Mirant Asia-Pacific Construction (Hong Kong) Ltd v Ove Arup and Partners International Ltd & Anor

Direct rectification costs $ 1,552,889

Liquidated damages $39,731,428

Additional preliminaries and disruption costs

paid to Alstom Turbine/GEC Electro and their

subsidiaries $15,799,777

The cost of extended insurance $621,607

Additional time related costs incurred by SCC $5,727,000

Additional time related costs incurred by CEPAS $1,467,180

Acceleration payments made to Alstom Turbine/

GEC Electro $10,273,060

Acceleration costs incurred by SCC $3,724,428

The general principles of the award of damages

The operative cause of delay.

The settlement of claims.

(I will deal with other issues of law when dealing with the individual claims.)

The witnesses

Disclosure and related issues

A discussion of what is meant by “the critical path” and “Critical Path Analysis”. These terms are used not only by the programming experts but also by witnesses of fact. An understanding of what the terms mean is essential to an understanding of the claims for delay.

The facts relating to the progress of the contract.

The specific issues which are raised in the litigation.

Conclusions.

In this section I deal first with the well known general principles of the award of damages. The basic principle is that a claimant is entitled to be compensated by being given such sum of money as will put it in the position which it would have been in if it had not sustained the wrong for which it is being compensated – see Livingstone v Rawyards Coal Co (1880) 5 App. Cas 25 at 39.

This principle was reaffirmed by Lord Haldane in British Westinghouse v The Underground Railway of London [1912] AC 673 at 689 together with the principle that it is the duty of a claimant to take all reasonable steps to mitigate the loss consequent on the breach.

The damages in respect of which compensation is given must have been caused by the defendant’s breach and must be of a type which was foreseen or should reasonably have been foreseen by the claimant (see The Wagon Mound [1961] AC 388 and The Wagon Mound No. 2 [1967] 1 AC 617).

It follows that if the whole or part of the claim does not arise out of a defendant’s wrongdoing but from some independent cause the claimant cannot recover damages arising from that cause. The independent cause may be an event which breaks the chain of causation or takes the form of negligent advice on which the claimant has acted. See e.g. The Board of Governors of the Hospital for Sick Children v McLaughlin & Harvey plc [1987] 19 Con L R 25 at 96.

The courts have made it clear that where a claimant has undertaken work to remedy a wrongful act the court should be very slow to accept an objection by the wrongdoer as to the method used by the claimant to repair the injury.

In the well-known speech of Lord Loreburn LC in Lodge Holes Colliery Co Ltd v The Borough of Wednesbury [1908] AC 327 he said,

“Now I think a court of justice ought to be very slow in countenancing any attempt by a wrongdoer to make captious objection to the methods by which those whom he has injured have sought to repair the injury … Errors of judgment may be committed in this as in other affairs of life. It would be intolerable if persons so situated could be called to account by the wrongdoer in a minute scrutiny of the expense as though he were his agents, for any mistake or miscalculation provided they acted honestly or reasonably. In judging whether they have acted reasonably I think a court should be very indulgent and always bear in mind who is to blame. Accordingly if the case of the plaintiffs had been that they had acted on the advice of competent advisors in the work of reparation and had chosen the course they were advised was necessary it would go a very long way with me: it would go the whole way unless it became clear that some quite unreasonable course had been adopted.”

It is clear that the burden of proving that the claimant has acted unreasonably lies with the defendant – see Steele v Robert George & Co [1942] AC 497 at 502-3.

This approach must be borne in mind in considering the defendants’ various defences in relation to alleged delays to the remedial works to the boiler foundations and to consideration of the remedial scheme adopted by the claimants. It is not enough that matters could have proceeded differently, the defendant must prove that the claimant acted unreasonably in the course which it took and that such conduct itself was the cause of the whole or an identifiable part of the damage.

The second issue of law relates to the operative cause of delay and the damages which flow from it.

I reiterate the basic principle that a party is entitled in tort to be compensated by being given a sum of money such as will put it in the position it would have been if it had not sustained the wrong for which it is being compensated. In contract the measure of damage is the damage which flows directly from the breach of contract.

If there are two concurrent causes of delay, one of which was the defendant’s responsibility (and the other not the claimant’s) the claimant is not required to choose between tortfeasors but can recover the damages against one of the tortfeasors if he can show that the fault of the defendant caused or materially contributed to his injury - see IBA v EMI and BICC [1980] 14 BLR l (HL). It is suggested that a claimant should recover in full if the matter for which the defendant is responsible contributed to the loss – see also Heskell v Continental Express [1950] 1 All E R 1033.

It is clear that a claimant establishes liability in contract if he shows that the cause which is the responsibility of the defendant is the dominant cause or, in Lord Shaw’s words, “the real efficient cause” – see Leyland Shipping v Norwich Union [1918] AC 350.

In this context I should also refer to what is known as the “but for” test which is conveniently set out by Rix LJ in BHP Billiton Petroleum Ltd v Dalime SpA [2003] BLR 271 at 277 (Para 26) citing Clerk & Lindsell on Torts, 17 ed (2000) at para 2-06:

“The first step in establishing causation is to eliminate irrelevant causes and this is the purpose of the “but for” test. The Courts are concerned, not to identify all of the possible causes of a particular incident but the effective cause of the resulting damage in order to assign responsibility for that damage. The “but for” test asks: would the damage of which the claimant complains have occurred “but for” the negligence (or other wrongdoing), or to put it more accurately, can the claimant adduce evidence to show that it is more likely than not, more than 50 per cent probable that but for “the defendant’s wrongdoing the relevant damage would not have occurred. In other words, if the damage would have occurred in any event the defendant’s conduct is not a “but for” cause.”

At paragraph 29 of the same judgment Rix LJ emphasises that the role of the “but for” test should not be exaggerated. The purpose of the test is to eliminate irrelevant causes.

The claimant says in closing that as an alternative I should consider whether or not they lost the opportunity to address the other causes of delay in the summer or autumn of 1997 because of the time, effort and focus of management on the problems relating to the boiler foundations. In this it relies on the reasoning of the Court of Appeal in Allied Maples Group v Simmons and Simmons [1995] 1 WLR 1602. Apart from the fact that this claim is not pleaded (and therefore I should not consider it) it does not seem to me on the facts of this case that the claimant lost the chance of addressing these problems because of the difficulties over the boiler foundations.

I should also refer to the burden of proof in relation to Arup’s assertion that the delays in respect of which claims are made by the claimant would have happened in any event. The claimant contends that the correct approach is that set out in BHP Billiton Petroleum Limited v Dalmine SpA, namely that Arup is making a positive assertion and therefore the onus is on Arup to prove it. Arup claims that the case assists its contention that the onus is on the claimant and not the defendants to prove its case. I do not need to consider this question of law in any detail since I have reached clear conclusions on the facts but insofar as it is relevant, I conclude that it remains for Mirant to prove its case that the failure of the boiler foundations caused the delay. However, it is for Arup to establish any positive case which it puts forward.

The third issue which I have to deal with at this stage is the law relating to settlement of claims. The law can be summarised as follows:

1. A party may rely on a reasonable settlement as relevant to the measure of loss which it has suffered as a result of a breach of contract or tort by the defendant – see Biggin v Permanite [1951] 2 KB 814. Not only must it have been reasonable to settle but the amounts must also be reasonable.

2. The claimant must prove that the defendant is liable to the claimant for a loss which can be measured by reference to the settlement. The settlement, or the fact of it, is not sufficient on its own to establish liability on the defendant – see Fletcher v Stewart v Peter Jay and Partners [1976] 17 BLR 38 and P & O Developments Limited v Guy’s and St Thomas’s NHS Trust [1999] BLR 3.

3. The settlement itself must be shown to be reasonable – see Seven Seas Limited v Al Essa (No.2) [1993] 1 WLR 1083, 1089 and DSL Group Ltd v Unisys [1994] 67 BLR 117. However I bear in mind the words of Lord Loreburn in Lodge Holes in considering the issue of reasonableness.

4. The fact that the settlement was obtained after receiving legal advice may be a relevant factor but is not sufficient on its own to demonstrate that the settlement was reasonable. The test is whether in all the circumstances the settlement was reasonable – see P & O Developments above.

5. The court will be astute to ensure that the defendant is not made liable to pay damages in respect of a liability for which it is not properly responsible. In John Doyle Construction Limited v Laing Management Scotland Limited [2002] Scot CS 11, Lord MacFadyan said:

“The logic of a global claim demands, however, that all the events which contribute to causing the global loss be events for which the Defender is liable. If the causal events include events for which the Defender bears no liability, the effect of upholding the global claim is to impose on the Defender a liability which in part is not legally his. That is unjustified. A global claim, as such, must therefore fail if any material contribution to the causation of the global loss is made by a factor for which the Defender bears no legal liability.”

6. This last quotation must be put alongside the Judgment of the Inner House on Appeal [2004] BLR 296 where Lord MacLean said at Para 14 that:

“1.

it must be possible to identify a causal link between particular events and the individual items of loss and

2.

“the question of causation must be treated by the application of common sense to the logical principles of causation.”

Lord MacLean noted that “if an item of loss results from concurrent causes and one of those causes can be identified as the proximate or dominant cause of the loss, it will be treated as the operative cause and the person responsible for it will be responsible for the loss.”

It is appropriate at this stage to introduce the factual witnesses and the experts to whom reference will be made in the course of this judgment.

Mr Kuester was the Chief Commercial Officer of CEPA from March 1997 to June 1997. He was an appointee of Southern after they had acquired the majority shareholding in CEPAS. In this capacity he reported to Mr Elliott while Mr Elliott was managing director but he also reported on Mr Elliott to the senior officers of Southern in Atlanta. Much of the reporting to Atlanta took place by telephone. After Mr Elliott’s departure in June 1997 Mr Kuester became managing director of CEPAS and SCC. As a witness he did his best but he did not have a good grasp of the detail of the events about which he had to give evidence before me. I bear in mind with all the factual witnesses that the events occurred up to 10 years or more before the witness gave evidence.

Mr Metcalfe was the Project Director for CEPA and PEC. He was involved in the Sual Project from its inception in 1994. He gave evidence on the formation of the contracts and the manner in which the liquidated damages rate in the contract was calculated.

Mr Stone was the SCC scheduling engineer at the Sual site from July to December 1997 and thereafter succeeded Mr McManus as Project Manager and remained in post until 13 March 1999. He was sent by Southern initially to assist Mr McManus on site and therefore in effect to do the Project Manager’s job on site for Southern. As a witness he had done his homework and had an impressive grasp of detail. His evidence was of considerable assistance although I am not able to accept all his opinion evidence.

Mr Benfield was vice president of construction for CEPAS. He was involved in the Project from January 1998 (after the departure of Mr McManus) until September 1999 at the end of the Project. I did not find him to have a sufficient grasp of the detail of the events about which he had to give evidence.

Mr Hawkins was and is a Geotechnical Engineer with Soil Mechanics Limited. He gave independent expert advice to Alstom between 1 May 1997 and 29 June 1997 on the cause of the failure of the Unit 1 Boiler foundations and on the proposals for the remedial works which needed to be undertaken. He produced detailed written reports at the time, which have been of particular assistance in this case.

Mr McManus was SCC’s Project Manager who was brought in by Southern on the departure of Mr Elliott in June 1997 and remained on site until December 1997. He is a qualified engineer and took the decision on 28 June 1997 to dismantle the steelwork before the repairs to the Unit 1 Boiler foundations were undertaken. He wrote helpful reports at the beginning and end of his tour of duty. I found him a helpful witness, although clearly he had a point of view which he expressed clearly to me.

Mr Thomson was during the Project a senior partner at Mallesons, an international law firm with its head office in Melbourne, Australia. He was then the principal outside legal adviser on the Project. He was involved from late 1997. Later he was seconded as Chief Commercial Officer of CEPA/SCC and in this capacity negotiated the Settlement Agreements in 2001 between the Consortium partners and PEC. He was an impressive and helpful witness.

Mr Hall was employed by Alstom as the Consortium Project Director between January 1996 and July 1999. He wrote many of the contemporaneous documents which chart the progress (and the problems) of the movement of the boiler foundations and of the remedial works. He was, in the course of this Project, as was entirely proper, astute to protect Alstom’s interests. He warned SCC very early of the consequences of delay in undertaking the remedial works to the boiler foundations and made Alstom's approach as to how the problems should be tackled equally clear. Although the programming experts have demonstrated that his understanding that the critical path always goes through the boiler is incorrect, he was also an impressive and helpful witness.

Ms Lam was the Senior Project Finance Manager for Mirant during the period from January 1996 to November 2000. She gave evidence by video link about the structure of the Mirant Group and the financial relationship of CEPAS and SCC. Later she became the finance director for CEPA. Ms Lam is the only one of the claimant’s witnesses who is currently employed by the claimant.

In addition, Mr Delkousis, a partner in Mallesons, gave evidence. Mr Delkousis was a more junior partner in the firm than Mr Thomson but he had specific responsibility for dealing with problems relating to the Boiler foundations while Mr Thomson had overall responsibility for dealing with the legal aspects of the Sual Project. Mr Delkousis gave evidence about the conduct of the litigation and in particular responded to Arup’s complaint about the perceived failure on the part of the claimant to disclose relevant documents in these proceedings. I shall deal with his evidence as a separate topic.

I should mention two others who did not give evidence. Mr Elliott was the managing director of SCC and CEPAS until he was removed from office by Southern in June 1997. There has been little disclosure of documents in relation either to the way in which he handled the developing problems with the Unit 1 Boiler foundations or the circumstances of his departure from the company. After a rather hurried negotiation he received a pay-off of US$2l million.

Various allegations of financial impropriety against Mr Elliott were made or at least hinted at in the course of the hearing. Rightly they were not pursued with any vigor and I do not need to deal with them.

Mr Elliott gave oral evidence at the preliminary hearing. I described him then as an astute businessman but not a great details man. I also concluded that he was anxious not to put himself in a position where his companies could be held liable. I see no reason in general to alter this assessment.

There are a number of important matters that he would, no doubt, have been able to explain had he given evidence before me, particularly in relation to the way the work was carried out at Sual, his view on the reliability of the programmes Rev D and Rev E; working on site; delays and their effect on the Project; the discussions over the remedial works to the boiler unit; and the circumstances of his departure. I am not prepared to accept at face value all the very adverse comments which were made about him by the claimant.

Mr Reynolds was General Counsel of Southern who acted as General Counsel of SCC/CEPAS until 2003. Since 2003 he has acted as Mirant’s independent consultant on the litigation. He is a member of the American Bar. I understand that if the claimant is successful in this action he stands to benefit financially. Although I comment later on his handling of the litigation I am not of the opinion that his conduct has been influenced by any potential financial benefit which he may receive from a successful outcome.

Arup’s main factual witness was Mr Higson, who has also given oral evidence at the two previous hearings. He is an Associate Director of Arup and was Arup’s Project Manager. Although he was based in Hong Kong he made frequent visits to Sual and was closely involved in the Project. In considering his evidence it is important to note that he and his company were advisors to CEPAS. Neither he nor Arup were in a position to direct how the remedial work should be carried out.

Mr Higson is clearly a competent engineer and experienced Project director. He was involved with other Arup engineers in developing the remedial scheme for the Boiler foundations which did not involve taking down the steelwork and which was in the end rejected by Mr McManus and Alstom (Stein). Mr Higson had a very good grasp of the detail, and his evidence was, in general, helpful.

Mr Evans was Arup’s site representative who was present on site for most of the period between April 1997 and the completion of the remedial works in September 1997. He kept a site diary which provides valuable and reliable factual information of the events on site in the period.

The engineering experts were Mr Reith for Mirant and Dr Mann for Arup. They were both helpful, although Dr Mann was unduly combative in the way he gave his evidence. They had, in accordance with the procedure, sought successfully to narrow the issues between them.

The Programming Experts, Mr Lechner for Mirant, is the principal of Price Waterhouse Cooper (PWC) in San Francisco. Mr Robinson for Arup, is a partner in the practice of Davis Langdon LLP, Chartered Surveyors. Both have given opinions and oral evidence in delay cases and are experienced expert witnesses.

The Programming Experts had a difficult task. The Project did not run smoothly. When the Southern management took over in June 1997, two months after the start of the movement in the boiler foundations, Southern were critical about almost every aspect of Mr Elliott’s methods of managing the Project and set about making radical changes. There were many variables for the experts to consider. Even the programme Rev E, agreed before the start of the boiler foundation failure, was regarded as unreliable.

The difficult task which they had to undertake was to give a retrospective analysis based on uncertain data. In the course of a number of interlocutory hearings I emphasized the need for the experts to meet to develop a common approach to the problem and then to engage with each other in addressing each other’s opinions and seeking to narrow the differences between them. This procedure, which saves substantial time and frequently leads to a settlement, is developed to a higher degree in the Technology and Construction Court in this country than elsewhere in the jurisdiction. Unfortunately it did not happen sufficiently in this case.

When they came to give evidence it was apparent that Mr Robinson was far better prepared than Mr Lechner on the details of the events with which I was concerned and was therefore able to be of much greater assistance.

Mr Lechner also gave evidence as a quantum expert. Mr Hackett acted as quantum expert for Arup. I will deal with their evidence later in relation to the specific issues.

The solicitors on both sides co-operated to produce bundles of documents which enabled this very complex litigation to be conducted in as orderly and convenient a manner as was possible. This was no easy task, with well over 125 lever arch files. I wish to emphasise also that counsel on both sides, assisted by their legal teams, were outstanding in the way in which they conducted the trial and produced detailed written submissions.

I should also pay tribute to my clerk, Mrs Kim Andrews, not only for her assistance at trial but also throughout the litigation. TCC clerks, to a greater extent than clerks elsewhere in the High Court, have important responsibilities for liaising with solicitors and counsel, arranging hearings and dealing with other administrative matters. She carried out these onerous and sensitive tasks throughout the litigation in a way which has contributed substantially to the smooth running of difficult and complex litigation.

Arup has made serious criticisms of Mirant’s legal team in relation to disclosure of relevant documents.

Mirant, as they were entitled to do, used Messrs Masons (now Pinsent Masons) as the solicitors of record and for the conduct of the UK litigation. They have relied on their regular solicitors, Mallesons, for the gathering of information, the production of documents and for the taking of witness statements. Mallesons have acted as lead counsel for the claimants and their predecessors in the disputes over the movement of the Unit 1 boiler foundations. The rules of procedure in civil trials in Australia are similar to those in England and Wales. Mr Delkousis said that he was well aware of the Rules of the CPR.

In this litigation, Mallesons have taken instructions from Mr Reynolds, the former General Counsel of Southern until April 2003. Since then he has been managing this litigation and also managing the dispute with the CAR Insurers.

Mr Reynolds had considered the feasibility of Mirant making a claim against Arup in respect of the boiler failure as early as December 1998 and proposed to use possible counterclaims in relation to the boiler foundations in ongoing negotiations relating to Arup’s outstanding claims. The letter instructing Mallesons to assist in the process is dated 9 December 1998.

The potential claims against Arup were summarised in a Mallesons presentation on 6 May 1999. Thereafter there were informal discussions involving Mr Delkousis, as the partner at Mallesons in charge of the running of this litigation. Mr Delkousis conceded in cross-examination that he was aware in 1999 that questions would be raised in any dispute as to the role that Mr Elliott had played in the boiler foundation failure. Thereafter, Mr Thomson and Mr Delkousis were involved in discussions during 2000 and 2001 which culminated in a formal letter before action written to Arup by Mr Reynolds on 2 May 2001.

Mr Reynolds gave evidence at the trial of preliminary issues that he had put in hand searches for documents in relation to a potential claim against Arup by early 1999:

“I had instructed outside lawyers [Mallesons] to come to our offices and search through our files and begin looking to see what the records were with respect to these matters.”

Mr Reynolds did not take steps to ensure that documents which were likely to be relevant in this litigation were preserved, nor did he retain documents held by Southern at the time of the demerger in 2001. He should have done so. Document preservation is an important part of US trial practice just as it is in this jurisdiction and as a US attorney conducting litigation he should have been well aware of the need to preserve and retain these documents

CEPAS’s declared email IT policy was that monthly back-up tapes would be kept for two years. It appears that the electronic copies of emails for 1997 and 1998 have been lost. Mallesons and/or Pinsent Masons did not request back-up tapes until 2004, five years after the claim against Arup was first considered.

Mr Delkousis has been the responsible Mallesons partner for this litigation. His evidence before me was far from convincing. He admitted that no formal document preservation policy had been put in place. No proper records were kept of the documents reviewed for relevance nor of the source of the documents which were disclosed. It is not possible now to know what files did exist and what documents existed within them.

The further difficulty arises that the quantum issues had not been fully developed in 2002, the date by which documents which still existed were assessed for relevance and were loaded onto Mallesons’ database. The database was not later revisited. Documents, including hard copy documents stored in Australia which were originally coded as “not relevant” were not reconsidered as the litigation progressed.

In addition, the allegation is made by Arup and contested by Mirant that Mr Delkousis took a very narrow view of his disclosure obligations. In a number of instances Arup’s allegation is correct. Initial disclosure did not even include disclosing Board Minutes and other documents surrounding the departure of Mr Elliott in June 1997. (The Board Minutes were finally disclosed at a very late stage.) In view of the trenchant criticism by Mr McManus and others of Mr Elliott’s conduct of the Sual contract it is obvious that such documents would be relevant. I am told that much of the communication was done by telephone but I am satisfied that some highly relevant documents which were in existence have not been made available to the Court. Further, it is surprising that no formal requests for documents were made by Mallesons to potential witnesses until October 2006, immediately before the start of these hearings.

Mr Delkousis said in oral evidence that he gave informal instructions in 2002 that all relevant documents relating to the dispute should be retained, although no formal letter or instruction was given. Mr Delkousis may have mentioned the topic in the course of informal discussions but I have serious doubts as to whether and if so, to whom, instructions were given. Certainly, if the instructions were given, there was no follow up until 2006.

