Chapter 18: CEC: May 2008 to 2010

Introduction

18.1 Following the award of the infrastructure contract (“Infraco contract”) and the tram vehicle supply and maintenance contract (“Tramco contract”) in May 2008, various issues arose that confirmed the earlier concerns of the “B team” about the accuracy of the information provided to the City of Edinburgh Council (“CEC”) by tie Limited (“tie”) andtie’s apparent resentment of the “B team” seeking clarification of information provided to CEC. These concerns were discussed in Chapter 13 (CEC: Events during 2006 and 2007) and Chapter 14 (CEC: January–May 2008). These and other issues relating to the role and conduct of CEC officials between May 2008 and the end of 2010 are considered in this chapter.

Relationship between tie and CEC

18.2 In Chapter 14 (CEC: January–May 2008), I have commented upon tie’s apparent lack of transparency with CEC officials throughout the Edinburgh Tram project (the “project”), as disclosed in the evidence of Ms Andrew. It appeared to me that the Director of Finance and the successive Directors of City Development, being the directors responsible for the project, placed undue reliance upon tie. In particular, they sent tie draft reports prepared by them for submission to councillors, to enable tie to comment upon them and to suggest amendments that they invariably accepted. Moreover, difficult or awkward questions from a member of the “B team” could result in a complaint to CEC senior management, who responded by supporting the complaint. As was explained more fully in paragraph 14.7 of that chapter, Ms Andrew had personal experience of such a complaint. It appeared to her that tie did not understand that CEC’s officials had a duty to question them to ensure that CEC’s interests were being protected. The incident involving Mr Hamill’s manual adjustment of the quantitative risk analysis (“QRA”) referred to in that chapter and discussed more fully in paragraphs 18.3–18.7 below occurred during the period covered by this chapter. It was also further evidence of tie’s apparent resentment at CEC’s scrutiny of the project, as was Mr Jeffrey’s reaction to Mr N Smith’s email to him requesting information from tie, which will be discussed in paragraphs 18.9–18.12 below.

18.3 On 11 June 2008 Mr Hamill, tie’s Risk Manager, provided Mr Coyle with an updated QRA, to reflect the changes made to the risk allowance at financial close [TIE00352465; TIE00352466]. Requests for an updated QRA had been made by CEC on 12 and 20 May [CEC01222120; CEC01246325]. What Mr Hamill failed to disclose to Mr Coyle, however, was that the QRA spreadsheet, unlike previous versions provided to CEC, was not simply a product of the QRA computer software but contained a figure that had been “hard-entered” by Mr Hamill. Although I will deal with this incident in the context of tie’s assessment and reporting of risk (see Chapter 21), it is also relevant in the context of the relationship between tie and CEC.

18.4 By way of background, Mr Hamill gave evidence that as the commercial negotiations between tie and Bilfinger Berger Siemens (“BBS”) progressed in the first half of 2008 he was instructed by senior individuals at tie (Mr McGarrity and Mr Gilbert) to make changes to the risk allowance, without having received an explanation as to why these changes were being made. When he tried to query that, he was told, in colloquial terms, to “get back in your box” [PHT00000023, page 43] and to follow the instructions that he was given. He was concerned that he was in danger of losing his job if he kept challenging the making of changes to the risk allowance. In relation to the adjustment to the risk allowance that took place after financial close, he was instructed to adjust the QRA to reduce the allowance for general programme delay by £1.3 million, for reasons that were not explained to him. He told his superiors that changing one figure in the QRA would (marginally) change all the other figures, as the computer software would undertake fresh calculations for all the items in the QRA. He stated that he sent the email noted in paragraph 18.5 below so that his colleagues at tie were aware that in order to make the instructed reduction of £1.3 million in the QRA without all the other figures changing he would have to “hard enter” the reduced allowance for general programme delay in the QRA spreadsheet [ibid, pages 39–64].

18.5 In an internal tie email sent on 27 May 2008 to Mr Bell, Mr McGarrity, Ms Clark and Mr Murray, Mr Hamill explained that it was not possible to reduce the value of one risk in the QRA without affecting all the others [CEC01288043]. The email stated:

“Therefore, in order to get round this problem, I have basically ‘pockled’ the spreadsheet and hard-entered some values. This solves the problem and helps us get the final result past CEC as I doubt they will notice what I have done.

“I will revert to normal practise [sic] for future QRAs however in this instance I think this is the best way to do it in order to avoid unnecessary scrutiny from our ‘colleagues’ at CEC.”

18.6 Mr Hamill asked the recipients of his email to confirm, by 30 May, that they were content with his proposed approach and that he would take no response as being acceptance. None of the recipients of the email appears to have responded to Mr Hamill to advise that they disagreed with his proposed approach.

18.7 Although the effect of the change may not have been material in the context of the project as a whole, what is of concern is that tie presented a spreadsheet of the QRA to CEC under the pretence that all the figures in it had been produced by the QRA computer software (and, therefore, had a statistical validity) whereas, in fact, the figure for the risk of general programme delay had been entered manually by tie. What is also concerning is the fact that Mr Hamill had taken steps to manipulate the risk allowance figure for general programme delay in order to achieve the desired final result without having received any satisfactory explanation for that course of action. Although he did so on the apparent instructions of Mr McGarrity and Mr Gilbert, and with the knowledge of Mr Bell, Ms Clark and Mr Murray, who acquiesced in his actions by their failure to object to the procedure that had been adopted by him, it is clear that Mr Hamill thought that what he had been instructed to do was irregular and designed to mislead CEC officials. I have reached that conclusion based upon his evidence that he was unhappy with presenting a QRA containing a figure that was unjustified and that he sought clarification from Mr McGarrity and other members of the management team, including Mr Gilbert, but did not receive a satisfactory explanation. Despite that, he made the manual change. In the email mentioned in paragraph 18.5 above, his reference to having “pockled” the figures and his expressed view that he did not think CEC officials would notice what he had done as well as his statement that he had changed the figure manually on this occasion “in order to avoid unnecessary scrutiny” by CEC officials clearly illustrate his knowledge of the irregularity and the unlikelihood of its being detected. His explanation that his actions were based upon a fear of dismissal if he did not comply with the instruction from senior management does not justify the action that he took; rather, it reinforces my view that he was aware that he was participating in a scheme to avoid legitimate scrutiny by CEC officials. His explanation provides an insight into the management culture within tie at that time as well as the relationship between tie and CEC.

18.8 In Chapter 14 (CEC: January–May 2008), I have referred to Mr Hamill’s evidence that the relationship between some of the tie employees and some of the CEC officials was not harmonious. I concluded that it was indicative of a culture within tie of failing to co-operate fully with CEC. In particular, I considered that it was suggestive of tie’s unwillingness to share information that might have a negative effect on the project or that would cause CEC to undertake independent investigations of the contract suite and the allowance for risk. It seems to me that the manual reduction of a figure by £1.3 million, without telling CEC what had occurred, and the absence of any justification for the reduction, is an example of what members of the “B team” referred to as tie’s lack of transparency with CEC.

18.9 Another indication of tie’s lack of co-operation with CEC officials was its practice of complaining about the scrutiny of the project undertaken by members of the “B team”. As was mentioned in paragraph 18.2 above, this had occurred earlier with Ms Andrew. A further example occurred with Mr N Smith in August 2010. Following a meeting between tie and CEC to discuss the option of terminating the Infraco contract, Mr N Smith emailed Mr Jeffrey on 27 August 2010, setting out his views on what CEC required to inform its decision-making process. Mr Jeffrey forwarded Mr Smith’s email to Mr Fitchie and others at tie on 30 August 2010, noting:

“I have explained to Dave Anderson that I consider this e-mail unhelpful and symptomatic of the CEC input lacking focus. I am seeing Dave to discuss this on Wednesday.” [CEC00098050, page 0001.]

18.10 Mr N Smith gave evidence that, around this time, he was taken aside by Mr Maclean, Head of Legal and Administrative Services at CEC, and was told that a complaint had been made by senior tie management that Mr Smith was asking some difficult questions and that someone should have a word with him. Mr Maclean explained to Mr Smith that although he was required to have a word with him, he wanted Mr Smith to continue to ask such questions [PHT00000006, pages 75–76]. Mr Smith gave evidence that he was not surprised thattie had complained about his asking difficult questions. He stated that any time a member of the “B team” asked difficult or searching questions of tie, his perception was that a phone call would be made to someone more senior in CEC and either the issue would disappear or pressure would be brought to bear upon the member of the “B team”, or a position would be taken with which members of the “B team” did not agree [ibid, page 76]. In his evidence Mr Maclean explained that the Chief Executive, the Director of Finance or the Director of City Development had asked him to speak to Mr Smith about this matter, but he could not recall which senior official it was [PHT00000008, pages 45–46].

18.11 In his evidence Mr Maclean also explained that Mr Smith’s email to Mr Jeffrey had been sent with his approval, if not at his request. The questions in Mr Smith’s email were perfectly sensible ones to be asking. He considered, however, that Mr Smith’s email had signalled a change of approach to which tie had not previously been accustomed and that Mr Jeffrey’s response was a sign of resentment by tie of any interference or scrutiny by CEC. Mr Maclean considered that the approach of CEC’s officials prior to that time had not questioned or scrutinised tie adequately to protect CEC’s interests, and that that approach needed to be changed. He was of the opinion that Mr Jeffrey’s comment in his email to Mr Fitchie and others [CEC00098050] was indicative of a wider problem in the relationship between CEC and tie whereby it was assumed that there was no difference in position or interests between CEC and tie and that there should be the appearance of little or no challenge by CEC. This resulted from the “one family” approach advocated by Mr Aitchison, which wrongly assumed that the interests of tie and CEC were aligned but which was not adopted by tie. Between September and December 2010, it became increasingly clear to Mr Maclean that tie was failing and was resenting and resisting CEC’s involvement. It also became increasingly clear that CEC’s supervision was not adequate and that legitimate concerns were being, and had been, ignored. The more interest that Mr Maclean or others began to show, the greater the irritation and push-back from tie [PHT00000008, pages 44–48; TRI00000055_C, pages 0016–0017, paragraph 51].

18.12 Mr Maclean was a solicitor from private practice with experience of commercial contracts, who had only recently become involved in the Tram project following the retirement of Ms Lindsay as Council Solicitor. I found his assessment of the weaknesses in the relationship between tie and CEC to be highly persuasive. It explained the resistance of tie to independent scrutiny before the approval of the Final Business Case (“FBC”) as well as the later inaccurate reports to CEC about the nature of the contract and its progress, which are mentioned in other chapters (see Chapters 8, 10, 12–14 and 17). The “one family” approach advocated by the Chief Executive (Mr Aitchison) explained the past failures of CEC’s senior management to protect CEC’s interests as tie’s guarantor. In particular, it had failed to subject the project to careful independent scrutiny.

18.13 A further indication of the nature of the relationship between tie and CEC is reflected in the fact that, by mid-2009 at the latest, senior CEC officials began to share the expressed concerns of the “B team” about the reliability of tie’s reporting to them. This will be discussed in paragraphs 18.20–18.24 below.

CEC’s concerns over tie’s reporting

18.14 A report to the Internal Planning Group (“IPG”) on 25 March 2009 noted:

“It is recommended that independent expert dispute and project management advice is sought to ensure that the Councils [sic] best interest [sic] are being met and that a full understanding of the Council’s liabilities are identified.” [CEC00892626, page 0003.]

