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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> McLaren Murdoch and Hamilton Ltd v. The Abercromby Motor Group Ltd [2002] ScotCS 299 (22 November 2002)
URL: http://www.bailii.org/scot/cases/ScotCS/2002/299.html
Cite as: 2003 SCLR 323, [2002] ScotCS 299

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McLaren Murdoch and Hamilton Ltd v. The Abercromby Motor Group Ltd [2002] ScotCS 299 (22 November 2002)

OUTER HOUSE, COURT OF SESSION

CA128/00

 

 

OPINION OF

LORD DRUMMOND YOUNG

in the cause

McLAREN MURDOCH & HAMILTON LIMITED

Pursuers;

against

THE ABERCROMBY MOTOR GROUP LIMITED

Defenders:

 

________________

 

 

Pursuers: J. W. McNeill, Q.C., Borland; Simpson & Marwick, W.S.

Defenders: J. J. Mitchell, Q.C.; DLA

22 November 2002

  • The pursuers practise as chartered architects. Their present managing director is Mr Michael Towers. The defenders are car dealers, and own and operate car dealerships in a number of places in Scotland. Their managing director is Mr Alaster Cunningham. Prior to November 1994 the pursuers had provided professional services to the defenders, and in particular had designed and supervised the construction of a number of car showrooms at Halbeath, Dunfermline. In about November 1994 the parties, and in particular Mr Towers and Mr Cunningham, began to discuss a proposal by the defenders to construct four car dealership showrooms and associated workshops at Kerse Road, Stirling. In due course the pursuers were appointed architects for the project, and the workshops were ultimately constructed in accordance with the pursuers' design and under their supervision. Two disputes have arisen between the parties.
  • First, the parties are in dispute as to the level of fee to which the pursuers are entitled. In the principal action the pursuers claim unpaid fees to which they say they are entitled for the works at Kerse Road. Second, the defenders have lodged a counterclaim alleging breach of contract and negligence on the part of the pursuers. They claim in particular that the pursuers were at fault in the design of the showrooms and workshops. Substantial parts of the counterclaim were abandoned by the defenders during the proof that took place before me, and all that remains is a claim by the defenders that the pursuers were negligent in the design of the heating system for the showrooms and workshops. For their part the pursuers have accepted that they were at fault in the design of the heating system. They dispute, however, whether the defenders have established any loss or damage consequential upon the pursuers' fault. Thus the only live issue in the counterclaim is the question of what loss, if any, the defenders have established as a result of the pursuers' negligent design of the heating system.
  • Pursuers' entitlement to fees

  • The pursuers claim fees amounting to 29,375.57 in total. That claim is based on an invoice dated 16 April 1998. In that invoice the main part of the pursuers' fee is based on a scale fee of 8% of the final account for the building works at Kerse Road. That final account is said to amount to 1,853,910; consequently the scale fee is said to be 158,312.80. Two additions to that scale fee are claimed, known as the Audi uplift and the CDM uplift. These amount respectively to 23,488 and 11,909. The total fee due to the pursuers is thus said to amount to 183,709.80. Of that sum, 158,709.31 has been paid, leaving a balance of 25,000.49. VAT of 4,375.08 is due on that sum, resulting in the alleged debt of 29,375.57. It can thus be seen that the pursuers' claim for fees is based on four propositions: that the pursuers are entitled to a scale fee based on the final contract sum; that the net fee is 8% of the final contract sum; that the pursuers are entitled to the Audi uplift; and that the pursuers are entitled to the CDM uplift. Each of those propositions is disputed by the defenders. Consequently it will be necessary to consider each of them independently. Before that, however, it is convenient to set out the evidence relating to the formation of the parties' contract and the manner in which the two additions to the scale fee are said to have arisen.
  • It is common ground that the parties entered into negotiations over the proposed works at Kerse Road in or shortly before November 1994. Those negotiations were conducted between Mr Cunningham and Mr Towers. Mr Cunningham gave evidence that, when the discussions about the Kerse Road project started, Mr Towers expressed dissatisfaction with the level of profit that the pursuers had obtained from previous work undertaken for the defenders, and Mr Cunningham had accordingly agreed to come up with a proposal to increase the pursuers' profit from the Kerse Road development. The defenders' development at Halbeath had just been completed, and it was assumed that the units at Kerse Road, consisting of showrooms and a workshop, would be similar to those at Halbeath; consequently it was thought that the design work should be relatively simple. One difference, however, related to the identity of the contractor. The defenders' previous developments had all been constructed by an associated company, but because external financing was required for Kerse Road it was necessary to employ an outside contractor and a standard professional team.
  • On 28 November 1994 Mr Cunningham sent Mr Towers a letter in the following terms:
  • "I refer to recent correspondence and discussions on the above and thought it would be worthwhile to put my thoughts on paper as a discussion document for us to use perhaps later this week.

    In view of the fact that the overall proposals and work to date have been speculative and remain so at present, I accept that in the event that the development becomes a commercial reality then the payments to your firm, which has participated in some of the front end risk, should reflect that risk.

    This will obviously also be the job which hopefully equalises your profit opportunity in relation to this Company, as much of the work has already been done on Halbeath...

    ...

    In order to address the subject of fees, I have endeavoured to make some assumptions which help to come up with actual cash sums. Once you have considered the schedule in some detail I would like to remove percentages and replace them with actual amounts. This will enable me to raise cheque requisitions and instruct... our group Finance Director to pay the amounts on receipt of the various pieces of paper without my personal involvement in the approvals.

    Assumptions

    ... [T]he projected price for a stand alone unit at Halbeath was 240 K. Therefore I have assumed that the total contract price for Stirling would be approximately as follows:

    Units 1,2 & 3 @ 240K

    550,000

    1 x VAG unit + small industrial

    720,000

    Total Contract Price

    1,270,000

    say

    1,300,000

    Notwithstanding the repetition etc, I suggest an initial team fee of 8%, which should increase with some small success-related bonuses. It would be my intention to pay the whole fee to McLaren Murdoch & Hamilton. Your firm would then be responsible for agreeing payments to any Engineers, Quantity Surveyors etc and also for ensuring that any requirement for collateral warranties etc were fulfilled adequately....

    My proposal on the 8% fee (104,000) is as follows:

    1

    On submission of detailed planning application:

    2%

    (2,080)

    2

    On receipt of satisfactory detailed planning consent:

    0%

    (Nil)

    3

    On missives becoming unconditional and land paid for:

    28%

    (29,120)

    4

    On submission for building warrant:

    0%

    (Nil)

    5

    On receipt of building warrant:

    (Fee for stage warrants to be divided accordingly)

    15%

    (15, 600)

    6

    On completion of Bill of Quantities:

    10%

    (10,400)

    7

    On acceptance of Contractor:

    10%

    (10,400)

    8

    On an equal monthly basis for the duration of the contract:

    20%

    (20,800)

    9

    On receipt of certificate of completion:

    5%

    (5,200)

    10

    On issue of "Making good defects" certificate:

    3%

    (3,120)

    11

    On final account agreement:

    2%

    (2,080)

     

    12

    On concluding all the above points within the timescale of the pre-agreed programme:

    12 2%

    (2,080)

    13

    On concluding the entire project within the pre-agreed budget

    3%

    (3,120)

    14

    On having all the units trading prior to 14 July 1995

    5%

    (5,200)

    Total

    105%

     

    I look forward to discussing these, and any other points you may wish to raise, later this week".

    Both parties accepted that that letter set out certain of the terms of their contract. In particular, the pursuers rely on it to establish a scale fee of 8%. In this connection, two points should be noted. First, the fee contemplated in the table was 105% of 8%, but that was dependent on having all units trading prior to 14 July 1995. Second, the figures used in the letter (as against the percentages) were derived from the Halbeath contract. New figures had to be substituted for Kerse Road. Mr Cunningham gave evidence that, when he sent the letter, he intended that the fee payable to the pursuers should be based on a fixed sum, not an unknown sum, because he thought it wrong to reward a huge overspend. He accepted, however, that the figures (as against the percentages) were indicative only, and that the actual figures for the Kerse Road project would be different.