A further problem related to the search for documents carried out by or on behalf of Mallesons. In the course of the interlocutory proceedings a number of specific requests for documents were made by the defendants. The response from Pinsent Masons, after receiving instructions from Mallesons, was in some cases that no documents existed only for some further documents in that category to be produced much later. It may be that this occurred because of Mallesons limited view of relevance or because it required the expenditure of significant time and resources to carry out the necessary searches fully and conscientiously.

Arup contends that the disclosure has been unsatisfactory in a number of specific ways. First although Mirant finally abandoned its contention that documents in the Mirant group of companies other than CEPAS or SCC were not disclosable, Arup contends that no systematic search of the files of such companies has been undertaken by Mallesons.

Secondly, it is claimed that as a result of Mr Reynolds’ deliberate decision not to preserve access to Southern Group files at the time when Southern and Mirant demerged, the following relevant documents which had once existed were not disclosed:

The third category of documents about which Arup makes complaint relates to those that are or were in the possession of Alstom. Mirant says that such documents are or were not in the possession of Mirant. Before the disclosure hearing in May 2006, Mirant wrote to Alstom requesting disclosure of the documents. These documents included both claim documents and programming documents. Arup claims that CEPAS and/or SCC had a contractual right to be provided with such documents.

Arup sets out in a series of appendices a detailed analysis of what it claims are specific disclosure failures of the claimant and their consequences in this litigation. Put shortly, Mr McManus’s report relating to the position on site on 21 June 1997, four days after he arrived, was not disclosed until 4 April 2006. It had been in Mallesons’ possession since 14 January 2005. Mr Kuester readily conceded that it was an important document. He thought, given its importance, that there would be multiple copies of the document. Mallesons explained that the late disclosure was due to inadvertence on their part.

In relation to Mr Elliott’s resignation, part of the relevant Mirant Board Minute was finally disclosed on 20 October 2006 after much effort on the part of Beale & Co acting for Arup. The Minute of the resumed meeting on 13 June 1997 which considered the way forward, including a recommendation to send Mr McManus to Sual to provide an independent assessment of the construction programme was also disclosed very late. None of the underlying documents which expressed such concerns have been disclosed. Arup says that such documents must have existed but may have been destroyed. I agree.

Thirdly, on 4 and 5 February 1998 Mr Kuester and Mr Benfield acting on behalf of Mirant met Mr Hall and other Alstom representatives in Hong Kong to discuss Alstom’s claim for delay and disruption as well as acceleration of the electrical and mechanical works. Mr Hall has disclosed his notes of the meeting. These appear to contradict Mr Kuester and Mr Benfield’s evidence that there was no discussion about a two month delay to the civil works. Neither Mr Benfield’s notes nor any documents associated with the preparation of the meeting have been disclosed by Mirant.

In the absence of full and proper disclosure I am invited by Mirant to accept the evidence of Mr Hall to the effect that at the meeting SCC accepted that there was an overall delay to the civil works of three months. This series of meetings produced the Incentive and Acceleration agreements with Alstom which forms a substantial part of the very large claim.

The fourth category relates to Alstom’s sub-contractors’ claims for delay, disruption and acceleration. Arup complains that the claimant failed to take any proper steps to obtain access to Alstom’s documents and that no written request was made until May 2006.

There is no dispute that the claimant had access to Alstom’s files when Mr Jobling, a senior associate of Mallesons, visited Knutsford in 2001. Mr Jobling went to Knutsford at the request of Mr Thomson. Arup complains that no record has been disclosed of the documents which he inspected.

In November 2001 Mirant and Alstom concluded two settlement agreements. These determined the final balances due to the contracting parties under the supply and construction contracts and how those balances were allocated between Alstom and Mirant. The complaint is made that only the draft dated 8 September 2001 has been disclosed. Earlier drafts have not been disclosed, nor have notes of a meeting in Hong Kong on 2 August 2001, attended by the Chief Executives of Alstom and Mirant at which at least in outline a settlement was agreed at chief executive level. There was a further meeting on 8 September 2001 at which agreement in principle was reached on delay claims, the apportionment of delay claims and cost claims – see an email for Mr Jobling dated 8 September 2001.

Arup contends that it must have been obvious that documents relating to the settlement agreement and the prior negotiations going back to mid 1999 would be highly material to the claim against Arup and should have been preserved and disclosed. These include the minutes/notes relating to the meetings in August 2001 and 8 September 2001. I am asked to infer

The final category of documents relates to delays to the installation of the cooling water system. Arup contends that these delays were perceived by Mirant and its programming expert to be relevant to this claim from a very early stage. Despite that, no serious attempt was made by Mirant to locate relevant documents until June 2006 following an order of the court. Thereafter disclosure of this category of documents has been minimal despite the fact that a large volume of such documents must have been in existence. It is claimed that these documents would have been in the control of SCC. The documents relating to the cooling water outfall failure must have been brought into existence at a time when these proceedings were in contemplation. Arup contends that in the absence of full and proper disclosure I should reject the claimant’s case that delays to the cooling water system could have been recovered but for the delays in the resolution of the boiler foundation settlement.

The claimant’s answer to these detailed complaints is in essence that it is sound and fury signifying nothing. It notes that there have been many visits overseas to search for relevant documents, that 20,000 documents have been disclosed and that disclosure alone has cost the claimant approximately £1.2 million.

They also note that they have attempted to deal with some 169 letters from Beale and Co involving nearly one thousand requests. They cite the involvement and co-ordination of various management, legal, finance and accounting staff based in Hong Kong, Manila and Sual. In relation to Mr McManus’s report and files they say that there were disclosed as soon as they came to hand. They also say that Arup has seen documents relating to the departure of Mr Elliott insofar as they existed. This issue, it is claimed, was not advertised in the pleadings, at least until the amended defence was produced in September 2006. I am bound to observe in relation to documents relating to Mr Elliott that there were always issues relevant to this dispute relating to his conduct of the Sual Project and the circumstances of his departure.

With regard to the draft Points of Claim in the Hopewell warranty dispute, the claimants say that it is clear after the cross-examination of Ms Lam and Mr Kuester that this is of no relevance.

In relation to emails and other documents said to have been lost or destroyed, the claimants say that they should be amongst the back-up tapes from 1999 that have been reviewed.

Both Pinsent Masons and Mallesons emphasize that they are aware of the disclosure requirements of the CPR and mount a robust defence of Mallesons’ conduct. This, they say, included providing extensive disclosure and responding to Arup’s solicitors’ rolling disclosure request. They refute the allegation that Mr Delkousis took a narrow view of the disclosure process. Having considered this matter, including Mr Delkousis’ oral evidence, I have already found that, in particular, in relation to the events surrounding the departure of Mr Elliott, Mr Delkousis did indeed take a narrow view of his disclosure obligations.

In relation to Alstom’s documents, the claimant says that at no time until it was mentioned in the cross-examination of Mr Hall were they aware that Arup had themselves had access to Alstom’s documents. At no stage, apparently, had Arup made a request to take copies of Alstom’s documents. Presumably, they say, Arup would have done so if they had found them useful or relevant.

Apart from these disclosure problems there is also a particular disclosure problem in relation to the programming expert, Mr Lechner. It appears that his firm, PWC, may have undertaken some of the aspects of the disclosure process without the overall supervision of either Pinsent Masons or Mallesons. In November 2004 Mr Lincoln, an employee of PWC, went to Hong Kong and Manila in search of financial documents which might be relevant to the claimant’s delay, disruption and acceleration costs incurred allegedly by reason of the boiler failure.

It also became apparent that in the period leading up to the trial Mr Lechner and his team had unfettered access to Mallesons’ database which in addition to documents which had been disclosed, included both privileged documents and undisclosed documents which were said to be of no relevance. Mr Lechner in his report referred to documents in the database which had not been disclosed either to Arup’s solicitors or to their programming and quantum experts, Mr Robinson and Mr Hackett. This was improper.

In order to deal with this problem, at my suggestion, a procedure was put in place involving very experienced junior counsel on both sides which I hope eliminated or restricted any damage caused. I have good reason to believe that this was the case.

It is elementary that the independent experts called by each party should have equality of arms. I do not accept Mr Delkousis’ recollection that he gave Mr Lechner oral instructions to restrict his search to disclosed and non-privileged documents. Neither Mr Lechner nor his assistant has any recollection of it.

I make the following findings.

(2) It is essential in such cases that the two firms work closely together, particularly on disclosure issues and that the firm on the record within the jurisdiction has the effective conduct of the litigation including the overall conduct of the disclosure process. It is the solicitors on the record who attend the preliminary hearings, deal with the legal team of the opposing party, and are able fully to understand what the procedure within the jurisdiction requires. As the solicitors on the record, they remain at all times answerable to the court for any shortcomings in the disclosure process. In the final analysis, as officers of the court they remain responsible for the whole of the litigation process including disclosure. These are not responsibilities that the solicitors on the record can delegate.

(3) It is inevitable that there will be some small but potentially important differences in approach to disclosure in different jurisdictions (even within common law jurisdictions). I illustrate the proposition by noting that the advent of the Civil Procedure Rules in 1998 provided for much more active case management by judges than under the previous Rules. It is the duty of the solicitors of record to ensure that those to whom the task of disclosure is partially delegated are made fully aware of, and carry out the process in accordance with the CPR and the specialist practice of this Court.

(4) I am not persuaded that Mallesons and/or Mr Reynolds co-operated sufficiently fully with Pinsent Masons in undertaking and carrying out the requirements under English procedure or the Orders of the court. I have no reason to think that Pinsent Masons failed to make Mr Reynolds or Mallesons aware of such requirements.

(5) Under the Rules of Procedure of the Commonwealth of Australia, the Federal Law of the United States and of this jurisdiction, there is a requirement to preserve documents which may be relevant to the litigation. I am satisfied that Mr Reynolds as General Counsel and Mallesons as standing outside counsel, could and should have made greater efforts to ensure the preservation of documents which were clearly relevant. These included many of the categories about which Arup makes complaint. It is clear for example that documents relating to the conduct of Mr Elliott of the Sual contract and documents relating to his dismissal in June 1997 were clearly relevant to this litigation. It should not have required any document request by the defendants’ solicitors in order to put the claimant on enquiry that such documents should be disclosed.

(6) It is, as the parties have acknowledged, elementary that the experts have equality of arms as far as documents on which their opinion is based is concerned. The experts themselves should be careful to check that documents on which their opinions are based have been disclosed to the opposing parties.

(7) Under the procedural rules of the High Court it is important to emphasize that there is a duty on parties to litigation not only to preserve but also to disclose all documents relevant to the issues in the litigation. I have found that Mirant’s legal team, and particularly Mr Delkousis, took an unreasonably narrow view of the claimant’s disclosure obligations and that Arup’s specific criticisms are justified. Where relevant I refer to them when dealing with the facts.

(8) I have helpfully had cited to me the decision of the Court of Appeal in Malhotra v Dhawan (26 February 1997) where Morritt LJ outlined the following principles:

“1.

Where destruction of evidence was carried out deliberately so as to hinder the opposing parties’ claim, that will reflect on the credibility of the destroyer. This would enable the Court to disbelieve the destroyer’s evidence.

2.

If the Court has difficulty in deciding which party’s evidence to accept it would be legitimate to resolve that doubt by the application of the presumption.

3.

If the judge forms a clear view as to which side is telling the truth he is not required to apply the presumption to accept evidence in which he does not believe or to reject evidence which he believes to be true.”

(9) Having heard all the evidence and read the documents that have been disclosed I am satisfied that although there is substance in Arup’s complaints, I can reach proper conclusions on each of the issues which I have to decide on the written evidence which has been disclosed and the oral evidence which I have heard. I have been careful to draw inferences from the evidence which I have heard and read and not in any sense to penalise the claimant because of the fact that documents have not been disclosed. I have based this judgment on the evidence before me. Where I have drawn inferences from the evidence I have said so. In taking this approach I should indicate that I am making no finding that the claimant destroyed evidence. I am making a finding that they failed to retain and/or disclose evidence which should have been retained and disclosed at trial.

The term “critical path” was used frequently in the course of the hearings by programming experts and non-experts alike. I was concerned to have a precise definition of what it and associated terms meant and after the hearing the parties provided me with an agreed reading list.

What is known as the Critical Path Method is frequently used by the construction industry both in the United States, the United Kingdom and elsewhere in planning construction projects and in analysing the causes of delay.

The critical path can be defined as “the sequence of activities through a project network from start to finish, the sum of whose durations determines the overall Project duration”. See BS.6079 – 2.2000 Part 2, 2.41.

In the helpful work, Delay and Disruption Contracts by Keith Pickavance (LLP 2005), the author makes the point that the Critical Path Method requires detailed and sophisticated analysis and that in complex projects it is unlikely that a critical path can be identified inductively, i.e. by assertion. “It can only reliably be deduced from the mathematical sum of the durations on the contractor’s programme to be completed in sequence before the completion date can be achieved.” This is an important cautionary word in this case where a number of witnesses were convinced, without the benefit of any such analysis, that they knew where the critical path lay.

It is important to have in mind that there may be more than one critical path. The Society of Construction Law Delay and Disruption Protocol (page 54) confirms:

“There may be more than one critical path depending on workflow logic of delay to the progress of any activity in the critical path which, without acceleration or resequencing, may cause the overall Project to be extended.” (Footnote: ¹)

At page 213 Pickavance noted that there has been an increasing acceptance in the United Kingdom and development of critical path management techniques over the period from 1995 to 2005. Critical path management was already generally accepted in the United States by 1995 but not then fully in the United Kingdom. A survey of 400 of the major contractors in the United States and 100 in the United Kingdom in 1994 showed that 100 per cent of the US but only 58 per cent of UK contractors had used critical path analysis for planning purposes. By 2005 the figure in the United Kingdom had very substantially increased.

Pickavance emphasizes, and I accept, that the critical path analysis is a tool or technique to assist in the management of construction Projects and not an end in itself. Indeed Mirant makes the same point in its final submissions.

Its purpose and effect if properly carried out is reflected in Core Principle No.1 in the Society of Construction Law Paper to which I have already referred:

“To reduce the number of disputes relating to delay, the contractor should prepare and the employer should accept a properly prepared programme showing the manner and sequence in which the contractor plans to carry out the works. The programme should be updated to record actual progress and any extensions of time granted. If this is done then the programme can be used as a tool for managing change and determining periods of time for which compensation may be due.” (Footnote: ²)

It is of course possible to affect the critical path by giving some activities a longer time than is necessary, thus keeping them on the critical path. This protects other activities from being on the critical path.

Time assigned to an activity, which is longer than the shortest time that is reasonably necessary to undertake that activity, can be referred to as “float”. The term “float” is often used in the alternative sense of the length of time before an activity becomes on (or very close to) the critical path.

As computers have become more sophisticated, the critical path analysis has been enabled to become more sophisticated. This has become an invaluable tool which enables a complex construction Project to be managed with better available information. The analysis will identify at a given date which important aspects of the Project are falling behind the programme, particularly if they are on or close to the critical path, what if any is the impact on other aspects of the programme and where additional resources need to be placed. It will also demonstrate where activities are ahead of what is planned and enable a decision to be taken on whether planned activities need to be rescheduled.

It is also used as a tool for analysing, as at the given date, what has caused any delay that has occurred and what is the extent of that delay.

Windows analysis is the most accepted method of critical path analysis. As Pickavance makes clear at page 572 of his book, “Windows” (and “Watersheds”) are not methods of analysis in themselves: they are merely aspects of conducting the critical path analysis. In essence they represent the division of the overall construction period into smaller periods into which each new set of corresponding progress can be entered into the programme and analysed.

The term “Windows analysis” refers to the regular reviews and updates undertaken by the contractor, normally monthly. These periods of time would be described as monthly windows. Unlike previous monthly reviews, the planner would use sophisticated software programmes to plot which activity or activities were on and which were near to the critical path each month. The programmes would take into account those activities which had started early or had been delayed. Also built into the programmes would be the progress of those activities which had started since the previous monthly window. This would enable the employer and the contractor to analyse over the relatively short periods of time what changes had occurred, and identify what problems needed to be investigated and put right.

The analysis would also identify delay, enabling those concerned to investigate and, if appropriate, agree the cause at an early stage. A monthly review would, in a complex Project like Sual, have enabled the consortium to see what activities were at or close to the critical path and to take urgent action where necessary. It would also have enabled a much more sophisticated retrospective analysis of the delay to be undertaken than that which was able to be carried out.

As Pickavance makes clear, the essence of windows analysis is to provide a snapshot at the point at which the analysis takes place. It is a method of discovering the effect between a particular event or series of events within the time frame and the effect of one or more events on the total contract period.

Pickavance also notes that if the critical path analysis takes place using less frequent intervals, for example at watersheds, i.e. critical benchmarks in the Project some months apart, it will be necessary to retain and review detailed records in order to provide reliable data. Clearly the longer the interval between windows, the more likely it is that the review will be inaccurate (particularly if the records are poor). In such cases, where something has gone wrong which requires blame to be attributed, there is likely to be more room for discussion and dispute as to who is responsible for losses which occurred in the period between windows.

In this case forms of the windows or, perhaps more accurately described, watershed analysis are used by the experts to attempt to re-create the critical path using, in Mr Lechner’s analysis, three benchmarks and covering a period from April 1997 to October 1998 and in Mr Robinson’s analysis, four benchmarks covering a period between April 1997 and October 1999. The fact that these bench marks cover extended periods of time reduce the overall reliability of the analysis which was carried out. I will deal with these matters in detail later but I refer to them now primarily to give some background to terms which will be used in the course of my analysis of the facts.

Mr Robinson’s analysis sets out and takes into account the actual date on which various activities other than the remedial works to the Unit 1 boiler foundations were completed in reaching his conclusions as to the effect of the remedial works on the overall delay to the Project. I refer to this aspect of his analysis when considering the facts.

Although I have already referred to them, the starting point is the network of contracts between PEC, the employer, CEPAS and SCC entered into in January and July 1995. Again I shall only rehearse briefly these contracts. They are analysed in more detail at paragraphs 641 and ff of the Judgment.

On 9 January 1995 the offshore companies entered into an agreement with PEC to supply all the equipment procured outside the Philippines (the Supply Contract). Also on 9 January 1995 the onshore companies agreed to erect the plant and do all work within the Philippines to bring the plant to full commercial use (the Construction Contract).

Under a Tripartite Agreement also dated 9 January 1995 CEPAS undertook to be responsible to PEC for the performance of the Construction Contract.

Under a Deed of Guarantee dated 12 January 1995 CEPAS also agreed to guarantee the liabilities of SCC under the Construction Contract.

On 23 May 1995 Arup and CEPAS entered into a Letter of Intent which formed the basis of the agreement between them. The agreement was contained in that letter and the payment schedules (see my Judgment on the Preliminary Issues, paras 251, 283 and 285 and the Declarations in relation to Issue 2).

On 1 February 1996 the “contract effective date” was specified under the Construction Contract. This meant that the date for the start of the plant reliability trials was 34 months after that date, i.e. l December 1998.

The consortium Construction and Supply Contracts were amended on 20 December 1996 to provide what was described as a preservation strategy if the transmission lines were not available by 1 April 1998.

On 29 January 1997 Southern acquired 80 per cent of the outstanding capital of Hopewell Holdings pursuant to a scheme of arrangement that gave Southern control of CEPAS and SCC. At that stage Southern anticipated that Mr Stewart Elliott, who had masterminded the Project, would continue as CEPAS’ managing director for the foreseeable future.

In January 1997 the works were still being monitored against strategy programme Rev D. The consortium agreed that slippage had occurred and in February 1997 a revised programme, Revision E, was agreed. By March 1997 the civil works were reported to be two to three months behind Rev E programme (see Brown & Root’s report of February 1997).

The Revision E programme for the Project was used by the programming experts as their benchmark in calculating delay. It was not, and did not contain, a critical path analysis showing what activities were at or near the critical path as the Project progressed. The experts also agreed that in a number of respects the Rev E programme was unreliable.

Under the Rev E programme, 1 April 1997 was the key date for the start of the erection of the steelwork of Boiler Unit 1. In fact Boiler Unit 1 was handed over on 2 April 1997. The erection of the steelwork by Stein (an Alstom company) started a few days later.

Mr Kuester had arrived in Hong Kong in March 1997 as Mr Elliott’s deputy. Although he reported directly to Mr Elliott he also provided independent reports (not shown to Mr Elliott) to his employers at Southern. He said in evidence that he set out his concerns about the way in which Mr Elliott was conducting the Project. He made it clear that most of his communications with Southern in Atlanta were oral and no document has been disclosed setting out these concerns. I have little doubt that relevant documents did exist. His evidence in relation to Mr Elliott was somewhat evasive. He said that he did not discuss with Mr Elliott the failure of the boiler foundations or what should be done about it. In view of his position in the company this is somewhat surprising.

After Boiler Unit 1 had been handed over, erection of the steelworks proceeded. Between 12 and 17 April 1997 a site survey of the foundations was carried out by SCC. The consortium did not agree what the investigation showed. This was at least in part because it was carried out without having benchmarks established which would have demonstrated clearly whether or not any movement of the foundations had occurred.

On 14 April 1997 it was realised that there was a potential problem of movement of the Boiler Unit 1 foundations at G2 and G5.

On 17 April 1997 Mr Adams of Stein, in charge of steel erection on site, noticed what he described as a “going down” of 10 mm on G2 and 20 mm on G5. He stopped the steel erection. His reading confirmed the earlier reading of Stein of 12 and 13 April 1997. Alstom’s surveyor had been instructed to take a daily reading of levels and after the initial drop he had not detected further movement.

Mr Lacoste of Alstom wrote to his colleague, Mr Rose, the acting consortium site manager and also an Alstom employee, that there was no assurance that there would not be further movement. The letter said that the steel erection would be suspended until Alstom received “a reliable explanation on the causes of the sagging and assurances that the risk of similar sagging is now nearly zero”.

