgamated contract.

(v) The meeting of 3 or 4 September 2003
[23] On either 3 or 4 September 2003 Mr Carr and Mr Leach had a meeting with Mr George Sloss at SW's office at Pentland Gait, Edinburgh, where SWS was occupying the bottom floor. It is unfortunate that no record was kept of the discussion as the exchanges at this meeting form the basis of this legal action. It was not disputed that at the meeting Mr Carr did most of the speaking for MUL and that Mr Leach said little. The recollection of witnesses as to what was said is not detailed; they did not recall the words used. But it is possible to reach certain conclusions.

[24] First, I accept Mr Carr's evidence that he understood that Mr Sloss represented SWS. Mr Leach had the same view.

[25] Secondly, I accept that Mr Carr explained to Mr Sloss the nature of the amalgamated contract and also the difficulties which MUL would face if it were to be remunerated for work in Dumfriesshire and Galloway on one basis and for work in Lothian and Borders on another, because of the relatively costly nature of the residual urban works in the latter area.

[26] Thirdly, I accept Mr Sloss's evidence that Mr Carr explained that he had heard that SWS was to be responsible for the delivery of work in Dumfriesshire and Galloway and he had a problem if he received the rates under the amalgamated contract only for the expensive Lothian and Borders work.

[27] Fourthly, I accept Mr Carr's evidence that Mr Sloss explained that contractors working for SWS were to be in house delivery partners and that they would work under a self-delivery contract, which Mr Carr understood to be a "cost plus" basis. It appears that Mr Sloss equated MUL with Morgan Est plc as it was part of the same group of companies. Mr Sloss's understanding in this regard was understandable as MUL's printed paper which it used for its correspondence described MUL as a division of Morgan Est plc.

[28] Fifthly, I accept the evidence of Mr Carr and Mr Leach that they both understood Mr Sloss to have agreed that MUL would have the status of a self-delivery partner both in relation to the works (except for design works) in Dumfriesshire and Galloway and in relation to the works in Lothian and Borders. In accepting this evidence I reject Mr Sloss's recollection that he explained that he was clear that SWS had nothing to do with the Lothian and Borders work. That in my opinion is a retrospective rationalisation of his position.

[29] But, sixthly, I prefer Mr Leach's characterisation of the discussion to that of Mr Carr. In his oral evidence Mr Leach said that he understood that the purpose of the meeting was to obtain guidance on the future organisation of the contracts and that it was not a contractual negotiation. He said that the purpose of the meeting was to discuss principles. He saw the principle under discussion as being whether MUL would be an in house delivery partner on the Lothian and Borders works once the SWS regime was in place. He was aware that Mr Sloss did not have a good grasp of the detail of the contractual arrangements which MUL had or of the differentiation between work in the East and the West of Scotland. On cross-examination when he was referred to MUL's position that Mr Sloss had instructed that MUL would be an in house delivery partner, Mr Leach said that "instructed" was not the word; it was more a discussion and an understanding.

[30] In my opinion, the most that MUL can claim from the meeting was that its officials understood from what Mr Sloss said that it was agreed in principle that MUL would be an in house delivery partner in respect of the works which it carried out, in both areas, except for the already commissioned design works in Dumfriesshire and Galloway. I am satisfied that Mr Sloss did not intend to create that impression. This is both because he was aware that he had no authority to enter into contracts before the completion of the Shareholders' Agreement and the Services Agreement and because he did not know whether it was intended that SWS would take responsibility in any form for the works which MUL was carrying out in Lothian and Borders. I am also satisfied that both Mr Carr and Mr Leach came away from the meeting satisfied that they had an understanding with Mr Sloss that MUL would in future undertake work in both areas under self-delivery contracts. Had they not had that understanding, they would have sought to raise the issue at a higher level within SWS as they were aware that it was not commercially viable to separate the contractual terms governing the works in Lothian and Borders from those which applied in Dumfriesshire & Galloway.