  • Mr Towers responded to Mr Cunningham's letter of 28 November 1994 by a letter dated 19 December 1994. So far as material, this was in the following terms:
  • "Thank you for your letter and the fee proposal of 28 November 1994. I confirm acceptance of this proposal, and I can advise that Thomson Bethune, Chartered Quantity Surveyors and Goodson Associates, Consulting Civil & Structural Engineers have agreed terms with us to join the Design Team....

    ... Once we have submitted for planning, I would suggest that Thomson Bethune prepare a Cost Plan, and with feedback from Planning, we should be able to put in place a final budget and project programme".

    Meanwhile extensive discussions continued in relation to the project, but both Mr Cunningham and Mr Towers accepted that these did not relate to the fees payable to the pursuers. On 14 August 1995, Mr Rodney Smith, who at that time was managing director of the defenders, wrote to Mr Towers in the following terms:

    "re: Cluster dealership development at Kerse Road, Stirling

    I write to confirm my Board's decision to proceed with the above development, for the building of Audi, Volkswagen, Citroen and Fiat motor dealerships.

    This project to be completed within the sum of 1,587,950, set out in the cash flow forecast".

    Mr Rodney Smith did not give evidence; he is no longer employed by the defenders.

  • Mr Cunningham's evidence was to the effect that the contract between the parties proceeded on the basis stated in the letter of 14 August 1995, namely that the pursuers' entitlement was to a fee based on the sum stated in the letter, 1,587,950. He stated that the parties tacitly accepted that their original understanding was to continue, and the result, it was said, was that the pursuers' fee was to be fixed at 8% of the sum of 1,587,950 mentioned in that letter. The pursuers would not be penalised if they made savings on the building contract price of 1,587,950; conversely, if there was an overspend the defenders would not pay extra fees to the pursuers. This, Mr Cunningham said, was part of the agreement from the outset. In cross-examination, Mr Cunningham accepted that a number of changes had inevitably taken place as the project developed. He further accepted that, by the time when the letter of 14 August 1995 was written, a cash flow forecast and business plan would have existed; these would have been required by the defenders and their bankers in order to see whether the development was viable. He agreed that the sum paid by way of capital cost could be more or less than the figure in the business plan. He was unaware, however, whether a construction contract was in place by this stage. He was cross-examined at some length about what he expected to happen if the extent of the building works changed after the engagement of the architect. When asked about the situation where the extent of the works was reduced because of a change in the defenders' or motor manufacturers' requirements, Mr Cunningham replied that he would presume that that was due to the architect's efforts; in any event, discussions had taken place with the manufacturers, and there was no reason to change the extent of the works. When asked what would happen if, for example, one of the four retail units were omitted from the contract, he replied that that would no longer be the present contract. I did not find Mr Cunningham's evidence on his understanding of the contract to be of assistance in reaching my decision. My impression was that he was largely unable to conceive of hypothetical questions; consequently he was unable to provide proper answers to them. In addition, I suspect that his evidence was influenced by the entrenched position that he had taken since the parties had fallen out over the present contract. The test that I must apply in deciding the terms of the parties' contract is an objective one, based on the understanding of a reasonable man in the position of the parties, and I do not think that the particular views held by Mr Cunningham are of any help in applying such an objective test.
  • Mr Towers stated in evidence that the pursuers' fee was to be 8% of the final account in the building contract, as computed by the contract quantity surveyor. His reason for that view was that that was the normal basis on which architects charged fees, under the standard Conditions of Engagement of 1995 and other similar forms of contract. The percentage, 8%, was based on the letter of 28 November 1994. Mr Towers further stated that the contract works had developed considerably from the original proposals; in particular, the four showrooms at Kerse Road were to display the cars of four manufacturers, Audi, Citroen, Volkswagen and Fiat, and those manufacturers had specific requirements for the showrooms which had to be met by the architect. Consequently the pursuers had to send drawings to the manufacturers and to make presentations to them. At the time when the letter of 14 August 1995 was sent, a tender had been obtained, but it had been based in part on approximate quantities as the design had not been sufficiently finalised for full bills of quantities throughout. After August 1995 significant changes had been made to the design. In cross-examination Mr Towers was asked at some length about the three letters of 25 November and 9 December 1994 and 14 August 1995. In his speech at the close of the evidence, Mr Mitchell, who appeared for the defenders, submitted that Mr Towers had accepted in cross-examination that it was "obvious" that the pursuers' fee would be based on a budget figure, namely 1.3 million or some other agreed figure, rather than the sum in the contractor's final account. Mr McNeill, who appeared for the pursuers, disputed that version of the evidence. I did not record any such admission in my notes. The nearest that I have been able to find to such an admission in the evidence is an acceptance by Mr Towers that Mr Cunningham obviously had in mind a figure of 8% of the budget price when he wrote the letter of 28 November 1994. It appeared to me, however, that that view was based on Mr Cunningham's evidence, rather than anything that Mr Towers knew beforehand. Moreover, the admission clearly related to Mr Cunningham's intention, rather than anything that was objectively obvious. Such subjective intentions are clearly not in any way decisive in construing a contract.
  • In my opinion the argument for the pursuers is correct, and their fee must be based on the final account in the building contract, and not on any budget figure. It was agreed by the parties that certain of the material terms of the contract of engagement are contained in the letter of 28 November 1994, which was accepted by Mr Towers' letter of 9 December in the same year. The dispute largely relates to Mr Smith's letter of 14 August 1995; the defenders claim that this was part of the contract, while the pursuers assert the contrary. In such cases, the court must examine the relevant documents in the light of the surrounding circumstances, and construe them objectively: Gloag, Contract, 398. Put in another way, the test is what a reasonable man in the position of the parties would understand that contract to be. Regard must obviously be had to the general commercial background to the contract and the circumstances in which the particular contract came to be concluded: Bank of Scotland v Dunedin Property Investment Company Limited, 1998 SC 657.
  • In the present case, the contract is for the engagement of an architect. The normal position in such a contract is that the architect's fee is based on the final account in the building contract. That is obviously not in any way conclusive; parties are always free to contract out of the norm. For this reason I do not accept Mr Towers' contention in evidence that the pursuers' fee should be based on the standard forms of engagement; these were not adopted by the parties. Nevertheless, the principle that an architect's fee should be based on the final account in the building contract is in my opinion founded on good sense in the commercial context of building projects. It is of the nature of building projects that the design and extent of the works is liable to be varied, often to a very substantial degree, after the contract is concluded. It is obvious that such variations may have a major impact on the total scale of the project. In such circumstances it is only fair that the architect should be remunerated according to the scale of the project as built, rather than the initial concept, because that will reflect the amount of work and responsibility required of him. I am accordingly of opinion that a reasonable man with substantial commercial experience would have realised that basing an architect's fee on the final cost of building works, rather than any initial tender or budget figure, was normally the fairest and most sensible way to proceed. In this particular case, such a construction of the contract is in my opinion supported by the terms of Mr Cunningham's letter of 28 November 1994. In the passage that precedes the table of percentages, the assumptions underlying Mr Cunningham's fee proposal are stated. At that point, the letter reads "Therefore I have assumed that the total contract price for Stirling would be approximately as follows". That clearly indicates that the fee proposals are based on the contract price, rather than any budget figure, and the normal understanding of a "contract price" is the final account in the building contract.
  • I have already indicated that I did not find Mr Cunningham's evidence on his understanding of the contract to be of help in applying an objective test. Mr Cunningham did state in evidence that the defenders' experience of standard contractual arrangements in the construction industry was limited, as they had carried out previous building projects using an associated company. I do not think that this affects the application of the objective test, however; in my opinion a reasonable man in Mr Cunningham's position would have realised that substantial additions to the building contract might be necessary, and that in those circumstances it was fair and reasonable to remunerate the pursuers accordingly. Moreover, the terms of his letter of 28 November 1994 support such an approach.
  • Against that background, I am of opinion that the letters of 28 November and 9 December 1994 and 14 August 1995 contained nothing to contradict the view that the architect's fee should be based on the final account in the building contract. Mr Cunningham's initial letter, dated 28 November 1994, contained figures (as against percentages) that were indicative only; that was quite clear both from the terms of the letter and from the evidence of Mr Cunningham and Mr Towers. In the letter Mr Cunningham did state that, after further consideration, he would like to remove the percentages and replace them with actual amounts. This, it was said, would facilitate the payment of the pursuers' invoices. Nevertheless, I can find no indication in the subsequent documentation that the percentages were replaced by actual amounts.
  • The letter of 9 December 1994 from Mr Towers to Mr Cunningham merely amounted to an acceptance of the terms set out in the letter of 28 November, and says nothing about the sum on which the pursuers' fee was to be calculated. The next letter relied on was that written by Mr Smith on 14 August 1995. This is a remarkably brief document to be given the momentous consequences that the defenders attributed to it. The first sentence is clearly an intimation that the defenders' board had decided to proceed with the project at Kerse Road; indeed it appears to confirm a previous verbal intimation. The sentence founded on by the defenders is the second, that "This project to be completed within the sum of 1,587,950, set out in the cash flow forecast". In my opinion that cannot reasonably be construed as an indication that the pursuers' fee was to be based on the sum stated. Indeed, if the sentence in question is read literally, it might be construed as involving a guarantee by the pursuers that the sum payable to the contractor under the building contract was not to exceed the sum of 1,587,950 stated in the letter. That would clearly be an extraordinary result. Of greater significance, however, is the fact that the letter makes no reference back to previous correspondence about the terms of the contract between the pursuers and the defenders. In my opinion that would be expected if the letter had any bearing on the level of the pursuers' fee. It is also significant that the sum stated in the letter was based on a cash flow forecast rather than any definitive tender figure. A cash flow forecast would normally be prepared for the defenders' internal purposes, or to exhibit to their bankers. Such a document is normally of no significance for the contractual relations of the parties to the building contract, including the architect. If the parties were to agree that the pursuers' fee should be based on a definite sum, I would expect that sum to be derived from a tender received from the contractor rather than a document without contractual significance prepared essentially for the defenders' own internal purposes. Moreover, Mr Towers gave evidence, which I accept, that by the stage when this letter was written a tender had been received from the contractor but certain parts of it only contained approximate quantities. In these circumstances, if the pursuers' fee were to be based on a specific figure, I would expect it to be derived from the tender document, probably with a provision for modification when definite quantities were known. Consequently I am of opinion that Mr Smith's letter of 14 August 1995, if it is construed objectively, cannot reasonably be considered as anything more than confirmation that the defenders had decided to proceed with the project.
  • The next question in dispute between the parties is whether the fee to which the pursuers are entitled is simply 8% of the contract sum, or is to be reduced to reflect the fact that stages 12 and 13 set out in Mr Cunningham's letter of 28 November 1994 were never achieved. Both parties were agreed that this matter depended on the proper construction of that letter, which they accepted as having contractual effect. The argument for the pursuers was essentially that the fundamental proposal contained in the letter of 28 November 1994 was for a fee of 8%. That fee was then broken down in the table into various stage payments, but these did not affect the basic fee, apart from the bonus of 5% found at stage 14. So far as stages 12 and 13 were concerned, these referred to "the pre-agreed programme" and "the pre-agreed budget", but there was no evidence that any programme or budget had ever been agreed in advance. Consequently these provisions were rendered meaningless, and one was left with the basic agreement for a fee of 8%. The defenders, on the other hand, argued that the fee payable to the pursuers was dependent on achievement of the various stages set out in the table. There was no evidence that any "pre-agreed programme" or "pre-agreed budget" existed; consequently stages 12 and 13 were incapable of achievement. Thus the parts of the pursuers' fee that were dependent on completion within the timescale of the pre-agreed programme and within the pre-agreed budget could not be due.