This letter reflected Alstom’s consistently conservative attitude to the problem. They were entitled to take this view. It is important for me to have in mind that the decision of how to deal with the problem that had arisen was the consortium’s decision and not Arup’s. In reaching a decision on whether steel erection would proceed it was likely that the decisive voice would be that of the steel erectors, Stein.

Mr Lacoste’s letter ended with the important comment “You will easily understand the necessity of fast action in this matter in order to avoid major consequences on the strategy programme”. Alstom consistently took the position that the boiler was on the critical path of the Project and this letter warned its partners of the need for fast action in order to avoid serious consequences to the Project as a whole.

A meeting took place on 19 April 1997 between Alstom, SCC and Arup to discuss the problem. It was reported that the top of the anchor foundation had been checked twice a day over a period of five days and the results showed no movement/settlement of the two foundations since 14 April 1997.

Mr Evans, Arup’s representative on site, said that based on a visual inspection he did not believe that any settlement/movement had occurred although there were signs of earth shrinkage which might have been caused by the heavy rain on the night of 12-13 April 1997.

All parties agreed that at this stage the evidence of movement/settlement of the two foundations was inconclusive. Alstom agreed to re-commence the erection of the boiler steelwork above 30 metres. The parties would jointly monitor the work. SCC and Alstom would set up control points to monitor possible future movements. If settlement became evident, SCC would carry out a visual inspection by excavating each corner of the foundation to ensure that the plinth was founded on rock.

There is a note of the meeting which says that Arup said at the meeting that the foundations were acceptable. In a correction on 24 April 1997 Arup made it clear that they did not make, and could not have made, any comment on whether or not the foundations were acceptable because the appropriate tests had not been carried out.

The control points were not in fact put in place immediately but only after 21 April 1997. This represented a four-day delay in the agreed monitoring process. Dr Mann’s opinion, which I accept, is that if the control points had been correctly set, it would have been immediately apparent on checking whether or not a level had changed.

On 21 April 1997 Mr Grant Smith, SCC’s Project Construction Manager on site, wrote to Alstom that SCC believed that no settlement of the foundations had occurred but said that the agreed monitoring system would be put in place. He went on

“Due to the above statement SSCC will accept no responsibility for any stoppage of the boiler erection works that might have occurred to date.”

Mr Rose responded on Alstom notepaper on 24 April 1997 to say that it did not accept full responsibility for the cessation of the steelwork, an element of which must be borne by SCC. The letter referred to the unnecessary difficulty of determining whether or not a settlement had occurred.

“The survey conducted on 18 April 1997 did reveal errors against design values which must put the results of previous surveys in doubt.”

“Had the original pre-turnover results been readily available against a reliable site co-ordinate, it would have been relatively quick and simple to determine if the settlement had or had not occurred.”

The view of Mr Rose is supported by Dr Mann’s expert opinion and I find that this was the case.

Also on 24 April 1997, having commented on the Minute of 19 April 1997, that no party having been able to provide substantial evidence as to what had happened in relation to the approval of the foundations, Mr Higson and Mr Evans recommended that a further inspection should be undertaken after trial pits had been dug. This advice was amplified in an entry from Mr Evans’ diary, “If settlement continues, dig pits on each of the four corners to check founding material”. This was a constructive suggestion.

The next meeting took place on 28 April 1997. After monitoring for five days a further drop in the bolt level of 7 mm and 6 mm respectively was noticed at the G2 and G5 foundations. SCC said that it would not expect Alstom to stop erecting the steel until exploratory excavation of the foundation had determined whether or not the foundation was founded on rock. SCC said it would conduct exploratory investigations to establish whether further settlement had occurred. SCC thought it was possible that after the initial settlement no further settlement had in fact occurred.

I accept Dr Mann’s expert evidence, which is in line with that of Alstom, that if the monitoring had been carried out properly, it would have been clear before this date that further settlement had in fact occurred.

At a meeting on 28 April 1997 Arup is recorded as suggesting that surveys on the foundations should be carried out twice a day. It put in hand immediate action to investigate the cause of the settlement and conducted probe tests on l and 2 May 1997.

On 30 April 1997 Mr Rose wrote again to Mr Grant Smith recording that, including that day’s results, total settlements of a maximum of 15 mm and 12 mm had occurred at the foundations. He said that Alstom wished to carry out its own investigations which it would complete by 1 May 1997. This, he said, would allow the consortium to obtain an agreed report of findings and results.

In the letter he noted, “There has been a maximum deviation of 15 mm which according to the technical design specification for the steel structure is not permissible between consecutive column blocks”.

Mr Rose concluded that Alstom had no alternative but to cease all structural steelwork erection and further loading of the two foundations until the current settlement problem was understood and any necessary rectification work had been completed. The letter declared that Alstom held SCC responsible for any costs of the delay, acceleration or damages.

It was clear to Alstom that remedial works would be necessary. This should have had a decisive impact on the course to be followed. By this stage Arup had also concluded that remedial works would be required and started to prepare sketches of possible solutions involving underpinning to the foundations.

Alstom’s site inspection took place on 1 May 1997. A visual inspection around the periphery of the foundations showed very weak highly decomposed closely jointed basalt. Since conditions under the central part of the foundations could not be assessed visually, it was thought to be possible that the movement represented an initial “bedding in” of the foundations.

The recommendations were:

“(a)

measured movements of the steel columns needed to be verified and reconciled with movements of the concrete foundations (currently undertaken by Alstom’s staff);

(b)

the depth of the decomposed materials should be verified.”

A further inspection was due to take place with Arup on 2 May 1997 and some further probing may have been carried out under Arup’s supervision.

It is clear that Arup was concerned that there might be a geotechnical problem which was their responsibility. Dr Littlechild, Arup’s Associate Director and specialist geotechnical engineer based in Hong Kong, was involved together with Mr Higson and specialist geotechnical engineers based in London and Mr Nyambayo, Arup’s technical engineer on site. They considered both the causes of the settlement and possible further investigations.

Alstom obtained outside professional expert advice from a geotechnical engineer, Mr Wigginton of Mouchel Asia Limited. He visited the site on 2 May 1997. A note records his visit and the investigations which were carried out whilst he was on site.

Further actions were agreed at an internal consortium meeting on 2 May 1997 at which Arup was not present. This involved re-commencing steel erection at Unit 1 and daily surveying of the columns and foundations to reconcile movements after jacking up the steel columns of the two foundations to the required additional level.

It was also agreed

“(d)

If total measured movement relative to the datum established on 23 April 1997 exceeds 25 mm at any stage then all operations should cease and a detailed investigation of the foundation material should be undertaken. It is envisaged that this investigation would need to include rotary cored drill holes.”

It was recorded as a matter of general agreement that the 25 mm movement cut-off was considered a reasonable benchmark.

In his written evidence Mr Higson was generally in agreement with the advice which followed Mr Wigginton’s opinion but thought that the 25 mm should not be an absolute limit provided there was no risk of damage or threat to the stability of the steelwork.

Arup (certainly Mr Evans and perhaps Mr Higson) was present at a meeting on 3 May 1997. Alstom reported Mr Wigginton’s findings that in his opinion the current movement in the foundations was unlikely to be due to the ground and that the formation under the foundations was Grade III/IV rock. (There are various categories by which the strength of rock is frequently assessed. Grade I rock is the strongest and shows no sign of decomposition. Grade II is a weaker variant of grade I. Grade III is moderately decomposed rock. Grade IV is highly decomposed rock. The last two categories are Grade V – completely decomposed rock, and Grade VI, residual soil.)

At the meeting there was a discussion as to possible causes of movement and Alstom’s limit of 25 mm was agreed. Some investigations had been carried out in Mr Evans’ and Mr Nyambayo’s presence which Mr Evans records as being inconclusive.

The investigations continued against a background which is reflected in the PEC Site Progress Report No. 23 dated 5 May 1997. The summary starts:

“Overall the Project is presently showing critical delay of 160 days in the area of the water treatment plant. The construction delay in the civils is the master delay which is masking a delay in the supply of materials of 43 days. The construction programme is currently being rescheduled to address this problem.”

Later the report goes on:

“The onshore construction contract continues to show the critical Project delays. Overall progress continues to be 4 weeks behind programme as per the April report.”

The report notes that the common services have slipped to a 10 week delay, i.e. water treatment, coal jetty, coal yard and limestone unloading.

The report makes reference to the problems with the boiler foundations and says that this issue will be addressed in the following month’s report. The report goes on to record correctly that 1 December 1998 is the date for the start of the reliability trials for Unit 1 and l March 1999 for Unit 2.

It appears therefore even from the contemporary documents that any delay in relation to the boiler must be seen against the background of other serious delays occurring on site. There is no suggestion in this Report that the problems with the boiler foundations represent any threat to the Project as a whole or need to be resolved as a matter of urgency.

There was heavy rain on site on the evenings of 4/5 May 1997 coinciding with a sudden drop in both Boiler foundations. It may well be that Alstom was in any event entitled to an extension of the contract because they were not able to work on those days due to the weather.

Ground investigations continued on 5 May 1997. The conclusion of Mr Nyambayo in an internal Arup note is that on the basis of investigation so far, he thought that the foundations were adequate for the existing load but that it was necessary to reappraise the magnitude of maximum settlement and its implications for the long term integrity of the structure. He advised that this should be done by Arup internally and Arup would then present its conclusions and representations to CEPAS. It does not appear that this was something which was required of Arup by the consortium.

There was a further site meeting on 5 May 1997. The results of the tests undertaken on 3 May 1997 were reported. Alstom repeated that it would accept movement of a total of 25 mm and no more, but only in 10 mm increments. Upon reaching a movement of 25 mm, the entire situation was to be re-assessed “as 25 mm is thought to be an acceptable maximum”. Meanwhile the monitoring was to continue.

On 7 May 1997 Alstom jacked up the western foundation. The result was that the foundation went down by 12 mm and the column went up by 29 mm. Work of steel erection stopped.

Mr Hall, who was adamant in his evidence that the erection of the boiler was and remained on the critical path, wrote to SCC (Mr Smith and Mr Eller) on 8 May 1997 in terms which made it clear that he had expected proposals for resolution of the boiler problem to have been implemented already and that he now expected a speedy resolution of the problem.

His assertion, without any critical path analysis, that the boiler was always on the critical path will be analysed later. It is not supported by the Programming Experts. It is in any event highly relevant to the degree of urgency with which he thought that the boiler foundation failure should have been tackled.

Mr Hall’s letter to SCC dated 8 May 1997 started by saying that “We still await your proposals for resolution of the boiler foundation settlement”. He repeated the parameters for settlement of the foundations which would be acceptable to Alstom. He went on

“”Based on this we have concluded that any additional loading will result in settlement breaching further the above conditions. In consideration of this, the boiler erection is stopped completely from 7 May 1997 until SSCC correct the problem. Obviously any solution which allows continued boiler erection will be the most beneficial for the Project.”

The letter went on:

“The delay to present dates back to April 14 ’97 when the problem was first identified to you. From April 14 ’97 normal boiler erection has not been possible.

“As you are aware, the boiler erection lies on the Project critical path and therefore this delay is affecting the Project end date and your speedy resolution of this issue is required.”

The letter was not copied to Arup. It again made clear Alstom’s view that there was an urgent need for SCC and Alstom to agree a solution to the problem, not least because the delay, in Alstom’s view, would have serious consequences for the Project as a whole.

On 8 May 1997 Mr Higson discussed possible options for remedial works with Mr Eller, the claimant’s Project Manager based in Hong Kong. Mr Eller confirmed that the decision on any appropriate remedial scheme would be taken by Mr Elliott.

Despite the fact that Alstom had regarded this as a potentially serious problem which had required an agreed urgent solution since the middle of April 1997, it appears that it was only on 14 May 1997 that Mr Elliott was able to make himself available to meet Dr Littlechild and Mr Higson in Hong Kong to discuss it.

Mr Higson’s note of the meeting reflects the feeling of those present that there was a need to find a solution to the problem. It does not reflect the urgency which Mr Hall had been expressing for some time.

The note acknowledges that movement had continued and that movement of 45 mm and 35 mm had now been recorded for G2 and G5 foundations. The meeting recommended that bore holes should be considered to investigate the formation to a depth of 15 m to demonstrate the absence of unforeseen features such as open natural joints (point xiii).

The conclusion, set out in point xiv was that

“remedial works and underpinning solutions as discussed in the meeting (piling, mini piles etc) to be developed for further consideration.”

This recommendation was clarified in evidence to the extent that it is clear that at the meeting Arup agreed to devise a scheme to resolve the problem. It may well be that part of the reason for Mr Elliott’s lack of urgency in agreeing and implementing a solution was that he still did not recognise that there was a serious problem. It is evident that he had no appreciation that any delay in finding a solution might increase the risk of delaying the Project as a whole.

There is some evidence that this may also be because Mr Elliott expected the transmission lines to delay the Project in any event and therefore saw no point in rushing through remedial works on the Boiler foundations. (See Mallesons’ Report of 23 November 1999, paragraph 438 below.)

I accept Mr Higson’s evidence that “Mr Elliott understood that there was a problem to be addressed but he did not consider it to be a problem that required an immediate fix, i.e. it could be fixed at a later point in time”.

Instead of instructing Arup to design the remedial scheme as a matter of great urgency, Mr Elliott, even at this stage, merely gave approval for further ground investigations and expressed the view that the erection of the steelwork should continue concurrently with any remedial scheme. This was not a realistic approach bearing in mind Alstom’s frequently stated position.

The emails passing between Arup’s offices in Sual, Hong Kong and London indicated that Arup was continuing to develop its ideas for a possible remedial scheme which did not involve taking down the steelwork and that this was not entirely easy. As Mr Evans confirmed in evidence, the failure of the foundation was the ultimate nightmare.

On the morning of 18 May 1997, with Dr Littlechild, Mr Higson and others, Mr Elliott visited the site to see the problem for himself. In the afternoon there was a meeting on the balcony of the Sual Clubhouse which was attended by high level teams from SCC and Alstom. Mr Evans’ diary note makes it clear that in his view there was a serious settlement problem which required appropriate remedial works.

This was certainly Alstom’s view. They made it clear that they would not re-commence the erection of the steelwork unless they had an instruction from Mr Elliott, acting on behalf of the employer, PEC, that there was an agreement between Alstom, PEC and/or SCC that Alstom would not be responsible for any delays or problems with the steelwork.

At the meeting Mr Elliott took a wholly contrary position. He said that as Alstom had not been instructed to stop the steelwork, there was no question of him giving any instruction to them to re-commence it. Mr Elliott was clearly attempting in this meeting to blame Alstom for foundation failures. This no doubt added to the uncomfortably aggressive atmosphere which was described by Mr Hall, who was present.

Mr Elliott’s view, still to some extent shared by Arup, was that the material under the two foundations contained voids/fractures which were causing the settlement when loads were applied. His preferred way forward was to continue loading the foundation. This, he argued, should continue until settlement stopped at which time such rectification work would be undertaken as was necessary to return the foundation to design condition.

Alstom did not agree and said it was taking independent advice and until it had received that advice, steel erection would remain suspended.

On 19 May 1997 Mr Higson had further discussions with Mr Hall in Manila regarding problems relating to the foundations and the best way of progressing the ground investigation and continuing the boiler steel erection.

Alstom’s position was reflected in a note from Mr Hall to Mr Elliott on 21 May 1997. Mr Hall said that Alstom was obtaining its own independent advice but he went on “In any event we believe that one action we should be taking before we proceed further is to employ the services of an independent geotechnical engineer to carry out a detailed survey to establish the underground conditions”.

Mr Hawkins, of Soil Mechanics, had already been instructed by Alstom to provide an independent report and he did so in a letter dated 21/22 May 1997. His conclusion was

“The ground is behaving neither like sound rock nor as a fracture rock would. It is essential that the nature of the ground below the foundation is known before any decision on the ability of the ground to support the structure under static or combined static and dynamic load is made.”

Although the claimant has not disclosed documents in relation to the running of the Project which I would have expected to be in existence and to be disclosed to the court, the situation is clear. There was a serious settlement problem which required an urgent solution. The members of the consortium were not prepared to agree or even to discuss an urgent solution. Part of the motivation to avoid addressing the problem was that SCC and Alstom were already seeking to blame each other for delays that had already occurred to the erection of the steelwork. Mr Elliott refused to recognise that Alstom was taking an intransigent position with regard to continuing the steel erection and take this into account in managing the way forward.

This failure to resolve the dispute and achieve a solution which resolved the problem meant that the members of the consortium continued to squabble and there was no urgent attempt to find a solution until after the new SCC team had taken over on 17 June 1997.

Long before the meeting on 18 May 1997, Mr Elliott should have had discussions with Alstom which provided a solution which was acceptable to Alstom and which would have enabled the settlement of the boiler foundations at Unit 1 to be resolved.

On 21 May 1997 Alstom gave notice to their insurers that a change in circumstances had occurred under the policy in that unforeseen ground conditions had caused work on the erection of Boiler Unit 1 to be suspended.

On 22 May 1997 Mr Hall notified Mr Elliott that

“…until it is clear that we can continue without causing damage to the boiler and we have insurers’ approval to continue, all erection work on the boiler must remain suspended. In this regard we require that you issue a formal notice of suspension in accordance with clause 35.1 of the contract.”

On 23 May 1997 Mr Eller responded on behalf of Mr Elliott. The fax was not in fact received until 29 May 1997. It complained that Alstom’s decision was taken unilaterally. On the contrary, in SCC’s view:

“9.

We reiterate our opinion that there has been no necessity to suspend erection and that the structural integrity of the superstructure can be maintained with necessary jacking as has been effected to date and as recommended by our respective engineering consultants …”

SCC went on to express disagreement with Alstom on its decision to suspend the steel erection and held Alstom responsible for any delays, cost and expense. The letter ended by agreeing that the boiler work was “in SCC’s view, on the critical path and should not be subjected to any unnecessary delays.

Also on 24 May 1997 Mr Wigginton met Mr Eller, Mr Larsen of Alstom and Dr Littlechild of Arup. He said that on the geotechnical issues there was agreement that the current settlements were relatively large and Arup agreed that some remedial works would be required to the foundations to accommodate final loading conditions. Several potential solutions were discussed. It was agreed in principle that investigation of the foundations by rotary coring should be carried out but neither Arup nor CEPAS would give a commitment as to when this would be done.

Mr Wigginton was clearly very conscious of the rift within the consortium and that this and non-geotechnical matters might impede a speedy solution. He noted “ … I appreciate that from the overall Project viewpoint there are commercial issues that also need to be addressed with the consortium in order to progress and resolve matters.” At the end of the meeting Mr Wigginton’s appointment was terminated. He was replaced as Alstom’s consultant by Mr Hawkins.

Alstom followed up the meeting on 24 May 1997 by complaining that part of its problem was the continuing reluctance of CEPAS to provide information to the consortium. The letter complained specifically,

“Despite requests, until the meeting on 18 May 1997, no information has been received as to the cause of the problem. Without your data, analysis and proposed solution it was clearly impossible to justify continued erection of the boiler in circumstances outside of its design criteria. Ample opportunity existed to avoid delay whilst boiler erection continued from 14 April 1997 when the problem became evident until 7 May 1997, when GECA (Alstom) found it necessary to stop erection.”

The letter went on to say that from 7 May 1997 it was not possible to proceed further since the next stage of the erection procedure doubled the load on the foundation which risked a catastrophic failure of the foundation.

On 27 May 1997 Alstom convened a high level internal meeting which included their construction director for the whole of their power plant business worldwide.

On 30 May 1997 a long letter was written by Mr Hall to Mr Eller, no doubt based on the approach agreed at the internal meeting. The letter reiterated Alstom’s complaint about lack of information and its opposition to continuing steel erection before dealing with the settlement. The letter said, however, that provided CEPAS agreed to indemnify Alstom against any loss or damage, CEPAS could proceed with its scheme. In the same letter Alstom notified SCC of its claim that SCC’s conduct had caused Alstom to suffer a material increase in the cost of carrying out its own obligations under the Construction Contract.

During the period 24 May to 2 June 1997 there was heavy rain in Sual but there was no noticeable change to the G2/G5 foundations. If this period becomes relevant as a separate item it may amount to excusable delay for which Alstom would be entitled to an extension under the Contract, if Stein would not, in any event, have been able to work on site.

On 3 June 1997 a meeting was held to review the situation. It was agreed that a detailed investigation of the ground would be undertaken, including bore holes drilled vertically as close to the reinforced foundation as practical. Cores would be taken. The investigation would be lengthy and there was no guarantee that the work would be complete within three weeks.

Also on 3 June 1997 Mr Franke, acting as an independent Consulting Engineer employed by Southern Geotechnical Services, carried out an investigation, not on behalf of Mr Elliott, but separately on behalf of Mr Kuester and Southern as the majority shareholder in SCC. It appears that Mr Elliott was not consulted and did not know about it. I have not seen any documents which explain the circumstances which led Southern in Atlanta to engage Mr Franke.

Mr Franke’s opinion was concise:

“In our judgment excessive movement with as little as 1250 psf on a footing designed for 25+tons/ff² says this foundation has failed. We think it would be fruitless beyond this point to try to assess its further use as is, or adjust to the load. In our judgment time would be better invested in the core borings and plan to remediate the condition.”

Mr Franke sets out the alternative options of underpinning or grouting and the investigations needed to determine which was the appropriate option. He concluded that

“Monitoring and documentation of the condition surrounding G2 and G5 as reported by Mr K F Hawkins of Soil Mechanics Limited appear to be complete, and very informative and to the mark concerning recommendations. We certainly agree with the concept of ceasing further loading of those foundations and moving into an investigative phase for remedial action.”

