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Chapter 4: Legal Advice

DLA

4.3 Throughout the period considered in this Report, the limited liability partnership now known as DLA Piper Scotland LLP underwent a number of changes of name. Although various documents provided to the Inquiry refer to the name of the firm at the relevant date (DLA Scotland LLP, DLA Piper Rudnick Gray Carey Scotland LLP and DLA Piper Scotland LLP) it is referred to throughout the Report as “DLA Piper Scotland LLP” or “DLA”.

4.4 DLA was first appointed by tie in November 2002, following a competitive procedure [CEC00031181; CEC00031180 – letter of appointment and letter of acceptance]. The scope of its instructions at that stage was stated to be “to provide legal advice to the extent required by tie in relation to overall procurement and strategy options for the delivery of the Edinburgh Tram project”. As matters developed, DLA not only provided advice up to the conclusion of the contracts but also advised in relation to the disputes that arose under those contracts.

4.5 The partner who led the team at DLA was Mr Fitchie. Mr Fitchie was assisted by his then associate, Dr Fitzgerald. In the stage up to conclusion of the contract, he was also assisted by Mr Hecht. Later, once the disputes had arisen with the consortium, he sought assistance from colleagues who dealt with contentious matters, namely Mr Bentley, Mr Kilburn and Ms Mason.

4.6 For some months in 2007, tie did not use the services of any external legal advisers. DLA was stood down in April 2007 and reinstated later that year. There is no written record of the decision to discard external legal advice or the detailed reasons that led to it. A “lessons learned” paper prepared by Mr Bissett in June 2008 [CEC01344688, page 0012] records that:

“Tie has enjoyed a close working relationship with principal legal advisors DLA. In 2007, a decision was taken by the project team to substantially replace DLA with internal resource as a means of saving cost. The internal resource was not adequate and exclusion of external advisors probably cost more than it saved.”

And

“[i]n a complex legal environment, consistency of advice is essential. Reversion to in-house resource was a mistake, though without lasting consequences, which should have been avoided.”

The statement of Mr Gallagher [TRI00000037_C, page 0016, paragraph 55] suggests that issues of cost may have influenced the decision to stop using external legal advisers.

4.7 The lack of a written record of the decision means that it is not possible to identify with certainty the period during which DLA was stood down. Mr Fitchie suggests that it was from April to September [TRI00000102_C, page 0133, paragraph 7.40], and he describes the period as being for “five to six” months. This period does not fit with the correspondence in August 2007 between Mr Fitchie and Ms Lindsay at CEC regarding the duties owed by the firm to CEC (see paragraph 4.24 below). Mr Fitchie says that during the period when DLA was stood down Jonathan More was employed by tie as an in-house legal adviser from June 2007 to April 2008, so for the period from April 2007 (when DLA was stood down) to Mr More’s appointment in June 2007 tie did not have access to any legal advice from either DLA or Mr More.

4.8 In his statement Mr Bissett says:

“Around the time of Financial Close, either just before or just after, there was a feeling within TIE that TIE and the Council’s position could be strengthened by having more internal legal support, instead of being solely reliant on external legal advisers. At that time, there was also a concern to assess whether TIE was obtaining value for money from the external legal services. Dundas & Wilson were also acting for TIE and possibly the Council, also in my view in a proper, professional manner.” [TRI00000025_C, page 0067, paragraph 188.]

4.9 There is no other evidence to support the view that having more internal legal support would strengthen the position of CEC and tie or that this view was held by anyone at the time. It is clear from other evidence, including Mr Bissett’s own “lessons learned” paper noted above, that shortly after contract close his view was that it had been a mistake to attempt to use only in-house resources. The passage quoted above, together with the evidence of Mr Gallagher mentioned in paragraph 4.8, tends to suggest that the reason for the decision to dispense with the services of DLA was based upon a desire to economise. If that was the reason, it was a false economy. As a generality, I agree that strengthening internal legal support should be beneficial to an organisation, provided that no other changes are made to its existing legal advisers. In the absence of a reason such as dissatisfaction with the services being provided (which was not recorded here), replacing existing external legal advisers, who have expertise in procurement and in advising on the terms of commercial contracts, with a newly recruited internal solicitor who has had no prior involvement with the project will weaken the position. That is particularly the case where, as here, that decision resulted in the unavailability of legal advice from either internal or external advisers for a period of about three months. I agree with the conclusion in the “lessons learned” paper that consistency of advice was essential and that the decision to replace DLA with an internal resource was a mistake. The “feeling within tie” referred to in Mr Bissett’s evidence quoted above as the reason for the action taken by tie, does not justify it and demonstrates a disregard of the interests of tie and CEC at a critical stage of the project.

4.10 It is also surprising, and a cause of concern, that a decision as important as deciding to cease using external legal advice was taken without any written record being made. At the time, tie was in the course of taking steps to award contracts for the infrastructure and the tram vehicles. This was a context in which it should have been clear to its management that access to legal advice with relevant expertise and experience was likely to be more important than ever. It is also noteworthy that none of the members of tie’s senior management, who gave evidence, admitted taking the decision to stand down DLA or was even able to say who had taken the decision or why. Despite being Executive Chairman, Mr Gallagher claimed to have no recollection of either standing DLA down or re-engaging it. Despite being the Project Director at the relevant time, Mr Crosse said that he was unaware that a decision had been made to stand DLA down.

4.11 It is incredible that no one from senior management would have been aware of these decisions at the time. Indeed, I would have expected most of the members of the team – and, in particular, those engaged in the award of the contracts – to have been aware of it. I am led to the conclusion that these witnesses, perhaps realising how ill advised the decision was, were trying to distance themselves from it. As a result of the paucity of documentary or oral evidence available to the Inquiry, it is not possible to say with certainty which witnesses were party to the decision. It is possible, however, to identify those who, on any view, because of their position in the company, ought to have known of it and must bear responsibility for it. On that basis, the responsibility for this decision must lie with Mr Gallagher, Mr Crosse and Mr Gilbert (the Commercial Director at that time).

