Navigation

Chapter 17: Adjudications and beyond

Adjudications and beyond

17.1 By mid-2009, the Princes Street Supplemental Agreement (“PSSA”) had made it possible for works to get under way, but it had not resolved the underlying issues between the parties. The PSSA made provision for the creation of a Project Management Panel (“PMP”) to “monitor implementation of the Infraco [“Infrastructure contract”] Works as a model for momentum on progressing the Infraco Works” [CEC00302099, page 0004, clause 3.5]. What this means is not immediately clear, but it appears that it was intended to provide a forum to address the issues between the parties. It was duly established and met on a number of occasions. Initially it appeared that progress was being made even though it was apparent that there were issues outstanding [minutes of Tram Project Board (“TPB”) meeting on 3 June 2009, CEC00983221, page 0007]. Nonetheless, by the start of July 2009 it was apparent that the issues at the heart of the disputes between the parties – in particular, those concerning changes – remained outstanding [minutes of TPB meeting on 8 July 2009, CEC00843272, page 0007]. As a result, there was a meeting of senior directors of the parties on 22 June 2009, at which the point was made that work would not progress in a satisfactory manner while the core commercial disagreements remained unresolved [CEC00783725, page 0006]. There was then a week of mediation in June 2009 [Mr Jeffrey TRI00000097_C, page 0019, paragraph 121]. This exercise also failed to achieve a breakthrough, however [CEC00376412, page 0015], leading Mr Jeffrey to inform Bilfinger Berger, Siemens and CAF (“BSC”) that tie Limited (“tie”) might pursue a more formal approach [CEC00843272, pages 0007–0008]. This chapter considers the actions taken in pursuit of that approach.

Contract provisions

17.2 In common with most contracts for large construction projects, Schedule Part 9 to the Infraco contract contained a number of formal procedures by which disputes between the parties might be addressed [USB00000045]. These covered a range of degrees of formality. Initially there was a requirement for a meeting between representatives of the parties. If that did not work, the matter could be escalated to preparation of position papers and meetings of the chief executives of the parties; and if that did not achieve resolution, only then was there was the option to proceed to mediation, adjudication or litigation. A number of disputes on key issues were taken to adjudication, so it is appropriate to consider briefly what this entails. It is a procedure very familiar to those who work with building contracts. The Housing Grants, Construction and Regeneration Act 1996 had made it mandatory that some form of adjudication procedure be included in any construction contract. It is intended as a procedure by which a decision on a disputed matter will be provided by an independent third party. That third party need not be a lawyer, and decisions are often made by engineers, architects, surveyors and others. The dispute could be of a factual nature but can also include the interpretation of the contract and the manner in which it should be applied to the facts. The decision is made within a short timeframe and, once made, it is immediately enforceable. It is not, however, a final disposal of the issue. It is open to either party to raise the matter later in a court action or in an arbitration. If that is done, the decision of the adjudicator has no binding force in those proceedings: the parties, in essence, start with a clean slate. The option of disputing the decision in further proceedings can, however, be removed by agreement, and that was done in the contract that emerged from the Mar Hall mediation, which I will consider in Chapter 19 (Medation and Settlement).

Decisions in February and March 2009

17.3 In order to understand fully the decisions that were taken once the post-PSSA mediations broke down, it is necessary to go back to the time when the Princes Street dispute had first emerged. Two formal dispute resolution procedures were instigated on 19 February 2009 [presentation to TPB for 11 March 2009, CEC00933351 and the Paper on Dispute Resolution Procedure submitted to the tie Board and TPB, CEC01001220, page 0003]. One concerned the failure to agree the estimate for the costs of the tie change consisting of retention of the bus lane, and the other concerned the issue of whether BSC was obliged to commence work on the basis of the notice that had been given. Following the commencement of those procedures, the tie Board and the TPB requested that they be given an analysis of the options that were available to them in view of the situation that had developed. They wanted to know the options available to them to achieve various objectives, including minimising delays and resolving disputes.

17.4 In response to the above request, a paper to the tie Board and TPB for the meetings on 11 March 2009, prepared by Mr McGarrity, firmly recommended that matters should be pursued through the contract dispute resolution procedure (“DRP”) [CEC00933931]. The view expressed in the paper was that this

“demonstrates our determination to preserve the terms of the contract we have agreed, exposes the failures of Bilfinger to perform to other members of the consortium and helps minimise further delays as we can instruct the commencement of work whilst matters are being pursued through DRP” [ibid, page 0001].

17.5 The paper accepted that “[a] prolonged DRP campaign” was unlikely to be in the interest of either party. The strategy proposed was to use it as a means to an end, “to force a more constructive resolution of issues in accordance with contract” and to achieve greater cost certainty [ibid]. It recognised that this would require a change in the contractual positions that had been adopted by Bilfinger Berger (“BB”) and expressly contemplated that it might be removed as the civil engineering partner within the consortium and replaced with another contractor. The paper considered but discounted the options of terminating the Infraco contract, tie stepping in to take over BB’s role and negotiating a settlement of the contractual disputes and programme. It noted that the last option was what BB wanted and would involve working on a “cost plus” basis [ibid, page 0002]. Significantly for what was to follow in 2011 when the parties had reached deadlock and undertook mediation, this paper also considered the possibility of truncating the line. Various different points at which the line could be terminated were considered. Termination at York Place/Picardy Place was one of the options considered, but the conclusion in respect of it was that it would mean the loss of both economic benefits and the opportunity to carry high volumes of passengers and reduce bus traffic volumes.

17.6 A further paper [CEC01001220] for the same meetings on the DRP noted that tie was preparing for a series of “surgical” applications of the DRP. The items to be referred were said to be ones with a strong likelihood of success, were “blockers” that were holding up work and items of particular commercial/contractual significance. This report referred to the issues relating to Princes Street that had been referred to the DRP and, applying the criteria in paragraphs 2–3 of the report, it stated:

“the next tranche of items being validated at present is highlighted below:

  • Application and calculation of Preliminaries.

(This impacts the agreement of all changes across the works, even if the direct cost is already agreed.)

  • Base Date Design Information (BDDI) definition.

(Base building block to measure changes from and BSC are trying to redefine certain drawings and hierarchy. Particularly relevant as a precursor to the likely dispute over design development and changes from BDDI to IFC [“Issued for Construction”])

  • Inclusion of Hilton Hotel Car Parks works with the Construction Work Price and therefore not a change.

(A straightforward disagreement over whether it qualifies as Accommodation Works (a provisional sum drawdown) or in included in the Works price. This has broader application.)

  • Edinburgh Park INTC 091 Estimate.

(An incompetent and grossly inflated estimate submission.)

  • Evaluation of Costs associated with V26-V31 agreed extension of time entitlement.

(Time already agreed and goes to the basis of all future Preliminaries calculations for any legitimate extension of time)” [ibid, page 0003 paragraph 4].

17.7 The report did expressly note that the outcome could be success for Infraco rather than tie. However, tie did not consider that to be a high risk in the case of issues already referred to the DRP or those under active consideration for referral, but “it should be considered as a possibility” [ibid, page 0004, paragraph 7]. It was stated that the possibility of losing had been mitigated by careful choice of disputes and that there would be challenge internally and by DLA Piper Scotland LLP (“DLA”) as well as engagement with the Tram Monitoring Officer and City of Edinburgh Council (“CEC”). At the 11 March meeting, the TPB supported the DRP approach and programme as set out in the report [CEC00888781, page 0005, paragraph 3.3].

 

 

Decisions by tie in July–September

17.12 As is noted in the minutes of the meeting of the TPB on 8 July 2009, Mr Jeffrey met Dr Keysberg and Dr Schneppendhal on 6 July 2009, to tell them that tie considered that it had no option but to pursue a more formal route [CEC00843272, page 0007]. Although this and the discussions at the March meetings referred to in paragraphs 17.4–17.7 above appear to indicate a concluded intention to proceed to adjudication, the decisions of the TPB after the meeting indicate that the issue was in fact still one for discussion. At the joint meeting of the TPB and the tie Board on 8 July 2009, Mr Jeffrey identified four options to address the problems with the Infraco works [CEC00783725; CEC00843272, page 0008).

1 Reaching a negotiated settlement with BSC.

2 Taking the formal contractual approach. The presentation indicates that the first element of this was to “[p]rogress selected issues through formal DRP process to adjudication – prioritised to the high value, risk and delay items and keeping a focus on the detail” [CEC00783725, page 0010]. It was also the intention that BSC would be instructed to implement changes in the meantime.

3 Reducing or re-phasing the scope of BSC works.

4 Ending the BSC contract.

17.13 Mr Jeffrey was perhaps well placed to present a review of this nature, as his involvement with tie post-dated the March discussions, having joined tie only three months earlier, and having first attended the TPB on 6 May 2009 [CEC01021587, page 0005]. His lack of involvement with the conclusion of the contract meant that he was in a position to provide some objectivity. His recommendation to the Board was that it pursue the second option of taking the formal measures under the contract. One of the reasons for recommending this option was that it would “[f]orce the hand of the consortium partners – Siemens and CAF – if replacement of BB in consortium is ever contemplated” [CEC00783725, page 0011]. The TPB agreed to pursue Option 2, but said that more information would be required before formal notices were issued to BSC [CEC00843272, page 0008].

17.14 In light of the decision to pursue the second option, Mr Bell stated to the meeting that a presentation would take place, within two weeks, on the matters that could be taken to adjudication. The Inquiry has not found a record of any such presentation within two weeks of 8 July, but three weeks later there was a further meeting of the TPB. In the presentation to that meeting on 29 July Mr Jeffrey indicated that 15 items had been identified for DRP referral and that these would be split into five tranches. The first tranche included the first extension of time claim and a dispute about the Hilton Hotel car park. The second tranche concerned Gogarburn bridge and Carrick Knowe bridge, and the third tranche included the Russell Road bridge. Four of the disputes related to BDDI – the issue of whether changes to the design after November 2007 meant that BSC was entitled to additional payment – and two of them concerned extensions of time sought by BSC to carry out the works. The presentation noted that a “challenge team” was in place and that its function would be to scrutinise the strength of each case and test it for weaknesses [CEC00791514, page 0016].

17.15 The presentation to tie and the TPB on 29 July set out the pros and cons of the DRP option [ibid, page 0011] and it is clear from the minutes of the meeting that Mr Jeffrey made it clear that this option was not risk-free [CEC00739552, page 0009]. The position was stated more strongly in the minutes of the August meeting, where there is a note that Mr Jeffrey stressed that 100 per cent success in each matter considered was highly unlikely [CEC00848256, page 0008]. Despite this, neither the papers given to the meetings nor the records of discussion at the meeting contain any consideration of the position that tie would be in if the decisions went against it, and there is no consideration of what options would remain open in that situation. In the July minutes there is a statement that the DRP process need not play out to a conclusion and that the parties could reach agreement at any stage, but there is no consideration of what would happen if agreement was not possible and tie, for any reason, wanted to withdraw. It should have been apparent to those making the recommendations that any unilateral abandonment of the procedure would be seen as a capitulation in relation to the issue in dispute and that the position of tie would thereby be weakened. This should have been brought to the attention of the TPB and taken into account by it in making its decision.