18.15 That was against the background that tie had acknowledged: “that the very future of the project might rest on the ability oftie to be successful on all major points of contractual principle in dispute” [ibid, page 0006]. The report recognised the need for tie‘s chairman to provide CEC’s Chief Executive with a report on the issues that were subject to the dispute resolution procedure (“DRP”) and for the provision of daily updates together with weekly written reports [ibid, page 0011]. In that context there were meetings between representatives of tie and CEC officials at various levels. Some of these meetings included members of the “B team” who were also the recipients of information from tie. Their involvement in these meetings did not allay the concerns about the relationship between tie and CEC that they had expressed at various stages including prior to the approval of the FBC and Financial Close.

18.16 By email dated 7 April 2009, Mr C MacKenzie provided an update of a meeting that he and Mr N Smith had had with Mr Fitchie and Mr McGarrity in relation to the DRP [CEC00900404]. In his email Mr C MacKenzie noted tie’s broad categories of disagreement with Bilfinger Berger, Siemens and Construcciones y Auxiliar de Ferrocarriles SA (“BSC”). The areas of dispute included the issue concerning which party had assumed the risks of “normal design development”. Moreover, BSC’s position was that until it was given unfettered access to work sites it would not lift a spade. Mr C MacKenzie noted that trust required to be built, both between CEC and tie and between tie and BSC. He noted that it was very clear that CEC was not in receipt of full disclosure from tie in the latter half of 2008 and in early 2009 and that there was a need for tie to be more transparent with the Tram Monitoring Officer (“TMO”). Mr C MacKenzie noted that the Infraco contract terms were developed and concluded effectively without reference to CEC. In an email dated 11 March 2009 to the Chief Executive of CEC, which will be discussed in paragraph 18.36 below, he had stated that Council officials did not know whether the contract was sound and in all respects in the Council’s best interests as client and funder. In his email dated 7 April 2009, Mr C MacKenzie also observed:

“The subject matter of the contentious points comes as no surprise. The B Team clearly stated what it believed to be risky areas for the project before a premature Financial Close; some of these matters are now heading towards DRP.” [ibid, page 0004.]

18.17 By email dated 9 April 2009, Mr C MacKenzie circulated a note of his meeting with Mr Fitchie and Mr McGarrity [ibid; CEC00900405]. It recorded that 350 Notified Departures were then in process. In respect of which party had responsibility for design management and evolution, the report noted:

“The main problem here stems from the fact that design was not complete at Financial Close. We understand from tie that the design part of the contract therefore had to be based on a number of agreed assumptions … The reality appears to be that such assumptions were based on the hope that the parties would agree matters commercially. However, it further appears if BSC seeks to stick to the contract terms absolutely, this will likely not favour tie. In short, we understand that the contract does not define ‘normal design development’ (which tie advise BBS are responsible for) on the basis that it is a term understood in the market. It now appears that it is more a ‘term of art’ capable of different interpretations.” [ibid, pages 0001–0002.]

18.18 Mr N Smith agreed with Mr C MacKenzie that there was a lack of trust between tie and some officials at CEC, particularly those officials in the “B team”. He stated that, throughout his involvement in the project between 2007 and 2008, his feeling was that tie did not often share full information with CEC. CEC officials would ask difficult questions and it would often take some time to get the information out of tie. He said that he was left with a feeling that he did not know whether he had the full picture [PHT00000006, pages 38–40].

18.19 Mr Coyle gave evidence that the quality of reporting from tie was poor, in that it was inconsistent and patchy and explanations regularly appeared to change [TRI00000144_C, page 0056; see also Mr Coyle’s email dated 23 July 2009, which noted that information on the Multi-Utilities Diversion Framework Agreement (“MUDFA”) seemed to change continually – CEC00666481].

18.20 The difference between the concerns of the “B team” at this stage and their earlier expressed concerns was that by mid-2009 they were shared by senior CEC officials. Mr Aitchison gave evidence that, in early 2009, his understanding of the extent to which the Infraco contract was for a fixed price had not substantially changed from his understanding when the Infraco contract was awarded in May 2008. I accepted his evidence on this matter because it reflected his reports to the Policy and Strategy Committee of CEC on 24 February 2009 and to the full Council on 12 March 2009, which will be mentioned in paragraph 18.35 below in the context of the Princes Street dispute. In both of these reports he referred to the Infraco contract as being a “fixed price” contract. From the impression that I formed of Mr Aitchison when giving his oral evidence to the Inquiry I am certain that he would not have repeated that description of the contract that had appeared in earlier reports prior to Financial Close if he had become aware that it was inaccurate. Increasingly, however, from around the summer or autumn of 2009, he considered that things were becoming less clear [PHT00000041, pages 157–158]. He shared Mr David Anderson’s concerns. expressed in an email dated 23 July 2009 (noted in paragraph 18.23 below) about the reliability of the information being provided by tie. In addition, there were issues about what was commercially sensitive and could be reported publicly. tie and CEC could not reveal figures that could have potentially damaged tie’s negotiating position with BSC. That also impacted adversely on the extent to which Council officials were able to provide the Council with realistic options. Mr Aitchison stated that, unfortunately, in the summer and autumn of 2009, there were too many variables and uncertainties to allow accurate reporting of strategic options. That, in fact, became a problem throughout the next 12–18 months [TRI00000022_C, pages 0063–0064, paragraphs 186–187].

18.21 Mr McGougan gave evidence that he also began to have concerns about the information coming from tie. These concerns had grown over time and started after the beginning of problems in respect of tie’s supervision of the MUDFA works and its supervision of the works on Princes Street. By the summer of 2009 there was concern, across the Council, about some of the information coming from tie. Mr McGougan emphasised, however, that it was very difficult for tie to provide definitive information, because so many of the key issues were subject to legal dispute [TRI00000060_C, page 0074, paragraph 194]. Although it may well have been difficult to put into the public domain sensitive information that might have affected tie’s negotiating position with BSC it is also important to recognise that the difficulties concerning the information provided by tie to CEC predated the approval of the FBC and the signature of the Infraco contract. Unlike Mr Aitchison, Mr McGougan as Director of Finance was one of the two directors responsible for the project. As was discussed in Chapter 13 (CEC: Events during 2006 and 2007), he and Mr Holmes had agreed to commission independent experts to review and quantify the risks to CEC associated with the Infraco contract and the Tramco contract but acceded to tie’s suggestion to replace that with an Office of Government Commerce (“OGC”) review. It seems to me that each of them must bear some responsibility for failing to protect CEC’s interests as guarantor of tie’s obligations to BSC.

18.22 Mr David Anderson recalled some reporting to the Tram Project Board (“TPB”), from around late autumn 2008, that there were some issues in relation to the interpretation of the contract. However, the first that he really became aware of the extent of the dispute between tie and BSC was as the Princes Street “stand-off” emerged in early 2009 [TRI00000108_C, page 0037]. The main thrust of tie’s reporting to the TPB was that the vast majority of Infraco Notices of tie Change (“INTCs”) were invalid and would be challenged [ibid]. He described a “dawning realisation” on his part that the cost of changes, differences in interpretation of the contract as to which party bore responsibility for the changes, delays in design completion, slow mobilisation of BSC and unsatisfactory progress of the MUDFA works were cumulatively putting pressure on the programme budget. When the Princes Street dispute arose, however, it became very clear that the programme budget was at risk [ibid, pages 0050–0051].

18.23 Mr David Anderson considered that tie was not as open and transparent as it should have been when reporting to CEC on the Princes Street dispute and, more generally, in relation to the disputes with BSC mentioned below and in Chapter 17 (Adjudications and Beyond). He felt that tie portrayed the situation as being due solely to an exceptionally aggressive commercial stance being adopted by the consortium (in particular, Bilfinger Berger (“BB”)). Although Mr Anderson considered that BB was taking an aggressive commercial stance, he did not believe that CEC was getting the full information that it needed at that stage, particularly about weaknesses in the contractual position and delays in design that were attributable to tie. In an email dated 23 July 2009, he had noted that he was “very anxious” about the reliability of the information being provided bytie (these comments being made in the context of tie’s best-case estimate for the cost of the project having moved from £534 million to £560 million without adequate explanation) [CEC00666481]. After Mr Jeffrey became Chief Executive of tie, and got up to speed with the details of the project and the weaknesses in the contract, Mr Anderson considered that a much more forthright and realistic view of the status of the project was provided [TRI00000108_C, pages 0055–0056 and 0059]. Mr Anderson felt as though he was “between a rock and a hard place” when reporting to councillors. Although there was a need to give councillors the fullest possible picture of the problems, and revised cost estimates, there was pressure from tie not to report information or figures that might find their way into the public domain, thereby undermining tie in its negotiations with BSC. Although the range of revised cost estimates was shared with senior councillors, he felt uncomfortable that these matters were not shared formally with other councillors, and he was not sure that the correct balance had been struck [ibid, pages 0064 and 0066].

18.24 Mr Inch gave evidence that there was an emerging concern in relation to tie’s relationship with BBS, which appeared to be becoming more confrontational. He began to doubt tie’s abilities in some respects, and its lack of sharing and transparency was worrying him. In that regard he detected almost an arrogance on the part of tie, which was irritating and was not well received by Council staff, who felt that they were being regarded as nuisances as opposed to people with whom to work to achieve a common goal. Mr Aitchison had raised withtie the fact that there required to be a more open and transparent relationship betweentie and CEC. The Council was in a difficult situation in that it was being given reassurance by specialists at tie that everything was all right, whereas junior Council officials were saying the opposite [TRI00000049_C, pages 0048–0050, paragraphs 123, 127 and 128].

Disputes

18.25 Early notice of the dispute that would arise between tie and the consortium in relation to which party bore the risks arising from incomplete design and design development was provided in July 2008 by an external peer review of the project, instructed by tie, which noted that:

“It is unclear to the review team where risk lies for design development. BBS and tie in interview considered risk lay with the other party.” [CEC01327777, page 0006.]

18.26 Moreover, by email dated 28 August 2008, Mr Fraser noted that it could be anticipated that tie would have to engage on extensive compensation events with its contractors and that he had been led to believe that BSC was preparing a multi-million-pound claim against tie. In a reply dated 29 August 2008, Mr C MacKenzie observed:

“This sounds rather ominous, but not altogether surprising. I cannot recall the number of warnings given by the “B Team” about the risk of claims materialising in this project.” [CEC01057495]

18.27 Mr C MacKenzie gave evidence that disputes were expected, given his knowledge at the time when the parties entered into the Infraco contract, and that it was no surprise when they did emerge. His expectation of disputes was derived, in part, from a general overview of the contract, as opposed to any detailed consideration of it. It was also derived from a sense that tie and BSC did not seem to have a satisfactory contractual relationship [TRI00000054_C, page 0104, paragraph 210].

18.28 At a meeting of the tie/CEC legal affairs group on 27 October 2008, Mr Bell reported that there were no formal disputes with any of the contracts but as contract management and implementation progressed there was the potential for a dispute to arise. Issues then under discussion between tie and BSC included a “point of principle” relating to the Base Date Design Information (“BDDI”). Other issues related to the delayed provision of Issued for Construction (“IFC”) drawings as well as what constituted “normal design development” and whether work at the Hilton Hotel car park was included in the Infraco works. Although Mr Bell considered that BSC might have a valid point in some of these issues, they would be dealt with on a case-by-case basis. He appeared reasonably optimistic about tie’s prospects of a successful outcome, based upon its analysis, which was supported by DLA Piper Scotland LLP (“DLA”) and independent contract consultants [CEC01166757].