[31] Seventhly, while Mr Carr asserted in his written witness statement that Mr Sloss had instructed that MUL were to undertake all work as an in house delivery partner from 1 July 2003 onwards, he was more guarded in his oral evidence when he recalled what had been discussed. He accepted that he was not authorised to negotiate the detail of an arrangement and that those discussions would be conducted by commercial personnel within MUL such as Mr James Tyson, its divisional commercial manager, and Mr Paul Else, its contracts manager. He had not agreed a cut off date from which work which MUL had carried out would shift from the amalgamated contract to a self-delivery contract with SWS. Similarly, he accepted that he had not agreed with Mr Sloss whether, in relation to work which MUL had already carried out and for which it had been paid, MUL would (i) reimburse SW the sums which it had paid and claim from SWS the whole sum due under the self- delivery contract for that work, or (ii) claim only the differential from SWS.

(vi) Subsequent correspondence
[32] Mr James Tyson gave evidence, which I accept, that Mr Carr had understood at the time that he had an agreement with Mr Sloss. He recalled Mr Carr telephoning him from his car immediately after the meeting with Mr Sloss and confirming what had been agreed. He had taken notes of the conversation at the time but unfortunately had not been able to find those notes when preparing to give evidence. He understood that it had been agreed that the Dumfriesshire and Galloway works and the Lothian and Borders works were to be tied together as MUL required.

[33] He used his notes and further discussions with Mr Carr to draft a letter which Mr Leach sent on MUL's behalf to SWS on 18 September 2003. The letter was marked for the attention of Mr Sloss and copied to Mr Sumption. It referred to the meeting on 3 September and stated:

"Outlined below is our confirmation of the agreements reached therein.

With regards to all Works undertaken for Scottish Water since 1^st of July 2003, it is our understanding that these will be undertaken in accordance with the generic self-delivery contract."

It then referred, as an exception to that rule, to ten design schemes in Dumfriesshire and Galloway which had been instructed on the agreed rates in the amalgamated contract and which it listed. The letter went on to refer to a letter from Mr Nick Sumption of SWS dated 11 September 2003, which appears to have been a response to MUL's letter of 26 August. See paragraph [15] above. In that letter SWS awarded MUL a contract to carry out works in Dumfriesshire and Galloway on the Quhytewoolen SR WSZ with an agreed target cost of £1,074,722 in accordance with an attached Scope of Works. Mr Sumption's letter had concluded as follows:

"Notwithstanding any previous contractual arrangements or negotiations with Scottish Water, as Morgan Utilities are categorised as an In-House Delivery Team (IHDT) partner within Scottish Water Solutions, the subject works shall be carried out and reimbursed in accordance with the generic self-delivery contract."

Mr Leach's letter of 18 September referred to this letter, confirmed its terms, asked for confirmation that it was

"in accordance with the previously detailed agreements reached at our meeting of the 3/9/03, namely the generic self delivery contract,"

and requested a meeting to discuss the process for measurement and valuation of the works and payment.

[34] While it was a substantial overstatement to describe the discussions at the meeting on 3 or 4 September as involving "detailed agreements", there was little room for doubt that MUL was asserting that an agreement had been reached at that meeting. Mr Borland for SWS submitted that MUL's letter of 18 September 2003 was ambiguous as it appeared to relate only to the particular works in Dumfriesshire and Galloway; but I do not see that ambiguity in the words which I quoted in the previous paragraph which were not so confined.

[35] In his oral evidence Mr Sloss explained that he was annoyed by the assertion that there had been an agreement reached at the meeting and that he had discussed the matter with Mr Sumption and had asked him to speak to Mr Stuart Marshall while he would speak to Mr Michael Beirne to arrange that SWS responded to the letter. Mr Beirne gave evidence, which I accept, that he had not seen the letter until he was preparing to give evidence in this proof and that he was never asked to respond to it. Mr Steven Downie, who was seconded from SW to SWS in September 2003, gave evidence that he also was not asked to reply to the letter and that he had not seen it before he prepared for this action. I also accept his evidence on that matter. It is remarkable that SWS never sent a proper response. This served to add to the misunderstanding between the parties.