17.16 The decision to instigate DRPs should be seen in its context. It was taken against a background of very little progress having been made in getting any Infraco works done. In the Project Director’s Report to Transport Scotland in July 2009 is a table that discloses that although it was planned that, by that time, 55 per cent of the engineering works required over the whole route should have been done, only 5.7 per cent had been completed [CEC00843272, page 0058]. It is therefore easy to see that there may have been a hint of desperation in the choice to pursue DRP.

Challenge team

17.17 One of the papers for the March meeting had stated that internal challenge was one of the means to mitigate the risk that tie might lose in any disputes referred to DRP and, as noted in 17.14 above, the presentation to the meeting on 29 July noted that each case to be referred to DRP would be scrutinised. To this end a panel was established and, in addition to personnel from tie and existing legal advisers, a solicitor new to the Edinburgh Tram project (the “project”), Mr Nolan, was brought in. He was a partner in McGrigors and he explained that his role was not to consider the legal advice that had already been given but to view matters with a “fresh pair of eyes” [PHT00000046, page 118].

17.18 Mr Nolan said that the first challenge meeting he attended was in August 2009 and related to the dispute in relation to Gogarburn bridge. The issue in that dispute was whether the differences between the BDDI drawings and the IFC drawings amounted to a Notified Departure, giving BSC an entitlement to additional payment. In large part, this turned on the meaning to be given to PA1 in SP4. In a paper prepared after he had attended the first challenge session, Mr Nolan stated that the answer to the issue would turn on the facts [CEC00805685]. This was because the dispute was presented to him on the basis that whatever changes there were did not amount to changes of “design principle, shape, form and outline specification”. If that was the position, there could be no departure from PA1 and the question of normal design development would not arise. If that was the view being taken, it begs the question why the dispute was being referred to DRP. If the outcome depended entirely on the facts, it would not be capable of establishing a precedent that would be useful in other instances. In fact, despite the presentation to Mr Nolan, the arguments that were before the adjudicator assumed that there had been a change that engaged the terms of PA1 and strayed well into the more fundamental issues between the parties concerning interpretation of the contract. These are considered further below.

17.19 Although, on the hypothesis on which it was presented to him it did not apply to the Gogarburn dispute, Mr Nolan recognised that if PA1 were to be given its literal meaning, the fact that a change in design principle, shape, form and outline specification, etc., arose from normal design development, would not prevent it from constituting a Notified Departure such that BSC was entitled to additional payment. He said that he raised this at the session but that Mr Bell took the view that the change from BDDI to IFC that it was considering did not fall foul of the words at the end of PA1 because it would not amount to a change of design principle etc [PHT00000046, page 127]. Again, this approach appears inconsistent with the rationale for pursuing the formal contractual approach as expressed in the meeting of 29 July. It would leave unresolved the real issue between the parties, and which was holding up the works. It also did not reflect the argument that was actually presented. I return to this below.

17.20 What was Mr Fitchie’s position in all this? Mr Nolan said that Mr Fitchie attended the challenge sessions [ibid, page 119], but Mr Fitchie made no reference to them. These were sessions to consider whether to initiate contract procedures with a view to getting a decision in favour of tie. Clearly, the decision to do this had to proceed on the basis that its arguments were “correct” and would be preferred by the adjudicator. According to Mr Fitchie’s written and oral evidence to the Inquiry, he was of the view that there was a problem in the wording of the contract and that the cost risk arising from development of designs had not been transferred to BSC. Although he was very evasive when questioned about this, when I asked him directly he said that his view was that any development from BDDI would entitle BSC to seek a variation [PHT00000017, pages 166–167]. Even if, for some reason, it had not been done earlier, the challenge sessions would have been the point at which to make his views on this clear. A process was being started which would lead to decisions which were intended to shine a very bright light on the issue of interpretation of PA1. Mr Nolan even said that he discussed the issue of interpretation of PA1 with Mr Fitchie and that he said nothing to the effect that he considered that there were dangers for tie in these provisions [PHT00000046, page 128].

17.21 A retained legal adviser who was aware of his client’s interests and was of a view that a course of action which the client was proposing to take would lead to an outcome adverse to the client’s interest or was likely to do so would be bound to bring that to the client’s attention. The client might disagree with that opinion or might decide that for various reasons it wished to proceed nonetheless, but that does not remove the obligation to advise. Mr Fitchie accepted that he was bound by his duty to tie to raise his concern [PHT00000017, page 170]. However, in his evidence to the Inquiry he accepted that he had not done so [ibid, page 168] and could not explain why this was so [ibid, pages 173–174]. I return to the issue of Mr Fitchie’s position further below.

The early referrals and outcomes

17.22 It is not necessary to consider the totality of the decisions on all disputes, and I therefore examine here the principal decisions and consider the actions in light of them.

17.23 In a decision dated 15 October 2009, the Adjudicator, Mr Howie QC, determined in favour of tie in a dispute concerning Hilton Hotel car park [BFB00053325]. The dispute was as to whether BSC was obliged to carry out works at the car park in the absence of any further instruction to proceed. The dispute was referred to DRP by tie, which claimed that there was such an obligation. BSC claimed that before it was obliged to start it had to receive an instruction intimating that a licence had been obtained from the landowners, permitting required access to land. In support of this it relied on clause 18.17A of the contract, which required it to take all necessary steps to ensure that CEC was not put in breach of its obligations under specified agreements. It said that to enter on the land without confirmation that a licence was in place to permit it would put CEC in breach of its obligations. It is immediately apparent that this is a narrow issue, with limited consequences. Mr Howie made the determination for which tie had argued, and to that extent it was successful. However, Mr Howie did not uphold the argument that tie had advanced. He concluded that the works at the hotel car park were not part of the Infraco works and therefore clause 18.17A did not apply. In the reports to the TPB and Transport Scotland it was said that the decision was awarded in tie’s favour [see, eg, CEC00681328, page 0008]. Although that was certainly true of the result, it was not true of the means by which it was reached.

17.24 The next outcome from an adjudicator was on 16 November 2009 in two disputes which had been referred to Mr Hunter, a Chartered Quantity Surveyor, concerning the Carrick Knowe bridge [CEC00479431] and the Gogarburn bridge [CEC00479432]. Both concerned the issue of whether changes from the BDDI to the IFC drawings gave rise to a Notified Departure and therefore went to the core of the differences between the parties. This was the issue that had been latent since the emails between Mr McEwan, Mr Fitchie, Mr Bell and Mr Bissett at the end of March [paragraphs 11.69–11.79 in Chapter 11 (Contract Negotiations)]. The changes that had occurred in the design were not themselves in dispute, and the issue was as to how the contract wording would be applied to them.

17.25 Although in relation to the Carrick Knowe bridge tie sought a declaration that the estimate for the works in question should be £71,757.37 excluding VAT [CEC00479431, page 0009, paragraph 6.19], in general the issue was not what value should be placed on the works but whether they were Notified Departures. The argument for tie as noted by the adjudicator was that, in order to be able to claim, BSC would have to prove that the change in design from BDDI to IFC exceeded normal development and completion of designs [ibid, page 0007, paragraph 6.10]. It is immediately obvious that this was not the way that Mr Nolan recorded the issue as having been presented to him at the challenge session. There, it did not turn on whether it was normal development, but was an issue of fact as to whether there had been a change in design principle etc.

17.26 Mr Hunter’s decisions were almost identical. He decided that the majority, but not all, of the claims that Notified Departures had occurred were justified. He refused all the orders that had been sought by tie in its reference to adjudication.

17.27 In the arguments presented to the adjudicator, tie focused on the issue of what obligation was being undertaken by BSC. It was noted that it was an obligation to complete the works in accordance with the Employer’s Requirements. Putting the matter very shortly, the consequence of this was said to be that any development of the BDDI intended to ensure fulfilment of those requirements was part of the normal development of designs and could not justify additional payment. As Mr Hunter identified, however, there was a distinction between the question of what works BSC was obliged to undertake on the one hand and the question of its entitlement to payment under the contract, including SP4, on the other [CEC00479432, page 0020, paragraph 7.46]. Although BSC had to satisfy the Employer’s Requirements, the price was only for the design shown in BDDI and normal development of that design, but anything more meant that there was an entitlement to additional payment.

17.28 The steps in Mr Hunter’s reasoning may be outlined as follows.

  • SP4 was intended to address the fact that design was incomplete at the time of concluding the contract and BSC could not be aware of how BDDI would be developed in some regards. The schedule dealt with the “unknown or insufficiently developed” elements [ibid, page 0015, paragraph 7.17].
  • If the development of designs from that shown in the BDDI to meet the Employer’s Requirements was more than the normal course of development, the risk of the additional cost was borne by tie [ibid, pages 15–16, paragraph 7.20].
  • He said that: “the Employer’s Requirements have in terms of price for the works been clarified in section 3.1 of Schedule Part 4 and thus limited by the BDDI and the Schedule Part 4 agreement in respect of the agreed price” [ibid]. The meaning of this is not easy to follow, but it appears to mean that the works included in the price are taken to be limited in the way identified and therefore it is not the Employer’s Requirements that are limited but the scope of what is included in the price.
  • It may be the case that a matter is “alluded to in the Employer’s Requirements … but because of the lack of complete design had not been sufficiently developed in terms of specification to become part of the price” [ibid, page 0016, paragraph 7.21]. This would mean that BSC was required to undertake the works (because it was part of the Employer’s Requirements), but it would be a Notified Departure entitling BSC to additional payment.
  • Any matter that goes beyond the normal design development of what was shown in BDDI would be a Notified Departure [ibid, page 0016, paragraph 7.21].
  • The above point does not mean that every change from BDDI is a Notified Departure [ibid, page 0016, paragraph 7.22].
  • The BDDI and not the Employer’s Requirements are the starting point for considering Notified Departures [ibid, page 0018, paragraph 7.32]. The obligation that is included in the price is limited to normal development of what is shown in the BDDI. This means that “if something is not in any way addressed on the drawing then I cannot see how it can subsequently be developed”. It would follow from this that if a matter was not included in a drawing that was part of the BDDI, the cost of providing it was not included in the price and it would constitute a Notified Departure if the Infraco contractors were required to do so. I return to the significance of this below.
  • Mr Hunter said that the proper approach was to identify changes between the BDDI and IFC, consider whether they were changes in design principle, shape, form or specification and then consider whether they are normal design development. If they were, they would not constitute a Notified Departure [ibid, pages 0018–0019, paragraphs 7.36–7.39].