On 7 June 1997 Mr Higson produced his report on the history of the boiler failure to date. This was amended after comments by Mr Eller. He reported that a number of proposals/contingency plans were under preparation for consideration by CEPAS and GECA (Alstom) but could include temporary pinning with mini piles in order to permit reinstatement of the foundation by extending it to a proven suitable rock formation.

On 10 June 1997 Mr Eller wrote to Mr Hall rejecting the claim that SCC had failed to provide Alstom with the necessary geotechnical information. He referred to the various meetings with Alstom and its independent technical advisors. The letter reiterated the claim that Alstom had, unilaterally and against SCC’s advice, stopped the erection of the steelwork without demonstrating or explaining the necessity to do so.

On 11 June 1997 a borehole investigation took place under Arup’s supervision. Mr Nyambayo’s summary said that the borehole was sunk on the edge of foundation G2/G5. It yielded poor recovery of material. The trial pit was also excavated. It showed material between highly weathered and closely fissured material. Based on visual evidence the rock was Grade III – Grade IV.

Mr Hawkins said that the investigation showed that there was rock to support piles 6 metres below ground level. With Bauer piles he concluded that there would be no problem in finding solid rock and that this provided an adequate remedial solution. All the piles did not need to be of the same length but each pile must be founded on solid rock.

It was at about this time that the Peso was devalued from an exchange rate of 27 Pesos to $1 to 40.5 Pesos to $1. Arup claims that the effect was a reduction in the cost of the Sual Project which needs to be taken into account in assessing damages. If this issue becomes relevant I will hear further submissions if necessary on what allowance (if any) I should make.

On 11 June 1997 CEPAS held a Board Meeting in Hong Kong. The claimant appears to have been very reluctant to obtain or disclose documents surrounding this meeting. Eventually it disclosed the Board Minutes and the brief exchange of letters between Mr Elliott and the Board.

The Board Meeting records that it started at 9.30 a.m. on ll June 1997, was postponed to 2.30 pm that day and was continued after further postponements at 5.30 pm on 12 June 1997. The Board Meeting was re-convened at 7.30 pm on that evening when it is recorded that Mr Elliott had tendered his resignation, that it had been accepted and that the termination agreement which included a payout to Mr Elliott of US$20 million and a confidentiality clause had been approved. (The payout to Mr Elliott was in fact US$21 million.)

Mr Elliott wrote on 12 June 1997 tendering his resignation and received the following reply from Mr Boren, the Chairman of Southern:

“After working together for the last few months we have reluctantly concluded that your management style is not compatible with ours. On that basis we have requested your resignation from the company.”

I have no knowledge as to what extent the problems over the boiler foundation played in this. Mr Kuester said in evidence that he had been reporting back to the majority shareholders in Atlanta on Mr Elliott’s performance. As I have already indicated, it is unfortunate that contemporaneous documents may have been destroyed which would have assisted me in understanding the boiler problem and Mr Elliott’s appreciation (or lack of it) of the impact of the problem on the Project as a whole. I would also have expected to have seen documents which reflected Mr Elliott’s understanding of and the reasons for the various delays to the Project and the extent to which those delays appeared to him to be critical.

Although he gave evidence at the hearing of preliminary issues, Mr Elliott was not called as a witness at this hearing so I was deprived of the opportunity of hearing him give evidence and being cross-examined on any of these issues. It is easy to see why his personality and authoritative style of working would have been alien to Mr Kuester, Mr McManus and Southern. I have no means of knowing from contemporary disclosed documents whether or not this represented the real reason for his departure.

On site Mr Hawkins was continuing his ground investigations on the causes of the settlement and his assessment of the way forward. He said in his report of 14 June 1997 that there was a need to determine the exact nature of the ground so that a solution to the problem could be found and that the results of the core drilling and testing were awaited.

It appears from notes for a presentation by Mr Kuester of actions arising out of the 13 June 1997 Board Meeting, that the Board took the decision to send Mr McManus immediately to Sual and to assign independent geotechnical experts to the Project to help assess the course of action to be followed for dealing with the boiler problem.

On taking over the management of the Project Mr McManus found that no critical path analysis of the Project had been undertaken. Mr Hall and Alstom assumed that the boiler foundations were always on the critical path. Mr Elliott’s lack of urgency in addressing the boiler problem was not consistent with Alstom’s view.

Mr Kuester agreed in evidence that without a proper analysis it was hard to know what was on the critical path. He said that you have “to base first emphasis on experience more so than the Project schedule”.

Mr Kuester agreed that there were already delays in the provision of the transmission lines which were critical to completion of the commissioning process of the plant. Some of the other problems would require significant additional resources to resolve. Mr Kuester also agreed in evidence that the coal loading jetty was such a problem. He also agreed that problems relating to infrastructure, plant, water, cement and sand constituted major problems to be solved and that these would require a significant increase in resources. A further important problem concerned safety.

Mr Kuester recognised that it would take time to review the Project and make the changes necessary to have the Project running efficiently. He felt, and this is supported by the monthly reports, that it was only in the latter part of 1997 that the Project was turned round. I also note the useful summary contained in Mallesons’ advice to SCC dated 23 November 1997.

Immediately after his appointment Mr McManus went to Manila. On 17 June 1997 a meeting took place to consider what should be done in relation to the boiler foundations. Mr McManus and Mr Kuester attended for the first time. Dr Littlechild and Mr Higson attended on behalf of Arup. Mr Trinquet attended on behalf of Alstom (Stein) and Mr Losner came from Paris as part of Alstom’s team. The meeting was opened by Mr Koch, Chief Operating Officer of CEPA, who said that the purpose of the meeting was to find the best technical solution to the boiler problem and that contractual and commercial debate should be avoided including any previous debates and conflicts.

Mr Hawkins outlined the investigations that had taken place including the ongoing ground investigations involving bore holes and coring. He concluded that it was difficult to explain the magnitude of the settlements that had occurred. These were agreed to be of the order of 35-45 mm. SCC acknowledged that the boiler foundations had failed.

Mr Higson outlined two possible solutions which are recorded in the minutes of the meeting as follows:

“Option 1: Piles used as temporary support to allow excavation for underpinning with mass concrete below the existing foundation.

Option 2: Piles used as temporary support initially but also forming part of the permanent works with a pile cap replacing the existing foundation.”

Mr Higson said in evidence that Option 2 was the only positive option put forward. It was estimated that the time for completion of the works would be of the order of six weeks. It was generally agreed that parallel working, i.e. continued erection of the steelwork/civils was possible.

Alstom agreed the way forward in principle but said that it required to obtain insurers’ approval. Arup agreed to complete the detailed design as a matter of urgency and 24 hour working was agreed. It should be noted that unlike the acrimonious meeting of 18 May 1997 this meeting, one month later, was positive and constructive.

On 17 June 1997 CEPA’s brokers wrote to say that any damage to work on the boiler foundation settlement after identification of the settlement problem would not be covered by insurance.

On 18 June 1997 Mr Evans was briefed by Mr Higson on proposals to provide temporary support of the steel structure. On 19 June 1997 the steel structure was jacked up and further settlement was reported. Settlement was to be monitored when piling commenced, which it did briefly on 19 June 1997.

Piling at G2 started on 20 June 1997. There was overbreak in the material below the foundation causing a small void. Mr Higson said that the void should be filled with concrete. Mr Hawkins did not agree. Piling stopped.

At a site meeting on 21 June 1997 attended by all the relevant senior representatives of the parties, the void which had been found at the side of the pile which had been filled was discussed. The pad foundation at G2 had sunk by 9 mm with possible tilt.

Various options were considered. These included the options previously discussed on 17 June 1997. The first of these involved drilling piles (caissons) into the rock adjacent to the existing foundations while leaving the existing steel structure in position. The piles would be retained and a large pile cap would be put in place of the existing foundations.

The second option previously discussed was to take down the steel structure, excavate and remove the existing foundations and put in a larger pile cap.

The meeting proceeded to consider the first of these options in detail. Mr Hawkins said that he was confident that either solution would be feasible. Arup would provide detailed plans.

On the following morning, 22 June 1997, the meeting re-convened. It was agreed that the temporary support system for the steel structure should involve MOF beams rather than knee braces. Mr Higson was instructed by SCC to finalise the detailed design.

This involved detailed work from Mr Higson and Mr Evans in conjunction with the London office. The process of evolving the solution required much technical skill on the part of Arup’s staff and demonstrated the collegiate approach which Arup was able to use, involving a number of highly qualified civil engineers.

I depart from the detailed narrative relating to the boiler at this point to review the situation on site as Mr McManus found it. On 21 June 1997 he sent a report to Atlanta setting out his initial investigations and his initial conclusions. This helpful report was only finally disclosed on 4 April 2006 after persistent questions by Arup’s solicitors.

It is interesting to note that it only makes a brief mention of the boiler problem. It may be that this was the subject of a separate communication or communications with Atlanta, which have not been disclosed.

The report was highly critical of the general management of the Project. Mr McManus noted that the civil contractor did not have an up to date schedule. There was no civil Project schedule or a consolidated Project schedule. Planning was non-existent or at best incomplete. Mr McManus further noted that civil Project manager schedules were useful in identifying total float and work arounds for troubled areas.

He identified problems with concrete production and quality, and work on the coal unloading jetty. Mr McManus said in oral evidence that in his view the jetty was close to or on the critical path. There were also problems in assessing the remaining work against budget and problems with productivity. In addition, there were problems with the major equipment, with the adherence on site to elementary safety rules and with living conditions for those working on site.

It is clear from this report, and from his approach to problems on his arrival, that Mr McManus intended to take control of the various problems and take the lead in making decisions on the remedial works which needed to be undertaken in conjunction with other members of the consortium.

There can be little doubt that if he had been responsible for the boiler problem from April 1997 it would have been resolved as a matter of urgency. It is clear that, like Mr Elliott, he regarded Arup not as the consultants who would have the decisive word on the remedial scheme to be followed, but as advisors whose opinions would be taken into account along with other matters.

This, of course, was the correct approach. Arup was not responsible for the construction work on site. Only SCC could know the impact of any delay on the programme as a whole. Mr McManus is himself a Registered Professional Civil Engineer who at the time had over 30 years’ experience in Project management and was qualified to evaluate advice and then to take his own decisions.

Mr McManus’s view of Arup’s advice was no doubt coloured also by his impression, recorded in his first witness statement, that “Arup were not concerned at this stage that there was a problem”. This was, I am satisfied, an incorrect impression.

It is clear that, although the way forward had been agreed at the 21/22 June 1997 meeting, some of those present had misgivings. Mr McManus expresses less than wholehearted support for the agreed solution in his first witness statement.

In oral evidence he conceded that he had in fact reached the conclusion that the steelwork ought to be dismantled within 24 hours of his arrival on site. I did not form the impression that he was acting a sham during the succeeding days but that it would not take very much for him to change his mind and revert to his initial plan.

Mr Higson describes a lack of commitment to the agreed solution from SCC and Alstom in his fourth witness statement. It may be that further documents were in existence which explain the problem. Perhaps the consortium was having second thoughts over the option which it had chosen. Unfortunately no such documents have been produced for this hearing.

There is no doubt that those involved worked very long hours to develop the solution agreed on 22 June 1997. On 23 June 1997 column G5 was jacked up and inspected. On 24 June 1997 the piling rig was working on site. Piling commenced and continued until 2.05 am the following morning. Mr Hawkins stopped the piling and instructed SCC to backfill the bore with sand because it had not been correctly cased before the pile was removed. This had resulted in its partial collapse.

Jacking up took place again the following day.

At 5 pm on 25 June 1997 it was initially agreed under pressure from Mr McManus to recommence piling that evening without casing support for the full length of the pile. After discussions with SCC staff it was agreed to suspend operations and recommence the following morning. This is a clear indication of the urgency with which the problem was being approached. By then Mr Hall, Mr Hawkins and others had been working continuously for 38 hours.

On 26 June 1997 Arup issued its final design details after its staff had themselves worked long hours to produce what it thought would be the agreed solution. The next pile was started on 26 June 1997 and completed early on 28 June 1997.

On 28 June 1997 further piling was suspended pending a decision to take down the steelwork. This came as a complete surprise to Mr Higson, who had left site on 25 June 1997 believing that all were proceeding with the agreed solution. He was not aware of anything that had happened since 21/22 June 1997 to change the agreed plan. There had been a further meeting on 25 June 1997 but at this meeting the plan had not been queried.

I now break off the narrative to set out my conclusions in relation to the period up to (but not including) the decision to dismantle the steelwork. I reach these conclusions on the evidence before me.

(1) By 14 April 1997 members of the consortium (and Arup) realised that there was a potential problem of movement of the Unit 1 Boiler foundations at G2 and G5. By 17 April 1997 there was significant movement reported – 10 mm on G2 and 20 mm on G5 – close to Alstom’s limits of tolerance.

(2) The consortium was responsible for monitoring the foundations. I accept the evidence of Dr Mann and others that they failed adequately to do so. Had they done so, the extent of the problem would have been identified and decisions taken by the consortium as to what needed to be done at a much earlier stage. As Mr Rose observed in his letter dated 24 April 1997, the extent of the problem would have been identified earlier.

(3) Arup was not responsible for monitoring the Unit 1 Boiler foundations.

(4) Alstom, whose company, Stein & Company, was responsible for erecting the steelwork, took a consistent and conservative attitude to the movement of the foundations which SCC as the contractor failed to take into account.

(5) SCC, and in particular Mr Elliott, did not regard the problem as serious or potentially critical to the timetable for the Project as a whole.

(6) SCC did not proceed with any urgency to try to develop and agree a solution which was acceptable to Alstom. I accept the comments in Mr Lacoste’s letter to Mr Rose dated 17 April 1997 and Mr Rose’s letter to Mr Grant Smith dated 24 April 1997 and Mr Hall’s evidence. Whether or not the Unit l Boiler foundation was on the critical path, a solution, agreed by the consortium, needed to be developed as a matter of urgency. In other circumstances the solution proposed by SCC after receiving advice from Arup might have been acceptable but it could not be implemented in any event because Alstom (Stein) was not prepared to do so.

(7) The only feasible solution was to agree a solution acceptable to Alstom. Urgent work in developing such a solution could have started when the control points, which should have been in position, would have demonstrated that further movement on the boiler foundation had occurred. If the proper monitoring had occurred this would have happened at the latest on about 21 April 1997.

(8). It is difficult to know precisely when the agreed remedial scheme should have been ready because in June 1997 time was taken by Arup at the request of the Consortium to develop an elaborate scheme which avoided the time and expense of taking down the steelwork. I am not sure precisely how long it would have taken to develop the alternative remedial scheme which was in fact adopted. Although it was more expensive, it was less technically difficult than Arup’s scheme. I find that it would not have taken any longer to develop than Arup’s scheme and would probably have taken a significantly shorter time.

(9) Alstom made it clear on 7 May 1997 that it would not continue to erect the steel. I accept Mr Hall’s opinion, expressed at the time, that he would have expected proposals for resolution of the boiler foundation problem to have been agreed and implemented by that date.

(10) If the problem had been addressed with appropriate urgency the SCC/Arup remedial scheme or the scheme which was implemented would have been ready to be put into effect by about 7 May 1997 rather than 28 June 1997.

(11) SCC’s “wait and see policy” was not practicable in the face of Alstom (Stein’s) refusal to carry on erecting the steel. This was a matter for the consortium and not for Arup alone. It is not necessary for me in relation to this issue to make a finding as to which of SCC or Alstom was to blame for failing to agree an appropriate solution within a reasonable time, i.e. by about 7 May 1997. Arup was not to blame for this period of delay.

On 28 June 1997 Mr McManus implemented his decision that the remedial scheme should not proceed until the steelwork had been dismantled. He made it clear in his witness statements and oral evidence that the decision was his. This decision was also taken at the insistence of Stein, the steelwork contractors. Mr McManus said that the decision was taken after consultation with Mr Kuester but in fact it is clear from the evidence that Mr Kuester did not have any significant input into the decision.

In considering Arup’s submissions I remind myself that it is for Arup to establish that it was unreasonable to take down the steelwork.

Arup’s first submission is that because of his recent arrival on site and the numerous other problems with which he was concerned, Mr McManus did not approach his decision in a reasonable way. A reasonable approach would, they say, have involved checking the facts and obtaining the appropriate expert opinions.

Arup contends that Mr McManus misunderstood Stein’s estimate of six weeks, which was discussed at the meeting on 17 June 1997. This was for the entire work of replacing the foundations and not for taking down the steel. Thus the later estimate of two weeks for taking down the steelwork did not, they submit, represent a decisive change which could have triggered the change from the decision which had been taken.

They contend that Mr McManus did not consult anyone at Arup before making the decision as he should have done. Any suggestion by Mr McManus that dismantling the steelwork would have led to the remedial works being completed more speedily because it was then possible to carry out the remedial work more quickly with the steel removed was unsustainable. The steelwork would take 35 days to dismantle and to re-erect to the same height. Mr McManus should have had proper and open discussions before reaching his decisions. Had he done so, he would have understood the situation correctly and have continued to follow Arup’s scheme.

Mirant says that Mr McManus was sensitive to Stein’s concerns about the integrity and stability of the steel frame and possible dangers and delays resulting from people working around it. These concerns were similar to his own initial thoughts. Stein’s concerns were real and had been expressed to Mr Hawkins and Mr Evans and were known to Mr Hall.

Stein, according to Mr McManus, also had concerns as to whether the ground was sufficient for the crane mats under the MOF beams in Arup’s temporary design to support the steelwork during piling. These, it is said, were legitimate concerns which Mr McManus should and did respect. Stein also had concerns (see e.g. Mr Adam’s letter to Mr Hall dated 3 July 1997) that if the steelwork remained in place while the remedial works were undertaken it might become unstable.

Mirant contends that Mr McManus was also entitled to take into account that while arrangements might be made to ensure the safety of individuals working on site, the safest way to carry out the work was to dismantle the steelwork. He was also entitled to consider that, as he put it, “we felt more comfortable drilling the piles without the structural steel and also that we had Stein – we had their concern satisfied and the insurers satisfied …”

It is important to note that Mr McManus went on to say that taking down the steelwork would give the new management time to get the site organised. It is clear to me and I find as a fact that the new management would have needed the amount of time that they in fact took to assess the situation on site in any event, and that during this time there would have been an inevitable delay to the Project while the assessment was carried out and the reorganisation of the site was being put in place. This period of investigation and reorganisation extended beyond the time taken to dismantle and re-erect the steelwork.

In these circumstances it did not matter to Mr McManus on the question of possible delay to the Project (although it did on cost) which of the alternative schemes was implemented.

Mr Hall supported Mr McManus’s decision. In his evidence he emphasized his concern for the safety of those working in the area if the steelwork remained in place. He agreed that he would have taken advice on this from Stein and from his own team at Alstom.

Mr Hawkins said in relation to the meeting on 21 June 1997 that, at that stage, dismantling the steelwork was considered but thought to be a remote course of action by those present. In Mr Hawkins’ view the change in attitude came about as a result of Stein’s concern raised at the meeting 26 June 1997 as to the effect of continued jacking of the existing steel structure. Stein, he said, was concerned at reversal of stresses on the structure (which they felt was resulting in structure fatigue) and was adamant that no further jacking should occur. Stein stated its preference for dismantling the structure.

Mr Hawkins said he was surprised by Stein’s concerns but he made it clear that he was speaking as a geotechnical engineer and that the ultimate decision was that of the steelwork designer. He was also surprised that Arup was not present to contribute to the final decision. Mr Hawkins’ conclusion was that in the light of Stein’s statement that they did not wish any further jacking or movement of the structure to occur, the decision to dismantle the existing steelwork was inevitable.

Mr Hawkins’ opinion in his August 1997 report recorded at Point 8 that Stein’s analysis was that the steelwork could be erected to 72 metres with limited risk but that the next stage of the construction, lifting the top main beams, could only be carried out with stable foundations and with the shear keys at the column bases embedded and grouted in the existing structurally modified reinforced concrete foundation.

The engineering experts agree, and it has never been disputed, that the piling solution that was finally adopted was a satisfactory and reasonable design solution. It could have been executed without the need to dismantle the steelwork provided that the erected steel settlement could be maintained within specified limits. Mr Reith considered that there was no proof that the ground on which the MOF supports were to be inserted had an adequate bearing capacity and therefore there was no certainty that the settlement of the steelwork could be maintained.

The experts agreed that there was no other scheme that could have been implemented more speedily or safely. Dr Mann expresses the view that the time taken to adopt the remedial scheme was excessive. I have already dealt with the detailed arguments on this. It is clear that I agree with him.

There are four areas on which the experts differ:

I have to bear in mind that the decision had to be taken, as Mr Reith rightly observed, urgently, after a substantial period of indecision. It had, of course, to be taken in the circumstances and with the knowledge of those present at the time.

In this respect the last two technical considerations, i.e. risk of movement and technical difficulties of constructing the new foundations with the steelwork in situ were the most important.

In relation to the movement of the steel frame, Mr Reith considered that damage would have occurred. Dr Mann considered that there was no risk of damage. I conclude that as part of the overall test as to whether or not in all the circumstances the decision was reasonable, the test was whether those taking the decision reasonably thought that there was a risk that damage might occur. I conclude that in the circumstances it was a reasonable concern.

In relation to the supposed technical difficulties of constructing the new foundations with the steelwork in situ, Mr Reith concluded that there were technical difficulties. Dr Mann considered that there would be no real difficulties. I conclude that there was a reasonable concern that there would be technical difficulties and that this was a matter which those taking the decision were entitled to take into consideration.

I also conclude that Mr McManus was entitled to take into account the other concerns which I have outlined. In my view taking all the considerations into account Mr McManus was not acting unreasonably in taking the decision which he did.

This was particularly so since Mr McManus had concluded that his decision would not cause any additional overall delay to the Project, since any additional time taken in dismantling and re-erecting the steel would be more than covered by the fundamental reassessment of the Project which was required in any event.