[36] Mr Steven Downie issued a variation order dated 13 October 2003 in the name of SW ordering that design work on certain schemes in Dumfriesshire and Galloway cease with immediate effect as SWS was to issue a new design specification. In response Mr James Tyson of MUL wrote a letter dated 15 October 2003 to Mr Downie at SW and copied it to Mr Sumption and Mr Sloss among others. In that letter he sought clarification of the use of and payment for MUL's design staff. He sought confirmation that the works which MUL had been instructed to cease had been ordered on 21 May 2003 during the negotiation of the amalgamated contract. He continued:

"Subsequent discussion with Mr George Slosh (sic), of Scottish Water Solutions, have removed on site construction activities from this agreed Framework Extension, and these are now valued in accordance with the generic self delivery contract. Design, however, was specifically ring fenced and not incorporated into this arrangement. Confirmation of these discussions was communicated via our correspondence of the 18/09/03, to Mr Slosh (sic)."

Mr Downie in his evidence recalled reading the letter at the time but did not recall responding to it. No response was produced in evidence.

[37] On 29 October 2003 Mr Tyson sent SWS a letter for the attention of Mr Sloss and copied the letter to, among others, Mr Sumption of SWS and Mr Carr and Mr Leach of MUL. In that letter he stated:

"Further to our letter of the 18/09/03 regarding agreements reached at our meeting of the 3/09/03, please be advised that Morgan Utilities are continuing to work and operate in accordance with the conditions laid down within said correspondence.

We are currently in the process of preparing statements of cost to enable reimbursement in line with the agreements, and these will be submitted in due course.

We trust this to be to your satisfaction, but should you require any further information, please do not hesitate to contact the undersigned."

[38] On 31 October 2003 Mr Steven Downie wrote a letter under an SW letterhead to MUL for the attention of Mr Keith Troughton, who was an area manager, concerning the submission of costs in relation to water mains rehabilitation in Dumfriesshire and Galloway. Under his signature he placed an email address which suggested that he was working for SWS. In the letter he complained that he had been requesting MUL's costs for work in Dumfriesshire and Galloway for several weeks and he informed MUL that he would refer the matter to Mr Michael Beirne if it did not submit the information by end of business on Monday 3 November 2003. Mr Downie explained that he acted for SWS after 9 September 2003 but that he also retained his role as project manager and employer's representative on behalf of SW in relation to the Lothian and Borders contract with MUL. He was later replaced in that role by Montgomery Watson Harza in early 2004. Again, there was no clear evidence that anyone in SW or SWS took care to explain to MUL employees the capacity in which he was acting.

[39] Mr Tyson replied by letter dated 3 November 2003. He apologised for any confusion relating to the submission of costs and stated that MUL had always intended to provide cost information in November for work undertaken in October. He stated that MUL was paying similar attention to the formulation of costs for the Lothian and Borders works so that full reimbursement could also be made for that work. SWS replied by letter from Mr Allan Falconer, a Senior Project Manager, dated 6 November 2003. In that letter Mr Falconer emphasised the importance of the prompt receipt of accurate costs. In relation to Mr Tyson's reference to the Lothian and Borders work he stated:

"Additionally, your letter of 3^rd November relates to commercial matters associated with your Borders and Lothian works. This matter will be addressed separately by Mike Beirne and Nick Sumption."

In his oral evidence Mr Sloss explained that he had requested his team to respond to MUL's assertions about what he had agreed and that this letter was his team's response. If that was the purpose of this letter, it did not give MUL notice of the disagreement which later became apparent.

[40] In a letter dated 13 November 2003 MUL submitted to SW its statement of costs for works which it had undertaken in Lothian and Borders in the period from 1 July 2003 and 26 September 2003. The letter was stated to be for the attention of Mr Steven Downie and was copied to Mr Sumption and Mr Sloss of SWS. In that letter Mr Tyson again referred to the agreement with Mr Sloss of SWS at the meeting of 3 September 2003 and to MUL's letters of 18 September and 29 October 2003.

[41] Mr Downie wrote to Mr Troughton of MUL on 25 November 2003 instructing him to recommence feasibility and design works on five projects in Dumfriesshire and Galloway. He stated that the payment mechanism for all work on the schemes had to comply with contractual agreements with SWS. Again, he wrote under an SW letterhead but included under his signature an email address at SWS. Further instructions to carry out water mains rehabilitation works in Dumfriesshire and Galloway were sent by Mr Stewart Marshall, a Commercial Manager Infrastructure of SWS, on SWS letterhead on 5 and 19 December 2003 and on 10 March 2004.