  • In my opinion the proper construction of the letter of 28 November 1994 is that the proposal made by the defenders was for a fee of 8%. In that letter, discussion of the level of fee is introduced by the statement "I suggest an initial team fee of 8%". That in itself suggests the primacy of a fee of 8% furthermore, the table itself is introduced by the words "My proposal on the 8% fee... is as follows". Once again, that emphasises that the basic fee is to be 8%. The table that follows does not in my view qualify the amount of the fee. It was intended rather to set out the stages at which instalments of the fee were to be payable. Consequently its basic purpose was not to determine the amount of the fee but rather the times for payment of the fee. In those circumstances I consider that the reference to a fee of 8% remains primary, and must prevail over anything contained in the table. Against that view it can be said that the first reference to such a fee, "I suggest an initial team fee of 8%", is qualified by the words "which should increase with some small success-related bonuses". That can certainly be construed as a reference to stage 14 in the table, which does provide for an increase above the basic 8% fee if all the units are trading prior to 14 July 1995. It is less clear, however, that it can be construed as a reference to stages 12 and 13; these did not involve any increase over the basic fee of 8%, and thus could not properly be considered "success related bonuses". In these circumstances I am of opinion that there is insufficient content in the words "which should increase with some small success-related bonuses" to bring about a reduction in the basic 8% fee in the event that stages 12 and 13 are inoperative because no programme or budget has been agreed in advance. So far as the time of payment of the last part of the 8% fee is concerned, it is clear in my opinion that it must be payable on final completion of the project. I am accordingly of opinion that the pursuers are entitled to a fee based on 8% of the final contract sum.
  • The next issue arising between the parties is whether the pursuers are entitled to an increase over the scale fee for extra work done in relation to the Audi showroom; this was known as the Audi uplift. When this matter was first raised in evidence, counsel for the defenders objected to the line of evidence on the ground that there was no record for such a claim. In my opinion that objection is not well founded, and I repel it. The pursuers aver that the original brief was changed to accommodate the requirements of the companies granting the dealership franchises, such as Audi. In the invoices relied on by the pursuers, which are specifically referred to in the pleadings, express reference is made to the Audi uplift, and sums are claimed in respect of it. In these circumstances I am of opinion that the nature and amount of this claim has been adequately disclosed.
  • The pursuers' claim for this increase was based on the evidence of Mr Towers. He stated that in May 1995 the works had been designed and put out to tender. During the week of 8 May, however, Audi, who were one of the four manufacturers involved in the project, indicated that they wanted to discuss the design of their showroom. A meeting to discuss the design was held on 15 May, in Milton Keynes. It was attended by both Mr Towers and Mr Cunningham. At the meeting Audi indicated that they were having a new branding image drawn up, and that they wanted to use Kerse Road as one of three pilot dealerships in the United Kingdom. Pictures of what they wanted were exhibited. These involved a hangar-like curved roof. The design was intended to distinguish Audi from Volkswagen, with whom they had been closely associated. Mr Towers was asked if he could produce a new design for the Audi showroom. Mr Towers stated that he discussed the matter with Mr Cunningham on the way back from Milton Keynes; the concept was sketched out in the course of the journey. Thereafter, Mr Towers said, the pursuers embarked upon a major redesign of the Audi showroom. This involved meetings with Audi's design consultants. In due course revised drawings and approximate quantities were submitted to the contractor, and a revised tender was obtained on the basis of those. Mr Towers further stated that Audi had indicated at the meeting held on 15 May 1995 that they would provide financial support to the defenders for the extra work involved in the redesign of the Audi showroom. This would cover the additional construction costs of the new design and the professional fees involved in the redesign. Audi accepted that the existing work that had been done for their showroom was thus rendered worthless. Fees for the professional team had been proposed to Audi; in this connection Mr Towers referred to a fax that he had sent to a Mr Richard Adams of Audi on 8 August 1995, which had been copied to Mr Rodney Smith of the defenders. That fax contained a breakdown of the additional fees for the professional team. Mr Towers further stated that Audi had agreed to pay those fees. He had no reason to doubt that the fees had been paid to the defenders, who would have been responsible for paying the pursuers. Consequently, the invoices rendered by the pursuers to the defenders included the amounts that the pursuers understood to have been paid by Audi to the defenders, under the description "Audi uplift" or "Audi fee". Those invoices referred back to the fax of 8 August 1995. That was clear in the invoices issued on 11 September 1995, 28 December 1995 and 28 March 1996, all of which had been paid by the defenders. In the pursuers' final invoice, the balance of the Audi uplift was claimed.
  • Mr Cunningham's evidence contradicted Mr Towers' contentions. He stated that he did not understand the basis for the Audi uplift, as the amount of it, 23,488, was the approximate amount for the entire dealership in other jobs that the pursuers had done. He accepted that changes had been made to the Audi building, but he stated that the fee of 23,488 had neither been pre-agreed nor accepted. In cross-examination, he was asked whether the pursuers had requested an additional fee for the Audi redesign. He stated that he could not recall, but that he thought that a request had been made for fees for the curved roof. He was asked if he was involved with Audi in relation to this matter, and stated that he was only on the periphery. In relation to the payment of the invoices, Mr Cunningham stated that these had been overpaid. Mr Towers had had what he described as "total control" over the amounts claimed by the pursuers, and had been able to go straight to the defenders' financial controller, a Mr Iain Purslow, with invoices. These were presented and paid immediately. It was only when the defenders conducted that final summing up of amounts paid under the contract that they realised that they had paid more than had been agreed. The overpayments were the responsibility of Mr Purslow. In cross-examination, however, Mr Cunningham was forced to accept that most of the invoices had only been paid weeks or months after they were rendered, and he was unable to point to any that was paid immediately. Mr Purslow did not give evidence.
  • On the question of the Audi uplift, I generally accept the evidence of Mr Towers. By contrast I found Mr Cunningham's evidence on this matter to be unsatisfactory. In particular, I consider it clear on the evidence that very substantial redesign work was required following the meeting in Milton Keynes on 15 May 1995. That work was carried out at Audi's request. It is thus inherently likely that the pursuers, and indeed the defenders, would be remunerated for extra work and extra costs necessitated by the redesign. In the circumstances I find Mr Towers' account to be inherently probable. Mr Cunningham was present at the meeting in Milton Keynes. In my opinion he must have been well aware of the need for extensive redesign. In the circumstances I find it difficult to believe that he would not have been well aware of any discussions regarding reimbursement by Audi of the additional costs of redesign. He nevertheless replied, when asked if Audi had been requested to pay an additional fee, that he could not recall; he thought that a request had been made for an additional fee for the curved roof, but he could not remember the details. When asked if he was involved in discussions with Audi on this matter, he said that he was on the periphery. In these circumstances I prefer Mr Towers' account of what happened at and following the meeting in Milton Keynes. Moreover, Mr Towers' account is strongly supported by the terms of his fax of 8 August 1995 to Mr Adams of Audi; this only makes sense if Audi had an interest in the amount of the professional fees for the redesign. Counsel for the defenders submitted that the fee arrangement involving Audi to which Mr Towers referred had not been put to Mr Cunningham in cross-examination. While the details were not put, Mr Cunningham was given an opportunity to state his position, and he said that he could not recall any fee arrangement. Mr Towers' account of what happened is strongly supported by the fact that invoices claiming sums for the Audi uplift were rendered and paid. I do not accept Mr Cunningham's suggestion that these were only paid because Mr Towers took them straight to Mr Purslow and obtained immediate payment. That was clearly contradicted by the documentary evidence, which showed substantial delays in paying the invoices. Moreover, the invoices bore to be authorised by Mr Purslow, who was the defenders' financial controller. Mr Purslow did not give evidence. In these circumstances I have no hesitation in drawing the inference that the invoices were properly checked, as would be expected of a competently run business. From that fact I conclude that an arrangement had indeed been entered into among Audi, the defenders and the pursuers whereby Audi paid the defenders for additional costs incurred as a result of the redesign, including professional fees, and the defenders remunerated the pursuers. I accordingly conclude that the pursuers are entitled to payment of the Audi uplift.
  • The next issue is the pursuers' claim for the CDM uplift. As in the case of the Audi uplift, when the CDM uplift was first raised in evidence counsel for the defenders objected to the line of evidence, on the ground of no record. In this case no express reference is made in the pleadings to the CDM uplift. Nevertheless, the pleadings do refer specifically to the invoices relied upon by the pursuers as setting out the sums due to them. These invoices refer in terms to the CDM uplift. In my opinion that is sufficient notice of the pursuers' claim, and I repel the defenders' objection.
  • Mr Towers explained the basis on which the CDM uplift is claimed. New Construction, Design and Management Regulations came into force on 1 August 1996. The original contract would not have fallen within the scope of the new Regulations, but it was thought that the changes to the brief and design that had taken place during the period from November 1994 to July 1995 were caught. The principal reason for that was the additional works carried out at Audi's request. The new Regulations required a pre-contract health and safety plan, which necessitated substantial additional work on the part of the architect. The pursuers had carried out that work, and were accordingly due an additional fee, which was to be paid by Audi, in the same way as the Audi uplift. The CDM uplift was included in Mr Towers' fax of 8 August 1995 to Mr Adams of Audi. Mr Towers understood that Audi were to pay the defenders, and the defenders were to reimburse the pursuers. Claims for the additional sum had been included in the invoices rendered by the pursuers to the defenders, and 90% of the total amount had been paid, leaving only the last 10% due. The entitlement of the pursuers to the CDM uplift was not put in terms to Mr Cunningham in cross-examination. Nevertheless, it is clear that the CDM uplift was in essentially the same position as the Audi uplift; it was an additional cost brought about by Audi's request for a total redesign of their showroom. Mr Cunningham stated that he had no recollection of any arrangement whereby Audi were to reimburse such additional costs. I am accordingly of opinion that the defenders were not prejudiced to any significant degree by the failure to refer to the matter specifically.
  • The CDM uplift is in my opinion in the same position as the Audi uplift. It was necessitated by Audi's request for total redesign of their unit. On this matter, as with the Audi uplift, I generally accept the evidence of Mr Towers. The CDM uplift was specifically claimed in invoices rendered by the pursuers to the defenders, and was paid on each occasion except the last. For the reasons discussed in paragraph [19] above, I consider that those invoices must have been properly checked by the defenders. I am accordingly of opinion that the defenders have accepted that the sum is due. Whether the defenders have in fact been reimbursed by Audi is not relevant to the present claim, and it is unnecessary for me to consider that matter further. I should note one further submission for the defenders, which was that allowing the pursuers 8% of the final account plus the Audi and CDM uplifts involved double counting. In my opinion that is not correct. The Audi uplift, as Mr Towers made clear in his evidence, was designed to compensate for the fact that all of the work that had been performed on the Audi showroom prior to the Milton Keynes meeting was rendered abortive. The CDM uplift was consequential upon that redesign work. The Audi and CDM uplifts were thus designed to deal with a specific instance of redesign rather than the vicissitudes of the building project as originally conceived.
  • Loss established by defenders in consequence of pursuers' negligent design of heating system