17.29 The final point noted above does not give effect to the wording of the contract and may be considered an error. The error is substantially in favour of tie. It gives primacy to the question of whether something is normal design development over the issue of whether it is a change of design principle etc. In my view, it fails to acknowledge the proviso at the end of PA1. This is surprising as the point was clearly argued by BSC and it is even expressly referred to as a limit on what may be normal design development by Mr Hunter in his decisions [ibid, page 0017, paragraph 7.26]. However, even with this apparent error in tie’s favour, the outcome was that most of the changes were found to be Notified Departures. On a more general level, it was significant that Mr Hunter stated that “quite clearly uncertainty in pricing has not been removed as the subject matter of the dispute referred to me clearly shows” [ibid, page 0014, paragraph 7.12]. I entirely agree with him in this regard. Even leaving aside the outcome of the particular dispute, this should have served as a critical warning to tie that the wording that it had accepted to get agreement on the Infraco contract meant that it had compromised any certainty in the contract price.

17.30 Although the financial effects of the ruling are not quantified in the decision, the adjudicator required tie to pay 75 per cent of his fees and BSC to pay 25 per cent. Although only a very rough guide, this gives some indication of where the balance of success lay. It is nonetheless important to note that some of the claims from BSC were rejected. Had tie not contested the adjudication, it would have had to accept liability for the whole of the claim made by BSC and paid these amounts to which there was no entitlement. However, in that most of the changes had been found to be Notified Departures it is not surprising that BSC saw the outcome as a victory [Mr Foerder TRI00000095_C, page 0048, paragraph 149]. The position within tie was much less clear. It seems that there was a reluctance on the part of the senior personnel to acknowledge the full ramifications of Mr Hunter’s decision. In his oral evidence, Mr Jeffrey said:

“There was a degree of disappointment. And as I say, shock. I don’t think anybody had expected – and in reasonably clear terms, Mr Hunter had preferred the Infraco’s interpretation of the contract.” [PHT00000032, page 107.]

17.31 He said that it gave an insight that the contract might not mean what the personnel in tie thought it meant and that, taken at face value, it meant that it was not possible to predict a final cost for the project. When questioned about this further, he agreed that that would be a catastrophic scenario for the project [ibid, pages 112–113]. However, this position was not apparent in the reporting at the time. There was a meeting of the TPB just two days after the decisions were issued. It is perhaps unsurprising that the outcome was not referred to in the Project Director’s report or the report to Transport Scotland included with the papers for the meeting [CEC00681328] as they would have been drafted and possibly issued before the decision was available. The presentation to the meeting did not give any more detail [CEC00835831] but the minute of the meeting records that Mr Jeffrey explained the outcome of these two decisions to the Board [CEC00416111, pages 0006–0007]. At the meeting, Mr Hogg asked whether the interpretation of the contract had changed and queried whether a review of the strategic direction was necessary. The minutes note:

“It was reiterated that it is too early in the process (for either party) to establish precedence at this stage in the process, and it was agreed that the current strategic direction should continue.” [ibid, page 0007.]

17.32 In the papers for the TPB and Transport Scotland in December 2009 [CEC00416111] neither the Project Director’s report nor the report to Transport Scotland made reference to the content of the decision, but a risk report did refer to the fact that the adjudicator had preferred Infraco’s case. The Project Director’s report in the papers for the TPB meeting on 13 January 2010 remained silent on the matter, but the Report to Transport Scotland said in relation to the decision simply that, “the Adjudicator found largely in favour of the position taken by BSC” [CEC00473005, page 0047, paragraph 2.2]. In questioning by counsel for the Inquiry and by counsel for former tie employees in relation to this Mr Jeffery agreed with the propositions that the fees for the adjudication were split and that there were elements of works that, despite the interpretation he had reached, were not Notified Departures. None of that is in dispute. If the outcome was considered, however, it is clear that the result had been very much in favour of BSC and if the intention had been to establish a principle that would be useful in future cases it had notably failed.

17.33 On 18 November 2009, DLA gave advice to tie as to its options to challenge the decision [CEC00479430]. This considered only challenges that might be made to the enforceability of the decision and did not consider raising court proceedings to consider the merits of the dispute afresh. At about this time tie resolved to obtain advice from another Queen’s Counsel, Mr Keen QC.[22] He gave his advice initially in a consultation and followed it up with a written Opinion on 14 January 2010. Prior to receipt of the written Opinion, DLA prepared a summary dated 9 December 2009 to draw together the advice of DLA, McGrigors and Mr Keen as to the interpretation of SP4 [CEC00651408]. It is apparent that in some respects the advisers were not in agreement. One such area concerned the position in relation to items that were not shown at all in the BDDI (section 2.3). DLA and Mr Keen were recorded as agreeing with the position taken by tie that as PA1 was only concerned with “amendment” to the BDDI, it had no application if there was nothing shown in the BDDI, as, in that situation, there would be nothing to “amend”. Part of the rationale for this approach was that the price for the Infraco works included the overhead electrical lines that would be provided by Siemens and for which it had never been intended that Parsons Brinckerhoff would provide the design. If the price included only matters which were shown in the drawings, it would mean that there would be an entitlement to additional payment in relation to all the work that would be carried out by Siemens. That was clearly not the intention of the parties. McGrigors took a different approach and agreed with Mr Hunter’s restriction of design development such that it would include only development that could be determined from the information available within the BDDI. In relation to the meaning of “normal development and completion of designs” both DLA and McGrigors endorsed the tie position that it included all that was required to develop the BDDI to the level of detail necessary to construct works to meet the Employer’s Requirements. That argument had, however, been rejected by Mr Hunter. Mr Keen took a different, but unspecified, view.

17.34 In December 2009, a further note was provided by DLA to respond to four questions that had been raised by tie management [CEC00578621]. This version is marked, “Draft – Work in progress”, but the Inquiry is not aware of a later version. This focused on the issue of how a Notified Departure was to be valued once it was established that further sums were due, and it provided a written recommendation that Mr Hunter’s decision should not be challenged. This was, however, on the same basis as the advice given in November, in that it solely considered challenge on the basis of some defect in the manner in which the decision had been taken and did not consider raising a court action or starting arbitration to reconsider the merits of the dispute.

17.35 The outcome of this consideration was that there was no challenge to this decision. Mr Jeffrey said that this was because tie had the opportunity to launch further DRPs before other adjudicators. While that is true, it would not change the fact that even where, as I noted in paragraph 17.29 above, an interpretation of the contract accepted by an adjudicator favoured its interests, tie had been unsuccessful. Although Mr Jeffrey had referred to the possibility of tie instigating further dispute resolution procedures, in fact the next decision of an adjudicator on the BDDI–IFC was on a reference by BSC. It was in a dispute arising out of a retaining wall in Russell Road, and the decision was given by Mr A Wilson, a Chartered Civil Engineer, on 4 January 2010 [CEC00034842]. Once again, the dispute centred on whether elements of the works amounted to Notified Departures. The adjudicator decided that they were.

17.36 Mr Wilson recognised the difficulty with PA1 in that its wording stipulated that normal design development was to be an exception from the specified prohibitions on change but then said that normal development excluded any of the specified prohibitions. He described this as tautological [ibid, page 0019, paragraph 94], but I think that it is better characterised as circular or self-defeating: the exception can never apply, as the situation in which it would be relevant (the development in question amounts to one of the prohibited changes) is also the one that means that it is disapplied. Unsurprisingly, he concluded:

“It appears that something has gone wrong with the language of Section 34.1.1 [ie PA1] as, on the face of it, on a literal reading some part must be redundant to give it meaning.” [ibid, page 0020, paragraph 100.]

17.37 He considered the components of the expression “design principle, shape, form and/or specification” and gave a definition for each [ibid, page 0021, paragraph 104] and then, drawing together these various interpretations, he reached a conclusion as follows:

“Pricing Assumption Section 3.4.1.1 on a proper construction should read

‘Design prepared by the SDS Provider will undergo the normal development and completion of design and will not in terms of design principle, shape, form and/or specification be amended from the drawings forming the BDDI (except in relation to Value Engineering).

Normal development and completion of design means those changes that an experienced contractor and his engineer can expect in providing full construction information.

Normal development of design is the process of analysing a structure and ensuring that, for example, the concrete and reinforcement are adequate to resist the specified forces. Completion of design is the process of finalising designs, receiving comments from relevant approval bodies, checking of design calculations and drawings, completing drawings.

Design principle is a fundamental source in the formulation of an idea and turning it into a practical reality; Shape is the total effect produced by the outlines of a thing; Form is the external shape or appearance of an object as distinct from the matter of which it is composed; and Specification is that provided in the contract documents specifying the nature and quality of the work.’” [ibid, pages 0024–0025, paragraph 127.]

17.38 Although this view of what was intended can be said to be reasonable, it innovates on the wording of the clause to a material extent. This is perhaps recognised by Mr Wilson in the passage quoted when he says that it is what PA1 “should read”. This reformulation of the contract still does not indicate what the outcome will be when there has been normal development of designs and that development amounts to a change of design principle etc. However, when Mr Wilson came to apply his test to the changes before him, he gave primacy to the requirement that there should be no change of design principle etc. So, in relation to the changes to foundations and piling he considered that these were changes that might be expected as part of design development but they were nonetheless a Notified Departure as there had been a change of shape and form [ibid, page 0029, paragraphs 154–157]. This was the opposite of the position that had been reached by Mr Hunter who said that if a change of design principle etc was a normal design development, it was not a Notified Departure.

17.39 BSC had sought to argue that the price related solely to works comprised within the BDDI, but Mr Wilson rejected that approach. In relation to the position where a matter was not shown at all on the BDDI, however, he stated that the use of the word “amendment” indicated that for there to be a Notified Departure there had to be something shown on the BDDI drawings in the first place [ibid, page 0021 paragraph 102]. This accords with the approach of DLA and Mr Keen, recorded in the advice from 9 December 2009, and I will return to it below when considering further disputes.

17.40 The reaction within tie to this decision was that the interpretation that it preferred had succeeded. I find this difficult to understand. The conclusion that the price was not solely for works as included in the BDDI meant that it would also include works arising from normal development of that design. The practical consequence of this was that when a Notified Departure did occur, the assessment of additional costs would not simply be determined by the increase compared with BDDI; the baseline for comparison would be the BDDI as subjected to a process of normal development. This would undoubtedly lead to savings, and to that extent was favourable to tie. Overall, however, it appears to me that Mr Wilson’s interpretation presented difficulties for tie in the following respects.

(a) He found that the changes he was considering were Notified Departures [ibid, pages 0028 and 0030, paragraphs 149 and 160 respectively].

(b) It still meant that the question of whether something was a Notified Departure would have to be decided on the facts of each change. This meant that arguments as to interpretation could not provide an answer to all the disputes such that tie could insist that BSC should simply carry on with the work.

(c) Most importantly, it meant that changes that arose from normal development and completion of the designs would be Notified Departures if they were changes of design principle etc.

