Chapter 11: Contract Negotiations
Contract Negotiations
11.1 Mr Maclean joined City of Edinburgh Council (“CEC”) in December 2009 as Head of Legal and Administrative Services. He therefore had no part in the conclusion of the infrastructure contract (“Infraco contract”). However, as part of his role, he was required to become familiar with it. Prior to the mediation at Mar Hall, he described the Infraco contract to Councillor Balfour as “mince” [TRI00000016, page 0020, paragraph 59; Mr Maclean PHT00000008, pages 41–42]. In evidence to the Inquiry he said that it was “riddled with deficiencies” [ibid, page 42]. When asked to elaborate on what he meant by this he referred to the fact that it was a fixed-price contract without a completed design in place; that the novation of the design contract meant that the designer and the contractor were “on the same team” [ibid]; that the pricing assumptions were vague and had contradictions; and that clause 80, which addressed changes to the works, meant that tie could not force the contractor to carry on with the works. I consider the disputes that arose under the Infraco contract, and the effect that they had on both the cost of the works and the timescale for completing them, in Chapters 15–18 below. Having regard to what happened in relation to those disputes, I find that, although Mr Maclean’s opinion in his evidence was strongly worded, it is accurate.
11.2 The disputes centred principally on two related sets of provisions in the Infraco contract: (1) the provisions relating to entitlement to additional payments in Schedule Part 4 (“SP4”); and (2) the provisions in clause 80 as to what should happen in relation to execution of the works when it was considered that a change was being made to those works. The former class of dispute centred on assumptions that were stated in the Infraco contract to be the basis on which the price was quoted. There were provisions whereby if those assumptions did not hold true, there could be an entitlement to additional payment. Clauses in contracts stating the basis on which the price has been determined and regulating entitlement to additional payments are common enough in construction contracts. In themselves, therefore, the existence of such clauses in the Infraco contract is not remarkable. It is apparent, however, that the terms as they appeared in the contract for the Tram project caused substantial problems that led to the breakdown of working relationships and, ultimately, the practical cessation of works. It is therefore necessary to consider how those terms came to be in the contract in the form that they did and why the potential problems were not detected or corrected prior to the signature of the contract.
Schedule Part 4
11.3 The pricing provisions were contained SP4 of the Infraco contract [USB00000032]. These included the pricing assumptions that were the focus of disputes and are considered in detail below. Although many parts of the contract had been drafted by late 2007, SP4 was blank at the time of the Wiesbaden discussions and the signature of the Wiesbaden Agreement. When CEC made the decision to proceed with the Edinburgh Tram project (the “project”) in December 2007, there were still no draft provisions on the pricing mechanism. Once approval to proceed had been given, however, it was necessary that the terms of this part of the Schedule be drafted and agreed. In order to consider how the contract came to be in the form that it was in when it was signed, it is useful to look at the principal steps in the process of negotiation. I have not sought to consider every communication and development of the terms and have concentrated instead on the ones that I consider were most significant.
The drafts
11.4 Early in 2008, Mr Dawson, tie‘s Procurement Manager, was tasked by Mr Gilbert with preparing a first draft of SP4. Mr Gilbert said that he regarded drafting SP4 as “straightforward” and that he gave the drafting exercise to Mr Dawson rather than doing it himself [PHT00000023, page 120]. Mr Dawson had not been involved in either the discussions at Wiesbaden or the preparation of the Wiesbaden Agreement that followed them. He was given a couple of days over a weekend to produce a draft. On 13 January 2008, he emailed his first draft to Mr Gilbert and Mr McGarrity [CEC01495585; CEC01447445; CEC01447446] and this draft was subject to revision within tie before it was sent to Bilfinger Berger Siemens (“BBS”) by an email of 16 January 2008 [CEC00592608; CEC00592609]. In the draft, clauses 1.1 and 1.2 read:
“1.1 The majority of the Infraco Construction Price is on a ‘fixed and firm’ lump sum basis and not subject to variation unless changed pursuant to one of the following clauses:
- Clause 80 – tie Changes
- Clause 81 – Infraco Changes
- Clause 82 – Small Works Changes
- Clause 83 – Accommodation Works Changes
- Clause 84 – Qualifying Changes in Law
- Clause 85 – Phase 1B Option
“1.2 However certain items are not ‘fixed and firm’ or alternatively are conditional upon certain criteria being fulfilled.This Schedule sets out the various categories of items that will be subject to change, together with a mechanism for adjustment.” [CEC01447446] (italics added).
11.5 The words in italics were introduced when the draft was revised within tie. At first sight, they appear to indicate a general qualification to the fixed nature of the price. However, when read alongside other terms, this does not appear to be the case. The provisions relating to value engineering (“VE”) were in the following terms:
“4.1 The parties have agreed Identified Value Engineering opportunities/savings as noted in Appendix D.
“4.2 These VE opportunities/savings and [sic] not simply targets but are fixed and firm reductions, save for conditions noted.
“4.3 In the event that the conditions noted are not possible, any adjustment will
be made by applying the principles of Clause 80 (tie Changes).” [CEC00592609, page 0004.]
11.6 Appendix D, which was mentioned in clause 4.1, also contained reference to the fact that the reductions identified were “fixed and firm” save for the conditions noted. There was no other reference to “conditions” in the draft. It therefore appears that the qualification to the fixed and firm nature of the price, to the effect that some matters are conditional upon criteria being met, relates to the element of VE rather than something broader.
11.7 Mr Gilbert said that the instructions that he gave in relation to SP4 were to incorporate the things agreed in the Wiesbaden Agreement [PHT00000023, page 116]. Mr Dawson said that he could not recall the basis on which he was asked to prepare it [PHT00000056, pages 56–57]. He was questioned about this matter and it did not appear that he had been told that SP4 was to mirror the written Wiesbaden Agreement [ibid, pages 57–58 and 103–110]. In the evidence there was conflict as to whether Mr Dawson had seen the Wiesbaden Agreement. He said that when he sent on his first draft of SP4, he had been informed by email of the figures that had been agreed [ibid, pages 35–36; CEC01495585] rather than getting them from the Wiesbaden Agreement. It was apparent from emails that he had nonetheless been sent a copy of that agreement on 9 January 2008 [CEC01546351]. He was questioned in relation to this and I found his attempts to suggest why he had not seen it unconvincing and also puzzling [PHT00000056, pages 74–77]. However, the draft that he produced is substantially different from the Wiesbaden Agreement and, when taken with his denial, it leads me to conclude that he did not refer to the Wiesbaden Agreement in preparing that draft.
11.8 As was noted above, the initial draft stated that the price was “fixed and firm”
unless changed in accordance with exceptions listed in the Schedule and, to that extent, did reflect the wording of the Wiesbaden Agreement. However, the draft does not incorporate many of the terms agreed under the heading “Basis of the Price” in the written Wiesbaden Agreement [CEC02085660, Part 1, pages 0005–0009]. Mr Gilbert said that he could not recall the reason for that being so. This is surprising in that he had given Mr Dawson the instruction to prepare the draft. It would be expected that the person instructing the draft would have some idea of what it should include. This could simply be a matter of recollection on the part of Mr Gilbert. Alternatively, it might reflect an unwillingness on his part to disclose what was happening at the time. Further, it may reveal a lack of any focus or consideration as to the intentions and objectives for what was, on any view, one of the most important parts of the contract. Certainly, in his evidence Mr Gilbert gave little indication that he appreciated how important these provisions were. The following exchange took place in his oral evidence.
“ Q. Why were you sending Schedule 4 out without any reference to those matters? [ie the negotiated terms contained within the Wiesbaden Agreement.]
A. I don’t recollect why. Much of what this document is about at this stage is about how the adjustments would be made to the price.
Q. Schedule 4 is essentially the price of the contract?
A. It is.
Q. Presumably it’s a matter of some critical importance?
A. Conceivably. I don’t – I don’t remember –” [PHT00000023, pages 126–127.]
11.9 When I asked him whether he was saying that the price of a contract might conceivably be important, he said:
“Sorry. Of course it’s important. Yes.” [ibid, page 127.]
11.10 This seems to indicate that it is not a matter of recollection but reflects a lack of insight on his part. His attitude is remarkable. If genuine – and I proceed on the basis that it is – it discloses a total failure on his part to appreciate the critical nature of this part of the contract. I am aware that there is always a danger that judgements such as this are made easily with hindsight and that matters are different for the people engaged in carrying out the work at the time. That, however, is not a factor here. Provisions of any agreement that regulate the price to be paid are obviously of key importance. Where, as here, there was the known sensitivity about costs that surrounded the Tram project, this was all the more so. If his attitude in this respect was not genuine, it is of equal concern. It demonstrates that he was prevaricating in an attempt to distance himself from any responsibility for difficulties arising from the terms of SP4 despite the fact that he was the commercial director of the project with responsibility for leading the work to award the Infraco contract and had instructed Mr Dawson to prepare the first draft of the document over a weekend. That latter fact alone tends to support the view that he failed to appreciate the critical nature of SP4.
11.11 It is of note for what follows that, despite being the person who drafted SP4, Mr Dawson said that, from January 2008, he was aware that the aim of price certainty had not been achieved and could not be achieved without the design. He accepted that this position was generally understood within tie [PHT00000056, page 95].
11.12 Significantly, neither Mr Gallagher nor Mr Crosse, who had represented tie at the Wiesbaden discussions, was involved in the preparation of this draft. Although, as Project Director, Mr Crosse had overall accountability for the discussions and negotiations relating to SP4, Mr Gilbert “was in the lead from the commercial and procurement perspective and finishing the drafting of that document” [Mr Bell PHT00000024, page 36]. Before agreement was reached on the terms of SP4, Mr Bell took over the role of Project Director from Mr Crosse. The decision that this should happen was made by Mr Gallagher on 30 October 2007 and was intended to take effect from 28 January 2008, but it fully took effect from the end of February [CEC01441488; Mr Bell PHT00000024, pages 36–37]. The impetus for that decision appears to have been the withdrawal of Scottish Ministers’ support for the Edinburgh Airport Rail Link (“EARL”) and the change in the management of the Stirling–Alloa–Kincardine railway (“SAK”), both of which resulted in reduction of staff requirements within tie [TRI00000037_C, pages 0011 and 0014, paragraphs 38 and 49 respectively]. Before this change, the intention had been that Mr Gilbert and Mr Dawson would both support Mr Crosse as he focused on managing the final stages of procurement and Mr Bell would take over from completion of procurement activities [ibid, page 0049, paragraph 49; Mr Bell PHT00000024, pages 23–24]. In fact, the procurement became so protracted that Mr Crosse, by now relieved of his role as Project Director, had left tie before it was concluded. This decision of Mr Gallagher to change the person in charge part-way through the work to award the most significant contract represented a loss to tie. Mr Gallagher’s concern to relocate staff from the EARL and SAK projects as replacements for consultants in the Tram project failed to appreciate and take full cognisance of the significance of the experience of tram and light rail projects that Mr Crosse had in contrast to Mr Bell’s lack of such experience [ibid, page 6]. There is no record of reasons for the absence of involvement from Mr Gallagher in the agreement of SP4. He was the Executive Chairman and, significantly, had chosen to attend the discussions in Wiesbaden. The preparation of the draft was a continuation of the process started there. While a chief executive or executive chairman might not always become involved in details of contract drafting, when he has elected to involve himself in a key element of the negotiations and has known that the other person in those negotiations was leaving, his involvement would have provided valuable continuity.
11.13 By email dated 4 February 2008, Mr McFadzen of Bilfinger Berger (“BB”) attached a draft of the SP4 pricing assumptions to Mr Dawson [CEC00592614; CEC00592615]. He copied it to Mr Gilbert at tie, personnel within BB and Siemens and their legal advisers. It was not sent directly to anyone at DLA Piper Scotland LLP (“DLA”) by anyone from the consortium, although, as noted below, Mr Dawson forwarded it to Mr Fitchie on 6 February in advance of a meeting with him an hour later to discuss the pricing assumptions in Schedule 4 [CEC01448308]. The draft included a number of “base case assumptions”. The effect of these was made clear by clause 1.1 of the draft, which stated:
“1.1 The Contract Price has been fixed on the basis of inter alia the Base Case Assumptions. If now or at any time the facts or circumstances differ in any way from the Base Case Assumptions (or any of them) the Infraco may (if it becomes aware of the same) notify tie of such differences (a ‘Notified Departure’).” [CEC00592615, page 0008.]
11.14 The specified consequences of a Notified Departure included changes in the programme and potential increase in the price payable to the contractors. This approach – of having assumptions which, if not correct, would give additional rights to the contractors – had not been discussed at Wiesbaden and was a new approach from BBS. That this was an innovation upon the Wiesbaden Agreement was accepted by
Mr Laing, a partner in Pinsent Masons, BB’s solicitors [PHT00000040, pages 13–14].
11.15 One of the draft’s base case assumptions that was to become particularly
important was:
“(a) that the Design prepared by the SDS [System Design Services] Provider will: … (ii) not, in terms of design principle, shape, form and/or specification, be … amended from the Base Date Design Information” [CEC00592615, page 0002].
11.16 The Base Date Design Information was defined as the design issued to the Infraco on or before 25 November 2007. No provision was made to the effect that changes arising from normal development of the designs that existed as at November 2007 would not infringe this assumption.
11.17 Although some of this terminology echoes what had been in the Wiesbaden Agreement [CEC02085660, Parts 1–2], there are differences in the way in which the wording is used and the agreement is structured. The relevant parts of the Wiesbaden Agreement are as follows:
“3.3 The BBS price for civils works includes for any impact on construction cost arising from the normal development and completion of designs based on the design intent for the scheme as represented by the design information drawings issued to BBS up to and including the design information drop on 25th November 2007.
“… For the avoidance of doubt normal development and completion of designs means the evolution of design through the stages of preliminary to construction stage and excludes changes of design principle, shape and form and outline specification.” [ibid, Part 1, pages 0005–0007.]
11.18 It can be seen that, in the Wiesbaden Agreement, the terms concerning development of the design were in the context of a statement as to what was included in the price. There was a general statement of principle that cost increases resulting from this would not increase the price. As such, it was a statement of the areas of risk that would be borne by BBS and for which no additional monies would be paid. As this meant that normal design development was at the risk of the contractor, it was necessary to have a date by which the design to be developed could be identified. The parties chose 25 November 2007. It is of note that the contractors take the risk of construction costs arising from development of designs based on the “design intent” represented by those drawings, which is broader than simply development of the particular drawings. In the draft of SP4 sent by BBS, on the other hand, there was no statement that design development is included and no reference was made to the design intent. Instead of a provision as to what was included in the price, the words define a state of facts that, if it is incorrect, will lead to an entitlement to additional money. That change of emphasis and approach was not noted or commented on at the time by tie.
11.19 Despite these points, nothing was done to assess the extent or value of the risk that was being undertaken in making these changes to SP4. Mr Gilbert said that he had considered the matter but had thought that the wording was still sufficient to pass the risk to BBS [PHT00000023, pages 137–138]. Both legal and practical issues arise from this. That an issue of the meaning of the wording even arose for consideration is an indicator that it would have been appropriate to have taken legal advice. At a practical level, no check was made with System Design Services (“SDS”) to assess the likelihood of changes that would be caught by this provision in the event that the risk lay with tie [ibid, page 136].
11.20 The following other significant base case assumptions were included in the draft
of SP4:
“that the Design would be issued to the Contractors ready for construction no
later than four weeks in advance of programme or any longer period necessary
to allow the contractors to procure plant and materials” (Base Case Assumptions, (a), (i)); and
“that the MUDFA [Multi-Utilities Diversion Framework Agreement] Contractor shall have completed all [MUDFA Works] in accordance with the MUDFA Completion Programme (Base Case Assumptions (d)(ii))” [CEC00592615, page 0003].
11.21 The assumption in relation to the MUDFA works was not part of the Wiesbaden Agreement and was therefore new. In relation to the assumption concerning delivery of design, it is of note that by this time the design had been slipping for over a year. Mr Gilbert was aware of the design slippage that had occurred up to that date. When asked whether he considered that it was highly likely that there would be further slippage in the design programme, his initial response was that it was possible. When pressed, he thought it likely that there would be further slippage [PHT00000023, page 151]. Nonetheless, nothing was done to remove or qualify these assumptions and there was no assessment of the extent or value of the risk.
11.22 Clause 1.1 of this draft made clear how the base case assumptions would affect the price. It stated:
“The Contract Price has been fixed on the basis of inter alia the Base Case Assumptions. If now or at any time the facts or circumstances differ in any way from the Base Case Assumptions (or any of them) the Infraco may (if it becomes aware of the same) notify tie of such differences (a “Notified Departure”).” [CEC00592615, page 0008.]
11.23 The draft also had provisions as to how the effect of a Notified Departure on the programme and the price should be assessed. The parties were to discuss and seek to agree these matters but, if agreement was not reached in 28 days, the issue would be addressed under the dispute resolution procedure (“DRP”). It is clear that this draft envisaged that the assessment of consequences for both programme and price of a Notified Departure would be determined after the change giving rise to it had been given effect.
11.24 There were meetings to discuss this draft within tie. Mr Gilbert marked up a copy of it with his comments [CEC01448862]. In relation to the provision quoted at paragraph 11.15 above, he suggested that it should state: “Save for design development. Words as Wiesbaden agreement.” [PHT00000023, pages 154–155.] This is significant, as it indicates that he considered that, as drafted, the assumptions went further than the earlier agreement. It is apparent that his suggestion was not implemented and Mr Gilbert did not pursue the matter. In his comments, Mr Gilbert also considered that it would be desirable to qualify the word “amended” by addition of the word “materially” [ibid, page 135]. He claimed, however, that he was unable to assist the Inquiry in determining the meaning of some of his comments [ibid, pages 147–152]. This is both surprising and disappointing. Although the comments were made some time ago, with the benefit of prompts from notes and emails written at the time, other witnesses attempted to recall the purpose of what was happening and appear to have been able to do so with reasonable accuracy. It is unsatisfactory that the person in charge of the process could not provide the Inquiry with similar assistance. I gained the impression that Mr Gilbert was not making any serious attempt to assist the Inquiry in understanding the apparent inadequacies of a contract in the preparation of which he had a significant role.
11.25 Mr Dawson said that he was not happy with parts of the draft from BBS, and this is apparent from his comments that he marked on to a draft that he sent to Mr Fitchie on 6 February 2008 [CEC01448308; CEC01448309]. During evidence, reference was also made to CEC00592615 as the document with the mark-ups. In common with Mr Gilbert, Mr Dawson suggested that the word “materially” should be added to qualify the word “amended”. In relation to clause 1.1 quoted above, he also noted that “[It] can’t be just any departure or all risk will come back to tie”. He said that he was concerned that, as the assumptions were not correct, there would be additional costs [PHT00000056, pages 64–69]. He had discussed this with Mr Gilbert, Mr Murray and Mr Fitchie [ibid, pages 70–71]. As a result of these discussions, he said that an attempt was made to mitigate the concern by progressing the design. However, it is immediately apparent that as the expedited design would still come after November 2007, this would be of no benefit to tie unless BBS agreed to change the “design freeze” date retrospectively. To do that, it would require to re-price, which would simply crystallise the problem.
11.26 In his comments on the draft [CEC01448355; CEC01448356], Mr Steel noted, in relation to the assumption that there would be no amendment in terms of design principle, shape, form and/or specification, “[g]iven that a substantial amount of design requires to be presented, reviewed etc this clearly will not happen”
[ibid,
page 0002]. This was a clear recognition that there would be a change from the factual position that was being assumed.
11.27 Mr Fitchie said that he did not like any part of this draft. Nor did he like the idea that the document had been drafted without any input from DLA or the fact that there was a design drop date of November 2007 when design had been evolving in the intervening months [TRI00000102_C, page 0175, paragraph 7.241; PHT00000017, pages 85–86]. He said that he assumed that in SP4 the terms of the Wiesbaden Agreement were being translated into a Schedule, but this is hard to reconcile with his claim that, at that time, he was not aware of the terms of the Wiesbaden Agreement [ibid, page 89]. He said that when he attended the meeting on 6 February 2008 to discuss this draft, he thought that “tie had agreed something which had very direct and serious contractual implications” [ibid, page 90]. He noted that he:
“quickly recognised that having a base case assumption in relation to design was an area where this would create – it was likely to create a large cost and time implication for tie” [ibid, page 91].
