Chapter 16: Princes Street Dispute

Princes Street Dispute

16.1 Disputes between tie Limited (“tie”) and Bilfinger Berger, Siemens and CAF (“BSC”) had started to manifest themselves shortly after the infrastructure contract (“Infraco contact”) was signed. Perhaps most significantly, irrespective of whether there had been a “gentlemen’s agreement”, BSC had not been paid additional sums in respect of what it saw as disruption to the works that it had carried out on Leith Walk. This had led to the hardening of attitude on the part of BSC and to its decision not to open up new work areas unless the issues were resolved. These problems flared up in relation to the works on Princes Street that were planned to commence on 21 February 2009. The dispute that emerged exposed the difficulties that had been built in to the contract and it set the scene for what was to follow until the Mar Hall mediation in 2011. Before examining the issues that arose and their consequences, it is useful to set out a chronology of the principal elements of the dispute and its resolution.

2008

1 October As part of the preparation for the works on Princes Street, temporary traffic management plans were put in place there, at its junction with the Mound. The result had been “an absolute snarl up of the greatest order” [Councillor Dawe, TRI00000019_C, page 0108, paragraph 415] and councillors were determined that there would be no repetition when work started in February 2009. The outcome of investigations following this was a decision that one lane of Princes Street should be kept open for buses. For completeness, I note that Mr Mackay, chairman of tie at that time, claimed that the decision to keep the bus lane open was unconnected with the congestion that arose in October 2008 [TRI00000113_C, page 0078, paragraph 288], but his evidence is at odds with the other material available to the Inquiry and I consider that he is mistaken in his recollection.

22 October A meeting of the Tram Project Board (“TPB”) took place, which was attended by a representative of BSC, Mr Brady. While the original plan had been to close Princes Street to all traffic, including buses, the meeting discussed the possibility of changing that plan so that a bus lane would be kept open [CEC01053731, page 0007]. This discussion was described as “amicable”, and a note in the minutes records that agreement was later reached. A PowerPoint presentation of the same meeting, however, noted that the revised approach would need to be carefully handled, as it was likely to require a notice of change under the contract, which would result in increased charges [CEC01167539, page 0022]. There was therefore clearly an awareness at tie that some claim could be expected.

6 December By this date, BSC had decided that, in the absence of agreement as to costs, it would not carry out works that it considered to be the subject of change [CEC01121557, Part 1, page 0003].

2009

12 January Following meetings with BSC to discuss the proposal to keep a lane on Princes Street open, tie issued a notice of change in relation to the provision of a bus lane on Princes Street during the works

9–10 February A meeting took place between representatives of tie and BSC to consider the position in relation to Princes Street. tie’s record of the meeting [TIE00089656] noted that BSC had said that the following were the options:

“They will only work on a cost+ basis for any work progressed prior to completion of design and utilities …, or …

“They could go away for 6–12 months until your utilities and your design are completed then come back to work as per the original contract sequence.”

12 February BSC intimated a draft assessment of the additional cost relative to the change notice [referred to in Infraco Position Paper for Dispute Resolution Procedure that followed: CEC01032611]. The sum identified was £8,001.96.

12 February Mr Mackay wrote to Dr Keysberg of BSC, expressing concern that BSC was not adhering to the contract in relation to variations [CEC00900093]. The particular concern was that BSC had said that the change was too complex to be able to permit an estimate in terms of the contract.

13 February tie issued Change Order 21. Mr Foerder’s evidence was that he understood that there had been no Change Order [PHT00000044, pages 24–25, but this is clearly incorrect. This Change Order agreed with the BSC estimate except in relation to head office overheads and profit; consortium preliminaries; and other preliminaries. The sum that tie identified in the Change Order was £6,546.55, which differed from the BSC figure by £1,455.41.

17 February A meeting took place between tie and BSC. At this meeting, tie representatives asked whether it was BSC’s position that it had no obligation to accept tie’s instruction to start work on Princes Street.

18 February BSC responded by email to the question posed at the meeting on the previous day [CEC00867153]. It said that it was not obliged to start work in Princes Street in the absence of agreement as to the additional cost. The email also stated:

“However we understand the importance of this area to you. Therefore as a gesture of goodwill and without prejudice to any entitlements with respect to events and circumstances given rise to this action we are prepared to evaluate diligently any proper instruction to commence the works in Princes Street. Such proper and detailed instruction is still outstanding. It is our strict understanding that we shall receive a proper instruction prior to our commencement of the works in Princess [sic] Street containing clear details on reimbursement of our actual costs and overheads, prelims and profit – further that tie accept of [sic] the risks associated with proceeding with the works under these circumstances. In addition that any extensions of time to the relevant milestones will be granted where such works are delayed.”

In his evidence Mr Foerder accepted that this was a demand to be paid on the basis of “demonstrable cost” [PHT00000044, page 22]. In my view, it is significant that this answer was given in an email a day later than the meeting rather than at it. It suggests that BSC took time to consider what its position was and that it was developing. I return to this issue below.