  • The second issue in dispute between the parties is whether the defenders have established any loss consequential upon the pursuers' negligent design of the heating system. It is, as I have already noted, a matter of concession that the pursuers' design of the system was negligent. The heating system originally installed in the Kerse Road development was one provided by a company known as Thermaray. This consisted of electrical underfloor heating, and worked on a night storage principle; electrical elements running through the floor of the building were heated at night, using cheap electricity, and the resulting heat was stored in the concrete of the floor and released during the day. The deficiencies in such a system were explained by Mr Gordon Morris, a consulting engineer who gave evidence on behalf of the defenders. Mr Morris was a specialist in the design and specification of environmental systems, including heating systems, within buildings. No evidence was led by the pursuers to contradict his views, and I accept his opinion on the adequacy of the heating system specified by the pursuers.
  • Mr Morris explained that night storage systems have a number of fundamental problems. It is impossible to control the release of heat during the day. Thus any control of the system must be related to the accumulation of heat at night, but the problem there was predicting what the temperature would be during the following day. On occasion too much heat might be stored, and this could be uncomfortable for persons walking on the floor. In addition, night storage systems worked best in buildings with high thermal inertia. These are generally buildings with thick walls and small windows. The buildings at Kerse Road, however, were of lightweight construction and included large amounts of glazing. That made them unsuitable for night storage heating. Further problems arose in relation to the workshop areas. These are used to carry out servicing and repairs to cars. During the day there was a considerable turnover of cars, which had to be moved in and out of the workshop area through a number of large doors. When the doors were opened heat was lost. This was a serious problem with night storage heating, because the heat lost could not be replaced during the day, as the system was dependent on heat stored during the night. For this reason other similar workshops nearly all made use of systems that allowed rapid replacement of heat after the doors were opened. Either electrical bar heaters or gas blower heaters were suitable for this purpose.
  • Mr Morris expressed the view that underfloor heating of any sort, whether based on storage or not, was unsuitable for the workshop area. The problem was that underfloor heating did not allow the rapid replacement of heat lost when the workshop doors were opened. Nothing of value could be obtained from the installation of an underfloor system in the workshop areas; if anything such a system was a liability, because it was difficult to install foundations for equipment on a floor containing heating elements. On the basis of that evidence, I am of opinion that it was clearly reasonable for the defenders to replace the underfloor system in the workshop areas with a system better suited to the requirements of those areas.
  • In relation to the showroom areas, Mr Morris stated that some level of heat was obtained from the underfloor system. The problem with the existing system only arose in winter, in particular on winter afternoons, when the heat stored overnight had been largely depleted. At those times the heat produced by the system was not acceptable, and something would require to be done to provide additional heating if staff and customers were to be comfortable. On the basis of that evidence, I am satisfied that it was necessary for the defenders to do something about the heating in the showroom areas. Mr Morris was not, however, a party to the pursuers' decision to replace the heating systems in the four units. The heating system had in fact been replaced in all four units, in late 1998 and early 1999 in the case of units 2, 3 and 4, and in 2001 in the case of unit 1, the Fiat unit. Unit 1 had been excluded from the first series of replacements because at that point it was thought that the franchise might be transferred to another manufacturer, and that manufacturer might have different requirements. The decisions to replace the systems were dealt with to some extent in the evidence of present or former employees of the defenders or other companies in the defenders' group. Mr Gary Wardall had been contracts manager employed by Moray Park Developments Limited, another company in the same group, in 1998 and 1999. He spoke to the quotations that had been obtained for the work of replacement, and to the invoices that were rendered by the contractors following the installation of the new heating system in units 2, 3 and 4. Mrs Sandra Cowie spoke to the replacement of the system in unit 1, and to the way in which the work had been ordered and the contractors paid within companies in the Abercromby group. Mr Peter McGregor had been the manager of the Citroen showroom at Kerse Road when the heating system was replaced, and he spoke to the obtaining of quotations and replacement work in units 2, 3 and 4. None of those witnesses, however, was asked about the decision to replace the entire system, in both showrooms and workshops, rather than replacing the system in the workshops and using supplementary heating in the showrooms.
  • The first submission for the pursuers in relation to the counterclaim was that there was no evidence for the defenders that the whole system had to be replaced, in both showrooms and workshops. Counsel submitted that ultimately Mr Morris's evidence was that he had in mind replacing the heating system in the workshops and giving further consideration to the heating system in the showrooms. There was no evidence on which the defenders could claim that it was reasonable to replace the whole heating system. The costs of replacement founded on by the defenders, however, related to the entire system. There were no figures on which the cost of replacing the system in the workshops alone could be calculated. In the showrooms, however, the evidence was that the existing system had significant capacity, and was generally in balance except during cold weather in winter. Mr Morris, it was submitted, envisaged that additional heating might be provided in winter, albeit at a higher cost, depending on the tariff achieved. There was no material on which the court could calculate the cost of such additional heating. Reference was made to Duncan v Gumleys, 1987 S.L.T. 729, in which it was held that damages should not be calculated in a capricious or arbitrary fashion.
  • For the defenders it was submitted that it was plain from the evidence of Mr Morris that, had proper specialist advice been taken, an appropriate heating system would have been obtained. Consequently the defenders' damages should be measured by the cost of reinstatement of the heating system, to provide a proper system. Reference was made to Ruxley Electronics v Forsyth, [1996] AC 344, Farley v Skinner, [2001] All E.R. 801; [2001] UKHL 49, and Bevan Investments v Blackhall & Struthers, 1977, 11 B.L.R. 78, a decision of the Court of Appeal of New Zealand. It was further submitted that, because the pursuers did not lead evidence to contradict the evidence of Mr Morris, only the most favourable inferences should be drawn from his evidence: Davidson v Duncan, 1981 S.C. 83. Thus it was not open to the pursuers to set up a case that additional heating should have been provided, rather than a completely new heating system, because no evidence had been led to that effect.
  • In my opinion the defenders are entitled to damages based on the cost of installing a completely new heating system. The relevant principles are as follows. First, following a breach of contract the innocent party is entitled, generally speaking, to be placed in as good a situation financially as he would have been in had the contract been properly performed. Second, where the obligation incumbent upon the party in breach of contract is a duty to exercise reasonable care, rather than a duty to achieve a particular result, the result is the same; in this case the innocent party is entitled to be placed in the position that he would have been in had the party in breach exercised due care: Farley v Skinner, [2001] 4 All ER 801, at 812 per Lord Steyn, 818 per Lord Clyde, 822-823 per Lord Hutton. Third, in cases involving construction contracts, including claims based on the professional negligence of an architect or engineer, the pursuer's loss is normally measured in one of two ways, either the cost of making the works conform to contract or the difference between the value of the works as built and the value of the works as they ought to have been built: Ruxley Electronics Limited v Forsyth, [1996] AC 344, at 366 per Lord Lloyd of Berwick; the same approach is taken by the other members of the House of Lords. If the cost of making the works conform to contract is less than the difference in value, that will be the measure of damages. Even in other cases, however, the cost of making the works conform to contract may be the natural and obvious measure of damages. That is so even where there is little or no difference in value, or where, as will often happen, the difference in value is hard to assess: ibid. For these reasons the cost of making the works conform to contract is regarded as the ordinary measure of damages for defective performance under building and similar contracts. Fourth, in some cases the cost of making the works conform to contract, by reinstating what ought to have been built, will not be the appropriate measure of loss. The relevant principle has been expressed as follows:
  • "First, the cost of reinstatement is not the appropriate measure of damages if the expenditure would be out of all proportion to the benefit to be obtained, and, secondly, the appropriate measure of damages in such a case is the difference in value, even though it would result in a nominal award": ibid, at 367 per Lord Lloyd of Berwick.

