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FIRST DIVISION, INNER HOUSE, COURT OF SESSION
[2021] CSIH 60
CA159/19
Lord President
Lord Woolman
Lord Pentland
OPINION OF THE COURT
delivered by LORD PENTLAND
in the Reclaiming Motion by
CRIMOND ESTATES LIMITED
Pursuer and Respondent
against
MILE END DEVELOPMENTS LIMITED
Defender and Reclaimer
______________
Pursuer and Respondent: Johnston, QC, G Reid; Lefevres
Defender and Reclaimer: MacColl, QC; Burness Paull LLP
29 October 2021
Introduction
[1]
In 2013 the parties entered into a contract in terms of which the pursuer agreed to
provide specified project management services to the defender in return for sharing in the
net sale proceeds of a development of flats on the site of Mile End School in Aberdeen. The
project did not run smoothly. Unforeseen problems were encountered from the start. There
were substantial cost overruns and a six month delay in completion.
2
[2]
In November 2016 the defender terminated the contract on the ground that the
development costs exceeded the agreed budget by more than the contractually permitted
margin of 5 per cent. The pursuer subsequently raised these proceedings alleging that the
termination was in breach of contract and seeking damages. Following proof, the
commercial judge held that the defender had not been entitled to terminate the contract; the
evidence showed that the defender had in fact approved the expenditure that had caused
the budget to be exceeded. The defender was therefore in breach of contract by purporting
to terminate when it had not been entitled to do so. No damages were payable for the
breach, however. This was because there would have been insufficient profits from the
project to entitle the pursuer to receive any of its agreed profit share; the flats failed to sell at
the expected prices as a result of the Aberdeen property crash brought about by the
downturn in the oil industry in 2018.
[3]
In this reclaiming motion (appeal) neither party challenged any of these findings.
The focus of the appeal was the commercial judge's decision to award the pursuer
£211,831.63 in respect of the alternative claim for reasonable remuneration for its services
under clause 3.12 of the contract. The defender argued that the judge had been wrong to do
so. He had misunderstood the clause and should have decided that it did not apply where
the termination had been in breach of contract. In other words, the clause applied only
where the termination had been lawful. If that argument was wrong, the judge should have
held that the damages payable under the clause should be calculated so as to reflect an
assessment of the quality of the services provided. In that event the works would have been
valued, according to the expert evidence accepted by the judge, at 10 per cent of the figure of
£211,831.63 and so the relevant sum in damages was £21,183.16.
3
The relevant terms in the contract
[4]
Clause 6.2 provides that the contract could be terminated by either party on the
service of thirty days written notice on the other party if:
"6.2.1 the other party is in material breach of this Agreement and fails to rectify
such breach within ten working days after being required in writing so to do
by the other party;
...
6.2.7 if the Development Costs or any reasonable estimate of same prepared by the
Professional Team Quantity Surveyor for the Company (i.e. the defender)
from time to time exceed the Budget by 5% or more, and such excess has not
been previously approved in writing by the Company."
[5]
Clause 3.12 governs the remuneration payable where there has been termination
under clause 6.2.1 or 6.2.7:
"In the event of termination of this Agreement by the Project Manager in terms of
clause 6.2.1 or by the Company in terms of clause 6.2.7, the Project Manager shall, in
the event that no Project Manager's Profit Share is due to the Project Manager
following the application of any part of this clause 3, be entitled upon completion of
the Development, and subject always to the application of Clause 3.9, to such
reasonable remuneration for its services up to the Termination Date, such
remuneration to be based on the open market rate for a project manager carrying out
the management of a development similar to the Development (but which
remuneration shall not in any event exceed the amount of the Profit Share A Cap),
and failing agreement to be fixed by the Adjudicator."