17.41 When Mr Nolan was asked about Mr Wilson’s decision, he was frank and said:

“But there were certainly bits in it which involved a more sophisticated consideration. So we did draw comfort from it – we being tie and McGrigors – but it still left us – this is the point I want to make fairly and squarely. There was still a massive problem. We lost the adjudication. tie lost the adjudication.” [PHT00000046, pages 151–152.]

17.42 This frankness may be contrasted with the information circulated about the decision at the time. In the papers for the TPB meeting on 13 January 2010 [CEC00473005], Mr Bell’s report and the report to Transport Scotland merely record that the issue had been determined on 4 January [ibid, pages 0012 and 0047]. The report to Transport Scotland said that the decision would be reported in the next period and that.

“[a] significant saving resulted (>£400K) on the estimate presented by BSC and the adjudicator agreed with tie on many of the principles in dispute” [ibid, page 0047].

17.43 I agree with the first part of this statement. Although Mr Foerder was adamant that the savings were exaggerated, they are in fact correctly recorded. Mr Foerder’s position was that tie overstated the position by saying that BSC sought £4.5 million and was awarded only £1.4 million, whereas the truth was that that it had sought only £1.8 million [PHT00000044, page 188]. It is apparent, however, that the claim was only that tie had saved £400,000. That is quite accurate. This is an important consideration. If it had not been resisted, tie would have paid a claim that had been significantly overstated by BSC. It can therefore be said that to this extent tie was vindicated in resisting the claim. To have paid the claims in full would have amounted to a waste of substantial sums of public money, which would have been unacceptable. This put tie in a difficult position. On the one hand BSC was claiming more than they were entitled to, so tie was bound to challenge the claims but, on the other, time and effort in challenging the claims, together with the fact that no works could take place until the matter was resolved (see below), meant that progress in the works fell further and further behind schedule.

17.44 I do not, however, agree with the second part of the statement – that the adjudicator agreed with tie on many of the principles in dispute. The dispute was referred to adjudication with a view to determining that the changes in question were not a Notified Departure. On this, the adjudicator found for BSC. Although there were clearly some arguments in respect of which the adjudicator found in favour of tie, I do not consider that this justifies the statement made. Mr Jeffrey was challenged as to whether the statement in the report was accurate and, in examination by counsel for the former tie employees, his attention was drawn to the fact that the adjudicator found that the price was not solely for BDDI, that there had been a saving on the amounts claimed by BSC and that the fact that the matter was referred to DRP meant that tie had been able to issue instructions to require that the works should proceed [PHT00000033, pages 95–102]. His comments on the points to which he was referred are correct to some extent. In my view, however, to state that the adjudicator had agreed with tie on many of the principles in dispute did not accurately represent the decision and would not give the reader an accurate impression of the outcome. The ability to instruct the consortium to proceed was not a matter on which the adjudicator had ruled. While there had been a determination that the price did not just reflect BDDI, on the more important issue of whether a Notified Departure had arisen, the decision overall favoured BSC. The issue of reduction in the claims made by BSC was not an issue of principle. Although one of the justifications for taking cases to adjudication noted at the outset had been that tie could instruct BSC to commence the works to which the dispute related [paragraph 17.4 above; ibid, page 96] this was not a matter established in the adjudication. So although, in response to a question from counsel for tie employees, Mr Jeffrey said that he thought the report was an accurate summary, when I asked him whether he considered that it was a full and frank disclosure of the outcome of the decision he agreed it was not [ibid, pages 103–104].

17.45 The lack of information in the reports provided in advance of the January TPB meeting might suggest that detail would be provided and discussion would take place at the meeting, but the minutes of the January meeting make no express mention of it, although it is recorded that there was a detailed discussion of the DRP/adjudication process [CEC00474418, page 0007, paragraph 3.5] and there was nothing about it in the presentation to the meeting. On a matter as significant as this I consider that it would not be adequate simply to give an oral explanation during the meeting. It was a very important matter and required careful consideration. It is something of which written notice should have been given in advance of a discussion if it was to be meaningful and effective and decisions were to be taken on a properly informed basis. In relation to Transport Scotland, Mr Jeffrey noted that there were other channels of reporting in addition to the written report referred to above. As I have indicated in Chapter 3 (Involvement of the Scottish Ministers), it is not satisfactory that it is necessary to rely on informal reporting to remedy shortcomings in implementation of formal reporting procedures. Despite the further decision, the minutes repeat the comment from November 2009 that it was “too early in the process to establish a clear precedence on some of the points of principle disagreement” [ibid]. It is clear, however, that it was no longer the intention solely to use the DRP to achieve tie’s objectives. The minute notes that Mr Jeffrey gave details of the strategy to be used in future and was to present options to the March meeting of the Board. I consider that meeting below.

17.46 On 14 January 2010, shortly after Mr Wilson had given his decision and the day after the TPB meeting, tie obtained the written Opinion from Mr Keen QC [CEC00648853]. Although it is watermarked “Draft”, the Inquiry is not aware of any later version. Further, although it was completed after the decision of Mr Wilson, it had been sought and the discussions had taken place earlier, and it considered the options only in light of the decisions of Mr Hunter. Mr Keen noted that the effect of the decisions was that any part of the design of the works required to fulfil the Employer’s Requirements that was not included in the BDDI would constitute a Notified Departure, creating an entitlement to additional payment [ibid, pages 0002 and 0005, paragraphs 4 and 8 respectively]. He stated that he considered that this conclusion was wrong [ibid, page 0005, paragraph 8]. The basis for his view appears to lie in the fact that a Notified Departure arises where the facts or circumstances “differ” from the base case assumption (which included the pricing assumptions but was actually much wider). His view was that “differ” denoted making something “unlike, dissimilar or different”. If nothing had been incorporated into the BDDI in relation to an element of the Employer’s Requirements and something was then added later, it would not be a Notified Departure as it did not “differ” from anything in the BDDI. Also, if there was an outline design in the BDDI which was developed in a way that did “not render it unlike, dissimilar or different to the outline in the [BDDI]” he considered that too would not amount to a Notified Departure [ibid, page 0006, paragraph 9]. Significantly, however, in response to a question about the interpretation of PA1, he said that he preferred the argument that had been advanced by BSC that any change in design principle etc is a Notified Departure [ibid, pages 0008–0009, paragraphs 11–13]. He considered that the argument that tie had been advancing did not take account of the proviso [at the end of paragraph 3.4.1 in USB00000032] that normal development excludes changes of design principle, shape and form and outline specification. This was the interpretation adopted by Mr Wilson and, as I have indicated above, it is also my view.

17.47 Although the report to Transport Scotland in January said that the decision would be reported in more detail in the next period, no details were in fact given. The papers for the TPB meeting on 10 February referred to Mr Wilson’s decision but did not make any statement as to the outcome and noted only that the decision was under review [CEC00474418, page 0028, paragraph 2.2]. The presentation to the meeting made no reference to the decision [CEC00376422]. It is apparent from the minutes of the February meeting that the issue was not discussed [TIE00894384]. In the presentation to the March meeting there is still no reference to the contents of the decision.

17.48 The difficulty with the picture created by these reports did not stop with the TPB and Transport Scotland, however. Mr N Smith of CEC accepted that reports to Councillors of 24 June 2010 [CEC02083184] and 14 October 2010 [CEC02083124, page 0007, paragraph 2.50] that said that the outcomes “in terms of legal principles” were “finely balanced” were not accurate [PHT00000006, pages 85–86; TRI00000280_C]. He accepted that he had drafted this element of the report. He said he could not recall where the wording had come from but thought that the phrase had come from Mr Jeffrey [PHT00000006, page 86]. From what I have seen of the reports to the TPB and Transport Scotland it seems probable that the sentiment – if not the phrase – originated within the tie executive team. That, however, does not excuse the actions of Mr N Smith in drafting the inaccurate reports, as I will discuss more fully in Chapter 18 (CEC: May 2008–2010).

17.49 In the presentation to the March 2010 meeting came the beginnings of a retreat from the advice previously given. It stated:

“the language in the Contract is open to differing interpretations and whilst there is a strong common sense argument which militates against BSC’s interpretation uncertainty does exist as to how far a court would go in supporting tie’s interpretation.” [CEC00575128, page 0008.]

17.50 Although this moved from the confidence that had been expressed up until then, in my view it did not go far enough in reflecting the extent to which BSC’s approach had prevailed over tie’s. The issue is further clouded in that the minutes of the meeting record that Mr Jeffrey stated that independent legal advice had been obtained and that this affirmed tie’s approach to the enforcement of the contract [CEC00420346, page 0007]. In light of the advice given, the TPB concluded:

“The approach adopted appears to have had a significant impact on BSC and the basis on which tie can seek to achieve an acceptable legal and commercial outcome is now considerably clearer. Accordingly, the TPB approved the following strategy:

  • Continue to pursue tie’s rights under the existing contract with vigour and seek acceptable resolution of the main disputes in accordance with the agreed action plan.” [ibid, page 0008.]

17.51 At about the same time, a “Minute of Tram Meeting” dated 16 March 2010 records a meeting attended by Mr David Anderson, Mr McGougan and Mr N Smith from CEC, and Mr Jeffrey and Mr Dunn from tie. It notes that “Tie will not challenge adjudications” [CEC00475671, page 0001]. This does not suggest that there was confidence in tie‘s arguments. There is no record of the decision whether to raise court or arbitration proceedings having been brought before the TPB at all. In view of the role that had been given to the TPB in relation to the management of the relationship with BSC, it would have been appropriate that they were involved in the decision. Although I have not found evidence of the reason for this action, when viewed objectively it can be seen as another example of information being withheld and scrutiny avoided.

17.52 The Project Director’s report for the TPB meeting on 10 March stated that an additional DRP relating to Gogar depot access bridge had been commenced by BSC and that tie had commenced two further DRPs in relation to track drainage and works at Tower Place bridge on 10 February and 25 February respectively [TIE00894384, page 0012]. The decision in respect of the Tower Place bridge works was given by Mr Hunter on 19 May 2010 [CEC00373726 as amended by CEC00325885]. It was accepted for the purposes of this adjudication that there had been a Notified Departure under clause 3.4.19 of SP4 rather than clause 3.4.1. The issue in this instance concerned how to identify the baseline from which the Notified Departure should be assessed. The BDDI was defined by reference to the design issued to BSC as at 25 November 2007. Clause 2.3 of SP4 stated that it meant:

“the design information drawings issued to Infraco up to and including 25th November 2007 listed in Appendix H to this Schedule Part 4” [CEC00373726, page 0009, paragraph 6.5].

17.53 Instead of listing the drawings, Appendix H merely said: “All of the Drawings available to Infraco up to and including 25th November 2007.” [ibid] This adjudication highlighted the dangers of this approach. The parties could not agree what was available to Infraco at the relevant date. The argument for tie was that drawings were available to BSC in an electronic data room and that these contained drawings in addition to those issued on CDs to BSC prior to the November cut off. Mr Hunter found that he could not conclude with certainty that either of the drawings relied on by tie for the purposes of its arguments were in the data room. He went further, however, and was unwilling to say even that the whole content of the data room was made available to BSC. This created further scope for dispute in relation to each possible Notified Departure as to what baseline should be taken. The omission of the list of design information drawings up to and including 25 November ought to have been identified by tie and its advisers prior to the signature of the contract. Had they done so there would have been no dubiety about the information available at the relevant date. Their failure in this regard is indicative of a desire to sign the contract in haste without undertaking the necessary checks to ensure that all relevant documents upon which reliance was placed were properly identified and included within the contract.