  • It is in my opinion important to notice the relationship between the third and fourth principles discussed in the last paragraph. In effect, they amount to this: a pursuer will be entitled to the cost of making building works conform to contract unless that cost is significantly disproportionate to the benefit that is obtained from it. That appears from Lord Lloyd's formulation in Ruxley Electronics v Forsyth, and also from the original formulation of the principle in question. That appears in the opinion of Cardozo J., sitting in the Court of Appeals of New York, in Jacob & Youngs v Kent, 129 N.E. 889 (1921), a case where a building contract specified that the plumbing should use a particular type of piping. In fact the builder used a different type of piping. Cardozo J. stated
  • "In the circumstances of this case, we think the measure of the allowance is not the cost of replacement, which would be great, but the difference in value, which would be either nominal or nothing.... It is true that in most cases the cost of replacement is the measure.... The owner is entitled to the money which will permit him to complete, unless the cost of completion is grossly and unfairly out of proportion to the good to be obtained. When that is true, the measure is the difference in value".

    The emphasis in this passage is on the cost of replacement as the norm, subject to an exception where that cost is seriously disproportionate to the good to be obtained. In other words, the reasonableness of the pursuer's remedial works is not to be weighed in fine scales. That seems only fair. The pursuer is the victim of a breach of contract, and it should not be open to the party responsible for that breach to place unreasonable obstacles in the way of the pursuer's recovery of damages. In my opinion the proper relationship between the third and fourth principles discussed in the last paragraph is this, that a pursuer will be entitled to the cost of making the works conform to contract except in two situations: firstly, where the cost involved is manifestly disproportionate to any benefit that will be obtained from it, in which case the court should take notice of the disproportion; and, secondly, where the defender leads evidence to show that there is a significant disproportion between the cost and the benefit. Even in the latter category of case, I consider that the balance between cost and benefit should not be weighed too finely. Nevertheless, where the defender leads such evidence, the court will be entitled to take a more critical view of the pursuer's actions.