[6]
Clause 3.9 stipulates as follows:
"For the removal of doubt the Project Manager acknowledges that no Project
Manager's Profit Share shall be payable unless and until (i) all of the Development
Costs incurred or to be incurred relative to the Development have been fully
accounted or provided for (irrespective of the stage of progress of the Development
as at the Termination Date it being the express intention of the parties that where
insufficient Net Sale Proceeds have been generated at the Termination Date to cover
all Development Costs incurred or to be incurred and the Priority Sum A that no
Project Manager's Profit Share shall be payable) and (ii) the Company has received
payment of the Priority Sum A in full. Where at the Termination Date adequate
provision has not or cannot reasonably be made for all Development Costs incurred
or to be incurred in order to ascertain the Project Manager's Profit Share the
Company shall be entitled to defer determination of the Project Manager's Profit
4
Share until completion of the Development by the Company or such earlier date on
which adequate provision can reasonably be made for all Development Costs. At the
discretion of the Company, provided it is demonstrably prudent to do so, the
Company may make payments to account of the Priority Sum A, the Priority Sum B
and the Project Manager's Profit Share."
[7]
Clause 3.9 therefore makes clear that no profit share would be due to the pursuer
unless and until all the development costs had been accounted or provided for and Priority
Sum A had been paid to the defender.
The decision of the commercial judge
[8]
As already explained, the commercial judge held that the defender was not entitled
to terminate the contract in terms of clause 6.2.7. Accordingly, it was in breach of contract.
[9]
His next task was to decide what damages the breach attracted, if any. The pursuer
relied for this on the evidence of one of their shareholders and directors, Mr David Suttie,
while Mr Jolyon Aldous, a chartered accountant, provided expert evidence on behalf of the
defender on this aspect. It is unnecessary, given the scope of the reclaiming motion, to
examine in detail the methods of calculation adopted by these witnesses. It is sufficient to
note that the commercial judge preferred the method used by Mr Aldous, on whose
approach the profits of the development did not exceed Priority Sum A. This was important
because of the terms of clause 3.9, which provided for the prioritisation of payments. The
result was that there was no profit share for the pursuer because it was absorbed entirely by
the defender's entitlement to Priority Sum A, and so there would have been nothing left
with which to pay the pursuer if the agreement had not been terminated. The judge
therefore held that no damages were payable in respect of the defender's wrongful
termination of the contract.
5
[10]
The commercial judge went on to consider whether there was remuneration payable
to the pursuer in terms of clause 3.12. It was not contended that the finding that the
termination was unlawful precluded the pursuer from seeking reasonable remuneration.
The judge observed that it would be odd to interpret the agreement as providing for such a
claim to be made where the termination was lawful, but not where it was unlawful. The
clause was sufficiently wide to apply to either a lawful or an unlawful termination.
[11]
Parties led expert evidence from two chartered surveyors as to the open market rate
for a project manager: Mr Douglas Garden testified for the pursuer and Mr Keith Strutt for
the defender. Mr Garden's calculation produced a fee of £383,422.58, based on a percentage
of 3.25% plus a further 1.95% for the services provided by the pursuer in addition to project
management.
[12]
Mr Strutt produced the figure of £211,831.63, based on a fee percentage of 2.5%.
Mr Strutt's calculation, in contrast to Mr Garden's, also considered the quality of the services
actually provided by the pursuer. Mr Strutt's rating for the most critical activities cost plan
and budget; programme and progress tracking; and monitoring the team was either "low"
or "none". The pursuer, in Mr Strutt's opinion, had not taken the systematic approach
required in project management, but had rather worked on an ad hoc basis. He considered
that the quality of the services delivered was on average no more than 10% of what was
required and so reasonable remuneration, applying that percentage to the overall fee, would
be £21,183.16.
[13]
The commercial judge found no reason to reject Mr Strutt's opinion as to the quality
of services provided by the pursuer. However, whether the services were carried out to a
high standard or not played no part in assessing remuneration under clause 3.12. Project
management services are normally remunerated by applying a fee percentage to the project
6
value. It was not suggested in the clause that the calculation required an assessment of the
standard of service delivered. It accorded with commercial common sense to construe the
word "reasonable" in clause 3.12 as a reference to the rate to be applied, rather than the
quality of the services. If the parties had intended that the standard of the project
management service provision was to be taken into account in determining the fee, then the
contract would have said so expressly. In any event, assessment of quality would be an
enormously laborious exercise with almost unlimited scope for disagreement. Such an
exercise would introduce unacceptable uncertainty.