19 February tie purported to instruct BSC in terms of clause 80.15 of the contract to implement the change.

19 February BSC responded that it was not obliged to accept the instruction of 19 February.

19 February tienotified BSC that it was referring the matter for dispute resolution in terms of the contact.

21 February Intended commencement date of Princes Street works [CEC01032608, page 0002, paragraph 2.1]. Full traffic diversion measures were in place by this date [CEC00988034, page 00013.]

23 February Dr Keysberg of BSC wrote to Mr Mackay to say that the consortium was not demanding an additional £80 million from tie but was indicating that it considered that it would cost an additional £50 million to £80 million to complete the contract. The letter stated that starting work on Princes Street was not conditional on payment of these sums. The letter referred to the belief within tie that the Edinburgh Tram project (the “project”) was fixed price, and it said: “Nothing could be further from the truth.” [CEC01009884.]

5 March Mr Flynn of Siemens sent a document entitled ‘March 2009 framework concept mf’ to Dr Keysberg and Mr Mackay [DLA00002513;DLA00001455]. This suggested that the parties should identify five critical examples in the “country area” of the issue, concerning the move from base date design to Issued for Construction (“IFC”) design,

“and agree an equitable solution to enable work to commence on those items. E.g. agree direct works costs (assuming they are changes) until a solution is agreed on the preliminaries discussion.

“… Agree a pragmatic working solution within the contract to the … ‘I need an estimate before I can agree it is a change’ … vs … ’you must agree it is a change before I give you an estimate’.”

17 March Mr Swinney and Mr Stevenson, both of whom were Ministers in the Scottish Government, had a meeting with Mr Mackay (recorded in email of that date: TRS00016931]. Mr Swinney expressed the view that the contract was in a bad place and that public confidence needed to be restored. Mr Mackay confirmed that he was working towards that.

20 March The first supplementary agreement was signed, stipulating that works should commence on 23 March [CEC00334456].

29 May The second version of the supplementary agreement was signed [CEC00302099].

Scope of the dispute

16.2 Perhaps the most immediately striking fact from the above chronology is the apparently small sum of money that was in dispute. Taken in isolation, it would not have been expected to bring matters to a halt. In reality, however, the issues went beyond the agreement of the particular change. It is necessary to take into account the difficulties and disagreements that had occurred when BSC attempted to carry out works on Leith Walk.^[21]
The essence of the dispute lay in the issue of whether it would be practicable to implement the contract terms at all in relation to works to be carried out on existing roads. As would be expected, the picture presented by the evidence of witnesses from tie was very different to that presented by the BSC witnesses.

tie witnesses

16.3 Mr Mackay led the tie team in relation to the discussions on the dispute. He was of the view that the refusal to work on Princes Street was a deliberate tactic on the part of BSC to bring tie and City of Edinburgh Council (“CEC”) to their knees [PHT00000038, page 104] and that the reference to the bus lane was a “red herring” [ibid, pages 158–159]. In his view, BSC wanted to change “the fabric of the contract” [ibid, page 95]. In particular, his view was that for on-street works BSC wanted to move from the payment terms specified in the contract to payment based on its costs. Mr Mackay said that BSC was indicating an intention to claim in respect of unforeseen ground conditions and utilities not being where it had thought they were, but he was of the view that it had known of these matters when it had bid for the contract [ibid, page 141]. When considering this, however, it is necessary to have in mind that, in relation to Princes Street, rather than have the utilities cleared in advance to permit construction of the tram infrastructure, Mr Gallagher testified that the decision to carry out the infrastructure works and the Multi-Utilities Diversion Framework Agreement (“MUDFA”) works at the same time was taken consciously [PHT00000037, page 122]. This was a departure from Pricing Assumption 24 mentioned in paragraph 8.64 above that had been built into Schedule Part 4 (“SP4”). I consider that in taking such a decision, there ought to have been a realisation that such a departure from the contract would not only entail additional costs but might require different procedures under the contract to manage the Notified Departures that would inevitably arise. However, this was not done.

BSC witnesses

16.4 In the main, the witnesses from the consortium who were able to provide evidence on this were those from Bilfinger Berger (“BB”). That was to be expected, as the dispute fell within the ambit of its works rather than those of Siemens or Construcciones y Auxiliar de Ferrocarriles SA (“CAF”). The evidence from the witnesses indicates a number of problems over and above the retention of the bus lane. In addition to the fact (which was well known) that the MUDFA works were not complete at the time that the infrastructure works were to commence, there were concerns about ground conditions and that there were voids under the road [see, eg, Mr Foerder TRI00000095_C, pages 0014–0015, paragraphs 49–50].

16.5 Mr Walker’s view was that the background to the dispute consisted of the failure of tie to adhere to the “gentlemen’s agreement” that he had made with Mr Gallagher [TRI00000072_C, pages 0045–0049, paragraph 89]. He said that there had been an agreement in relation to Leith Walk and that tie had, in his words, reneged on that [PHT00000035, page 137]. Irrespective of whether there was such an agreement, there was clearly a concern that if works were carried out without an express understanding that they were additional, BSC might not be paid. He said that this was the reason for the decision to work strictly in accordance with the contract. This alone illustrates that, as commencement of the Princes Street works approached, BSC’s concerns about payment for work to be undertaken there were much broader than those restricted to the bus lane.