  • In the present case the defenders' counterclaim is for the cost of replacing the entire heating system, in both the showrooms and the offices, with a gas-fired system. The evidence of Mr Morris was that the system of underfloor heating installed on the pursuers' instructions was inadequate in both the workshops and the showrooms. The situation was much worse in the workshops; nevertheless, his evidence was quite clear that the system in the showrooms was not adequate either. The point taken by the pursuers is that it might have been possible to continue using the existing system in the showrooms, but supplementing it with extra heating during the winter. Mr Morris stated that the decision whether to install a new system rather than supplementing the existing one depended on a consideration of operating costs and capital costs; installing a new system would involve higher capital costs, but providing supplementary heating was liable to produce higher operating costs. The capital and operating costs involved in replacement and in supplementing the existing system would have to be compared over the entire life of the system. That indicates that the decision whether or not to replace the heating system in the showrooms is anything but clear-cut. I am accordingly of opinion that it cannot be said that the defenders' decision to replace the existing heating system in the showrooms involves costs that are manifestly disproportionate to any benefit that will be obtained. The pursuers did not lead any evidence about those costs, and indeed did not cross-examine Mr Morris on his matter. In the circumstances I do not consider that it is appropriate to take a critical view of the defenders' decision to replace the heating system in both workshops and showrooms. I therefore conclude that the defenders are entitled to the cost of replacing the entire heating system, and not merely the system in the workshops.
  • The second submission for the pursuers in relation to the counterclaim was that the defenders had failed, in respect of certain heads of the damages claimed by them, to establish that the loss had been sustained by them as against other companies in the Abercromby group. The first of these heads was the claim to the cost of replacing the heating system in the Fiat showroom, No 1. The relevant invoices, which were rendered in the period from June to September 2001, were all in the name of a company known as Carden Investments Ltd. That company was spoken to by Mrs Sandra Cowie, who was its property director. She explained that it was in the same group of companies as the defenders, and was a wholly owned subsidiary of the same holding company. It functioned as a property investment company, and held the properties in the group, including Kerse Road. By a Lending Agreement concluded between the defenders and Carden Investments Ltd on 28 March 2001, it had been agreed that certain properties, including Kerse Road, should be transferred from the defenders to Carden Investments Ltd with effect from 1 May 2000. Under that agreement, the defenders agreed to discharge any liabilities in connection with the property arising or accruing due in respect of the period up to that date and Carden agreed to pay and discharge all such liabilities in respect of the period after that date. It followed, counsel argued, that the defenders could not establish any loss in respect of that property. Mr Cunningham had chosen to create a particular corporate structure for his business, and he must take the consequences of that structure. In the present case, no invoices had been produced identifying any liability on the part of the defenders, as against Carden Investments Ltd; consequently the defenders' claim must fail.
  • This argument raises the issue of the legal "black hole", a phrase originally used by Lord Stewart in GUS Property Management Ltd v Littlewoods Mail Order Stores Ltd, 1982 S.C. (H.L.) 157, at 166. That expression is normally used to refer to the situation where a breach of contract has occurred, and loss has resulted from the breach, but that loss has been sustained, wholly or partly, by a person other than a party to the contract. That occurs typically in two categories of case: where one family member has concluded a contract on behalf of himself or herself and other members of the family, and where a contract has been concluded by a company forming part of a group and the subject matter of the contract belongs to or has been transferred to another member of the group. In such cases, the argument for the person responsible for the breach is typically that the other party to the contract has suffered no loss, and thus is not entitled to damages, whereas the party who has sustained the loss is not a party to the contract, and accordingly has no title to sue. The claim for breach of contract accordingly disappears, it is said, into a black hole. That result is clearly undesirable; in a well-regulated legal universe black holes should not exist. Nevertheless, the basis in principle on which recovery can be achieved in such cases has been the subject of some disagreement. The matter has been considered at length by the House of Lords in a number of English cases, notably The Albazero, [1977] A.C. 774, Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd; St Martin's Property Corporation Ltd v Sir Robert McAlpine Ltd, [1994] 1 AC 85, and Alfred McAlpine Construction Ltd v Panatown Ltd, [2001] 1 AC 518. While those cases turned to some extent on specialties of English law, they provide some guidance as to the manner in which Scots law might approach the problem of the black hole. That is particularly true of the speech of Lord Clyde in the most recent case, Alfred McAlpine Construction Ltd v Panatown Ltd, which considers the underlying principles in detail and indeed makes reference to Scots law.
  • In any such case, however, the initial task is to identify the precise loss that has been sustained, and consequently the person who has sustained that loss. That is because the problem of a "black hole" truly arises only if loss has been sustained by a person other than a party to the contract. In identifying the loss, it is of critical importance to bear in mind that the loss resulting from a breach of contract is not the same thing as the quantification of that loss. Nor is it the same as the remedial measures necessary to put right the loss. The loss is rather the actual physical or economic damage sustained in consequence of the breach of contract. In the present case, the loss sustained in consequence of the pursuers' breach of contract in respect of the Fiat showroom and workshop is that that building had an inadequate heating system. That loss was sustained as soon as the building was completed. No doubt it took some time for the inadequacy of the system to be noticed, and a considerably longer time for remedial measures to be taken. Nevertheless, the loss itself existed independently of those remedial measures, and indeed before it was even noticed. At a time when the loss was sustained, the building was the property of the present defenders; it was not until May 2000 that it was transferred to Carden Investments Ltd. It follows, accordingly, that the defenders were the party who initially sustained the loss. That in my opinion of itself entitles them to sue in respect of that loss. The work necessary to remedy that loss was paid for by a third party, Carden Investments Ltd, after the property had been transferred. So far as the defenders' claim against the pursuers is concerned, however, that is quite irrelevant; the remedial work is not the same as the loss, and the situation is no different from a case where a third party such as an insurance company pays for the necessary remedial work. Nor does it matter that the defenders may have transferred the property to Carden Investments Ltd at full value; the loss resulting from the breach of contract was still sustained by the defenders, and the involvement of Carden Investments Ltd is res inter alios acta. For these reasons I am of opinion that the problem of the "black hole" does not truly arise in the present case. If I am wrong in that conclusion, however, I am of opinion that the defenders are still entitled to recover the cost of the necessary remedial works from the pursuers, for the reasons stated in the following paragraphs.
  • The starting point in the English cases has been the formulation, by Lord Diplock in The Albazero, of the special rule applicable to contracts of carriage. That rule is generally attributed to the Scottish case of Dunlop v Lambert, 1839, Macl & Rob 663, but precisely what that case decided was a matter of some confusion until it was fully analysed by Lord Clyde in Alfred McAlpine Construction Ltd v Panatown Ltd., and it is probably not authority for the formulation of the rule in The Albazero. The latter rule is regarded as an exception to the general principle that a person cannot recover substantial damages for breach of contract where he himself has suffered no loss by reason of the breach. The exception applicable to contracts of carriage has been stated as follows (per Lord Diplock at [1977] AC 847):
  • "In a commercial contract concerning goods where it is in the contemplation of the parties that the proprietary interests in the goods may be transferred from one owner to another after the contract has been entered into and before the breach which causes loss or damage to the goods, an original party to the contract, if such be the intention of them both, is to be treated in law as having entered into the contract for the benefit of all persons who have or may acquire an interest in the goods before they are lost or damaged, and is entitled to recover by way of damages for breach of contract the actual loss sustained by those for whose benefit the contract is entered into".

    In such cases, however, the party who sues on the contract is accountable to the true owner of the goods for the proceeds of any decree that he obtains: ibid at 844. In subsequent cases there has been discussion of the question whether the foregoing rule is better regarded as a rule of law or a rule of implication based on the intention of the parties. In Alfred McAlpine Construction Ltd v Panatown Ltd, Lord Clyde preferred the former view, as the parties may in reality not have applied their minds to the point: [2001] 1 A.C. 530.

  • A similar rule was applied to building contracts in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd; St Martins Property Corporation Ltd v Sir Robert McAlpine Ltd, although the basis in principle for the extension of the rule is not entirely clear, beyond a desire to ensure that damages could be recovered for a breach of contract. The result was that the employer under a building contract could, on the facts of the case, sue the contractor for breach of contract even though the loss resulting from the breach had been sustained by a third party to whom the employer had sold the building while it was under construction. In Alfred McAlpine Construction Ltd v Panatown Ltd, Lord Clyde commented on the St Martins case as follows (at [2001] 1 A.C. 530):
  • "In that case the point was made that the contractor and the employer were both aware that the property was going to be occupied and possibly purchased by third parties so that it could be foreseen that a breach of the contract might cause loss to others than the employer. But such foresight may be an unnecessary factor in the applicability of the exception. So also an intention of the parties to benefit a third person may be unnecessary.... If the exception is founded primarily upon a principle of law, and not upon the particular knowledge of the parties to the contract, then it is not easy to see why the necessity for the contemplation of the parties that there will be potential losses by third parties is essential".