[14]
That being so, the only issue which remained was which expert's evidence as to the
level of remuneration was to be preferred. The commercial judge preferred Mr Strutt's
approach. There was no contractual basis for Mr Garden's application of an additional fee
and the rate of 3.25% could not be justified, given that the comparators relied upon related
to much larger projects and in any event did not support the application of that percentage.
Mr Garden produced no reasoning or evidence to support the figure and failed to confirm
the sources of construction costs used in his calculation.
The issues in the reclaiming motion
[15]
In the appeal the defender advanced three short points which were said to amount to
errors of law on the part of the commercial judge: (i) clause 3.12 did not apply because the
contract had been terminated by the defender in breach of contract (this point had not been
taken in the Outer House); (ii) if the clause did apply it required the quality of the services to
be taken into account; and (iii) the reference in clause 3.12 to clause 3.9 meant that no
remuneration was due to the pursuer since the development costs had not been provided for
and Priority Sum A had not been paid to the defender.
7
[16]
In the next section we will address each of these points in turn.
Analysis
(i)
Did clause 3.12 apply?
[17]
The relevant part of the clause reads: "In the event of termination of this Agreement
by ... the Company in terms of clause 6.2.7... (the pursuer) shall ... be entitled ... to ...
reasonable remuneration ...". The defender argued that this meant that the clause applied
only if the termination at its hand was lawful or valid. Here it had been in breach of
contract. So the clause simply did not apply. Valid termination was a condition precedent
to the clause being engaged. This argument raises a question of contractual interpretation.
[18]
In recent times this territory has been extensively explored. The approach is now
clear. As Lord Hodge explained in the Supreme Court in Wood v Capita Insurance Services
Ltd [2017] AC 1173, paras 8 to 15, interpreting a contract involves an iterative process; the
text and the context are equally important, as are the real-world consequences of the
competing constructions. This court took the same approach in Ardmair Bay Holdings Ltd v
Craig 2020 SLT 549 (Lord Drummond Young delivering the opinion of the court at paras [47]
to [49]). There are four key points. (1) A contract must be construed objectively; what one
party may subjectively have taken its terms to mean is irrelevant. (2) The words of the
contract must be understood in their proper context; this extends to the totality of the
contract itself and to the surrounding circumstances known to the parties when they enter ed
into it. (3) The contractual terms must be read in a purposive sense so that the basic aims of
the contract are fulfilled and not frustrated. (4) In the case of a commercial contract, what
makes common sense in business terms may often be a useful interpretative tool.
8
[19]
Applying these principles to the present case we have no difficulty in holding that
clause 3.12 applied in the circumstances which arose. The starting point (and also the end
point) is that the clause does not say that the termination has to be valid or lawful. It states
only that termination has to be in terms of clause 6.2.7. That is in fact what happened in
November 2016 when the defender sent the termination notice; it did so in terms of clause
6.2.7. The fact that it was not entitled to terminate on that ground does not detract from the
fact that it sought to do so. In other words the defender's reliance on clause 6.2.7 for the
purpose of terminating the contract was sufficient to engage clause 3.12.
[20]
We are fortified in this reading of the clause by the fact that it makes commercial
common sense. We can see no reason why the parties would have agreed that an
entitlement to reasonable remuneration would arise where there was a valid termination but
not where termination was in breach of contract. That would mean that the defender would
be left better off in circumstances where its termination of the contract was unjustified. It is
unlikely that the parties would have chosen to create the potential for such an anomalou s
outcome, which would run contrary to the well-known rule of construction that a party
should not be entitled to rely on its own breach of contract to obtain a benefit under the
contract (Alghussein Establishment v Eton College [1988] 1 WLR 587, Lord Jauncey at 595; BDW
Trading Limited (t/a Barratt North London) v JM Rowe (Investments) Limited [2011] EWCA Civ
548, Patten LJ at paras 29-31).
[21]
We conclude that clause 3.12 was worded so as to apply to the termination of the
contract by the defender in November 2016.
[22]
Having answered the first issue in the affirmative, we turn now to the question of
reasonable remuneration.