11.28 Although his first involvement with SP4 was in early February, Mr Fitchie claimed that a version of SP4 had been negotiated by tie and BBS for two to three weeks immediately after Christmas 2007, that it included all the pricing assumptions, excluding engineering and commercial pricing assumptions [ibid, page 149] and that tie and BBS had been discussing SP4 from mid-December [TRI00000102_C, page 0174, paragraph 7.235]. He claimed that the drafting of SP4 was fixed in email exchanges between tie and BBS in January 2008, before the issue of SP4 as a working draft in early February 2008 [ibid, page 0178, paragraph 7.259]. I reject his evidence in this regard. It seems to be an attempt to put forward an account that has the effect of portraying him as having had no involvement when key matters were being determined. I prefer the accounts of Mr Dawson and Mr Gilbert as to the production of the first draft as noted above. That account is supported by the contemporaneous documentation. It is also consistent with the account of Mr Laing. He, too, said that there had been no discussion about assumptions prior to the draft sent by BBS in early February 2008 [PHT00000040, page 8]. In his evidence, Mr Fitchie was asked about emails, and he agreed that none of the emails referred to in his statement or the attachments to them dealt with the issue of pricing assumptions [PHT00000018, pages 1–8]. He ultimately accepted that the first mention of pricing assumptions had been in early February 2008 [ibid, page 8]. There is accordingly no basis at all for his suggestion that they were in any sense agreed or even discussed before the sending of the first draft at that time. The practical consequence is that Mr Fitchie was aware of the use of pricing assumptions from the first time that they were proposed.
11.29 Mr Walker said that the thinking behind this draft was developed by Pinsent Masons. Where there was something relevant that BBS did not know or could not quantify, it was put in a “risk basket”. This later became SP4. Mr Walker said that if matters could not be properly priced, BBS was not willing to take the risk [TRI00000072_C, pages 0013–0015, paragraph 21]. This is borne out by the evidence of Mr Laing, who said that the assumptions were intended to address risk.
11.30 At about this time, the parties concluded an agreement that came to be known as the Rutland Square Agreement [CEC01284179]. This increased both the price payable for the infrastructure works and the programme length. It is considered at the end of this chapter. A draft of what were termed “base case assumptions” was attached to the agreement. Although not part of the draft SP4, a page attached to the back of the agreement states:
“The design information which provided the basis for BBS’s price will be a pricing assumption under Schedule 4. The risk of design ‘creep’ accordingly lies with tie.” [ibid, page 0027.]
11.31 This shows that BBS saw the liability for design development resting with tie. There is, however, no record of this document having been sent to tie.
11.32 tie responded with an email dated 19 February 2008 from Mr Dawson with an attachment in which tie took some of the points that BBS had raised in its draft of the pricing assumptions and included them in a new draft [CEC00592621; CEC00592622]. Mr Dawson had prepared this draft [CEC01448861]. The email with the new draft SP4 was sent to Mr McFadzen at BB and Mr Flynn at Siemens. It was not sent to anyone at DLA. Within the email, Mr Dawson stated “I think we need to resolve practical issues between ourselves before you involve your lawyers this time” [CEC00592621].
11.33 In this new draft, both the approach in the Wiesbaden Agreement and the approach in the BBS draft of assumptions are apparent. The first price assumption had been changed to read:
“The Infraco Construction Works Price includes for any impact thereon arising from the normal development and completion of designs based on the design intent for the scheme as represented by the design information drawings issued to Infraco up to and including the design information drop on 25th November 2007.” [CEC00592622]
11.34 Notably, this echoed the Wiesbaden Agreement, with its reference to the “design intent”
and the fact that costs arising from development of this were included. By way of clarification of what was meant by “normal development and completion of designs” the draft again echoed the Wiesbaden Agreement and stated:
“For the avoidance of doubt normal development and completion of designs means the evolution of design through the stages of preliminary to construction stage and excludes changes of design principle, shape and form and outline specification.” [ibid]
11.35 The exclusionary approach adopted by BBS is, however, apparent in the last part of paragraph 2.4(a), in which the assumption stated is that the design would not:
“in terms of design principle, shape, and/or specification be materially amended from the drawings forming the Infraco Proposals (except in respect of Identified tie Changes or Value Engineering)” [ibid].
11.36 There are inconsistencies in this clause 2.4. The first is that the inclusive term defines the design that is to be developed by reference to the design information drop on 25 November 2007, whereas the prohibition or exclusion seeks to fix design by reference to the Infraco proposals. The latter approach could have led to some flexibility in tie’s favour if those proposals had been developed at all between November 2007 and the date of the contract. The prohibition also includes the word “materially” as a qualifier in relation to changes, whereas the stipulation of what is included in normal development does not. The inclusion of such overlapping and potentially inconsistent terms indicates that the draft had not been properly considered before being sent out.
11.37 The assumption that design delivery was aligned with the Infraco construction delivery programme remained. The assumption as to completion of the MUDFA works was changed so that they would be done in accordance with the requirements of the Infraco programme. This was a surprising change, as at this time there was no concluded Infraco programme, which meant that it would not be clear precisely what this obligation entailed.
11.38 This tie draft did state the consequences if the assumptions turned out not to be correct, but it did not use the term “notified departures”.
11.39 Shortly after Mr Dawson had sent his draft, on 22 February 2008, Mr Laing sent an email with a further draft attached [CEC01449876; CEC01449877] to him, Mr Gilbert and Mr Fitchie. It was copied to others. The draft of SP4 had a note in clause 2.4 that the preferred approach was to state the assumptions on which the price had been prepared rather than to consider what was or was not included in the price. There was a comment that the wording of the assumptions would have to change to reflect this, but they had not been reworded in this draft.
11.40 In the assumptions in relation to design, both the reference to “outline” in relation to the specification and the word “materially”, which had been inserted to qualify the statement that there had been no change in the design, had been deleted. This draft contained the following definition:
“normal development and completion of designs means the evolution of design through the stages of preliminary to construction stage and excludes changes of design principle, shape, form and outline or specification”
[ibid].
11.41 A footnote on page 0006 stated that the definition of normal design development was not satisfactory and that it would be helpful to understand what was included in “normal development”. As the wording used reflected that in the Wiesbaden Agreement, it is surprising that there was not an understanding on this matter
before this time.
11.42 The deletion of the requirement that, in order to be relevant, any change to the design had to “materially” amend the design as at November 2007 is significant.
This was a qualification that tie had sought. It would have been aware of the reasons that it wanted it and, presumably, considered that this was appropriate to protect
its interests. Despite this, no objection appears to have been raised to the deletion.
11.43 At the end of February 2008, a draft negotiating paper [CEC01450123] was prepared by tie. tie‘s aims were to “resolve outstanding points of principle and take due account of any material financial, time and risk impacts” [ibid, page 0001]. It anticipated that BBS would seek to amend “price levels upwards, leave options open post contract award and negotiate risk transfer” [ibid]. The paper noted that SP4 was one of the areas not yet agreed and suggested that tie should get agreement that the definition of “normal design development” from the Wiesbaden Agreement should be used [ibid, page 0004]. In relation to risk transfer, it said that there should be no difference to the preferred bidder position [ibid]. This negotiating paper also stated, in relation to SP4, that there should be agreement that it was subsidiary to contract terms, Employer’s Requirements and the Infraco works proposals [ibid, Table, page 0004]. Although the author of the documents was not identified, the statements that it contained demonstrated that within tie there was a view that such matters were still open for negotiation. It did not consider that the terms of SP4 had been dictated by the Wiesbaden Agreement or BBS or that everything had already been fixed.
11.44 I acknowledge that certain aspects of what follows here have already been noted at paragraph 11.12 above, but I consider that they bear repeating. At about this time, Mr Bell took over the role of Project Director from Mr Crosse. The intention had been that Mr Gilbert and Mr Dawson would then support Mr Crosse as he focused on managing the final stages of appointment of contractors, and that Mr Bell would take over from completion of procurement activities [Mr Bell PHT00000024,
pages 23–24]. In fact, the procurement became so protracted that Mr Crosse, by now relieved of his role of Project Director, had left before it had been concluded. This decision of Mr Gallagher to change the person in charge part-way through the procurement of the most significant contract represented a loss to tie. Mr Crosse had experience of tram projects, whereas Mr Bell had no experience of tram or
light rail projects [ibid, page 6]. The decision appears to have been undertaken at
a time when it might reasonably have been obvious that the target of concluding the contract by the end of January 2008 was not going to be achieved. It was not the first – nor would it be the last – change in key personnel in this part of the contract process.
11.45 On 3 March 2008, Mr Dawson sent out a further draft of the agreement [CEC01450182; CEC01450183]. There were no material changes to the base case assumptions. This time, the definition of Notified Departure referred to the situation
“where the facts or circumstances that comprised the basis of the Base Case Assumptions are subsequently changed in a manner that results in a tie Change in accordance with this Agreement” [ibid, page 0005].
11.46 The definition of base case assumptions had not been completed. On the wording of this draft, there would be no entitlement to additional payment or time to complete the works unless what had taken place amounted to a “tie Change”. As that already had consequences for time and payment, it meant that the existence of a Notified Departure added little to what was already in the contract. In relation to the issue of precedence between SP4 and the remainder of the contract, a note on the cover sheet recorded that tie did not want SP4 to have precedence as its function was simply to explain the basis of the price.
11.47 On 10 March 2008, Mr Dawson sent an email to the solicitors for BB and for Siemens and their representatives, and also to Mr Fitchie [CEC01450544]. It followed on an earlier message that he had sent on 6 March 2008, which had attached a further draft of the agreement. The email noted that there had been a “telephone conference with Geoff and Dennis” in which wording had been agreed for a clause dealing with the situation in which the facts differed from the base case assumptions. The agreed text read:
“3.4 The Construction Works Price has been fixed on the basis of inter alia the Base Case Assumptions noted herein. If now or at any time the facts or circumstances differ in any way from the Base Case Assumptions (or any part of them) such Notified Departure will be deemed to be a Mandatory tie Change in respect of which tie will be deemed to have issued a tie Change on the date that such Notified Departure is notified by either Party to the other.” [ibid]
11.48 The effect of this is that any departure from the base case assumptions would now give rise to an entitlement to additional time and payment. Despite the reference to discussion with Mr Gilbert and Mr Murray, it is apparent from the context that the discussion must also have involved representatives of BB and Siemens and was intended to agree the effects of a Notified Departure. It is not clear whether the
legal advisers for BB and Siemens were involved in the call. From the absence
of any mention of Mr Fitchie in the body of the email, I conclude that he had not
been involved.
11.49 This new wording created a situation in which, if the facts did not accord with the assumptions, there was an automatic right to additional payment and further time for the works. This is different from the liability that would arise if tie instructed any amendments to the works, because, in that situation, the decision whether to proceed with the amendment was within tie’s control. Mr Gilbert was asked whether any assessment had been carried out of the risk presented by this automatic liability. This was one of the many occasions in his evidence on which he said that he could not recall [PHT00000023, pages 183–184]. As there is no evidence of any such assessment, I conclude that this change to the wording was put into effect without any such assessment being undertaken and that this was another situation in which the parties engaged in the drafting were unaware of the effect of the agreements that they produced.
11.50 There were a number of developments in the drafting process in mid-to-late March. A new draft was sent by Mr Laing to Mr Dawson and was copied to other tie personnel and Mr Fitchie on 19 March 2008 [CEC01451012; CEC01451013]. Mr Fitchie clearly saw this, because he commented on some of the terms in an email the same day [CEC01489543]. The draft reflected changes made in meetings on 11, 12 and 18 March 2008. It contained the agreed wording noted above in relation to Notified Departures being deemed to be a Mandatory tie Change [CEC01451013, page 0013, clause 3.5]. It stated that any change to the base case assumptions was a Notified Departure. The definition of Base Date Design Information (“BDDI”) was revised with the intention that there be a list of the documents that comprised it. More significantly, however, base case assumptions were defined to include the BDDI, the base tram information, the pricing assumptions and the specified exclusions. When these terms were read together, the effect was that any change of design as it stood in the BDDI as at November 2007 would be a change in a base case assumption and therefore a Notified Departure. This made any consideration of whether a change fell within normal design development – or even whether it was a change of design principle, shape and form and outline specification – irrelevant. This was not commented on at the time, or even in the context of the disputes that arose once the works had started. It is, however, the clear meaning on a plain reading of the wording. That a revision amounting to such a departure from the negotiating strategy at Wiesbaden could be made without consideration or comment demonstrates that the persons involved for tie had no proper understanding of the effect of the clauses that they were drafting and therefore no proper understanding of the obligations that they were agreeing that tie should undertake.
11.51 Despite the width of the change discussed above, this draft also reworded the first assumption so that it read:
“The design prepared by the SDS Provider will not (other than amendments arising from the normal development and completion of designs):
“1.1 in terms of design principle, shape, form and/or specification be amended from the drawings forming the Base Date Design Information (except in respect of Value Engineering identified in Appendices C or D),
“1.2 be amended from the drawings forming the Base Case Design Information as a consequence of any Third Party Agreement (except in connection with changes in respect of Provisional Sums identified in Appendix B) and
“1.3 be amended from the drawings forming the Base Case Design Information as a consequence of the requirements of any Approval Body.
For the avoidance of doubt normal development and completion of designs means the evolution of design through the stages of preliminary to construction stage and excludes changes of design principle, shape and form and outline specification.” [ibid, page 0007.]
11.52 Thus, this draft (1) removed the statement that normal design development was included; (2) removed the qualifier that change had to be “significant”; (3) in sub-paragraph 1.1 introduced the requirement that there could be no amendment of design principle, shape, form and/or specification from the Base Date Design Information as opposed to the Infraco proposals; and (4) provided an exception from this prohibition where the change arose out of normal design development, but then (5) defined that exception so that it could not include changes of design principle, shape and form and outline specification. As a matter of interpretation of the words used, the prohibition and the proviso were drafted in such a way that they cancelled each other out. In disputes that arose later, the parties were agreed that the fact that the text in paragraph 1.1 referred simply to “specification” and the proviso referred to “outline specification”
made no difference to the effect of the clause. So, if there was a change of “design principle” etc, contrary to sub-paragraph 1.1, the exception for normal design development in the opening phrase would not apply as a result of the proviso at the end. In his evidence, initially Mr Laing would not confirm that this was the case, and he said that it was an issue for engineers [PHT00000040, page 26], but he later agreed that the wording in brackets in the opening words was redundant [ibid, page 34]. Mr Fitchie recognised that there was a contradiction or difficulty with this clause and that, in this form, the issue of normal design development was redundant [PHT00000017, page 145]. It is important to note that this occurred with the change of wording contained in this draft from mid-March – which he had seen and commented on – and not, as Mr Fitchie claimed, in the first draft.
11.53 In conclusion, the effect of the first sub-paragraph, when read with the opening words and the proviso at the end, is that wherever a variation in the works amounted to a change to “design principle, shape, form and/or specification” [CEC01451013, page 0007], there was an entitlement on the part of BBS to further payment and additional time. How onerous this would turn out to be would depend on how those words are interpreted. While “design principle” could readily be understood as referring to quite high-level design considerations such that only a significant change would be caught, on the face of them, the notions of “shape”, “form” and “specification” could catch far more. There is no record of this being the subject of any consideration. As it was critical to any understanding of the effect of the assumption, this was a material omission.
11.54 The only potential scope for input from engineers, as Mr Laing had suggested, was as to whether any particular alteration to the design amounted to a change of “design principle, shape, form and/or specification” [ibid]. If it did not, the prohibition was not engaged – quite apart from issues of normal design development. Witnesses from BBS were asked what change might arise that would not conflict with the assumption. Mr Walker said that a change of quantities by plus or minus 5 per cent might be something that would be normal design development and would not be caught by the words “design principle” etc [PHT00000035, page 74]. Mr McFadzen thought that it might include things such as increase in section size or reinforcement content [PHT00000034, page 88]. He appeared, however, to be struggling to identify what change could be made without being caught by this assumption.
11.55 The exception in relation to normal development and completion of designs also applied to the prohibition on changes that were a consequence of third-party agreements and the requirements of an approvals body – sub-paragraphs 1.2 and 1.3. The various sub-paragraphs use differing terms: “Base Date Design Information”, “Base Case Design” and “Base Case Design Information” [CEC01451013, page 0007]. However, there were definitions only of “Base Case Assumptions” and “Base Date Design Information” and it therefore appears that the others were drafting errors that went unnoticed. On the face of it, changes under these last two sub-paragraphs might be thought to have fallen under the more general prohibition in sub-paragraph 1.1. If that is the case, they added nothing to the position noted above. It is possible, however, that they were even wider and that they covered any change, provided that it was for one of the reasons specified. If that is the situation, it follows that two considerations arise. The first is that it is not clear how they would interact with the proviso in the opening words as to “normal development and completion of designs”. The second is that the changes would have been caught anyway, as a result of the terms considered in paragraph 11.50 above. The width of the second means that there is little purpose in attempting to reach a view as to how the opening proviso interacts with the various sub-paragraphs. On any view, the fact that there is no immediately obvious answer gives the clear impression that this had not been thought through when the draft was sent out.
11.56 The overall picture of the evidence from this draft is one of a lack of coherence. Clearly it was a work in progress and it is to be expected that there might be ambiguities, areas of lack of precision and infelicities in any draft of an agreement. Despite this, the terms of the draft do not appear to relate to an underlying understanding of what the position should be and what rights and obligations parties should have. The impression that I have is of discussions that have dwelt on individual clauses without any attempt to get an overview or working understanding of the position. It is a cause for concern that it was this draft, with all its apparent disarray, that marked the change from the approach that had been contained in the Wiesbaden Agreement to the one that appeared in the final version of SP4 in the signed contract.
11.57 This draft also changes the assumption in relation to the Design Delivery Programme version 26.[17] It is notable that the reference to version 26 is in square brackets, which clearly suggests that at the time it was thought that another version would be the one actually to be used. The significance of this is that it indicates that tie was aware that it would be necessary to change the version of the design programme that it was using. Despite this, there had been no consideration with BBS during the negotiations about whether it would agree to such a change. The very fact that tie was anticipating further change in relation to this should have put it on notice that, in the absence of agreement with BBS, there would be a consequence for the project cost. The issue of which design programme was assumed in relation to the price was to arise again later,
and I consider it in that context from paragraph 11.66 below onwards.
11.58 At the same time as these modifications were being considered, another major change was made to the team conducting the negotiation. Mr Gallagher transferred responsibility for managing completion of SP4 to Mr McEwan in place of Mr Gilbert. As he was to be put in charge of negotiating a pricing schedule to a civil and electrical systems engineering contract, it might be thought that Mr McEwan would have had some relevant experience, but this was not the case. Mr McEwan’s job title was “Business Improvement Director”. He had worked for Scottish Power and its predecessors for the preceding 40 years [TRI00000057_C, page 0001]. He had worked in information technology for 25 of those years and, in the last 20, had managed projects. While this gave him business experience, none of it was in the field in which he was now to conclude a contract. The reason for the transfer of responsibility from him to Mr McEwan was one more matter that Mr Gilbert said he could not recall [TRI00000038_C, pages 0116–0117, paragraph 292]. He said that he thought that he had made it clear that he had to leave by a certain date and that his successor, Mr Murray, was already at tie. He thought that Mr McEwan would provide the continuity through to conclusion of the contract. This is hard to reconcile with the fact that Mr Gilbert remained involved in the process until he left tie at the end of April 2008. Mr Bell also became more involved in the negotiation process from
around this time [PHT00000024, pages 25–26]. While BBS had retained the individuals who had been involved in the discussions in Wiesbaden to lead the contract negotiations, tie made yet another change and had done so while the drafting of the pricing assumptions was at a critical stage.
11.59 As I consider in more detail in Chapter 14 (CEC: January–May 2008), another factor at this time was that Mr Gallagher wished tie to press ahead with publication of a Notice of Intention to Award the contract and, following a decision to that effect by the Tram Project Board (“TPB”) [CEC00114831, Part 1, page 0008], tie did so on 18 March 2008 [TRI00000102_C, page 0222, paragraph 7.481]. This could only be seen by BBS as an overt commitment by tie to appointing them that would be difficult to depart from.