    The principle applicable in cases such as St Martins was summarised by Lord Clyde in the following terms (at [2001] 1 AC 532):

    "The approach under The Albazero exception has been one of recognising an entitlement to sue by the innocent party to a contract which has been breached, where the innocent party is treated as suing on behalf of or for the benefit of some other person or persons, not parties to the contract, who have sustained loss as a result of the breach. In such a case the innocent party to the contract is bound to account to the person suffering the loss for the damages which the former has recovered for the benefit of the latter".

    In Alfred McAlpine Construction Ltd v Panatown Ltd, the majority of the House of Lords held that the exception described in The Albazero could not apply on the facts of the case. A building contractor entered into a contract with an employer for the construction of an office block. The site, and consequently the building when it was constructed, were the property of another company in the same group as the employer. The contractor entered into an agreement with the owner of the site under which it undertook a duty of care in favour of the owner. That agreement conferred a direct remedy against the contractor by the owner. In those circumstances it was held that the arrangements between the parties did not require that the employer should be able to sue under the building contract on the owner's behalf; the owner had its own direct right of action.

  • Apart from the argument based on the rule formulated in The Albazero, the employer in Alfred McAlpine Construction Ltd v Panatown Ltd argued that it should be entitled to sue the contractor on a wider ground. This was that the innocent party to the contract should be entitled to recover damages because he had not received the performance that he was entitled under the building contract to receive from the contractor. This has been described by academic writers as a contracting party's "performance interest", that is to say, a party's interest in having the contract performed by the other party. If there is a failure to perform, the innocent party is entitled to recover damages for himself as compensation for what is seen as his own loss, with no obligation to account to anyone else for the amount recovered. This approach, which had been supported by a substantial number of distinguished academic writers, found favour with Lord Goff of Chieveley and Lord Millett. They accordingly dissented, and would have found the contractor liable to the employer in substantial damages. The majority of the House of Lords, however, rejected this approach. Their reasons for doing so were summarised by Lord Clyde at [2001] 1 A.C. 533-534:
  • "First, if the loss is the disappointment at there not being provided what was contracted for, it seems to me difficult to measure that loss by consideration of the cost of repair. A more apt assessment of the compensation for the loss of what was expected it should rather be the difference in value between what was contracted for and what was supplied. Secondly, the loss constituted by the supposed disappointment may well not include all the loss which the breach of contract has caused. It may not be able to embrace consequential losses, or losses falling within the second head of Hadley v Baxendale (1854) 9 Exch 341.... Thirdly, there is no obligation on the successful plaintiff to account to anyone who may have sustained actual loss as a result of the faulty performance. Some further mechanism would then be required for the court to achieve the proper disposal of the monies awarded to avoid a double jeopardy. Alternatively, in order to achieve the effective solution, it would seem to be necessary to add an obligation to account on the part of the person recovering the damages. But once that step is taken the approach begins to approximate to The Albazero exception. Fourthly, the 'loss' constituted by a breach of contract has usually been recognised as calling for an award of nominal damages, not substantial damages".

    Lord Clyde continued:

    "The loss of an expectation which is here referred to seems to me to be coming very close to a way of describing a breach of contract. A breach of contract may cause a loss, but is not in itself a loss in any meaningful sense. When one refers to a loss in the context of a breach of contract, one is in my view referring to the incidence of some personal or patrimonial damage".

  • Lord Clyde went on to discuss the significance of the doctrine of privity of contract to the problem of the legal black hole. He suggested, at [2001] 1 A.C. 534-535, that the solution to the problem might lie in the jus quaesitum tertio, particularly in cases where a husband instructs repairs to the roof of his wife's house, or orders and pays for a holiday which results in disappointment to all the members of the family. By using the jus quaesitum tertio, compensation might be paid to those who actually suffer the loss. Such a solution is available in German law, and Lord Clyde suggested that it might also be available in Scotland. It was not, however, available in England, where the jus quaesitum tertio was not recognised at common law. In the absence of any remedy using the jus quaesitum tertio, Lord Clyde concluded, in a passage that sums up the views of the majority of the House of Lords, that the best solution was
  • "to permit the contracting party to recover damages for the loss which he and a third party has suffered, being duly accountable to them in respect of their actual loss.... The solution is required for the law will not tolerate a loss caused by a breach of contract to go uncompensated through an absence of privity between the party suffering the loss and the party causing it. In such a case, to a avoid the legal black hole, the law will deem the innocent party to be claiming on behalf of himself and any others who have suffered loss. It does not matter that he is not the owner of the property affected, nor that he has not himself suffered any economic loss. He sues for all the loss which has been sustained and is accountable to the others to the extent of their particular losses.... If there is an anxiety lest the exception would permit an employer to receive excessive damages, that should be set at rest by the recognition of the basic requirement for reasonableness which underlies the quantification of an award of damages" ([2001] 1 A.C. 535).