16.6 BSC’s concerns about payment for changes related to the contract generally, but there were others that arose specifically out of circumstances on Princes Street. Mr Walker said that the MUDFA works had not been completed and there had been changes from the Base Date Design Information (“BDDI”) [TRI00000072_C, page 104, paragraph 52]. Although Shandwick Place was not part of the Princes Street works, Mr Walker used it to illustrate BSC’s concern about utilities that remained after the MUDFA works had allegedly been completed and their effect on BSC’s ability to implement the Infraco contract. In the 700 metres of Shandwick Place there were 302 utilities within the designated working area that had not been moved, despite the MUDFA works being said to be complete. As noted above, tie had taken a conscious decision not to move utilities on Princes Street in advance of the Infraco works. In these circumstances, it was reasonable to assume that BSC would encounter utilities in its path, causing disruption to the programme of work in Princes Street. Mr Walker pointed out the practical difficulty that would have arisen had BSC attempted to work under the contract terms in this situation, when he said:

“[The supplementary agreement] was necessary because, as I described before, if we found an obstruction in one place, then we had to stop until we had it agreed and a TIE change order was received then we would proceed. It was so complex on the ground that 2 metres further down, approximately, you would hit another one, and you would stop again. It was just completely unworkable. The contract was the wrong contract.” [ibid, page 0058, paragraph 104.]

16.7 This concern that it would be impracticable to operate the agreement was evident also in the evidence of Dr Keysberg. He said that BSC knew that it would find “a substantial amount of utilities when we started to dig up the road” [PHT00000036, page 44]. He said that the delays to reach agreement as to each change could bring the city to a standstill [ibid, page 39], then works would resume until another change was found, at which point they would be at a standstill again. In the following passage of his evidence he illustrated the impracticability of implementing the terms of the contract in Princes Street when utilities had not been moved in advance of the construction works:

“[I]t would be a complete mess if we had to progress this under the contract regime by raising a Notified Departure for each and every change.” [TRI00000050_C, page 0018, paragraph 19(c).]

16.8 Mr Foerder said that it was clear to him that the dispute was about more than the bus lane. The bus lane issue was simply another example of tie failing to act in accordance with the contract that had been in existence for 10 months or more. During that time tie had been instructing whatever it wanted to instruct, without issuing tie changes and having no contractual basis for the instructions [PHT00000044, page 193]. Mr Foerder said that, in relation to the MUDFA works, the problems consisted of both works that had not been completed and those that had not been carried out in a way that would permit the infrastructure works to take place. Examples of the former included incomplete diversion of Scottish Gas network infrastructure at various locations, including the Mound; and of Scottish Water infrastructure at various locations, including the Mound, South St David Street to Waverley Bridge and a water main running the length of Princes Street. Issues relating to MUDFA also impacted upon infrastructure design and, consequently, Infraco works. For example, the Crawley Tunnel was uncovered at the foot of the Mound, with a water main running through it. Although its existence was known, its exact location and dimensions were not, and work relating to it had been overlooked in the MUDFA scope of work. When it came to light, Infraco had to develop options, re-design the works and implement Scottish Water’s preferred option [TRI00000095_C, pages 0017–0018, paragraphs 59–60]. Mr Foerder said that it was the combination of the position in relation to the MUDFA works and the requirement to keep a bus lane open that meant that BSC “couldn’t have worked properly” as it would not have exclusive control of the roadway [PHT00000044, pages 15–18]. He said that BSC was concerned that if it proceeded with these works without agreement as to the quantification of the impact of the changes, it would be in a very poor financial situation. BSC considered that the contract mechanism was being entirely neglected by tie [ibid, page 25]. Mr Foerder said that this was not a position that applied just in relation to Princes Street [ibid, page 15]. There were concerns as to the many changes that would be required to cope with the utilities that remained, which would mean that the work had to be done in smaller sections [ibid, page 22]. Its concern was that the approach in the contract would not have worked as it would have had to agree estimates for additional work each time an unresolved utility was identified. In addition, it might have been necessary to obtain approval of design changes resulting from the presence of unresolved utilities before calculating and submitting estimates to tie for approval [ibid, page 24].

16.9 BSC took the view that the effect of clause 80.13 of the contract was that not only was it not bound to start work where there were changes and the resultant costs had not been agreed, but that it was not entitled do so [see, eg, Mr Foerder TRI00000095_C, paragraph 79]. It was for this reason that it was able to refuse the direction of tie to commence work despite the absence of agreement as to costs.