17.54 The matter of the contractual issues arising from the adjudications and, in particular, the interpretation of PA1 was the subject of a report to tie dated 23 March 2010 from McGrigors [CEC00591754]. This noted that while there was a “stateable” argument that something had gone wrong with the wording, it was extremely difficult to demonstrate the result that had been intended. When a legal adviser uses the term “stateable” in relation to a position that might be advanced by a party to a dispute it means that there is not great confidence of its prospects of success. More importantly, McGrigors noted that showing that something had gone wrong was only the first part of what would have to be demonstrated. It would also be necessary to show what the parties had in fact intended. The report discussed a number of possibilities but was not able to state a clear solution. This is a striking contrast to the information that had been given to the TPB less than a fortnight previously that independent legal advice affirmed the approach taken by tie.

17.55 The arguments that had been included by Mr Keen in the Opinion that he provided in January were put to the test in an adjudication concerning track drainage. The point he considered as to the correct position when something was not shown on the BDDI drawings had in fact arisen in both the Carrick Knowe and Gogarburn adjudications [Gogarburn decision, CEC00479432, pages 0015 and 0018, paragraphs 7.20 and 7.32 respectively; Carrick Knowe Decision, CEC00479431, pages 0013–0014 and 0016, paragraphs 7.20–7.22 and 7.33 respectively] as well as the Russell Road adjudication [CEC00034842, page 0021, paragraph 102]. Mr Hunter’s decision in the Carrick Knowe and Gogarburn decisions implied that if something was not shown, it would follow that BSC had not been able to price it and therefore it would be a Notified Departure, leading to further payment. Mr Wilson, on the other hand, appeared to take the view that if there was nothing on the BDDI drawings, there could not be an “amendment” and this might support an argument that it was not a Notified Departure. On those occasions the point had arisen as a side issue but in the track drainage dispute the argument took centre stage.

17.56 Mr Coutts QC was appointed adjudicator in relation to the track drainage dispute and gave his decision on 24 May 2010 [TIE00231893]. The adjudication concerned more than one change but, in relation to one concerning what was referred to as Section 7A, tie argued that there could be no departure from the drawings as there were no BDDI drawings for that part of the works. As the works were not specified in the earlier drawings, the drawings could not be considered to have been amended and there was accordingly no Notified Departure. This was rejected by Mr Coutts, who considered that “amendment” was broad enough to include additions. The argument was not advanced in any further proceedings.

17.57 Until Mr Wilson’s decision in relation to the Russell Road retaining wall, the focus had been on whether there was an entitlement on the part of BSC to additional payment for a Notified Departure. There was, however, another effect of these disputes that was also causing concern, namely, the fact that the progress of the Infraco works was very substantially behind schedule. The papers for the TPB meeting in May 2010 note that BSC had failed to commence on-street works and refused to progress works until the estimates in relation to changes were agreed under clause 80 of the contract [CEC00245907, page 0018]. The difficulty lay in the contract mechanism regulating changes to the contract. A Notified Departure was deemed to be a Mandatory tie Change [SP4, USB00000032, page 0009, clause 3.5]. Clause 80 of the Infraco contract regulated all tie changes. Clause 80.13 said:

“Subject to Clause 80.15, for the avoidance of doubt, the Infraco shall not commence work in respect of a tie Change until instructed through receipt of a tie Change Order unless otherwise directed by tie.” [CEC00036952, Part 2, page 0195, clause 80.13.]

17.58 The difficulty lay in reaching agreements in respect of the estimates of the costs of carrying out the works. If the parties did not agree the estimate, the works could not proceed. If BSC submitted an inflated estimate, tie was faced with the choice of agreeing it and bearing the increased cost or disputing it with the result that the works would be delayed. The position was more difficult where tie did not even agree that a matter was a Notified Departure so as to trigger the change mechanism in the contract. That would mean that it would not engage in discussions with a view to agreeing the estimate, whereas BSC, being of the view that there was a change, considered that it could not start works until agreement had been reached. This was a problem that had been inherent in the clause 80 wording from the moment that the contract was signed. Wording that meant that work could not proceed in the absence of agreement as to the price was insisted on by tie in the contract negotiations. This was presumably in the belief that it would give it some control over price increases. That would only be the case, however, if there was an option not to proceed with the work in question. In a construction contract that would typically be the case in a situation in which the employer wanted to make some change to the works after the contract was signed. If the price was too high to be capable of agreement, the employer would have the option simply not to proceed with the change. A lack of agreement as to an acceptable price in that situation need not hold up the works. The difficulty here was that the way in which the pricing assumptions had been framed was such that Notified Departures and the entitlement to additional payment would arise even in completing the works required by the contract. As this was work which had to be undertaken to fulfil the Employer’s Requirements, there was no scope to decide that it should not take place and the deadlock could not be avoided. This might have been of little effect had there been only a few changes arising under the contract. When taken with the plethora of assumptions in SP4 and the knowledge that there would be departures from them, however, clause 80 presented a problem that was bound from the outset to arise. It put tie in a very difficult position. The way that the contract had been drafted put pressure on tie to accept even overstated estimates of the cost and this was apparent to Infraco. It is notable that where adjudicators quantified the sums to which Infraco was entitled, claims were reduced substantially. In the adjudications relating to Russell Road, Tower Bridge, the Depot Access Bridge and S7A track drainage the total of the sums claimed was £4,454,222 and the total of the sums awarded to Infraco was £2,754,511.56, being approximately 62 per cent of the sums claimed. It seems to me that a reduction of 38 per cent of the sums claimed is indicative of significantly inflated estimates. Moreover, as discussed in paragraph 19.83 below the evidence about claims by Infraco was not confined to those referred to adjudication. The Audit Scotland Report refers to claims by BBS prior to December 2010 from which it appears that 198 claims were settled by tie paying to BBS £23.8 million against the sum of £44 million claimed by BBS, representing 54 per cent of the sum claimed [ADS00046, Part 1, page 0021–0022, paragraph 44 and Exhibit 5]. Although for the reasons given in paragraph 19.83 I consider that it is over-simplistic to compare the sums originally claimed by BBS in respect of notified changes with those ultimately paid by tie for these changes, nevertheless it is an adminicle of evidence tending to support my view that excessive claims were made. It is also of note that the Audit Scotland Report records that in the same period BBS withdrew 139 claims without pursuing them.

17.59 Although the issue was initially overshadowed by the question of whether or not changes were Notified Departures, McGrigors considered the problem of the lack of progress that resulted from the operation of clause 80 as early as their advice on 23 March 2010 [CEC00591754]. As was noted in paragraph 17.57 above, clause 80.13 was subject to clause 80.15. That stated:

“Where an Estimate has been referred to the Dispute Resolution Procedure for determination, but it is deemed by tie (acting reasonably) that the proposed tie Change is urgent and/or has a potential significant impact on the Programme, …. tie may instruct Infraco to carry out the proposed tie Change prior to the determination or agreement of the Estimate by issuing a tie Change Order to that effect.” [CEC00036952, Part 2, page 0195.]

17.60 The disadvantage of tie issuing a Change Order under clause 80.15 was that in terms of clause 80.16, BSC would then be entitled to claim payment on the basis of demonstrable costs. That was the basis on which it had been agreed that the Princes Street works would be done. It was recognised that it was likely to increase the cost of the works and for that reason, tie was reluctant to use that approach. The issue was whether there was any way to get around the prohibition in clause 80.13 other than using the express terms of clause 80.15 and, in particular, whether reliance could be placed on the words “unless otherwise directed by tie” at the end of clause 80.13 [ibid].

17.61 The advice given by McGrigors was to the effect that rather than giving an instruction under clause 80, it would be more effective if an instruction was given under clause 34.1. This stated:

“The Infraco shall construct and complete the Infraco Works in strict accordance with this Agreement and shall comply with and adhere strictly to tie and tie’s Representative’s instructions on any matter connected therewith (whether mentioned in this Agreement or not) provided that such instructions are given in accordance with the terms of this Agreement and will not cause Infraco to be in breach of this Agreement.” [ibid, Part 2, page 0103.]

17.62 It was considered that this would not conflict with clause 80.13 as that clause only referred to works that were required by a tie Change and the instruction under clause 34.1 was not accepted to be a tie Change [CEC00591754, pages 0036–0037, paragraphs 17.10–17.16]. The Report noted that advice had also been sought on this issue from Mr Keen and that he agreed with the parts of the report dealing with clauses 80 and 34.1.

17.63 The ability to give directions to order BSC to commence work was put to the test in an adjudication concerning works to create an underpass at Murrayfield. BSC declined to start works on the basis that what was required amounted to a Notified Departure or a Mandatory tie Change and that the contract required that they should not start work until a price had been agreed for the additional works. At the time tie disputed the estimate of additional costs and that there was a Notified Departure but they later conceded the latter point. The dispute for adjudication was not concerned with the question of the costs but considered only whether work should be commenced without the cost estimate having been agreed. An instruction had been issued by tie to BSC to carry out works in an attempt to get matters moving. The instruction stated that if the works were a Notified Departure then it would be deemed to have been given under clause 80.13. The instruction would mean that BSC had been “otherwise directed” in terms of that clause. The Instruction also referred to clause 34.1 and the obligation of Infraco to comply with instructions from tie’s representative. BSC specifically queried whether the reference in the letter of 19 March to clause 80.13 was correct and it was confirmed that it was. Infraco maintained their position that as there was no agreed Estimate and no Change Order, tie was not entitled to issue an instruction under clause 80.13 or 34.1 and in the absence of agreement on the additional costs it was not bound to start the work in question. Infraco referred the matter to adjudication and tie responded issuing an instruction under clause 80.15 that the work should be done on the basis that the work was urgent. However, in giving that instruction, tie stated expressly that it did not supersede the earlier instruction.

17.64 The Adjudicator appointed was Lord Dervaird and he gave his decision on 7 August 2010 [BFB00053462]. He accepted that clause 80.13 had the effect that tie could issue an instruction to proceed notwithstanding the non-receipt by Infraco of a tie Change Order. However, he said that it did not follow that tie was able to issue instructions under clause 80.13 except where the contents of an Estimate have been agreed. He noted that clause 80.13 which contained the prohibition on starting work in the absence of agreement was expressly stated to be subject to clause 80.15 which entitled instructions to be issued when the Estimate had been referred to the DRP and the work was considered by tie to be urgent. He had regard to the fact that BSC would be entitled to payment on a demonstrable costs basis if instructed under clause 80.15 but would have no such entitlement if instructed under clause 80.13. He considered that the entitlement to payment on a demonstrable costs basis was a protection for BSC and its absence in relation to clause 80.13 indicated that the instruction could not be given under that provision in order to deprive BSC of the intended contractual protection. This was the case despite the inclusion within clause 80.13 of the words “otherwise directed” [CEC00036952, Part 2, page 0195]. The instruction in the letter of 19 March was therefore ineffective. tie lost the adjudication.