4.12 In the period during which DLA was not instructed, tie was undertaking the work to award the infrastructure contract (“Infraco contract”) and the tram vehicle supply and maintenance contract (the “Tramco contract”). Although the preferred bidder stage had not been reached, discussions were held with bidders as to the terms of the contracts. While no final agreements were concluded in the period between April and September, Mr Fitchie explained that what had happened placed additional pressure on legal resources when DLA was reinstated. Agreements that were intended to be in the same form for all bidders had been changed by negotiation. This was a departure from the procurement strategy. The reasons for it are not recorded. Mr Fitchie explained that DLA’s ability to negotiate the contracts in the period remaining before the intended close was impaired because it had not been engaged for this five-month period. He said that when DLA was re-engaged, it was necessary to revisit parts of the draft contract that had been agreed by tie during the period when DLA was not involved. In this regard, I prefer the evidence of Mr Fitchie, who was directly affected by the decision, to the very general statement made by Mr Bissett in the “lessons learned” paper noted above that the decision caused no lasting effects.

4.13 I am not, however, able to find that there was a direct causal link between the situation created by the absence of legal advice from DLA for several months and the problems that emerged in December 2007 and are considered in this chapter and in Chapter 10 (Events between October and December 2007). I consider that it is clear, however, that the absence of external legal advice for several months and the departure from the procurement strategy contributed to the situation that existed in December 2007. It meant that tie was “on the back foot” in negotiations at the critical period of moving to the preferred bidder stage and negotiating up to financial close.

4.14 I consider that the decision to abandon external legal advice in 2007 was very ill advised. The absence of any documentation recording the decision or the basis for it makes it more unsatisfactory. Any decision to do without legal advice at such a critical stage would require clear and compelling reasons in order to be justifiable and appropriate. The absence of documentation suggests that the matter was not properly considered before the decision was taken. While the inadvisability of the decision was recognised in June 2008 by Mr Bissett, I consider that it should have been apparent at the time that the decision was made. The decision was reckless.

Mr Fitchie’s secondment to tie

4.15 When DLA resumed work on the project, Mr Fitchie was described as being “on secondment” to tie. It appears from Mr Fitchie’s statement that this was in response to Mr Gallagher’s desire to have his secondment from DLA to tie, failing which tie would seek someone from D&W [TRI00000102_C, page 0135, paragraphs 7.49–7.50]. There was some ambiguity as to what the secondment meant. Mr Gallagher said that the rationale for it was to make Mr Fitchie “part of the team” [TRI00000037_C, page 0016, paragraph 55]. In the same vein, a draft set of proposals for the secondment attached to an email sent on behalf of Mr Fitchie at the time [CEC01656650; CEC01656651] envisaged that he would be the Acting Commercial Director of tie, reporting to the Executive Chairman. Despite these proposals, Mr Fitchie was not a director, an employee or an officer of tie. It appears that the secondment amounted only to Mr Fitchie committing 90 per cent of his time to work on the project. This meant that it was DLA that was providing legal services to tie and bearing responsibility accordingly. It is apparent, however, from emails from Mr C MacKenzie, a solicitor within CEC’s Legal Department, dated 23 November [CEC01399996] and 28 November 2007 [CEC01544715], and a meeting of the CEC/tie Legal Affairs Group on 26 November 2007 [CEC01500853], that confusion as to his status remained.

Bonus

4.16 After the Infraco contract was signed, tie paid a bonus of £50,000 to Mr Fitchie. This was paid to him personally and not to DLA, which fuelled further ambiguity about his status. A bonus paid to him personally from tie would not be expected where the firm, DLA, rather than him as an individual, was providing services. That the bonus was paid to him rather than the firm tends to suggest that there was a direct relationship in terms of which Mr Fitchie personally, rather than DLA, was providing the services for legal advice. However, later, when it became aware of the bonus, DLA required that he remitted it to the firm. This, in turn, is consistent with the position, noted above, that the services were provided by DLA and the secondment was merely a commitment that a certain proportion of Mr Fitchie’s time would be devoted to the project.

Role of DLA in relation to CEC

4.17 It had been part of the terms of the procurement exercise under which DLA was appointed that whoever was awarded the work would have to acknowledge that, in performing it, a duty of care was owed to CEC. On 23 June 2005, in response to a request for acknowledgement that DLA owed a duty of care to CEC, DLA sent a draft letter to tie, confirming that it owed the same contractual duty of care to CEC as it owed to tie [DLA00006300]. This was said to be subject to the following conditions, among others:

“1 DLA Piper’s primary responsibility has been and is to advise tie Limited and DLA Piper may at all times and for all purposes rely upon tie’s instructions given to us under the Appointment as being identical to CEC’s instructions as if emanating from CEC itself and as taking into account CEC’s objectives and best interests;

2 DLA Piper remains expressly authorised to receive and seek all instructions (and any clarifications) under the Appointment solely from tie as Project manager and agent for CEC and in the absence of specific written instruction from tie, DLA Piper has not been and is not under obligation to advise CEC staff or members directly;

3 DLA Piper is entitled for all purposes to rely upon (i) the satisfaction and approval of tie Limited with, and of our performance of services, delivery of work product for the Project and discharge of the duties of care in accordance with the Appointment and (ii) the presumption as to such satisfaction and approval to date. Under no circumstances shall the existence of the contractual duty of care acknowledged in this letter give rise to CEC having any separate or different recourse, remedies or claims to those available to tie Limited by reason of any default by DLA Piper under the terms of the Appointment … ”

4.18 The last paragraph of this letter stated that in order to put the undertaking into effect, tie should arrange for a copy of the letter to be signed by representatives of tie and CEC and returned to DLA. This was not done.

