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Scottish Court of Session Decisions
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Cite as:  ScotCS 104
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OUTER HOUSE, COURT OF SESSION
OPINION OF LORD MACFADYEN
in the cause
DRAKE AND SCULL ENGINEERING LIMITED
N.G. BAILEY LIMITED
Pursuers: Wolffe; Masons
Defenders: Patterson, Solicitor-Advocate; MacRoberts
12 April 2000
 In this action the pursuers make two monetary claims against the defenders under a contract between them in terms of which the pursuers contracted to supply, install and commission mechanical and plumbing installations in certain buildings being constructed at Faslane Naval Base. The action was transferred to the commercial roll on 29 November 1999. At a procedural hearing on 24 January 2000 it was determined that one issue in the case, relating to the relevancy of certain of the pursuers' averments asserting that certain terms were implied in the contract, should be appointed to debate. A diet of debate was fixed for 6 April 2000. At a subsequent By Order hearing on 6 March 2000, a further issue suitable for disposal at debate was identified. That issue related to certain averments made by the pursuers bearing upon the contractual status of a fax from the defenders to the pursuers dated 20 March 1995. At that stage, that issue was added to the matters to be debated on 6 April. Also at that stage the pursuers were allowed to lodge a minute of amendment. Thereafter both parties lodged notes of argument, the defenders answered the minute of amendment, and the pursuers adjusted it.
 When the case called before me on 6 April for debate, I was informed that as a result of the amendments proposed by the pursuers, the relevancy of the averments concerning implied terms of the contract was no longer in issue. On the pursuers' unopposed motion, I allowed the pleadings to be amended in terms of paragraph 1 of the minute of amendment (as adjusted), since that paragraph bore on the issue that remained for debate. I reserved for future discussion, perhaps after further adjustment, the question of amendment in terms of the remainder of the minute of amendment (as adjusted) and the answers. The debate then proceeded in respect of the issue concerning the fax of 20 March 1995.
 The main contract, to which the contract between the pursuers and the defenders is a sub-sub-contract, is for the construction of the Warrant Officers' and Senior Ratings' Mess and Single Staff Quarters (WO & SR Mess and SSQ) at HMS Neptune, Faslane. The employer is the Secretary of State for Defence. The main contractors are Trafalgar House Construction (Regions) Limited. They entered into a sub-contract with the defenders for the design, supply and fixing of mechanical, electrical and plumbing installations. The defenders in turn further sub-contracted the supply, installation and commissioning of mechanical and plumbing installations to the pursuers.
 The contract between the pursuers and the defenders is No. 7/2 of process. Paragraph 2.0 provides inter alia that:
"THE Seller [i.e. the pursuers] shall execute and complete the Contract Works subject to and in accordance with this Contract in all respects to the reasonable satisfaction of the Buyer [i.e. the defenders] ..."
Paragraph 3.0 provides:
"THE Seller shall observe perform and comply with all the provisions of the Main Contract and of the Sub-Contract on the part of the Buyer to be observed, performed and complied with so far as they relate and apply to the Contract Works (or any portion of the same) and are not repugnant to or inconsistent with the express provisions of this Contract as if all the same were severally set out herein."
Part I of the Appendix to the contract gives the "Particulars of the Works (being a part of the Works comprised in the Main Contract), in this Contract referred to as 'The Contract Works'" as:
"Supply, install and commission Mechanical and Plumberwork Installations at the WO & SR Mess and SSQ at H.M.S. Neptune, Faslane".
 Part IV of the Appendix to the contract is in the following terms:
"It is hereby agreed that this Contract incorporates the terms and conditions contained in the following documents and it shall be construed as if the same had been set out herein at length.
This is a Sub-contract order to carry out the Mechanical and Plumberwork Services Work on the WO and SSR (sic) Mess and SSQ at H.M.S. Neptune, Faslane. The Sub-contract Works shall be fully in accordance with the Main Contract documentation and the Trafalgar House Construction (Regions) Limited Sub-contract documents for Mechanical/Electrical Services.
The terms and conditions of Sub-contract place Drake & Scull Engineering Limited back to back with N. G. Bailey & Co. Ltd (sic) in respect of all Sub-Contract and Main Contract conditions and terms and incorporates (sic) the following documents, where applicable to the Mechanical Service Works (emphasis added).
The Seller has had the opportunity of inspecting all documents relating to the Sub-contract and shall be deemed to have full knowledge of the contents of such documentation. Without prejudice to the generality of the foregoing the Seller expressly confirms it has had sight of the following:-
 The defenders' letter of 8 May 1995 referred to in the last paragraph of Part IV of the Appendix is No. 7/8 of process. Paragraph 14 of that letter is in inter alia the following terms:
"Any Sub-Contract Agreement that may be entered into ... would incorporate the undernoted:-
(c) List of Tender Documents - Appendix A (2no pages) attached.
