Chapter 15: Contractual Disputes: May – December 2008
Introduction
15.1 As noted in Chapter 12 (Contract Close), tie Limited (“tie”) and Bilfinger Berger Siemens (“BBS”) concluded the infrastructure contract (“Infraco contract”) on 14 May 2008. On the same date the contract for the manufacture and supply of the trams was concluded between tie and Construcciones y Auxiliar de Ferrocarriles SA (“CAF”). The immediate novation of that contract to the Infraco contract resulted in the consortium becoming Bilfinger Berger, Siemens and CAF (“BSC”). Although Bilfinger Berger (“BB”) was responsible for the construction work, apart from the laying of the track, and most of the disputes related to BB’s entitlement to payment arising from changes to the contract, I have referred to these disputes as being between tie and BSC as the contracting party following novation.
15.2 At a fairly early stage after signature of the Infraco contract, a dispute emerged between tie and BSC in relation to BSC’s entitlement to additional sums for notified changes. In particular, there was a difference of opinion between the parties concerning whether, under the contract change mechanism, BSC was required – or even entitled – to commence work that was subject to a disputed change.
15.3 Many of the disputed changes related to the issue of which party bore the risk under the contract for design development (design having been incomplete when the contract was awarded, with many approvals and consents outstanding). The parties disagreed over the correct meaning and application of Pricing Assumption 1 in Schedule Part 4 (“SP4”), which related to design.
15.4 An ominous, early indication of that dispute arose during a peer review of the Tram project in July 2008, undertaken by the team that had carried out the Office of Government Commerce reviews of the Edinburgh Tram project (the “project”) before financial close. The report of that review outlines the procedure adopted by the review team that followed a similar procedure to that of the earlier reviews, which included conducting interviews with key personnel except that, on this occasion, the interviews were not confined to employees of tie. They included Mr McFadzen and Mr Brady, both of BBS [CEC01327777, page 0003 and page 0012 Appendix B]. In the section of the report dealing with contract issues the review team noted that design was not complete when the design contract was novated to BSC at financial close, and that, at interview, tie and BBS each considered that design risk lay with the other party [ibid, page 0006].
15.5 That can be contrasted with tie’s undisputed liability in terms of the Infraco contract for delays to the diversion of utilities that impacted upon the Infraco works. The extent of such delays in July 2008 is reflected in the report of the review, which recorded that the Multi-Utilities Diversion Framework Agreement (“MUDFA”) works were approximately 60 per cent complete [ibid, page 0003]. The necessary implication of that statement, based upon information provided to the review team, is that where the MUDFA works were complete there were no remaining utilities in those locations that could interfere with the progress of the Infraco works. The peer review recommended:
“prioritising the remaining MUDFA works packages in order to minimise the impact on the Infraco programme should be undertaken as soon as possible” [ibid, page 0006].
15.6 This was a recognition of the obvious risk that outstanding MUDFA works could result in delays to the Infraco programme, resulting in increased costs to tie.
15.7 Ultimately, various disputes between tie and BBS were referred to adjudication. The nature and outcome of these disputes will be discussed more fully in Chapter 17 (Adjudications and Beyond). Despite these formal disputes there was evidence before the Inquiry that BBS made an early attempt to carry out, on an informal basis, work that was subject to a disputed change. However, that did not prove effective or workable and, around October 2008, BBS decided that it would not open up any new work areas that were subject to an unresolved change notice.
15.8 That resulted in a “stand-off” between the parties that continued until the resolution of the dispute at the Mar Hall mediation in March 2011.
Early change notices
15.9 By letter dated 21 May 2008, within a week of concluding the Infraco contract, BBS sent tie six Infraco Notices of tie Change (“INTC”) (INTCs 1–6) [CEC01288310]. The first notice related to the impact on the construction programme of the slippage in the design programme from version 26 to version 31 [ibid, page 0002]. As was mentioned in paragraph 11.66, on 26 March 2008 Mr Laing had drawn attention to the fact that the pricing assumption in SP4 assumed that the design programme would not change from version 26. By that date the design programme had changed to version 28, giving rise to the possibility of a Notified Departure immediately after contract signature. The other notices related to works at the Hilton Hotel car park, roads surveys, works at Russell Road bridge, works at Haymarket viaduct and works at Gogarburn viaduct [ibid, pages 0003–0007]. Although the change mechanism required BBS to provide an estimate of the cost of the change for tie’s approval, no estimates were provided with any of the INTCs. The stated reason for omitting estimates in each case was “due to the complexity” of each change. tie responded by letter dated 29 May 2008, commenting on the change notices, including the requirement for BBS to provide estimates to enable tie to consider the change notices further [CEC01311410].