4.19 The draft letter was sent under cover of another letter of 23 June 2005 from Mr Fitchie to Mr Macaulay, Projects Director at tie [DLA00006301]. It provided an explanation for each of the paragraphs above, as follows:

“Para 1 We are happy to extend to CEC the same duty of care we owe to tie. Since we have contracted on the basis of tie Limited as client and the party who instructs us, we believe it would not be reasonable to place us in a position where we have to make assumptions about CEC’s interests or instructions.

Para 2 We need to continue to advise tie (as a sole source of instructions), whose interests (and therefore the fiduciary duty of its Board) may not fully coincide with CEC’s objectives and interests; this is a judgement only tie can make.

Para 3 Absent a separate appointment providing for direct engagement with CEC, the additional duty of care should not give rise to the possibility that CEC applies a different interpretation of the duty of care we owe or seeks different recourse or remedy for any breach by us.”

4.20 Even taken at face value, these explanations raise questions. If a duty owed to CEC was to be effective, it would be necessary that the interests and objectives of CEC were taken into account, and DLA would have to be made aware of them. It is also notable that Mr Fitchie recognised that the interests of tie might not fully coincide with the interests and objectives of CEC. This became an issue later and is considered in the paragraphs below. At this stage, however, it is surprising that CEC was willing to accept a duty of care qualified by a statement that DLA was entitled to follow the instructions of tie without any regard for whether they were in the interests of CEC. This unsatisfactory position, remained, however, for a further two years while several significant contracts for the project were awarded (the Developing Partnering and Operating Franchise Agreement (“DPOFA”), the Multi-Utilities Diversion Framework Agreement (“MUDFA”) and the System Design Services (“SDS”) contract).

4.21 In 2007, as the work to appoint a contractor for the Infraco contract was under way, an issue arose within CEC as to whether it required external legal advice independent of that available to tie. Ms Lindsay, the Council Solicitor within CEC, considered that it was unnecessary, provided that DLA acknowledged CEC as a joint client with tie. Other officials at CEC took the opposite view.

4.22 In a private internal email within CEC’s Legal Department, dated 1 August 2007, from Mr N Smith to Mr C MacKenzie and Mr Squair, Mr Smith expressed the following view:

“To the extent that the Council is unable to consider/accept that tie has fully considered and acted in CEC’s interests throughout the negotiations to date, a full external review [of the proposed contracts] would in my opinion be required to protect CEC’s interests fully.” [CEC01564769]

4.23 On 7 August 2007, Mr Bissett of tie sent an email to Ms Lindsay and Mr C MacKenzie, among others, in which he said that he would contact DLA about tie’s relationship with CEC. On 10 August, Ms Lindsay responded to express her view that what was required was for DLA to accept that CEC was a joint client with tie or the ultimate client [CEC00013273]. That is what happened eventually and it raises two issues:

1 was any arrangement that was to be put in place sufficient to ensure that CEC obtained the advice that was appropriate to it; and

2 was there an actual or potential conflict of interest between the interests of CEC and those of tie?

4.24 On 16 August 2007, Mr Fitchie sent an email to Ms Lindsay [CEC01711054] with a draft letter [CEC01711055] that he said he proposed to send to CEC to affirm the duty of care and joint client status. The attached letter reiterated that DLA owed the same contractual duty of care to CEC as it owed to tie. In a development upon the correspondence in 2005, the draft letter specifically acknowledged that CEC was a joint client with tie. However, that was said to be on the basis of the following conditions:

“1. DLA Piper’s primary responsibility has been to advise tie Limited and DLA Piper may at all times and for all purposes rely upon tie’s instructions given to us under the Appointment as being identical to CEC’s instructions as if emanating from CEC itself and as taking into account CEC’s requirements, objectives and best interests.

2. DLA Piper remains expressly authorised to receive and seek all instructions (and any clarifications) under the Appointment from tie as Project manager and agent for CEC. In the absence of specific written instruction, DLA Piper has not been and is not under obligation to advise CEC officers or members directly, under exception that DLA Piper will brief CEC officers at regular intervals as instructed by tie Limited, or as required by CEC.

3. DLA Piper is entitled for all purposes to rely upon (i) the satisfaction and approval of tie Limited with, and of our performance of services, delivery of work product for the Project and discharge of the duties of care in accordance with the Appointment and (ii) the presumption as to such satisfaction and approval to date. Under no circumstances shall the existence of the contractual duty of care acknowledged in this letter give rise to CEC having any separate or different recourse, remedies or claims to those available to tie Limited by reason of any default by DLA Piper under the terms of the Appointment …” [ibid].

4.25 The three conditions repeated what had been said in the 2005 letter, with the only change of substance being the addition, at the end of the second condition, of the words after “under exception that”. Despite this, the covering email from Mr Fitchie stated:

“I do not envisage any conflict of interest here; to the contrary – in closing the required supply contracts as part of the procurement process, there needs to be complete commonality of interests and objectives among the Council, tie and TEL. That is not to say that there will be and will have been detailed discussions (in which we would have our role as advisers for the Project) on key issues in order to reach that commonality.” [CEC01711054]

4.26 There is a clear inconsistency between the statement in this email that Mr Fitchie did not envisage a conflict of interest and the contents of the 2005 letter, noted above, which recorded that the interests of tie and those of CEC might not fully coincide. This was not commented on at the time.

4.27 Once again, both the email and the letter sought that tie should sign and return a copy of the letter after it had been signed on behalf of CEC, but this was not done. Although the letter was not signed and returned as requested, DLA continued to provide advice. During the hearings, counsel for DLA accepted that the letter bound the firm.