Comments

16.10 The first issue to consider is the effect of clause 80.13 of the contract. In view of the wording of that clause, which had been inserted at the insistence of tie, I consider that BSC was correct in its view that it was not entitled to start works. It is significant, however, that such an issue could occur only when a Notified Departure arose under the contract – although it would not matter what had given rise to the Notified Departure. In February 2009, BSC was refusing even to start work, in the expectation that Notified Departures would arise. Even though I consider that such expectation was justified, it was an innovation on the contract to refuse to work until a new basis for payment was agreed simply on the basis of problems that were foreseen. In adopting this approach BSC was in breach of its contract with tie. In the context of Mr Foerder’s criticisms of tie and BSC’s insistence on applying the terms of the contract rigorously, it is ironic that BSC chose to act in a manner that was not consistent with the terms of the contract. Its conduct in this regard resulted in additional pressure on tie.

16.11 BSC’s concern was that Notified Departures would arise in such numbers that there would be difficulty in operating the contractual mechanism for agreement of change. I agree that the mechanism was complex and was unsuited to addressing the situation in which a number of Notified Departures might arise each day. By the time that the contract was signed, the way in which SP4 had developed meant that it should have been foreseeable that such a situation would arise. This was therefore undoubtedly a failing in the drafting of the contract but, as noted above, it should have arisen only where there had been an actual – as opposed to an anticipated – event giving rise to a Notified Departure from the contract terms.

16.12 The complex contractual mechanism for the agreement of change was not, however, the only problem. As will have been apparent from Chapter 15 (Contractual Disputes: May–December 2008), which considers the disputes that arose, the estimates for additional costs submitted by BSC were overstated and were sometimes significantly inflated. It may be said that it was hoped that the partnering ethos that was referred to in the contract [CEC00036952, Part 1, page 15, clause 6.1] would mean that this would not happen. If that was what was in mind, I consider that it was naïve and wholly unrealistic. Very substantial sums of money were at stake in the contract. Anyone in the legal teams or the tie management team with experience of disputes under contracts such as this one and the claims that were being made would have been aware that such claims are often overstated and that resolving them after the work has been carried out can take time, even when using the adjudication procedures now available. It should have been obvious that to expect to have such disagreement resolved before any works could be carried out would vastly prolong the works.

16.13 In view of the breadth of BSC concerns generally, the obvious question is why they emerged only as the Princes Street works were about to start. Mr Flynn claimed that it was not a deliberate strategy to focus the issues between the parties on a part of the construction with a high public profile [PHT00000045, page 120]. Dr Keysberg said that BSC did not raise its concerns only once the road was blocked and that it had told tie very clearly beforehand [PHT00000036, page 47]. There is no evidence at all, however, to support the view that BSC made it known to tie prior to the meeting on 9 and 10 February that it would not carry out works unless it was paid on a “demonstrable cost” basis. There had been no mention of that at the outset when Mr Brady attended the TPB in October 2008 and the need to keep a bus lane open was discussed. It was said that it could be accommodated, and there was no suggestion that it would lead to great difficulty [PHT00000038, pages 154–161]. Neither was any comment made to the effect that the position in relation to utilities would mean that the contract was unworkable. When questioned about it by counsel for the tie employees, Dr Keysberg agreed that Mr Sheehan’s email of 18 February 2009 was a demand to be paid on a “cost-plus” basis and that this was a change from the position that had existed for some months [PHT00000036, page 90]. I reject the claims of Dr Keysberg and Mr Flynn that the timing was not deliberate. The works to close Princes Street had been under way for some time by the time that BSC’s position was disclosed; and they had begun in January 2009 and were programmed to be complete by mid-February [CEC01053731; CEC00988024, Parts 1–2; CEC00988026]. In fact, it was not until 21 February 2009 that preparatory works were complete so that the traffic diversion could be implemented [CEC00573427, page 0013], but it would have been clear for some time that the closure was imminent. To give notice of just three days prior to the completion of the enabling works to create the traffic diversion was, to all intents and purposes, raising the issue only once the road was blocked. It would have been obvious to anyone that this put tie in a very disadvantageous position and exposed it to public and political pressure, at local and national levels, to resolve the issue. This may have informed Mr Mackay’s impression that tie was being “held to ransom” [TRI00000113_C, page 0077, paragraph 286]. I consider this in paragraph 16.16 below.

16.14 Mr Mackay said that in February 2009 there was a completely different attitude at BSC from that which had gone before [PHT00000038, pages 157–158 and 161], and I accept that assessment. He said that the demands found in the letter of 18 February had not even been raised at the meeting that took place on 17 February between tie and BSC. It had been referred to on 9/10 February but, as I note above, the fact that the question posed by tie at the meeting on 17 February was answered only by an email the next day suggests that the position of BSC was still developing and hardening. I accept that this must be seen against the background that, in December 2008, BSC had decided that it would not carry out works to implement a change in the absence of agreement as to costs. Nonetheless, I conclude that the position of BSC had developed from December 2008 such that, by 18 February 2009, a decision had been made to take a hard line not only in relation to agreement as to the overheads arising out of the bus lane and implementation of the notified change, but also in relation to all costs that would arise from the Princes Street works. I consider that, by then, it was obvious to BSC that there were many utilities remaining in Princes Street that would clash with the works that it was to carry out. The existence of these utilities would give rise to a Notified Departure in terms of SP4, and the decision was made to press this issue prior to implementing works and actually encountering the remaining utilities even although it had not been canvassed in any detail in the correspondence leading up to this point.