The “gentlemen’s agreement”
15.10 Mr Walker, the managing director of BB at the relevant time, gave evidence that the price in the Infraco contract was based on significant assumptions that were accepted by BSC and tie as not reflecting the true position. Both parties knew that the price would increase as soon as the contract was signed, as a result of the assumptions not holding true and triggering contract changes. He stated that, in the days following signature of the contract, in relation to discussions about the construction programme having been based on a superseded version of the design programme, Mr Gallagher acknowledged that the price would increase, but said that tie could not go back to City of Edinburgh Council (“CEC”) and ask for more money without any works having been started. Mr Walker said that he responded that BSC would work in good faith over the summer period, without agreeing in advance the cost of contract changes, and would seek payment for these works in September, when tie would have some “works on the ground” to show that there had been progress. He stated that, in essence, he and Mr Gallagher entered into a “gentlemen’s agreement” to the effect that BSC would progress with the works in that manner and would be paid for them, assuming that its invoices were fair and reasonable. While BSC was of the view that the change mechanism in the contract did not require – or even entitle – BSC to commence work that was subject to a disputed notified change in advance of the cost of the change being agreed, Mr Walker gave evidence that it was prepared to put the strict terms of the contract to one side to allow work to be carried out [PHT00000035, pages 111–114 and 123–126; TRI00000072_C, pages 0043–0044 and 0055–0057, paragraphs 87 and 101–103; see also email dated 21 November 2008 from Mr Walker to Mr Bell, CEC01125238].
15.11 For his part, Mr Gallagher gave evidence that although he recalled a discussion with BSC in which he had emphasised the need to start work on building the tram line, he had not been involved in the detailed management of the works. He denied the suggestion put to him by Inquiry Counsel that his response to BSC’s first Notified Departure claim was that he could not be seen to be paying for, or agreeing to, additional sums before the works had started, and that he had, therefore, said to BSC to start the works, without agreed estimates for changes, and that things would be sorted out later [PHT00000037, pages 144–146].
15.12 Mr Flynn, of Siemens, gave evidence that although he was not aware of any “gentlemen’s agreement”, he recalled that there were some discussions about the contract processes being slow and that, in an effort to show goodwill, BBS proceeded with some of these works on the basis that the contract processes would catch up. In the event, the contract processes did not catch up; consequently, BBS’s position hardened. In other words, BBS proceeded with some work but when payment was not forthcoming it reverted to the terms of the contract and insisted upon following the contract process [PHT00000045, page 99]. Similarly, Mr Eickhorn, of Siemens, gave evidence that although, in the beginning, there was more willingness to be a little bit more relaxed about the precise terms of the contract, as the number of changes grew and could not be agreed, “the consortium felt more and more exposed that it might not be … recompensed in a fair manner for [the] changes that had occurred” [ibid, page 146].
15.13 The evidence in relation to what, exactly, was discussed between Mr Walker and Mr Gallagher, in the days and weeks following the award of the Infraco contract, was not clear. In his oral evidence Mr Walker originally stated that the conversation with Mr Gallagher took place on the day of contract signature, but when I sought clarification of the timing he thought that the discussion occurred after BSC sent its letter to tie on 21 May, enclosing Notified Departures [CEC01288310], and that the letter probably prompted that discussion. The latter position is consistent with his written evidence [TRI00000072_C, pages 0043–0044, paragraph 87]. Mr Gallagher denied that such a conversation took place, but confirmed that he was pressing for progress. I am not able to come to any firm conclusions as to whether a “gentlemen’s agreement” was entered into, along the lines set out by Mr Walker. Even if there had been such an agreement as described by Mr Walker, there was scope for dispute about the price payable for work done on that basis. It lacked the certainty of an accepted estimate for the work to be undertaken, even if that estimate permitted re-measurement of the work actually undertaken. Moreover, any agreement to depart from the strict terms of the contract ought to have been recorded in writing. Although a formal minute of variation of the contract would have settled the matter of what had been agreed, the Inquiry has not even seen any less formal record of the agreement that was reached, such as an exchange of letters or emails. The absence of any documentary evidence is surprising in view of the expenditure that BSC was incurring on the basis of the alleged “gentlemen’s agreement”, but I am not prepared to conclude on that basis alone that Mr Walker’s evidence on this matter was untrue.