4.28 The decision to proceed on the basis of this draft letter was opposed by a number of council officials. Some of them, including Mr C MacKenzie, Mr N Smith, Mr Squair and Mr Fraser, were members of the project team within CEC who were engaged on the Tram project full-time and who reported to the Director of Finance and the Director of City Developments as the two responsible directors or, in the case of legal issues, to the Council Solicitor. The members of the Tram project team who reported to the two responsible directors or the Council Solicitor referred to themselves as the “B team”. They used that term in email correspondence as illustrated by Mr C MacKenzie’s email dated 11 March 2008 to various people including the two responsible directors (Mr Holmes and Mr McGougan) and Ms Lindsay, the Council Solicitor [CEC01393838]. For ease of reference I have adopted that term when referring to their actions but in doing so I acknowledge that there was only one Tram project team within CEC and I do not intend to minimise their role or their responsibility for their actions as part of that project team. The persons in that group were strongly of the view that CEC should obtain external legal advice from a firm other than DLA. The principal concerns, from Mr C MacKenzie and Mr N Smith in particular, were as follows.

1 The attempt by tie to involve CEC could have the effect of letting tie “off the hook” and was a trap for CEC.

2 If CEC were to become involved in carrying out a review, it would be necessary to have external advice, as the necessary expertise did not exist within CEC.

3 The possibility of a conflict of interest between tie and CEC meant that they should not be using the same advisers.

4 Related to the previous point as to conflict of interest, because DLA had been instructed solely by tie to date and CEC was not aware of the content of all the instructions, CEC could not be sure that what had been done to date was in its best interests.

4.29 On 15 August, Mr C MacKenzie responded to Ms Lindsay’s email of 10 August [CEC00013273], referred to in paragraph 4.23 above. He expressed the view that CEC would require detailed advice on all the risks to it in signing the contracts and that its internal solicitors did not have the necessary expertise or manpower to carry out the required review. He did not regard as adequate the proposed solution of DLA accepting CEC as a joint client. He explained that this was because CEC would have no assurance that its interests had been safeguarded in the negotiations that had already taken place and the drafting that had already been done. He was concerned that, by involving CEC at the last minute, tie might get off the hook and that it would be a trap for CEC. He also posed the question of what would happen if a conflict emerged between tie and CEC prior to the contracts being concluded. In his oral evidence, he reiterated his concern that, by making CEC the joint client, tie was transferring some of the responsibility for the contract to CEC [PHT00000026, pages 21–22]. He considered that the commonality that was referred to in Mr Fitchie’s email enclosing the draft “duty of care” letter did not exist [ibid, page 26]. Mr C MacKenzie’s colleague, Mr N Smith, considered that the proposed letter was wholly inadequate to protect CEC’s interests. This was because it was predicated on the assumption that all instructions that had been given from tie were identical to the ones that would have come from CEC [PHT00000005, page 148].

4.30 Both Mr C MacKenzie and Mr N Smith felt sufficiently strongly about the issue of the requirement for external legal advice that they considered whether they should inform CEC’s Monitoring Officer of their concerns. Mr N Smith did not go so far, however, as to consider that the failure to obtain external advice was maladministration. In the event, neither of them took the matter up with the Monitoring Officer.

4.31 On 23 August 2007, another member of the “B team”, Mr Fraser, of CEC’s Development Department, sent an email to Mr Holmes, the Director of City Development, in which he, too, recommended the appointment of external advisers to consider the risks to which CEC was exposed by the contract [CEC01567522].

4.32 Ms Lindsay, on the other hand, was equally firm in her view that independent legal advice was not required and that DLA could represent the interests of CEC. In response to the email dated 15 August from Mr C MacKenzie [CEC00013273], referred to in paragraph 4.29 above, on 17 August she sent him a memorandum in which she expressed, in trenchant terms, her dissatisfaction with his approach. Ms Lindsay noted that, as far as she was concerned, the decision to have DLA provide letters acknowledging CEC as a joint client had already been taken, and she forwarded to him draft letters from DLA. She reiterated her request for a report on the contract documents as they then stood [TIE00897231]. Although he was told by Ms Lindsay in that memorandum not to pursue the matter of separate representation, Mr C MacKenzie continued to do so, as he was not satisfied with the justification that Ms Lindsay had given for her decision [PHT00000026, page 28]. In response to the memorandum, Mr C MacKenzie instructed Mr N Smith to undertake a review of the contracts but, on 28 August 2007, he emailed Mr C MacKenzie, indicating that he could not do so [CEC01564795]. In his oral evidence, he explained that this unwillingness to provide the review was on the basis that it would not be a comprehensive review, would not be in CEC’s best interests and would amount to his failing in his professional obligations to CEC. It does not appear that Ms Lindsay was made aware of this refusal.

4.33 It is striking that, during the correspondence in August 2007 about whether CEC should have independent legal advice or about varying the terms of the appointment of DLA as project solicitors to include CEC as a joint client with tie, no one from tie or DLA mentioned that tie had taken a decision in April 2007 to stand DLA down and that it had had no external legal advice since then. Neither was any mention made of the fact that there was a period of about three months between April and June 2007 when tie did not have the benefit of legal advice from either DLA or Jonathan More, the internal solicitor recruited to replace DLA. It is apparent from emails within CEC that it was not aware of this. It is obvious that such information would have been material to consideration of whether independent legal advice was required.

4.34 The dispute as to whether to seek external legal advice took place between August and November 2007. At that time, the parts of the contract that were to cause so much difficulty later had not been drafted. If, however, an external adviser had been appointed, or it was clear that DLA was required to be familiar with and protect the interests of CEC, I consider that the terms of the contract as it developed from this time until it was concluded in May 2008 would have been scrutinised to assess their potential effect on CEC. If this had not been done, there would have been little point in having the advice. Had there been legal advice on the evolving contract that considered the interests of CEC, it is likely that the problems that later came to light would have been detected. I reach this view on the basis that those problems were identified in March 2009 when Mr Ramsay of Transport Scotland instructed D&W to carry out a review (see paragraph 4.64 below).