11.60 In relation to the MUDFA works, although there had been a change to the wording there was still an assumption that the MUDFA contractor would have completed the works in accordance with the Infraco contract programme. I have referred above to the assumption in relation to the timing of delivery of the design and whether it was known that the facts were likely to be different. The same issue arises in relation to the assumption about the MUDFA works. Mr McEwan was asked about his understanding of the extent to which the works would be complete so as to comply with the assumption. His answers were inconsistent. He accepted that by this time (March 2008) he was aware that there were issues with the progress of the MUDFA works [PHT00000022, page 140]. When asked whether he was aware that it was unlikely that the MUDFA works would be finished before commencement of the Infraco works, however, he replied:
“I don’t think I was explicitly aware. I don’t think I remember – if you’re saying very unlikely, I think I was aware that there may have been a potential, I think, but I wasn’t aware – in fact not even that. I wasn’t aware, no.” [ibid, page 141.]
Later, he said:
“In terms of the programme, there was clearly potential for MUDFA to affect the programme, but the true extent of that was unknown. It was unknown to me.”
[ibid, page 148.]
11.61 Shortly after that, the following exchange took place:
“Q. But by that time you perhaps would have been aware – were you aware that the MUDFA contract was running late and that was going to be a change that would arise under the contract?
A. My – my understanding –
I certainly personally wasn’t aware that the MUDFA contract would potentially generate a major change, not at that point in time. I knew there were problems. There are always problems. I wasn’t aware of the extent of the problems, and to be fair, I don’t (inaudible).
Graeme Barclay reported directly to Steven Bell. I’m not certain Steven understood the full extent of what – and perhaps Mr Barclay didn’t either – the full extent of what we were going to uncover and things that were going to delay that project. The issues that delayed that project were legion, and unfortunately, on 31 March 2008, weren’t fully understood.
Q. Were they understood at all?
A. Because they were discovered on a daily basis.
Q. Were you aware that they were being discovered on a daily basis, that problems were arising?
A. I wasn’t aware of the extent of the problems at that specific time, no. I was – I was aware of some reporting at tie executive meetings on the ones that I attended that there had been problems. But, you know, frankly, I wasn’t particularly tuned into those.” [ibid, pages 149–150.]
11.62 For completeness, when questioned about the assumption in relation to delivery
of design, Mr McEwan said:
“My understanding was that SDS were slipping in some design elements as far as I’m aware. In delivery of design. But I don’t have any detailed understanding and I don’t have any detailed recollection of it. I’m sorry.” [ibid, page 150.]
11.63 Mr McEwan sought to pass responsibility to Mr Bell. I find his denials of knowledge wholly unconvincing. However, even accepting his answers at face value, it is remarkable that he was leading a team that was drafting a contract containing assumptions and yet had no idea whether those assumptions were correct and if they were not correct, to what extent the facts would depart from the assumptions. Nor did he attempt to assess the financial consequences of any departure from the assumptions.
11.64 Mr Dawson said that it was known prior to the end of March that the design programme did not fit with the Infraco programme as there was a “negative float”, meaning that the design was too late for the Infraco programme [PHT00000056, page 50]. However, he said that because he was leaving, he did not know what was happening with design. He said that when he left, he did not think that a design sufficient to get a fixed price would be available any time soon [ibid, page 53]. He did not accept that he had considered this draft sent back by BBS on 19 March, despite the fact that it had been attached to an email addressed to him [CEC01451012]. This was on the basis that he was leaving at the end of March, and he said “I may have been doing other things” [PHT00000056, page 87]. His job title was “Procurement Manager”. This was the largest single contract of the project and he was identified as part of the team. His unwillingness to accept responsibility was striking. His efforts to distance himself from negotiations in March about the draft document were unconvincing. I gained the impression that he was seeking to shelter behind his imminent departure from tie to minimise his involvement, thereby avoiding criticism for any failure to protect tie‘s position. In all the circumstances, I am satisfied on a balance of probabilities that Mr Dawson would have considered the email and the attachment sent to him on 19 March and attended the meeting the following day. He had been actively involved in considering earlier drafts of the document and it is inconceivable that, having received the draft on 19 March, he would not continue to be involved as part of the tie team until his departure at the end of March. In his evidence, he stated that he assumed that he had attended the meeting on 20 March but that he could not recall [ibid, page 89]. The email from Mr Hecht, of DLA, mentioned in paragraph 11.65 included Mr Dawson as a principal addressee along with other employees of tie, and it was copied to Mr McEwan. It is a reasonable inference that the principal addressees were those who had attended the meeting to which the email referred. Disappointingly, Mr Dawson maintained his position that he could not recall what was discussed at that meeting.
11.65 Following the meeting on 20 March to consider the draft, on the same day
Mr Hecht sent out a new version that recorded what had been agreed [CEC01451053; CEC01451054]. All the changes referred to above remained and the square brackets around reference to Version 26 of the SDS programme were removed. In that the earlier draft had been sent to Mr Fitchie and this draft was sent out by DLA, it is apparent that there had been input from legal advisers for tie at the meeting that day.
11.66 On 26 March, Mr Laing sent an email [CEC01451185] to various persons including,
on the tie side of the discussion, Mr Hecht, Mr Bell, Mr Murray, Mr Dawson and
Mr McGarrity. It was also copied to Mr McEwan and Mr Fitchie. It said:
“As we discussed earlier today, the Design Delivery Programme that [sic] will be v28. The Pricing Assumption in Schedule 4 of the Infraco Contract assumes that the Design Delivery Programme will not change from v26. It follows that there is the possibility that there will be an immediate Notified Departure on contract execution. Given the unusual position that we are in, please can you confirm that this is understood and agreed by tie.”
11.67 Perhaps reflecting the change in responsibility within tie, this email was not addressed to or copied to Mr Gilbert, who said that it was not shown to him [PHT00000023, pages 192–193]. On 31 March, Mr Laing sent a follow-up or chaser email [CEC01465933] in the following terms:
“Please can you let me have confirmation that the position on the Notified Departure in relation to the Design Delivery Programme is understood and
agreed by tie.”
11.68 In his oral evidence, Mr Laing explained that his motivation in sending the emails was to ensure that there was a common understanding and a concern on his part that the Notified Departure should not sour relations if a claim was made immediately following signature of the contract [PHT00000040, page 42].
11.69 Mr McEwan forwarded the chaser email to Mr Fitchie on 31 March 2008 [CEC01465933] and asked for advice as to what the response should be. While Mr McEwan accepted that what Mr Laing was saying was factually correct and that the version change would be a Notified Departure, in his email he expressed the concern that there should be
“no gaming of this position by BBS, and that only where the change can be shown to materially change the Infraco programme critical path should we be liable for potential additional charges”.
11.70 This shows that there was at least some understanding on his part of the scope for BBS taking advantage of this provision. His email is couched, however, solely in terms of considering the particular issue that arose in relation to the change from version 26 to version 28 of the design delivery programme and not the possibility of more widespread departures from the assumptions. In his oral evidence, he said that he was not concerned by the email from Mr Laing but simply wanted to know the correct way to respond [PHT00000022, pages 145–146].
11.71 On the same day, Mr Fitchie responded in an email to Mr McEwan and Mr Bell that was copied to Mr Gilbert, and Mr Bissett at tie. It is appropriate to set out the text of his email in full:
“If the situation is that at this point SDS is unable to produce a design delivery programme which is reliable and static at V26 –
and that is indeed the situation that SDS have articulated – and that this programme will need to be varied immediately post contract award, tie needs to endeavour to negotiate with BBS now the specifics of what is or is not to be permitted as a variation to the Infraco Contract and its master construction programme, otherwise the Notified Departure mechanism is too blunt and will permit BBS to include everything that they estimate is going to affect them to be priced and to be granted relief. That Estimate is bound to be all encompassing and conservative.
“The only approach open to tie, in my opinion, is a factual one, not a contractual one (since the mechanism for Notifed [sic]
Departure puts the advantage with BBS by creating an automatic tie Change): to capture as many identified key changes that tie knows will be required and to attempt to fix them and agree their likely programme and/or cost impact with BBS prior to contract award, or at the least identify the reasonable range of programme and cost impacts. Tie can still monitor/evaluate what are the elements of this specific Notified Departure for which Infraco will assert claims for additional cost and time, but tie has no ability to prevent there being a tie Change, other than going to DRP.
“The optimal response to Ian would then be to acknowledge that V26 will need to [be] varied to reflect v28 but that tie wishes to agree the principles and key facts around which the construction programme and any related financial impact will be assessed and calculated by BBS.
“This is one where Steven and Geoff must, I feel, have a better sense of how factually to restrict BBS’s ability to exploit this. After this review, we might be able to go about trying to structure acceptable controls in the Infraco Contract.” [CEC01465933]
11.72 The opening of the first paragraph clearly deals with the issue focused by Mr Laing’s email – the mismatch between the design delivery programme in the contract and that which it was then thought would be current when the contract was awarded. It is aimed at identifying the various consequences that flow from this departure and getting agreement on them so that tie had a more accurate understanding of the liability that it was undertaking. The remainder of the first paragraph and the reference in the second paragraph to “as many identified key changes that tie knows will be required” seems to go further and contemplate the other changes that may be required. Thereafter, and in the following paragraph, however, it seems to revert to consideration of the change from programme version 26 to programme version 28. It seems to me that Mr Fitchie had in mind the possible impact of other changes. This is consistent with his evidence as to his understanding of the problems that lay in SP4 as it was then drafted. However, his email does not clearly communicate the concern. It is not surprising that the recipients of the email did not understand it to be referring to the broader risk.
11.73 Oddly, when asked about this, Mr Fitchie presented his email on the basis that it addressed only the particular concerns arising out of the change in design programme. He said that it was significant in that, up to that point, there had been no intimation of a specific Notified Departure that was going to take place. Mr Laing’s email indicated that there would be, and his advice was aimed at quantifying the liability arising from that change [PHT00000017, pages 155–157]. It is surprising that he would focus such efforts on a single change when there was a possibility of a much larger claim on all sorts of fronts. Even if BBS had been willing to put a price on the single change represented by the move from version 26 to version 28, the potential for other changes meant that tie would have had no real certainty as to the likely final contract price. To have that, they would have to engage on the subject-matter of changes on a much broader basis. To secure an agreement on the value of one change and ignore the others entirely would be to create a false sense of security. It is all the more surprising when one has in mind that Mr Fitchie said that he was aware that other Notified Departures would arise under Pricing Assumption 1 (“PA1”) [ibid, page 160]. If he knew that, why make the suggestion that the liability in respect of design programme should be pinned down and say nothing about this other liability? His advice was clearly incomplete to the extent that it was misleading. The problem was not merely a matter of identifying changes to date, as Mr Fitchie suggested [ibid, page 161]; it was also appreciating what further changes would be made in future and the quantification of both past and future changes.
11.74 It is of note that, assuming that Mr Fitchie was intending to communicate the risk that could arise from changes more generally, he did nothing thereafter. In view of the potential scope of the risk of which he said he was aware and the absence of anything being done to meet or even acknowledge it, I would have expected him to make sure that a response to it had been considered or, at the very least, that it had been understood.
11.75 Although Mr Fitchie’s email was neither sent nor copied to him, I asked Mr Gallagher whether the terms of the email were such that he considered that it would have been appropriate to take it to the Board, but he did not give a clear answer [PHT00000037, pages 108–109]. On any view, the records of the boards of tie, Transport Edinburgh Limited (“TEL”) and the TPB suggest that it was not taken to them and they were not told in such clear terms that changes were going to happen and that the cost would increase.
11.76 Although Mr Laing had not addressed his email to Mr Gilbert, Mr Fitchie did copy him in to his answer to Mr McEwan’s question. Mr Gilbert responded on 31 March [CEC01465933] to say:
“My view is that we need to:-
a) confirm the agreements made with SDS on how the differences between
V26 and V28 will be dealt with e.g. where and how they have agreed to pull
back those dates.
b) identify the impact of these mitigations and any unmitigated changes from V26 on the BBS critical path. This presumably shows that their critical path is unaffected. Then agree this position with BBS.
c) include the agreed SDS mitigations in the Programme Schedule.
“This is I think the best that we can do to pin BBS and SDS down on this issue.
“Any Pricing Assumption ought to be no more than that already stated in
clause 3.4 item 2 of Schedule 4.”
11.77 Mr Gilbert accepted and supported the approach suggested by Mr Fitchie that there was a need to agree the detail of what the consequence would be of the change from version 26 to version 28. In his oral evidence, he said that it was a matter that needed to be resolved before the contract was concluded [PHT00000023, pages 197–198]. Adopting this approach would have meant that tie would at least have been certain what additional liability it would assume and that the matter could be reported to CEC. Although Mr Gilbert said that he could not recollect whether his concerns extended to other possible Notified Departures, it is apparent from his reply that he had not taken on the more general implications of the effect of the pricing assumptions and instead viewed the issue as arising only in relation to the move from version 26 to version 28. Mr Gilbert could not recall whether anything was done to implement his advice, did not recall any feedback on it from Mr Bell or Mr McEwan and did not pursue the matter [ibid, pages 201–202].
11.78 Although he was the principal person to whom it was addressed, Mr McEwan appeared to have little understanding of Mr Fitchie’s reply. Mr McEwan made the point that if tie had been able to understand all the differences that might arise, the issue would not have existed in the first place [PHT00000022, pages 147–148]. This is correct, but it does not explain his response by email on 31 March 2008 that:
“if we pursue Andrew’s steer on this we will open up the whole can of worms on the Infraco contract cost overall, and that we have to take on the chin that the programme version is not consistent, get the deal signed and then fight the notified departure tooth and nail. I understand Andrew’s point but if we are at all hopeful of getting this done by the 15th April (this year) we cannot take his suggested approach” [CEC01465908].
11.79 This clearly only applies to the change from version 26 to version 28 of the design programme. Mr McEwan proceeded on the basis that anything that could be considered normal design development would be at the risk of the consortium [PHT00000022, pages 154–155 and 190]. As I have noted above, that interpretation was simply not open on the plain wording of the contract terms that had been agreed. Mr McEwan did not give any clear answer on what he was referring to by the expression “can of worms” [ibid, pages 153–154]. He said that by May 2008 there was a concern that a year had elapsed since bids had first been put in and that the contractor’s supply chains might collapse if the matter was delayed further [ibid, page 191; TRI00000057_C, page 0041, paragraph 36(4)]. It was thought that commodity prices had increased and that if the contract was re-tendered the price would have gone up. This meant that if the contract had to be opened up, there was a concern that the prices would increase. The approach suggested by Mr McEwan amounted to an outright rejection of the advice from Mr Fitchie and, in effect, proceeded on the basis that the problem should be shelved and that once tie had committed itself to a contract in these terms it could argue about it afterwards. This approach was foolish in the extreme. Nonetheless, in essence, it is what was done.
11.80 Although Mr Bell said that tie followed the recommendation of Mr Fitchie and Mr Gilbert [PHT00000024, page 99], in fact the approach adopted was largely that advocated by Mr McEwan. There was an attempt to mitigate the scope of changes that had been identified, but no attempt was made to identify and assess changes generally [ibid, page 104]. Mr Bell said that where there was a known risk of a likely Notified Departure, an allowance would be made for the risk [ibid, page 94]. Mr Murray explained that this is what would happen in other contracts where there was to be something of the nature of a pricing assumption [PHT00000055, pages 119–121]. He said that where there is an assumption, there is a risk. It would, he said, require an assessment of potential exposure and what the possible magnitude of claims might be. In fact, in the period from January 2008 to contract signature, tie made no increase in the risk allowance to reflect the way in which the contract was drafted, and it was instead assumed that the existing provision would suffice. This is despite the fact that it was aware of the liability that would flow from design programme changes and it was becoming apparent within tie that there were challenges with completion of the MUDFA works [tie Board Minutes, 12 March 2008 CEC01271457, page 0002]. By this time, tie was also aware of further issues concerning the assumptions as to the depth of road reconstruction [PHT00000024, pages 95 and 109].
11.81 On 2 April 2008, Mr Laing sent a further draft of SP4 to Mr Bell, Mr Murray, Mr Dawson and Mr McGarrity of tie and Mr Hecht among others [CEC01423746; CEC01423747]. He copied the email to Mr Fitchie and others. In the previous draft, clause 3.2 had said:
“It is accepted by tie that certain Pricing Assumptions have been necessary and these are listed and defined in Section 3.4 below.” [CEC01423075, page 0005]
11.82 In this version, it said:
“It is accepted by tie that certain Pricing Assumptions have been necessary and these are listed and defined in Section 3.4 below. The Parties acknowledge that certain of these Pricing Assumptions may result in the notification of a Notified Departure immediately following execution of this Agreement. This arises as a consequence of the need to fix the Contract Price against a developing factual background. In order to fix the Contract Price at the date of this Agreement certain Pricing Assumptions represent factual statements that the Parties acknowledge to represent facts and circumstances that are not consistent with the actual facts and circumstances that apply. For the avoidance of doubt, the commercial intention of the Parties is that in such circumstances the Notified Departure mechanism will apply.” [CEC01423747, page 0005.]
11.83 Mr Laing had not had an acknowledgement of his emails of 26 and 31 March and this was his way of ensuring that the matter had been disclosed to tie and that it was aware of the possible consequences. He explained that he wanted to ensure that, if there was a dispute as to the meaning of the contract, tie would not be able to argue that an interpretation that gave rise to immediate claims could not have been what the parties had in mind [PHT00000040, page 46]. A similar argument had been used in the case of Emcor Drake and Scull v Edinburgh Royal Joint Venture, 2005 S.L.T. 1233, in which one of his partners in Pinsent Masons had acted [ibid, pages 42–44]. He said that he had never used such a clause before and Mr Bell said that it was not a standard clause [PHT00000024, page 136]. Mr Laing noted that the contract had an “unusually large number of qualifications to the price” and that the parties needed to understand clearly what the consequences would be.
11.84 Mr Bell pointed out that it was the inclusion of the assumptions that enabled the consortium to provide a firm construction works price, together with a clear basis by which it was administered and could be adjusted if a Notified Departure occurred. When asked whether this was not in fact the precise opposite of firming up a price, he replied: “It allows us to be firm on the price. It doesn’t – it doesn’t mean it’s fixed.” [ibid]
11.85 Although a price is obtained, it is provided in the knowledge of all parties that it will change immediately after the contract is signed. This neatly encapsulates the contradiction. I asked him whether the price in such circumstances is a fiction. His reply and my follow-up questions were as follows.
“ CHAIR OF THE INQUIRY: Firm on the price; in these circumstances the price is a fiction? Is the price a fiction in those circumstances, if you alight on a price which you acknowledge the day after the contract won’t apply?
A. I don’t believe it’s a fiction. It is the basis on which the obligations are going to be delivered. There were certain elements that were not complete in the design, and this approach allowed us to be firm on the items that were clear and to take cognisance of areas that weren’t, for example by provisional sums, and to allow a mechanism to say: well, you’ve based this element of work as follows; if it changes from that outwith in a review normal design development, then the Infraco is entitled to make the case on that, and it’s our job to have identified elements within the risk allowance to deal with the items that we saw.
CHAIR OF THE INQUIRY: But if I had come along to you on the day of the contract signing and said: right, what’s the cost then; what would you have said?
A. We would have said we had a firm construction works price and there are elements of risk that need to be addressed. So the contractor is obliged to provide certain things for this amount of money. If certain events happen, then he may be entitled to additional monies. Our approach from a project perspective was to address that through either a contingency sum for certain items or a risk allowance.
CHAIR OF THE INQUIRY: What’s the price?
A. The contract price is for the items that we can be firm on.
CHAIR OF THE INQUIRY: But it’s acknowledged here that it’s based on circumstances that don’t exist. So what’s the price? If I want to know, is it 100 million, 200 million, you can’t tell me, can you? You can see there are certain things we’ve priced on the basis they’re fixed, but that might change. But in any event it’s based on a design that has developed, and therefore it’s not fixed at all.
A. It’s fixed in terms of the elements that are clear from the documentation, and has to be read in conjunction with the commitment from the contractor to achieve the employer’s requirements, and there are a number of areas that were not fixed and we agreed a mechanism by which we would value them.
CHAIR OF THE INQUIRY: There’s a price based on certain elements, but as of today’s date, when I’ve signed it, there’s an immediate uplift. Would that be a fair way –
A. There is. Yes. There is a Notified Departure, and that’s why in the items we discussed a couple of questions ago, it was very clear that we knew there was going to be an impact of the SDS design deliverables version of the programme.