Princes Street dispute

18.29 In early 2009, a dispute arose between tie and BSC in relation to the planned commencement of works in Princes Street. The circumstances of the dispute and its resolution on 20 March 2009, resulting in the Princes Street Supplemental Agreement (“PSSA”) and the completion of the work in Princes Street on a demonstrable cost basis, were more fully discussed in Chapter 16 (The Princes Street Dispute). That chapter principally considers the dispute from the perspective of tie and BSC. However, in paragraph 16.24 of that chapter I have also noted that after work commenced in Princes Street there was a change in the construction programme at the insistence of tie and its stakeholders, notably CEC. That change was made to ensure that Princes Street would re-open to traffic on 29 November 2009 for the Christmas season. Prior to the Tram project it was customary to have an embargo on utilities works and resulting roadworks during the Christmas and New Year period and during the Festival period. Although it would be possible to undertake roadworks during these periods as an exception to the embargo, that would require special circumstances and the agreement of the relevant convenor and the local councillors whose wards would be affected [TRI00000099_C, pages 0072–0073, paragraphs 303–306]. Senior officials in CEC ought to have been aware of that political approach to work embargos during these periods and should have taken steps to ensure that tie was aware that work in Princes Street should not be undertaken then or to obtain the approval of councillors to an exception permitting such work during those periods. The Inquiry has seen no evidence of CEC officials notifying tie of the likelihood of such an embargo or of seeking authority for tie to undertake work contrary to it. The failure to address the question of re-opening Princes Street for the festive season before the construction programme was agreed resulted in increased costs and reflected adversely upon the management of the project by both tie and CEC. In the case of the latter, councillors and officials were aware, in October 2008, of the disruption caused by the temporary traffic management plans at the foot of the Mound as part of the preparation for the works on Princes Street. They ought to have anticipated disruption throughout the period of work in Princes Street, including during the festive season in 2009. In these circumstances, in advance of any agreement about the construction programme for Princes Street, CEC ought to have advised tie to ensure that the programme complied with its desire to re-open Princes Street for the festive season. As was noted in Chapter 16 (The Princes Street Dispute), CEC’s failure in that regard necessarily resulted in increased costs associated with the change in the programme of work requiring Infraco to work 24 hours per day and 7 days per week.

18.30 On 24 February 2009, Mr Aitchison provided members of the Policy and Strategy Committee of CEC with a report informing them of the current position of the project, which stated that an additional sum agreed with the consortium shortly before contract close in May 2008 for completion of the project had

“cemented the risk allocation position agreed by the client and consortium, whose three members are jointly and severally liable for its successful completion within the terms of the fixed price contract” [CEC00682449, page 0001, paragraph 2.2].

18.31 The utility diversion works were stated to be “well underway [sic] and on target to be substantially completed by July 2009” [ibid, page 0001, paragraph 2.3]. It is notable that the report made reference to the fixed-price contract, confirming that as at that date Mr Aitchison was still under the impression that the contract was a fixed-price one.

18.32 The report advised members of the committee that, over the previous two weeks, significant issues had arisen in respect of contractual matters, financial consequences and the commencement of work that had been scheduled to start on Princes Street on 21 February 2009. Discussions between tie and BSC had continued over the previous few days, but BSC had failed to give a commitment to commence work on Princes Street in accordance with the contract. Accordingly, on 20 February, tie, with the support of CEC and the awareness of Transport Scotland, had issued a statement advising the public that work on Princes Street would not commence on 21 February as planned. Moreover, tie had formally activated the DRP in the contract. For legal reasons, it was not appropriate for the Chief Executive to say anything further at that point in time [ibid]. The Policy and Strategy Committee agreed with the recommendation strongly to support the position taken by the tie Board, and it noted that the Chief Executive would keep the Council “fully informed on the contractual issues referred to in his report” [CEC02083836, page 0001].

18.33 In view of the Chief Executive’s obligation, mentioned in paragraph 18.32 above, to keep the Council fully informed on the contractual issues and as part of CEC’s due diligence relating to the contractual dispute, CEC officials recognised that they required to obtain information from tie. The nature of the information to be provided by tie and its frequency were the subject of discussion within CEC on 26 February. Prior to that meeting, by email dated 26 February 2009, Mr Coyle circulated a note of matters that CEC required tie to clarify in relation to the contractual dispute [CEC00858138; CEC00858139]). The note recognised the need for CEC, as guarantor of tie’s financial obligations in respect of the Tram project, to be “in touch with the full facts of the dispute”, which only tie could provide. It stated:

“The Council should seek a report from tie explaining the actual root of the contractual dispute … tie need to update the Council on a daily basis on matters relating to the dispute. Currently there is a vacuum of knowledge from the Councils perspective.” [ibid]

18.34 By letter dated 5 March 2009, Mr Aitchison wrote to Mr Mackay, interim Chairman of tie, setting out a number of matters in respect of which tie was required to provide regular reports to CEC in relation to the contractual dispute [CEC00870592]. He confirmed that Mr Mackay was in regular contact with him around this time, in order to keep him informed about what was happening [TRI00000022_C, page 0061, paragraph 181].

18.35 On 12 March 2009, Mr Aitchison reported to the full Council in similar terms to the report provided to the meeting of the Policy and Strategy Committee on 24 February 2009 noted in paragraph 18.30 above. The report to members again referred to the Infraco contract as being a “fixed price” contract [CEC01891494, page 0001]. Members agreed to continue strongly to support the tie Board in its efforts to reach a satisfactory outcome to the dispute with the consortium [CEC00485227].

18.36 In paragraph 18.16 above, reference was made to Mr C MacKenzie’s email dated 11 March to Mr Aitchison about his report to the Council (mentioned in paragraph 18.35). On 11 March 2009, Mr C MacKenzie received a copy of an email from the Committee Clerk concerning the contents of Mr Aitchison’s report to the Council for its meeting the following day. In his response to Mr Aitchison, which was copied to Mr Inch and Ms Lindsay, Mr C MacKenzie did not address the point raised by the Committee Clerk but advised Mr Aitchison that it had been necessary for him to read Mr Aitchison’s report. He added:

“If I may be so bold as to venture a comment, might I say that what the Council officers do not know is whether the Infraco contract is sound and in all respects in the Council’s best interests as client and funder. It is just possible that the contract is not robust enough and as a result affordability for the Council becomes an issue. I appreciate we must be seen to be supporting the tie board in its contractual dispute, but I feel officers are lacking the requisite information, certainty and confidence at the present time.” [CEC00869667, page 0001.]

18.37 As was mentioned in Chapter 14 (CEC: January–May 2008), Mr C MacKenzie received a draft of Schedule Part 4 (“SP4”) of the Infraco contract in April 2008, and he read it. He stated that it was evident to him that clauses 2 and 3 of SP4 excluded a fair amount from the certainty of the lump sum, fixed and firm price of the construction works price. Despite that, it does not appear that he took any steps to alert the Council Solicitor or anyone else to his concerns in that regard. His email to Mr Aitchison might be seen as an oblique reference to his view that the contract was not a fixed-price contract. If that is correct, he ought to have advised Mr Aitchison directly of his view about the effect of SP4 on the issue of price certainty, to avoid perpetuating the misunderstanding of the Chief Executive and councillors.

18.38 As I discussed in Chapter 16 (The Princes Street Dispute), in 2008 a dispute arose between tie and BSC in relation to works on Princes Street, which was settled by the signing of a further agreement (the “PSSA”) [CEC00302099]. The PSSA amended the Infraco contract by providing that BSC would be paid on a demonstrable cost basis for the Princes Street works. CEC officials as well as tie appreciated that, even in the context of a fixed price for sections of the route, such as Princes Street, tie would incur the additional cost of Infraco having to deal with unforeseen ground conditions or to remove utilities that remained in the path of the construction works as well as additional costs arising from Notified Departures from the Infraco contract.

18.39 At the Council meeting on 30 April 2009, Mr David Anderson and Mr McGougan provided councillors with an update report [CEC02083772]. It stated that, following the commercial difficulties experienced between tie and BSC in respect of the works at Princes Street:

“a supplementary agreement has been entered into … to allow progression of Princes Street infrastructure works on demonstrable cost. This allows the contractor to be paid on this basis, for Princes Street works only, should they discover unforeseen ground conditions. This represents no further transfer of risk to the public sector.” [ibid, page 0002, paragraph 3.3.]

18.40 Paragraph 3.11 of the report also advised councillors that tie had undertaken a recent review of the tram budget. Although additional costs had been incurred as detailed in that paragraph, and any further adjustments would depend on the outcome of commercial discussions and the DRP between tie and BSC, it concluded:

“At this stage the range of numbers indicates the base case scenario remains that the full scope of the project can be delivered within previously agreed funding levels.” [ibid, page 0003.].

18.41 The report omitted to advise members of the likely increase in the cost of works on Princes Street as a result of the change from a fixed price for those works to payment on a demonstrable-cost basis. Members reaffirmed the Council’s commitment to delivering “tram line 1A” (also known as phase 1a) within the then current funding envelope, and noted the updated position in relation to progress, programme and cost of phase 1a [CEC01891440, Part 1, page 0008].

Other disputes

18.42 Apart from the Princes Street dispute there were numerous other disputes between tie and Infraco about the operation of the Infraco contract. By email dated 13 August 2009, Mr Jeffrey of tie notified Board members that BSC was refusing to start work on Shandwick Place, which was due to commence at the end of that month, unless the Infraco contract was amended to a cost-plus basis of payment for all remaining on-street works. tie had suggested that payment should be made in terms of the Infraco contract, failing which tie was prepared to enter into a revised PSSA, but BSC had rejected both of these options as unworkable, maintaining that the only workable option was a cost-plus basis [CEC00788086]. Mr McGougan gave evidence that BSC was simply refusing to undertake works that were subject to dispute and that even when specific changes had been agreed BSC sometimes took between six and eight months to provide estimates for tie’s approval. The estimates were invariably inflated, in tie’s opinion, and could not be agreed, resulting in the matter being subjected to the DRP. He described the situation as a “war of attrition” between tie and BSC [TRI00000060_C, pages 0075 and 0079, paragraphs 196 and 205].

18.43 On 20 August 2009, Mr David Anderson and Mr McGougan provided councillors with a further report updating them on the progress of the project [CEC00738172]. In relation to disputes the report advised councillors that the first DRP had been held on 29 May 2009 and an acceptable solution had been reached for the disputed estimates. However, despite mediation, tie and BSC had been unable to agree a revised programme and commercial baseline. As a result, tie had sought, and received, the approval of the TPB to take a more formal contractual approach to resolving the outstanding issues. It was noted that tie had taken extensive legal and technical advice and was

“confident of its position on the key matters in dispute. However, given the nature of the process and the complexity of certain issues, it is unreasonable to expect that all adjudication outcomes will be awarded in favour of tie.” [ibid, page 0003, paragraph 3.11.]

18.44 It was noted that:

“Given the above issues, it is now considered that it will be very difficult to deliver the full scope of Phase 1a within the available project envelope of £545m. Until the key issues are resolved through the contractual and legal process, it will not be possible to forecast accurately a revised budget outturn.” [ibid, page 0003, paragraph 3.12.]