4.35 Given that DLA had been instructed on the basis noted above, I consider that it was necessary to instruct external legal advisers to ensure adequate protection for CEC’s interests. The failure to take external advice was a missed opportunity to detect and correct the problems. In view of the value of the contract and the obvious potential exposure for CEC, I consider it a clear error of judgement not to have sought independent legal advice and that there was a failure by Ms Lindsay, as the Council Solicitor, to protect her client’s interests. I agree with Mr N Smith, however, that, while this was a serious failure, it did not amount to maladministration.

4.36 There was a marked lack of clarity as to the obligations to CEC being undertaken by DLA. Despite the misgivings of council officials noted above, the intention was that CEC would be a client of DLA along with tie. If CEC were a joint client, it would be expected that DLA would be in a position to advise CEC and protect its interests. That was the understanding of Ms Lindsay. Mr Gallagher was also of the view that DLA was to advise CEC [PHT00000037, page 149]. It is striking, however, that in his statement Mr Fitchie expressed the view that “[i]t was not my or DLA Piper’s function, as TIE’s legal advisor, to provide advice spontaneously to CEC” [TRI00000102_C, page 0138, paragraph 7.64]. Similar views were expressed in paragraphs 7.65 and 7.275. In his oral evidence, Mr Fitchie initially stated that his role had been to advise tie and that he was never involved in advising CEC unless directly requested to do so by tie [PHT00000017, page 13]. He was of the view that the protection of CEC’s interests was handled or dealt with by tie.

4.37 The lack of clarity may have its roots in the terms of the letter provided in August 2007 [CEC01711055]. Although there is a clear statement that DLA “acknowledge CEC as joint client with tie Limited” [ibid, page 0001], it is then qualified by the same conditions as contained in the earlier 2005 letter [DLA00006300], as is noted in paragraph 4.17 above. These are difficult to reconcile with joint client status. Mr Fitchie was questioned about the apparent inconsistency between the second condition and the position in his statement at paragraph 4.60, on the one hand, and the records of advice having been given. He said that there was “quite a mixture of instruction going on” [PHT00000017, page 34]; and that there was:

“a general instruction from Richard Jeffrey for me to provide CEC with legal support or … to provide CEC Legal with what they wished to have in terms of information and advice that tie was … receiving from DLA Piper” [ibid, page 35].

Mr Jeffrey’s involvement in the project did not occur until after the signature of the contracts and the later departure of Mr Gallagher.

4.38 Mr Fitchie ultimately accepted that DLA was providing advice directly to CEC [ibid, pages 37–47]. He was at pains to point out that this illustrated DLA’s support for the project. However, for present purposes what matters is that DLA was undertaking the role of providing advice to CEC. Having considered the evidence I am satisfied that CEC was DLA’s client for the purposes of the project from at least 2007. As such, DLA owed duties of care to CEC. These duties would apply in addition to those owed to tie and, critically, even if the interests of tie and CEC were to diverge.

4.39 In considering whether there was such a divergence of interests and what effect the 2007 letter had upon that, it is useful to consider the meaning of the conditions in the draft letter sent in 2007, which are reproduced in paragraph 4.24 above.

4.40 The first condition in the letter was concerned with the issue of instructions. It addressed the situation that could occur if tie and CEC were to give inconsistent instructions to DLA. That would put DLA in an impossible position as it could not perform its duty to both clients. However, the condition purported to go further than this in that it gave primacy to the obligations owed to tie. It also deemed tie’s instructions to be the same as any that would be given by CEC. This appeared to put CEC in the position of not being able to give instructions or properly to acquaint DLA with its interest and objectives. The very act of deeming CEC’s instructions to be the same as those of tie should have raised the very obvious question as to what should have happened if the instructions in fact were not the same. How would the interests of CEC be addressed in that situation? This was more than a theoretical possibility, in that while tie’s interests were focused on delivery of the project, the interests of CEC as a local authority were much wider. Such questions should have been considered by DLA and, more importantly, CEC. Had CEC done so, it would have been apparent that it required independent external advice to protect its interests, including its obligation to safeguard the public funds that it was providing to tie for the project.

4.41 The first part of the second condition dealt once again with instructions. It made tie the agent of CEC for the purposes of giving instructions. This created all the problems noted in paragraph 4.40. It meant that although a duty was owed to CEC, the views and interests of CEC would not be considered except to the extent that they were articulated by tie. The later part of this paragraph dealt with the issue of provision of advice. It sought to remove any obligation to advise CEC directly. It had the same problems as have already been discussed. However, as noted above, DLA did provide advice directly to CEC. In my view, the actions of the parties clearly superseded this part of the qualification.

4.42 The conditions did not address the question of what was to happen if DLA were to become aware that the interests of its two clients did not coincide and that a course of action proposed by tie was not in the interests of CEC. There appears to have been an assumption that the interests of tie and CEC were the same. This rested on the fact that tie was wholly owned by CEC. In that regard Mr Fitchie observed that:

“TIE’s interests were accepted as derivative of and synonymous with those of CEC. CEC could therefore avoid the strict legal requirement for a formal tender process.” [TRI00000102_C, pages 0009 and 0047, paragraphs 2.11 and 4.30.]

4.43 The import of that evidence was that the parent–subsidiary relationship meant that CEC had been able to appoint tie to carry out the works rather than seeking bids in a public procurement exercise. That was correct as a matter of the law of public procurement, but it did not address the issue of whether a conflict of interest could emerge between tie and CEC. It did not necessarily mean that the subsidiary would always act in the best interests of the parent. This should have been apparent to the parties at the time. The same assumption as to common interest appears to have arisen out of the Operating Agreement between tie and CEC [CEC01351476], which was also relied on by Mr Fitchie [TRI00000102_C, pages 0009 and 0047, paragraphs 2.12 and 4.32]. While the intention was that tie would act to promote the interests of CEC, it should have been apparent that this might not be the case – whether as a result of inadvertence or intention.