CHAIR OF THE INQUIRY: So if the people of Edinburgh or the Council came to you and said: we need to know what the price is; you wouldn’t have been able to tell them, would you, apart from this formula that you keep repeating? But if we want to know what the price is, can you tell me?
A. The contract was not set as a guaranteed maximum price form of contract. If it had been, then you could use that number.” [ibid, pages 137–139.]
11.86 Whatever one thinks of Mr Bell’s explanation, it is quite clear that this was not the way in which matters were communicated to CEC when it came to the decision to enter into the contract. It is apparent that the fact that the price was not truly fixed was apparent to others involved in the negotiations. In his internal report dated 18 April 2008, Mr Reynolds stated:
“To a large extent the current position is one of BBS’s making where the offer is dependant [sic] upon a set of pricing assumptions which can be interpreted by the informed reader as a basis for price increase and programme prolongation.” [PBH00018333, page 0001, paragraph 1.3.]
In this report Mr Reynolds noted that Mr Walker had concerns as to how the Infraco deal was being presented to CEC. Mr Walker’s concerns were such that on 22 April 2008 he drafted a letter to Mr Gallagher for signature by him and Mr Flynn about these concerns but he was instructed by Dr Enenkel not to send it, [PHT00000035, pages 91–102; SIE00000401]. Mr Flynn too confirmed that before contract signature Mr Walker expressed to him the concerns set out in the letter [PHT00000045, page 66, line 9–page 75, line 14]. The concerns of Mr Walker and Mr Reynolds in relation to tie’s reporting to CEC, as noted in its contemporaneous records before contract signature, lend support to the perception of financial engineering to secure the approval of CEC. I consider that matter further below.
Quality assurance
11.87 With so many people involved in drafting the various parts of the contract, it was clear that some process for quality assurance/quality control (“QA/QC”) would be required, and a scheme was accordingly put into place. The procedure is described in an email from Mr Bissett dated 25 March 2008 with attached spreadsheet [CEC01431194; CEC01431195]. It identified the person or persons responsible for finalisation of each element of the contract or the close documentation, who was to carry out the main quality control review and, in some circumstances, the secondary quality control review. It also stipulated that all elements of the contract should be subject to a full legal quality control review by DLA. Mr Bissett explained that it was intended that DLA should provide confirmation the contract was “in shape for signing” [PHT00000056, page 9]. In relation to documents such as the Close Report, the question for DLA was:
“do these documents provide a fair representation of all the key issues that are relevant to people being asked to approve the contract signing?” [ibid, page 9.]
11.88 On the basis of his previous experience of significant corporate transactions,
Mr Bissett was able to explain that a similar sort of check is common in large commercial transactions involving legal advisers. He said that in his experience
the firm of solicitors
“takes responsibility for the final quality control over all of the legal documentation which they’ve obviously been involved in negotiating and advising on”
[ibid, page 7].
11.89 In terms of the QA/QC procedure, Mr Gilbert, Mr Dawson and Mr Murray had responsibility for finalisation of SP4. Mr McGarrity was to carry out the main quality control review and Mr Bell was to carry out the secondary review. As noted above, DLA was to carry out “full legal quality control” review. Day-to-day monitoring of the implementation of the programme was the responsibility of Ms Clark, assisted by Mr Bissett [ibid, pages 3–4]. All the persons named and Mr Fitchie were recipients of the email from Mr Bissett intimating the procedure and identifying individual responsibilities. There is no record of any party taking objection at the time to what was proposed.
11.90 On 22 April 2008, Mr Murray sent an email to Mr McGarrity and Mr Fitchie, which was copied to Mr Bell [CEC01374219], with a copy of the draft of SP4 as it stood the previous day. The first line of the email said “Schedule 4 Attached for QA review”.
11.91 In substance, the pricing assumptions in the draft sent out in March 2008, which are considered in paragraphs 11.45–11.47 above, remained in the draft attached to the email. Mr Murray explained that in response to his email he expected that there should be an overall quality assurance check on the whole document [PHT00000055, page 138]. To anyone who had received details of the QA/QC procedure – as Mr Fitchie, Mr Bell and Mr McGarrity had – this should have indicated that the recipient was required to discharge his responsibility under that procedure. Mr McGarrity responded to Mr Murray’s email the following day [CEC01293506].
The Inquiry has not found any record of a secondary review by Mr Bell as required
by the QA/QC procedure.
11.92 Mr Fitchie accepted that, under his supervision, DLA was responsible for the final due diligence and QA/QC of the Infraco contract and the accuracy and consistency of the entire suite of ancillary documentation, but not for the content of technical, commercial and financial schedules [TRI00000102_C, page 0202, paragraph 7.376]. He appeared to rely on this when claiming that no legal input was required for quality assurance of SP4 [PHT00000017, pages 162–163]. It is correct that the question of the commercial aspects of the deal was clearly one for the tie employees and directors to determine. However, there is still a role for legal advice. There is always the possibility that there are matters in the contract wording that will present problems. This could be because objectives will not be attained, procedures will not work or because risks are placed on the client rather than the contractor. If the client is happy with such a position, that is fine. The legal adviser’s role is to ensure that the persons taking the commercial decision are properly informed of the likely effect of the contract. Mr Bissett was clear that the review was not intended to require a review of negotiated positions and second-guessing commercial positions [PHT00000056, pages 11–12]. Nonetheless, he said,
“if the reviewer felt: well, I know that’s where we’ve got to, but this clearly carries significant risk, for example; that would be something that might be raised and discussed further before people put pen to paper” [ibid, page 13].
11.93 In relation to the issue of whether the problems inherent in SP4 were the sort of matter that should have been identified in a legal review, Mr Bissett said:
“[it] depends on the sequence of events.
“If – I’m not quite sure where that situation ended up, but if a commercial view had been taken by the team in a discussion with the legal advisers, and that final position was, as far as they could tell, the extent of the negotiating power that they had, and it was properly represented in the documents, it may not – excuse me – of itself be something that would be flagged because it was there as an agreed position, and understood to be agreed.
“On the other hand, if the presentation in the documents seemed to say something that was at odds with the apparently agreed position, then one would expect that to be flagged and, you know, that would be one example, had that transpired.” [ibid, pages 11–12.]
11.94 The issue of legal advice is considered in detail below. For present purposes, it is enough to note that tie had not taken a decision to accept the commercial risk that lay in SP4 having first taken legal advice. The procurement strategy required that there was a fixed price with a transfer of risk. Even on Mr Fitchie’s own evidence, he was aware that this was not the result that would be produced by the agreement as drafted. Accordingly, it is a matter that should have been identified and notified to tie in a competently conducted review. This was not done. At the same time, no query was raised within tie that it had not had the legal quality control that the QA/QC procedures required to be undertaken by DLA. Accordingly, a further opportunity to identify the problems was missed.
11.95 When asked about Mr Murray’s email [CEC01374219], Mr Fitchie at first tried to say that it was internal and it had to be pointed out to him that it was in fact sent to him [PHT00000017, page 163]. He then claimed that he did not know why it was sent to him [ibid, page 164]. I do not accept this. However, even if he had been ignorant of the purpose, he should have found out. He was aware from Mr Bissett’s email of 25 March 2008 that DLA had a role in the QA/QC process for SP4. From Mr Fitchie’s reference during his oral evidence to paragraph 7.379 of his statement [ibid, page 165], it seems that he relies on the fact that Mr McGarrity replied to the email from Mr Murray [CEC01293506] to mean that he did not have to. This makes no sense at all. The QA process specified that Mr McGarrity would provide the first QA check. DLA was to provide the legal overview. The procedures were intended to be complementary and carrying out one would not do away with the need for the other. This must have been apparent to Mr Fitchie. His attempt to say otherwise seems to be no more than another attempt to avoid the fact that he did not fulfil his responsibilities.
11.96 In all its reviews of the documents, the Inquiry Team has not found any written report of consideration by DLA of the contract suite and whether it “works” to achieve the objectives of the client of which it was aware. Nothing of this nature has been drawn to the attention of the Inquiry by the representatives of DLA. It is clear that this exercise required of them in the QA scheme was not in fact carried out. As a result, a significant opportunity to identify the problems that were later to plague the project was lost.
Role of Wiesbaden Agreement and the willingness to negotiate
11.97 Within the evidence relating to the negotiation of SP4 there were the linked issues as to the role that the Wiesbaden Agreement had to play and the extent to which BBS was willing to negotiate the terms. There was a sharp conflict in the evidence on these matters.
11.98 I have considered above whether the Wiesbaden Agreement dictated or informed the initial draft of SP4, and I have concluded that it did not. Mr McEwan said that, although the Wiesbaden Agreement was assumed to be a foundation document for SP4, there was scope for negotiation and the terms of the Schedule were not set in stone [PHT00000022, pages 119–120 and 179]. Mr Bell said that the Wiesbaden Agreement was the framework that tie would work to [PHT00000024, pages 40 and 143]. While he said that it was the intention of Mr Crosse and Mr Gallagher that there would not be further adjustments of the points agreed in Wiesbaden, this was presumably on the basis of what they had agreed while there – the transfer to BBS of the cost increase from design development – rather than the position in the written agreement concluded by Mr Gilbert. Mr Murray was not aware of any statement that, as far as the consortium was concerned, there was a bar to a fixed-price deal [PHT00000055, page 132]. Mr Laing had a different recollection and said that he had no recollection of going back to the Wiesbaden Agreement and it being something to which they had to adhere on an ongoing basis [PHT00000040, page 15]. He said that this was not least because circumstances were constantly changing throughout the negotiation of the Schedule. He denied that there should be no development of SP4 after the Rutland Square Agreement [ibid, page 17]. He accepted, however, that Wiesbaden indicated the view as to what BBS was prepared to accept in terms of risk [ibid, pages 51–52].
11.99 At the other extreme, Mr Fitchie claimed that the basic principles of SP4 came from the Wiesbaden meeting and that these did not change and sat within SP4 [TRI00000102_C, page 0174, paragraph 7.235]. He said that nothing in SP4 went further than the Wiesbaden Agreement [PHT00000017, page 106]. He described that agreement as a “200-page pre-contract agreement”, which he had not seen in its entirety until 2009/10 when tie had an investigation into what had happened at Wiesbaden [ibid, page 108]. This misrepresents the contents of the Wiesbaden Agreement. A reading of the Wiesbaden Agreement reveals that the “legal” terms make up just the first six pages and the remainder is Appendices consisting of price breakdowns, programmes, correspondence and minutes of meetings. In relation to the negotiations as a whole, he said: “There were few changes we managed to make to SP4 but none to PA1 language” and
“Pinsent Masons/BBS simply refused to re-open the principle of PA1 on the basis that it had already been agreed between the clients’
senior representatives at Wiesbaden” [TRI00000102_C, page 0175, paragraph 7.243].
11.100 He also put the matter more broadly by stating that there was no willingness on the part of BBS to make any changes in relation to acceptance of risk of cost changes arising from design.
11.101 Mr Fitchie sought to support his contentions in a number of ways. In relation to SP4 in particular, he said that, at a meeting on 6 February 2008, he was told by Mr Laing that the language in SP4 regarding design was “not negotiable, because it had been agreed … at Wiesbaden” [PHT00000017, pages 104–105] and that he told tie of this at the time or within a few days [TRI00000102_C, page 0184–0185, paragraph 7.291]. He also said that he was told by Mr Laing, at a meeting on 9 February 2008, that the concept of Notified Departures and the language of PA1 were not open for discussion [ibid, page 0176, paragraph 7.249]. He took this to mean that it was “set in stone” [ibid, page 0177, paragraph 7.251].
11.102 As noted above, the evidence of Mr Laing is inconsistent with this evidence. At the stage when it was claimed that Mr Laing had made the statement, BBS had sent only a draft of the pricing assumptions, and that had been received just two days beforehand. The Wiesbaden Agreement had contained no reference to pricing assumptions, which of itself indicated that matters were still fluid. It would be surprising for Mr Laing to have said what was claimed at that stage. No one on the negotiating team had any recollection of having been told that BB and its solicitor were saying that the terms were non-negotiable. Had it been said to them, in view of the importance of that part of the Schedule, I consider that they would have remembered it. In addition, and most tellingly, it is apparent that, as a result of negotiation, the pricing assumptions in general and the wording of PA1 developed considerably during the period prior to contract signature. In this period, as noted below, there were three agreements to increase the price. It cannot be said that SP4 was simply replicating the Wiesbaden Agreement as, apart from anything else, it went far beyond what was discussed at Wiesbaden in terms of stating assumptions on which the price was based. Taking all these matters together, I reject Mr Fitchie’s evidence on this issue. It is yet another example of his distorting the facts to suit his own preferred narrative.
11.103 Mr Fitchie’s allegations about the stance taken by BBS raise the broader issue of what the intentions or aspirations were in relation to SP4. At the outset, there was
an understanding among the representatives of tie that the normal design risk should fall on the contractor [see, eg, Mr McEwan PHT00000022, pages 122–123].
Mr McEwan said that his view was that as the contract was drafted, the risk arising from development of the incomplete designs lay with BBS [ibid, page 132]. This belief was incorrect. Mr Dawson displayed more insight when he said that the responsibility for additional costs arising from design development was to rest with the consortium, but what constituted design development was difficult to resolve [PHT00000056, page 41]. He said that when it was drafted, he was concerned that the contract would not achieve a fixed price and that he discussed his concerns with Mr Gilbert, Mr Fitchie and Mr Murray [ibid, page 45]. This concern does not appear have been understood and was clearly not acted upon.
11.104 On the part of BBS, on the other hand, it is apparent that there was an intention not to accept the risk of matters over which it could not exercise control. This was described as a “mantra” [Mr Walker PHT00000035, pages 44 and 77]. Mr Walker’s comments indicate that throughout the negotiations BBS maintained the position that it would not accept the risk from design development. This was reflected in an email that he had sent to Mr Gilbert and others on 1 February 2008 [CEC01489538], in which he said:
“Bilfinger Berger’s business model does not permit the liability for risks that do not belong in our industry or risks which are unable to be assessed and quantified.”
11.105 As I have noted in paragraph 10.102 during the discussions at Wiesbaden it appears that BBS agreed that the consortium would accept the design development risk but that it drew back from this position in the course of converting those discussions into a written agreement. Mr McEwan noted that, even as late as May 2008, Dr Enenkel said that the policy of BB was that it would not carry any risk in construction contracts and that the client held all the risk [PHT00000022, pages 103–104].
11.106 It is difficult to say what the outcome of discussions would have been had the matter been pressed by tie. A weekly report from Parsons Brinckerhoff (“PB”) from February 2008 noted that Mr Walker had said that, within BB, he and his manager had seriously discussed withdrawing their bid [PBH00035854, page 0003]. Mr Walker, however, said that there was no desire to withdraw [PHT00000035, page 89; TRI00000072_C page 0031–0032, paragraph 59]. Mr McFadzen said that he was in favour of proceeding [PHT00000034, page 142]. If both sides wished to reach an agreement it would be expected that, through negotiation, they would reach a compromise of some sort. This is perhaps the fundamental principle underlying any contractual negotiations. I do not think that it is possible to conclude that had tie identified the issue of the risk that it was being asked to take and pressed it with BBS, it would have made no difference to the outcome. I am reinforced in that view because BB desired to develop its business in the United Kingdom and the Tram project was seen as the foundation of other developments [Mr Walker TRI00000072_C, page 0002; PBH00035854, page 0003]. On the other hand, any attempt to state what the outcome of that negotiation would have been would entail too much speculation to be of value. What can be said, however, is that if the issue had been identified and pressed, there would at least have been a chance of a better outcome in which the risk was, from the standpoint of tie, better managed and, on any view, would have been one that tie and CEC would have been fully aware that they were taking on. CEC could even have taken an informed decision as to whether to proceed with the project in whole or in part, but it was denied that opportunity.
Persons involved
11.107 The discussions at Wiesbaden were conducted for tie by Mr Gallagher and Mr Crosse. Thereafter a written agreement was negotiated by Mr Gilbert. At the outset of the negotiation of SP4 in January 2008 he was leading the tie team. The Quality Assurance Scheme for contract documents sent out by Mr Bissett in March stated that responsibility for negotiating SP4 lay with Mr Gilbert, Mr Dawson and Mr Murray (see paragraph 11.89 above). As noted above, Mr McEwan took over from Mr Gilbert as leader of the team in March 2008.
11.108 While Mr Gilbert accepted that he had led the team until Mr McEwan replaced him, it was a feature of the evidence of the others involved that they denied or sought to play down their role. Mr McEwan said that the part of SP4 that gave rise to disputes once the works were started – PA1 in SP4 – was “cellophane wrapped”
before he and Mr Bell became involved [PHT00000022, page 138]. While it is true that this had its origins in the Wiesbaden Agreement concluded months earlier, it is clear from the above that the negotiations in relation to the pricing assumptions and their effect continued after Mr McEwan took over from Mr Gilbert on 18 March 2008. As to when his involvement ceased, Mr McEwan said that it was at the end of March or the beginning of April [ibid, pages 109–110]. Here, too, I do not accept his evidence. It is apparent from the documents that he was involved in meetings right up until May.
11.109 Mr Dawson said that after his initial draft in January 2008 he was kept out of meetings [PHT00000056, pages 59 and 79] or at least was not involved in all discussions [ibid, page 82]. He said that the reason that emails were sent to him was only that he was acting as a post box [ibid, page 83]. I do not accept his evidence in this regard. The emails in question were sent to the others in the team as well as him [see, eg, ibid] and that is not consistent with his being included only as a post box. It is also plain from the terms of the emails that he was involved in discussions [see, e.g., in CEC01545414; CEC01451012; PHT00000056; pages 83–85]. In reply to questions that I asked him, he ultimately accepted that he was part of the team that was responsible, but continued to insist that he was junior to the two directors involved [ibid, pages 79–80]. In his evidence he was at pains to stress that he was to leave at the end of March 2008 – before the contract was concluded. That is correct, but he clearly played an important role before he went and, had the contract been awarded on the timescale originally intended, he would still have been there. It is therefore quite reasonable to have expected that he would play a full role as part of the negotiating team until his departure.
11.110 Mr Dawson said that he believed that Mr Murray was to take over from Mr Gilbert [ibid, page 48]. However, Mr Murray did not believe that he had responsibility for SP4. He had joined the project as Commercial Director in January 2008. He was to be responsible for commercial management of the contract after it was awarded and believed that this would be by the end of January [TRI00000063_C, pages 0004–0005]. Clearly, matters did not proceed as intended and this was not the case. It is necessary to consider what Mr Murray’s role came to be rather than simply what had been planned. He did not accept that he was part of the team responsible for general drafting [PHT00000055, page 122]
irrespective of the fact he was one of the three people identified for the task in the Quality Assurance Scheme sent out by Mr Bissett in March [CEC01431195 – see paragraph 11.89 above]. He said that this was intended merely to refer to his role in populating schedules of rates for pricing changes. He recognised that he attended meetings and discussions, including those considering SP4, but said that he did so as part of getting himself up to speed rather than taking responsibility for the drafting [PHT00000055, page 121]. He said that he was copied into emails for information purposes and his role was confined to agreeing rates etc to be included within SP4 to assist with pricing post-contract changes [ibid, pages 122 and 124]. It is of note, however, that he is named by Mr Dawson as part of the negotiating team for SP4 in an email sent to Mr Walker on 11 February 2008 [CEC01448511].
11.111 As I note in Chapter 22 (Governance), it is a feature of the project that allocation of responsibility for various tasks was not clearly made and communicated. It was often done in a way whereby a number of people could be thought to bear responsibility, and this appears to have led to a culture in which everyone assumed that someone else would address concerns. Where the decisions and the responsibilities were collective, no one felt that matters were “their” problem to address or report upon. What was required was a clear allocation of responsibility with an understanding of the position by the person to whom it had been allocated. It would then be necessary that that person should account for what was being done and the extent to which they had been able to achieve the goals. Sometimes the approach of the contractors would have meant that that was not possible. In that situation, what was required was a clear statement to that effect so that an informed decision could be taken as to whether the position was acceptable and what, if any, further protections might be required.