18.45 The Infraco contract prescribed a timetable for the resolution of contractual disputes, and it was expected that the budget and programme implications would become much clearer by January 2010.

18.46 As part of the formal contractual approach to disputes mentioned in paragraph 18.43 above various disputes were referred to adjudication, and these were discussed more fully in Chapter 17 (Adjudications and Beyond). As was discussed in that chapter, tie was successful in the dispute relating to the Hilton Hotel car park that was referred to adjudication, albeit on a different basis than that advanced by tie. Mr Howie QC issued his decision in that dispute on 13 October 2009 [WED00000026]. In other disputes, tie succeeded in securing a significant saving in the sums claimed by BSC in its estimates submitted as part of the change procedure. However, BSC was successful on the question of principle that the adjudicator had been asked to determine, namely whether the change in question was a Notified Departure. On 16 November 2009, adjudication decisions were issued in the disputes arising under the Infraco contract in relation to Gogarburn bridge and Carrick Knowe bridge [CEC00479432; CEC00479431]. On 26 November 2009, Mr Fitchie emailed Ms Lindsay a copy of the adjudication decisions and an advice note by DLA [CEC00479429]. The advice note stated that BSC was likely to seek to rely on the adjudication decisions as they were favourable to BSC’s position [CEC00479430]. DLA recommended that advice be sought from senior counsel on potential grounds for challenging the adjudication decisions.

Reports by CEC officials

18.47 As I have noted in other chapters, senior CEC officials did not subject the FBC to the level of independent scrutiny advocated by the “B team”, and they provided councillors with reports that were inaccurate in material respects. These inaccuracies arose because of officials’ reliance upon the Chief Executive’s “one family” approach, mentioned in paragraph 18.11 above, and their uncritical acceptance of tie’s classification of the Infraco contract as being substantially a fixed-price one.

18.48 Bearing in mind the terms of previous reports to councillors before signature of the Infraco contract, and the later reports by Mr Aitchison mentioned in paragraphs 18.30 and 18.35 above, the impression conveyed by them to councillors was that the Infraco contract was one in which a substantial percentage (of the order of 90 per cent or 95 per cent) of the price was fixed, with the remainder being provisional sums [see, eg, CEC00906940; PHT00000001, pages 95–100; TRI00000015, page 0008, paragraph 26; PHT00000002, pages 154–156; TRI00000016, pages 0007–0010, 12–13, paragraphs 20–29, 36 and 40; PHT00000003, page 136; TRI00000099_C, pages 0036–0037, 0050, 0055, 0058, 0065–0068, paragraphs 156, 160, 211, 228, 243, 272 and 280; PHT00000002 pages 64, 68 and 91; TRI00000086_C, pages 0028–0029, 0048–0049, 0056, paragraphs 66, 68,121–123,147; TRI00000092_C, page 0025, paragraph 69; TRI00000125, pages 0024–0025, 0032–0034, paragraphs 28 and 42]. That was a false impression.

18.49 The update report by Mr McGougan and Mr David Anderson mentioned in paragraph 18.39 above suggested that as a result of the PSSA the fixed price for the Infraco works in Princes Street would not apply and that payment for these works would be on a demonstrable cost. This change only applied to Princes Street works. Although the update report mentioned that the PSSA would not result in a further transfer of risk to the public sector, I consider that it omitted to mention the likelihood of a price increase attributable to the change from a fixed price to a price based upon re-measurement after work was completed. Mr McGougan accepted that the change to payment on the basis of demonstrable cost was likely to result in a price increase [PHT00000043, pages 69–71; TRI00000060_C, pages 0072–0073, paragraphs 190–192]. His explanation for omitting to advise councillors of that likelihood was that only an engineer could answer whether the work could have been undertaken for the allocated fixed price of £2 million. I did not find that explanation to be convincing, and neither was his explanation that it would have been irresponsible to include an assessment of the cost in the update report. It would have been possible to advise councillors that the PSSA was likely to result in an increased price for these works without quantifying that increase. In the result, the cost of the works increased from £2 million to £11 million. Mr McGougan attributed that increase to poor supervision of the works by tie and the quality of the contractor’s work, resulting in the contractor redoing the work following the resumption of work after the signature of the settlement agreement (MoV5) on 15 September 2011 [CEC02085585].

18.50 It is axiomatic that councillors depend upon accurate reports from officials to enable them to take informed decisions. Misleading statements about the contract being a fixed-price contract or about the outcome of adjudications (discussed in Chapter 17, Adjudications and Beyond) rendered the reports inaccurate and tend to suggest a failure by senior CEC officials to protect CEC’s interests by subjecting the FBC, the draft Infraco contract and generally the information provided to them by tie to independent scrutiny. On any view that was a serious omission. However, the evidence of Mr N Smith’s briefing of Mr Maclean and his revision of draft reports to the Council in June and October 2010 caused me to consider whether it was truly an omission, the result of a deliberate policy of withholding information from councillors or simply reckless.

18.51 Shortly after Mr Maclean’s appointment in December 2009 as Head of Legal and Administrative Services within CEC, Mr N Smith sent him a briefing note about the project by email dated 8 January 2010. In his email Mr Smith stated that the briefing note was highly confidential and that:

“dissemination of the actual history here could cause serious problems and we definitely don’t want to set hares running. Some of it is down to internal politics, but it gives you a flavour of where we are and why … be very careful what info you impart to the politicians as the Directors and tie have kept them on a restricted info flow. Given current sensitivities it is critical that this remains in place.” [CEC00473789]

18.52 The briefing note attached to Mr Smith’s email provided a “potted history” of the project, including the difficulties that had arisen, the reasons for these difficulties, potential final costs and possible strategic options. The briefing note ended by stating: “Please also note that Members only have a small knowledge of the above so the info should be treated with caution.” [CEC00473790]

18.53 Mr N Smith gave evidence that he sent his email because Mr Maclean was going to meet a senior politician from the Scottish National Party (“SNP”) and he wanted to make sure that Mr Maclean was fully briefed. Councillors were receiving information through group leader briefings, to ensure that everyone got the same information at the same time. Mr Smith wanted to ensure that Mr Maclean was fully informed but that he was also aware that sensitivities were involved in releasing information to councillors. Mr Maclean was new to the Council, and Mr Smith was concerned that, in trying to be open with councillors, Mr Maclean might say something in Mr Smith’s briefing note that either was just Mr Smith’s perception, and was wrong, or was something that councillors did not know and should receive via the proper routes for receiving such information. He did not consider that there was any orchestrated campaign to keep information away from members – or that, if there was, he was not aware of it. He also stated that matters relating to the project were finding their way into the press fairly regularly, which he considered was to the detriment of tie and CEC, and that the project had become a bit of a “political football”. The reference to politicians having been kept on a “restricted info flow” was a reference to the route of the provision of information rather than to the qualitative or quantitative aspects of the information that had been provided. It was necessary to control the route by which information was provided to councillors in order to minimise leaks of information and protect tie’s commercial position during the dispute [PHT00000006, pages 53–60; TRI00000071_C, pages 0084–0086].

18.54 Although Mr Smith stated that the reference in his email [CEC00473789] to members having been kept on a “restricted info flow” was simply a reference to the route by which they received information (ie through group leader briefings), I reject his evidence in that regard. I consider that Mr Smith’s narrow reading of “restricted info flow” is contradicted by the reference in his email to dissemination of the “actual history” having the potential to cause serious problems. I further consider that Mr Smith’s narrow reading is also contradicted by the following sentence at the end of the briefing note: “Members only have a small knowledge of the above so the info should be treated with caution.” [CEC00473790] I consider that that sentence is a clear indication that, for whatever reason, members had not been provided with full information in relation to the project. My rejection of Mr Smith’s evidence in this regard is also consistent with his subsequent actions in relation to the content of the reports to the Council on 24 June 2010 and 14 October 2010. Even if the contents of the briefing note were merely Mr Smith’s perception that councillors were not advised of the “actual history” and were kept on a restricted flow of information, it seems to me that any official having such a perception ought to report his or her concerns in that regard to the monitoring officer because it could amount to maladministration if that perception reflected what was happening. There is no evidence before the Inquiry that Mr Smith reported such concerns to the monitoring officer.

Report to the Council on 24 June 2010

18.55 On 24 June 2010, Mr David Anderson and Mr McGougan, the responsible directors, provided councillors with an update on the project, including the then current contractual difficulties with the consortium. The report to the Council, again, referred to the Infraco contract as a “lump sum, fixed price” agreement [CEC02083184, page 0004, paragraph 3.3]. It noted that the contractual programme remained well behind schedule and that there continued to be serious contractual difficulties with BSC. It was unlikely that the project could be delivered within budget, but the overall outcome could not be forecast as long as there remained uncertainty associated with the disputes between tie and BSC.

18.56 The report stated that the application of the DRP had achieved resolution of a number of issues subjected to the process and had reduced by almost 60 per cent the amounts initially claimed by BSC, saving about £11 million to date, albeit that the improvement sought in infrastructure installation productivity had not materialised [ibid, page 0002, paragraph 2.4]. It also noted:

“Although the formal adjudications under the DRP have produced mixed results, the advice received has reinforced tie’s interpretation of the contractual position on the key matters under dispute … The outcome of the DRPs, in terms of legal principles, remains finely balanced and subject to debate between the parties.” [ibid, pages 0002 and 0005, paragraphs 2.6 and 3.12.]

18.57 The outcome of the adjudications was discussed more fully in Chapter 17 (Adjudications and Beyond), from which it is clear that the statement in the report that the outcome was finely balanced in terms of legal principles was inaccurate. It is unnecessary to undertake a detailed analysis of the adjudication decisions prior to that date because, in his evidence to the Inquiry, Mr David Anderson accepted that, by the time of the meeting of the Council on 24 June 2010, he considered that what was said in the report in relation to the outcome of the adjudication decisions was inaccurate. tie was losing the battle, albeit that there was a view from its legal advisers that it might not have lost the battle entirely in relation to legal principles. In addition, tie had been successful in reducing the cost sought by BSC for the works that were the subject of dispute [PHT00000043, pages 172–176; TRI00000108_C, pages 0087–0088]. Although tie had intended to enter into a lump-sum, fixed-price contract, the pricing assumptions in SP4 frustrated that aim. The practical effect of tie’s losing the adjudication decisions clearly invalidated its interpretation of the contract [ibid, page 0087]. In his evidence Mr Anderson stated that he did not draft the section of the report about the outcome of the DRPs and was not clear where it came from but in that context referred to Mr N Smith in the legal department [PHT00000043, page 172; TRI00000108_C, page 0088].

18.58 Mr McGougan, the co-author of the report along with Mr David Anderson, considered that in the early stages the result of the adjudications was mixed success, but later it became clear that for tie “things were not improving in relation to the results of the adjudication”. He assessed the date of that change as being “well into 2010” [PHT00000043, page 77]. In view of the passage of time between his involvement in the project and giving evidence it is understandable that Mr McGougan was unable to be more precise about the date of that change. That evidence does not contradict the evidence of Mr Anderson, who accepted that what was said about the outcome of the adjudications in this report was inaccurate [ibid, pages 172–177]. Mr Anderson’s evidence was also consistent with the evidence of Mr N Smith (mentioned in paragraph 18.59 below) that, with hindsight, he did not consider that the statement about the DRP decisions in the report was correct. Both Mr Anderson and Mr McGougan, as the authors of the report, accepted that they had responsibility for its accuracy even although they were relying upon colleagues within the legal department to provide the appropriate wording relating to the outcome of the DRPs in terms of legal principles.