(f) This letter dated 8 May 1995."
Item (10) on the List of Tender Documents - Appendix A was in the following terms:
"NGB fax to Drake and Scull dated 20 March 1995 (18 pages) which includes Hulley and Kirkwood comments dated 17 March 1995 to the proposed design changes."
That fax is No. 7/5.10 of process. It comprises a single sheet of manuscript message from the defenders to the pursuers, and two attachments. The manuscript message contains the following passage:
"We herewith enclose the revised design parameters as DSSR [Donald Smith Seymour Rooley, the defenders' consulting engineers] submission 15/3/95, together with H & K [Hulley & Kirkwood, the employer's consulting engineers] comments 17/3/95. You should consider the above when finalising your tender offer.
Please also note that all design and design responsibility will be DSSR's."
The first attachment is the DSSR submission and the second contains the H & K comments. The DSSR submission begins: "This report is to describe the services as envisaged at tender and incorporate the first stage of the design development prior to commencing detail design".
 The DSSR submission referred to in the fax as "the revised design parameters" proposed an alteration to the design of the works. In their pleadings the pursuers say that the effect of the submission was to change the method of heating the low pressure hot water system from a traditional, boiler heated system to a direct-gas system. The defenders maintain that it effected other changes as well. In order to trace the context in which that submission was made and its relationship to the evolution of the contract between the pursuers and the defenders it is necessary to go back to the invitation to tender which the defenders issued to the pursuers (No. 7/5 of process). Paragraph 13.00 of that document referred the pursuers to the list of tender documentation in Appendix A (c.f. paragraph 14 (c) of the letter No. 7/8 of process). The second page of Appendix A contains a list of tender documents received, which includes material which does not bear directly on the mechanical and plumbing installation, but also includes volumes 2A, Design Brief, and 2B, Mechanical Installation. Those volumes are Nos. 7/4.3 and 7/4.4 of process. In them are to be found the design parameters originally set. The DSSR submission alters in certain respects those design parameters. In their tender submitted on 7 April 1995 (No. 7/6 of process) the pursuers confirmed that they had checked and accepted inter alia volume 2B. They also sought confirmation that design responsibility rested solely with DSSR. Confirmation of that point was given by the defenders in their letter of intent dated 10 April 1995 (N. 7/7 of process). There then followed the letter of 8 May 1995 (No. 7/8 of process) and the formal contract (No. 7/2 of process).
The Pursuers' Averments
 It is convenient to set out not only those averments that the defenders submit are irrelevant, but also the averments which precede them and set the context for them. In the quotation which follows, it is the underlined averments that the defenders submit are irrelevant and should not be admitted to probation. The pursuers aver:
"Explained and averred that responsibility for design lay with the Defenders and the Consulting Engineer [i.e. DSSR]. Reference is made to the Defenders' letter of 10 April 1995. Further explained and averred that the Consulting Engineer's Schematic Design enclosed with the Defenders' fax of 20 March 1995 described a proposal for the mechanical services and plumbing design system. The Consulting Engineer confirmed to the Pursuers that this proposal was made in an attempt to make a cost saving. As the Pursuers did not consider that the proposal would save costs, they submitted their tender dated 7 April 1995 on the basis of the existing design. The pursuers had subsequent discussions with the Consulting Engineer regarding the proposal. At a meeting on 21 April 1995, attended by Steve Morrison of the defenders, the Consulting Engineer agreed with the Pursuers that as no cost-saving would be achieved, the design should revert to the original system proposed. Accordingly the Pursuers did not enter into the Sub-Contract on the basis of the information contained in the Consulting Engineer's Schematic Design."
The Defenders' Submissions
 For the defenders, Ms Patterson submitted that it was clear that the DSSR submission appended to the defender's fax of 20 March 1995 (No. 7/5.10 of process) was incorporated into the contract. The process of incorporation could be traced through Part IV of the Appendix to the contract (No. 7/2 of process), paragraph 14 (c) of the defenders' letter of 8 May 1995 (No. 7/8 of process), and item (10) of the attached List of Tender Documents - Appendix A. She acknowledged that the DSSR submission was incorporated only "where applicable to the Mechanical Service Works" (Part IV of Appendix A to the contract), but submitted that it was plain that the submission dealt with an aspect or aspects of, and was therefore applicable to, the mechanical services works. It followed that the pursuers could not relevantly make averments which sought to go behind the contract documents and displace the incorporation of the DSSR submission. She submitted that the averments in question did not set the scene for any particular interpretation or natural meaning of the contract. The pursuers sought to rely on discussions which took place on 21 April 1995 and earlier for the purpose of excluding from the contract a document that was expressly incorporated into the formal written contract executed on 19 May 1995. In any event, the averments relate to discussion said to have taken place between the pursuers and the consulting engineer. The consulting engineer is not a party to the contract, and there are no averments to the effect that he had authority to negotiate in relation to the formation of the contract. Further, the discussions averred related only to one aspect of the DSSR submission, and did not justify the inference that it was in its entirety excluded from the contract.