15.14 What is clear, however, is that BSC did attempt initially to carry out works on Leith Walk and that the difficulties in carrying them out due to the presence of undiverted utilities and underground obstructions, the growing number of unresolved changes, and the dispute in relation to which party bore the risk of design development, led to a hardening of BSC’s position, as will be discussed in paragraphs 15.26 – 15.35.
Work carried out
15.15 Between June and August 2008, BSC carried out site clearance and demolition works. In its report to tie for the period to 11 October 2008, BSC recorded that it had received Issued for Construction (“IFC”) design on 15 September 2008 and thereafter had commenced works on Leith Walk between McDonald Road and the Foot of the Walk [CEC00430660, page 0008]. When BSC started work on Leith Walk it encountered difficulties that prevented it from working in an efficient manner. These included lack of design, late design, failure to have unrestricted access to designated work areas due to continuing MUDFA works in those locations, and the existence of utilities in a work site that ought to have been diverted even after the MUDFA contractor had ostensibly completed the MUDFA works in that location.
15.16 The continued presence of the MUDFA contractor in designated work areas that ought to have been available exclusively to BSC resulted in inefficient and unproductive work. Its continued presence in those work areas meant that BSC was given access to only small work areas (of approximately 20–25 metres in length at a time), rather than the large work areas (of approximately 300–350 metres in length) that it had anticipated when it entered into the contract. Moreover, the small work areas were not adjacent to each other and, upon completion of a short section of 20–25 metres, the workforce would relocate to another short section that was possibly 200 metres up the road, or even on the other side of the road. Different traffic management arrangements were required. Consequently, the work flow was interrupted, and there was no consistency. This was not conducive to efficient working.
15.17 The existence in BSC’s work areas of utilities that had not been diverted by the MUDFA contractor meant that BSC had to divert them [Mr Walker PHT00000035, pages 127–128]. Mr Donaldson, BSC’s Construction Manager from July 2008, summarised matters by stating that it was impossible to carry out any meaningful work on Leith Walk because of the amount of utilities still there. He considered that the contract was unworkable, because every time that BSC discovered an undiverted utility following its excavation of the work site, that amounted to a change, which then required BSC to follow the contract process for dealing with changes. At the same time, BSC was trying to undertake construction work in parallel with the change process [PHT00000036, pages 106–108].
15.18 In his evidence to the Inquiry, Mr Foerder, BSC’s Project Director, illustrated the impracticality of the change mechanism in the contract if contractors experienced numerous unexpected obstructions within their work areas. He explained that, upon its discovering an unexpected obstruction such as undiverted utilities, the contract mechanism required BSC to notify tie of the change to the contract and to submit an estimate of the cost of the additional work. Before work could commence, tie had to issue a Change Order, following which BSC could proceed with the work. That process was time consuming and had to be repeated every time that BSC encountered an unexpected obstruction. In the context of the work on Princes Street, on which Mr Foerder was giving evidence, the contractual mechanism would not have worked because of the number of obstructions present there [PHT00000044, pages 23–24]. Although this evidence related to the conditions on Princes Street at a later date, it supports Mr Donaldson’s evidence about the contract being unworkable because of the need to follow the contract process for dealing with changes when BSC discovered an obstruction such as an undiverted utility. tie recognised that the contract change mechanism was not effective in allowing BSC to progress urgent work pending evaluation and agreement of a change notice. It was willing to consider solutions such as agreeing that work might progress up to a limited sum without prior agreement, but considered that much of the difficulty lay with BSC’s failing to adhere to the timetable of the change procedure and submitting inflated estimates for work to be done, to which tie could not possibly agree [CEC00605558]. However, even if these alleged difficulties that tie attributed to BSC did not exist, it seems to me that the contract mechanism for change was impractical where there were numerous unexpected obstructions.
15.19 Mr Walker gave evidence to the effect that BB was approximately £2.5 million out of pocket because of the delay and disruption to its works on Leith Walk. In September and October 2008, he had two meetings with Mr Gallagher, at which payment was sought for the work that had been undertaken.. At the second meeting, he presented photographs and diagrams showing the extent to which BSC was unable to progress its works on Leith Walk as a result of ongoing utility diversion works, undiverted utilities and underground obstructions [WED00000025]. He understood that Mr Gallagher intended to speak to the appropriate people at tie to resolve this matter. As will be seen from paragraph 15.20 below, there was correspondence between Mr Walker and Mr Gallagher, and discussions between representatives of tie and BSC, about issues in dispute. Payment was not, however, made before Mr Gallagher’s departure from tie, which will be mentioned in the same paragraph.