  • In Scots law, the jus quaesitum tertio may clearly provide a remedy in a significant number of cases. If, for example, a man concludes a contract for a holiday on behalf of himself, his wife and his children, the requirements of the jus quaesitum will almost certainly be met, and the individual members of the family will then be able to sue for their own losses. The jus quasitum tertio is of limited utility, however, owing to certain of the restrictions that have been built into its application. In the first place, the parties to the contract must intend to benefit the third party: Peddie v Brown, (1857) 3 Macq 65; and Finnie v Glasgow & South Western Railway, (1857) 3 Macq 75. In the second place, the third party who is to benefit must be identified in the contract: ibid; Kelly v Cornhill Insurance Company, 1964 S.C. (H.L.) 46. These restrictions would exclude from the application of the jus quaesitum tertio any case in which one party to a contract was unaware that the other intended to benefit a third party, such as a member of his family or a company in the same group. They would also exclude any case where the contract was for work on a particular property which was thereafter transferred to a third party. For these reasons the jus quaesitum tertio in its present form is of relatively limited utility in dealing with the problem of the legal black hole. No doubt the applicability of the principle might be extended by removing the two restrictions referred to above, but that is clearly beyond the competence of the Outer House. In any event, while it is always tempting to develop solutions to legal problems by extending the existing institutions of Scots law, it is not obvious that the jus quaesitum tertio is appropriate for such extension by removing the two restrictions referred to above. Both restrictions are founded on the fundamental principle that the terms of a contract must be based on the parties' agreement; that is why the parties must intend to benefit the third party and identify him sufficiently in their agreement. Consequently it does not seem appropriate that a contract should confer a direct benefit on any person who was not contemplated by the parties as a beneficiary at the time when they entered into their agreement. For these reasons I am of opinion that the jus quaesitum tertio, at least as it has developed in Scots law, is incapable of providing a general solution to the problem of the legal black hole.
  • I am equally of opinion that the solution favoured by the minority of the House of Lords in Alfred McAlpine Construction Ltd v Panatown Ltd is not in accordance with the underlying principles of the Scots law of contract. That solution is based on two propositions, that a party who enters into a contract has an interest in having the contract performed, and that that interest is sufficient to entitle him to claim substantial damages if there is any failure in performance. In my opinion the second of these propositions does not follow from the first; indeed, the distinction between them is emphasised by the traditional approach of Scots law to contractual remedies. The first proposition, that a party to a contract has an interest in enforcing the contract, merely by virtue of his position as a party to it, clearly accords with Scots law. Thus a party to a contract has title and interest to sue on the contract merely because he is a party. Equally, a party to a contract will, merely because he is a party, be entitled to enforce the contract by compelling the other party to implement his obligations, whether by specific implement or interdict; that assumes, obviously, that the other necessary conditions exist for the remedies of specific implement or interdict. Similarly, a party to a contract will be entitled to obtain a declarator of his rights under the contract merely because he is a party.
  • It does not follow, however, that a party to a contract should be entitled to recover substantial damages merely because he is a party to the contract. The remedy of damages is fundamentally different from implement. Implement involves the direct enforcement of the contract, and can thus be regarded as the primary remedy for a failure to perform. Damages, by contrast, is a secondary, substitutionary remedy. The purpose of damages is to provide financial redress for the loss caused by a breach of contract. That result is achieved by ordering the party in breach of contract to pay a sum sufficient to place the other party in the same position as he would have been in had the contract had been performed. Thus the notions of loss and financial redress for that loss are central to the remedy. That indicates that a loss itself must be substantial, capable of being measured in financial terms. The mere existence of a breach of contract does not of itself create a loss of that nature; the loss is rather something flowing from and independent of the breach, and must be substantial in the sense that it can be measured in financial terms. That is the point made by Lord Clyde in the second of the passages quoted in paragraph [37] above. If damages requires a loss capable of measurement in financial terms, it is obvious that the loss must be that of a particular person. In a case where, for example, a husband has contracted for repairs to a house that belongs to his wife, or a company has contracted for building works on land belonging to another company in the same group, it cannot be said that the person who is a party to the contract is the person who has suffered loss in the sense described above. The person who suffers that loss is rather the person who owns the property on which the work is performed. I am accordingly of opinion that in Scots law a party to a contract should not be entitled to recover substantial damages for breach of contract merely by virtue of that breach, although he may be entitled to specific implement or interdict in that situation. It seems to me that the difficulty that confronts English law is that damages is regarded as the primary remedy for breach of contract. Consequently the minority of the House of Lords in Alfred McAlpine Construction Ltd v Panatown Ltd, together with a number of distinguished academic writers, took the view that that primary remedy should be available whenever there is a breach of contract. In Scots law, by contrast, while damages is undoubtedly the commonest remedy for breach of contract, the primary remedy is implement. It is that remedy that is available merely by virtue of the breach of contract. Damages requires more, and thus is not a remedy available on the mere occurrence of a breach of contract.
  • It is clear in my opinion that the existence of legal "black holes" is undesirable; if a breach of contract has caused loss, it should be possible to obtain redress for that loss from the party in breach. The same is true of delict, although somewhat different considerations apply there. That has been recognised in a series of cases in the House of Lords, including GUS Property Management Ltd v Littlewoods Mail Order Stores Ltd, 1982 S.C. (H.L.) 157, Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd; St Martin's Property Corporation Ltd v Sir Robert McAlpine Ltd, supra, and Alfred McAlpine Construction Ltd v Panatown Ltd, supra. Although the approach of the majority of the House of Lords in the latter case was based on a series of English authorities (apart from Dunlop v Lambert, which is restricted in its ambit to contracts of carriage by sea), the result is in my opinion wholly consistent with the principles of Scots law. I am accordingly of opinion that Scots law should adopt the same general rule as that applied by the majority of the House of Lords in that case, as described by Lord Clyde in the passage quoted above at paragraph [38]. In effect the rule comes to this: if a breach of contract occurs, causing loss that can be measured in financial terms, the party who is not in breach may recover substantial damages even if that loss has been sustained by another person; if a loss has been sustained by a person other than the contracting party, however, the contracting party must sue on behalf of that other, and must accordingly account to that other for the damages recovered. The right to raise an action in this way is deemed by law to exist in any case where the loss resulting from the breach of contract occurs to a person other than the correcting party. It should not in my view be based on the intention of the parties; the right is rather conferred as a matter of general legal policy, to ensure that if a loss results from a breach of contract damages can be recovered from the party responsible for the breach; that was Lord Clyde's conclusion at [2001] 1 A.C. 530-531. Nevertheless, if the third party who suffers loss has a direct right of action against the party in breach of contract, for example under a duty of care warranty, there is no need for the contracting party to have a right of action on the third party's behalf, and the law will not deem such a right to exist. That was critical to the decision of the majority in Alfred McAlpine Construction Ltd v Panatown Ltd. While the contracting party is obliged to account for the damages recovered, he will in my opinion be entitled to the expenses that he has incurred in conducting the litigation, so far as he has been unable to recover those from the person in breach of contract. Such an approach has a number of advantages. In the first place, it provides a solution to the problem of the legal black hole that is capable of almost universal application. In the second place, it permits recovery even in the case of contracts that are incapable of assignation, since it is the original party to the contract who is responsible for raising any action. That is particularly important in relation to the standard forms of building contract, as it was held in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd; St Martin's Property Corporation Ltd v Sir Robert McAlpine Ltd, supra, that the employer's rights under the J.C.T. standard form could not be assigned to a third party. In the third place, it maintains the fundamental principle that the remedy of substantial damages can only be available if there exists a loss capable of being measured in financial terms. That means that the usual rules on remoteness of damage will continue to apply.
  • On the foregoing analysis, I am of opinion that the defenders would be entitled to raise proceedings against the pursuers for substantial damages even in respect of a loss that had been suffered by another company such as Carden Investments Ltd. The defenders would be subject to an obligation to account for any damages recovered to such third party, but that is not a matter that concerns me in the present proceedings. Consequently, if I am wrong in the conclusion reached at paragraph [34] above, that the loss resulting from the pursuers' breach of contract was initially sustained by the defenders, I would hold that the defenders were still entitled to recover that loss from the pursuers, albeit on behalf of Carden Investments Ltd. On that basis, it is irrelevant whether the defenders ever reimbursed Carden for the loss, or whether the defenders received full value for the property when it was transferred to Carden. What the defenders are suing for on the present hypothesis is a loss that was ultimately sustained by Carden, not by the defenders.
  • Counsel for the pursuers finally submitted that certain other heads of claim advanced by the defenders involved losses that had not in fact fallen on the defenders. First, it was said that evidence had not been led that the costs of installing a gas-fired heating system in showrooms Nos 2, 3 and 4 had in fact been charged to the defenders or paid by them. For the reasons stated in relation to showroom No 1, I am of opinion that it has clearly been established that the cost of installing the gas-fired system results from the fact that an inadequate system was installed initially. The existence of that inadequate system was in itself a loss sustained by the defenders. Consequently the defenders are entitled to recover all of these losses, whoever paid for them. Even if I am wrong in categorising the loss as one initially sustained by the defenders, I am of opinion that the principles discussed in paragraph [42] above are applicable. The result is that the defenders are entitled to recover damages for the losses resulting from the pursuers' breach of contract, subject to an obligation to account for those damages to the companies that actually incurred the expenditure necessary to put matters right. Second, part of the defenders' claim related to work performed by Mr Gary Wardall, who at the material time had been the contracts manager employed by Moray Park Developments Ltd, a company in the same group as the defenders and having the same holding company. He had been responsible for supervising the replacement of the heating system in the showrooms and workshops at Kerse Road. Counsel submitted that Mr Wardall's salary had not been paid by the defenders, and there was no indication that the relevant part of his salary had been charged to the defenders. In my opinion exactly the same principles apply to Mr Wardall's services as to the heads of damages discussed above. On the evidence it appeared that Mr Wardall's services were necessary to deal with the defective heating system. Consequently they were a legitimate part of the claim resulting from the loss sustained by the defenders as a result of the defective heating system. In any event, the defenders would be entitled to recover for the services on the basis of the principles discussed in paragraph [42] above.
  • Finally, counsel for the pursuers submitted that the cost of installing a mains gas supply to Kerse Road should not form a proper head of the defenders' loss, as that would have been required in any event. In my opinion that argument is not correct. If the decision to install a gas-fired heating system was itself reasonable, as I have already held, it seems to me that the installation of a mains gas supply must also have been reasonable, as the system clearly could not operate without a mains supply. It did not appear to me that the mains supply would have been required otherwise. I accordingly consider this to be a proper head of the defenders' claim.
  • For the foregoing reasons I will pronounce decree in the principal action for the full amount of the pursuers' first conclusion, namely 29,375.57. In the counterclaim, I will pronounce decree for the full amount claimed by the defenders at the conclusion of the proof, namely 54,706. That sum consists of a total of 35,472 in respect of the installation of gas-fired heating in units Nos 2, 3 and 4 and 19,234 in respect of the installation of a gas-fired heating system in unit No 1. Parties were agreed that, following my decision on the merits of the principal action and counterclaim, I should put the case out by order in order that the question of interest might be discussed. I will accordingly do so.

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