Put briefly, the remedial works to the Unit 1 Boiler foundation then proceeded as planned. On 5 July 1997, a few days later than the Projected date of 30 June 1997, the dismantling of the steelwork started. It was completed on about 20 July 1997, well within the 25 days allowed. Piling re-commenced and was completed on 3 August 1997. The existing foundations were lifted out by crane. On this point I prefer Mr Higson’s evidence to that of Mr Stone, who said in his witness statement that the foundations needed to be demolished before they could be replaced.

Thereafter re-erection of the steelwork recommenced. The remedial work on the boiler foundations was completed on 3 September 1997. Alstom then took until 10 September 1997 to provide the necessary Turn Over certificate. Arup claims that this delay was unnecessary and that they should not be responsible for it in any event. I have not seen any reasonable justification for the week’s delay.

On 12 September 1997 the continuing erection of the steelwork re-commenced from the height at which it had been discontinued.

At this time the new SCC management was still investigating how the Project could be managed more efficiently and how delays elsewhere on site could be mitigated. This was inevitably taking time although SCC was confident that it would be beneficial in the long run. The parties were working to plan Rev E which was felt not to be adequate and to need updating.

Focusing now on problems other than those related to the Unit 1 Boiler foundations, I am satisfied that the arrival of Southern’s management team over time made a dramatic difference to the progress of the Project. A daily report from the employers’ representative, Mr Dunning, described the impact as “dramatic and immediate”. The report went on:

“They are currently reviewing site operations from top to bottom and making recommendations to further improve morale and production.”

It is clear that the proposed improvements included the addition of manpower and equipment which would have been necessary even if the boiler foundations had not failed. Mr Stone arrived on site as SCC’s manager in July 1997. He was an impressive witness with a good recollection and grasp of the events in which he was involved. In evidence he confirmed the problems which I have already set out. Indeed the impression which he gave and which I accept, was that when he arrived there were no adequate records which made it very difficult to determine what was happening on site. This all had to be put right and it took time.

The PEC consortium management summary for July 1997 expected the repair work to the boiler using what is described as the “least risk approach” to be one of three and a half months (or 15 weeks) to September 30 1997 on what is described as the critical path. The reported delay on civil works is said to have slipped from 12 to 15 weeks.

On 12 July 1997, NEIE Corporation (North East China Electric Power Import and Export Philippines Corporation, the sub-contractor responsible for the boiler structural steelwork and pressure parts) entered into an agreement with GECA for the dismantling and re-erection of the steel structure. The cost was US$314,480 plus VAT. Time was to be extended to cover periods when it was impossible to work due to bad weather.

It is clear that the Unit 1 Boiler was not the only item in the programme that was causing concern. On 15 July 1997 Mr Bickerstaff, the employers’ representative, wrote to Mr Hall expressing similar concerns over the coal jetty and the coal water conveying system. There were also concerns expressed over progress on the Labrador substation and the transmission lines. As early as 2 May 1996 work had been done to estimate the impact of both a 3- and 6-month delay for the completion of the transmission lines.

In its independent engineer’s report dated 21 July 1997 (covering the period to the end of April 1997) Brown and Root estimated that the civil design was seven months late. Even before the problems to the Unit 1 Boiler foundations, the foundations were found to be delayed by 11½weeks and Boiler Unit 2 foundations also by 11½ weeks.

There was a meeting of members of the consortium on 27 July 1997 in order to review progress. Those present included Mr Kuester, Mr McManus and Mr Hall. Concern was expressed at the delay to the availability of the transmission lines. It was also said that the civils were four months behind schedule and it was getting worse.

Mr Hall’s note of the meeting on 27 July 1997 records that Mr McManus denied that SCC was four months behind schedule. In cross-examination Mr McManus had to admit that at that stage he did not know how long the delay was.

What are described as “the toughest tasks facing SCC” were recorded as being infrastructure, plant, water, cement and sand. Mr Kuester agreed in evidence that these were real problems. The boiler works were said at that stage to be expected to be between 3½ and 4 months in delay.

Under item 17 Mr Hall records that the cooling water system was the most critical on the Project. Mr Kuester, in oral evidence, agreed that it was important but declined to describe it as “the most critical”. For the water treatment plant all areas – civil manufacture, construction and commissioning are described as critical.

It is right to note that Mr Stone said in oral evidence that everyone at his level was convinced that the problems with the boiler were their No. l priority.

It is very clear that internal assessment of the position on site was coloured by the knowledge that SCC, Alstom and Arup were blaming each other for the problems and delays on site and were conscious that some of the blame might be justified and result in claims under the various contracts.

On 31 July 1997 there was a meeting at Alstom’s offices at Knutsford between Mr Roberts, Arup’s Project Director based in London, Mr Fox a Senior Arup Director also based in London and Mr Hulme, Managing Director of Alstom. It is clear that Mr Hulme was anxious to blame Arup and went as far as saying that he would not consider Arup as a suitable organisation with which to work in the future. Rather surprisingly, considering Arup’s worldwide good reputation, he said that he did not know much about Arup.

For his part, Mr Roberts said that the employees of Arup on site had the impression that, having established a contractual position, Alstom was unwilling to take any action. Mr Hulme is recorded as appearing to accept this position.

Mr Roberts noted that there had never been an overall integrated programme for the Sual Project covering the requirements of both Alstom and SCC. Alstom had kept all the available float to themselves and was considerably later on key dates than the programme permitted.

Under the heading “Interpretation”, the following possible interpretations of Alstom’s position are recorded in Alstom’s Minute of the meeting:

“1.

Arup was not in control or acted unprofessionally.

2.

Alstom is very concerned about its own position in relation to claims resulting from actions which they took before Mr Elliott’s resignation.

3.

There are those in GECA who fear that they will be blamed for the lack of timely resolution of the foundation problem. ‘Scapegoats’ are required.”

The debate on the progress of the Project continued. A PEC Consortium Management Summary No.26 for August 1997 showed a 27% deficit in the progress of civil works. The report said that “The primary reason for the increased delay remains the slippage in the rate of civil progress and the continued cessation of Boiler Unit No.1 erection”.

Substantial delays are recorded for the coal jetty, the raw water plant and the water treatment plant. The note records that the raw water plant was to be replaced and there were plans to address the other delays. The implication is that an acceleration programme would have been required in these areas irrespective of the problems over the boiler foundations.

The Consortium Report for August 1997 noted that extra resources were being committed to the civil activities and a recovery programme was being developed for Boiler Unit 1 to minimise, where possible, the impact of dismantling the steel.

On 6 August 1997 Alstom moved on to Unit 2 and commenced steel erection on Unit 2. This is relevant to Arup’s claim that Alstom should have made a greater effort to introduce parallel working in order to reduce potential delays to the Project.

A further consortium meeting on 24 August 1997 suggested that the Turbine Deck was on the critical path and that the coal bunker and coal conveyors were two months behind schedule.

The Southern Company was sufficiently concerned about the progress of the Project to ask its employee, Mr Blalock, to do an internal financial audit. He delivered his report entitled “Operations Review for Sual” on 15 August 1997. He noted an inter-company receivable “due from CEPA of US$400,000 which involved a use of funds for a purpose other than the Sual Project and a sum of US$24,700,000 payable to Tileman Engineering in respect of which no value had been received. It is recorded that ‘the payments were approved based solely on Stewart Elliott’s instructions’”.

Mr Blalock also noted that no profit percentage had been identified for the contract and that there was no construction budget to use for evaluating costs and producing management reports. Ms Lam, then finance manager, said that she was not aware of a construction budget. The contract was a fixed price agreement with Mr Elliott who expected to make a profit out of it.

Mr Blalock was also critical of the fact that a large part of procurement of materials and equipment relating to the offshore and mechanical and engineering contracts were sub-contracted to Slipform Engineering (USA) Limited, a Hopewell subsidiary and that Frank and Vargesson did not in his opinion use the proper degree of diligence in carrying out their responsibility to approve payments to sub-contractors.

On 24 August 1997 there was a consortium meeting at which Mr Hulme and Mr Hall were present for Alstom and Mr Kuester, Mr McManus and Mr Stone represented Mirant. At the meeting Alstom claimed that the boiler work was five months behind schedule and that SCC was not catching up. SCC made it clear that a fully integrated schedule had not yet been produced and they were looking to use any available float within the Alstom programme.

Outside the boiler area Alstom was claiming that the common services were five or even six months late. These delays were expected to cause commissioning delays. Mr Hall explained in oral evidence that these delays were running alongside the boiler delays. His opinion is based, at least in part, on his article of faith that the boiler was always on the critical path. As I have already noted, the literature emphasizes that without doing a critical path analysis it is not possible to arrive at a reliable conclusion. Indeed, the delay experts do not think that on 2 April 1997 the boiler foundations were on the critical path.

On 31 August 1997 the institutional lenders produced their report on the Project. This assumes that the boiler is on the critical path and that unless the length of the delay is mitigated it will be five months.

At the end of August 1997 SCC produced its own evaluation of progress. It noted that “during August Sual Slipform Construction Corporation continued its programme begun in July to evaluate its current schedule status, assess the equipment material needs and labour requirements necessary for completion of the Project”. It goes on to say that it did a preliminary assessment in June 1997 and identified that the Project was four months behind schedule. “Much of July was spent evaluating the conditions of construction, equipment, recruiting, additional supervision and evaluating the schedule.” In August the time spent in performing the evaluation is said to have started to pay off and the report talks of an action plan being put in place.

I find that this evaluation occurred because the incoming Southern team felt that there was a need for a new direction on site. Any delay after June 17 1997 associated with the evaluation would lead to significant improvements but the need for the evaluation and the attendant delay did not occur because of problems with the boiler foundations but because of Southern’s view of Mr Elliott’s poor management of the Project.

On 3 September 1997 SCC handed over Unit 1 boiler foundations to Alstom. There was a gap of one week before Alstom issued its Turnover Certificate. In oral evidence Mr McManus said that Alstom never gave what he described as “a good answer” for not accepting the handover immediately. I have already indicated that I agree with Mr McManus. There is no reason why, given the urgency which Alstom had emphasized, the Certificate should not have been given immediately. I find that there were seven unnecessary days’ delay for which Arup should not in any event be responsible.

Taking my earlier findings into consideration I can now make findings in relation to overall delays caused by the remedial works on the foundations at G2/G5 and the re-erection of the steelwork.

1. The consortium should have reached an agreed solution on the necessary works by 7 May 1997 at the latest.

2. It was, on balance, reasonable for Stein to insist and Mr McManus to agree to the dismantling of the steelwork.

3. The remedial scheme should have been implemented immediately it had been agreed.

4. The dismantling of the steelwork took 15 days. The remedial work to the foundations took 13 days and the re-erection of the steel took a further 31 days.

5. If this timetable had been followed, the steelwork would have been dismantled by about 22 May 1997. Remedial works to the foundations would have been completed by about 6 June 1997 and the re-erection of the steel would have been completed by about 6 July 1997. This (including the week’s delay in September 1997) is 66 days earlier than in fact the work was completed. A period from 1 April 1997 to 6 July 1997 amounts to 96 days. The delay to the civils at this time was substantially in excess of this and getting worse.

6. This calculation does not take into account the amount of time actually allowed in Rev E for the completion of the steelwork. There is no very clear date on which it was completed but it would appear that the steelwork was in fact completed at the beginning of December 1997 against a target date in October 1997. If the remedial works had proceeded with the necessary degree of urgency they would have been completed at or close to on time according to the Rev E schedule.

7. Apart from other considerations I am satisfied that a significant period of time would have been taken by Mirant in reorganising the Project and trying to arrest and reverse the lengthening delay to the civils. This was the dominant cause of the accelerating delay to the Project in August and September 1997 and continued long after the remedial works to the boiler foundations were completed.

8. In these circumstances I find that the movement of the foundations in Boiler Unit 1 was not the dominant or even a dominant cause of the delay to the Project, nor did the boiler problem contribute materially to the loss arising out of the delay to the Project.

9. I have considered Arup’s claim that Stein should have shortened any delay to work on the boiler foundations by instituting parallel working. I am not satisfied that Stein acted unreasonably in the work programme which they carried out.

10. Once Mr McManus had taken over direction of the Project he was able to decide within less than two weeks what course was to be followed in relation to the remedial works on the boiler foundations. I find that Mirant’s contention that it lost the chance of addressing the other problems on site more quickly would have been unsustainable even it if had been pleaded.

The following dates provide a framework for consideration of the further stages of the Project:

Mr Stone said in oral evidence, and I accept, that at the beginning of September 1997 he was still engaged in crisis management.

On 8 September 1997 Mr Hall reported to his superior at Alstom, Mr Hulme, on his impression of what the new management of Mirant would accept. He recorded “Slipform (SCC) to buy five month delay on the Boiler”. When asked about this estimate in cross-examination, he agreed that the time which had been taken to deal with the boiler problems was excessive and that the way in which the Project had been managed before Southern took over was a contributory factor.

He thought that SCC would agree that the delay for civils was only three months but he did not believe that SCC could achieve the turnover for civils in such a short time. He thought that SCC’s tactic at that stage was to claim that the boiler problems were the primary cause of delay and that they were due to Mr Elliott.

This approach was in line with an email to Mr McManus from Mr Owen, Southern’s offsite employer representative, when on 10 September 1997 he said “SCC appears to be fully liable for liquidated damages for delay”.

On 10 September 1997 Arup, in a report to CEPAS, was stressing the need to report factually on the degree of urgency of the investigation of the boiler problems. Its understanding was that Alstom was frightened of the delay because they believed that they would be blamed. Arup thought that Alstom was also concerned that “the unwillingness of GECA to help in taking down the steelwork or loading the foundations further should be documented as it is a matter of recorded fact”. Arup’s note makes it clear that the purpose of the report (already in an early draft) to be produced by Arup in December 1997 would be limited to setting out facts and should not include what is described as “interpretation”.

On 26 September 1997 Mirant held a review meeting of the Sual Project to which Mr Kuester and Mr McManus contributed. It started with the action resulting from the Board Meeting of 13 June 1997. Under “Actions” the minute records that the assessment of the construction programme found that there were significant problems. The meeting agreed what is described as a “Schedule Recovery Plan” which included completing a detailed agreed construction schedule, and developing and implementing a GECA Incentive scheme. It also involved, specifically, assessing the problem of completion of the transmission lines and the substation, matters which were continuing to cause particular concern.

I note that the March Rev E programme gives a date of 1 October 1997 for the activity of erecting the steelwork to drum lift. Arup suggests that this was completed on 20 October 1997, i.e. 19 days late. It may well be that it should have been completed on 15 July 1997, which would indicate a delay of just over three months. This is an example of the difficulties of drawing firm conclusions based on a programme which both sides agree was unreliable and yet formed the basis for subsequent analysis by the experts.

The Progress Reports No. 28 of 5 October 1997 to the employer, PEC, showed a number of substantial delays to other parts of the programme.

On 7 October 1997 a meeting of the consortium took place. Mr Higson was also present. The civil works were being integrated into the whole programme and the overall result was being reviewed. When it was completed it was to be presented to the employer, PEC, as Rev F of the Strategy Programme.

On 11 November 1997 Mr Hall made formal claims against SCC in a faxed letter to Mr Kuester claiming for damage caused to Alstom by the rectification works of the Unit 1 Boiler foundations and what are described as the consequent changes embodied in the forthcoming Rev F programme. The claim amounted to US$31,137,760.63. It is made up of sub-contractor costs, GECA staff costs, financing insurance, bonding and extended warranty. The letter sets out in some detail the assumptions on which the claim is based. The letter makes it clear that these claims are in addition to the claims already submitted to recover the costs incurred on the boiler steelwork and the cooling water pipework.

The assumption continued to be made that the work on the boiler was always on the critical path. A fortnightly construction programme of 15 November 1997 did not include the cooling water intake structure which Mr Stone agreed in evidence was causing concern as being at or near the critical path.

On 1 December 1997 Arup presented the fourth issue of its investigation into the problems associated with the boiler foundations. The first issue had been on 18 August 1997. It was intended as a factual summary of events into the problems and their investigation. It was not intended to ascribe blame for what had occurred.

The introduction set out the history. It noted that detailed surveying had started on 23 April 1997 and after 14 May 1997 Arup had, at the request of CEPAS, investigated the Unit 1 foundations with the purpose of proving or eliminating possible causes of the problem and of identifying the most appropriate remedial measures. The report made it clear that it carried out each stage of its investigations at the request of CEPAS, although as a result of the probe hole results in May 1997 Arup had recommended a ground investigation including coring of the rock in order to calibrate the probe holes.

The report set out a summary of the remedial measures which were undertaken. Mr Higson emphasised in oral evidence that it was, and was intended to be, a factual summary of events.

In these circumstances, contrary to the submissions of Mirant in closing, I draw no conclusions from the report either that Arup was blaming others or by implication accepting blame itself for what had occurred. In particular I draw no inferences from the Report as to whether in the circumstances Arup thought that SCC could or should have addressed the problems of the foundations with greater urgency, or whether they thought it was reasonable for Alstom (Stein) to take down the steelwork before doing the necessary work to the foundations.

On 9 December 1997 the final version of the Rev F programme was published.

On 11 December 1997 Mr Hall wrote to Mr McManus claiming that the total claim for damages resulting from the failure of the Unit 1 Boiler foundations (excluding the claim for delay) was US$7.34 million.

On 15 December 1997, immediately prior to his departure for the United States, Mr McManus summed up what he described as the current status of the Project and matters requiring follow up by his successor.

In a four page letter to Mr Kuester he noted that the Revision F schedule pointed to a five month delay in the Project from Revision E. He said that with the exception of the boiler areas SCC could support a three month slip. With co-operation from GECA, SCC could co-ordinate the schedule so as to accelerate it. He noted that in the past SCC had wasted time at the beginning of the activity.

He said that the administrative and procurement activities needed additional supervision and that the quality assurance team needed to be strengthened.

He expressed concern over Leightons, the Australian firm that had taken over a high proportion of the civil works after New Sampaguita Builders Construction Incorporated (NSBCI) had left and who were making claims against SCC.

Mr Kuester mentioned the possibility that Arup would make claims for additional sums including Project management but did not mention the possibility of CEPAS/SCC making a claim against Arup in respect of the boiler failure.

This was consistent with the attitude taken at the Board Meeting by Mr Kuester on 18 December 1997 which was “accept responsibility for foundation problem and address impact of delay on GECA”.

In oral evidence, Mr McManus said that when he left the site he thought that it was going to be difficult to keep the civil delays to three months regardless of problems over the boiler foundations. He noted that although some mitigation in the timetable had already taken place, Alstom was insisting that they should be compensated for any reduction in delay below five months.

At the Board Meeting Mr Kuester said that Revision F had been agreed by the consortium. SCC set itself the target of reducing delay from five months to three months with the work to be carried out independently of the main construction teams in order to minimise the disruption to the site works.

On 20 December 1997 Frank & Vargesson submitted their preliminary report on Alstom’s claim for additional costs arising from delay to the boiler foundations. The report noted that each month’s reduction in delay would reduce the claim by approximately US$6 million and that it was not unreasonable to expect a reduction of one to two months.

Frank & Vargesson noted that SCC might be liable for liquidated damages. It observed that it was unlikely that any liquidated damages which were incurred on the Project would be to the sole account of SCC. It urged SCC to keep adequate records of any failure of Alstom to achieve critical milestones or to divulge information which may impact on SCC’s ability to achieve Key Dates and/or milestones. Mr Lechner admitted in cross-examination that he had not checked whether or not this had been done.

Mr Benfield replaced Mr McManus as Project Manager from 1 January 1998. He had to admit that he prepared his witness statement, the truth of which he swore on oath, without the assistance of any detailed records. He did no worthwhile analysis when he took over the Project. He appears to have accepted the received wisdom from the consortium that the delay to the boiler foundations was still causing an overall delay to the Project. It was put to Mr Benfield that the delay could not have been more than three months. He said in evidence that he could not explain his error. He also said that he understood that the circulating water intake structure might be a problem but said that he was reassured by Mr Stone that it would be delivered on time.

Mr Benfield, as the Project Manager for the claimant, had responsibility for dealing with claims arising out of the delays on the Project and needed to reach an agreement with Alstom over payments for acceleration. He clearly found himself at a considerable disadvantage in arriving on the Project so late. Before reaching agreements with Alstom in February 1998, he did no analysis of GECA’s claims for acceleration payments. He did not analyse NEIE’s delay claim but relied on Mr Hall’s analysis although he conceded in cross-examination that SCC and GECA’s interests were in conflict. He did not analyse any of the claims of the other sub-contractors. He emphasised that his only objective was to try to get the programme back on schedule.

I do not have the benefit of any commentary from him which might assist me in assessing whether there were other causes of delay apart from the boiler foundations or whether the sums paid in respect of acceleration or claims by sub-contractors were reasonable.

As a result of very late disclosure it appears that another major claim was commenced in early 1998. Southern instructed their London solicitors, Messrs Linklaters & Paines, and leading and junior counsel to draft a claim in the London Commercial Court against Hopewell, the previous owners of Mirant. The claim alleges that Mr Elliott’s company was appointed as sub-contractors under the Sual contract and was paid US$7.351 million for work which was carried out by other sub-contractors. Further it claims that Southern was induced to enter into its agreement to take over a majority shareholding in SCC by misrepresentations made by Hopewell. As I understand it, these proceedings were not pursued.

NEIE had made a claim on 25 October 1997 which was discussed early in 1998 as part of the Mirant/Alstom settlement negotiations. It was alleged that Alstom notified NEIE that the starting date of the works would be 1 February 1997. NEIE was ready to start on 8 February 1997 but was not able to start for two months, until 2 April 1997. Thereafter work finally restarted on 12 September 1997, i.e. a delay of 2l9 days. Arup cannot on any view be responsible for the delay from 8 February to 2 April 1997 (53 days). On 25 February 1998 NEIE’s delay claims were settled by Alstom at $3.158 million. NEIE was also to be paid a bonus of $4,190,000 for accelerating the programme by 60 days for Units 1 and 2. The agreement provided for penalties if the work was not completed on time.