Awareness of consequences
11.112 A striking feature of the evidence was that while the contract terms were being settled and tie was agreeing to wording in which there was no doubt that there would be Notified Departures, there was no attempt to quantify the financial exposure inherent in the risk that it was assuming. Mr Dawson did not have a view as to what the consequences might be [PHT00000056, page 43]. He was not even sure whether anyone at tie had asked whether SP4 created a liability for tie. Mr McEwan did not know what the likely value of Notified Departures would be, but considered that these would not exhaust the contingency included within the project cost estimates [TRI00000057_C, page 0057, paragraph 55(3)]. This assumption was based upon the “painstaking process undertaken by the procurement team to document and review the Employer requirements”. However, in his oral evidence Mr McEwan observed that while there was a contingency within the tie budget to deal with Notified Departures, the “reality was that nobody knew the extent or otherwise of what those Notified Departures were going to be” [PHT00000022, page 185]. It seems to me that documenting and reviewing the employer requirements for the purposes of designing the project is different from, and no substitute for, an assessment and valuation of the likely extent of Notified Departures that would certainly arise following contract close. In the circumstances that prevailed in this case there was no rational basis for the assumption that Mr McEwan was making.
11.113 The evidence from witnesses from tie contrasts sharply with that from other witnesses. As mentioned in Chapter 9 on procurement up to the appointment of preferred bidder, when I was considering the question of VE savings, Mr Reynolds expressed concerns in his internal reports dated 28 March 2008 and 18 April 2008 about tie’s presentation of the Infraco deal to CEC [PBH00036973; PBH00018333] and cautioned that PB would need to ensure that it was protected against any accusations of deception that could be levelled at tie in the future. In his later report he explained that the pricing assumptions in the offer from BBS could be “interpreted by the informed reader as a basis for price increase and programme prolongation” [ibid, page 0001, paragraph 1.3]. Mr Walker had similar concerns about tie‘s reporting to CEC, which will be considered below. Witnesses from BBS were aware that tie/CEC would be taking on a substantial risk and they even sought to check that tie appreciated this. Mr Walker said that the fact that the price would increase was the subject of discussion that he had with Mr Gallagher, Mr McFadzen and Mr Flynn in January 2008 [PHT00000035, page 83]. His evidence was not only that BBS was aware that the price would increase but that, within tie, at least Mr Gallagher was also aware that it would go up. He claimed that Mr Gallagher had said to him on or shortly after the day on which the Infraco contract was signed that everyone knew that the price was going to go up [ibid, pages 111–112]. Mr Gallagher denied this [PHT00000037, page 98]. Mr Gallagher also denied that he was told by Mr Walker that CEC would have to fund increases in the contract price [ibid, pages 117–118] or that he said that everyone knew that the price would increase when the contract was signed.
11.114 The evidence in this respect is not dissimilar to the evidence mentioned in
Chapter 9 on procurement up to the appointment of preferred bidder about the
use of unachievable VE savings as financial engineering to achieve a target price that would enable tie to obtain CEC’s approval to proceed with the project. Mr Reynolds’s report in the month before contract close recognised that the pricing assumptions could be interpreted as a basis for a price increase. It is probable that senior employees of tie involved in the contract negotiations were aware of the likelihood of price increases following contract close, and it seems unlikely that Mr Gallagher would not have been made aware of that. I have concluded that, as a matter of fact, everyone did know that the price would increase. The only remaining issues are whether Mr Gallagher said so and was told by Mr Walker that CEC would have to fund price increases. It is difficult to see what benefit would accrue to Mr Walker from giving such evidence, if it were untrue. In contrast, Mr Gallagher has an interest to deny such conversations as they might suggest that he was complicit in misleading CEC. Having regard to the conclusion that I reached in Chapter 10 (Events between October and December 2007), that Mr Gallagher’s evidence was untruthful about the existence of practices within tie to ensure that the project could be reported as being within budget, as well as the contemporaneous records of Mr Reynolds mentioned above and the draft letter prepared by Mr Walker on 22 April 2008 [SIE00000401],
I prefer the evidence of Mr Walker.
Legal advice: the role of DLA
11.115 There was conflicting testimony about the role played by DLA in relation to settling the terms of SP4. I comment that, in general, the evidence of Mr Fitchie was particularly unsatisfactory in this regard. He was often reluctant to give clear, straightforward answers to questions, preferring obfuscation and diversion. He prevaricated and often had to be pressed repeatedly to provide an answer to the question posed. In answering questions, his desire to refer to his statement suggested that he was not confident of what it said and that he preferred the answers that had been crafted there over giving his recollection to the Inquiry. By relying upon his statement he could reduce proper scrutiny of his evidence and the risk of any resultant criticism. The written closing submissions on behalf of DLA, adopted by Mr Dunlop, suggest that DLA perhaps appreciated the inadequacies of Mr Fitchie’s evidence in this regard by commenting on the robust and rigorous cross-examination by senior counsel to the Inquiry for a day and a half on 10 and 11 October 2017 and the fact that Mr Fitchie was clearly exhausted at the end of proceedings on 10 October. In support of the allegation that Mr Fitchie was exhausted at that time the submissions contained the following footnote:
“As the Inquiry is aware, Mr Fitchie had travelled from the west coast of the USA the day before his evidence and would also have been dealing with the consequent time difference.” [TRI00000288_C, pages 0010–0011 and footnote 20.]
As noted below this statement was inaccurate but its inclusion in the closing submissions on behalf of DLA was given widespread coverage in the media on 25 and 26 June 2018 in the course of which reference was made to Mr Fitchie suffering from “jet lag” having travelled from the USA the day before he gave evidence. That coverage prompted Brodies, the solicitors for DLA and Mr Fitchie, to write to the Solicitor to the Inquiry on 29 June, advising that this statement was inaccurate and that Mr Fitchie had arrived in Edinburgh on Thursday 5 October, 5 days before he started to give evidence at the public hearing. A copy of the letter is contained in Appendix 6. The letter makes it clear that the error was not attributable to Mr Fitchie or DLA but arose due to a misunderstanding on the part of the drafter at Brodies. Although a misunderstanding might explain the error about the date on which Mr Fitchie travelled from the USA, it does not explain the allegation that the Inquiry was aware that he had travelled the day before he gave evidence implying that the Inquiry ought to have known that he might be exhausted as a result. It is a matter of regret that, as far as the Inquiry is aware, Brodies made no contact with the media seeking to correct the coverage based upon the inaccurate information that they provided in the closing submissions. For the sake of completeness, I wish to record that I did not gain the impression that Mr Fitchie was exhausted nor did senior counsel for DLA or anyone else draw any such concern to my attention or to the attention of either Senior Counsel to the Inquiry or the Solicitor to the Inquiry in the course of Mr Fitchie’s oral evidence when clearly it would have been open to them
to do so.
11.116 Mr Fitchie was firmly of the view that DLA had been excluded from the negotiation and preparation of SP4 [PHT00000017, pages 94–95 and 141]. Initially, he said that a decision in that regard was taken after the first meeting that he attended regarding SP4 on 6 February 2008 [ibid, page 95]. He went as far as to say that “the instruction was that I was not to get involved in Schedule Part 4 until asked to” [ibid, page 136]. This alleged positive instruction was said to have come from Mr Bell and Mr Gilbert. Later in his evidence he said there was a distinct discussion on the issue of DLA involvement, but that it was in March rather than at the February meeting as he had said before [ibid, page 137]. In addition to an instruction not to get involved, he relied on an absence of specific instructions to provide advice to support his stance. He claimed instead that while he was on secondment he was not instructed to get involved in the drafting.
11.117 A decision that Mr Fitchie and DLA should not be involved could be seen as consistent with the decision that had been taken in 2007 to stand down DLA at the time that the contract was being negotiated. However, I reject Mr Fitchie’s evidence in this regard. The contemporaneous documentary evidence, the evidence of other witnesses and even Mr Fitchie’s own testimony are all indicative of his involvement. In his statement, Mr Fitchie accepted that DLA was to represent tie in relation to the Infraco main contract terms [TRI00000102_C, page 0181, paragraph 7.273]. Mr Fitchie seemed reluctant to accept that SP4 was a main term, but it is hard to conceive of something much more important than the price for most contracts – and even more so when getting a fixed price is seen as a key objective. Thereafter, it is apparent that he was involved throughout.
11.118 Mr Fitchie recognised – as he had to – that drafts of SP4 were sent to him, but he claimed that this did not mean that he was being asked for advice [PHT00000017, pages 97, 104–106 and 137]. His answers to questions on this matter were notably evasive and vague. For instance, when asked whether he had been specifically instructed not to get involved in SP4 until asked to do so, his answer was lengthy and opaque [ibid, pages 136–137]. He was at tie on secondment for the very purpose of providing advice during the procurement phase. This was the most significant contract of the project. Any person in his position would have considered why the drafts were being sent to a solicitor on secondment. It would have been obvious that this was with a view to getting advice. When asked why he thought tie employees continued to copy him into emails with drafts, he simply said that he did not know [ibid, pages 105–106]. I do not accept this. He recognised that as he was, in effect, the in-house lawyer for tie, it would have been of assistance to the client if he had pointed out any difficulties [ibid, page 140]. He was fully aware that he was being relied on to provide legal advice generally and would have been aware of an email from Mr Dawson on 11 February 2008 [CEC01448511] that named him as part of the negotiating team. Further, he did offer advice on some of the drafts [PHT00000017, pages 139–140]. He tried to explain this away by saying that he might have been asked to look at this particular draft that had been sent to him [ibid]. There is nothing in the material available to the Inquiry to support this and it appears to be pure speculation in an attempt to avoid the inference obvious from the documents.
11.119 Mr Fitchie pointed out that he was not given a draft of SP4 until 6 February 2008 and said that by this time the core principles and language were established [TRI00000102_C, page 0177, paragraph 7.252]. It is true that this is when he was first given the draft but, as I have noted above, it is not the case that by then the core principles and language were settled. It is clear that at the time he was given a draft and became involved tie had submitted a first draft of SP4 to BBS and BBS had, in return, submitted a first draft of the pricing assumptions. Negotiations in relation to both were continuing and each was changed to a significant extent as a result of those negotiations. The process of negotiating the assumptions continued until about 20 March 2008. Mr Fitchie would have been in a position to give advice to tie and CEC as to the risks presented by the form in which SP4 had been drafted both during that period and after.
11.120 The evidence from tie personnel was overwhelmingly to the effect that DLA was providing advice in relation to the negotiation of SP4. Mr Gilbert recognised that at the outset SP4 had been seen as a mechanistic exercise that would not require lawyers but he described Mr Fitchie as “part of the team” as matters progressed [PHT00000023, page 116]. He said that where there were representatives from DLA at meetings, they were there to provide legal advice and not, as Mr Fitchie claimed, merely to mark up the drafts [ibid, page 117]. When considering who was to attend negotiation meetings for SP4, Mr Gilbert suggested that Mr Fitchie or Mr Hecht, his assistant, should attend [email from Mr Dawson to Mr Walker dated 11 February 2008, CEC00592619]. Mr McEwan confirmed that DLA was providing legal advice and stated that the suggestion that solicitors from DLA were there simply to mark-up drafts was ‘[n]onsense’ and that there had been no decision to exclude legal advice [PHT00000022, page 116]. He said that the reason that emails were sent or copied to DLA personnel was to ensure that they were up to speed to provide an assurance in that regard. Mr Dawson said that DLA advised on SP4 [PHT00000056, page 38] and that Mr Fitchie was heavily involved in meetings [ibid, page 78], but he did not recall any advice from DLA on the liabilities that it created for tie [ibid, page 44]. Mr Bell said that DLA was at least implicitly involved in giving advice on SP4 from the time when he himself became involved – mid-February [PHT00000024, pages 44–45]. Mr Fitchie gave advice about the mechanism by which SP4 would convert into a tie change [ibid, page 45]. He did not accept that DLA was excluded from the discussions on SP4 [ibid, pages 50–51]. He said that it was “fundamental” to the drafting and finalisation of SP4 [ibid, page 41]. Mr Murray said that Mr Fitchie was involved in drafting. Mr Gallagher said that legal representation was attached to every clause within the contract and schedule [PHT00000037, pages 106 and 110].
11.121 It was not solely on the part of the tie representatives, however, that there was an understanding that DLA was involved. As is apparent from the communications noted above, DLA was included as recipients of emails sent both from BBS and their representatives and from within tie.
11.122 Although it is clear that DLA had involvement in drafting SP4 it is clear also that it was not concerned in all communications and drafts at the time. There were communications in relation to SP4 that were not copied to Mr Fitchie or DLA. The agreement as to the effect of Notified Departures in the email of 10 March 2008 from Mr Dawson [CEC01450544] noted above is an example of something agreed without any legal input. The Citypoint Agreement, which will be considered at paragraph 11.168 below, was negotiated without any legal advice. It is also to be noted that there is no record of DLA’s expressly being asked for advice. Mr Bell said that advice was not sought from it [PHT00000024, page 48]. Although Mr McEwan said that he was certain that advice had been taken as to whether the terms of SP4 were effective to transfer risk [PHT00000022, page 138], on the basis of the evidence as a whole I accept that Mr Fitchie is correct in saying that no one at tie expressly sought an opinion as to the meaning of the contract and whether it was effective to achieve its objective as to a fixed price and the transfer of risk. Nonetheless, Mr Fitchie was aware of the objectives that tie had in relation to the agreement and was concerned in the drafting process. Even if advisers had not negotiated a term, on being presented with the draft as it had been developed and knowing that there were to be further negotiations I would have expected that they would consider the terms and advise whether there were pitfalls or perils. The issue arises as to whether he did this. Again, the testimony of Mr Fitchie conflicts with other evidence.
11.123 As I noted above, Mr Fitchie said that he did not like SP4 when he first saw it [TRI00000102_C, pages 0027 and 0175, paragraphs 2.130, 2.131 and 7.241; PHT00000017, pages 85–86]. He said that this was because the price was fixed by reference to design as at 25 November 2007 and he was aware that the design had been developing constantly since then [ibid]. By the end of February he knew that there would be design development that would generate a Notified Departure [ibid, pages 129–130]. As such, he was in a position to appreciate the risk presented to tie by the pricing assumptions and, in particular, PA1. The issue is then whether he did anything to communicate his concerns effectively to the management of tie.
11.124 Mr Fitchie appeared to claim that advice from him was not necessary. He said:
“TIE’s Project Directorate’s internal work on SP4 PA1 long before DLA Piper even saw it means that it is axiomatic that TIE knew with precision what the meaning and effect of SP4 and especially PA1 was” [TRI00000102_C, page 0180, paragraph 7.269]
and
“[s]ince TIE had agreed this document themselves without any input from DLA Piper, my natural starting point was that TIE management knew what its purpose and effect was” [ibid, page 0183, paragraph 7.286].
11.125 At the heart of these statements there is a non sequitur. Just because a client has drafted an agreement, it does not follow that they will fully understand the effect of the words chosen. They may not have managed to give effect to the intention in their mind when drafting the document. Any legal adviser would be aware of this. However, it is apparent that there must have been some knowledge within the tie team that there could be variation and demands for more money once the contract was signed. I have referred to the wording of the contract introduced on behalf of BBS on 2 April 2008 (see paragraphs 11.81 and 11.82 above), which made it clear that there could be a Notified Departure immediately on signature of the agreement. In addition, Mr McEwan was aware of the need to fight the Notified Departures “tooth and nail”
[PHT00000018, page 120] and Mr Laing recalled a comment by Mr McEwan made shortly before contract close that the agreement had “more holes than a teabag” [PHT00000040, page 49].
11.126 In my view, this does not have the result that advice is not required. The Notified Departure that had been discussed in correspondence prior to conclusion would arise because the design programme that would be used was not that referred to in the contract. The scope of the potential liabilities under PA1 went much further. It was not merely a question of the dates on which designs would be made available; it covered the content of the designs. Critically, the effect of the wording in the contract as finalised was that there was no express statement that BBS would bear additional costs arising from normal design development, and that had been tie’s clear intention. On the contrary, the wording that had been included tended to transfer the liability for additional costs arising from changes to tie. Mr Fitchie was aware of the importance that had been attached to transfer of this risk and on his own evidence was aware that the agreement did not achieve the objective.
11.127 If Mr Fitchie was aware of the pitfalls in the contract and advice was appropriate, the question is whether it was given. He said that it was. Some of his evidence in relation to this is as follows.
(a) He said that he had made his views known on SP4 in general and PA1 in particular [TRI00000102_C, pages 0175 and 0183–0184, paragraphs 7.241 and 7.286 respectively; PHT00000017, page 86].
(b) He said that he had notified Mr Bell and Mr Gilbert that there would be design development that would generate change [ibid, pages 129–130].
(c) He said that he had had discussions with them regarding Notified Departures
[ibid, page 132].
(d) He said that he gave advice on PA1 in meetings in February; at meetings with Mr Bell and Mr Murray; in discussions with Mr Gilbert; in the course of his daily updates to the tie management team; and at a Legal Affairs Committee meeting [TRI00000102_C, page 0183, paragraph 7.283].
(e) He said that, by 22 February 2008, he had had a discussion with Mr Gilbert and Mr Bell that the draft SP4 was transferring the whole risk of MUDFA works being incomplete to tie [PHT00000017, pages 123–124].
11.128 As to the content of the advice that was given, Mr Fitchie said,
“I believe that my verbal advice on this was very clear: it introduced obvious blunt transfer back to TIE of cost and time implications from SDS design development post BDDI” [TRI00000102_C, page 0185, paragraph 7.291].
11.129 He said that he told Mr Gallagher that SP4
“carried, in my opinion, currently unquantified time and cost consequences for TIE because of the incomplete and unapproved state of a significant part of the SDS scheme design” [ibid, page 0185, paragraph 7.293].
11.130 Mr Fitchie said that he told Mr Bell that there were different ways of reading PA1 and that BBS would exploit that fact [ibid, pages 0185–0186, paragraph 7.295]. Having been told by Mr Fitchie that BBS was not open to any adjustment of the PA1 language, Mr Bell said that he accepted this [ibid, page 0186, paragraph 7.297]
but that he was “sanguine” about the PA language [ibid, page 0184, paragraph 7.287]
and Mr Bell’s ultimate view was that “what was or was not normal design development would be relatively easy to agree, if everyone was pragmatic” [ibid, page 0184, paragraph 7.290].
11.131 There is no dispute that no written advice was given [PHT00000017, page 168]. There is no letter or report from DLA or Mr Fitchie that draws the attention of tie, and/or CEC, to the risks inherent in SP4 as it had been drafted. At one point Mr Fitchie claimed that he had sent tie a message saying that what it was negotiating was beyond the original premise of SP4 [ibid, page 106]. The Inquiry has not found any such message in its searches and none was provided to the Inquiry by DLA. On the basis of the material that is available, I conclude that no such message was sent. What was said in the Close Report and the letter issued by DLA at close is considered below.
11.132 Mr Fitchie contends that advice would have been given orally and that in the context of contract negotiation there is often not sufficient time to record advice in emails, formal papers or letters [TRI00000102_C, pages 0045–0046, paragraphs 4.19–4.20]. He said that the outcome of advice is often enshrined in the next draft. I accept that the position was one in which rapid responses were required and it would not have been reasonable to document every piece of legal advice given throughout the negotiation. I accept also that while he was on secondment it would be expected that some informality would arise in the way in which advice would be tendered. However, these matters have to be seen in the context of the very obvious importance of the risk that was being undertaken. There could be no doubt of the importance to CEC, and therefore to tie, of having a contract that was “fixed price” or in which risk was transferred to the contractors. The effect of the wording that had been arrived at was the opposite. Far from seeing the position corrected from one draft to another on the basis of advice that had been tendered, if anything the position for tie worsened as the drafts progressed. In itself this should have indicated that any advice that had been given had not been heeded, and it raised the possibility that it had not been understood. In view of the importance of what was at stake, it would have been appropriate to ensure that any advice that had been given was recorded in writing, had been fully understood and had been properly passed on within tie and to CEC.