 In support of her submissions, Ms Patterson cited the well-known passage in the speech of Lord Wilberforce in Reardon Smith Line Ltd v Hansen-Tangen  1 WLR 989 at 995-6:
"When it comes to ascertaining whether particular words apply to a factual situation or, if one prefers, whether a factual situation comes within particular words, it is undoubtedly proper, and necessary, to take evidence as to the factual situation. ...
It is less easy to define what evidence may be used in order to enable a term to be construed. ... No contracts are made in a vacuum: there is always a setting in which they have to be placed. The nature of what is legitimate to have regard to is usually described as 'the surrounding circumstances' but this phrase is imprecise. In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating. ...
It is often said that in order to be admissible in aid of construction, these extrinsic facts must be within the knowledge of both parties to the contract, but this requirement should not be stated in too narrow a sense. When one speaks of the intention of the parties to a contract, one is speaking objectively - the parties cannot themselves give direct evidence of what their intention was - and what must be ascertained is what is to be taken as the intention which reasonable people would have had if placed in the situation of the parties."
The pursuers' averment that they entered into the contract on the basis of the original design did not relate, Ms Patterson submitted, to a matter which was, or could reasonably be taken to be, known to both parties. The averments about the discussions and meeting with the consulting engineer, even with the averment added by the minute of amendment to the effect that a representative of the defenders was present at the meeting, were not averments from which an inference might be drawn that the tender price reflected the original design and not the revised version outlined in the DSSR submission.
The Pursuers' Submissions
 Mr Wolffe for the pursuers did not dispute that, by the route discussed above, the fax of 20 March 1995 was incorporated into the contract between the pursuers and the defenders, if and to such extent as it was "applicable to the Mechanical Service Works". He submitted, however, that it remained to be determined in due course by the court which parts of which documents were incorporated into the contract as being "applicable to the Mechanical Service Works". The disputed averments would, in his submission, be relevant to that determination. They thus formed a proper part of the factual matrix in which the contract fell to be construed.
 Mr Wolffe drew attention to the way in which the various components of the contract documents were put together. Part IV of the Appendix incorporated inter alia the whole of the main contract and principal sub-contract documentation. Much of that material could be seen to have nothing to do with the works to which the contract between the pursuers and the defenders related. Nothing was done to identify which parts of the main contract documentation and the principal sub-contract documentation were relevant to the contract between the pursuers and the defenders. The exclusion of irrelevant material was achieved solely by the provision that documents relating to the other contracts were incorporated only "where applicable to the Mechanical Service Works". The meaning of that phrase was therefore central to the problem of determining the extent of incorporation.
 While Mr Wolffe accepted that the DSSR submission was incorporated into the contract to such extent, if any, as it was applicable to the mechanical service works, he pointed out that the incorporation provisions also incorporated into the contract the original design proposals to which that submission constituted an alternative solution. Those were to be found in volume 2B of the main contract documents (No. 7/4.4 of process) at paragraph 3.06. Part IV of the Appendix to the contract provided that the sub-contract works (i.e. the works to be undertaken by the pursuers) were to be "fully in accordance with the Main Contract documentation" (emphasis added). There was thus a second problem, in addition to determining the extent to which the DSSR submission was incorporated, of determining how to resolve the conflict between two different design proposals, both of which had been incorporated into the contract. What mattered in that connection was what the parties had in view at the date of the formal contract. The averments in question were capable of shedding light on that matter.
 Mr Wolffe submitted further that the use of the phrase "where applicable to the Mechanical Service Works" implied that the mechanical service works would be identifiable before the question of incorporation was addressed. The averments in question could therefore be seen to go towards assisting in identifying the mechanical service works, as they were conceived to be at the date of the contract. If by the date of the contract it had been agreed that the relevant aspect of the mechanical service works would be based on the design outlined in the main contract rather than on the revised version outlined in the DSSR submission, that would point to the conclusion that the DSSR submission was not applicable to the mechanical service works.