18.59 Mr Smith gave evidence that, although a lot of legal dialogue was going on at the time, with hindsight, he did not consider that what was said in the report about the DRP decisions was correct. Although those decisions had resulted in savings from the amounts claimed, there was a knock-on impact of tie’s losing the underlying legal arguments. He associated the phrase “finely balanced” with Mr Jeffrey, but he did not know whether it had come from him [PHT00000006 pages 85–87]. Following Mr Smith’s evidence at the public hearing, and Mr David Anderson’s query about the source of the relevant sentence, the Inquiry undertook further investigations into the various revisions to this report as well as to the report to the Council meeting on 14 October 2010. The outcome of those investigations was that Mr Smith had sent an email dated 11 June 2010 to Mr McGougan and Mr Anderson, stating that he had agreed “a few comments from Richard” [CEC00246713]. That tended to support his original impression that the phrase “finely balanced” emanated from Mr Jeffrey. He also stated in his email that (paragraphs) “3.13 and 3.5 are now correct” [ibid]. Paragraph 3.13 included the sentence about the outcome of the DRPs being finely balanced, and the tracked changes disclosed that Mr Smith had added that sentence [CEC00246714, page 0005]. In a supplementary statement to the Inquiry, he accepted that he had inserted the relevant sentence into the report although when he originally gave evidence he could not recall doing so [TRI00000280_C, page 0001].

18.60 It appeared from his evidence overall that Mr Smith sought to justify on two counts his inserting into the draft report the inaccurate sentence about the outcome of the adjudications. The first was that it might have emanated from Mr Jeffrey [PHT00000006, page 86]. Even if that were the case, it did not justify his inserting an inaccurate statement into a report that he knew was intended for councillors who were entitled to rely upon the accuracy of information provided to them by officials. The second was that there was no discussion or challenge of the sentence despite the fact that the draft report was subject to review by a number of individuals from CEC, tie and DLA [TRI00000280_C, page 0001]. This is an astonishing position to adopt. It suggests that it is in order for an official to include a statement in a draft report that he knows to be inaccurate, because he expects others reviewing the draft to correct the inaccuracy. It fails to recognise the obligation of all officials not to mislead councillors, which would occur if others failed to notice the error. It also fails to appreciate that on issues of interpretation of legal decisions council officials, including senior officials who are not legally qualified, might be expected to rely upon the views expressed by qualified solicitors within CEC. In this case Mr Smith, a qualified solicitor, not only introduced the inaccurate sentence but reassured the responsible directors in his email to them that the paragraph containing that sentence was correct. The failure of others to notice and correct the relevant sentence cannot, and does not, excuse Mr Smith’s actions.

Report to the Council on 14 October 2010

18.61 Before considering the report to the Council meeting on 14 October 2010, which included a similar inaccurate statement about the outcome of the DRPs, it is important to recognise the significance of Lord Dervaird’s adjudication decision in relation to the Murrayfield underpass dispute, issued on 7 August 2010 [BFB00053462]. This was discussed in more detail in Chapter 17 (Adjudications and Beyond), but, in short, Lord Dervaird found in favour of BSC that, having regard to the terms of clause 80.13 of the Infraco contract, BSC was not obliged to start work that was subject to an INTC until an estimate had been agreed for that work. Work could, however, commence if tie relied upon clause 80.15, but in that event BSC was entitled to payment for the work on a demonstrable cost basis. This decision caused increased concerns within CEC about the project.

18.62 In a memorandum dated 11 August 2010, addressed to Mr Aitchison and copied to Mr McGougan, Mr David Anderson set out his view that, following Lord Dervaird’s adjudication decision, he was now “deeply concerned” about the project [CEC00013622]. Mr Anderson gave evidence that his concerns had been growing for a long time and that tie had clearly ended up in a weakened position following the various adjudication rulings that had undermined its view of the contract. He considered that tie’s losing the adjudication in respect of the correct interpretation of clause 80 was the end of the road for its endeavours to adopt a more aggressive commercial approach to the dispute [TRI00000108_C, page 0091]. Mr McGougan shared these concerns [TRI00000060_C, pages 0094–0095, paragraph 240].

18.63 Against that background, Mr David Anderson and Mr McGougan provided councillors with a report for the Council meeting on 14 October 2010 [CEC02083124]. The purpose of the report was to refresh the business case as requested at the Council meeting on 24 June and to update councillors on recent contractual negotiations and governance arrangements.

18.64 Paragraph 2.50 of the section of the report dealing with the dispute between tie and BSC was in the following terms:

“tie has been exercising its various rights and remedies under the contract. Further to the figures reported to the Council in June, to date the application of the dispute resolution process to disputed matters has reduced BSC’s claims for additional payment from £21.9m to £9.5m (a saving of £12.4m). tie remains satisfied that the overall balance of dispute resolution including adjudication outcomes has more than justified its interrogation of the initial claims made by BSC. The overall outcome of the DRPs, in terms of legal principles, remains finely balanced and subject to debate between the parties.” [ibid, page 0007.]

18.65 Members endorsed tie’s rigorous application of the contract and noted that, in the absence of robust remediation plans from BSC and a change of behaviour in relation to progressing the works, serious consideration would need to be given to termination of the contract and re-procurement CEC01891429, page 0007].

18.66 Mr McGougan gave evidence that, although he signed off the report to the Council on 14 October, in relation to the text commenting on the DRPs, he was relying on legal advice from the Council’s legal staff and from tie’s legal advisers [TRI00000060_C, page 0099, paragraph 250]. He stated that he thought that success in the adjudications was mixed, but he was aware that, over the course of the disputes, the trend was that tie was becoming less successful. The commercial situation (ie the dispute between tie and BSC) was a significant factor in how much information members were given, and the wording of reports to the Council was “incredibly important” to CEC officials, tie and tie’s legal advisers. He was still receiving advice that in terms of legal principles there was an argument to be had [PHT00000043, pages 78–82]. Although I accept that the wording of reports was important to ensure that negotiations between tie and BSC were not compromised, that did not justify giving members false information. When confronted with the suggestion that tie was losing the DRPs overall but that that was not being reported to members, he replied:

“Well, one, I’m not sure if that’s the case or not. But if it had been, I think it might have been damaging to tie’s further attempts to secure other legal routes with the contractors, to place that into a public document.” [ibid, page 80.]

18.67 It seemed to me that Mr McGougan was being disingenuous. Even on the assumption that he was unsure whether tie was losing the DRPs overall, which I do not accept, it is difficult to understand how placing that information into the public domain by incorporating it into a report to councillors could affect tie’s decision to pursue other legal remedies. That decision would depend on the strength of the evidence supporting such a course of action. Although it is true that tie was exploring other remedies, including the use of Remediable Termination Notices (“RTNs”), and in that context there might well be legal arguments to be deployed, that is different from the outcome of the DRPs that had already been determined. As with any anticipated legal dispute that envisages future action involving the deployment of legal arguments, there would be uncertainty about the outcome of the use of RTNs. Any assumption, however optimistic or even realistic, about the outcome of such future disputes cannot act as a balance against the known outcome of the matters that have already been determined. To the extent that this evidence was intended to refute any suggestion that the report was inaccurate in its reporting of the outcome of the DRPs, I reject it. I prefer the evidence to the contrary effect of Mr David Anderson (mentioned in paragraph 18.68 below), who accepted that the report was inaccurate about the outcome of the adjudications. Mr Anderson’s evidence was also consistent with the evidence of Mr N Smith that, with hindsight, he did not consider that the statement about the DRP decisions in the report was correct.

18.68 Mr David Anderson gave evidence that the wording in the report to the Council on 14 October in relation to the outcome of the adjudications was clearly not accurate by that time and should not have appeared in the report [PHT00000043, page 177].

18.69 For the sake of completeness, I should deal with Mr David Anderson’s evidence about the availability of information to councillors from sources other than reports to the Council. He explained that each party’s transport representatives could attend the TPB each month (albeit that the SNP did not take up its seat on the TPB, and the Green Party rarely attended) and were getting updates of the problems as they unfolded. TPB members were aware by June 2010 that the project’s contingency budget was almost fully committed and that a number of claims on that budget were attributable to DRP decisions in favour of BSC. In addition, the senior politicians in the administration, namely Councillors Dawe, Cardownie, G Mackenzie, Wheeler and Buchanan, were also briefed by CEC officials on a regular basis about problems as they unfolded. Beyond these members, however, Mr Anderson considered that there was a delay in formally advising CEC of the growing problems [TRI00000108_C, pages 0088–0089]. Although councillors were also advised of the general state of play through party briefings, Mr Anderson considered that, with the benefit of hindsight, there might have been an element of optimistic bias in the reporting, with it having been done through the lens of tie’s view of the world [PHT00000043, pages 176–179; TRI00000108_C, page 0096].

18.70 Information available to members of the TPB and to senior politicians is different from information within formal reports to the Council upon which councillors as a body rely when taking decisions. The fact that some members may have had other sources of information does not excuse the submission of inaccurate reports to councillors in advance of Council meetings. In fairness to Mr David Anderson, I do not think that he was seeking to excuse the inaccuracy in the June and October reports when referring to these other sources of information. Mr Anderson’s perception of party briefings was that the information provided to councillors in that forum might have been unduly optimistic. The Inquiry is unaware of the detail of any information provided at group meetings about the outcome of the adjudications by October. In my view it is unlikely that it would differ from the content of the report to the Council on 14 October, otherwise I would have expected councillors to have taken issue with that report. In any event the availability of information to individual councillors from attending the TPB or meetings of senior politicians in the administration or group meetings is no substitute for providing information to councillors as a whole. Councillors are entitled to expect officials to report to them as a body, thereby enabling each councillor to take decisions that he or she considers to be correct based upon the formal reports provided to him or her. Needless to say they are also entitled to expect that the reports are accurate.

18.71 Both Mr David Anderson and Mr McGougan, as the authors of the report, accepted that they had responsibility for its accuracy even although they were relying upon colleagues in the legal department to provide the appropriate wording relating to the outcome of the DRPs in terms of legal principles. However, Mr N Smith must also bear some responsibility for misleading councillors about the outcome of the adjudications because, as will be noted in paragraph 18.78 below, the final version of paragraph 2.50 of the report was drafted by him when he knew that it was inaccurate. Nevertheless, that does not exonerate the authors of the report, who were aware of the implications of Lord Dervaird’s decision.

18.72 Mr Smith gave evidence that, looking back, what was said in the report to the Council in relation to the outcome of the adjudication decisions was not accurate. He acknowledged that, at the time, he would probably not have thought that it was accurate to suggest that the overall outcome of the adjudications was finely balanced in terms of legal principles [PHT00000006, pages 100 and 140–141]. He stated that he could not “honestly recall how that wording or where that wording came from” [ibid, page 101] but he was aware of discussions about what should be included in reports and that tie had strong views about that.