17.65 As with the disputes concerning the Gogarburn and Carrick Knowe bridges, the argument presented to Lord Dervaird had not quite been the one that was envisaged by McGrigors in their report and approved by Mr Keen. The instruction was expressly given under clause 80.13 rather than clause 34.1. The view of McGrigors and Mr Keen after the decision was therefore that it had not settled what was meant by “otherwise directed” in clause 80.13 and had not addressed the argument that the instruction could be given under clause 34.1 [CEC00129396]. In light of this, their recommendation was that tie should proceed to DRP in relation to an instruction issued under clause 34.1 as soon as possible. This was not done, however. Mr Jeffrey said that by the end of the month it was clear that the DRP strategy should no longer be pursued [PHT00000033, pages 97–98] or, as he put it in his statement, “every avenue that we had sought to pursue had proved to be ineffective in one way or another” [TRI00000097_C, page 0046, paragraph 276]. I agree with this assessment. The strategy that had first been implemented in March the previous year had on any reasonable view failed to achieve its objectives.

17.66 In reviewing the strategy of adjudications, the most striking aspect is that the policy would work only if tie were to be in the right. Otherwise, it would result in a situation in which it would be the position of the consortium that would be vindicated. Mr Nolan was of the view that he had given advice that if they went to court and lost, it would be very damaging to tie [PHT00000046, pages 158–159]. This means that there were two aspects to consider; what advice was available as to tie’s position and had the proposed arguments been scrutinised. I have noted above that the efficacy of the challenge sessions was undermined in that the issues identified in the course of them were not the ones that were actually argued. I cannot say whether tie personnel – and Mr Bell in particular – were aware that the basis on which the dispute was presented to Mr Nolan and the others at the challenge sessions was inaccurate but they certainly should have been. The sessions were intended as a safeguard to protect tie by scrutinising and testing thoroughly the arguments that would be advanced but it could do so only if the correct arguments were identified. This would have been obvious to anyone within tie involved in these sessions.

17.67 In that the policy that was pursued in taking matters to adjudication was said to have been to preserve the terms of the contract it should have been obvious that advice was required as to the legal effect of the terms of the contract. It is notable that the general decision to proceed to DRP was taken before formal legal advice was provided, although by the time that the individual dispute procedures were instigated, advice had been taken both from solicitors and counsel. The issues that had been considered were dictated by a narrow view that had been formed of the dispute by the advisers, and the issues were not approached and evaluated as widely as they could and should have been. Nonetheless, advice having been taken, tie personnel cannot be criticised on that front. It is necessary, however, to consider the position of DLA.

17.68 The statement from Mr Fitchie that DLA was confident of the contractual position of tie [TRI00000102_C, page 0249, paragraph 8.33] is in marked contrast to his evidence to the Inquiry regarding concerns about the contract, in which he said he was fully aware of the problems in the contract and had given warnings on this matter. Alongside this, it is necessary to consider that Mr Fitchie remained silent as to any concerns as to interpretation of the Infraco contract during the challenge sessions. Finally, it is of note that once the adjudication decisions had started to come in there was a focus on the genesis of the wording in SP4 and PA1. In particular, McGrigors was instructed to investigate and report upon the circumstances surrounding conclusion of the Wiesbaden Agreement and the Infraco contract. This was known as Project Challenge. When asked why he had not mentioned his concerns about the contract during this exercise, Mr Fitchie said:

“I do not recall whether I specifically drew this matter to McGrigors’ attention during their Project Challenge phase. But if I’m allowed to qualify that by saying I was placed in an extremely difficult position in relation – during Project Challenge, and the reason is this. And I think it must come over from my evidence. That my position on this is that Schedule Part 4 and Wiesbaden were documents and contractual, commercial, financial and engineering arrangements that tie wanted to have, and so the responsibility in my mind for doing that lay with tie. And meeting in Project Challenge and having your lawyer tell you in front of another lawyer – law firm that it’s your fault didn’t seem to me to be the right way to approach Project Challenge.” [PHT00000017, page 169.]

17.69 There are a number of ways in which the conflict in the evidence may be resolved. The first is that Mr Fitchie may truly have been unaware of the problems inherent in the contract wording and that the claims to the contrary in his evidence to the Inquiry are simply false. The second is that he was aware of the problems and for some reason decided not to voice them at the time that future strategy was being determined. There is theoretically a further option: that he was aware of the concerns at the time of contract close but, 12 months later when the problem that he had foreseen arose, he forgot that he had had these concerns.

17.70 The final option is fanciful, and I discount it. Of the other two options, the first is perhaps the most straightforward – that is, of course, leaving aside the fact that it entails a deliberate attempt to mislead the Inquiry. However, as I have noted above in Chapter 12 (Contract Close), there is at least a hint in the email of 31 March 2008 [CEC01465933] that Mr Fitchie was aware of the problems that would arise if the contract was concluded in the form of the then current draft. This leads me to the remarkable conclusion that, despite his awareness, he said nothing when the strategy was under consideration and when the situation was being investigated. Why would he possibly have done this? It is not enough to say that he did not want to be in the position of saying “I told you so” [PHT00000017, page 168]. The very nature of the challenge sessions that he attended was to subject the arguments to scrutiny and avoid tie taking a route that was a dead end. Whatever his motivation, it was a critical failing. Had he done as he ought to have and brought the issue to the fore I consider that it is likely that a different strategy would have been adopted. Of course, this would not have changed the wording of the contract that was the source of the problem. To the extent that the contract meant that tie had undertaken a liability greater than had been intended, that would have remained. It should have meant, however, that less time and effort would have been wasted in pursuing a strategy that was likely to fail. That time and effort translated to delay in the project which in turn meant further costs over and above the additional liability that had inadvertently been accepted.

17.71 The full range of tie’s motives in pursuing the DRPs also seems questionable. Attempting to uphold what it considered to be its contractual rights was one thing, but to attempt to force BB out of the consortium was quite another. It seems that a view had been taken within tie that it was right and BB was wrong, and this meant not only that tie should prevail but that it could expect the consortium to be re-formed to suit it. This is epitomised in the presentation to the TPB of 10 February 2010, which contained the following:

“The moral case – That BB have, from day 1 and consistently since then, through a combination of claiming over 500+ changes and ‘holding the city to ransom’ (primarily through slow progress), sought to undermine the proper operation of the contract with a view to extracting more money from the client.” [CEC00376422, page 0025.]

17.72 The same presentation referred to an “abuse” of SP4 by BB. This would be an extreme view in any circumstances but, coming after adjudication decisions that had largely vindicated BB’s position on the matters of principle, it was truly remarkable. The rhetoric represented a complete failure to take the sort of objective view that was necessary if balanced judgements were to be made as to what was to be done.

17.73 Should a court action have been raised to get a definitive view on the interpretation of the Infraco contract? In my view it is unlikely that this would have helped. Not only was it probably correct that a change of design principle etc would have amounted to a Notified Departure; the question of whether that was the case would have to be answered on the facts of each dispute. This means that the best outcome of any action would have left the matter to be determined on a case-by-case basis. This would be of no assistance to tie, as the issue would have to be determined repeatedly in relation to each change. Even leaving aside the issue of the possible additional costs, the delay that would result under clause 80 while these determinations took place would be devastating for contract progress. Although I consider that the decision not to pursue the matter in court was probably correct, it is not satisfactory that there is no proper record of the consideration given to this issue, the factors taken into account and the basis on which the decision was taken. The importance of this matter will have been obvious to all involved. A decision of that importance on a publicly funded project should be taken in a way that is fully transparent.

Further and alternative action

17.74 As I noted in paragraph 17.45 above, at the January 2010 meeting of the TPB Mr Jeffrey was to prepare options for future conduct of the relationship with BSC for the March Board meeting. Immediately following the January meeting he sent an email calling an emergency meeting of the tie executive team [CEC00623955]. His email noted that tie was again facing a

“situation where the very future of the project, not to mention the future of TIE and all our own personal, emotional and professional investments in this project are at stake” [ibid, page 0001].

17.75 He identified that the three options that tie had were:

(1) termination of the whole Infraco contract;

(2) negotiating BB out of the consortium; and

(3) “[c]arrying on slugging it out with [Bilfinger] in an uneasy marriage” [ibid, page 0002].

17.76 As matters developed over the remainder of 2010, the contract remained in place and BB remained a party, but increasingly a war of attrition developed until a decision was made to attempt mediation. It is useful to give an outline of some of the principal activities undertaken in the remainder of the year, to provide some context for the discussions that took place at Mar Hall in 2011.

Reporting to the March 2010 meeting

17.77 The report setting out the state of the project was first drafted in mid-February 2010 and was revised a number of times up to and then following the TPB meeting on 10 March. The work was known as, and the report was titled, “Project Pitchfork” [CEC00142766]. This was a reference to the various prongs of the approach that was in contemplation [Mr Jeffrey PHT00000032, pages 102–103]. Although the report was drafted by Ms Clark, as would be expected Mr Jeffrey was also involved in its preparation [TRI00000097_C, page 0047, paragraph 285] and the report itself indicates that various members of the tie executive team were involved [CEC00142766, pages 0038–0039]. The report summarised as follows the position that had come to exist:

“The Infraco Consortium has achieved 14% of the physical construction of tram infrastructure compared to 75% anticipated in the programme within the Infraco Contract by the end of February 2010. Utility diversion work under the MUDFA Contract and related agreements with utility companies (including all telecoms cabling) is expected to be complete by December 2010, some 24 months later than in the Infraco programme. The design work, which has been under the control of Infraco since Financial Close, is expected to be substantially complete by April 2010, some 18 months later than in the Infraco programme. No reliable revised programme to completion has been agreed to deal with these delays and the most recent submission from BSC sought to confirm a commencement of revenue service date of October 2013, compared to July 2011 in the Infraco Contract. Construction of the tram vehicles has proceeded to programme.

“The full project cost estimate has recently been revised to c£540m plus X, a factor which is driven by the cost of delay and other matters of dispute between tie and Infraco. X is difficult to estimate with any certainty because of the nature and complexity of the matters in dispute, but the signs are that it will take the full project cost into the range of £600m – £650m.” [ibid, page 0006.]

17.78 Although the report describes the events that had led to the creation of the situation then facing the project, in my view it does not tell the whole story. It does not set out in frank terms the debate that led to the Princes Street problems and the ongoing BDDI–IFC disputes. This omission is material because if decisions were to be taken as to what should be done from this time it was clearly important that the decision makers should have a proper understanding both of the situation that existed at the time and the circumstance that brought them to it.