15.20 By letter dated 13 October 2008, Mr Walker suggested to Mr Gallagher a structured approach to evaluating and agreeing the impact of delays and changes to date and the development of a revised baseline for the programme going forward [DLA00001671]. In his reply on 14 October 2008, Mr Gallagher stated that tie did not accept that “a significant number of changes” had been “instigated or caused by tie” or that tie had caused “a notified 6 month delay”. tie was also of the view that it was important to recognise that normal design development from the Base Date Design Information (“BDDI”) in SP4 was included in the price agreed at contract close [DLA00001672]. The proposed work streams set out in the letters were discussed in a telephone conference call in the evening of 14 October 2008 [DLA00002768]. It also appears that meetings were arranged between tie and BSC in the week beginning 20 October 2008, to discuss and, it was hoped, to resolve the various issues that had arisen [email dated 17 October 2008 by Mr McGarrity with note – CEC00605557; CEC00605558]. In the event, Mr Gallagher left tie in late October or early November 2008, and the various issues that had arisen between tie and BSC remained unresolved.
Mobilisation of BSC
15.21 The issue of mobilisation in this section relates to the actions of BB and Siemens as the members of the consortium respectively responsible for the construction of the project and the necessary systems, including the track. tie had concerns that, following the award of the Infraco contract in May 2008, BSC had been slow to mobilise, enter into contracts with sub-contractors and commence the Infraco works. These concerns were raised with BSC as early as June 2008 [DLA00001673] and were noted in various documents thereafter [see, eg, report for meeting of the Tram Project Board on 2 July 2008 USB00000005, page 0012; tie programme report relating to progress up to 3 August 2008 CEC01355364; email dated 27 August 2008 from Mr Bell to Mr Walker CEC01165082; and letter dated 14 October 2008 from tie to BSC DLA00001672]. A number of tie witnesses also gave evidence that, in their opinion, BSC had been slow to mobilise. Mr Bell acknowledged that delayed design was not BSC’s fault, but considered that its use of civil engineering sub-contractors to do packages of work caused an element of delay in mobilising and managing the supply chain [TRI00000109_C, page 0084; see also Mr McGarrity TRI00000059_C, pages 0189 and 0191].
15.22 Mr McFadzen, of BB, acknowledged that its mobilisation was open to criticism, but that was not a critical delay and did not affect overall progress [TRI00000058_C, page 0053, paragraph 185] In his oral testimony he explained that it was a more complicated contract to sub-contract than a standard contract, because it was bespoke. There was no standard form of sub-contract that could be used. The absence of an agreed programme in the first few months of the project made the appointment of sub-contractors more difficult. A further difficulty was that BB was “new on the block as far as the Scottish construction industry was concerned, and we had to get people in”. Nevertheless sub-contractors had been identified and pre-selected for particular sections of work, and there were memoranda of understanding with them [PHT00000034, pages 169–170]. Mr Donaldson, of BB, considered that the project mobilised in accordance with what work sites were available to BSC following completion of the MUDFA works [PHT00000036, page 104]. Although BSC reported, in late June 2008, that its recruitment of staff for the project had been adversely affected by the protracted negotiations in relation to the Infraco contract and the consequent uncertainty over the project commencement date, by August 2008 it reported that mobilisation was well advanced and that key personnel were in place to progress the available work [BFB00036446, page 0003; BFB00056434, Part 1, page 0003]. Dr Enenkel, Chief Executive Officer and member of the Executive Management of Bilfinger’s Construction Subgroup between 2006 and 2010, gave evidence that no work package was available that justified significant mobilisation and that, in areas where BSC were able to work, mobilisation took place and work was started [TRI00000161_C, page 0041].
15.23 Mr McFadzen’s evidence on this matter reflected BB’s contemporaneous internal report [BFB00112167], which will be mentioned in paragraph 15.27 below, and was balanced. He accepted that BB could be criticised for slow mobilisation, but it is clear from his evidence – and the evidence generally – that there was delay in completing the design. That, together with the lack of an agreed and up-to-date construction programme, made it difficult for BB to plan its works and enter into contracts with sub-contractors. In the absence of sub-contracts, they issued letters of intent to their sub-contractors to enable work to commence at sites where IFC design was available and utility diversions had allegedly been completed. Sub-contractors were able to commence work on the basis of a memorandum of understanding pending the execution of a sub-contract. I am satisfied that although there may have been a degree of slow mobilisation by BB immediately after the Infraco contract was awarded, any initial delay by BB in that regard was of less importance than the delay caused to the Infraco works by incomplete utility diversions and incomplete design.