18.73 Mr Maclean gave evidence that the wording that appeared in the report to the Council on 14 October in relation to the DRPs was not in the draft report on which he had been asked to comment. He first became aware of the wording at the Council meeting and he was angry because what was reported was not accurate and, with the benefit of hindsight, was probably misleading [PHT00000008, pages 65–70]. He accepted that what was said in the report to the Council about the outcome of the adjudications was patently an incorrect factual statement and, in his view, could amount to maladministration [ibid, page 77].

18.74 In light of the above evidence, the Inquiry decided to ascertain the provenance of paragraph 2.50 of the report. As was the practice in CEC at that time, junior officials drafted a report for consideration of the responsible directors. The directors would be involved in revising the draft report and in signing the final report for submission to councillors in advance of Council or committee meetings. Mr Coyle and Mr N Smith were the junior officials involved in the drafting of the report on this occasion. As with many reports, there were several iterations before it was finalised.

18.75 Mr Maclean considered the fifth version of the draft (Draft v1.5) and made manuscript amendments to it that he forwarded to Mr Smith on 6 October. In particular he proposed the deletion of paragraphs 3.49–3.53 inclusive, which related to the DRPs and to the service of RTNs, and drafted an alternative paragraph 3.49 in the following terms:

“To date tie has been exercising its various rights and remedies under the Infraco contract but the detail of that needs to remain confidential at this stage. However, the Council should be aware that all options are being considered.” [WED00000648, page 0007.]

18.76 In his supplementary statement to the Inquiry he explained that he had suggested the above amendments because he thought that neutral wording about the outcome of the DRPs should be used in view of concerns that what had been said in the June 2010 report might have breached the confidentiality obligations in the Infraco contract. In addition, “the language at paragraphs 3.49 to 3.53 went into detail about the adjudications, sought to justify tie’s approach and present them in a favourable light and also gave detail in relation to the RTNs”. He also wished to “buy time” to enable a proper legal analysis to be carried out by CEC (and not tie), with the assistance of external legal advisers, before councillors were given a proper analysis and informed recommendations [TRI00000274, page 0005, paragraph 2.5].

18.77 By email dated 6 October, Mr Smith sent Mr Coyle a revised draft incorporating Mr Maclean’s amendments and explaining that Mr Maclean was “rightly concerned that disclosing certain of the info could potentially breach the wide confidentiality provisions under the contract” [WED00000652 pages 0023–0032 at page 0023]. He sent a copy of that email and attachment to Mr Maclean and Ms Campbell, a senior solicitor in CEC. On 7 October there were subsequent communications involving Mr Coyle, Mr Smith and employees of tie about the content of the report, during which tie emphasised the importance to it of the inclusion of information in the report on the DRPs [email dated 7 October 2010 from Ms Haeburn-Little – ibid, page 0047]. At 17.27, Mr Coyle sent an email to Mr Jeffrey enclosing what he hoped would be the final version of the report. At 20.01, Mr Jeffrey sent Mr Coyle and Mr Smith a revised report [ibid, pages 0035–0046]. Paragraph 2.49 of the draft from Mr Jeffrey was in identical terms to paragraph 2.50 of the final report submitted to members and quoted in paragraph 18.64 above, with the exception of the last sentence which was in the following terms:

“Suggestions in the press that BSC have ‘won 13 out of 15’ adjudications are without any foundation and factually incorrect.”

18.78 On 8 October, Mr Smith sent an email to Mr Coyle, explaining that Mr Maclean was keen not to go further than they had done in June but that it did not seem logical to provide the same figures as had been produced in June and he had updated them. He provided the text of the new paragraph 2.49, which was in identical terms to, and became, paragraph 2.50 of the final report. He then forwarded the email to Mr Maclean and Ms Campbell without any comment [CEC00036173]. Apart from providing revised figures, the effect of Mr Smith’s amendments was to delete the last sentence included by Mr Jeffrey that is mentioned above and to substitute for it the sentence to the effect that the overall outcome of the DRPs was finely balanced in terms of legal principles.

18.79 In his supplementary statement Mr Maclean said that he did not recollect seeing the email from Mr Smith to Mr Coyle on 8 October 2010 despite it, apparently, having been forwarded to him (albeit with no covering message). Mr Maclean maintained his position that he had been unaware, before the meeting of the Council on 14 October 2010, that his suggested neutral wording, which was mentioned in paragraph 18.75 above, had not been accepted. He did not take issue with the wording in the report in relation to the outcome of the DRPs at the meeting of the Council. He explained that to have done so would have been unheard of and that it would have been a significant breach of protocol for a third-tier officer (as he then was) to correct a director’s report in public and in front of councillors. At the time, he considered that he had given his advice and that if his superiors chose to override that advice, it was their prerogative to do so. Rather than create further confusion, he had taken the view that the better course of action was to continue to pull everything together so that, for the first time, a proper reasoned analysis could be provided to councillors [TRI00000274].

18.80 In a supplementary statement Mr Smith accepted that he had inserted the sentence in the report in relation to the outcome of the DRP decisions. Although he could not remember his thinking at the time, he suspected that he had inserted it in an effort to find a middle ground between whattie had requested in the draft attached to Mr Jeffrey’s last email and what CEC could accept. In his statement he referred to the fact that CEC had instructed Shepherd & Wedderburn to advise it “in relation to the possible contract termination or a variation on this theme” [WED00000652, page 0049] and it was proposed that a comprehensive report would be submitted to the Council in December 2010. He also mentioned that his proposed wording had been sent to Mr Maclean and Ms Campbell as well as Mr Coyle. Finally, he observed that his inclusion of the last sentence in paragraph 2.50 was not questioned at any time [TRI00000280_C, pages 0003–0004].

18.81 The criticisms of Mr Smith’s acts and omissions in relation to the June report apply with greater force to his involvement with the October report. As with the June report, he cannot rely upon the failure of others to question the accuracy of the relevant paragraph. He was aware that Mr Maclean had suggested amendments to the draft report two days before it was finalised and had proposed neutral wording for what became paragraph 2.50. Although Mr Maclean was the head of the legal department of which he was a member, Mr Smith altered that paragraph in an effort to accommodate tie’s wishes without seeking Mr Maclean’s views. I do not consider that forwarding to Mr Maclean his email to Mr Coyle dated 8 October with no covering message or request for any action by Mr Maclean can provide Mr Smith with any excuse or comfort for his actions on this occasion, the seriousness of which needs no elaboration. Councillors rely upon the accuracy of reports to enable them to take informed decisions. Clearly, on occasions, mistakes may occur in the drafting of reports, but that is not the situation with the October report. Mr Smith inserted the last sentence in paragraph 2.50 of the report, but it did not reflect what he believed at the time [PHT00000006, page 100; TRI00000280_C, page 0003]. That is inconsistent with the standards expected of officials and solicitors within a local authority.

18.82 The impression created by his evidence is that he inserted that sentence because of the desire by tie to have a reference in the report to the DRPs. Having regard to the views that he had expressed to Ms Lindsay as a member of the “B team” about the need for independent advice to protect CEC’s interests, it is ironic that he should pray in aid tie’s wishes when his primary obligation was to councillors, the responsible directors and the Head of Legal Services.

Re-organisation within CEC legal

18.83 In paragraph 18.95 and the subsequent paragraphs I will consider the issue of CEC exercising more control over the project during 2010. Before doing so, it seems appropriate to consider whether there was any lack of clarity about which official had responsibility for providing legal advice to CEC on the project between December 2009 and August 2010 and, if so, whether that delayed the action that CEC ultimately took.

18.84 In 2009, CEC required all departments, except education, to make efficiency savings. Mr Inch was the Director of Corporate Services, responsible for “back office services” such as Council secretaries and Council solicitors. He had to make substantial savings in that department, resulting in several employees opting for early retirement. As part of departmental savings Mr Inch created an amalgamated post of Head of Legal and Administrative Services and dispensed with the post of Council Solicitor. Ms Lindsay was the Council Solicitor and submitted a case for her appointment to the newly created post, but Mr Inch rejected that submission. Accordingly she intimated her desire to retire early rather than participate in a recruitment process for the new post. Mr Maclean was appointed to the newly created post in December 2009. Mr Inch was keen to retain Ms Lindsay’s services to enable a proper transfer of her knowledge and experience with the project to Mr Maclean and to delay her retirement for that purpose. In addition, further savings were envisaged by outsourcing some Council services and Ms Lindsay had also been heavily involved in that project, called the alternative business model [PHT00000007, pages 186–190; PHT00000027, page 181].

18.85 Ms Lindsay remained employed by the Council, in a specially created post that sat outside the Legal and Administrative Services division. A letter dated 12 November 2009 from Mr Inch to Ms Lindsay (copied to Mr Maclean) stated that, with effect from 1 December 2009, Ms Lindsay would work:

“as part of the Tram Project team representing the Council’s interests in the tram project including:

(i) Membership of tram project sub-committees, ensuring the Council is accurately briefed on the legal aspects of commercial engagement and provide both a support and challenge role with tie.” [CEC00692177, page 0001.]

18.86 Separately, Ms Lindsay was also to lead the legal advisory work stream of the Council’s alternative business models project. Ms Lindsay remained employed by the Council in that post until her departure in August 2010.

18.87 Ms Lindsay gave evidence that Mr Maclean was responsible for providing legal advice to the Council on the project between December 2009 and August 2010. Although she continued to attend meetings of the IPG until May 2010 (with Mr Maclean attending such meetings from June 2010 onwards), Ms Lindsay did not consider that that was a good indication as to when the transition in responsibility for providing legal advice to the Council in relation to the project occurred. Instead, Ms Lindsay gave evidence that, at the meeting of the IPG in January 2010, it was agreed that weekly meetings would be scheduled with Mr McGougan, Mr David Anderson, Mr Jeffrey and relevant others [CEC00470184, page 0001, item 2], which meetings Mr Maclean was to attend. Ms Lindsay considered that her role in the project was a more limited one, involving providing operational support to Mr Smith [PHT00000027, pages 180–181]. From January 2010, her role was in the alternative business model project (together with another developing project), which were her priorities, and she retained only a “peripheral” role in the Tram project, involving interfacing with CEC’s in-house legal team. She stated that she was last “fully engaged” in the Tram project in 2009 [TRI00000160, pages 0014 and 0067]. Mr Inch and Mr Aitchison supported the view that Mr Maclean was responsible for providing legal advice to CEC on the Tram project, although Mr Inch anticipated that that would be done in consultation with Ms Lindsay [PHT00000007, page 190; TRI00000022_C, page 0068, paragraph 201]. Mr Anderson did not consider that Ms Lindsay was playing any active role in the project in the first half of 2010, and his recollection was that Mr Maclean began to be involved in the project in a significant way from the early autumn of 2010 [TRI00000108_C, page 0094].

18.88 In contrast, Mr Maclean gave evidence that it was made clear to him, both from the letter from Mr Inch to Ms Lindsay mentioned in paragraph 18.85 above and from a conversation that he had had with Mr Inch before he started with the Council, that his responsibilities for the project “were nil” [PHT00000008, page 12] and that they had been passed over to Ms Lindsay until her retirement in August 2010. He described that as being awkward and frustrating. Before he joined the Council, he was expecting that he would become immersed in the project. Mr Maclean was quite clear that he was not given responsibility for providing legal advice to the Council in relation to the project during the period from December 2009 until August 2010.