4.44 Not only can it be said that it ought to have been apparent that interests could diverge; the evidence indicates that DLA was in fact well aware of that possibility. Even the letter of 23 June 2005 from DLA, which accompanied the draft letter confirming the duty to CEC, noted that the interests of tie might not fully coincide with those of CEC [DLA00006301, page 0001, paragraph 2]. The email sending the 2007 “duty of care” letter [CEC01711054] said that there “needs to be complete commonality of interests and objectives among the Council, tie and TEL”. Mr Fitchie said that the duty was extended to CEC on the basis “that there was complete commonality of interest” [TRI00000102_C, page 0049, paragraph 4.41]. This makes no sense. It is clear from the accompanying letter in 2005 that Mr Fitchie was aware that the interests might not converge. It appears that this reliance upon commonality of interest was an attempt to sweep a very difficult and important issue under the carpet. In addition, Mr N Smith pointed out in evidence that he was not aware of such discussions regarding commonality having taken place [PHT00000005, page 157]. The acknowledgement by DLA that discussions would be required, together with the knowledge from DLA and CEC that these had not taken place, ought to have indicated to both CEC and DLA that the necessary commonality might not exist, and should have raised concerns. The possibility that the interests were not aligned should have been the subject of particular care so that, if it did arise, DLA would be able to meet its professional obligation to notify both clients and one or both of them could be advised to seek independent legal advice [Mr Fitchie PHT00000017, pages 29–30].

4.45 As noted above, the issue of whether separate advice was required was hotly contested. On this basis, I consider that if it had not been made clear at the outset that the interests of CEC were to be protected, even in 2007 when the issue was first raised, separate advice for CEC would have been appropriate. This is not a comment made only with the benefit of hindsight. I consider that a proper examination of the position in 2007 would have revealed the scope for the interests of tie and CEC to diverge. The 2007 letter did not address that adequately. It attempted to hide the problem by sidelining CEC. The interests of CEC were subordinated to those of tie and were inadequately protected. In this regard I agree with the views of Mr C MacKenzie and Mr N Smith, noted in paragraph 4.28 above. It also appears to have given DLA the false comfort that it did not need to be on guard for a situation in which the interests of the parties diverged so that it could bring this to its clients’ attention.

4.46 Mr Fitchie considered that the various CEC officials involved in governance of the project were in a position to judge whether separate legal advice was necessary. While it is fair to say that these people might have been in a position to make such an assessment, that does not relieve Mr Fitchie and DLA of their obligation to notify CEC if they considered that a conflict of interest might arise – not least because DLA would be better informed than CEC was of developments in the project and the instructions given by tie. Mr Fitchie accepted that none of the other people whom he said were in a position to form a view on whether independent advice was required was in as good a position as he was to understand the development of the draft contracts and the risk that they presented to CEC.

4.47 In fact, as the negotiations on the Infraco contract proceeded and moved towards conclusion, the interests of tie and CEC did start to diverge. Mr Fitchie, at least, was aware of this. He considered that the decision by tie not to exercise remedies available to it under the Rutland Square Agreement must have sent a message to the consortium that, above all else, tie wanted to award the contract [TRI00000102_C, page 0220, paragraph 7.467]. Mr Fitchie pointed out that the context for his statement was that CEC was aware of the demand for price increase. Nonetheless, a desire to award the contract “above all else” is indicative that the interests of CEC were no longer being protected by tie. That alone should have indicated to him that the interests of tie were likely to be in conflict with those of CEC.

4.48 As will be considered in more detail in later chapters, tie went on to conclude the contract on terms that imposed substantial risks on CEC. When asked whether he was in fact in the best position to advise CEC if the contracts turned out to be adverse to its interests, Mr Fitchie initially claimed that he did not have complete knowledge of CEC’s interests. If that were the case it would strengthen the argument for CEC’s taking separate independent legal advice. On further questioning, however, it was clear that he fully understood that CEC was exposed to overruns on the cost and that he was in the best position to take a view on whether the contract was a fixed–price one [PHT00000017, pages 49–50]. This was an area in which it should have been apparent to him, to officials in CEC and to the personnel at tie that tie and CEC had different interests. Accordingly it would have been expected that DLA would advise its client, CEC, that its interests were not being protected. That this was not done is a material failing.

4.49 Had CEC sought independent legal advice prior to conclusion of the Infraco contract it is likely that the risks would have been disclosed to it. What difference would that have made? I have already rejected any suggestion that it would have made no difference to the outcome of the project even if CEC had been made aware of the true position (see paragraph 3.129).The concern of CEC to avoid exposure to cost overruns was apparent to all. The importance of the contract’s being a fixed-price one had been emphasised time after time. At the very least, had CEC been aware of the situation it could be said that its decisions had been fully informed and taken with full awareness of the possible consequences. If that had been so, the response by tie and CEC when problems arose under the contract would probably have been different. I find it inconceivable that matters would have proceeded as they did had there been awareness of the risk. However, had CEC had the necessary awareness I think that it more likely than not that the terms of the draft contract would have been developed further to provide some protection to CEC. Bilfinger Berger asserted that it would not have done anything differently. It is easy to make such a claim after the event. I accept that it is possible that this would have been the outcome, but experience of commercial parties negotiating agreements suggests that it is more likely that there would have been some element of compromise. Whether there was any compromise or not, CEC would have been aware of a more realistic estimate of the cost of the project. If the estimated cost exceeded the budget of £545 million, CEC could have considered different options, including: refusing to conclude the Infraco contract with the consortium; constructing only part of the route (as ultimately happened); postponing the project; or abandoning it altogether.

4.50 I accept the evidence that the consortium would not have accepted all the risk for incomplete designs without adjusting the contract price. It is possible, however, that different parts of the risks would each be handled in their own way, with perhaps some of them being accepted by the consortium in return for the addition of a risk premium to the contract price and other risks remaining with tie/CEC. Even if all the risks were left with tie/CEC it is likely that they would have been properly valued and, when the risk event arose, there would have been less procrastination, with the resultant delay to the contract and consequent expense. It is also likely that fewer matters would have been referred to the dispute resolution procedure, with its consequential delays, additional costs and deterioration in the working relationships between the parties.