11.133 When the tie witnesses were asked about whether advice was given, they all denied having been told by Mr Fitchie of the risks that lay in SP4. Mr Gallagher denied being told that the effect of SP4 was that all the risk for design development lay with tie and that it gave rise to unquantifiable risks to tie [PHT00000037, page 114]. He also denied that Mr Fitchie had said that tie should not sign the contract until matters were clarified [ibid, page 115]. Mr Murray also did not recall advice from DLA that SP4 represented a substantial risk to tie [PHT00000055, pages 124–125]. Mr Gilbert could not remember whether he got advice as to transfer of design risk [PHT00000023, pages 180 and 204–205]
or having been told of the risk presented by SP4 [ibid, page 141]. Although his recollection was generally poor, he said that had he been made aware that the risk lay with tie, he would have discussed it with the rest of the team and gone back to Mr Walker to try and take them back to what he believed had been agreed at Wiesbaden and was reflected in the written agreement from December [ibid, pages 141 and 180–181]. That this did not happen indicates that Mr Gilbert did not get advice as to the risk. He also said that had he been told that risk remained with tie it would have been such a significant matter that he would expect to have remembered it. Mr Dawson said that Mr Fitchie never advised him that BBS would not accept a fixed-price deal or that matters should be delayed to enable the legals and the design to catch up before the contract was concluded [PHT00000056, page 77]. Mr Bell said that he and his colleagues at tie were not given advice that PA1 meant that the design risk had not been transferred and that they simply trusted that, as between tie and BBS, there would be a “collegiate approach” to the missing design as there were obligations in the contract to work collaboratively and the Infraco contractors had to insert their proposals into the final design [PHT00000024, page 53]. Mr Bell said that Mr Fitchie understood that tie was interpreting PA1 as meaning that it was only when matters went beyond normal design development that tie would bear the liability for additional construction costs [ibid, pages 46 and 48], and he did not demur. When comments from the statement from Mr Fitchie were put to him, he denied that Mr Fitchie had said he had misgivings that responsibilities for cost following Base Date Design Information (“BDDI”) design development remained with tie [ibid, page 57]. He accepted that he was told that a Notified Departure would be associated with the design time issue, but denied that he had been told of the more general risks facing tie [ibid, pages 57–58]. Neither did he recall being told of the magnitude of the risk transferred to tie or having a discussion in 2007 about halting the procurement process. Ms Clark said that she was not aware of advice having been given by Mr Fitchie regarding risks [PHT00000025, page 152].
11.134 In support of its contention that advice was given, DLA rely on a document that bears to be a DLA file note [DLA00006319]. It has as its date “9 April [2010]”. It is said that the year is an error and it should refer to 2008. The DLA submissions give an account as to how this document and others came to be produced and why they were late on behalf of DLA. It is said that the note was created when Mr Fitchie asked a secretary to type up his handwritten notes. The Inquiry requested that the handwritten notes be provided, but it was told that they were no longer available. The purported justification for getting the note typed was to preserve the record of what had happened. If that was the intention, it would have been necessary that the typed-up version be checked. The file note clearly contains errors so it is apparent that this had not been done. It seems odd, to put it at its lowest, for the original to have been destroyed without Mr Fitchie or someone else within DLA having checked the notes. According to the DLA submissions, notes were typed up as Mr Fitchie was leaving and this was presumably with a view to having a proper record. Not checking the new version and destroying the original would have the opposite effect.
11.135 On the face of it, the file note records that on 9 April a meeting took place between BBS and tie with their respective advisers to consider a claim by BBS for an additional price increase of £9 million. In his statement, Mr Fitchie referred to a demand for a price increase of £17 million having been made for the first time at a meeting on 9 April 2008 [TRI00000102_C, page 0224, paragraph 7.498]. He said that there was a breakout from this meeting, which was attended by the tie team and him. The question that the file note records as having been posed to Mr Fitchie was whether tie could close on this – ie the contract with an increased price. The concern appears to be that to have allowed another increase in price would have increased the chance that the award would be challenged by the disappointed bidder on the basis that it was a breach of the rules on public procurement [ibid, page 0225, paragraph 7.499]. The file note [DLA00006319] records Mr Fitchie as having said that SP4 already “contained numerous relief/compensation/arguable risk allocation points for BB(S) – on civils work” and was “[b]iased for Infraco”. It notes that Mr Fitchie referred to a risk of BB exploiting SP4. There is a section that records the views of the various members of the tie team and, in that context, there is a note that Mr Fitchie said that SP4 was not negotiable.
11.136 A number of factors cast doubt on the extent to which it is appropriate to place reliance on the file note.
(a) It contains errors. It refers to “very slim price differential at PB appointment in December” [ibid]. I assume that in this context “PB” means “preferred bidder”. It is of note, however, that the appointment of preferred bidder was made in October and not December as stated.
(b) The request for a price increase of approximately £9 million, which is the context for the meeting, is said to be a demand for £9 million from the contractors. In the evidence there has been no reference to a demand for £9 million in early April. tie acceded to demands in February, March and May.
(c) The note indicates that one of the matters in respect of which additional monies were sought was the costs of the bid for phase 1b. The issue of those costs was dealt with as part of the demand, made in early May, which led to the Kingdom Agreement.
(d) A document that describes the outstanding issues as at 7 April 2008 [TIE00079487] refers to VE and immunisation, which are two of the matters said to justify the price increase sought, but makes no reference to any price demand. Similarly, an email from 1 April 2008 [CEC01466500] deals specifically with NR Immunisation, but without any demand being noted.
(e) An email from Mr Fitchie dated 5 April 2008 (Saturday) refers to a meeting on the following Monday [CEC01542399], two days before the meeting said to be covered in the note, but there is no reference to price demands. Instead it says: “[s]ome knotty smaller issue remain [sic] but nothing that cannot be solved.” This is hardly consistent with a demand for £9 million to be discussed in the following days.
(f) There is another email string, including an email from Mr Laing dated 4 April in which he says “I hope that the project comes to a successful close during my annual leave” [CEC01541476]. This, too, is a very odd thing to say if there is an unresolved demand on the table.
11.137 Although, in response to questioning by counsel for DLA, Mr Murray said that he could not contradict that there was a meeting at that time [PHT00000055, pages 143–144], as it was one meeting among very many held 20 years ago, that is hardly surprising.
11.138 It may be said that the above factors indicate that the note is in error in saying that the meeting took place in April and that it should have said May. An error such as that, however, would be wholly inconsistent with the document originating in a handwritten contemporaneous note as opposed to an account prepared later. I observe also that had the meeting been on 9 May rather than 9 April, Mr Gilbert could not have been in attendance, as the note records. He left tie at the end of April, other than a couple of days spent in the office on 6 and 7 May. Quite apart from all these considerations, and even taking it at face value, the note does not support the contention in the submissions for DLA that there was a clear discussion of risks [TRI00000288_C, page 0012, paragraph 20]. In all the circumstances, I place no weight on it.
11.139 There is one further factor that, in my view, is perhaps the most important as an indicator that Mr Fitchie did not give the advice that he claims to have given. As events unfolded and the works commenced, the meaning of SP4/PA1 and the issue of where risk lay came to assume critical importance. These issues were the subject of a lot of controversy between the parties. There was a great deal of correspondence and discussion and there were several adjudications (considered in Chapter 17, Adjudications and Beyond). Mr Fitchie was involved in the discussions and correspondence, and DLA had involvement in most of the adjudications. Not once in this period did Mr Fitchie refer to any email or minute of a meeting relating to the DRP in which he said he had given earlier advice to the effect that his view aligned with that of BBS and that the risk lay with tie [PHT00000017, page 168]. Even when McGrigors started to act for tie and it conducted an investigation into the Wiesbaden Agreement and SP4, Mr Fitchie did not claim that tie was advised of, and was therefore fully aware of, the effect of the agreement that it signed [ibid, pages 169–170]. Mr Fitchie did not raise the issue of advice in response to an email from Mr McGarrity in the middle of the dispute process [ibid, pages 170–174]. Although he said that it could have put him in an awkward situation to raise this, it seems to me that the situation would be much worse, and far more awkward, if Mr Fitchie had critical information and did not provide it to McGrigors and/or Mr McGarrity. He accepted that he would have been duty-bound to provide the information in the investigation [ibid, page 170].
Legal advice: advice to CEC
11.140 In the preceding paragraphs, I have considered the issue of advice to tie. There is a separate question of advice to CEC. Mr Fitchie’s response was that DLA was not advising CEC [TRI00000102_C, pages 0181–0182, paragraphs 7.275–7.277]. I have considered this in Chapter 4 (Legal Advice). He accepted that where a conflict of interest arose, he would be obliged to bring this to the attention of CEC. It seems to me that, after February 2008, he should have been aware that such a conflict had arisen. Mr Fitchie noted that the Rutland Square Agreement concluded in February 2008 contained a clause in terms of which BBS could lose preferred bidder status if it did not adhere to its terms, including the requirement there be no further claims for additional payment, but that tie neither used nor threatened to use this sanction. In his view, this sent an “unmistakable signal” to BBS that tie wanted “above all else” to award the Infraco contract [ibid, page 0220, paragraph 7.467]. This being so, it meant that tie was no longer necessarily acting in the interests of CEC. If that was the position, and he was aware of it, as a solicitor he had a professional duty to notify CEC.
11.141 The state of knowledge of CEC even became a matter of concern to BBS. Mr Laing explained that shortly before contract close there was a CEC meeting at which it was reported that the contract was near finalisation and that it was a lump-sum, fixed-price contract. Mr Laing thought there was a risk that CEC might misunderstand the position, and he raised the matter with Mr Fitchie. He recalled that Mr Fitchie was irritated by this and told him in effect that it was none of his business and that CEC was being advised by its legal advisers [PHT00000040, pages 47–48]. Mr Laing gave his evidence in a straightforward manner and was a credible and reliable witness. I believed his evidence that he was anxious that there should be no misunderstanding about price on the part of CEC and that he raised this matter with Mr Fitchie. Moreover, contemporaneous records support Mr Laing’s understanding at that time. The minutes of the meeting of CEC on 1 May 2008 noted:
“the imminent award of the two contracts [Infraco and Tramco] with a final price for the Edinburgh Tram Network of £508m which was within the funding envelope of £545m” [CEC00079774, page 0008].
11.142 Immediately after the signature of the contracts tie and Edinburgh Trams issued a media release on 14 May 2008, which included the following statement:
“With these final fixed price contracts now completed all parties can now
proceed to delivering this project safely to programme and budget.” [CEC01231567, page 0001.]
11.143 As mentioned in paragraphs 11.113 and 11.114 above, Mr Reynolds had similar concerns and had mentioned them in internal reports. Mr Walker also had concerns regarding CEC’s understanding of the nature of the Infraco contract. He said that he was concerned whether CEC fully understood that there was likely to be a significant increase in cost and duration once the contract was signed [PHT00000035, page 6]. He had expressed such concerns to Mr Reynolds, who mentioned Mr Walker’s concerns in his internal report dated 18 April [PBH00018333; PHT00000035, pages 90–91]. Mr Walker had raised it with Mr Gallagher, and he said that on 22 April 2008 he was concerned enough to draft a letter [SIE00000401]. He produced a copy of this letter at the outset of his oral evidence. It is unfortunate that this was not produced by BB to the Inquiry at an earlier stage so that it could have been made available to other parties in advance and considered in Mr Walker’s statement. He did not send the letter as Dr Enenkel considered that it would spoil the working relationship between Mr Walker and Mr Gallagher. In his oral evidence, Mr Walker explained that he had asked Mr Gallagher to give him an undertaking that CEC was aware that the price would increase. Mr Gallagher said that CEC was informed [PHT00000035, pages 92–94]. The draft letter was intended to confirm this. In summary, his concerns were to ensure that CEC fully appreciated that “the woefully inadequate progress of the utility diversions were dramatically going to affect the price by a significant number of tens of millions” [ibid, page 93]. For completeness, it may be noted that Mr Gallagher denied that the conversation mentioned by Mr Walker took place [PHT00000037, pages 117–118]. I preferred the evidence of Mr Walker.
Misunderstandings
11.144 Although there appeared to be a general view among those negotiating for tie that the objective was to transfer risk to the contractors, a number of misunderstandings could have affected the negotiating process.
11.145 Mr Gilbert said that in February 2008 he assumed that the pricing assumptions were agreed [PHT00000023, page 144]. This was clearly not the case. Not only were they the subject of continued discussions; BBS continued to obtain concessions from tie. His view that they were agreed may be tied to his view that he did not expect further changes because he thought that the future design risk had been passed to BBS [ibid, page 148]. Such a significant error in understanding was bound to have affected his approach to negotiation.
11.146 There was a misconception among a number of the key personnel that the novation of the System Design Services contract (“SDS contract”) from tie to the consortium would transfer design risk [see, eg, Mr McEwan PHT00000022, pages 124, 128, 134, 183–184; Ms Clark PHT00000025, pages 155–156]. In the December Board Minutes for tie, in response to a question from Mr Holmes about the risk of programme delays, Mr Gallagher said that normal design risk had been passed to BBS through the novation. It is remarkable that someone in his position should not understand that while the novation meant that PB would complete the design as a sub-contractor of BBS, the risk of additional costs arising from that work would fall on tie. This may show up a critical lack of consensus as to what was meant by “design risk”. Part of the problem was that a general term such as “design risk” may have been understood by different people to mean different things. This may explain the competing messages about design risk reported to tie and the TPB following the Wiesbaden Agreement. It demonstrates the importance of ensuring that all persons had a clear understanding of what was meant by terms being used in relation to key elements of the contract. The number of changes of personnel within the tie management team generally would have increased the scope for misunderstanding.
11.147 Another problem apparent in the approach of the persons involved within tie was to conflate what they considered ought to happen or was appropriate with what they were offering to agree. Purely by way of example, Mr McEwan relied on the fact that tie was to pay the consortium a substantial sum of money to have the SDS contract novated to it as meaning that the consortium should be required to absorb a significant part of the risk [PHT00000022, pages 128, 134–135 and 155]. He also claimed that the consortium would be assuming the risk on the basis that it had, in his view, been given critical design elements and had provided a price for the works [ibid, page 133]. There was therefore a lack of focus on what was actually agreed.
11.148 To remedy the above problems, it would have been necessary to have had a clear statement of what the objectives were and to ensure that each person conducting the negotiations had the same understanding of it. It would have been necessary also that they had effective legal advice, which they understood, both on what had been drafted and on the effects of procedures such as novation.
Clause 80
11.149 In paragraphs 11.73, 11.133 and 11.139 above I have considered at some length the process by which the terms of SP4, and, in particular PA1, were determined. When the works commenced, PA1 created demands for additional payment under the Infraco contract but, when taken with clause 80 of the contract, it resulted in significant delays to the progress of the works. The delays and the steps that were taken to address them are considered below. It is useful at this stage, however, to consider the process by which the terms of clause 80 were finalised.
11.150 Clause 80 dealt with “tie Changes”. In Schedule Part 1 of the contract these are defined as follows:
“‘tie Change’ means any addition, modification, reduction or omission in respect of the Infraco Works instructed in accordance with Clause 80 (tie Changes) or any other event which this agreement specifically states will be a tie Change but which shall not include any Small Works Change or any Accommodation Works Change” [CEC00036952, Part 3, page 0290].
11.151 As a subset of this, “Mandatory tie Change” was defined as follows:
“‘Mandatory tie Change’ means any addition, modification, reduction or omission in respect of the Infraco Works instructed in accordance with Clause 80 (tie Changes) which this Agreement specifically states will be a Mandatory tie Change”
[ibid, Part 3, page 0272].
11.152 Clause 3.5 of SP4 included the following:
“If now or at any time the facts or circumstances differ in any way from the Base Case Assumptions (or any part of them) such Notified Departure will be deemed to be a Mandatory tie Change requiring a change to the Employer’s Requirements and/or the Infraco Proposals or otherwise requiring the Infraco to take account of the Notified Departure in the Contract Price and/or Programme in respect of which tie will be deemed to have issued a tie Notice of Change on the date that such Notified Departure is notified by either Party to the other.” [USB00000032]
11.153 The base case assumptions were defined in SP4 as being the BDDI, the base tram information, the pricing assumptions and the specified exclusions. The effect of these was that if there was a divergence from the pricing assumptions, tie was deemed to have issued a notice of change and there was a tie change to be dealt with in terms of clause 80. For completeness, it should be noted that with the contract in this finalised form that would also be true whenever there was a difference from the BDDI – that is, the design information drawings issued up to and including 25 November 2007. This had the potential to catch changes that would not be caught as departures from PA1, but it does not appear that Bilfinger Berger, Siemens and CAF (“BSC”) ever relied on this. Clause 80 dealt with the contractor’s entitlement to additional payment where there was a tie change and also regulated when the works that were the subject of the change could be started.
11.154 The first issue is how the position came to be that the clause 80 mechanism was to be used to address the consequences of departures from the pricing assumptions. The issue of how such changes should be valued was first raised in February 2008. The first draft of the pricing assumptions provided by BBS on 4 February [CEC00592615] stipulated that the parties should seek to agree an increase or decrease in price resulting from a Notified Departure and identified the criteria as to how the valuation was to be carried out. The draft said that if the matter could not be agreed within 28 days, it could be referred for determination under the DRP. Given the way in which the provisions were drafted, it is apparent that the intention was that the works would proceed and the issue of additional price could be determined separately, and later if need be.
11.155 tie‘s response on 19 February 2008 included a draft that did not incorporate any of the mechanism that had been proposed and instead said that the price would be adjusted in accordance with clause 80 [CEC00592622, page 0010, paragraph 6.3].
Mr Laing responded on 22 February 2008 with a further draft [CEC01449877]. In relation to the revised clause that stipulated that any departure from the assumptions and exclusions stated in the Schedule should amount to a Notified Departure giving rise to an adjustment of price in accordance with clause 80, he had added a note in the following terms:
“We are not clear why the drafting proposed by BBS has not been adopted here. Clause 80 contains a procedure which in practice is unlikely to be appropriate for pricing assumptions. The reason is that clause 80 envisages a change mechanism and agreement as to the price of the change prior to the change being implemented. This, in turn, envisages that there may be circumstances where the change is then withdrawn. That would not be an option for a notified departure. If the concern is to link the valuation to the methodology set out in clause 80, the intention of the BBS drafting was to capture this principle. We will also require a discussion as to payment for actual costs as they are incurred in the event that there is a dispute as to the value of the impact of the notified departure. As has been discussed previously, BBS cannot assume the cash flow risk on notified departures.” [ibid, page 0011.]
11.156 Mr Laing said that the concerns in relation to pricing were not how it was arrived at but how long it would take to achieve agreement during the works and who would bear the cash flow risk in the meantime [PHT00000040, pages 19–20]. As matters turned out, the concern as to whether clause 80 was appropriate was well founded and operated to the considerable detriment of tie. These concerns were not, however, accepted by tie, and the terms of SP4 were as noted above.
11.157 The effect of this is that whenever there was a departure from a pricing assumption, BBS was obliged to deliver within 18 business days an estimate incorporating various matters including any increase or decrease in sums payable to it to implement the change (clause 80.4). The criteria for valuing the change were specified (clause 80.6). Once the estimate was received, the parties were to discuss it with a view to agreeing it (clause 80.9) and if they could not, then either could refer it to the dispute resolution machinery (clause 80.10). Clause 80.13 stated that once agreement was reached, tie was to issue a tie Change Order. In some situations, tie would also have the option at that stage to withdraw the notice that had given rise to the change, but this did not apply to a Mandatory tie Change – ie one arising under SP4. Critically, clause 80.13 also stated:
“Subject to Clause 80.15, for the avoidance of doubt, the Infraco shall not commence work in respect of a tie Change until instructed through receipt
of a tie Change Order unless otherwise directed by tie.” [CEC00036952,
Part 2, page 0195.]
11.158 As the clause had appeared in the draft issued with the tender documents there was a provision whereby tie had a power, where works were urgent or could impact on the programme, to determine a provisional estimate with the result that BSC would be compelled to proceed with the works [CEC01650760, page 0162, clause 80.10]. Other than that, BSC was not to commence works prior to receipt of a Change Order that would be provided when the estimate was agreed or determined by the DRPs. In the contract as signed, clause 80.15 [CEC00036952, Part 2, page 0195]
provided a mechanism in which tie might instruct BSC to carry out the change in the absence of agreement or determination of an estimate. This will be considered in more detail in Chapter 17 (Adjudications and Beyond) in relation to the disputes that arose.