[42] In summary, SWS failed to respond directly to the repeated assertion in MUL's letters that an agreement had been reached on 3 September 2003. It and SW did not explain that in their understanding there were different employers in relation to work in Dumfriesshire and Galloway on the one hand and work in Lothian and Borders on the other. As a result, MUL proceeded with the works in Lothian and Borders without having obtained the confirmation which it sought from SWS.

[43] MUL submitted claims to SW for the works which it carried out in Lothian and Borders and SW paid for those works. Mr Carr explained that MUL did so because there appeared to be some uncertainty as to the contractual arrangements and MUL needed to maintain its cash flow while that was sorted out. I see no reason to doubt his explanation and do not accept the suggestion that MUL by so acting showed that it knew that the Lothian and Borders contract had remained with SW. MUL also submitted claims to SWS for those works based on its understanding of an agreement with SWS.

(vii) Attempts at clarification
[44] In an attempt to resolve those uncertainties a meeting between SWS and MUL was held on 3 February 2004. Mr Sumption, Mr Sloss, Mr Beirne and Mr Marshall attended on behalf of SWS and Mr Leach and Mr Tyson on behalf of MUL. The parties did not agree a formal minute of the meeting and the witnesses who were able to speak to the meeting had varying recollections. The only contemporary document which parties produced in the proof was a manuscript note which Mr James Tyson made at the meeting.

[45] Mr Tyson asserted at that meeting that SWS should be paying MUL for the Lothian and Borders works under the self-delivery contract. It appears that there was some uncertainty within the SWS camp as to the status of the Lothian and Borders contract. The manuscript note, which is the best evidence, records Mr Sumption as suggesting that the contract should form part of the "managed works" and asking whether it currently formed part of the "allocated works." The note showed someone asking the question, "Who is the contract with now?" The note also recorded an explanation of the differences between managed, legacy and allocated works. The note showed someone speaking of an instruction from Mr John Bennett of SW to Mr Bradbury of SWS confirming that it was a managed project. In his oral evidence Mr Tyson accepted that Mr Sumption had suggested that SW would have to give such an instruction for the works to be treated as a managed contract. The note recorded that Mr Sumption advised Mr Tyson and Mr Leach to liaise with Mr Marshall to establish precisely what had been paid to date. While it is not possible to determine in any detail what was discussed and agreed at this meeting, it is clear that there was uncertainty within SWS as to the status of the Lothian and Borders contract and that no conclusion was reached on that matter.

[46] There was no meeting of minds in the following months. SW paid MUL certain sums for the Lothian and Borders works on the basis of the amalgamated contract but MUL's submissions to SWS on the basis of cost were not paid. On 5 August 2004 Mr Martin Broome of MUL sent an email to Mr John Manners of SW in which he stated that he was clarifying the situation with the benefit of hindsight. He asserted that at the meeting on 3 September 2003 it had been agreed that the Dumfriesshire and Galloway contract would be carried out under the allocated programme and that the Lothian and Borders contract would be carried out under the managed programme. At a meeting on 17 November 2004 between MUL and SWS, Mr Tyson and Mr Broome of MUL asserted that the Dumfriesshire and Galloway contract was part of the generic partnership contract and that the Lothian and Borders works had been transferred to SWS and were to be paid on a cost plus basis. Mr Sumption, Mr Marshall and Mr Sullivan attended the meeting for SWS. Their position was that while the construction work in the Dumfriesshire and Galloway contract was paid by SWS through a partnership contract, it was SW and not SWS which was responsible for the Lothian and Borders contract. In his oral evidence Mr Tyson did not accept that the assertion in SWS' minutes of the meeting that MUL had accepted that its contract for the Lothian and Borders works was with SW. But SWS' position was clear: it was not responsible for those works. It offered to assist MUL in the submission of a claim to SW.