15.24 Mr Eickhorn gave evidence that Siemens mobilised its main sub-contractor, BAM, at a very early stage. That early mobilisation caused Siemens problems later, when the works could not be progressed as planned. In addition, despite the project delays, Siemens continued to order and manufacture the necessary parts and equipment. The reasons for doing so were twofold: because many of the items were bespoke and had long lead-in times, and to enable Siemens to start work immediately when work sites became available [PHT00000045, page 150]. On 22 May 2008, Siemens issued its instruction to BAM, its sub-contractor responsible for laying the track, to ensure that it could deliver its works as originally planned. When the project was delayed, BAM made claims against Siemens, which Siemens sought to recover from tie. These sums were ultimately only recovered to a large extent as part of the Mar Hall settlement agreement [ibid, pages 156–158; TRI00000171, page 0010, paragraph 22.1.1].
15.25 I accepted Mr Eickhorn’s evidence. In fairness, tie’s criticism of slow mobilisation was directed at BB, and no criticism was made of Siemens in that regard. Having regard to Mr Eickhorn’s evidence, there could be no basis for any such criticism. Indeed, Siemens mobilised its main sub-contractor within days of signing the Infraco contract and suffered loss as a result of tie’s failures. It did not recover that loss until after the settlement following mediation.
Progress of works and hardening of BSC’s position
15.26 BB sent monthly reports to its group head office in Germany about the progress of the project. These were obviously of value as internal documents, but they provide a useful summary of the state of the project at the date of each report as well as an insight into BB’s concerns and its reaction to tie’s proposals for resolving them.
15.27 BB’s monthly report for September 2008 noted that actual performance achieved in the month and overall performance to date were at approximately 40 per cent of planned levels. The causes of that underperformance were stated to be delays to design approval, issues of access to work sites and changes to work scope, all of which had reduced the amount of work available. BB attributed responsibility for each of these causes to tie [BFB00112167, page 0004]. The programme issued in April 2008 had been superseded for the reasons outlined in paragraph 15.10 above, which BB maintained were the responsibility of tie. Works were five months behind the existing programme, but were being managed on site with a four-month interim programme, although continuing problems with design and access were affecting progress [ibid].
15.28 Although there continued to be delay in design approval, some of the final drawings that had been approved were significantly different from the “freeze” drawings on which the Infraco contract was based, requiring changes to be agreed with tie. In the on-street section, initial works had commenced on Leith Walk, following partial completion of utility diversions by tie, but ongoing utility diversions continued to have an adverse impact upon construction. In the off-street section, works were in progress at various sites. Firstly, work had commenced at Haymarket viaduct, but design changes were causing delay there. Secondly, foundation works were in progress at Edinburgh Park bridge, but were delayed by design change. Thirdly, after delay caused by undiverted utilities, piling works had now commenced at the A8 underpass. Preparatory works were also in progress for embankment fill at Carrick Knowe [ibid, page 0005].
15.29 The report also dealt with the status of major unapproved claims, variations and changes. As at the date of the report, more than 120 changes had been notified to tie, but nothing of any substance had been agreed. The process of preparing a programme and cost estimate for each change was very demanding, and BB was allocating extra resources to that task. BB had submitted an extension of time claim in respect of initial design delay at the date of contract award, but was preparing to substantiate the delay. One of the issues in dispute was the delayed commencement of work, which BB acknowledged had been caused by a combination of tie’s delay and BB’s slow mobilisation, whereas tie maintained that all delays had been caused by BB’s late mobilisation. It is also clear from this report that BB was unwilling to accept tie’s proposed compromise of negotiating a revised programme incorporating all delays to date, as it considered that that would not result in a fair evaluation of the delay and associated costs already incurred by BB [ibid].