18.89 Although that was the formal position, informally Mr Maclean tried to keep abreast of where things were with the project by getting information about it from people such as Mr Smith, so that he would be able to “hit the ground running” when he did become responsible for it following Ms Lindsay’s departure. Prior to August 2010 he responded to ad hoc requests for advice and emails and provided minor comments on reports to the Council [ibid, pages 12–22; TRI00000055_C, pages 0001–0003, paragraphs 3 and 15].

18.90 Mr Smith’s understanding was that Ms Lindsay was given responsibility for the project between Mr Maclean’s appointment in December 2009 and her departure in August 2010. He stated that, given the ongoing difficulties, he preferred to have a clear line of reporting to someone who would still be in post after the summer of 2010, and that he felt more certain that Mr Maclean would listen to, act upon or challenge his views or concerns [TRI00000071_C, page 0080]. He stated that the presence of both Mr Maclean and Ms Lindsay created certain difficulties for him, as he was, in essence, “briefing two masters” [PHT00000006, pages 51–52]. Email correspondence in February, April and May suggests that Ms Lindsay expected Mr Smith to report to her about the project and to keep her advised of developments [CEC00480029; CEC00242287; CEC00242406]. It also appears that Mr Maclean recommended that CEC should instruct Dundas & Wilson (“D&W”), solicitors, to review the Infraco contract and to report to CEC on (1) the options for tie under the contract to exit it and tie’s exit liabilities; and (2) the ability to reduce the cost of the contract by instructing a change to downsize the project and consequent liabilities [CEC00479797; CEC00480029]. Ms Lindsay was unaware of such instruction.

18.91 From the above evidence it appears that there was a lack of clarity about which official was responsible for giving legal advice to CEC on the project between December 2009 and August 2010, which was the official retirement date for Ms Lindsay. One might have expected the Head of Legal Services to fulfil that role but Mr Inch’s letter appeared to suggest otherwise and Mr Maclean was entitled to assume that Ms Lindsay retained that responsibility until she left or the transfer of responsibility was effected prior to that date, particularly as she was in a specially created post outside the Legal Services Department. Mr Smith, the solicitor principally concerned with the project on a day-to-day basis, considered that Ms Lindsay retained responsibility as CEC’s legal adviser in relation to the project despite his resistance to that situation. Moreover, Ms Lindsay continued to attend IPG meetings until May 2010 and Mr Maclean only attended them from June. On the other hand, Mr Aitchison, Mr David Anderson and Mr Inch thought that responsibility lay with Mr Maclean, although Mr Inch expected Mr Maclean to fulfil his duties in that regard in consultation with Ms Lindsay. Mr Maclean also gave ad hoc advice on some issues that arose: for example, he suggested the instruction of independent solicitors in February 2010 to advise on the limited issues mentioned in paragraph 18.90 above.

18.92 On the evidence, I have concluded that Mr Maclean genuinely believed that Ms Lindsay was still responsible for providing legal advice to CEC on the project until he commenced attending the IPG in place of Ms Lindsay in June. Mr David Anderson was the director responsible for the project and, from his views mentioned above, it appears that during the relevant period nobody senior to Mr Smith was performing the role of legal adviser to the project. The fact that Mr Smith reported to Ms Lindsay and Mr Maclean does not resolve the issue of ultimate responsibility.

18.93 The confusion arose because of Mr Inch’s letter of appointment to Ms Lindsay. Mr Inch was aware that the project was the largest project for which CEC bore ultimate responsibility as guarantor of tie’s obligations to BSC. He was also aware that the project would not be completed before Ms Lindsay’s retirement date in August 2010. It did not make sense for her to remain part of the project team “ensuring that the Council was accurately briefed on the legal aspects of commercial engagement”. The responsibility for briefing CEC on all legal issues, including those relating to the project, ought to have rested with Mr Maclean as Head of Legal Services. The terms of the letter suggested that his responsibilities in that regard did not extend to the Tram project. Mr Inch’s explanation that he was anxious to ensure the transfer of Ms Lindsay’s knowledge and experience of the project to the successful candidate for the new post certainly explains his desire to delay her departure for a sufficiently long period to achieve that objective. However, that objective did not require him to restrict Mr Maclean’s responsibilities in the manner suggested by the letter. Mr Inch could have avoided any confusion by restricting Ms Lindsay’s duties to the alternative business model and to such other projects as he considered appropriate. This would not have prevented him from appointing her to a specially created post outside the Legal Services Department until her retirement. He could also have achieved his objective of transferring her knowledge and experience about the project by ensuring that there was a proper handover of responsibilities for the project to Mr Maclean after December 2009.

18.94 It is difficult to assess the consequences for CEC of the confusion mentioned above. However, if Mr Maclean had clear responsibility for providing legal advice to the Council on the Tram project when he joined CEC in December 2009, his subsequent actions (which will be discussed below) might have been accelerated by several months – perhaps to March or April 2010. If that had occurred it is possible that the issues between BSC and tie would have been resolved sooner, resulting in some saving of expenditure on the project.

CEC’s more proactive role

18.95 It is clear from previous chapters that the “B team” considered that CEC placed undue reliance upon the information that tie provided to it and that CEC ought to protect its own interests as tie’s guarantors by obtaining independent legal advice and independent project assurance. The responsible directors at that time rejected that suggestion. However, as noted in paragraph 18.13 above, senior officials in CEC began to have concerns in summer or autumn 2009 about the reliability of the information being provided to them by tie.

18.96 Subsequent events increased these concerns. Mr David Anderson considered that the Gogarburn bridge adjudication (in November 2009) and an opinion received by tie from Mr Keen QC in January 2010 called into question CEC’s reliance upon tie’s optimism concerning the probable outcome of the disputes between it and BSC [TRI00000108_C, pages 0075–0076 and 0078]. In an email dated 21 January 2010, Mr Coyle invited Mr Maclean to comment on draft responses to queries raised by Mr Jeffrey. While he had no comments about them, Mr Maclean replied to Mr Coyle that “it still feels as though we are being too reactive. I would like us to get much more proactive around this” [CEC00473835, page 0001]. Mr Coyle agreed and advised Mr Maclean that Mr McGougan and Mr Anderson had agreed with his suggestion that an independent legal opinion should be sought concerning the options available to tie to terminate the contract. This was pursued and is mentioned in paragraph 18.90 above. His suggestion had followed his concerns at a meeting that he had had with Mr Jeffrey and Mr Fitchie at which they were unable to answer his questions regarding the termination provisions of the Infraco contract.

18.97 Mr Maclean gave evidence that he had an intuitive, rather than well-informed, sense (from how the organisation was being run and how the project was being dealt with) that it felt as though tie was in complete control of what was going on and that CEC was too removed. He felt that there was a rigidity in tie’s approach and a lack of inquisition from CEC. His impression was that CEC was fully relying on tie without an understanding of what was going on. He wanted CEC to have a better understanding of matters rather than taking at face value what was said by tie. He was also concerned by the “one family” approach adopted by senior officials in CEC, whereby tie’s and CEC’s interests were considered to be fully aligned. That did not seem right to him [PHT00000008, pages 32–37].

18.98 By letter dated 8 March 2010, BSC wrote to CEC expressing concerns in relation to tie and the lack of meaningful progress in resolving the outstanding disputes, including the fundamental dispute concerning the correct interpretation of the contract [CEC00548728]. The letter was addressed for the attention of senior officials in CEC (namely: Mr Aitchison, Mr McGougan and Mr David Anderson) and Councillor G Mackenzie. It expressed concern about the accuracy of reporting by tie, stating:

“From the first day tie has publicly sought to insist that it has signed a lump sum, fully fixed price contract with the consortium. This is not the case, as evidenced by the extensive list of defined pricing assumptions which form an integral part of the contract, and also by the clear rulings of the independent adjudication process which fully support the consortium’s legal and contractual interpretation.” [ibid, page 0002.]

18.99 The letter referred to significant delays in utility diversion works. BSC considered that the project was approximately two years late and that, taking a conservative approach, its additional costs were likely to be in excess of £100 million.

18.100 By the spring of 2010, it was becoming clear to Mr Aitchison that there was a huge gulf in the different interpretations of the contract by tie and BSC and that evidence was beginning to come through that it appeared as though BSC was more right in that regard than tie [PHT00000041, page 167].

18.101 By letter dated 8 June 2010, the chairman of Transport Edinburgh Limited (“TEL”) formally advised CEC’s Tram Monitoring Officer, in terms of the operating agreement with CEC, that the TEL Board considered that it was reasonably expected that the full scope of line 1a could not be delivered within a budget of £545 million and by October 2012 [TIE00084642].

18.102 In paragraph 18.62 above, I have referred to the concerns of Mr David Anderson and Mr McGougan following Lord Dervaird’s adjudication decision issued on 7 August 2010. In Mr McGougan’s view the only option left to improve BSC’s behaviour was the threat of termination, assuming there was a proper basis for that course of action [TRI00000060_C, pages 0094–0095, paragraph 240]. As was discussed in Chapter 17 (Adjudications and Beyond), between 9 August and 12 October 2010, tie served on BSC ten RTNs and three underperformance warning notices without a proper evidential basis justifying such notices.

18.103 Mr Aitchison gave evidence that Mr David Anderson was not alone in being concerned following Lord Dervaird’s decision. The universal view across the Council was one of deep concern. He considered that, over the coming weeks and months, a way had to be found whereby CEC officials could provide councillors with clear policy advice on how to handle the Tram project. Around this time, the balance started to shift from the CEC officials relying substantially on tie for information and analysis to wishing to get to a position in which officials had more direct control in respect of presenting information to councillors. Mr Maclean brought a fresh perspective on where things were, and CEC began to recognise that it had to do more of its own thinking, rather than overly rely on tie. Although there was still a recognition that it was important to work alongside tie, information from it required to be “stress tested” by CEC officials wherever possible [TRI00000022_C, pages 0074–0075, paragraphs 223–225; PHT00000041, pages 169–170]. It seems to me that August 2010 was the stage at which CEC’s senior officials began to subject the project to the careful scrutiny that the Council was entitled to expect from the outset. The Chief Executive and the responsible directors, including Mr Holmes, as Mr Anderson’s predecessor, must bear responsibility for their failure to do so from the outset.

18.104 Mr Maclean gave evidence that, around August 2010, he began to develop a good understanding of the Tram project and the dispute, and that tie’s strategy was failing. By that time he had gleaned information from various sources in the Council, including Mr N Smith, and he could see that there were historical problems from the point at which the project was entered into. He could also see from the adjudication decisions that they were not going well on a number of fronts, the first adjudication decision that he read being Lord Dervaird’s decision. Mr Maclean read SP4 to the Infraco contract for the first time around then, and he stated that it was “patently obvious” that there was a fundamental problem with that contract. He was particularly concerned by clause 3.2.1 of SP4, which stated that the contract was based on a set of pricing assumptions, some of which the parties accepted were wrong at the date of signing the contract, and which would result in an immediate claim or claims after the contract was signed. He considered that that clause was very clearly an open-ended, or certainly worrisome, provision, which meant that the Infraco contract was not for a fixed price. He was not an expert in construction law, but he considered that any lawyer reading that clause would have come to a similar view. I agree. If any support for his view was required, it is to be found in Mr C MacKenzie’s evidence mentioned in paragraph 18.36 above.