(viii) The internal treatment of the MUL contracts by SW and SWS

[47] From the internal documentation of SWS it became clear in the course of the proof that the Lothian and Borders contract had not been transferred from SW to SWS either as an allocated contract or as a managed contract. The contract had an autocode number 4549, which applied to an SW project. It was not a project which was transferred to SWS under the Services Agreement. SW employees authorised payments to MUL in monthly payment certificates. Accordingly, notwithstanding the uncertainty of senior employees of SWS, there was no transfer of the contract from SW to SWS. There was no evidence that SW had requested the transfer of the agreement to SWS. It remained a legacy agreement in which SW was the contracting party with MUL. The only basis therefore on which SWS could be liable under the contract was if SWS had undertaken responsibility to pay MUL for the contract works under a self-delivery contract. The central issue therefore is whether Mr Sloss entered into a binding agreement to that effect on 3 or 4 September 2003.

(ix) Other evidence

[48] For completeness, I record that the parties led evidence about a number of matters which might have supported the view that SWS had taken over from SW the responsibility for the Lothian and Borders contract in September 2003. First, MUL questioned SWS's assertion that it did not place contracts for infrastructure works before 9 September 2003. Mr Bill Leach gave evidence in his witness statement that an SWS Monitoring Report dated November 2003 gave rise to an inference that it had placed two contracts at Stenton and between Dunkeld and Perth on 14 August and 5 September 2003 respectively. But SWS established by documentary evidence and Mr Leach accepted in his oral evidence that SW had awarded those contracts.

[49] Secondly, SW instructed MUL at a monthly progress meeting on 10 September 2003 to adopt the new format of the SWS monthly report in reporting the progress of the Lothian and Borders work. Thirdly, there was evidence that health and safety advisers employed by SWS made site visits in October and November 2003 to sites on which MUL was working at Musselburgh and reported on them in SWS Contractor Performance Summaries. Mr Hall, one of the health and safety advisers, gave evidence that he had visited the site because he had understood that it was the subject of a managed contract and thus under the control of SWS. Fourthly, emails sent on 1 July 2004 by a person seconded to SWS instructed MUL not to carry out work in Musselburgh during Gala Week and criticised it for a failure to restore iron covers on manholes in that area and for other minor matters. There was also, fifthly, a suggestion that at least one invoice which MUL had submitted before September 2003 had been processed by SWS. Finally, there was evidence that SWS included work which MUL carried out in Lothian and Borders in the outputs which SWS reported to the WICS. But Mr Bradbury explained that SWS had agreed with SW that it was entitled to include prior under-measurements of SW work in its returns to the regulator. There was also evidence of the confusing practice of personnel wearing two hats. For example, Mr Steven Downie issued instructions in relation to Lothian and Borders work in his capacity as an employee of SW but issued instructions for work in Dumfries and Galloway in his capacity as a representative of SWS. His messages to MUL did not clearly distinguish the capacity in which he was acting.

[50] In summary there was extensive evidence of uncertainty among MUL employees in late summer 2003 as to when SWS took over from SW; there was also evidence of uncertainty within SW and SWS as to who had responsibility for different projects in the months after the transfer of authority to SWS. But the evidence in aggregate did not contradict the internal documentation of SW and SWS which demonstrated that the Lothian and Borders works remained legacy works which SW managed and for which SW was liable to pay.

Discussion

[51] There were three central legal issues in this case. The parties disputed (i) whether there was an intention to contract on 3 September 2003, (ii) whether Mr Sloss had apparent authority to contract and (iii) if there were an intention to enter into legal relations, whether there had been sufficient agreement to create a contract. I set out briefly my understanding of the relevant law before considering its application to the facts of this case.