17.79 The report noted that, as early as December 2009, it had been concluded that the policy of pursuing DRPs was not delivering the required outcomes. It stated:

“Whilst tie had achieved the objectives of getting work started at some locations put into dispute and significantly driving down the final value of Estimates being submitted by BSC, success had not been as visible on matters of legal interpretation and especially on the principles of the Pricing Assumptions contained in Schedule Part 4 of the Infraco Contract.” [ibid, page 0009.]

17.80 The report hides behind circumlocutions and, once again, does not accurately state the outcome of the adjudications. The problem was not that success was not “visible”; it was largely absent. This issue persisted into a further draft of the report on phase 2 of Project Pitchfork that was drafted in June 2010 and revised periodically until October that year [CEC00088220]. It noted that the policy of promoting DRP “has brought a positive outcome for the project overall compared to the claims submitted by the Consortium” [ibid, page 0013, paragraph 4.1]. It provides a table of the outcomes of the adjudications that bears little relation to reality. For Gogarburn and Carrick Knowe it merely says that a decision was made, and the “savings” were given. In relation to Russell Road it stated that a decision was made but it then stated that the sum payable was agreed and that there was a saving of £2.2 million. Neither statement was correct. In relation to the adjudication concerning track drainage in section 7, the report did state that the decision favoured Infraco on the issue of principle, and it referred to savings. The comment in relation to Lord Dervaird’s decision on the Murrayfield underpass is that it was found that clause 80.13 could not be applied, but the report then stated that the issue was “ability to instruct rather than the costs at this location” [ibid, page 0015]. That was the issue that Lord Dervaird had decided against tie. The report also referred to numerous reasons why it had been successful for tie to be involved in the DRP, including the fact that work was carried out at the locations where the matters in dispute had been referred to adjudication [ibid, page 0021], but that was an incidental effect of the reference rather than a justification for it. The report correctly noted that there had been a saving and, even although, as I noted above, they were not accurately stated, it cannot be disputed that had tie not stood its ground, the result would have been that BSC would have been paid overstated claims. This is another example of an issue that has arisen in relation to many aspects of the Project: an unwillingness to provide candid and accurate reporting of the position.

The March 2010 TPB meeting

17.81 The minutes of the March 2010 TPB meeting record that Mr Jeffrey reported to the Board members on the ongoing issues facing the project, including tie’s desire to operate the existing contract mechanisms robustly. He advised that an analysis of independent legal advice, including Counsel’s Opinion, had affirmed tie’s approach [CEC00420346, page 0007]. I have not seen legal advice to that effect. The reference to external legal advice having affirmed tie’s approach to seeking to enforce the Infraco contract cannot be reconciled with the advice that I have outlined above. A presentation was also given to the TPB. As I have observed in paragraph 17.49 above, this noted that the language in the contract was open to differing interpretations and that:

“whilst there is a strong common sense argument which militates against BSC’s interpretation uncertainty does exist as to how far a court would go in supporting tie’s interpretation” [CEC00575128, page 0008].

17.82 The minutes record that, following discussion, the TPB approved the following strategy: “Continue

  • … to pursue tie’s rights under the existing contract with vigour and seek acceptable resolution of the main disputes in accordance with the agreed action plan;
  • The options and opportunities discussed in detail with the TPB to be pursued in accordance with the agreed action plan;
  • Actively address affordability and incremental options, including operational and financial viability;
  • Reach a resolution of the key matters with BSC;
  • Confirm a new way of working with BSC which mitigates against further dispute risk;
  • Report progress regularly to the TPB, especially in relation to cost estimates, programme forecasts and potential scope changes in the context of funding availability and the structure of delegated authority which will govern any material changes; and
  • Report to the next TPB on progress and advise the Board on the emerging timetable to resolution.
  • Continue to update Transport Scotland and CEC and the Non-Executive Directors on developments on regular and detailed basis. DMcG suggested that the FCL Sub-Committee could be an appropriate means of achieving this.” [CEC00420346, page 0008.]

17.83 It is apparent that many of these (eg “[r]each a resolution of the key matters with BSC” and “[c]onfirm a new way of working with BSC”) can be seen as aspirations or a “wish list” rather than any firm plan of action. Others are merely restatements of what should already have been taking place by way of reporting. What remains does not offer any new insight or direction for the project.

Further work on the BDDI–IFC dispute

17.84 In the period after the meeting, further work was done in relation to the meaning of SP4. On 31 March 2010, Mr Nolan emailed the senior personnel within tie to say that he had had another meeting with Mr Keen [CEC00592602; CEC00592603]. They were both of the view that although it was clear that something had gone wrong with the wording and that arguments could be made to support an interpretation of SP4 that was more satisfactory to tie, neither was confident that the court would accept the alternative wording that they suggested [ibid, page 0003]. They recognised that, as drafted, the contract placed almost the whole of the risk of design changes on tie and that Infraco had said that it was not willing to accept the risk of design development. The argument that something had gone wrong with the wording was described as “stateable”, and Mr Nolan accepted that this was a term used by lawyers to mean that the argument was there to be made but that the prospects of success were not good [PHT00000046, pages 165–166].

17.85 In his email Mr Nolan said that he wished to test the arguments further with leading counsel in London who had experience in commercial litigation, and he suggested that they consult Helen Davies QC. This consultation took place in the following month and, on 29 April, he provided a note of the discussions that had taken place and the advice that Ms Davies had provided [CEC00323248; CEC00323249]. She agreed that if PA1 were to be given a literal interpretation, the proviso at the end deprived the opening words of meaning. Her advice was that it was unlikely that it had been intended that the opening words were to be deprived of effect or that the proviso was intended to be empty of meaning but that it was difficult to give it any meaning that did not undermine the opening words. This was the problem that had been identified in McGrigors’ advice from 23 March. The solution that emerged from the consultation was that, by using the concept of normal development and completion of design, the parties to the contract had intended that there would be an exercise of engineering judgement to determine whether any amendment from BDDI could be described as the normal development and completion of the design. Two arguments about how this could be done were considered. The first was that something would not be a Notified Departure if it had been necessary to make the design work in accordance with the contractual, statutory or best practice requirements. The second argument was that an amendment that was reasonably foreseeable to a reasonable contractor in the position of Infraco would not be a Notified Departure. In many situations the arguments would overlap. Both arguments, however, would be required to be considered for each amendment on a case-by-case basis and the prospects of them being upheld by a court were considered to be uncertain. Mr Nolan said that there was no great confidence in the arguments [PHT00000046, page 185]. The conclusion that the answer to the question was fact specific and would have to be considered individually for each amendment was highly material. Mr Nolan noted that there were eventually 850 alleged Notified Departures, so the need to consider each was a “huge problem” [ibid, pages 169–171]. Unsurprisingly in view of the advice, this was not pursued further in adjudications, but it was included in the position papers submitted to the Mar Hall mediation [ibid, page 185].

Project Carlisle

17.86 This project did not come into existence until after the March meeting. It was overseen and directed by Mr Rush. He had been brought in by Mr Jeffrey at the start of 2010 to assist in managing the situation that had developed with BSC. He explained that he received a call in March 2010 from Mr Flynn, a Director of Major Projects at Siemens, requesting a private meeting [PHT00000033, page 131]. Mr Rush said that the aim of the discussion at the meeting and the project that followed was to see whether the contract could be amended in order to provide CEC/tie with certainty [ibid, page 132]. This was to take the form of a new agreement in which there would be a maximum price for a reduced scope of works. The meeting took place in Carlisle, which was how the project acquired its name.

17.87 In pursuit of this goal, on 29 July 2010, BSC sent a guaranteed maximum price proposal to tie [CEC00183919, Parts 1–2]. This covered works to construct the full infrastructure from the east end of Princes Street to the Airport and some enabling works for the remainder of the original scope of works. The price that it said would be required for this was for a sum greater than anticipated by tie/CEC. Mr Rush noted that in terms of the previous overstatement of claims in adjudications this was not surprising, he said that it nonetheless created “panic” in CEC and tie that they could not afford the offer that had been made [PHT00000033, page 148]. The offer was still on the basis of pricing assumptions albeit that they had been reduced in number. In response, tie prepared and intimated a counter-offer on 24 August 2010 [CEC00221163; CEC00221164; CEC00221165; CEC00221166; CEC00221167]. This noted that it was a requirement of any agreement that tie should have certainty as to both price and time. To do this, any entitlement to additional payment under SP4 was removed. This offer had a price for works from the Airport to Waverley Bridge and another for works from Waverley Bridge to Newhaven. It was to be entirely in the discretion of tie whether BSC was called upon to undertake the second part of the works.

17.88 The proposal made by tie was not satisfactory to BSC and it made a further counter proposal by way of letter dated 11 September 2010 [CEC00218042]. This covered works only from Haymarket to the Airport. Again, the price was higher than had been hoped for within tie. The covering letter stated that the consortium had sought to remove exclusions and caveats that had been in the previous offer but that as tie had not resolved outstanding issues, this had not been possible. The letter said that it was a “Full and Final Offer” [ibid, page 0001] and that BSC was not willing to entertain any further discussions of the tie counter-proposal as it was “totally unrealistic both in terms of it’s [sic] pricing structure and level of risk transfer back to lnfraco” [ibid]. The offer itself said that the tie approach had sought to transfer risks to BSC many of which were not quantifiable. BSC said that it was willing to accept risk where it could be quantified but that the remainder must remain with tie. This was a clear echo of the communications that had taken place in the context of the original conclusion of the contract.

17.89 Mr Rush explained that an analysis had been carried out of the price sought by BSC in its second Carlisle offer and that it was apparent that the difference in respect of Siemens’ work was greater than that for BB [TRI00000141_C, page 0009]. He characterised the Siemens price as “opportunistic” as there had been no change in the work required of it since the BDDI. He considered that it was probably intended to correct errors in its tender. This was, however, denied by Mr Flynn and Mr Eickhorn for Siemens [PHT00000045, pages 136–137; PHT00000046, pages 21–22, respectively]. Notwithstanding the statement that the BSC offer was “Full and Final”, tie responded with a counter-offer on 24 September 2010 [CEC00129799; CEC00129800; CEC00129801; CEC00129802; CEC00129803]. It is apparent from the terms of the offer letter that BSC had in fact continued to work with tie in an effort to reach an agreement. The tie counter-offer was for a line from the Airport to St Andrew Square. The tie counter-offer was not accepted and there were no more substantive discussions.

17.90 On 29 October 2010, BSC wrote to tie [CEC00079219] responding to a letter of 19 October 2010 [CEC00132507]. The response from BSC appeared to take contradictory positions. On the one hand it said that it had not withdrawn from Project Carlisle but on the other that it would not participate further in meaningless discussions and that, in the absence of what it termed a reasonable response to its proposals, the effort to achieve a Project Carlisle-type agreement had “run its course” [CEC00079219]. This is consistent with Mr Jeffrey’s account of a telephone conversation on 7 October 2010 in which he said that Mr Walker had said that BSC had no appetite for Project Carlisle [CEC00099403].