11.159 In December 2007, Mr Dawson prepared material for DLA to draft clause 80 [PHT00000056, pages 53–54]. Mr Fitchie said that it was based on wording appearing in standard form contracts and had not changed much from the time of the issue of the invitation to negotiate. It is apparent from an email of 3 March 2010 from Mr Fitchie [CEC00619254] that DLA was involved in the drafting. He notes in that email that it was “heavily negotiated” and said:
“we did insist on the final words in Clause 80.13 (bear in mind that there had been various attempts by BB to entirely recast Clause 80) and there was a heated argument about this at the time – precisely, I imagine, because BB recognised
it could be used to unpick their desired approach.”
11.160 Mr Fitchie said that BBS had sought to rewrite clause 80 in mid-April and he had told it that this was not possible. He said that nonetheless the clause was redrafted at the last minute by Mr Gilbert and that Mr Gilbert came to him with his draft. He said that he pointed out the implications for tie of the revised draft to Mr Gilbert, who explained that tie did not wish to be exposed to BBS carrying out work without pricing certainty. Mr Fitchie considered that this change to clause 80 was at the “core of TIE’s post contract award problem” [TRI00000102_C, pages 0229–0232, paragraphs 7.522–7.531].
11.161 Mr Gilbert had no recollection of having drafted or redrafted clause 80 [PHT00000023, page 206]. He noted that, had he done so, it would be in the email records of tie. It is apparent from what I have said above that Mr Gilbert was a very poor witness. However, I accept his evidence in saying that had there been a redraft it would have been sent, or at least referred to, in an email, as it has been apparent from the work carried out in the course of the Inquiry that this was the normal means of communication. There is no record of any email in relation to a re-draft of clause 80 in April or May 2008, whether from the records of tie or otherwise – nothing sending a draft, anticipating or acknowledging a draft or even making reference to a draft having earlier been sent. Together with the email to which I refer in paragraph 11.160, this leads me once again to reject Mr Fitchie’s evidence. Mr Fitchie sought to explain away the terms of the email by saying that clause 80.13 was something that he attempted to salvage from the re-draft in April 2008 [TRI00000102_C, page 0231, paragraph 7.527]. I do not accept that. It is not consistent with the reference to the terms being “heavily negotiated”. Had
Mr Fitchie been unhappy about clause 80 and had he carried out the legal review that had been intended in the quality assurance procedure [see paragraph 11.87 above] this would have been an opportunity to give advice.
11.162 The risk presented by the interaction of clause 80 and SP4 is that there was no clear idea of the likelihood that there would be changes of design principle, shape, form and/or specification that would be Notified Departures/Mandatory tie Changes and therefore of the number of estimates that would have to be agreed. Requiring agreement before the work is done is quite understandable in relation to a change that is optional in the sense that tie could determine whether or not it wanted to make the change. Many of the pricing assumptions would not be a matter of choice. A change in the design programme or completion of the MUDFA works was simply a factual position that would arise in the absence of any volition. The same would turn out to be true of design changes. These would be made as a matter of finding solutions to problems as they arose and there would not really be a choice whether to proceed. There would be no choice as to whether these costs were incurred. It might be said that agreeing costs in advance was intended as a means to avoid the situation in which the contractors made claims that were more than had been anticipated after the works were done. What was not considered, however, was what would happen under clause 80, as drafted, if that were not to happen. The works would not be started. There was no consideration of how both parties would manage if the volume of Notified Departures was greater than they could deal with by either agreement or DRPs. If a deadlock built up at the agreement/DRP stage it would be a bar to works continuing. An agreement in which tie could not control when changes arose but which required agreement or dispute resolution to determine the costs of any change before work was done was always likely to be unworkable. It may be said that tie was not aware of how many changes were going to arise but that is exactly the point. They should have considered the matter and come to a clear and defensible view before agreeing these terms.
Additional agreements
11.163 A consideration of the progression of negotiations in this period would not be complete without some consideration of the demands made by BBS for increases to the contract price and the decisions by tie to accede to them. Although the agreed price rises were not of such a magnitude as to make a significant contribution to the eventual cost overrun, the demands and the decision of tie to enter into these agreements do shed light on the approach of the contracting parties. The increases in price were reflected in three agreements known as the Rutland Square Agreement (also known as the Rutland Agreement), the Citypoint Agreement and the Kingdom (or Brunel) Agreement. A summary of the various increases in price, from the agreement concluded in Wiesbaden to the signed contract, can be found in CEC00132442 – a document prepared by Mr McGarrity in 2009. This provides a record of increases totalling £17.4 million excluding the price increase in respect of “incentivisation bonus for achieving sectional completion dates” but, as will be explained below, the sums reflected there do not include all the payments that could fall due under the agreements.
The Rutland Square Agreement
11.164 The first agreement to arise out of a claim for additional monies was signed on 7 February 2008. [More than one copy of the agreement was referred to in evidence to the Inquiry. The versions used were CEC00205642; CEC00825620; CEC01284179.] It was signed at DLA’s offices in Rutland Square in Edinburgh and became known as the Rutland Square Agreement or the Rutland Agreement. The principal features of the agreement were as follows:
(a) The price agreed at Wiesbaden was increased by £3.8 million. This accounts for the cost increase of £3.8 million noted in Mr McGarrity’s table referred to in paragraph 11.163 above.
(b) Clause 2 declared that:
“tie and the BBS Consortium agree that under no circumstances shall the Construction Contract Price of £222,062,426 be increased prior to formal signature of the Infraco Contract and Schedules (including the Employer’s Requirements and the Infraco Proposals), the Tram Supply Agreement and Schedules, the Tram Maintenance Novation Agreement and Schedules, the SDS Novation Agreement and Schedules, the Tram Supply Novation Agreement and Schedules and the Tram Maintenance Agreement and Schedules (the ‘Infraco Contract Suite’) except in respect of:
“2.1 the formalisation of the price for changes to the Employer’s Requirements Version 3.1; and
“2.2 the resolution of the SDS Residual Risk Issue” [ibid, page 0003].
The meaning of “SDS Residual Risk Issue” was explained in clause 4 as the provision of adequate design information:
“and particularly earthworks design by SDS and the recovery by the BBS Consortium of costs and expenses from SDS in the event that their designs are inadequate” [ibid].
Mr Bell said that there was a question about the level of groundworks investigation that had been carried out, and earthworks were therefore a particular area of concern, but that it “may” be that the term related to design beyond that [PHT00000024, page 65]. When Mr McFadzen was asked about this, he said that:
“the big thing was that the design was incomplete … And there were big gaps in it, and particularly in earthworks and the like.” [PHT00000034, pages 93–94.]
The use of the term “resolution” in clause 2.2 [CEC00205642] in relation to the “SDS Residual Risk Issue” suggests that it was a particular question that was to be dealt with rather than an ongoing problem. If the term was given the widest possible meaning, it is hard to see that, even in February 2008, it would be thought that it was going to be resolved. That being the case, it tends to suggest that the parties had in mind a narrower meaning. It is striking, however, that a clause carving out an exception to what purported to be a fixed price was so ill defined and poorly understood. This is another example of agreement of contractual terms in the absence of a clear understanding of what they meant. The actual legal effect of the words is, however, of little importance as this aspect of the agreement was almost entirely ignored in the months that followed.
(c) The programme was extended by three months.
(d) tie agreed to Construcciones y Auxiliar de Ferrocarriles SA (“CAF”), the supplier of the tram vehicles, entering into the consortium with Siemens and BB.
(e) Clause 3 identified a dispute that existed as to the sum that would be due in respect of changes from the employer’s requirements version 3.1. It recorded that BBS had advised that £3.2 million would be due but that tie’s budget was £1.6 million. The agreement did not determine what sum would be due, and it was later agreed at £2.7 million [TRI00000102_C, page 0028, paragraph 2.143]. Mr Fitchie said that this situation had come about because the BBS Infraco proposals were too basic to allow SDS to design the Siemens component of the Employer’s Requirements [ibid, pages 0172–0173, paragraph 7.231.1]. The sums for these changes were in addition to the increase in price of £3.8 million noted in Mr McGarrity’s table.
(f) The Infraco contract suite was to be closed by 1 March 2008.
(g) Clause 7 said that adherence to the terms of the agreement was a condition of BBS retaining the status of preferred bidder.
11.165 The agreement arose out of a demand for additional monies from Siemens, which accounted for the increase in the price [PHT00000045, page 53]. Mr Flynn said that this sum was to reflect a new version of the Employer’s Requirements that had made changes to the scope and conditions of Siemens’ work by tie after the discussions in Wiesbaden [ibid, page 54]. On the other hand, Mr Crosse said that Siemens had wanted £20 million for “integration issues” [TRI00000031_C, page 0044, paragraph 134]. Mr Fitchie recalled that the demand had been for £8.5 million [TRI00000102_C, pages 0028 and 0213, paragraphs 2.142 and 7.434 respectively] and said that Siemens was unable to justify this sum [ibid, page 0213, paragraph 7.437]. Mr McFadzen said that a big element of the justification for the agreement was to address the three-month delay in getting the contract under way, which resulted in additional costs for preliminaries [PHT00000034, pages 92–94].
11.166 The agreement was negotiated over three days [TRI00000102_C, page 0028, paragraph 2.142] and at various times Mr McEwan, Mr McGarrity, Mr Crosse, Mr Gilbert and Mr Richards were involved from tie. Mr Gilbert led on behalf of tie [ibid, page 0215, paragraph 7.448]. Mr Fitchie was involved for tie in the drafting exercise and some of the negotiations [PHT00000017, page 102]. The negotiations extended to issues arising in SP4, and that was addressed in the agreement. Mr Fitchie said that, during the negotiations, Mr Laing said that BBS was not prepared to absorb any cost or time risk relating to post-contract signature design production and development [TRI00000102_C, page 0214, paragraph 7.442] but it is of note that the agreement was negotiated just as the first draft of the pricing assumptions appeared and, in its final form, made changes to SP4. It is also apparent from what I have set out above that negotiations concerning SP4 continued thereafter for some weeks.
11.167 Although tie had conceded the increase in price, it was intended that the provisions referred to in paragraph 11.164(b) above should be a “line in the sand” and prevent further demands. It became clear, however, that it did not do so. It is not possible to assess to what extent the readiness with which additional payment had been conceded on this occasion spurred BBS on to make more demands, but that is exactly what it did. Mr Fitchie noted that at no time after the Rutland Square Agreement was signed did tie seek to enforce the provision that there should be no further change in the price. It informed his view that it wanted to sign the contract “above all else” [ibid, page 0220, paragraph 7.467]. The apparent divergence of interests between tie and CEC that this disclosed and the effect on the professional obligations of Mr Fitchie were considered in Chapter 4 (Legal Advice).
The Citypoint Agreement
11.168 On 7 March 2008, an agreement was made at a meeting between Mr Bell and Mr McEwan for tie, Mr Walker for BB and Mr Flynn for Siemens [CEC01463888; Mr Bell PHT00000024, pages 85–86]. The meeting took place at tie’s offices at Citypoint and the agreement became known as the Citypoint Agreement. Mr Bell referred to the agreement made in March as the Rutland Square Agreement [TRI00000109_C,
page 0043, paragraph 29(1)]. This contradicts the other available sources and I conclude that it is an error. On this occasion, legal advisers were not involved prior to the agreement being concluded and no written document was produced incorporating the agreement.
11.169 In terms of the Citypoint Agreement, the price was increased by £8.6 million to reflect:
(a) an amendment to the contract programme extending the opening date for revenue service from March 2011 to July 2011;
(b) the impacts of version 3.5 of the Employer’s Requirements;
(c) BBS accepting the design quality risk and consequential impact on time;
(d) providing compliant depot equipment; and
(e) provision of tapered poles for the overhead electrification lines. This was an issue of aesthetics in which CEC considered that the tapered poles looked better.
11.170 Mr Gallagher said that the agreement was the result of “a final negotiation on the transfer of design risk and the acceptance of the transfer by BBS” [TRI00000037_C, page 0103, paragraph 315].
11.171 It is not apparent, however, that any risk over and above the risk in relation to design quality was accepted by BBS. Mr Bell explained that this was intended to refer to the risk that the design produced under the SDS contract was not of sufficient quality to be acceptable to achieve the approval of authorities such as CEC [PHT00000024, page 86]. He said that it was not a reference to the development of design, as the understanding was that this risk had already been accepted by BBS if it was normal design development and by tie
if it went beyond that [ibid, pages 86–87]. I prefer
Mr Bell’s account and reject the construction Mr Gallagher sought to place on it. This is relevant to the understanding of the “SDS Residual Risk Issue” as used in the Rutland Square Agreement.
The Kingdom Agreement
11.172 After months of negotiations, at the end of April it was thought that the contract would be signed on 2 May. A meeting in Edinburgh had been attended by senior personnel from BB and Siemens and had addressed minor issues that were still outstanding and agreed the timetable for signature. Despite this, on 30 April 2008, at a meeting of Mr Flynn, Mr Walker and Mr Gallagher, BBS intimated that it was not willing to sign the contract unless the price was increased by £12 million. Mr Fitchie claims that these demands were first tabled at a meeting on 9 April and that they were the context for the meeting note referred to in paragraph 11.134. However, other witnesses, from both tie [eg Mr McGarrity] and the contractors, all say that the demand was made at the last minute [PHT00000047, pages 64–65]. Contemporaneous documents are also consistent with the demand having been made only at the end of April. That is the position in the presentation to the TPB meeting on 7 May 2008 [CEC01282186, page 0007]. In the email exchange from 30 April that gave the news of the demand [CEC01274960], Mr Gallagher said that it had been made to him that day by Mr Walker. Mr Fitchie also stated that the demand was made shortly before contract close [TRI00000102_C, page 0224, paragraph 7.493]. Accordingly, I reject the evidence from Mr Fitchie that this demand was first made in early April. It is clear that a meeting did take place earlier in April. However, in his emails of 30 April, Mr Gallagher refers to a deal “negotiated and agreed on April 14th by all parties” [CEC01274960]. Information as to what was discussed at the meeting is given in the minutes of the CEC/tie Legal Affairs Group for 14 April [CEC01227009], Mr Fitchie’s email that day [CEC01425364] and a note of what was agreed circulated by Mr Gilbert [CEC01451880; CEC01451881]. It does not relate to a substantial demand for additional monies.
11.173 The initial approach from tie to BBS’s request for a further price increase was one of hostility. The demand was viewed as brinkmanship. The initial justification given for the demand was that BB had problems with its supply chain. Mr Gallagher said that he had been told that BB claimed that the additional cost was really £17 million but that it had been brought back to £12 million. He explained that, in his view, this served to demonstrate the lack of credibility of the claim. tie investigated whether it would be possible to remove BB from the contractors’ consortium and replace it with another party or to re-procure the contracts as a whole [TRI00000037_C, pages 0103–0104, paragraph 318; CEC01282186]. However, it was recognised that there were substantial practical difficulties with these approaches [DLA00006446; CEC01373756]. One of the major problems was that any such approach would take time. It was considered that anything that resulted in delay to the contract would push up the price and, as funding was fixed, there was a concern that this would make matters unaffordable.
11.174 As would be expected, the witnesses from BBS had a very different recollection of this to those from tie. When asked what the increase was for, Mr McFadzen said:
“It was – it was borne out of our – what I think I have described in my statement as increasing alarm that this was not going to be a good project. All of the things that were coming up like the design was late, MUDFA was late, albeit that we had Pricing Assumptions that were protecting us from that, but nonetheless the reality of projects are that it looked like a job that was heading for disputes and big disputes, and big disputes are expensive.
“That’s pretty easy to say at this stage, when it did go to lots of disputes, but this was – growing alarm to the extent that we, Bilfinger Berger, were considering whether this job was worth doing or not.” [PHT00000034, pages 111–112.]
11.175 This gives the clear impression that the concern was a general one in relation to the contract and its profitability as a whole. This is entirely at odds with what had been said to Mr Gallagher about difficulties with the supply chain.
11.176 While tie had characterised the conduct of BBS as brinkmanship, in relation to the demand, Mr Walker referred to letters from Mr Gallagher in this period and described them as “pressurisation and bullying from tie who were out of their depth” [TRI00000072_C, page 0038, paragraph 74]. He noted that discussions continued in the first half of May and that the line from BBS was that the design was not finished, the utilities were not finished and the price was going up [ibid, page 0037, paragraph 73].
11.177 There was an emergency meeting of the TPB when the demand was made, a meeting of the Principals from both sides on 5 May and a further meeting of the TPB on 7 May 2008. Following the meeting on 5 May, tie made a counter-proposal that there would be an increase in cost of £3 million and that it would agree a further payment of £3.2 million to BBS if phase 1b did not proceed. This was rejected by BBS and a demand for £9 million was made. Early on the morning of 7 May 2008, Dr Enenkel sent an email to Mr Gallagher [CEC01275063] in which he said that there was “no space left for negotiation anymore”. According to Mr Gallagher, he was told that if the additional monies were not made available, BBS would not sign the contract [TRI00000037_C, pages 0105–0106, paragraph 321]. In response, Mr Gallagher said that what he had offered was at the limit of his authorisation [CEC01275063]. The matter was taken to the TPB on 7 May 2008. The conclusion of the discussions there was that tie did not have much room for negotiation [CEC00080738, page 0006, item 2.11]. The decision made on 7 May was to seek the best deal in negotiations and report to the sub-committee of the Boards consisting of Mr Gallagher, Mr Renilson and Mr Mackay.[18]
11.178 At a meeting on 9 May, agreement was reached. Mr Fitchie said that after this he was told what had been agreed and he and Mr Bell prepared a document to record that. Mr Fitchie had not been involved in the negotiations as to the substance of the deal. The agreement that he prepared was signed on 13 May 2008 [WED00000023] and was known as the Kingdom Agreement after the room in which it had been negotiated. This has the following principal elements.
(a) tie was to pay BBS the sum of £4.8 million by way of what was described as an “incentivisation bonus” in four instalments throughout the works. These incentivisation provisions were carried through to clause 61.8 of the Infraco contract [CEC00036952, Part 2, page 0143].
(b) If tie did not proceed with phase 1b of the project then tie was to pay £3.2 million to BBS to compensate it for work done in the procurement period.
(c) The contract suite was to be closed out on the basis of positions recorded in a summary table attached to the agreement.
(d) There were provisions to regulate the terms on which CAF would join the BBS consortium.
(e) The mobilisation and advance works contract that had been concluded between tie and BBS was to be closed down and BBS waived any entitlement to claim time relief or payment for the four months preceding award of the Infraco contract, which would have been compensation events if the contract had been in force at that time.
(f) Costs that might arise from PA12 in SP4 were to be capped at £1.5 million save for specified exceptions. This pricing assumption related to the roadworks in Princes Street, Shandwick Place, Haymarket Junction and St Andrew Square and was that full-depth reconstruction of the road would not be required. The entitlement to an extension of time arising out of departure from PA12 was limited to eight weeks.
(g) Subject to a cap of £1.5 million, BBS agreed to accept costs arising from changes related to early release of intended for construction information.
(h) Any sums due to tie from the reserve account established under Part 43 of the Infraco contract on issue of the reliability certificate were to be waived. Although this is stated in the Kingdom Agreement, it is not apparent that there was any entitlement on the part of tie to any sums within seven days of issue of a reliability certificate.
11.179 When first responding to the demand for more money, Mr Gallagher had pointed out that both because the contract involved expenditure of public funds and because it was governed by the rules on public procurement, tie could not simply cede additional payment to BBS without getting value in return. The presentation made to the TPB meeting on 7 May 2008 [CEC01282186] recorded that tie believed that a deal of £3.2 million if phase 1b did not proceed and a further £3 million could be justified. Of the proposed payment of £3 million it was said that it “buys benefit, difficult to quantify definitively but real”. Mr Gallagher said:
“We also found a way of getting further improvements to either programme or risk which we could quantify and justify as adding further value to the project.” [TRI00000037_C, page 0105, paragraph 321.]
11.180 In relation to the agreement that was reached, he claimed that tie was not
“straining to accommodate BB’s late request” [ibid, page 0107, paragraph 326].