Legal issues
(i) An intention to enter a contract

[52] There was no dispute between the parties on the approach which the court should adopt in deciding whether there was an intention to enter into a contract. The task of the court can be summarised in four propositions. First, the court has to decide whether the parties had manifested an intention to be immediately bound, "there and then": Aisling Developments Ltd v Persimmon Homes Ltd 2009 SLT 494, Lord Glennie at paragraph 56; Fletcher Challenge Energy Ltd v Electricity Corporation of New Zealand Ltd [2002] 2 NZLR 433, paragraphs 51-53. Secondly, the court adopts an objective approach, having regard to what the parties did and said. It asks what would reasonable and honest men in the position of the parties and having their shared knowledge of the surrounding circumstances have understood by the discussion which they had or the communications which passed between them: Fletcher Challenge Energy Ltd (above) at paragraphs 54-55. In the context of a commercial transaction the court asks what would have been the reasonable expectations of sensible businessmen: G Percy Trentham Ltd v Archital Luxfer Ltd [1993] 1 Lloyd's Law Reports 25, Steyn LJ at p.27. Thirdly, while it is important to consider events as they unfolded in order to take an objective view of what reasonable people would have understood the position to be at the time the deal was allegedly concluded, it is also relevant to look at parties' behaviour after that time to the extent that that may cast light on what reasonable persons would have understood at that earlier time: Fletcher Challenge Energy Ltd at paragraph 56. Communications between the parties after an alleged agreement may help the court evaluate evidence about what occurred at the time of such an agreement: Australian Broadcasting Corporation v XIV th Commonwealth Games Ltd (1988) 18 NSWLR 540, Gleeson CJ at p.550. Fourthly, when the court is considering whether or not the parties intended to enter into a contract at a particular time, it adopts an entirely neutral approach: Fletcher Challenge Energy Ltd at paragraph 58. It is only once the court has decided that the parties did intend to contract that it will seek to give effect to that intention and uphold the contract if it can: G Scammell and Nephew Ltd v Ouston [1941] AC 251, at p. 268. See generally, Baillie Estates Ltd v Du Pont (UK) Ltd [2009] CSOH 95, at paragraphs 25 and 26.

(ii) Apparent authority

[53] The issue in this case is not the actual authority of Mr Sloss to enter into a contract on behalf of SWS with MUL. Mr Howie did not contend that he had such authority. The evidence revealed that he did not. Instead Mr Howie founded on Mr Sloss's apparent authority.

[54] It is well established that apparent or ostensible authority arises from a representation by the apparent principal to the contractor that the agent has authority to enter into a contract of a kind within the scope of that authority. The agent may be unaware of the representation by the principal. That representation, when acted on by the contractor by entering into the contract with the agent, bars the principal from asserting that he is not bound by the contract: Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480, Diplock LJ at pp.503-504.

(iii) The sufficiency of an agreement

[55] Where it has been established that the parties intended to enter into a binding agreement with immediate effect, it is necessary to consider whether they have agreed enough to enable the court to give effect to their agreement. In his judgment in Fletcher Challenge Energy Ltd, which Lord Glennie quoted in Aisling, Blanchard J pointed out (at paragraph 50) that one could not sensibly divorce the question whether the parties intended to enter into an immediately binding agreement from a consideration of the terms express or implicit in the product of their negotiations. A failure by parties to agree terms which are legally essential elements of a bargain may point to the failure of a negotiation or to the achievement of no more than an understanding or agreement in principle which the parties did not intend to be legally binding.

[56] Even where the parties intend to enter into a contract, the result of their discussion or negotiation may not deal with an essential term and the court may not be able to determine the parties' intention by implying a term or by referring to an objective standard such as what was reasonable in the circumstances. The parties require agreement or the objective means of achieving agreement on every term which is essential to the formation of their deal.

Whether the parties entered into a contract on 3 or 4 September 2003

[57] I turn to the three issues, namely (i) whether the circumstances viewed objectively demonstrated that the parties intended to enter into a binding agreement at the meeting of 3 or 4 September 2003, (ii) whether Mr Sloss had apparent authority to contract, and (iii) if issues (i) and (ii) were decided in MUL's favour, whether there was sufficient agreement of the essential terms to create a binding agreement.

[58] There are a number of factors which cumulatively persuade me that the parties did not intend to reach a binding agreement at the meeting on 3 or 4 September 2003. First, there is the informality of the meeting. No formal minutes were prepared and exchanged. Mr Sloss was not accompanied by any other officer of SWS. Mr Sloss spoke of understanding that Mr Carr had come for "a chat." Secondly, Mr Leach characterised the nature of the discussion as achieving an understanding rather than a contractual negotiation. While there is scope for a contract to come into existence without detailed negotiation of its terms, Mr Leach's characterisation was telling. Thirdly, there is the relative complexity of the arrangement by which the contract works would be transferred from the amalgamated contract to the new SWS system of a generic self-delivery contract. There was no agreement of the scope of the works or a target cost for those works. The former was perhaps already discernible in what SW had agreed with MUL in relation to the Lothian and Borders works under the amalgamated contract but the latter was a crucial component of a generic self-delivery contract. It was therefore not clear how, on MUL's understanding, a "cost plus" arrangement would work. Fourthly, there was no agreement as to the start date of the new arrangement or as to whether MUL would repay SW sums already paid under the amalgamated contract and obtain the full sum due for the works under the new arrangement from SWS.