16.15 In his evidence, Mr Foerder said that, had a notice been given under the contract that would have entitled BSC to the additional costs arising from the bus lane, it would have started work [PHT00000044, page 25]. That is inconsistent with the notice that had been issued on 12 January. It is also inconsistent with BSC’s position, which emerged in mid-February, that it was necessary that costs were agreed before a notice would be implemented. In addition, having regard to his evidence as a whole and his expressed concerns about the other problems on Princes Street, I consider that the decision of BSC was entirely unrelated to the existence of a notice or its belief as to its existence. This dispute was clearly about more than a bus lane. The question is: why did it erupt when it did? Although Dr Keysberg considered that all “the reputational damage” from a blockage of Princes Street would lie on BSC [PHT00000036, page 48], I consider that it would have been obvious to BSC that a situation in which Princes Street had been closed but no works were being carried out would put great pressure from retailers and the public generally on CEC and from CEC on tie. This would give BSC the upper hand in any negotiations as to the basis for payment. I agree with the suggestion by tie that the timing was deliberate so as to cause maximum embarrassment to it with a view to providing the most favourable outcome for BSC. In this regard, it largely succeeded. Faced with media pressure and directions from the Scottish Ministers and CEC, tie had little alternative but to give in to the demands of BSC, as I consider below.

16.16 Mr Mackay used the emotive expression of being “held to ransom” to describe what was being done [TRI00000113_C, page 0077, paragraph 286]. Mr Jeffrey stated that, at a meeting in July 2009, Dr Keysberg had observed: “this contract allows us to hold you to ransom” [PHT00000032, pages 63–64]. While this was later than the commencement of the Princes Street dispute, it provided Mr Jeffrey with an insight into the strategy that had been, and was being, adopted by BSC. Dr Keysberg denied making such a comment, but I accepted the evidence of Mr Jeffrey in this regard. He was a more impressive witness than Dr Keysberg, and I formed the impression that he was credible and reliable. He had no reason to fabricate evidence – and the comment reflected the position of BSC, as will be explained below. However, any connotation of impropriety or illegality implied in Mr Mackay’s comment overstates matters in what is, at its heart, a commercial contract in which each party is entitled – and may be expected – to put its own interests first. While BSC may have taken advantage of the situation to create and press an advantage, it is remarkable that tie appeared to sleep-walk into it. tie’s response when the dispute arose tends to show that there was little understanding of the contract mechanisms and no real grasp of the scope of the problem that existed. Waiting until the matter had crystallised on the most prominent street in Edinburgh put tie in the worst possible negotiating position. In view of the difficulties that arose in relation to Leith Walk and the demands for payment that were made there, tie should have had some awareness of the problem. With such an awareness, it could – and should – have developed a strategy as to how it could be addressed in a way that would protect the interests of tie/CEC. This was not done.

Intervention by the Scottish Ministers

16.17 As was noted in Chapter 3 on the involvement of the Scottish Ministers in the project as a whole, Mr Swinney asked to meet Mr Mackay and, at that meeting, told him to “get it sorted” [PHT00000038, page 96]. Mr Mackay said that he was reluctant to give BSC more money and did not consider that that could be justified but that, in light of the comment made to him by Mr Swinney, he suggested to Dr Keysberg that Princes Street could be dealt with on a “demonstrable cost” basis as a one-off situation [ibid, page 97; TRI00000113_C, page 0079, paragraph 291]. It is not surprising that BSC accepted this proposal because, as can be seen from the chronology above, it was something that had been demanded by BSC before the meeting between Mr Swinney and Mr Mackay.

16.18 When questioned about it during the Inquiry, Mr Mackay was not clear how tie had got to the stage of offering to pay for all the work on a “demonstrable cost” basis when the only dispute in terms of the documentation concerned approximately £1,500 in relation to the bus lane [PHT00000038, pages 107 and 140]. Mr Mackay noted, however, that the dispute was about more than that. It appears also that he was influenced by the claim by BSC that the works as a whole would cost an additional sum of £50 million to £80 million [ibid, page 144]. In contrast, Mr Walker denied that it was ever represented that agreement of this additional sum was a precondition for commencement of works on Princes Street, and I accept his evidence on this point. Nonetheless, it is understandable that when considering demands to change the basis of payment under the contract, Mr Mackay would be concerned at such estimates.

16.19 The meeting with Mr Swinney was not the only involvement of the Scottish Ministers. On 26 February 2009, just as the dispute was developing, Mr Stevenson wrote to Councillor Dawe, the leader of CEC, to seek reassurance that there would be early settlement [included within CEC01891494, page 0006]. Mr Stevenson said that in doing so he was:

“simply trying to make sure my political opposite numbers, in the Council, remembered the nature of the commitment we had made to the project. I think that is what I read when I read my letter of 26 February 2009.” [TRI00000142_C, page 0054, answer 116.]