11.181 Did tie get anything meaningful in return for the additional money? This question is not easily answered. In the Kingdom Agreement itself, the payments are said to be due within 7 days of issue of Sectional Completion “as detailed on the Contract Programme in Schedule Part 15” [WED00000023, page 0001]. On the face of this, payment is not made conditional on the completion being achieved on the programmed date. This is consistent with the views expressed by witnesses that this was not in reality an incentive payment. That they were not incentivisation payments was accepted by Mr Walker [PHT00000035, pages 106–107] and was also apparent to Mr Fitchie [TRI00000102_C, page 0227, paragraph 7.507]. When this commitment found its way into the Infraco contract, however, the following proviso was added:
“except where Infraco has failed to achieve sectional completion by the Planned Sectional Completion Date and such failure is not due to a Compensation Event, Notified Departure, tie Change or Relief Event in which event such amounts will be paid within seven (7) days of issue by tie of the relevant Certificate of Sectional Completion.” [CEC00036952, Part 2, page 0143, clause 61.8.]
There are echoes of SP4 in the manner in which this is drafted. It appears that the entitlement to payment of each of the sums of £1.2 million will be lost where two conditions are satisfied; firstly that completion has not been achieved by the planned date and, secondly, that the failure to complete on time is not attributed to one of the four matters specified. If the clause ended there, it would be an incentive in that if they failed to complete on time without a valid reason, the bonus would be lost. The final wording, however, indicates that the sum will be paid in any event within seven days of the date of the relevant Certificate of Sectional Completion. As this seems to cut against the whole purpose of the proviso I have considered whether this is intended to regulate payment where the proviso does not apply and is merely poorly placed within the clause. In my view that is not the case as time of payment for the situation in which the proviso does not apply is dealt with in the opening words of the clause as follows:
“Within seven (7) days of the date programmed for completion of each Section in Schedule Part 15 and against the submission of a valid VAT invoice, tie shall pay the Infraco an incentivisation bonus with respect to the completion of each Section of the Infraco Works.” [ibid]
So, while an initial view of the clause gives the impression that it is conditional on the works being done on time and therefore does provide an incentive, when it is considered in more detail I have concluded that it does not and the payments were structured in such a way that they provided no inducement for meeting any timescales. The draft Infraco contract already had incentives to encourage Infraco to complete the relevant sections by their programmed date, in respect that clause 62 permitted tie to recover liquidated and ascertained damages from Infraco if it failed to complete a section by the programmed date. Calling the sums covered by the Kingdom Agreement an “incentivisation bonus”
was simply a device to give the impression that something had been obtained in return. This has a bearing on the description of the agreement that was given to CEC at the stage of contract close. This will be considered in paragraph 12.64 below.
11.182 It is also apparent that nothing new was given by BBS in return for the additional £3.2 million that it would be paid if phase 1b did not proceed. In some large contracts, it is the practice to offer to make payments to tenderers to encourage them to incur the possibly significant costs of preparing a bid. In these situations, however, the undertaking to make payment is made in advance and, in return, the tenderer will submit a bid. While no firm bid had been made for phase 1b by May 2008, it was not apparent that, in view of the work that had already been carried out, it would cost anything like that to submit a compliant bid. BBS was the only party that would be providing a price for the works, so this was not a situation in which bids had to be encouraged to have some competition. The only factor that would determine whether BBS was asked to undertake this work was the costs contained within its bid. Agreeing to make payment to BBS if its bid was not accepted meant that, once again, BBS was getting something for nothing. I would add that, in relation to this element of the agreement, the waters are further muddied by the statement that the sum of
£3.2 million of cost had previously been transferred from phase 1a to phase 1b in order to keep the cost of phase 1a down in order to make it acceptable. For example, on 12 December 2007, in response to an email from Mr Crosse to Mr McFadzen, listing information required by midday, Mr Flynn advised Mr Crosse that “Scott [McFadzen] will prepare a consolidated formal response which will pick up items like the transfer of money from 1A price to 1B price etc” [CEC00547750]. In relation to that email Mr Walker expressed the opinion that this was:
“TIE’s attempt to reduce the price of phase 1A by moving monies for phase 1A into phase 1B because phase 1B did not seem to be under the commercial scrutiny that phase 1A was, and it was an attempt to mislead City of Edinburgh Council. There cannot have been any other reason for it.” [TRI00000072_C, page 0019, paragraph 28; PHT00000035, pages 106–107.]
11.183 I agree that phase 1b was not subject to the same level of scrutiny as phase 1a, not least because the grant from the Scottish Ministers was restricted to phase 1a. On 19 March 2007, Scottish Ministers had awarded CEC a grant of £60 million to “be used only for the purpose of continuing the development and procurement of Phase 1a of the Edinburgh Tram Network and for advance works, land acquisition and utilities diversions needed for that phase incurred between 1 April 2007 and 31 March 2008” [TRS00004113; TRS00004112]. The letter dated 17 January 2008 offering a grant of £500 million was also restricted to phase 1a unless the Scottish Ministers agreed to extend the scope of payment to include phase 1b in accordance with clause 2.2 of Schedule 1 [TRS00011006; CEC00021548].
11.184 In his evidence at the hearings, Mr McEwan suggested that the liability caps referred to in paragraphs (f) and (g) mentioned in paragraph 11.178 above were of value to tie but he could not recall what value was placed on the liability without the cap [PHT00000022, pages 113–114]. When considering what benefit flowed to tie from this agreement, as one of his points Mr McGarrity said:
“Capping of the tie/CEC exposure for the extent of roads reconstruction required to £1.5m (the pre-existing risk allowance was £2m) and capping the tie/CEC cost for delays relating programme exposure for the extent of roads work as per pricing assumption 12 of Sch Pt4 to 8 weeks –
assessed as £1.3m. This further mitigated general delay risk for which the pre-existing risk allowance was £6.6m.” [TRI00000059_C, page 0151, paragraph 99.]
11.185 The risk valued at £6.6 million was for the whole of the project and was not directly referable to the alleged benefits from the Agreement. Even taken at its highest,
the benefits referred to by Mr McGarrity are far less than the payments that tie was to make.
11.186 The report on this agreement included within the Close Suite [CEC01338847] sets out what it claims are the benefits to tie from this agreement. It refers to the fact that it secures immediate close and therefore avoids legal and management costs. This is not a benefit in the sense that tie gets more for the money it is spending. It means only that a payment is being made to get the consortium to move to a position in which it is hoped that they cannot make further demands for additional payment and tie need not spend further time and money on the negotiations. In relation to the Mobilisation and Advance Works Contract (see paragraph 11.178(e) above) it noted that no claims had been made but there had been some difficulties in early stages “which could have given rise to claims in the hands of a determined contractor.” An “outline” value of £1.7 million was put on these. In relation to the cap described in paragraph 11.178(f) above, the report notes the same saving of £0.5 million described by Mr McGarrity. The report notes a saving in relating to roads related prolongation of £1.3 million. It also notes a saving of £0.5 million in relation to “[o]ther improvements affecting contamination and design & consents risk” but it is not apparent what provision of the Kingdom Agreement this is intended to refer to. The report notes that the effect of the provision referred to in paragraph (h) mentioned in paragraph 11.178 was that tie was waiving payment of up to £1 million to which it might be entitled. It was noted, however, that the matter had never been accounted for in project estimates and in my view it cannot be considered as something given by BBS to tie in return for the additional payments. It was claimed in the Report that “[s]ome £4.6m of exposures” had been removed by the Agreement and that the elimination of exposure “substantially offsets the majority of the price amendment”. The Report acknowledges that the evaluation of these matters is “judgemental”. I consider that this wording conceals the truth which was that, like the value engineering savings discussed in Chapter 9 on procurement up to the appointment of preferred bidder, they were largely illusory. It therefore appears that, contrary to Mr Gallagher’s evidence, tie had been straining to accommodate BBS’s request.
11.187 There does not seem to have been any express consideration by tie to simply call the consortium’s bluff. Mr Flynn said that if BB had not been happy with the deal they would not have signed [PHT00000045, page 76]. That, however, was the positon also when they said that it would not go away for less than £9 million. Later, it took less. The willingness to depart from positions in which it is said that the contract will not be concluded unless a party gets what it wants is highly relevant to viewing the assertions made by BB and DLA that BBS was only content to do the deal actually reached and would not have entered into an agreement on any other basis.
11.188 In relation to the demand for an additional £8.5 million from Siemens in early 2008, Mr Fitchie said that he had never encountered an experienced international supplier engaging in such conduct to the same extent [TRI00000102_C, page 0213, paragraph 7.437]. On the other hand, Mr Crosse said that in commercial negotiations relating to large turnkey contracts such as this it was normal for parties to push back against what had already been agreed, necessitating reconsideration of the issue [TRI00000031_C, page 0040, paragraph 118]. The real issue is how such demands are handled when they are made. I consider that the fact that tie was unwilling, or considered itself unable, to stick to the line that it had attempted to draw in the Rutland Square Agreement is likely to have had an effect on the entire negotiations. In ceding ground in February and then again in March, a message was sent that further requests for additional monies would be met. Later, when the works were under way, there was a resolve to resist demands for additional payment. The problem was that, by that time, the contract had been concluded in terms that, in many of the situations that arose, created an entitlement to additional monies. The time to take a stand in order to limit liability was in the course of negotiations between January and May, when matters were still fluid. The idea that the issues could be addressed by signing the contract and then arguing about liability was fatally flawed. This should have been apparent to all concerned.
11.189 It is impossible to avoid the conclusion that the approach that had been taken to procurement and negotiations had put tie in a position in which it would be difficult to resist demands for additional payment made late in the day. In this respect, the procurement process had handed all the power to BBS. Mr Renilson said that tie had put itself under pressure to sign [TRI00000176, page 0054, paragraph 168].
11.190 By the time it came to concluding the Infraco contract, the SDS contract and MUDFA were already in place and considerable expenditure had taken place under each. The MUDFA works were causing disruption on the streets of Edinburgh. It would be obvious that this created pressure on tie to conclude the deal. So much money had already been expended that it would have been difficult to walk away. The Scottish Ministers had made it plain that there would be no money beyond the £500 million grant. It would be obvious that if a deal could not be done with BBS and it was necessary to re-start the procurement procedure, there would be questions as to whether the funding was sufficient. With a need to avoid being seen to have wasted all the money spent to date and unable to look for other contractors, tie was in a position in which there was only one party with whom it could conclude the contract. In that situation, unwillingness to call the consortium’s bluff is more understandable. The danger is that the consortium would all too quickly call its bluff in return.
11.191 It may be said that the pressure on BBS was that if it did not get a deal, all the money that it had spent on putting together the bid would be wasted. I do not consider that this redressed the imbalance in the negotiating positions. tie/CEC had spent a far greater sum of money than BBS. If the contract did not proceed, BBS would be able to explore other commercial opportunities. For tie/CEC it could have been the end of the Tram project.
11.192 It may be said that part of the problem was the decision to give BBS preferred bidder status. Certainly, this removed any element of competition and put BBS in a very secure position. The step of appointing a preferred bidder had been supported by the Office of Government Commerce (“OGC”). It may be that at the time that it made its recommendation, OGC did not have a proper understanding of all that was left to do in order to award the contract. Although there was a concern that without the award bidders might start to lose interest, I consider that at the very least, there should have been a firmer and more defensible position in relation to pricing.
11.193 The decision in March to announce the formal intention to award the contract while the price negotiations were still incomplete also weakened tie’s position. Unlike the decision to appoint a preferred bidder, there does not seem to be any clear reason why tie took this step when it did.
Reporting to TEL/tie and TPB
11.194 Throughout the period from January to April 2008, the minutes of the meetings of the boards of tie and TEL contain no discussion of the issues arising in relation to negotiation of the contract or the three additional agreements. The minutes of the meeting on 28 January 2008 note that the discussion on risk transfer “was continuing with BBS” [CEC01015023, page 0005]. This does not really give a flavour of the negotiations for SP4. The Project Director’s report for that meeting recorded the conclusion of the Wiesbaden Agreement and the “[e]ffective transfer of design development risk excluding scope changes to BBS” [ibid, page 0009]. The presentation for the meeting on 13 February 2008 [CEC01480084] included a presentation from Mr Fitchie. It appears from the slides that he referred to the fact that completion of the financial schedules was outstanding but there is no hint that he was unhappy with the draft of SP4 prepared by tie or the draft of pricing assumptions prepared by BBS. The Project Director’s report to the March meeting [CEC01246825, page 0010] contained nothing of note regarding the negotiations and no mention of the Citypoint Agreement. There is an agenda for a tie meeting on 14 April 2008, which includes “Update on Contract Negotiation” [CEC01466890], but there are no minutes of it and there is no reference to the Kingdom Agreement in the agenda for the meeting on 7 May 2008 or in the minutes of the meeting [CEC00080738], although they record that Mr Gallagher provided an update of the current state of contract close and refer to the events following the increased price demand communicated by BBS on 30 April. Even the minutes of the meeting on 3 July 2008 [CEC01282131] make no mention of the Kingdom Agreement or the discussions that led up to it.
11.195 A little more information was provided to the TPB and, as it was frequently the case in 2008 that the TPB met along with the tie and/or TEL Boards, some of that information will have been spread more widely. However, in the Project Director’s report to the TPB for 13 February [CEC01246826, page 0009], there is still no mention of the Rutland Square Agreement signed earlier that month. While it might be possible that it was too late for inclusion in the report, there is also no mention of the Rutland Square Agreement in the presentation to that meeting [CEC01480084]. In the minutes of the meeting [CEC01246825], there is a comment at item 6.3 that “the level of change in prices since Preferred Bidder recommendation was expected”. This was in the context of consideration of the increase in budget price and the prospect of any challenge to the procurement process from Tramlines, the unsuccessful bidder, as a result of the price increase. Nonetheless, the report to the Board from Mr Fitchie that the price change was expected is entirely at odds with the evidence to the Inquiry about the Rutland Square Agreement. Assuming that the evidence to the Inquiry was truthful, this is an example of the TPB’s having been given inaccurate advice. I cannot envisage how this could have been done unknowingly.
11.196 In the minutes of the March meeting at item 10.1 [CEC00114831, Part 1, page 0006], there is a note that Mr McGarrity had explained that increases in project price meant that the baseline estimate had risen from £498 million to £508 million, but there is no record of any explanation of the Rutland and Citypoint Agreements. The papers for the March meeting describe it as a meeting of the TPB [CEC01246825], but the minutes state that it was a joint meeting of TPB and the tie Board [CEC00114831, Part 1, page 0005]. Oddly, the minutes also record the approval of the minutes of the previous meeting despite the fact that it was with TEL rather than tie [ibid]. The Project Director’s report to the April committee meeting says nothing about the negotiations or additional agreements and the minutes of the April meeting simply record that an update was provided on progress in relation to inter alia pricing and a reference to an explanation of increased prices in the draft of the Close Report [CEC00079902, page 0006].
11.197 The Project Director’s report to the May meeting [ibid, page 0011] indicated that a demand had been made for a further increase in price. It was said that discussions were continuing to determine the nature of the BBS requirement and “to rebuff any price increase”. Although the report should be considered at the date when it was written, it is apparent from the discussion above that, by 7 May (the date of the meeting), tie had actually reached the decision to make payment, provided that it could be contained. The presentation to the meeting recorded that tie had said that it would pay a further £3 million for contractual and risk improvements and an additional £3.2 million if phase 1b did not proceed [CEC01282186]. Also, as noted above, at the meeting on 7 May it was decided to continue with negotiations for the best deal, although tie did not have a lot of room to negotiate [CEC00080738, page 0006]. It may be assumed that as the contract was due to have been signed by the date of the meeting, it was necessary to provide some details of what had happened to explain to the meeting why the contract had not been signed.
11.198 It is apparent from the above that none of the boards was kept fully informed of the process of negotiations and, on the face of it, the tie Board received very little information through formal channels. It is, of course, the case that it would not normally be the function of the Board to participate in the detail of the negotiations. It would, however, have an interest in determining strategy and in understanding what was taking place. The way in which risks were being addressed in the contract affected the strategy, but these were not brought before the tie Board. This was a material failing. The process of accounting to the Board for what was being done might have acted as a check on the actions of the negotiating team and brought home to it just how far it had strayed from the procurement strategy. On the other hand, the Board would have been in a position to tackle this matter during the negotiations instead of being presented with a fait accompli of a negotiated contract and asked to authorise signature.
Conclusions
11.199 In the consideration above, I have focused on how the terms as drafted affected the work that was to be carried out by BB within the consortium. That work was designed by PB and, as noted above, in December 2006 when the draft Final Business Case was approved it had been intended that designs would be available at the time that the contract was signed and that design delivery would be aligned with the Infraco contract delivery programme. However, even if that design had been fully prepared, PB prepared the design for the engineering work to be carried out by BB but did not design the work that would be carried out by Siemens. It was of a specialist nature and was to be designed by Siemens itself. SP4 did not accommodate this. If there was no design of this whole element of the works at the date of signature, it is not clear what would be included in the price. The contract did not reach the stage of disputes regarding this issue prior to the Mar Hall mediation. It is remarkable nonetheless that the drafting did not address it.
11.200 The use of pricing assumptions need not be a problem. Stating assumptions in a contract is a means of allocating risk. It means that a benchmark is established such that if there is a divergence from it, one of the parties has a claim against the other. Situations in which a party warrants a state of facts are an example of this. The party subject to the claim is the one who bears the risk. This is not particularly unusual – especially when pricing large works where the scope of performance is not entirely clear. It also happens from time to time that the parties are aware that a stated assumption is not in fact correct. Where this is done, the position has moved beyond allocation of a risk and becomes the allocation of a specific liability to one party or another. I would have expected this to be readily understood by any of the lawyers involved and also any person experienced in negotiation of commercial contracts.
11.201 While it is perhaps inevitable that in the context of negotiations of a complex contract errors will be made in the drafting, the striking and troubling aspect of the position that I have narrated above is the failure to identify the errors that were made and, if possible, take steps to correct them. The problem that was created by SP4 and clause 80 was significant. It was also foreseeable. The stages at which it could have been identified are as follows.
(a) As the clauses were negotiated by Mr McEwan, Mr Murray, Mr Dawson and, to some extent, Mr Gilbert, where there was uncertainty as to the effect of clauses, advice should have been sought. Since 2007, there appears to have been a view within tie that legal advice was unnecessary. That was clearly incorrect. While it could be said that the persons within tie were relying on Mr Fitchie, even when he gave his incomplete advice at the end of March, there was a determination to press on and leave problems to be sorted out later.
(b) As the clauses were negotiated, the problem could have been identified by DLA and, in particular, Mr Fitchie.
(c) DLA does not seem to have carried out the legal quality control review, and tie did not demand it. The responsibility for overseeing implementation lay with Ms Clark, who should have pursued this matter with DLA. There is no record of her having done so. This was another missed opportunity to detect the problem. It is not enough to have detailed programmes and procedures; someone who has available to them the necessary information and the appropriate advice must take responsibility for what is being done. That was lacking in the drafting process.
11.202 The negotiations were marred by a lack of leadership, vision and understanding of what was to be done and how it was to be achieved. All these matters could have been prevented. Repeated changes of personnel carrying out drafting and conducting the negotiations resulted in a loss of continuity and poor understanding of the position and objectives. This was compounded by a lack of clear instruction as to what aims were to be achieved. A failure to take legal advice, coupled with a failure by Mr Fitchie to give effective advice and warnings in relation to the matters of which he was aware, meant that problems grew undetected. The persons involved did not appear to appreciate or understand their roles and there was no oversight or leadership to rectify this. Poor or non-existent reporting to the Boards meant that oversight and direction were not available from that quarter. When the negotiations drew to a close there was no adequate legal quality control review and within tie there was a failure to notice this and require that it be corrected. Throughout it all, and probably as a result of the above matters, there was a failure to identify the risks that were being taken on and to assess accurately the risk to tie and, in consequence, CEC. Within tie, all the parties involved must bear responsibility to some extent, but the principal responsibility rests with Mr Gallagher as Executive Chairman, Mr Bell as Project Director and both Mr Gilbert and Mr McEwan as the persons heading the negotiation team. Beyond tie, Mr Fitchie is responsible for his failure to give clear advice and, when it appeared that matters were continuing despite his concerns, to ensure that his advice had been understood.
Footnotes
17. Although this is said in the draft to be a term from the SDS Agreement [CEC00839054], this is not the case. That agreement defines “programme” to refer to that programme set out in Schedule 4 of that agreement. Alternatively, it may have been intended as a reference to the programme to be provided under clause 4.5 of the SDS Agreement setting out the order in which each deliverable is to be submitted. ↵
18. This sub-committee was known as the Approvals Committee and its work will be considered in more detail in Chapter 12 (Contract Close). ↵