[59] Some light is cast by the subsequent behaviour of the parties. MUL's correspondence after the event clearly pointed to an understanding that it had a deal with SWS in relation to the Lothian and Borders works. But the subsequent behaviour of Mr Sloss and of Mr Steven Downie, the project manager who was responsible for administering those works, did not demonstrate such an understanding. Mr Sloss did not inform Mr Bradbury or his subordinate, Mr Beirne, of any such deal. Mr Downie gave evidence that SW always intended the Lothian and Borders works to be legacy works and that he administered the contract on that basis.

[60] Turning to issue (ii), I am not persuaded that Mr Sloss had apparent authority to enter into a contract with MUL on behalf of SWS. Mr Bradbury's suggestion that Mr Carr should discuss his concerns about MUL's future contractual position with Mr Sloss is not sufficient in the circumstances to amount to a representation of apparent authority to contract. Mr Sloss, as Mr Carr knew, was responsible for project delivery. I do not accept that Mr Sloss's title contained a representation of power to contract. Mr Sumption and not he was responsible for commercial services, which included the negotiation of contracts. There was no evidence that Mr Bradbury or any other senior SWS employee made any representation to Mr Carr about Mr Sloss which was sufficient to bestow on him an apparent authority to enter into a contract on behalf of SWS.

[61] As I have concluded both that the parties did not intend to reach a binding agreement there and then and also that Mr Sloss did not have apparent authority to contract, the issue of the sufficiency of the agreement does not arise. But, in case I am wrong on issues (i) and (ii), I record my conclusions on issue (iii). In my opinion the understanding was lacking in one fundamental respect. There was no agreement at the 3 September meeting or afterwards on a start date at which the works, which were being carried out under the amalgamated contract, were to become the subject of a generic self-delivery contract. In the practical context in which infrastructure works were being carried out in Lothian and Borders and design work was being undertaken in relation to works in Dumfriesshire and Galloway, it was essential to any agreement that a start date of the new arrangements had been agreed. It had not. That was fatal to the existence of a binding agreement.

[62] Mr Borland submitted that the failure to agree a payment or repayment mechanism also prevented a binding agreement. I am not persuaded that that of itself would have been fatal if otherwise the court were satisfied that there was an intention to contract. MUL could either (i) repay to SW sums which the latter had paid under the amalgamated contract and seek payment in full for the works from SWS under a generic self-delivery contract or (ii) simply obtain from SWS the balance of their entitlement under the latter contract. Which arrangement would have been made is to my mind a matter of mechanics and the absence of agreement on such mechanics would not have invalidated an otherwise sufficient agreement.

Conclusion

[63] I have concluded that MUL has not proved that it entered into a binding agreement with SWS that SWS would pay it for works in the Lothian and Borders area under a contract which was to replace the amalgamated contract. The action therefore fails.

[64] I am left with a sense of disquiet at the outcome. Mr Borland could not explain how as a matter of law SW had uncoupled the Dumfriesshire and Galloway works from the amalgamated contract. There was no evidence to support any agreement between SW and MUL to novate that agreement to separate those works from the Lothian and Borders works. Given Mr Carr's concerns about the viability of the Lothian and Borders works on their own, it is very unlikely that MUL would have agreed to that separation. It appears that, through pressure of work, inadvertence or otherwise, the people in SW and other organisations, who were responsible for the establishment of and transfer of responsibility to SWS, failed to address SW's obligations to MUL under the amalgamated contract. As a result MUL has been treated rather shabbily. But that consideration cannot alter the duty of the court to apply the law relating to the formation of a contract.

[65] I therefore repel the first plea in law for the pursuer, sustain the fourth plea in law for the defender and grant decree of absolvitor.