16.20 I disagree with his characterisation of his intervention; it was an overtly party political act. It is hard to see any purpose in sending that letter that is either legitimate or appropriate. It represents nothing more than political point scoring and could serve only to exacerbate matters by raising the tension. Mr Stevenson was not even in a position to indicate in his oral evidence to the Inquiry what his state of knowledge had been at the time or what information he had relied on. Perhaps recognising this, he sought to play down the point scoring against CEC by saying:

“It is therefore quite reasonable that we should seek to make common cause with the City of Edinburgh Council against Bilfinger Berger who were just sitting on their hands not doing anything, because that was what the letter was about.” [ibid, page 0055, answer 119.]

16.21 There are a number of problems with this assertion. The most striking is that the letter that he had sent was not, on any reasonable reading, making common cause with the CEC. The reference to the wish of the Scottish Ministers having been defeated by other political parties gives a much better indication of the nature of the letter. The more fundamental problem with Mr Stevenson’s statement, however, is that it is not clear what standing the Scottish Ministers had to intervene. They had quite deliberately stepped back from taking a position that would have given them a role in the management of the project, and then, at the first sign of a significant problem, they sought to give directions as to what should be done. Mr Stevenson’s suggestion that the purpose of his letter was simply to make sure that “we do not, as politicians of different political parties, head off in different directions” [ibid] lacks any credibility. It is therefore highly ironic that he claims that adding other parties to a negotiation would only cause difficulty [ibid, page 0058, answer 128]. He appears to be unwilling to adopt his own advice.

Outcome and aftermath

16.22 There were two versions of the Princes Street Supplemental Agreement (“PSSA”). The first was signed on 20 March 2009, but only on behalf of tie and BB [CEC00334456]. The second version, identical to the first, was signed on 29 May 2009 by all four parties to the agreement – namely tie, BB, Siemens plc and CAF [CEC00302099; Mr Foerder PHT00000044, pages 28–29]. I presume that the error in execution of the first version of the agreement was attributable to the fact that BB was the only member of the consortium involved in the Infraco works on Princes Street at that time. The PSSA stipulated that works should commence on 23 March. The immediate consequence of the PSSA was that works started on Princes Street on that date, but it appears that there were adverse consequences in the longer term.

16.23 The PSSA represented a concession by tie that the works in this location would be carried out on the “cost-plus” basis of payment that had been requested by BSC. The rates that would be paid were specified in the PSSA, but BSC would be entitled to payment for all the time taken. This meant that it was not necessary to reach agreement as to the existence of changes or the value of the work that would be required to implement them. Advice sought by Mr Ramsay, on behalf of Transport Scotland, from Dundas & Wilson (“D&W”) noted that there was no fixed-price element at all in the works in the PSSA [PHT00000012, pages 224–228]. Even if taken in isolation, this indicates how far matters had come from the intentions that underlay the procurement strategy and the contract negotiations. It was a departure from what had been one of the fundamental precepts of the procurement strategy.

16.24 Apart from requiring the Infraco contractors to commence work in Princes Street on 23 March, clause 5 of the PSSA also required them to “submit a construction programme to demonstrate the intended progress of the Princes Street Works within 7 days” [CEC00302099]. The construction programme that was submitted showed works commencing on 23 March 2009 and running all the way through until March 2010 without a break for either the Festival or Christmas. However, not long after work commenced, tie and its stakeholders made it clear that Princes Street would need to re-open to traffic on 29 November 2009 for the Christmas season. Infraco contractors were instructed to take whatever action was required to achieve that opening date, including working 24 hours per day and 7 days per week [Mr Foerder PHT00000044, pages 35–36; TRI00000095_C, pages 0016–0017, paragraph 57]. This change necessarily increased the cost of the Princes Street works but, more significantly, I consider that it illustrated the mismanagement of the contract by tie and CEC, both of whom, before concluding the PSSA, ought to have considered the need to open Princes Street for Christmas trading. If the earlier opening date had been stipulated at the outset, planning could have been undertaken to consider the available options, which might not have included the expense of working for 24 hours each day, such as completing smaller sections of Princes Street that would enable it to be re-opened during the festive season.

16.25 When the concluded PSSA was presented to the TPB at the meeting on 15 March 2009, Mr Bell is recorded as having said

“that there will be no increase in liability to tie, compared to that previously, and that there is no material difference in the way costs would have been agreed.” [CEC00888781, page 0009.]