15.30 BB’s monthly report for October 2008 noted that performance in the period was approximately 90 per cent of the revised target, which had been reduced in the previous month in view of the continuing disruption being experienced due to changes, external delays and lack of instructions. Efficiency had been significantly reduced by these circumstances, and BB would not open up new work areas unless these issues were resolved [BFB00112170, page 0004]. The decision not to start work in areas affected by change, external delays and lack of instructions was clearly critical for the progress of the project. In effect, it meant that BB would refuse to commence work in those areas unless and until the underlying dispute over the correct interpretation of the contract was resolved or tie authorised BBS to proceed with the work in terms of the agreed change procedure. Despite the significance of that decision, BB did not intimate it to tie until December 2008, as will be discussed in paragraph 15.35 below.
15.31 The above report noted that the on-street works at Leith Walk were seriously impacted by undiverted utilities. It was hoped that a system of authorisation of, and payment for, diversion of utilities could be devised, ensuring that BB received payment when costs were incurred. In the off-street section, works had continued, on a small scale, at Haymarket viaduct, Carrick Knowe, Edinburgh Park and the A8 underpass. All these locations had been affected by external delay or change, making work inefficient and uneconomical. Prior to the date of the report, BB had notified 187 changes to tie, but had submitted only 41 cost and programme estimates. BB was recruiting a planner and an estimator to improve performance on submission of estimates. The report also stated that there were recent indications that tie was intending to dispute certain basic pricing principles, such as all departures from the November 2007 BDDI being mandatory changes for which BB would be paid. That was “absolutely unacceptable” to BB and would be “strongly contested” [ibid, pages 0004–0005].
15.32 Dr Keysberg, a member of the Executive Board of Bilfinger Berger AG in Wiesbaden between 2008 and 2010, with responsibilities for the project, gave evidence that BB had undertaken the work on Leith Walk on a “good faith basis” but had not been paid for that work. The work had not gone well because of the presence of many utilities that should have been moved before BB started work. He commented: “it was such a mess that we were subsequently instructed to close it up again” [TRI00000050_C, page 0010]. This experience made BB very nervous and reluctant to continue working on a good-faith basis. Furthermore, BB’s decision not to start work in areas that were subject to disputed notified changes was consistent with that company’s philosophy of not accepting risk that was unusual for the industry or could not be quantified [see paragraph 11.104]. In addition, where sums were due to BB, the company policy was that these sums could not be forgone except with the consent of the executive management in Germany. That meant that, without such consent, disputes required to be pursued at all levels, including, if need be, through the courts [Dr Enenkel PHT00000034, pages 135–137; TRI00000161_C, page 0040].
15.33 BSC’s report to tie for the period to 8 November 2008 recorded that construction works were in progress in sections 1B, 2A, 5A, 5B, 5C and 7, but were all impacted by external issues that required resolution through the change process. On Leith Walk, undiverted utilities in the first work site were severely hampering progress. At Edinburgh Park viaduct, significant changes to foundation works were required due to unsuitable ground conditions. The overall volume of changes and, in some cases, the requirement for design work to produce change estimates, were overloading available change management resources and introducing severe delay. Disagreement over liability for change, for example, between BDDI and IFC drawings when produced, was exacerbating the delays in agreeing changes [CEC01169379, Part 1, page 0003]. The report did not contain any reference to BB’s decision not to start work in any areas that were subject to a disputed change.
15.34 BB’s internal monthly report for November 2008 noted that performance in the period was in line with the target, albeit that the limited works in progress were affected by changes or obstructed by undiverted utilities in many areas, reducing efficiency and increasing costs. Progress in finalising approvals and consents for track and highway drawings by System Design Services (“SDS”) had been poor and was threatening to delay commencement of works on Princes Street. Some progress had been made in securing tie’s agreement for civil works enhancements to suit Siemens’ proposals, notably for a ground improvement layer under the track, but duct and overhead line equipment foundation designs remained delayed by Siemens’ late design finalisation. Additional resources had been mobilised. On-street works had continued in one area of Leith Walk, in an attempt to establish a method for dealing with undiverted utilities and other obstructions. Traffic management was being installed to enable work to commence on Princes Street in February 2009. Off-street works had continued at Haymarket viaduct, Edinburgh Park bridge, Carrick Knowe bridge and the A8 underpass to the extent possible without taking any risk for changes that had not been agreed with tie. Following indications from tie that it intended to dispute changes from BDDI to IFC drawings, meetings had been held to explain the scope of, and reasons for, the changes, particularly changes to structures adjacent to the railway line [BFB00112174, pages 0004–0005].