On 5/6 February 1998 GECA and SCC reached an agreement which purported to set out the basis on which outstanding claims would be settled. “It is agreed that the programme is now delayed by five calendar months as a result of a failure of the Unit 1 Boiler foundation and further to this all civil construction works are in delay by an average of three calendar months. For both these delays SCC accept responsibility.” The document goes on to declare that “SCC will make incentive payments to Alstom which will be payable if acceleration of the work is achieved, thus reducing SCC’s liability for delay damages”. It is in respect of this claim that Mirant seeks to recover US$15,799,777 by way of delay and disruption and US$10,273,060 for acceleration.

On the basis of the documents available to me (which are far from complete) it is clear that the acceleration programme was required for the civils irrespective of the failure of the boiler foundations. I have no reason to believe that the missing documents would provide any support for a contrary view.

The meeting of the CEPAS Board took place in Hong Kong on 23 February 1998. Mr Benfield reported on the Sual Project including the cost impact of the delay. The problems relating to the transmission lines were also raised at the monthly meeting and Mr Benfield said that they provoked a heated debate.

On 25 February 1998 Alstom entered into a settlement agreement with NEIE. They agreed to settle outstanding claims in the sum of US$3,158,648 and pay a lump sum bonus of US$4,190,000 for acceleration of the works. Mr Benfield said that he did not consider whether the incentive measures or what is described as the tight programme of works would be needed in any event. He said that he made no analysis before agreeing to pay the delay claim or to support the acceleration payment for the shortening of the overall programme.

Although Mr Hall made and signed the agreement, a memo of 3 March 1998 from Mr Hall to Mr Benfield acknowledged that Mr Benfield signified his agreement in a telephone call with Mr Hall on 24 February 1998. Surprisingly there is no indication that his superior, Mr Kuester, was involved in the process.

On 26 February 1998 Mr Stone wrote to Mr Hall expressing concern at the lack of progress by Leightons in the design of the cooling water process and at the fact that the Project was already two weeks behind the revised schedule.

On 28 February 1998 Leightons themselves complained to Mr Stone at delays which they said SCC was causing to the work on the cooling water pump house. This was caused, they said, by the installation of the conveyor gantry to the Unit 1 Boiler area. The letter ended, “As you are aware, the construction of the pump cavity and the stop log area is critical to the overall site programme”. Mr Stone agreed in evidence that it was a critical activity.

There continued to be problems with the cooling water intake. The claim was made to Leightons that the completion of works to the pump cavity was two months late. This claim was rejected by Leightons. Mr Stone said in evidence that Leightons’ work was not going to schedule or being carried out in a workmanlike manner.

In its response dated 10 March 1998, Leightons acknowledged the importance of the cooling water intake in these terms:

“We do understand that the timely completion of the CW intake structure is critical to the overall completion of the Project and we are prepared to add additional resources to complete the works as quickly as possible.”

On 10 March 1998 Mr Stone sent Mr Benfield a Sual Project Incentive Programme for CEPA employees based on a Unit 1 Boiler first fire on December 12 1998. It should be noted in relation to critical path issues that the date for flooding the cooling water intake structure was extended to 30 June 1998.

On 12 March 1998 one of the parties providing outside finance wrote to CEPA. It noted that Brown & Root was projecting a five month delay on the Project from the estimated completion date of June 1999. This was said to be due to the settlement of the foundations in Boiler Unit 1. It was noted that this would not affect the target date of 28 June 2000 and the National Power Corporation would not be entitled to any damages. It also noted that should the consortium members refuse to pay for the late delivery of the Project, PEC may call in their performance bond.

The letter was sceptical of the notion of a five month delay noting that:

“The Project cost does not vary very much from the original plan submitted in November 1996. CEPA does not feel that the five month delay discussed by the Independent Engineer (Brown & Root) will have a material effect on the Project cost as stated in the November 1996 Revised Base Case because in the Revised Base Case CEPA had already imposed a six month cushion Projecting completion in December 1999. The Independent Engineers’ estimated five month delay is based on its original estimated Project completion in June 1999. One of the other potential problems areas, the transmission lines, was said to be expected to be completed by the end of January 1999.”

On 14 March 1998 Mallesons published its second draft of the incentive agreement between SCC and Alstom. The benchmark of First Fire is used although the benchmark under the contract is commencement of reliability testing. As Mr Benfield explained to Mr Hall in a letter dated 22 March 1998, the agreements were intended to resolve all outstanding claims between the parties. On Mirant’s part, as Mr Benfield admitted, the agreements were not based on any detailed analysis.

The Incentive Agreement was linked to a new Rev G strategy programme. The first draft was circulated on 20 March 1998. The final Rev G plan was issued by the consortium on 7 April 1998.

On 27 April 1998 Mr Hall wrote to Mr Benfield to notify him of payments amounting to $9,528,282.93 in respect of payments for delay made to NEIE, AG & P and EEI and GECA staff costs. (EEI was the sub-contractor responsible for the erection, testing and maintenance of the boiler sub-packages Alpha and Delta, flue gas desulphurisation plant (FGD), the balance of plant (mechanical) for the turbine hall, the turbine generator and the coal and ash plants). The payment for GECA staff costs amounted out of that sum to $4,221.796.93.

The next draft of the acceleration agreement between Alstom and SCC acknowledged in Recital B that SCC had accepted full responsibility for the delay in the construction programme, said to amount to 153 days, due to the failure of the Unit 1 Boiler foundations and that the extent of the delay was reflected in the change in milestone dates from Rev E to what is described as the F2 Strategy Programme which extends the original dates by 153 days. This draft clearly has the reliability trial as the defined acceleration milestone. This is in conformity with the original contractual provisions. An SCC estimate dated 12 May 1998 had the total additional cost to SCC estimated at $78,898,588.

Negotiations continued with a further letter from Mr Hall dated 18 May 1998 which emphasised that the Incentive Agreement would operate by reference to Steam to Set (not Reliability Trials). “If GECA reduce the Steam to Set Rev F date for each unit by two months, total bonus of $8,433,594 will be recorded. If GECA reduces the steam to set on Rev F date for each unit by one month, total bonus of $5,629,062 will be recorded.”

Work on the Project was clearly now progressing well. Mr Stone in a memorandum to Mr Jackson, the plant manager, was able to report on 4 May 1998 that there remained two critical areas, the boiler foundations and the pump house for the cooling water system.

An activity schedule of 22 May 1998 showed a Projected completion date of 16 October 1998 for the commissioning of Unit 1 and 28 November 1998 for Unit 2.

There remained serious concerns about the quality of Leighton’s work (see email of 25 May 1998) from the Assistant Project Manager. This was to remain a concern.

On 29 May 1998 Mr Benfield approved Alstom’s Incentive scheme with ECCO Asia which involved paying a programme bonus of US$1,023,060 if they achieved all the milestones. It was envisaged that this would involve ECCO Asia in nearly doubling its staff on site from 370 to 703. The initial bonus was to be paid on mobilisation of the additional resources.

An insight into the problems of computing the cost of delay is demonstrated by Mr Benfield’s email to Ms Joyce Kwan dated 13 June 1998. It reads:

“There is ‘no official commercial operation date’. The boiler delay caused a five month schedule delay and we have developed a recovery plan called Revision G of the schedule which if we are able to recover it, will recover two months of the five months lost. Our agreement a couple (sic) ago was that we would pay for three months of schedule delays with an option of two months if we needed it.

Our boiler delay will not affect the installation date of the transmission line which is scheduled to be complete by the end of October 1998. However by losing three months of the schedule we will not require the transmission until some time in December 1998.”

This email was written in response to Ms Kwan’s email on behalf of underwriters seeking confirmation of the actual date when the plant could operate commercially. It is clear that the plant could not operate commercially until the transmission lines were fully operational.

On 11 September 1998 Brown & Root set out in Report No. 31 its assessment of the Project as at 31 August 1998. It described the Revision G Strategy Programme (April 1998) as “optimistic”.

The Report noted successful progress on the erection of Boiler Units 1 and 2 which were nearing completion. The dates for the start of the reliability trials were expected to be 1 March 1999 and 1 June 1999 respectively for Units 1 and 2. The Report noted that the excavation of the cooling water intake channel was approximately one month behind the new schedule.

The target date for the completion of the new Labrador substation for the transmission lines was 26 January 1999. The Report explained:

“The export of power from one unit can be accomplished through the 230-KV tie line and the new bay at the old Labrador substation. The new Labrador substation must be complete to be able to export power from both Unit 1 and Unit 2 simultaneously. Synchronisation of Unit 2 is presently scheduled for March 18 1999.”

On 1 October 1998 Mr Hall reported progress against dates in the Rev G programme. There were problems over the first coal shipment to the Boiler plant. The coalyard was not yet ready to store coal which had been delivered but this was said to be a few days away. The work on the cooling water discharge channel had yet to be completed. Mr Hall was concerned at the impact of such delays on the Project.

The management synopsis of 8 October 1998 noted that a typhoon passed over the site in the early hours of 19 September 1998 causing damage on a broad front. This caused work to be suspended. The report noted that Alstom claimed for force majeure and a consequential extension of time of five to six days covering the period during which commissioning of the Unit 1 Boiler was halted to the point in time when the programme was resumed. The Report also warned that further claims may arise. I am not sure whether or not an allowance has been made for the period of time for which Alstom was entitled to an extension.

The report also noted that a strict weight restriction to the main site access road was imposed by the local municipal council. It said that this had not yet caused delay but there was potential delay to the delivery of chemicals required for the Unit 1 Boiler chemical clean and the demineralised water plant. This meant that the chemicals would need to be brought in by sea. This required a special licence.

In relation to the new Labrador substation, Mr Hall reported that the interface between the Sual protection equipment supplied by CEPA and the provision of the new Labrador substation had not been engineered. He warned that “both of these issues are now perceived to pose a significant threat of delay to the post-synchronisation testing plan (December 18 1998 and on) and therefore the Project as a whole”.

Mr Hall’s report on 29 October 1998 was less optimistic. It was now hoped that the first coal shipment would take place in the first week in November 1998 (later postponed to 28 November 1998). The access bridge to the site remained closed. The preparation of the coalyard was now causing grave concern. There was no information on the construction of the limestone jetty.

In the meantime, on 10 October 1998, Mr Stone reported that First Fire in the boiler had been achieved triggering incentive payments. Mr Stone reported that this indicated that “we have been successful at cutting two months off the construction schedule over the last 13 months”. This implies that in his view the period of acceleration started well before the date of the acceleration agreement with Alstom.

It is also worth noting that CEPAS’ law firm in the Philippines instructed by Mr Kuester made a formal claim against New Sampaguita Building Construction Limited. The claim, in respect of which they requested arbitration, amounted to US$76 million including the cost of the agreement with Alstom for three months’ delay to the Project amounting to US$39 million. These figures are rather similar to the claims against Arup in this litigation.

On 12 November 1998 Mr Hall wrote to Mr Morris, the employers’ representative on site. He noted that with the three month delay to the programme, the revised date for the delivery of coal under the Rev G programme was 31 August 1998. As a result of delays caused by back energisation the first coal delivery was delayed until 1 October 1998. Mr Hall expressed concern that there had been numerous extensions to the delivery date and it was now becoming critical to the overall commissioning programme. Alstom was claiming that the delays were impeding its ability to achieve commencement of the reliability trials on time and was therefore claiming an extension of time.

On 5 December 1998 Alstom issued its certificate for the takeover of the first part of the coalyard. Until this had occurred coal could not be accepted on site. Mr Hall agreed that this was a few days less than three months from the reliability trials. There were other problems to be resolved in the coalyard and in particular the conveyors had to be installed on a section by section basis. It was then estimated that it would take 10 to 14 days to unload the first shipment of coal.

On 9 December 1998 Mr Reynolds, in his capacity as General Counsel of CEPAS, wrote to Mr Thomson at Mallesons asking for his firm’s assistance on five separate issues relating to the Project. The fifth issue was as follows:

“5.

Finally, limited consideration of our possible counterclaims against Ove Arup & Partners (“OAP”) arising from their involvement at Sual … We propose to use these counterclaims in our ongoing negotiations with OAP in relation to their outstanding payment claims … (reference to Mr Delkousis)

In my opinion you and your team can add real value to Sual. It is important however for us to strike a balance between your on-going role and the transfer of know-how from Shajiao [another Project]. I would therefore propose a monthly retainer for a period of nine months with a bonus to be awarded at the end of this period. This bonus would be at my discretion and in the order of 20% - 30% of the retainer. It would be payable should I determine that real value has been added by your firm. This is vague but I am certain your team is adding substantial value”

The Incentive Agreement between Alstom and SEC had not been formally completed. In an email from Mr Benfield, which went amongst others to Mr Reynolds, he confirmed that he had received advice from Mr Thomson at Mallesons that delay payments under the contract were tied to the reliability trials.

Despite all the problems on the contract, the budget forecast as at 31 December 1998 showed that the offshore and onshore contracts were on track for completion at substantially less than the original budget.

On 6 January 1999 the Unit 1 generator at the plant failed. The parties are agreed that it was an intervening event and that subsequent delays cannot be ascribed to the failure of the Boiler Unit 1 foundations but are the responsibility of Alstom.

However various matters after that date shed light on the issues which I have to decide. The cooling water outlet channel was defective and required replacement. A letter from Mr Hall to Mr Benfield dated 5 May 1999 made it clear that in his view this was due to faults in construction. Serious remedial works were required and this resulted in critical mechanical and engineering works being suspended for two weeks. Mr Hall said that the lack of availability of the CW outlet channel itself had a direct impact on the timetable for commissioning and that this was in equal proportion to that of the generators. It was claimed that the problems might lead to delays to the reliability trials, then scheduled for 21 August 1999 and 13 September 1999.

On 6 May 1999 Mr Thomson, still at Mallesons, made a presentation to Mirant. We do not have a transcript of the detailed presentation but the Powerpoint discussed Arup’s potential liability in these terms:

“Issue

Potential liability of Ove Arup in relation to the boiler foundation problems

Facts

A review of Ove Arup’s role has discovered evidence to suggest a potential claim, particularly in relation to their possible role in monitoring the foundation/excavation works

•

A number of evidentiary uncertainties may impact on any entitlement to recover from Ove Arup in particular the role of Stewart Elliott

•

Draft contract issued.”

It is clear that by May 1999 Mirant thought, and was advised by Mallesons, that it had a worthwhile claim against Arup albeit that there were difficulties.

On 10 June 1999 IFC, as representatives of the independent investors, wrote to CEPAS referring to the Construction Contract and the Supply Contract, to the target dates for plant reliability of December 1 1998 for Unit 1 and March 1 1999 for Unit 2 and asked what was being done to collect the liquidated damages. It noted that under s.3.02(a) and (e) and/or 6.10(ii) of the common agreement a waiver would be required in relation to any delay in pursuing these claims.

On 9 July 1999 a meeting took place in Hong Kong. Representatives of CEPA and Alstom attended including Mr Benfield, Mr Hulme and Mr Hall. Mr Thomson was present as the Mallesons partner advising CEPA/SCC, together with a claims consultant.

The purpose of the meeting was to set out a formula for resolving the claims within the consortium and to consider the way ahead to the conclusion of the Project. There was a discussion at the meeting of how the courts might view activities to mitigate losses caused by delay. At this stage CEPAS said it was preparing a substantial claim against Alstom amounting to 257 days delay for Unit 1 and 188 days delay for Unit 2. This was said to take into account the number of days in respect of which an extension of time had been granted.

The meeting also discussed Alstom’s claim against SCC. CEPAS argued that the Incentive Agreement should “be set aside” as the parties had not agreed the final terms. However the discussion took place on the basis that a form of agreement or understanding had been reached on 6 February 1998. The agreed action was that Alstom would calculate SCC’s liability taking into account the Steam to Set data achieved and the forecast date to commencement of a successful reliability trial.

On 14 July 1999 the Southern Company (acting for PEC as employer) made a formal claim against Alstom. After referring to the various contracts, it noted that the letter dated 4 February 1999 granted an extension of time of four days to 5 December 1998 in respect of Unit 1. The date for Unit 2 remained 1 March 1999. Apparently no other formal extensions of time had been requested by Alstom. The claim was for US$37,296,000 in respect of delay to Unit 1 and US$14,406,000 in respect of Unit 2.

On 23 November 1999 Mallesons sent CEPAS an Advice following a review of the responsibility of SCC for delay to the Sual Project. The Advice was written after a detailed review of numerous documents and the various monthly reports. I cannot be certain that all these documents have been made available in this litigation.

The objective of the review was stated to be to determine the number of days of critical path delay in achieving the commencement of the reliability trials. Although it concluded that critical Alstom failures before the failure of the foundations would be difficult to prove, it noted that in November 1996 the Boiler steelwork was approximately six weeks late. In May 1997 the supply of materials was six weeks late. The FGD (Fuel Gas Desulphurisation System) was nine weeks late and the raising of the steel drum was nine weeks late.

The report was not concerned directly with delays or inefficiencies in SCC’s performance but it noted delays in contract effectiveness and recorded Mr Higson’s understanding that these delays resulted from

“(i)

Stewart Elliott’s fear that the civil works could not be completed on time and delaying contract effectiveness gave the civil contractor time to progress its works, and

(ii)

difficulties in obtaining confirmation that NPC would provide transmission access when required – there was no point to rushing through if transmission access was not in place.”

This may point to Mr Elliott regarding the transmission lines as being on the critical path and concluding that until the delay had been resolved there was no urgency in dealing with the boiler problem or the civils. Since he did not give evidence I cannot say more than that this may be one of Mr Elliott’s explanations for his apparently leisurely approach to the resolution of the boiler problem.

Mallesons’ conclusion for the period before the boiler foundation failure was that it might be possible to question the effect of delays resulting from the supply of steel and the drum and to put the onus on Alstom to demonstrate why there was not a four to eight week delay to the Project prior to the boiler foundation failure.

Secondly, Mallesons concluded that, since there was no problem with the foundations of Unit 2, Alstom should be asked why Unit 1 steel erection did not take place on 7 July 1997 when the boiler foundation was available. (It appears that work on steel did progress in respect of Unit 2 on 7 July 1997 or thereabouts but stopped when Unit 1 again became available for steel erection.) This issue of parallel working is raised by Arup as one of its defences.

On the separate point of retention of documents, Mr Kuester as the then Managing Director of CEPA, agreed that the documents relating to Mr Elliott’s time as Managing Director of SCC and CEPAS were of considerable importance. They should have been retained.

In relation to other delays between the Unit 1 Boiler foundation failure and the generator failure, Mallesons’ report flags up the possibility that Alstom was responsible for some critical delay in relation to the circulating water discharge channel. It was originally programmed in Rev G to be completed by 31 July 1998. It was not completed until November 1998, four months late. The circulating water intake channel was two months late. This was the channel which failed on 6 March 1999.

The Mallesons report also notes that the Rev F programme indicates 61 days from First Fire to steam to set whereas the Rev G programme allows 67 days. Alstom gives no reason for allowing itself an additional 6 days’ float. I have no reason to disbelieve the comment attributed to Mr Higson that CEPAS were “hopeless” when it came to programming.

In conclusion the Mallesons report says that First Fire should be the benchmark for delay in respect of claims from Alstom, that this would eliminate the six days float but it would allow the three days in September 1998 for typhoon Gading when no work could be done.

In 1999 CEPAS was renamed CEPA Construction (Hong Kong) Limited. It had a deficit of about US$37 million and was dependent on Southern as the ultimate holding company to fund its activities. This result took into account a long term loan to a fellow subsidiary of US$73 million.

A detailed log shows that testing after the generator failure started on 5 July 1999. Permission was given to increase to full power on 12 July 1999 and on 29 September 1999 Unit 1 reliability trials began.

It appears that on 1 February 2001 Southern divested itself of its interest in CEPA (Southern Energy Asia-Pacific Construction) Limited (SEAPCL) and the name was changed to MAP Construction (Hong Kong) Limited. The date is important, because although I have not seen the agreement I have been told that it did not require Southern to preserve documents which may be relevant to these proceedings.

On 2 May 2001 on a Mirant letterhead, Mr Reynolds described himself as General Counsel for and on behalf of MAP Construction (Hong Kong) Limited and SCC. The letter made claims against Arup arising from the failure of the boiler foundation and the cooling water outfall channel. The letter refers to “your letter dated 28 April 2001 (without prejudice) in which Ove Arup continues to deny liability”.

It is clear therefore that Mirant was making a formal claim against Arup significantly before 28 April 2001. It is very surprising in these circumstances that no proper arrangements were made for the retention of documents before Southern divested itself of its interest in Mirant.

Previously a claim had been made against insurers as long ago as 9 September 1998. Mr Benfield tried to suggest in evidence that at that stage he did not think there was a worthwhile claim. The insurers clearly did. They refused to extend insurance unless the boiler claim was withdrawn.

Settlement discussions took place between Mirant and Alstom on 13 September 2001. Mr Thomson was able to report to the Board Meeting of Mirant Asia-Pacific Limited that “agreement had been reached with Alstom for a net payment to Alstom of around US$2.5 million for settlement of all the claims in relation to the construction of the Sual plant”. These agreements were made without any admission of liability.

On 27 September 2001 Mr Thomson and Ms Lam were able to brief the Mirant Board on the agreed principles of settlement of the dispute on the delay to the construction of the Sual power station including the dispute with Alstom. These were approved and the final negotiations and agreement were delegated to one of five senior officials including Mr Kuester, who was by then Chairman of the Board. I deal with the details of the Settlement Agreements when I address Issue 3 of the agreed list of issues at Paragraph 632 below.