4.51 The above discussion considers the issue of advice from DLA as it arose in the evidence; it was instructed for tie at the outset, a “duty of care” letter in favour of CEC was sought and, as contract close approached, questions arose as to whether CEC should have independent legal advice. In my view, however, this could be seen as considering the issue of legal advice from the wrong starting point.

4.52 The respective interests of CEC and tie should have been addressed at the outset, when tie first appointed DLA to advise on legal issues relating to procurement and strategy options for the delivery of the project. Although tie was charged with taking decisions to implement the project, it was CEC’s project. As noted in Chapter 3 (Involvement of the Scottish Ministers), the grant funding was capped. As such, the whole financial responsibility for excess cost would fall on CEC and it was its reputation that would suffer if the project failed to deliver. The interests of tie in the project were those of delivery by a single-purpose company that was wholly owned by CEC. CEC’s interests were very much broader, in relation to both the trams and its other statutory responsibilities. The interests of CEC were the ones that DLA should have been required to protect. If, at any time, the interests of tie differed from CEC’s interests, it should have been recognised that they were subordinate to those of CEC and should always have been treated as such. It should have been presumed that tie’s interests coincided with those of CEC, but if any doubt or conflict arose the interests of CEC should have prevailed. Therefore, had the proper approach been adopted at the outset, it would have been apparent that the correct question was not whether CEC might require independent advice, because there should have been a clear understanding that its interests were paramount and the advice that was obtained should be to protect CEC’s interests. If advice was necessary to consider the interests of tie in isolation, that should have been the advice that was sought independently.

4.53 Neither tie nor CEC should have accepted “duty of care” letters in the form in which they ultimately rested. The second paragraph of Mr Fitchie’s letter of 23 June 2005 to Mr Macaulay, mentioned in paragraph 4.19 above, should have served as a clear warning that the priorities were not adequately understood and reflected in the letter [DLA00006301]. It should have been apparent to all concerned at that time that the interests of tie were subservient to those of CEC, and the need to be aware of CEC’s interests, the clarity of instructions and the duties owed should have been framed in light of that. This was an issue that should have been identified at the time of the tendering exercise to obtain legal services so that the duties were owed to the most appropriate party form the outset. DLA was correct to say that it should not make assumptions about CEC’s interests. DLA should have been required to determine what those interests were. If it considered that the actions of the persons at tie from whom it took instructions were in conflict with those interests, it should have been clear to all parties that the matter would be reported to CEC for clarification. CEC was not an “add-on”. It is simply not adequate – from the standpoint of either a proper discharge of professional duties or the effective management of CEC’s interests – to say that the issue of whether the interests of CEC and tie diverge “is a judgement only tie can make” [ibid], as Mr Fitchie stated in his letter.

4.54 The consequences of not having these priorities accurately established were correctly identified in the email from Mr N Smith to his colleagues dated 1 August 2007, which is mentioned in paragraph 4.22 above [CEC01564769]. CEC’s interests should have been fully considered in 2002, when tie, as agent for CEC, appointed DLA as solicitors for the project. In 2007, during the run-up to the award of contracts, it was far too late for this critical issue to surface, by which time the only way to ensure that CEC’s interests had been adequately protected until then was for CEC to seek independent legal advice. In my view the position in relation to the “duty of care” letter was even worse than Mr N Smith suggested in his evidence (see paragraph 4.29 above); it was couched in such terms that its true function was to protect DLA’s interests rather than those of CEC.

4.55 Had DLA been instructed in such a way that it had to protect the interests of CEC, in preference to those of tie, where there was any misalignment between them, I consider that the failures to identify and advise on the terms of the contract during the negotiation and at contract close would not have happened; see Chapter 11 (Contract Negotiations) and Chapter 12 (Contract Close).

4.56 There were a number of points at which critical decisions were taken in relation to legal advice. The first was at the stage of tendering and appointment where the scope of work was limited to advising tie with only a duty of care being owed to CEC. The second was in accepting a “duty of care” letter, which, as noted above, was inadequate to protect CEC. The third – which I consider to be very much subsidiary – was the failure to obtain independent legal advice when the limited terms on which DLA would give a “duty of care” letter became apparent. The outcome of these decisions left CEC unprotected. I consider that, taken either individually or collectively, this was one of the key elements in the project where a decision or decisions were taken that would have far-reaching adverse consequences.

McGrigors

4.57 The firm known by the name “McGrigors” in the period from 2009 to 2014 has since been merged with another firm: Pinsent Masons. That latter firm was involved in the project as legal advisers to Bilfinger Berger. Therefore, to avoid confusion and to differentiate the two firms as they were in the period of the implementation of the project, the name “McGrigors” is used to denote the firm that existed under that name in the period from 2009 to 2014.

4.58 Throughout its involvement McGrigors was instructed by tie. As part of its appointment it was required to provide a “duty of care” letter to CEC [CEC00774999]. This was addressed to CEC rather than tie and did not contain the qualifications that DLA had sought to impose. It was therefore more likely to provide an appropriate degree of protection to CEC. However, the work in relation to which McGrigors was instructed was such that, in my view, the same conflict between the interests of tie and CEC did not arise. Nevertheless, the same consideration as to which body’s interests should have been put first applies.