15.35 BSC’s report to tie for the period to 6 December 2008 noted similar problems as before in relation to construction works being impacted by changes, which required resolution through the change process. Discussions were in progress to seek to agree an interim change mechanism to permit works to proceed while the full change process was followed. Importantly, the report stated that: “[u]ntil this is in place, BSC will not progress any further changed works prior to agreement on costs” [CEC01121557, Part 1, page 0003]. This appears to have been the first time that BSC made tie aware that it would not commence works that were subject to a disputed notified change without the cost of these works being agreed in advance or without there being an amendment to the change mechanism in the contract. This was an ominous indication that the simmering dispute over changes and the change process was about to come to a head. However, in BSC’s next report to tie, for the period to 31 January 2009, there was no repetition of its intention to refuse to start work in new areas in the above circumstances. As will be discussed in Chapter 16 (The Princes Street Dispute), BSC’s position in that regard would crystallise shortly before the planned commencement of the works on Princes Street in early 2009.
Change notices
15.36 The minutes of a meeting between members of the consortium on 5 June 2008 noted that the lump sum in the Infraco contract was “soft” because the price was based on design information as at 25 November 2007 and later changes in the IFC design were regulated by SP4. Everyone in the BSC team was to read SP4 in order to understand BSC’s strategy towards design changes. In addition, delays due to approvals, consents and third-party imposed changes would become tie changes. A dedicated change team was being established. Weekly change meetings were to be held within BBS, and Pinsent Masons (BB’s solicitors) were to hold a session about the contractual change mechanism to be followed [SIE00000228, page 0004].
15.37 As was stated in paragraph 15.9 above, BSC notified the first 6 changes to tie on 21 May 2008 [CEC01288310]. By 10 July 2008, the number of notified changes intimated by BSC to tie had risen to 50 [CEC00793598]. By November 2008, the total number of notified changes had increased to 240, 26 of which had been notified by tie and the remaining 214 by BSC. Of these notified changes, tie had acknowledged that 87 were valid, it had rejected 54 and had yet to state a position on 99. BSC had submitted 51 cost estimates [BFB00112174, page 0005].
15.38 The Inquiry understands that there was no internal monthly report for December 2008 because of the festive season, although such reports were prepared and submitted to the group headquarters in Germany each December between 2009 and 2013 inclusive. However, BB’s internal report for November 2008 included a table listing the claims, variations and changes to the contract [ibid, pages 0014–0018]. The table gives a flavour of the more significant claims for changes in respect of which estimates had been provided:
- changes to the programme as a result of slippage in the IFC design for the on-street section (£3 million)
- amendments to Ocean Terminal layout (£2.6 million);
- Ocean Terminal revised finishes (£1.7 million);
- Gogarburn tram stop feasibility cost (£1.2 million);
- Gogar depot public tram stop proposals (£2.6 million);
- public realm works at St Andrew Square (£9.9 million); and
- public realm works at Bernard Street (£1.2 million) [ibid].
15.39 The sheer volume of changes presented problems for both BSC and tie. BSC experienced difficulties in producing estimates for the changes within the period specified in the contract. In addition, it was difficult to value the prolongation effect of a change until the underlying change had been agreed. In order to cope with the volume of work associated with the number of changes the BSC change team, particularly BB, required to be increased significantly [Mr Eickhorn PHT00000045, page 147].
15.40 Processing the larger than expected number of notified changes also presented difficulties for tie. That difficulty was exacerbated by a number of factors. It was of the view that many of the changes lacked sufficient detail to enable it to form a view as to whether a change had occurred. In addition, the majority of the estimates were not provided within the timescale stipulated in the contract and, where estimates were provided, tie considered that the estimates were either lacking in specification and/or were excessive [Mr Murray TRI00000063_C, pages 0024 and 0026; Mr Murray TRI00000155, page 0003; Mr McGarrity TRI00000059_C, pages 0210–0211]. More fundamentally, however, tie did not accept that the contract gave rise to a right to additional payment in respect of the changes in question.
15.41 Witnesses from both tie and BSC gave evidence that there were an abnormally high number of changes, and disputed changes, over the course of the contract. In the event, by the time of the Mar Hall mediation in March 2011, there were more than 700 notified changes. Mr Bell gave evidence that, when the Infraco contract was awarded, he anticipated that there might be in the region of 60–100 notified changes over the course of the contract [TRI00000109_C, page 0072]. Dr Keysberg gave evidence that no one anticipated the number of changes that arose, which was extremely high compared with those for other projects, and that the number of changes that were disputed, and which remained unresolved over a long period of time, was also unprecedented [TRI00000050_C, pages 0010–0011].