A Settlement Agreement dated 21 August 2003 concluded the dispute with re-insurers. This had involved proceedings in Hong Kong brought by re-insurers to enforce an arbitration agreement. They agreed to pay SCC the sum of US$4.5 million to include interest in a sum relating to rectification costs which SCC have been unable to quantify. Also paid was a sum of US$600,000 in respect of legal and associated costs of Mirant companies. Mr Delkousis signed on behalf of Mirant.

On 1 December 2004 SCC and Mirant entered into a Deed of Assignment on the advice of Mr Reynolds, who was by then acting as consultant to Mirant/SCC. On 21 July 2004 I had dismissed the claims by SCC. SCC intended to cross-appeal but instead entered into this assignment.

Under paragraph 2.1(a) of the assignment SCC assigned its claims to Mirant but under 2.1(b):

“If the assignor receives any money arising out of or in connection with the claim or the appeal it must immediately notify the assignee and the assignor:

i.

will hold such money on trust for the assignee, and

ii.

will deliver such money to the assignee within seven days of receipt of such money.”

The Deed is signed by Mr Bautista, as Director and President of SCC and by Ms Lam as an authorised signatory of Mirant.

I am bound to comment that such an assignment can only assign any existing rights of SCC. It cannot create new rights. It is difficult to see how it can be effective unless SCC is entitled to introduce the argument that it has entitlement under the contract. This argument has already failed.

Delays to the Project other than to the Boiler Foundations

This section investigates other delays to the Project and compares them with the total delays to the boiler foundations.

I have already found that there was no critical path analysis before November 1997 and that the Project was in serious delay as was acknowledged by the substitution in February 1997 of the Rev E programme for the previous Rev D programme. I have also noted that this new programme was thought already to be in significantly further delay by the beginning of April 1997.

There is little direct evidence to assist me in determining accurately the precise extent of the delay to the civils but there are significant clues. Also the programming experts, and in particular Mr Robinson, have been able to assist me.

I have already referred to a number of reports. Various reports have also estimated the percentage degree of completion of tasks against Project dates. This may be a rather rough and ready measure both in terms of accuracy and also because items not thought to be at or near the critical path may proceed more quickly or more slowly than initially planned taking into account a variety of circumstances.

The Brown & Root Consortium Progress Report No.21 dated 7 March 1997 said that the actual 12% against planned activity of 16% showed a delay of one and a half months. If the delay is reviewed on an area basis the delay to the common works had already grown to one and a half months reviewed against the strategy programme Rev E which had been introduced one month before.

The Report noted that delays were being caused by the slow rate of pouring concrete, the lack of materials and the need to increase civil staffing and construction equipment. The critical items in delay were said to be the details of the source and location of the Raw Water Supply and the Water Treatment Plant.

Under the heading “Sual 6 Precipitators” the Report said that:

“The manufacture period of the precipitators has extended by three month (sic) but on a phased delivery means that the first item will be available four months before programme delivery complete, seven months before the erection phase so these activities do not threaten the programme.”

Under the heading “Sual 16 Design of the Flue Gas Desulphurisation System (FGD)” the Report concludes:

“The six month delay of this design activity is at present affecting the end date of the Project.”

Under “Sual 10 Design of Water Treatment Civil Works” the Report records:

“The civil design of the water treatment areas is showing five months’ work to complete. This delay has utilised one month float in the programme … Impact on end date cannot be forecast at this time.”

The relatively unsophisticated analysis did have a positive benefit in that having concluded that “at present the critical item remains the details of the source and location of the Raw Water Supply and the Water Treatment Plant”, the consortium changed its plans for the raw water system so that it ceased to have the potential to delay the Project.

In assessing the impact of the delay that is noted in the Report, and indeed in Mr Lechner’s main report, para 5.26 (“The evidence suggests the potential delay is between one and two months across both units”) I observe that this delay has occurred not in the middle of a programme but in one which had been introduced only one month before to correct pre-existing delays. Already significant further delays were occurring when the ink was hardly dry on the revised programme.

The Brown & Root comments must be read in the context that the slow rate of concreting, the lack of materials and the need to increase staffing and equipment were all problems which Southern concluded in June 1997 needed to be addressed and took most of the rest of the year to pull round.

Mr Robinson attempted to analyse the earliest date on which the current reliability trials could have started taking into account his corrected version of the Rev E programme as at 20 March 1997.

From this analysis the critical path of the civils would appear to go through the flue gas de-sulphurisation plant (FGD) and the electro-static precipitators. The waste water system had the capacity to delay the commencement of the plant reliability trials beyond the completion of the other works.

Mr Lechner concluded in his main report at para 8.38 that the critical path in March 1997 went through the coal jetty and the fuel supply. In his main report at paras 8.96 to 8.98 he concluded that delays to the circulating water pipe backfill in the boiler unit had the potential to delay Boiler Unit 1 for 37 days for seven days, and Boiler Unit 2 for 23 days, based on six-day working.

In relation to the Revision E programme I have reached the following conclusions:

1. By the end of March 1997, one month after being introduced, it was already in significant delay.

2. The evidence before me and the time that had elapsed between the introduction of the revised programme and the end of March 1997 makes it impossible to predict with accuracy what the scale of delay would have been in that period without costly measures being taken to remedy the general and specific problems identified in the Brown & Root Report. Mr Lechner’s estimate of 42 days (since February 1997) may well be a reasonable estimate.

3. These delays did continue to increase until the end of the year when the incoming Southern management started to reverse the trend.

4. By the end of 1997 there appears to have been the potential for up to four months’ delay to completion of the Project caused by problems other than Boiler Unit 1. This conclusion is based on what must inevitably be a somewhat uncertain analysis because it uses uncertain data but is amply supported by the contemporaneous documents which have been disclosed.

5. On the basis of Mr Lechner and Mr Robinson’s analysis, the boiler unit was not on the critical path as of 1 April 1997. Had a monthly critical path analysis been undertaken, as would have been normal at the time in a similar Project in the United States, the parties would have been able to determine how much time was available (if any) to deal with the boiler foundation problem before it affected the Project as a whole and therefore how urgent it was for the consortium to agree and implement a solution.

In paragraph 72 of the Schedule of Claims Mr Lechner’s concession that apart from the problems to the Boiler the Project was 42 days in delay was withdrawn because “further programming analysis had shown that while certain civil activities were late at the time of the foundation failure, which had the potential to delay the Project critical path, absent the boiler foundation failure, SCC could have (and most likely would have) implemented sufficient acceleration measures to recover the pre-existing civil delays such that they would not have resulted in the critical Project delay”.

This statement was made on 28 April 2006. Although the statement does not explain precisely how the 42 day period was calculated it would appear to equate with the just under one and a half months’ delay in the civil work in Consortium Progress Report No. 21. I cannot accept Mr Lechner’s conclusion that the consortium would have made up the 42 days by implementing acceleration measures without any cost to SCC. It is clear that the delay to April 1997, which he estimated at 42 days, was an increasing delay as is demonstrated by the following Reports.

Consortium Progress Report No. 23 dated 5 May 1997 shows a delay in the supply of materials of 43 days. The Report says that the construction programme is being re-scheduled to address the problem. Onshore delays are said to be “as per the April report”. The delay to the common services has slipped to ten weeks.

Consortium Progress Report No. 24 dated 5 June 1997 indicated further slippage in the programme for civils. Overall delay to progress of the civil works was said to be 21% against a planned 30%. The primary reasons were given as a slippage in the rate of civil progress and the cessation of Boiler Unit 1 erection. Slippage in relation to common services is demonstrated by an estimate of 25% complete against a planned percentage of 41%, i.e. a slippage of 16%. The Report noted extensive delays in other areas of work.

That these reports involve a good deal of speculation is demonstrated by Mr McManus’s critical initial report to Southern on 21 June 1997 a few days after his arrival on site, to which I have already referred in detail. Since there was no Civil Project Management Schedule or consolidated Project schedule, it is difficult to see how he or Brown & Root were able to gauge the progress of the Project with any accuracy. Nevertheless they show a trend.

Although it was an article of faith with Alstom and others that the boiler was on the critical path no-one has done a critical path analysis as at the date of Mr McManus’s arrival on 17 June 1997. I am therefore unable to reach a firm conclusion as to whether or not at that date the boiler works were on the critical path or, as is likely, other civil works were further delayed so that they remained on the critical path.

By 5 July 1997 the Consortium Report indicated that delays on civils had slipped from 12 to 15 weeks (29% achieved against 54% planned). This was said to follow the trend of recent months. It is also only an average. For example, the coal jetty was estimated to have achieved 22% completion against a planned 49%, i.e. a slippage of 27%. The water treatment plant showed a slippage of 37.6%. The report indicated that progress against plan had continued to slip. It stated particular difficulties, “Results to date indicate that productivity must be increased by a factor of three in the case of rebar and by a factor of four in the case of formwork … equipment and labour are currently a concern where additional resources and supervision are being sought”.

Mr Stone’s impression when he arrived on site was similar to that of Mr McManus. In evidence he accepted that a number of areas were substantially in delay including networks and road crossings, water treatment, coal transfer towers, cooling water outlet pipes, FGD, the coal jetty and the turbine hall. There was also a serious problem with concreting.

The period from July to September 1997 was a period of crisis management as Mr Stone acknowledged. This did not only refer to the urgent steps which were being taken to address the problems caused by the failure of the boiler foundations but also to the attempt to address all the other problems on site. Increased manpower and improved methods of working were required if aspects of the Project other than the boiler foundations were not to slip further behind schedule.

The Consortium Progress Report of 5 August 1997 shows a further slippage. Surprisingly the percentage achieved for common services is recorded as having been reduced from 29% to 23%, whereas the percentage planned has increased from 54% to 61%, giving a deficit which has now risen to 38%.

The figures for individual activities show some oddities. The percentage achieved for the coal jetty has apparently declined from 22% to 6%; that for FGD has slipped by 10% (the August schedule miscalculates the slippage by 10%); raw water cooling, building and water treatment plant still show a deficit of over 30%.

The delay and slippage of the common services was the subject of a re-assessment by SCC’s new management during July 1997 in relation to resources and programme.

The continuing problems reflected in SCC’s own progress reports indicated that on the basis of the preliminary assessment in June 1997 the Project was approximately four months behind schedule and unless corrective action was taken this deficit would grow.

The Consortium Progress Report No. 27 dated 5 September 1997 indicated that common services were still slipping overall. The percentage achieved was back to 26%, the figure of two months earlier. The percentage planned had increased from 61% to 68% and the overall deficit had increased to 42%. This figure is increased to a deficit of 48% in Progress Report No. 29 for November 1997 and to 51% in the Report of December 1997 (Progress Report No. 30). This is not evidence of a reduction of delay.

By this stage the remedial work on Boiler Unit 1 had been completed. Unit 1 showed 61% achieved against 83% planned and Unit 2, 32% achieved against 56% planned, a smaller deficit than for the common services.

Consistent with the further delays in the civils, the management synopsis of the Consortium Report states that “turnovers to mechanical and electrical works has not been achieved and general lateness is in the order of five months”. The Report goes on to state that “the civil delays will not exceed the boiler and could be mitigated to three months against the strategy programme”. It is difficult to see from the Report clear and hard evidence for this assertion.

Mr Robinson’s detailed analysis is that the common services may have been in delay by as much as five and a half months in September 1997, the time when the remedial work on the boiler foundations had been completed. This is consistent with the evidence in the contemporary reports.

Mr Robinson calculated the anticipated date for the reliability run (without mitigation) at this stage as:

On this analysis the FGD plant, the waste water treatment, the cooling water supply system, the electro-static precipitators and the ash systems had as great or greater a potential to delay the reliability trials as at the dates when the remedial works on the boiler were completed in September 1997. In his closing submissions Mr White QC for Mirant agreed that the Waste Water Treatment, the Cooling Water System and the Ash Systems were not linked to the boilers.

Mr Robinson demonstrates in his evidence that much of this delay was at best only partially recovered.

The 20 October 1997 version of Rev F programme shows that some changes were made to the anticipated date for the reliability run (due under the Construction Contract to commence on 1 December 1998). The dates now shown are (compared to the dates in the previous table, minus equals earlier):

On this basis the FGD plant, the waste water treatment system, the coal supply system, the precipitators, the ash systems and the turbine generator systems together with the Unit 1 Boiler were at or near the critical path. If someone chose to have the Unit l Boiler as the activity on the critical path it would be necessary (if it was possible to achieve it) to expend substantial additional resources on the other activities to ensure that they were completed before the Unit 1 Boiler foundations.

Mr Robinson compared the anticipated dates of the reliability run for those activities with the Rev E programme. Under Rev E the figures compared with Rev F were as follows:

Whereas on Mr Lechner and Mr Robinson’s analysis the Unit 1 Boiler steelwork was in fact close to but not on the critical path in March 1997, the problems of the boiler foundations had in the Rev F Programme put the boiler foundations on the critical path. The point which needs to be made is that the delays to the other systems and the delays to the civils were still in many cases increasing, whereas from this point on it appears that the boiler foundations were on course or, if anything, able to catch up any existing delay.

I have already noted and accept Mr McManus’s opinion in his farewell report in December 1997 that he thought it was going to be difficult to keep the civil delays to three months. It would appear from the analysis which I am presently undertaking that they had been significantly in excess of three months in a number of areas. This again confirms the trend of the evidence.

As with previous revisions there is significant evidence that Alstom designed the Rev F programme so as to allow float for its own activities. The duration of various activities was extended between Rev E and Rev F. The completion of the steel erection for Unit 1 was extended from 100 to 168 days. Time allowed for erection of the boiler pressure parts for Unit 1 was extended from 154 to 220 days. The evidence is that if these activities had been reduced in time they would not have been on the critical path. However, if you take actual delay as against the Rev E estimate it shows delay reduced by 68 days, i.e. to 3 February 1999, a delay of 39 days.

On 23 March 1998 the consortium agreed the Rev G programme. Mr Robinson in his expert evidence produced a table setting out the earliest dates on which the Plant Reliability Trials could have taken place bearing in mind an up to date assessment of activities. They are:

The Rev F2 programme, issued at the same time as the Rev G programme, showed changes to the F2 programme which Mr Robinson says, and I agree, indicate that in certain areas there had been slippage between 20 October 1997, the date of the original issue of the programme, and March 1998. This is consistent with the internal evidence that it took the new management on site most of the autumn of 1997 to turn the Project round. Indeed there is evidence that it had not been turned round completely by December 1997. The effect of the further slippage, Mr Robinson suggests would, without the acceleration measures incorporated in Rev G, have taken the start of the reliability trials to 7 June 1999. In Mr Robinson’s view, this delay was caused, not as a consequence of remedial works to the boiler foundations but by reason of other causes. These included in particular the waste water treatment plant, the turbine hall, civil work, the ship unloaders and coalyard commissioning.

As a result of his comparison between the F2 and Rev G programmes Mr Robinson concludes that the acceleration took place in areas which had nothing to do with the boiler problem – the ash disposal system, the cooling water system, the coal handling control building, coal commissioning and the chlorination plant. Mr Robinson’s evidence on this was not challenged and I accept it.

Arup’s case is that there were substantial delays in areas other than the Unit 1 boiler foundations which needed to be accelerated and were the subject of the draft Incentive Agreement.

Recital B of the draft Incentive Agreement states:

“There have been delays in the performance of the works. SCC accepts responsibility for a 153 day delay due to the failure of the Unit 1 boiler foundation between 1 April 1997 and 1 September 1997 as well as from an average approximate 3 month delay across the other civil construction works as reflected under the F2 strategy programme.”

Without analysing what the delay is in individual cases, Arup contends rightly that it is not possible to know whether individual items would have been on or near the critical path and would or might have delayed the plant reliability trials. The three months’ delay for civils, even if accepted as being correct, is only an average. It is likely that much of the acceleration involved other activities which would otherwise have been as delayed or more delayed than the Unit 1 boiler.

I agree that it is difficult to predict with accuracy when the item of civil works would have been completed if it had not been for the failure of the generators but Mr Robinson’s table is instructive:

Of these, the coal supply system and the cooling water system were independent of the Unit 1 boiler steelwork. One would have been completed one month later and one at the same time as the Boiler Unit 1 steelwork.

I conclude both on the basis of the contemporary evidence and the subsequent analysis, that in fact the acceleration and incentive agreements enabled the civils to be accelerated and were not properly attributable to any delays caused by remedial works to the Boiler foundations.

For completeness and in order to confirm this conclusion I now consider in detail those of the activities to which reference has frequently been made: (1) the coalyard and coal jetty, (2) the cooling water system and (3) the provision of the transmission lines.

The coalyard and coal jetty: I have already referred to a number of references in the contemporaneous documents which expressed concerns over the delays to the coalyard and I have set out part of Mr Robinson’s analysis which follows through the revisions in the work programmes to reflect the expected delays.

I accept Mr Robinson’s analysis of the delays set out in his main report, s.7.0 and his second supplemental report, paras 18-22. There were extensive delays to the commissioning of the coal system which are recorded in the documents and these delays have nothing to do with the problems relating to the boiler foundations. There is no documentary evidence to suggest that work was deliberately delayed because of any delays caused by work on the foundations.

The projected date for completion of the coalyard, ready for deliveries, was 1 July 1998. On 18 August 1998 Mr Hall gave notice to Mr Stone of delay and disruption to the electrical and mechanical work caused by the late turnover of sleepers in the coalyard.

On 1 October 1998, at a time when Alstom were putting pressure on SCC to complete the work on the coalyard, Mr Hall noted in a memo that the yard could not be declared to be ready to receive coal until the limestone bed had been placed in the central section of the coalyard.

On 8 October 1998 Mr Hall sent a further memorandum to Mr Stone and Mr Morris seeking confirmation that the yard would be ready to receive coal in the following week. This aspect of the work was already one month behind the revised Schedule G. Mr Hall went on to say that coal delivery and export power “are now perceived to pose a significant threat of delay to the post-synchronisation taking place (December 18 1998 and on) and therefore the Project as a whole”.

On 12 November 1998 Alstom claimed an extension of time under the contract for the late delivery of coal (which had not yet occurred). Mr Hall noted that “the supply of coal is now becoming critical to maintaining the overall commissioning programme”.

After further problems the turnover certificate for the central coalyard section was given on 5 December 1998. Coal arrived at the yard on or about 6 December 1998 and was unloaded between 10 and 18 December 1998.

The load commissioning of the coal handling equipment was carried out between 7 December 1998 and 13 January 1999.

The delays in the commissioning of the coalyard would normally have had a direct impact on First Fire of Boiler Unit 1 but it appears that sufficient coal was provided earlier to enable the boiler to be fired on coal before coal commissioning finished.

There is some evidence that the absence of coal would have delayed the commissioning of the boiler if grid restrictions had not taken place.

The events after 5 January 1999 are inevitably a matter of informed speculation because of the generator failure on 6 January 1999 but assuming that the testing on full load prior to reliability trials took an equivalent time to that taken between July and September 1999 (12 weeks) this would have meant that plant reliability trials could not have been started in any event until the end of March/early April 1999.

Cooling Water System: Mr Robinson intimates the date for the reliability trials as 26 March 1999, the same date as for the Unit 1 boiler steelwork. As is clear from my summary of the facts, the cooling water system appears in the monthly reports as a constant worry. Here is a brief summary of the evidence.

The initial delay was caused by a re-design of the system in late 1997. Leightons, an Australian firm with what is described as a “western style of working” was retained to carry out the work. Unfortunately, according to Mr McManus and Mr Stone, their performance was very disappointing. This was worrying since by the autumn of 1997, as Mr Stone frankly acknowledged, the cooling water system was at or close to the critical path.

Mr Stone continued to be concerned with Leightons’ performance in February 1998. As Mr Stone put it in answers in cross-examination, in terms of being critical to the completion of the Project, the cooling water intake was “right up there” with the boiler.

In March 1998, in the knowledge that the cooling water intake was critical to completion, a bonus scheme was suggested to Leightons.

In May 1998 Mr Stone agreed that the cooling water intake was critical to the completion date of the Project.

In the six months from March to the end of September 1998, the cooling water intake and the pump house were on a tight schedule. Mr Robinson’s estimated date for completion to reliability trial is not disputed.

SCC did not accelerate the work despite the concerns of the consortium over the delays. Mr Stone said that, as a result of the problem with the boiler foundations, to some extent they took their eye off the ball in management terms. I do not accept this as an explanation. Mr McManus and Mr Stone were quite clear that when they arrived on site the boiler foundation was only one of a large number of problems which they had to tackle and did tackle. There is no evidence that they failed to carry out their other responsibilities under the contract because of the boiler foundation failure or that this provided any or any sufficient excuse for any failings in other areas.

Mr Stone went on to say that “the other extent is that quite frankly we blew it”. This seems to me to be a frank admission and much closer to the real explanation. Mr Stone refused to speculate as to what would have happened if this had not occurred although, of course, the comment acknowledges that SCC would have done things differently. In making this comment I should add that I do not make a finding that Mr Stone himself was necessarily in any way negligent. He impressed me as a very conscientious and very competent manager. He had a difficult job to do because of the many problems which existed on site on his arrival, particularly since he wished to institute “Western working”.

I cannot conclude that the cooling water system would have been completed earlier but for the boiler foundation problem. The problem was that time was taken up with the re-design of the system and in retaining Leightons. There were further delays as a result of Leightons’ disappointing performance. There is no evidence that in the summer or autumn of 1998 the programme would or could have been accelerated.

Mr Robinson’s evidence in re-examination, which I accept, is that he could not see how SCC could have completed the work quicker bearing in mind the problems which they had with the concrete.

The cooling water system failed in March 1999. It took about a month to carry out the remedial works. If one discounts the generator failure, the proximate cause of the delay to the commencement of the reliability trials was the delay to the completion of the cooling water system which (after necessary remedial works) was not ready until May 1999.