9
(ii)
Does reasonable remuneration involve an assessment of the quality of the pursuer's
services?
[23]
Clause 3.12 provides for payment to the pursuer of "reasonable remuneration for its
services up to the Termination Date". It continues by stating that such remuneration is to be
"based on" the open market rate for a project manager carrying out the management of a
development similar to the Mile End development.
[24]
The defender submitted that the use of the words "based on" implied that the open
market rate for a similar project was no more than a starting point in a process of qualitative
evaluation of the services provided. The quality of the work had to be taken into account.
Otherwise the pursuer could insist on payment even if it had done no work. That defied
commercial common sense. The reference to such reasonable remuneration meant that the
pursuer was not entitled to payment for work done negligently or in a substandard fashion.
[25]
The defender's approach is misconceived. There is nothing said in clause 3.12 about
reasonable remuneration being based on the quality of the services provided by the pursuer.
There is no mechanism in the clause for carrying out an exercise of evaluating the quality of
the pursuer's services. What the clause does contain is a definition of reasonable
remuneration. It is to be based on the open market rate for a project manager engaged on a
similar development. In other words the basis of the remuneration is to be what would be
the going rate in the open market for similar services. This does not justify wider factors
extending to the quality of the services or the time spent on them having to be factored in.
We agree with the commercial judge that assessment of quality would be a laborious
exercise with substantial scope for disagreement. As he observed, it would introduce
unacceptable uncertainty as well as a need for the application of subjective judgement in
relation to every aspect of the service provision. The task faced by an adjudicator appointed
10
to fix the remuneration in the absence of agreement would, in the absence of any agreed
methodology, be an exceptionally difficult and controversial one.
[26]
As to the argument that this interpretation would allow the pursuer to carry out no
work, but nonetheless insist on payment of reasonable remuneration, this is unrealistic. In
the real world the likelihood that the pursuer would decline to provide any services under
the contract is implausible. It was in the pursuer's financial interests to maximise its profit
share from the development; inevitably it would do this by carrying out the project
management services for which it was appointed. Moreover, clause 3.12 makes clear that
the pursuer is entitled to reasonable remuneration "for its services". In the event that it
provided none there would be no entitlement to such remuneration.
[27]
In conclusion on this branch of the case, the commercial judge did not err in holding
that the quality of the pursuer's services did not require to be taken into account.
(iii)
What is meant by "subject always to the application of Clause 3.9"?
[28]
The defender submitted that the proper construction of this phrase in clause 3.12 is
that any claim for reasonable remuneration only arises once the development costs have
been provided for and the defender has been paid Priority Sum A in full. Since the latter
had not been paid, the pursuer had no entitlement to reasonable remuneration.
[29]
We note that clause 3.12 specifically states that it applies in the event that no
manager's profit share is payable to the pursuer. Clause 3.9 is concerned with a different
scenario, namely the conditions which require to be satisfied before the manager's profit
share becomes payable. The latter provision does not place any limitation on the
circumstances in which the former applies. As the pursuer submitted, the two clauses are
concerned with two different types of payment, arising in distinct sets of circumstances. We
11
reject the defender's contention that payment under clause 3.12 only falls due once the
conditions set out in clause 3.9 have been fulfilled. Such a construction would require there
to be read into clause 3.9 the words "or reasonable remuneration under clause 3.12" between
"no Project Manager's Profit Share" and "shall be payable". There is no justification for
rewriting the contract in this way.
[30]
Even if that is wrong, the defender's approach makes no commercial sense and
would cut across the whole purpose of clause 3.12, which applies where no project
manager's profit share is payable to the pursuer. The position would, on the defender's
argument, be entirely circular. We agree with the commercial judge that the more sensible
construction is that the phrase refers to the second part of clause 3.9 which provided for the
deferral of any payment to the pursuer until all development costs had been ascertained and
paid or provided for. This is consistent with commercial common sense and gives content to
the phrase. There is no suggestion that the development costs remain unascertained or
unprovided for. In the circumstances the phrase has no practical application.
Decision
[31]
For the reasons we have given, the reclaiming motion is refused. We have reserved
all questions as to expenses.
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