 Mr Wolffe referred to two cases in support of his submissions. The first was Bank of Scotland v Dunedin Property Investment Co. Ltd. 1998 SC 657, in which it was held that it was appropriate to take into account evidence of what was said at a meeting between the parties before the contract was signed in order to determine the parties' knowledge of the circumstances in which certain words were used in the contract. Mr Wolffe relied in particular on the following passage from the opinion of Lord President Rodger at 665F:
"As these authorities [Prenn v Simmonds  1 WLR 1381 per Lord Wilberforce at 1384; Inglis v Buttery & Co (1878) 5 R (HL) 87 at 102-103; Bovis Construction (Scotland) Ltd v Whatlings Construction Ltd 1994 SC 351 per Lord President Hope at 357] demonstrate, the rule which excludes evidence of prior communings as an aid to interpretation of a concluded contract is well-established and salutary. The rationale of the rule shows, however, that it has no application when the evidence of the parties' discussions is being considered, not in order to provide a gloss on the terms of the contract, but rather to establish the parties' knowledge of the circumstances with reference to which they used the words in the contract."
The second case on which Mr Wolffe relied was Bovis Construction (Scotland) Ltd v Whatlings Construction Ltd. There Lord President Hope said at 357C-358C:
"In my opinion the issue which has arisen between the parties in this case requires that reference should be made to the previous correspondence in order to resolve it. This is because the essential point which is in dispute is not the meaning of the words and phrases used in the ... agreement but the circumstances in which it was intended to apply. The ordinary rules for the construction of written documents, including contracts such as that entered into in the present case, exclude reference to extrinsic evidence, unless there is an ambiguity in the words used which requires to be resolved by the use of such evidence. ... But ... it is legitimate to look to the surrounding circumstances and see what was the intention of the parties, expressed in the words used, as they were with regard to the particular circumstances and facts with regard to which they were used. ...
We were referred by the pursuers' counsel to a number of cases where it was recognised that extrinsic evidence was admissible to identify something mentioned in the contract, such as a person, thing or document referred to in it ...
The purpose of such evidence is not to modify the contract but to apply it to the facts as explained by the extrinsic evidence."
 In my opinion it is clear from the terms of Part IV of the Appendix of the contract between the pursuers and the defenders that the fax sent by the defenders to the pursuers on 20 March 1995 and the documents attached to it, including in particular the DSSR submission, were incorporated into the contract, but only to the extent to which they were "applicable to the Mechanical Service Works". As Ms Patterson was at pains to emphasise in the course of her submissions, the arrangements for the design of the contract works remained fluid during the period in question. The design was still evolving. That meant that the content of the mechanical service works was evolving. The documents which were incorporated into the contract included both the original design proposals (No. 7/4.4 of process, paragraph 3.06) and the revised proposals (the DSSR submission in No. 7/5.10 of process). There is therefore potentially an issue as to which of those inconsistent provisions identifies what was meant in the contract by "the Mechanical Service Works". If attention were focused exclusively on the incorporated documents, it might be thought that the later document superseded the earlier one. But what the pursuers offer to prove is that the proposed supersession was later (but before conclusion of the contract) reversed. The averments in question relate to discussions between the pursuer and the consulting engineer, who the defenders accept was the party on whom design responsibility rested. In addition, it is averred that the defenders were represented at the meeting at which the revertion to the original design was agreed upon. In my view, consistent with the authorities cited, the discussions and agreement alleged in the disputed averments may well be relevant to the proper interpretation of the phrase "Mechanical Service Works" in Part IV of Appendix A to the contract. If by mechanical service works the parties, by the date of execution of the contract, meant the original design, it would then be arguable that the DSSR submission was not incorporated into the contract, because it was not "applicable" to the mechanical service works so understood.
 If the DSSR submission were held to be incorporated into the contract, it seems to me that a question might arise as to the intended effect of that incorporation. It does not seem to me that a decision that the fax of 20 March 1995 and its attachments was incorporated into the contract is necessarily tantamount to a decision that the pursuers must be taken to have based their tender on the alternative design set out in the DSSR submission. It may be that the correct conclusion would, in these circumstances, be that they must be taken to have done so. It seems to me, however, that it would be wrong to exclude ab ante evidence of the discussions between the pursuers and the consulting engineers, since those discussions may - I put the matter no higher than that - form part of the relevant surrounding circumstances in which the contract was eventually entered into in the terms it was.
 For these reasons I am of opinion that it would be wrong to exclude the challenged averments from probation. In so holding, I emphasise that I am making no final decision as to the relevancy of those averments. Any proof will require to be before answer. It may be that after evidence relating to those averments is led the defenders will be able to argue that it has no proper bearing on the issues which require to be decided. That, however, is a decision better taken, in my view, at that stage.
 I shall therefore refuse to give effect to the defenders' submission that the averments in question should be excluded from probation. Since the procedural course best adapted to the resolution of the outstanding issues between the parties remains to be identified, I shall at this stage simply put the case out By Order for further discussion of future procedure.