Tuesday, 5 September 2023

Lagan Construction Group Ltd (In Administration) & Ors v Scot Roads Partnership Project Ltd & Anr

[2023] ScotCS CSIH_28

We discussed this case in Issue 271. Lagan and the Second Defender formed a Joint Venture to carry out motorway upgrade works for Scot Roads. Clause 5.5.6 of a letter of credit procured by Lagan provided: 

“Project Co [Scot Roads] shall return to the Contractor by transfer into a bank account specified by such Contractor, an amount equal to such Contractor Company Contractor Security Account Balance as soon as reasonably practicable following: [two events] ...”

One of the two events having passed, the issue for Lord Baird was what (or who) was meant by “the Contractor” in the first line; the JV or Lagan? The balance of the monies, after deduction of sums due to Scot Roads, was just over £1 million. If “the Contractor” meant Lagan, the parties were agreed that it was entitled to payment of the sums. If not, then a full hearing would be needed to determine what should happen. Lord Baird held in favour of Lagan. 

On appeal, Lord Carloway noted that the litigation concerned the construction of a contractual provision containing a defined term. The clause stated that certain monies are to be returned to "the Contractor". The contractor was defined as a JV between the pursuers and the second defenders. The first defenders had paid the monies to that JV. Lagan maintained that they should not have done so. Lagan said that "the Contractor" should be construed as referring solely to themselves, i.e., Lagan. 

Lord Baird had noted that the contract was not “happily” drafted, whilst Lord Carloway noted that the contract had some 80 clauses and 26 schedules (some "not used"). It was over 200 pages long, with over 30 pages of defined terms. It had: “the air of being stitched together from similar contracts, rather than being bespoke”. All parties had legal advice and there had been some 21 earlier versions.

Two defined terms were at the core of the dispute. First, "the Contractor" was said to be the JV; second, as a defined term (clause 1(1)), "Contractor Company" meant "any company forming part of the Contractor". It was made clear that "Contractor" and "Contractor Company" meant different things for the purposes of the contract.

The contract required that the Contractor "procure that each Contractor Company shall perform its obligations" and that the Contractor shall deliver to Project Co an "Acceptable Letter of Credit procured by each Contractor Company in favour of Project Co" in a particular form. These letters were designed to ensure that the contract works were carried out and any defects either remedied or compensated for. 

Both Contractor Companies obtained Letters of Credit, but Lagan went into administration. This resulted, under the JV agreement (clause 6.7), in Lagan’s exclusion from further participation in the management and profits of the JV; albeit they would continue to be liable to share any losses. Project Co insisted on payment of the Letter of Credit sum into the account and that was done by the bank. In due course (20 June 2020), the "Letter of Credit Discharge Date" arrived. This triggered the application of the clause before the courts. 

Lord Carloway noted that Lord Baird had asked whether the language of clause 5.5.6 admitted two possible constructions. If it did, it was only then that the court could have regard to commercial common sense as suggested by Lagan. If there was only one possible meaning, then the court would have to give effect to that meaning, even if that appeared to be commercially undesirable. From a commercial common-sense point of view, the purpose of the account was to provide security for Project Co. Each Contractor Company had an obligation to the bank, which had provided the Letter of Credit, to account for the balance. It did not make sense to pay the balance to the JV, which had no such obligation. This would enable the second defenders to "scoop the jackpot", even if the funds had not arisen from any default by the pursuers. Had both Contractor Companies become insolvent, it would make no sense for the funds to be retained by the JV, but for the funds to be returned to the person who had an obligation to account to the bank. 

Lord Carloway held that the parties' intention was most obviously gleaned from the language which they had chosen to use. The court should not normally search for what were termed “drafting infelicities” in order to justify a departure from the natural meaning of that language. A court: 

“should identify what the parties agreed, not what it thinks that common sense may otherwise have dictated. Contracts are made by what people say, not what they think in their inmost minds.”

Lord Carloway agreed that Lord Baird was correct when he acknowledged that the clause began in an unambiguous manner. It stated that Project Co were to return the monies to "the Contractor" by transferring an equivalent sum into a bank account specified by "such Contractor". The "Contractor" was the JV. It was expressly not the component companies, each of which is defined instead as a "Contractor Company". The terms were used carefully throughout, and legal advice had been taken. There was no ambiguity and thus no basis to a search for an alternative meaning. The appeal was allowed.

Where there is an agreement between two persons, one of whom is a JV, and surplus funds exist at the end of the contract, the obvious consequence is that those funds be returned by the party holding them (Project Co) to the other party, i.e., the JV. What might happen to them thereafter is something which ought to be regulated by the JV agreement between the Contractor Companies.

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