17.91 The position that had been advanced by BSC was rejected because it was considered too expensive. The differences in price were summarised in a spreadsheet[23] that was produced later by Mr Coyle in the context of the mediation [TIE00355078]. It showed that BSC was seeking £450.6 million and that tie was willing to pay £314.3 million in total for works by the consortium. The gulf between them was very large. However, Mr Jeffrey explained that the core issue was not so much the headline price but the fact that it still contained assumptions in relation to the price and that this would not provide the degree of certainty required by tie [PHT00000033, pages 46–47; TRI00000097_C, page 0044, paragraph 266]. It will be recalled that certainty was one of the principal objectives of the proposal at the outset. Although an agreement had not been reached, the proposal that had been discussed formed the basis of the Project Phoenix proposal that was later considered at mediation [Mr Rush PHT00000033, pages 147–149; Mr Foerder PHT00000044, page 147]. I consider that mediation in more detail in Chapter 19 (Mediation and Settlement).

Termination

17.92 In his email convening the emergency meeting in January 2010 [CEC00550672], Mr Jeffrey had described the termination option as the least attractive one. Nonetheless, it played a part in the approach taken by tie throughout 2010. There were different strands to the thinking in relation to termination. One was that there would be termination by mutual agreement allowing tie to go on and re-procure works with a new contractor. The second strand was that there would be termination unilaterally by tie in respect of breach of contract on the part of BSC. The arguments for termination also arose in different contexts. In part it was considered a goal to be pursued in its own right, but it was also used as part of the strategy to get agreement in Project Carlisle. This was in the hope that an accumulation of Remediable Termination Notices (“RTNs”) served under the Infraco contract would undermine BSC’s negotiating position [Mr Fitchie TRI00000102_C, pages 0270–0271, paragraphs 8.147–8.150]. Once it was apparent that the Project Carlisle negotiation would not produce an agreement, however, termination was pursued solely as an end in its own right [ibid, page 0274, paragraph 8.170; Mr Jeffrey PHT00000033, pages 47–48].

17.93 Early in 2010, legal advice was taken by tie on the application of the contract terms. On 29 January 2010, DLA provided an outline of the termination provisions in the contract [CEC00444298]. Later, the report prepared by McGrigors on 23 March 2010 [CEC00591754], which was considered in paragraph 17.54 above in the context of the interpretation of the contract, also considered the termination provisions.

17.94 If termination was to take place without the agreement of BSC, it was necessary for tie to rely on the terms of clause 90. It made provision for termination of the contract by tie on the basis of default by Infraco [CEC00036952, Part 3, pages 0210–0214]. The term “Infraco Default” was defined in the first Schedule to the Contract [ibid, pages 0263–0264] and contained several elements. Those that were of interest to tie were:

“(a) a breach by the Infraco of any of its obligations under this Agreement which materially and adversely affects the carrying out and/or completion of the Infraco Works”

and

“(j) the lnfraco has suspended the progress of the lnfraco Works without due cause for 15 Business Days after receiving from tie’s Representative a written notice to proceed” [ibid].

17.95 For tie to be entitled to terminate the contract on these bases, it was required to give notice to BSC of the default that had occurred (an RTN). In response to an RTN, BSC was required to prepare a rectification plan. If tie did not accept the plan or, tie having accepted it, BSC did not adhere to it, the contract could be terminated on five days’ notice.

17.96 The service of RTNs was overseen by Mr Rush with assistance from DLA [Mr Rush PHT00000033, page 132; Mr Fitchie PHT00000017, page 36]. RTNs were served in August, September and October, and it is useful to look at the legal advice that was obtained in relation to them. In June 2010, DLA again sought advice from Mr Keen [CEC00337188; CEC00337189], but there does not appear to be any contemporaneous written record of the advice given. Mr Rush recalled that Mr Keen had advised caution in relation to the notices and had been, as Mr Rush put it, “very forthright on the possible adverse – adverse effect of terminating the contract” Mr Rush also commented that Mr Keen had almost gone as far as “saying it’s almost impossible to terminate the contract” [PHT00000033, page 163]. An email from Ms Glover of DLA dated 23 September [CEC00207814] refers to getting comments “on the RTN” but it is not clear that this is the same one on which advice was sought in DLA’s July letter. In relation to one matter it notes that it is “ok for this to go in if there are facts to support it” and this makes it clear that there had not been a review of the underlying merits on that occasion. In his statement, Mr Fitchie said that Mr Keen had advised that if tie was going to issue RTNs, tie would need to show material breaches of contract based on good factual information [TRI00000102_C, page 0326, paragraph 11.23]. Further light is shed on this by a report on what was called Project Resolution, which was prepared for the TPB and updated from time to time by Ms Clark. The final version, dated 22 December 2010, noted:

“Counsel did also confirm that it would be necessary for tie to provide evidence of adverse breach of contract to substantiate termination. However, it was not necessary to compile and test the body of evidence prior to the issue of RTN’s [sic]. We took a conscious decision in light of time pressures from CEC to issue RTN’s [sic] without having compiled this evidence but recognising that such evidence would need to be completed prior to any termination.” [CEC02084200, page 0048.]

17.97 Although this does not identify the date of the advice to which it refers, it is consistent with the narrative that I have given. Overall, the picture is one in which tie served the notices before evidence to support them was marshalled, but advice was given that it would be necessary to gather evidence to substantiate the allegations in any notices that it was serving.

17.98 McGrigors became involved in the consideration of termination on the basis of the RTNs at the end of 2010 [PHT00000046, page 178]. As the mood turned more to using the notices to terminate the contract rather than merely to apply pressure to BSC, it was again decided to consult Mr Keen for his views, and a meeting with him took place on 4 November 2010. In addition to Mr Rush and Mr Bell representing tie, it was attended by Mr N Smith and Ms Campbell from CEC and representatives of DLA and McGrigors. The record of the meeting makes it clear that the outcome was that further investigation was required of various matters in order to establish the strength of tie’s position in relation to proving the Infraco defaults that had been made the subject of RTNs [CEC00101459, page 0003, paragraphs 5.1–5.3].

17.99 I find it remarkable that sufficient investigation work to reach a defensible position had not been carried out before the notices were served and even more remarkable that it still had not been carried out by November, by which time it was clear that tie might want to be in a position to exercise rights under the contract. They were formal notices in relation to a matter in which substantial sums of money were at stake. It was envisaged that reliance would be placed on them to terminate the contract. If they were intended as a bluff, it should have been obvious that it was one that would be called. If they were not a bluff, it was reckless not to have gathered the necessary evidence. It left tie in a situation in which it could not follow through on threats because it could not be sure that it could prove its claims. Mr Jeffrey had not been directly involved in the work to serve the RTNs and said that he felt frustration that they had been served prior to having established a robust basis for them [PHT00000033, page 50]. Even if, as is suggested in the Project Resolution report, the decision to serve the notices was taken because of time pressure from CEC, I consider that to have been foolhardy. The notices should not have been served without the necessary supporting evidence. However, having served the notices without any evidential basis, it was obvious that it would be necessary to undertake investigations immediately afterwards to ensure that there was a sound evidential basis to support the notices in any subsequent litigation. Without such an investigation the service of the notices would be no more than sabre-rattling and risked undermining tie’s negotiating position if it transpired that they had been served without a proper evidential basis.

17.100 Shortly after the meeting with Mr Keen on 4 November, CEC decided that it wished to obtain its own advice in relation to the RTNs and the proposal to rely on them to terminate the contract. Mr Maclean sought advice from Mr Dennys QC, who specialised in the area of construction disputes in England, and then emailed Mr Jeffrey on 26 November with a summary of the advice that he had been given [CEC00013537]. This was recorded as being:

“To put this more clearly, termination on the basis of the present RTNs would not be advisable. However on any view, given progress to date by the consortium on the delivery of the works, it would appear probable that if properly investigated and formulated, valid grounds of breach could be articulated effectively in due course.” [ibid, page 0002.]

17.101 He also advised that the RTNs should not be tested through the contract DRP.

17.102 Further advice was provided to tie by Mr Keen and McGrigors [TIE00080959, Parts 1–2]. Mr Keen provided Opinions on 22 November 2010 and 1 December. In his advice of 22 November, he noted that the operation of the contract was such that

“unless tie is absolutely certain of being able to serve a valid termination notice such a course of action would carry considerable risk” [ibid, Part 2, page 0037].

17.103 In his advice dated 1 December, Mr Keen considered that the terms of the notices that had been served were such that if reliance were placed on them to terminate the contract, there was a material risk that tie would be found to have acted wrongfully [ibid, Part 2, page 0045]. On 14 December, McGrigors then provided further written advice to tie, in which it agreed that it would be unsafe to rely on the existing notices in the absence of a detailed analysis of all available material to enable a view to be taken on whether an Infraco default could be established [ibid, Part 1]. Again, as a reaction to this, Mr Jeffrey expressed frustration that, having gone down this route, tie was being told that it lacked the factual material justifying the notices [PHT00000033, page 57]. Mr Rush, on the other hand, claimed that by this time it was embarking on the mediation process and he may even have been relieved by the advice in that it underscored that termination was not the best option [ibid, page 172].

17.104 The possibility of termination had been pursued in one form or another for much of 2010. It is clear that it had taken up a lot of time and effort. Legal advice had been obtained on a number of occasions. Despite that, just as tie approached the stage at which it might have had to decide whether to take the final step to terminate the contract, it was advised that the work that had been carried out was not sufficient for it to be able to do so with any confidence. This arose from a failure to act in accordance with the advice that it had consistently been given. I very much doubt that relief was its reaction. I do not doubt that the advice that it was not prudent to proceed was correct but, in effect, it closed off the last possibility for tie to manage the situation that had developed under the contract. Using the contract dispute resolution machinery, seeking an agreement and attempting to terminate the contract had all run into the sand.

17.105 As the relationship between tie and BSC deteriorated, in September 2010 BSC indicated that it would stop works at a number of locations where it considered that it was working in the absence of an obligation to do so under the contract. From the start of November, it started to demobilise its site resources and those of its sub-contractors [CEC02084200, page 0016]. The Project Director’s report to the TPB for the meeting at the end of October noted that BSC had intimated that it would ramp down construction works at various locations and that there had been media reports that staff and sub-contractors were being laid off [CEC00014055, page 0017; Mr Bell TRI00000109_C, page 0158, paragraph 133]. Although tie disputed BSC’s entitlement to take such action, it was clear not only that the various strategies had failed to provide the desired breakthrough, but that, two and a half years after the contract was signed and while substantially behind programme, the works were grinding to a standstill. This was the context in which the mediation proposal took shape.

Footnotes

22. Now Lord Keen of Elie. ↵

23. Referred to as the “deck chair spreadsheet”. ↵

BACK TO TOP