18.105 Mr Maclean formed the view that the Infraco contract was “riddled with deficiencies”, with the following problems having leapt out at him:

• clause 3.2.1 of SP4, which, as noted above, stated that the price was based on certain pricing assumptions that were known not to be correct when the contract was entered into;
• awarding an allegedly fixed-price contract without a completed design being in place;
• the design provider being novated to the consortium so that it was, effectively, on the same team (which created a conflict of interest, in that the party that could change the design was also able to benefit from an increase in price because of that change);
• vagueness in the pricing, including, in particular, in relation to Pricing Assumption 1, whereby the definition of “normal design development” contained contradictory wording; and clause 80, whereby it appeared that the contractor could down tools and tie could not force the contractor to carry on with the works unless it paid the contractor for the work on a demonstrable costs basis. [PHT00000008, pages 20, 23–25, 40–43.]

18.106 In short, Mr Maclean considered that the biggest issue was the contract and that the die was cast at the time of signing it. Given the shape of the contract (ie the pricing assumptions and other unfavourable items), it was almost inevitable that difficulties would arise [TRI00000055_C, page 0021, paragraph 61]. He considered that tie had adopted an intransigent and adversarial stance towards the consortium and that, with the benefit of hindsight, it was making things worse, not better [ibid, page 0023, paragraph 65].

18.107 By October 2010, Mr Maclean had concerns as to whether councillors, had been, or were being, kept fully informed in relation to the Tram project. They thought that the Infraco contract was a fixed-price contract when it clearly was not. He was also concerned that, at a briefing of councillors on 12 October 2010, they had been advised that termination was the only option left. In the course of that briefing Mr Jeffrey had, apparently, stated that tie had a “cast-iron” right, or guaranteed right, to terminate the contract, which was backed up by the opinion of Queen’s Counsel. That rang a significant alarm bell for Mr Maclean, as he had never heard a QC say that there was a cast-iron right to terminate a contract [PHT00000008, pages 24–25 and 84–86].

18.108 Mr Maclean had quite serious concerns in relation to what appeared to be tie’s preferred strategy of terminating the Infraco contract, as CEC did not have a good understanding of the factual basis for the RTNs. He also had serious concerns about their validity. Against the background of these concerns, the results of the adjudication decisions and concerns about tie, Mr Maclean recognised the need for CEC to obtain its own independent legal advice. Moreover, on 13 October 2010, when tie suggested the establishment of a special planning forum (referred to as the “war room”) to discuss the option of terminating the Infraco contract, Mr Maclean sent an email in the following terms to Mr McGougan:

“At the risk of being controversial my feeling is that the special planning forum is for CEC and not tie – tie should come along to help us where we need them but not take control!” [CEC00012760, page 0001.]

18.109 Looking back, he considered that this period was a turning point in the control of the project slowly starting to move away from tie to CEC [PHT00000008, pages 82–83; TRI00000055_C, page 0017, paragraph 52].

18.110 External events also influenced future decisions about the project. On 13 October 2010, BSC wrote directly to councillors. The purpose of the letter was stated to be to set out BSC’s perspective of the dispute in order that councillors had both sides of the story before making any decision in relation to the project [CEC00012755]. The letter appears to have been the first occasion on which councillors were made aware of SP4 to the Infraco contract and the fact that the price was based on various pricing assumptions and was, therefore, liable to change. It also stated that of the nine adjudication decisions that were available in relation to the correct interpretation of the Infraco contract, six were in favour of BSC, one was in favour of tie and there were two split decisions (in which the principle was in favour of BSC). That was clearly different to the information provided to councillors hitherto. BSC’s letter stated that, in the interests of accuracy and transparency, BSC had no objection to the disclosure of the adjudication decisions to councillors, so they could make their own judgements. Mr Maclean asked each of the group political leaders to decline that request, because his investigations were not complete and he wished to brief councillors at the appropriate time when he had better knowledge and information [PHT00000008, pages 56–57]. At that stage he intended to seek the views of Shepherd & Wedderburn and Mr Dennys QC of the English Bar about RTNs and the outcome of the adjudications respectively.

18.111 There was also increasing political pressure to resolve the dispute. On 7 October 2010, representatives from CEC met Mr Swinney. Mr McGougan was present at the meeting and gave evidence that its focus was about how a solution could be reached that protected the public purse, secured an asset and delivered a working tram system [TRI00000060_C, page 0097, paragraph 245]. On 16 November 2010, Councillor Dawe and Mr Aitchison met Mr Swinney at his request. At the meeting, Mr Swinney expressed concern over the lack of progress with the project. He had met representatives of tie regularly over the preceding months, but was increasingly losing faith in the quality of advice that he was receiving from it and he wanted to hear direct from CEC. The representatives of CEC advised that they were considering proposing mediation. Councillor Dawe gave evidence that she had considered that mediation was the only way forward and that Mr Swinney “was very keen on the idea that formal mediation … might be the best way forward”. He offered the assistance of Transport Scotland if it should be required [TRI00000019_C, page 0183, paragraphs 690–693]. Mr Aitchison was of the view that mediation was worth pursuing, given that other options had not been successful [TRI00000022_C, pages 0079–0080, paragraphs 236–237].

18.112 On 18 November 2010, the Council approved an emergency motion proposed by Councillor Dawe to instruct Mr Aitchison to continue to make preparations with tie and BSC for mediation or other DRPs [CEC00054300; CEC01891442, pages 0021–0022]. The motion noted that, on 17 November, the TPB had agreed to support an independent mediation process. Councillor Dawe explained in her evidence that Mr Jeffrey contacted her when he learned of her intention to table the emergency motion. He told her that he did not think that it was a good idea. She thought that he did not understand the way in which local authorities worked and he came round to the view that some intervention was necessary [TRI00000019_C, pages 0184–0185, paragraphs 698–699].

18.113 On 23 November 2010, CEC obtained advice from Mr Dennys QC. The following day, Mr Maclean prepared a note on legal strategy based upon that advice [WED00000008]. The Inquiry also recovered a handwritten note by Mr Maclean, dated 24 November and headed “Summary for Tram IPG” [WED00000010]. By this time, Mr Maclean had lost confidence in tie and its strategies for seeking to resolve the dispute with BSC. He reported his concerns and the advice from Mr Dennys to the IPG. A meeting with Mr Jeffrey was convened on 24 November 2010 to discuss matters. Mr Jeffrey walked out of the meeting and, in an email later that day, apologised for the speed and nature of his departure from the meeting, explaining that he had been late for another meeting and he thought that their conversation was “becoming unproductive” [CEC00013441, page 0001]. In his evidence to the Inquiry, Mr Jeffrey accepted that he was a little irritated by the fact that CEC had gone off and taken its own legal advice without discussing or sharing that with tie, whereastie had discussed and shared all its legal advice with CEC [PHT00000033, page 55].

18.114 Prior to this, CEC officials had always refused requests for meetings with representatives from BSC because the Infraco contract was between it and tie. Any discussions about the contract and its implementation ought to be confined to the contracting parties. However, by November their view changed and Mr Jeffrey also agreed that CEC should meet BSC “to listen to their side of the story” [CEC00013441, page 0001]. On 3 December 2010, a meeting took place between Mr Maclean, Mr McGougan and representatives of BB and CAF [CEC02084346]. On 4 December 2010, Mr Maclean sent a note of the meeting, including his advice on the matters arising, to Mr Aitchison, Mr McGougan and Mr Inch [WED00000009]. Mr Maclean gave evidence that he found the views of Mr Walker of BB, as expressed at the meeting, to be entirely credible; that it was clear that BSC did not regard the Infraco contract to be a fixed-price contract; and that it was accepted that there was a dispute that required to be dealt with and could not be walked away from [TRI00000055_C, page 0030, paragraph 77. A further meeting took place on 13 December 2010 between CEC and representatives of BSC – CEC02084349].

18.115 On 16 December 2010, Mr Aitchison provided the Council with a report updating councillors on the project and the proposed mediation [CEC01891570]. Mediation talks with BSC would be taken forward. Thereafter parties prepared for and proceeded to mediation at Mar Hall in March 2011, as will be discussed more fully in Chapter 19 (Mediation and Settlement). Although representatives of tie were in attendance at Mar Hall, the Chief Executive of CEC (Dame Sue Bruce) led the negotiations on behalf of the client and took the ultimate decision to settle the dispute on terms discussed in Chapter 19. One of the consequences of the settlement was the removal of tie from the project, completing the transfer of control of the project to CEC that had started in the autumn of 2010.

Conclusions

18.116 Concerns continued within CEC as to the reliability of the information and advice coming from tie but by mid-2009, for the first time, they were shared by senior officials including the Chief Executive underlining the past failures of CEC’s strategy of largely relying upon information and assurances provided by tie in accordance with the “one family” approach advocated by the Chief Executive. That approach failed to recognise the need for anxious scrutiny of information from tie to ensure that CEC’s separate interests as guarantor of tie’s financial obligations to BSC were adequately protected.

18.117 It appears from Mr N Smith’s briefing note for Mr Maclean that he perceived there to be a culture within CEC of withholding information from councillors. Even if that perception did not reflect reality, he ought to have reported it to the monitoring officer, in case it did have some factual basis, to enable the monitoring officer to investigate whether the culture within CEC or the actions of any officials in that regard amounted to maladministration, but he failed to do so.

18.118 Reporting to councillors was misleading either by reason of omissions or by statements that were inaccurate.

18.119 The report submitted to councillors on 30 April 2009 by Mr McGougan and Mr David Anderson omitted to mention that entering into the PSSA gave rise to a real risk that the cost of the works on Princes Street would rise significantly.

18.120 It was erroneous, and misleading, for the reports to the Council in June and October 2010 to have advised councillors that the outcome of the DRP decisions, in terms of legal principles, was finely balanced. In fact, by the time of the meeting of the Council in June 2010, tie had lost the majority of DRP decisions determined by that date and, by the time of the meeting of the Council in October 2010, the decision of Lord Dervaird in August 2010 had put the matter of BSC’s success in the DRPs beyond any doubt.

18.121 Although the signatories of the reports mentioned in paragraph 18.120 above must bear responsibility for those inaccuracies of which they were aware, Mr N Smith cannot avoid criticism as it appears that he drafted the statement about the outcome of the DRPs and included it in the draft reports when he knew that it was not accurate.

18.122 Mr N Smith’s speculation that the reason for including the inaccurate statement in the October report was because tie had emphasised the importance of including information about the DRP decisions and his terminology was a middle course between what Mr Jeffrey had suggested and what CEC could accept does not bear scrutiny. It is another illustration of an official in CEC providing councillors with unreliable (and, on this occasion, false) information to accommodate the wishes of tie despite the official’s overriding duty to provide accurate information to councillors to enable them to make properly informed decisions.

18.123 Despite the impression of some senior officials in CEC that Mr Maclean was responsible for representing CEC’s interests in the Tram project and for providing CEC with all necessary legal advice relating to the project after his appointment, the terms of the letter dated 12 November 2009 from Mr Inch, as Director of Corporate Services, to Ms Lindsay outlining her working arrangements after Mr Maclean commenced employment as Head of Legal and Administrative Services conferred that responsibility upon Ms Lindsay who was located outside the Legal Services Department and who attended IPG meetings between December 2009 and June 2010 when Mr Maclean first attended the IPG.

18.124 The involvement of Ms Lindsay in the project to the exclusion of Mr Maclean, other than for providing ad hoc advice when it was sought or responding to emails, led to confusion illustrated by Mr N Smith having “two masters” and probably delayed CEC’s exerting greater control over tie and the project by several months.