16.26 Mr McGarrity said the same to Mr Ramsay [PHT00000013, page 9], and Mr Ramsay, in turn, reported within Transport Scotland that it would not involve paying BB any additional monies [TRS00016963, paragraph 2]. As well as being important for the purpose of managing the budget, this was relevant to the law of procurement. A variation of the terms of the contract to entitle the contractor to a price greater than that stated in its bid could render the procurement process unlawful. As the law stood at that time, this could have opened up the possibility of the disappointed bidder challenging the contract or seeking damages. A report dated 22 April 2009, to CEC from Mr David Anderson and Mr McGougan, noted that the PSSA represented no further transfer of risk to the public sector [CEC02083772, page 0002, paragraph 3.3]. Mr McGougan explained that the risk of increased cost associated with ground conditions had always remained with tie/CEC so that it had always been anticipated that the contract price for the Infraco works, including those in Princes Street, would increase as a result of unexpected ground conditions. The increase would be offset by the risk allowance for such a contingency. This view that no further risk was being passed to tie contrasts with the evidence from Mr Mackay that within tie there was an awareness that the costs under the PSSA would be very much greater than the sums initially talked about in February 2009. Mr McGougan was correct to note that, in terms of the contract as it had been signed, there would have been a claim for additional costs in respect of many Notified Departures and that there was therefore already a liability on tie in addition to the “fixed” contract sum. The question was the size of this pre-existing liability and how it compared with the sums that became payable under the PSSA. Mr Murray said that a lot of work was carried out before the agreement to assess the likely liability that it would generate. He noted, however, that it was difficult to determine what the original contract price was for this element of the works [TRI00000249, pages 0008–0009, paragraph 17].

16.27 On any view, however, the sums payable under the PSSA were greater than would have been paid under the Infraco contract if the changes had not arisen and were greater than had been anticipated when the PSSA was signed. In an email in December 2009, Mr Jeffrey noted: “We have now completed Princes Street, but at vast expense, and way over budget. (do we know how much?)” [TIE00032413]. The precise amount of the additional cost is not clear. Mr McGougan noted that the amount in the contract for Princes Street was £2 million, but the cost rose to £11 million [TRI00000060_C, page 0072, paragraph 190]. Mr Poulton said that costs were £9 million greater than they would have been under the contract, although “elements” of this would have been payable in any case [TRI00000115_C, page 0048, paragraph 220]. An email from Mr Rush to Mr Fitchie sent in April 2010 referred to costs increasing from the original £2.8 million to a sum between £8 million and £13 million [CEC00445284]. Dealing with the estimates for the works, Mr Coyle noted that the anticipated costs under the PSSA were £8.3 million compared with the £3.7 million that was the sum in the original contract [TRI00000144_C, page 0059, paragraph 62]. Whatever difficulties Mr Murray considered there were in making an assessment of contract costs prior to the PSSA, they are much greater now. It is simply not possible for me to make an estimate of what the costs would have been had there been no PSSA and each Notified Departure had been priced and paid for in terms of the Infraco contract.

16.28 Even although the PSSA resulted in a net increase in cost allowing for risk transfer, it might nonetheless have represented good value for money had it resolved the problems that were inherent in the contract. The problem was that it did not do so. Mr Ramsay noted that advice from D&W regarding the PSSA made the following comments:

“[It] does not finally resolve any of the underlying issues and may have opened the way to further disputes not necessarily limited to the matters originally in dispute. It is not evident that this agreement offers a sound basis upon which the parties can develop a commercially agreed recovery programme. It would certainly not be a good precedent for the final documentation.” [PHT00000012, page 227; TRS00031282.]

16.29 The impact of the PSSA would at least have been limited had the justification for it been the need to provide a bus lane or in some other respect it had related solely to Princes Street, but that was not the case. Both parties were aware of the underlying issue of the incomplete MUDFA works.

16.30 From the start of 2009, BSC did not carry out any on-street works under the standard payment terms specified in the contract [Mr McGarrity TRI00000059_C, page 0287, paragraph 30 and page 0319, paragraph 36; Mr Jeffrey PHT00000033, page 77]. The Princes Street on-street works were carried out under the PSSA. Some other on-street track-laying works were carried out under instructions issued under clause 80, which meant that BSC was entitled to agreed additional sums. Mr Foerder gave evidence that on-street works were carried out at Lindsay Road retaining wall, Victoria bridge and Tower Place bridge on a “goodwill basis” [PHT00000044, page 119]. These were works to produce new structures rather than to lay tracks [Project Director’s Report, April 2010, CEC00420346, page 0013]. Mr Foerder recognised that no track was actually installed from Haymarket to the west end of Princes Street or from the east end of Princes Street to York Place under the Infraco contract terms [PHT00000044, page 120].

16.31 Mr Mackay explained in evidence that, not long after the PSSA was signed, the idea of a supplemental agreement covering all on-street works was raised by BSC [Mr Mackay PHT00000038, page 109]. The main events in relation to this may be summarised as follows.

(a) At a meeting in May 2009, representatives of BSC said that they would not be starting any more on-street works unless they had a supplementary agreement similar to the PSSA. BSC said that it would contest every part of the contract change mechanism and that it could take six months to resolve each dispute [TIE00033088].