15.42 The abnormal number of changes can be seen as a consequence of tie’s decision to conclude the Infraco contract when the design was incomplete, and when pricing of the contract was based upon an out-of-date design and upon pricing assumptions that were known not to reflect the actual situation that prevailed at the time of the contract. Moreover, in the contract the parties had acknowledged that certain of the pricing assumptions might result in a Notified Departure immediately after contract signature. It is hardly surprising that BB sent six INTCs to tie within a week of concluding the contract, or that notices of change arose because of tie’s failure to give BB unfettered access to work sites, or because sites that were provided to BB contained obstructions that should have been removed. Nor is it surprising that, unless the contractual change mechanism were to be changed, tie would not issue Change Orders in the absence of estimates of the cost of any change. That was simply an indication that tie was adhering to the terms of the contract relating to the change mechanism as BSC intended to do, by refusing to start work in any areas that were subject to a disputed change. These opposing positions illustrate that strict adherence to the terms of the contract would continue to affect the progress of the project unless the contract was amended.
Proposals to amend the change mechanism
15.43 In view of the difficulties that BSC experienced when it commenced work on Leith Walk, and the implications for future progress of the contract of adhering to the contractual change mechanism every time that an unexpected obstruction was encountered, it is not surprising that BSC and tie realised that it was necessary to attempt to resolve this issue at the earliest opportunity. From September 2008 onwards, discussions took place between tie and BSC in relation to amending the change mechanism in the contract (clause 80) to deal with urgent changes, ie where time was critical to prevent delay to construction operations in progress [email dated 17 September 2008 from BSC to tie with a draft agreement (CEC01130811; CEC01130812); tie’s proposed protocol in October 2008 (DLA00001328); and BSC’s letter dated 4 November 2008 (CEC01123824)]. Although parties appear to have been close to reaching agreement in late 2008 [email dated 20 November 2008 from Mr Bell (CEC01125114) and Mr Walker’s reply the following day (CEC01125238)], they were unable to agree an amendment to the change mechanism. They disagreed on the fundamental issue of whether BSC was obliged or even entitled, under clause 80, to carry out the works that were subject to a disputed notified change before the cost of these works had been agreed. That issue was not finally determined until August 2010, with Lord Dervaird’s decision, mentioned in Chapter 17 (Adjudications and Beyond).
Updated construction programme
15.44 Although tie and BSC failed to agree on an amendment to the change mechanism, they did agree in principle to a revision to the construction programme in around November 2008. That revision took account of the change from version 26 of the design programme, being the version of the design programme upon which BBS had based its tender to version 31 (which was the version in force when the Infraco contract was awarded). The agreed revision included an extension of time of seven weeks and three days [BB’s internal monthly report for November 2008, BFB00112174, page 0004]. The revision to the construction programme formed the basis of the first change notice intimated by BSC to tie (INTC 1), the cost of which was subsequently agreed on 19 November 2009 at £3,524,000 [CEC00121677].
15.45 By the time that the revision to the construction programme was agreed, however, the revised construction programme was already out of date as a result of further design delay and further versions of the design programme having been issued. In the event, no further revision of the construction programme was agreed until the resolution of the underlying dispute between the parties at Mar Hall in 2011.
Conclusions
15.46 By the end of 2008, the dispute between tie and BSC in relation to the correct interpretation of the Infraco contract – concerning which party bore the risks arising from incomplete design and the correct operation of the provisions relating to the change mechanism – had come into focus.
15.47 With a view to keeping its exposure to risk to a minimum, BB decided not to start work in areas that were subject to a disputed notified change, resulting in delay to the progress of the project.
15.48 Given the number of disputed changes throughout the route of the tram line, and the failure to reach an agreement about an amendment to the provisions for contract change in clause 80, it ought to have been apparent to parties that progress would be severely impeded and would ultimately be brought to a halt.
15.49 The dispute came to a head shortly before the planned start of the works on Princes Street in early 2009, and this contributed to the ultimate decision of the parties to enter into the Princes Street Supplemental Agreement, which will be discussed in Chapter 16 (The Princes Street Dispute).
15.50 The difficulties with the project in 2008 and the abnormal number of Notified Departures were a consequence of tie’s decision to conclude the Infraco contract when the design was incomplete and pricing of the contract was based upon an out-of-date design and upon pricing assumptions that were known not to reflect the actual situation that prevailed at the time of the contract.