4.59 McGrigors’ first involvement in the project post-dates the conclusion of the Infraco contract. The firm was first instructed in July/August 2009 in relation to the disputes under that contract that were accumulating. Mr Jeffrey, tie’s Chief Executive between April 2009 and June 2011, instructed it with the specific intention of assisting in the determination of which disputes should be referred to the contractual dispute resolution procedure [TRI00000097_C, page 0020, paragraph 124; presentation to Tram Project Board of 29 July 2009, CEC00376412, page 0022]. Mr Jeffrey stated that he was unhappy by the end of 2009, following the decisions of adjudicators that were adverse to tie’s interests, and consequently decided to instruct McGrigors [TRI00000097_C, page 0059, paragraph 363]. In fact, it is apparent that McGrigors had already been instructed to work for tie but its role did increase significantly after the end of 2009. In an email from Mr N Smith to Ms Lindsay in February 2010 there is a suggestion that the reason that McGrigors, as opposed to DLA, was tasked with reviewing the contract for tie was in case solicitors within DLA were required to be witnesses in any litigation alleging breach of contract [CEC00480029].

4.60 In 2010, McGrigors was instructed to provide advice as to the meaning and effect of the Infraco contract, and it became involved in the conduct of an adjudication and the determination of strategy to be adopted by tie, as well as Project Pitchfork, which is mentioned later in the Report. In November 2010, McGrigors largely took over from DLA in providing legal advice to tie. The only matters retained by DLA concerned ongoing adjudications. There was a formal handover in January 2011. McGrigors provided advice leading up to, during and after the Mar Hall mediation in 2011.

4.61 It is apparent from the above that, for some time, both DLA and McGrigors were instructed to act for tie. There does not appear to be a clear record of the demarcation for division of work or consideration of the rationale for maintaining instructions to two firms.

Dundas & Wilson

4.62 D&W was instructed at a number of different times and in relation to a number of different issues.

4.63 Initially, it had been engaged along with Bircham Dyson Bell, solicitors in London, in relation to the promotion of the private Bills necessary for the construction and operation of the tram lines.

4.64 Later, in March 2009, Mr Ramsay of Transport Scotland asked D&W to review the Infraco contract. This was in part to ensure that the Scottish Ministers would not be exposed to claims for cost overruns. In addition to producing a formal letter reporting on the contract [TRS00031282], D&W commented to him that the contract was not fit for purpose and would tend to encourage disputes [PHT00000012, pages 222–226]. This is considered in more detail in Chapter 3 (Involvement of the Scottish Ministers).

4.65 Later, in February 2010, on the recommendation of Mr Maclean, following his appointment as Head of Legal and Administrative Services, CEC instructed D&W to conduct a review of the Infraco contract and report on options for tie leaving the contract [CEC00480029 – email from Mr N Smith to Ms Lindsay]. Mr Jeffrey stated that the reason for the report was that CEC was concerned that the option of termination was being considered and that wrongful termination would have a substantial downside [TRI00000097_C, page 0034, paragraph 209]. The tenor of the advice is recorded in an email from Mr N Smith dated 12 February 2010 [CEC00450359] and a draft report, also dated 12 February 2010, from D&W [CEC00551307]. The issue of termination of the contract is considered in more detail in Chapter 17 (Adjudications and Beyond).

Anderson Strathern WS

4.66 In November 2010, Mr Jeffrey became concerned at certain issues relating to the contract and the advice received by tie and CEC in the run-up to awarding it. He reported his concerns to Mr Maclean, who, in turn, reported them to the CEC Monitoring Officer (Mr Inch) [TRI00000055_C, pages 0026–0027, paragraph 71; CEC00013342]. Mr Jeffrey then instructed Anderson Strathern to advise on the following three questions:

“1) were there grounds for TIE to take action against DLA for advice they gave TIE in the run up to the contract signature, 2) was there evidence that TIE misled or misreported the issues on the contract to CEC at the time of the contract signature and 3) was payment of bonuses to TIE staff following conclusion of the contract legal and appropriate” [TRI00000097_C, pages 0005–0006, paragraph 24]?

4.67 The letter of advice is WED00000018. On behalf of CEC Recovery Limited (the current name for tie), CEC has claimed privilege in relation to this document. It has therefore been redacted to conceal parts to which this privilege attaches.

Shepherd & Wedderburn WS

4.68 Mr Maclean stated that Shepherd & Wedderburn (S&W) was instructed by CEC at around the end of September or early in October 2010 [TRI00000055_C, page 0017, paragraph 52]. He said that, until that time, CEC had been relying on tie and its advisers. This therefore reflects the first step to obtaining independent legal advice. Mr Maclean records that the reasons for seeking independent advice at this stage were his “serious concerns about the validity of these [Remediable Termination] notices and, further, the strategy that TIE were adopting” as well as his concerns “about the approach of TIE, DLA, in some cases CEC’s management team and the Project Team”. S&W was then instructed in a number of the issues that were arising at the time:

1 In October 2010, S&W was instructed to consider possible termination of the Infraco contract and the validity of the Remediable Termination Notices served under the contract [ibid, pages 0018–0019, paragraph 55].

2 In November 2010, S&W was instructed by CEC to review the commentary on adjudication decisions prepared by DLA for tie [CEC00005337]. S&W’s report is dated 26 November 2010 [CEC00013525]. It says that it was instructed by CEC, but in his statement Mr Mackay says that he had instructed it to provide an independent report [TRI00000113_C, page 0094, paragraph 338]. I prefer the statement in S&W’s report and have concluded that Mr Mackay is mistaken in his recollection on this matter.

3 In November 2010, S&W was also instructed to advise on what the contractual position would be with Construcciones y Auxiliar de Ferrocarriles SA in relation to supply of tram vehicles if the Infraco contract were to be terminated [TRI00000055_C, pages 0021–0022, paragraph 62].

4 Also in November 2010, S&W was instructed in relation to seeking the advice of Nicholas Dennys QC in relation to the issues with the Infraco contract. This is considered in more detail in Chapter 17 (Adjudications and Beyond); Chapter 18 (CEC: May 2008–2010); and Chapter 19 (Mediation and Settlement).

4.69 It is apparent that, later, Mr Maclean sought advice from S&W as to whether CEC, as the parent of tie, should become involved in the disputes between tie and the consortium. The advice was that it should not.

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