(b) In an email of 31 July 2009, Mr Jeffrey said that he had met Mr Foerder the previous day, when Mr Foerder had said that BSC would not start any on-street works without a supplemental agreement, which would affect the start date for works at Shandwick Place and Leith Walk [CEC00667242].

(c) On 30 July 2009, Mr Foerder sent a “final settlement” proposal to tie [TIE00031089]. In addition to terms that entailed payment to BSC for delays to the contract and a mechanism for assessing claims for changes from BDDI to IFC drawings, it required that there would be an agreement that all on-street works would be carried out on a “cost reimbursable” basis.

(d) On 4 August 2009, Mr Jeffrey rejected Mr Foerder’s proposal [TIE00033401].

(e) By letter dated 6 August 2009, BSC again indicated that it would not work on Shandwick Place without a supplementary agreement [TIE00088884]. This letter is ambiguous in that, in part, it appears to be directed to raising concerns that the PSSA is insufficiently broad and that it will have to be amended. Nonetheless, the letter clearly identified the same issue as existed before: that the IFC drawings contained changes from the BDDI drawings and that this required a Notified Departure. It said that, on that basis, BSC was not in a position to undertake works at Shandwick Place.

(f) Representatives from tie and BSC met on 6 October to explore the possibility of using the PSSA as the basis for a wider On-Street Supplemental Agreement (“OSSA”). It appears that there may have been some irritation on the part of BSC that it was not going to get the additional agreement that it believed had been within its grasp [Mr Walker TRI00000072_C, page 0064, paragraph 113].

(g) At the TPB meeting on 21 October 2009, Mr Bell reported that BSC was refusing to carry out on-street works unless it was provided with a “cost–plus” agreement. The minutes of the meeting envisaged that a new on-street agreement would be brought before the TPB meeting in November [CEC00681328, page 0009].

(h) The minutes of the November meeting of the TPB record that discussions to reach an OSSA were continuing. This approach was approved by the Board and it shows that, in principle, tie was willing to concede the position [CEC00416111 page 0007].

(i) In February 2010, BSC proposed an OSSA. This would have entailed that all the on-street works would be carried out on the same basis as the works in Princes Street – on a “demonstrable cost” basis. This was said to be justified by the lateness of the MUDFA works on all street sections [Mr Foerder TRI00000095_C, page 0055, paragraph 170]. This proposal was rejected by tie.

(j) The minutes of the TPB meeting on 10 March 2010 record that the terms that BSC sought to impose had been rejected [CEC00420346].

16.32 As is noted above, at the time of the Princes Street dispute, Mr Mackay had been reluctant to enter into a new agreement. When he did so, he considered that it should be strictly a one-off agreement [PHT00000038, page 109]. Nonetheless, as disputes accumulated (see Chapter 17, Adjudications and Beyond) and it was clear that virtually no progress was being made under the contract with the on-street sections of work, the idea of a further agreement obtained some traction and a draft was prepared. Within tie there was recognition that, in the absence of an agreement such as the PSSA for other on-street works, it would be difficult to get the infrastructure built. For example, Mr Bell said that it would be impossible to build the tramway through the on-street section of the city with the existing Infraco contract [TRI00000109_C, pages 0139–0140, answer 110]. All this is recognition that, as it was drafted, the contract was not fit for purpose. Nonetheless, it was also recognised that a new agreement akin to the PSSA in respect of other on-street sections would move risk to tie, would increase costs and would be inconsistent with the public procurement exercise that had been undertaken. As is noted above, this could lead to a challenge from the unsuccessful bidder and a claim by it for damages.

16.33 The fact that it was necessary to conduct on-street works prior to removal of the utilities was a failure in the intended contract methodology and a departure from the basis on which the works had been procured. This failure had an immediate and expensive effect on the works. The issues that arose in relation to works in Leith Walk and Princes Street disclosed the potential for the contract wording to produce a situation in which a minor dispute would mean that the works could not proceed. If BSC said that there was a Notified Departure, tie was unable to compel BSC to carry out the works until agreement was reached as to whether there was a change and, if so, its financial consequences. The scope for delays resulting from this should have been apparent to tie and CEC before the contract was signed. It should have been the subject of advice from DLA at that time. Despite this, nothing was done to address it and, although the PSSA meant that the works were carried out, the problem remained. Indeed, in that tie had acceded to the demands of BSC to make payment on a “demonstrable cost” basis in order to get the works done, it is reasonable to conclude that the positions of tie and CEC were now materially worse. This was the first real test of the contractual arrangements, and they were found wanting from the tie/CEC perspective.

16.34 Having regard to the limited on-street works before the Princes Street dispute, the manner in which the matter was raised in relation to Princes Street, the conduct attempting to secure an OSSA and the absence of further on-street works, the issue arises as to whether BSC ever intended to carry out on-street works under the contract provisions. If they did not, it would be consistent with Mr Walker’s claim that his position had always been that the price would be £50 million to £80 million greater than the contract price. On balance, however, I do not consider I am in a position to reach that conclusion.

Footnote

21. See paragraphs 15.15–15.20. ↵