I conclude that following a successful completion of the cooling water system and completion of the commissioning process, the earliest date for the start of the reliability trials would have been 26 March 1999 and that therefore in the absence of the problems with the Unit 1 boiler foundations and the generator (and the coalyard and coal jetty) the earliest date for the start of the reliability trials would have been 26 March 1999.

Provision of the Transmission Lines: An agreed schedule of all the references was very helpfully provided by the parties on 2l February 2007. It is clear that throughout the period from 1996 there was concern among the consortium that the transmission lines would not be ready to enable the reliability trials to start and the plant to operate at full power on time. On 26 January 1996 amendments were made to the contracts to include provision for an extension of time if the transmission lines were not completed on time. Further concerns were raised as early as May 1996. On 2 May 1996 work was done to estimate the impact of both a three- and six-months delay to the completion of the transmission lines.

On 3 December 1996 Ms Willcock, Commercial Manager of Alstom based at Knutsford, wrote to CEPAS saying that she was concerned that the transmission lines might not be available and might delay the operation of the plant.

In March 1997 Brown & Root (Report No. 15) noted that the largest obstacle the Project faced was the installation of the transmission line and the substation.

In May 1997 Mr Elliott thought that there was no point in rushing through the remedial work on the boiler foundations if transmission line access would not be available in time to enable the Plant Reliability Trials to commence – see Mallesons’ Report of 23 November 1999.

The importance of the transmission line and the new Labrador substation is frequently mentioned in reports. Sometimes the references are optimistic that it would be ready on time, sometimes less so. By December 1997 there were serious problems reflected in Brown & Root’s Report No. 34. This report was concerned that the current delays which it identified “will possibly cause additional delays to the Project”. These problems were also raised at the meeting of the CEPAS Board in Hong Kong on 23 February 1998 and provoked a heated debate. By this date back energisation was three months and 14 days late.

On 12 March 1998, in a letter by one of the parties providing outside finance for CEPA, it was noted that the transmission lines were expected to be completed by the end of January 1999.

Brown & Root’s Report No. 31, giving its assessment of the Project as at 31 August 1998, set out the position of the transmission lines and the new Labrador substation as follows:

“The export of power from one unit can be accomplished through the 230 KV toe line and the new bay at the old Labrador substation. The new Labrador substation must be complete to be able to export power from both Unit 1 and Unit 2 simultaneously. Synchronisation of Unit 1 and export of power was targeted for 18 December 1998. Synchronisation of Unit 2 is presently scheduled for March 18, 1999.”

On 10 December 1998 Mr Hall wrote to CEPAT (CEPA Tileman Project Management Corporation) to say that NPC had confirmed that prior to final connection to the new Labrador substation, the load on Boiler Unit 1 would be restricted to 300 MW, inevitably causing commissioning delays.

Boiler Unit 1 was synchronised on 27 December 1998. The generator failure then intervened before Unit 1 could reach the full power needed to allow it to export 600 MW. NPC reported that the new Labrador substation and the transmission lines were scheduled for completion and energisation on 26 January 1999.

Alstom’s memo of 5 January 1999 (the day before the generator failure) warned of delays on a day-to-day basis if the 300 MW restriction could not be removed. The new Labrador substation was in fact completed on 23 January 1999. At the same time the 300 MW restriction was lifted. This enabled commissioning to continue. It had to be completed before plant reliability trials could begin.

In February 1999 Brown & Root’s Project Report No. 38 said that NPC reported that energisation of the 500-KV transmission system would commence on 5 February 1999.

The PEC Monthly Implementation Report for March 1999 (No. 38) said that NPC reported that the San Manuel/San José section of the 500-KV system was completed and energised on 31 March 1999.

The PEC Monthly Implementation and Progress Report No. 39 for April 1999 noted that NPC reported that the whole section from new Labrador to San José substation for the 500-KV system was energised and operational.

On 5 July 1999 the first synchronisation of the boiler was achieved. The following day, 6 July 1999 Boiler Unit 1 was first taken above 300 MW after being synchronised. On 9 July 1999 Boiler Unit 1 was raised to 485 MW at 0847 hrs and reached in excess of 600 MW by 20.02 hrs on 12 July 1999 (one week after first synchronisation).

On 25 September 1999 plant reliability trials commenced for Boiler Unit 2 and on 29 September 1999 plant reliability trials commenced for Boiler Unit 1.

Mr Hall agreed in cross-examination that the fact that the 500 kV transmission line was not available until the end of March 1999 would have meant that the commissioning would have taken longer than it did later in the year. He also said that he was not aware of any factor which would have enabled the process to have been any quicker than it was between July and September 1999.

The claimant contends that by using the old substation it could have worked around the problem in a way which would have amounted to substantial compliance with the contract enabling the plant reliability trials to begin without the commissioning of the new Labrador substation having been completed. I do not agree. I find that the work on the transmission lines and the Labrador substation proceeded independently from the problems to the Unit 1 foundation. The provision of the transmission line and substation was a constant worry throughout the Project and would have caused delay for as long as or longer than the remedial works to the Unit 1 foundation.

I specifically reject the suggestion that the claimant could have worked round the problem in such a way that it could have achieved earlier compliance with the contract as far as the plant reliability trials are concerned.

The claimant also relies on its interpretation of Clause 30.2 of the Construction Contract.

“If by reason of delay, default …current event force majeure, the contract shall have been delayed or impeded in achieving commencement of a successful reliability run, then he is entitled to an extension of time.”

The claimant also contends that until it was in a position to require the transmission line and the substation “it would not have any need for it and he would not have been delayed by its absence”.

The claimant also contends that there was a link between the failure of the boiler and delay to the transmission lines and the Labrador substation, although Mr White QC acknowledged that this was probably not the case. I find that this was not the case.

The defendants contend that any loss of revenue cannot in any event be attributable to problems over the boiler foundations. If the electricity was not available it could not be sold. The proximate cause of failure to be able to generate revenue was the lack of electricity.

I find that the defendants are correct. The dominant cause of any such loss would be the lack of the transmission lines unless it could be shown that such loss was caused because the lack of provision of transmission lines was linked directly to the boiler foundation failure.

I summarise my earlier observations as follows:

1. The critical path can be defined as “the sequence of activities through a Project network from start to finish, the sum of whose durations determine the overall Project duration”.

2. Duration is only the shortest time if activities on the critical path are carried out in the shortest time.

3. There may be more than one critical path.

4. It is important to look at activities at or near the critical path to understand their potential impact on the Project.

5. Windows analysis, reviewing the course of a Project month by month, provides an excellent form of analysis to inform those controlling the Project what action they need to take to prevent delay to the Project.

6. Without such analysis those controlling the Project may think they know what activities are on the critical path but it may well appear after a critical path analysis that they were mistaken.

7. A less reliable form of critical path analysis is the watershed analysis. This analyses the Project in terms of a few key events. It may be a sufficient check in the course of a Project to analyse what changes, if any, may need to be made in the Project at the time of a benchmark event.

8. Both windows analysis and watershed analysis are used frequently to analyse delays at the end of a Project. A watershed analysis will be less reliable particularly if the gaps between the watersheds are lengthy. It does not show the pattern of events between the watersheds. This may be very important where a number of activities are at or near the critical path. What the watershed analysis provides is a snapshot at the particular time when it is carried out.

9. Float in a programming sense means the length of time between when an activity is due to start and when it must start if it is to avoid being on the critical path. Float can also be used to refer to the additional time needed/allowed to complete an activity over and above the shortest time that is reasonably required.

10. It is, of course, obvious that the analysis is only valid if it is comprehensive and takes account of all activities.

11. As the claimant readily acknowledges, it is merely a tool which must be considered with the other evidence. The question of whether or not the failure of the Boiler foundation caused delay to the commencement of the Reliability Trials and if so what delay is a question of fact. The evidence of Programming Experts may be of persuasive assistance.

To these propositions I add the proposition that if a retrospective delay analysis is being conducted on a Project, the analysis must include the time to the end of the Project, otherwise activities may occur which will take them on to the (or a) critical path after the date of the final window or watershed. In this respect Mr Lechner’s analysis which ends in October 1998 is seriously flawed.

Further, the value of any windows analysis in this case is seriously diminished by the fact that CEPAS (or SCC) did not undertake any critical path analysis as the Project progressed. It is less surprising that it did not occur in Mr Elliot’s time. It is more surprising that it did not occur at all, let alone on a monthly basis, after the Southern employees took over the running of the Project. As Mr White QC accurately put it, “Perforce the programming experts have had to work with what is there.”

Both experts undertook what they called a critical path analysis using the Windows method. Mr Lechner’s windows took 20 March 1997 (the start of the Rev E programme); 20 October 1997 the Rev F programme and 20 October 1998, a date soon after First Fire. Mr Robinson had the following windows or watersheds: 20 March 1997 to 20 September 1997; 20 September 1997 to 20 October 1997; 20 October 1997 to 23 March 1998; and 23 March 1998 to 25 November 1999. His starting point is Rev E. His first window covers the period to the date on which the remedial works to the Unit 1 boiler foundations were completed. His second window covers the period from the completion of the remedial works to the time when the first version of Rev F was issued. The third period covered the time between the first version of Rev F and Rev G, issued on 23 March 1998.

The last period is from 23 March 1998 to the completion of the Project. As Mr Robinson put it in paragraph 3.32 of his report:

“Whilst any delay caused by the Unit 1 boiler foundation settlement, together with any acceleration measures said to have been put into effect as a result, ought to be evident from my examination of Windows 1, 2 and 3, the principal purpose of Window 4 is to permit a continuing examination of the Project through to its completion. The reason for carrying out this exercise is to consider further whether, based on the actual progress of the work during Window 4, areas of work unrelated to the Unit 1 boiler foundations would themselves have had the potential to cause delay to the key Project milestones regardless of the settlement of those foundations.”

I should note Mr Lechner’s definition of the plant reliability trials because it reinforces the need to use that as the key date. He describes it as “contractual procedures to be completed by the contractor following the issue of the Mechanical and Electrical Completion Certificate to demonstrate the reliable operation of the facility, milestones linked to the liquidated and ascertained damage provision of the supply and construction contracts”.

The second joint statement of the programming experts makes a number of points:

“1.

First, both experts agree that a “windows” approach is a valid method of delay analysis considering the Project facts and circumstances. Mr Lechner has adopted a more traditional form of Windows analysis, carrying out adjustments as necessary to the various strategy programmes used in the analysis. Mr Robinson has modified the Windows analysis methodology to identify a number of key work sequences, including but not restricted to the boiler sequence, and to independently project the likely start of dates for plant reliability trials based on the progress of each of those work sequences as reflected in the updated strategy programmes.

2. Both experts agree that delays occurred to the boiler foundations and the steelwork and also to other elements of the works. Based on his analysis Mr Lechner concluded that the dominant cause of critical delay to completion of the Project (not including delays caused by the failure of Unit 1 generator) was the boiler foundation settlement and that other civil delays that existed at the time of the failure of the boiler foundations also contributed to critical Project delay. Mr Robinson has concluded that in the light of other delaying factors (including civil delays, the generator failure and the lateness of the transmission line) the boiler foundation settlement did not cause critical delay to completion of the Project. In this respect Mr Robinson considers that all delays to the Project, including that caused by the Unit 1 generator failure, are relevant to his analysis. Mr Lechner does not believe that delays to transmission lines constructed under a separate contract, the construction contract, contributed to critical Project delays.

3. Both experts have analysed hypothetical scenarios which assume that the boiler foundations did not settle. Mr Lechner has concluded that, in such an event, it is likely that acceleration measures which were undertaken by the civil contractor on the Project would have successfully recovered all of the remaining critical Project delays. Mr Robinson has concluded that it is likely that the remaining critical Project delays would not have been successfully recovered by such methods. Both experts recognise that in reaching these conclusions it has been necessary for each of them to proceed on the hypothetical (as opposed to factual) basis that the boiler foundation settlement did not occur. Both experts recognise that it is for the Court to reach a decision on any such hypothetical scenarios in the light of all the available evidence.

4. Both experts agree that delays occurred to parts of the Project other than the boiler foundations and steelwork in the period after March 1997. Mr Robinson considers many of these delays to have been unrelated to and independent of the boiler foundation settlement. Mr Lechner, by contrast, considers that there are causal links between these delays and the settlement of the boiler foundations.

5. Mr Robinson, having regarding to the views expressed in the expert report of Alan Mann, concluded that the delay to Unit 1 boiler steelwork ought reasonably to have been significantly less than 162 days. Mr Lechner has now had the opportunity to consider Dr Mann’s views and has concluded that in his opinion, the various activity sequences and durations identified by Dr Mann are incomplete, oversimplified and unrepresentative of the actual site conditions.”

I note in relation to point 5 that although Mr Lechner criticises Dr Mann’s opinion, he does not express any view of his own as to whether or not the Unit 1 boiler steelwork delay ought reasonably to have been significantly less than 162 days.

Arup makes a number of well-founded and fundamental criticisms of Mr Lechner’s analysis.

Mr Lechner is also criticised by Arup for refusing to enter into detailed discussions with Mr Robinson on Mr Robinson’s report and particularly on his more broadly based assessments of each of his programme updates.

For its part the claimant criticises Mr Robinson for not undertaking what it regards as a traditional Windows analysis but rather making up his methodology as he went along. It says that Mr Robinson has failed to address the issue of criticality and understand the interrelation of activities to the boiler foundation failure. In short, it claims that Mr Robinson’s analysis “establishes nothing for it takes no account of the programmed sequences or the timing of the activities or whether the programme would have permitted delay to those systems without any resulting impact on the completion of the Project”.

Mr Robinson identifies a number of activities, the cooling water system, the coal supply system and the transmission lines, which he says were not linked to the boiler foundation failure. Despite his refusal to accept this in the second experts’ joint statement Mr Lechner had to agree with this proposition in cross-examination.

With regard to the precipitators and the FGD system, Mr Robinson accepted that the precipitators and the FGD system may have been adversely affected by the remedial works on the boiler foundations because they were being used as lay-down areas for the boiler steelworks. There is no evidence of the extent to which (if at all) they may have been affected.

I comment immediately on the complaint that Mr Lechner failed to co-operate sufficiently in the process. Under the sophisticated procedure developed by this Court, well known to Pinsent Masons, the claimant’s solicitors on the record, the experts are required in advance of a trial to co-operate to the greatest possible extent in agreeing a methodology and in understanding and commenting on each others’ reports so that they are able as far as possible to reach agreement or narrow issues so that only those matters in real dispute are put before the Court for decision. Although the experts made some attempt to have meaningful discussions, this did not happen to a sufficient extent. It was a considerable disadvantage to me that Mr Lechner refused to discuss Mr Robinson’s report in detail. Had he done so in advance of the hearing, he may well have continued to disagree fundamentally with the principles on which it was based, but I am confident that he would have been able to reach a measure of agreement on a number of important factual matters in the report which had to be investigated in oral evidence.

It is right to say that some matters were clarified in supplemental reports. For example, it was Mr Lechner’s criticism of the precipitator system as an independent source of delay in the supplemental report para 345 which led Mr Robinson to modify his view that it was not linked to the boiler foundation failure.

I should refer specifically to one fundamental criticism of Mr Robinson’s evidence. Mr Lechner criticises Mr Robinson’s “final window” in his delay analysis in which he considers a hypothetical scenario assuming that the Unit 1 generator had not failed in January 1999. He says that Mr Robinson’s analysis is “a highly theoretical exercise built on unsupported assumptions which does not produce a reliable result”. There was ample opportunity in cross-examination to challenge Mr Robinson’s analysis and conclusions. Having considered the evidence I am able to accept his analysis that there were a number of separate events which would have been completed ready for the plant reliability trials at or in some cases after the Unit 1 boiler steelwork.

Mr Lechner’s own analysis does not go beyond October 1998. It therefore does not even take into account events to the end of December 1998 immediately before the generator failure. His analysis, which only goes to the completion of Unit 1 First Fire and Steam to Set, is flawed because it does not attempt to address the position at the critical date of start of the reliability trials. I note the words of caution which the experts have very properly introduced into their second Joint Statement. I conclude that the Reports of the Programming Experts take me no further than the findings which I have already made.

I now review and make my findings on the specific issues agreed by the parties and make my findings. I have used the numbering in the list but address Issue 11 out of order. The issues are:

1. To what extent was there critical delay to the commencement of the Plant Reliability Trials for Boiler Unit 1 and Boiler Unit 2 and what activities or events caused or contributed to such delay (and who was responsible for the delay)?

Again I have considered this issue in my discussion of the facts. I have concluded that acceleration measures were taken by Mr McManus when Southern Management took over from Mr Elliott. These included, for example, seven day working. I am satisfied that the effect of the acceleration and incentive agreements was that work on the civils was substantially reorganised and accelerated. In view of the lack of reliability of the work programmes and in particular Rev E, it is difficult to estimate by how much the programmes (and work relating to the boiler foundations) were in fact accelerated.

It is clear that the need for acceleration of the programmes for the civils and not the delays caused by the remedial works to the boiler foundations was the proximate or dominant cause of the delays. I find that the work on the boiler was not five months in delay as a result of the remedial works to the boiler foundations. It was no more than three months in delay. I accept Mr Robinson’s estimate that in the autumn of 1997 the civils were as much as 5½ months in delay. I have found that the acceleration measures together with the more efficient working on site, reversed the drift in the work programme and reduced the deficit on the civils by a significant amount, to perhaps three months.

I accept Mr McManus’s evidence that the measures which he took (unrelated to the remedial works for the Unit 1 Boiler foundations) started to take effect to reduce delays to the civils in November/December 1997.

(a) Mirant contends that CEPAS can recover damages for losses suffered by SCC even though SCC has, itself, no cause of action against Arup. It contends that a claimant who has a cause of action but who has not or will not incur loss amounting to more than a nominal amount may recover valuable damages from the contract breaker or tortfeasor representing losses incurred or to be incurred by a third party which has no direct cause of action against the defendant.

Mirant makes its claim on three separate grounds:

(2)(a)What it describes as “the broad ground”, namely that a claimant (CEPAS) may recover for itself valuable damages in respect of losses caused to a third party (SCC) as a consequence of the breach of contract by the defendant on the grounds that those losses represent damage to CEPA’s interest in having the contract performed according to its terms.

(b) Mirant claims that the additional costs and expenses incurred in the rectification of the Unit 1 boiler foundations were caused by Arup’s negligent designs which the court found were produced in breach of the terms of the design agreement with CEPAS.

(3) There was a network of agreements, in particular the Tripartite Agreement and the Guarantee Agreement under which CEPAS was required to guarantee and, if necessary, pay losses incurred by SCC. I will address this issue later in Paragraph [ ]

Arup contends that although the law will treat loss suffered by a third party as if it had been suffered by the defendant, it will not do so if the parties themselves have provided a remedy for the third party or if separate contracts are contemplated between the third party and the claimant.

In this case Arup contends that the parties intended to enter into separate contracts for separate services provided by Arup, namely for design and for site services and in relation to site services did enter into a separate contract. Further, they note that I have already held that Arup owed no duty to SCC in tort to avoid causing economic loss. This finding was not appealed.

Arup contend further that the ‘black hole’ which the law seeks to avoid did not exist in this case. Mirant is seeking to take advantage of payments on behalf of a group of companies without giving credit for equivalent receipts so as to create artificial losses. The employer, PEC, did not suffer any loss. Particular companies within the Group made paper losses.

In addition, Arup claims that the Tripartite Agreement properly construed, does not result in a liability to CEPAS to pay SCC’s losses.

The Law

This case predates the Contracts (Rights of Third Parties) Act 1999 which enables a third party in its own right to enforce a term of a contract under certain conditions. The question of Third Party rights and remedies has been considered in a number of relatively recent decisions including important decisions from the House of Lords.

The general rule is that where there is no privity of contract a party may not sue on behalf of another party even if it has suffered loss. In The Albazero [1977] AC 774 at 847, Lord Diplock said that as an exception:

“… in a commercial contract concerning goods, where it is in the contemplation of the parties that the proprietary interest 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 and 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 Linden Gardens Ltd v Lenesta Ltd [1994] 1 AC 85 (also cited as St Martins Property Corporation v McAlpine (the joined Appeal) Lord Browne-Wilkinson at page 114 explained:

“In my judgment the present case falls within the rationale of the exceptions to the general rule that a plaintiff can only recover damages for his own loss. The contract was for a large development of property which, to the knowledge of both Corporation and McAlpine was going to be occupied and jointly purchased by third parties and not by the Corporation itself. Therefore it could be foreseen that damage caused by a breach would cause loss to a later owner and not merely to the original contracting party, Corporation. As in contracts for the carriage of goods by land there would be no automatic vesting in the occupier or owner of the property for the time being who sustained the loss of any right of suit against McAlpine. On the contrary, McAlpine had specifically contracted that the right of action under the building contract could not, without McAlpine’s consent, be transferred to third parties who became owners or occupiers and might suffer loss. In such a case it seems to me proper, as in the case of the carriage of goods by land, to treat the parties as having entered into the contract on the footing that Corporation would be enabled to enforce the contractual rights for the benefit of those who suffered from defective performance but who, under the terms of the contract, could not acquire any right to hold McAlpine liable for this breach. It is truly a case in which the rule provides ‘a remedy where no other would be available to a person sustaining a loss under a rational legal system ought to be compensated by the person who has caused it. ”

In St Martin’s Property Corporation, Lord Griffiths preferred to rely on the wider ground that Corporation had suffered loss because it did not receive from McAlpine the performance of the bargain which it contracted for. This approach was supported and developed in McAlpine Construction v Panatown [2001] 1 AC 518 discussed below.

In Darlington BC v Wiltshier Northern Ltd [1995] 1 WLR 68, a construction company entered into two contracts with a finance company to build a recreational centre for the borough council which owned the site. The finance company assigned to the council all rights and causes of action against the construction company to which the finance company was entitled under the contract. It was held that since the building contracts were, to the knowledge of both the parties, entered into for the benefit of the council and since it was foreseeable that damage caused by a breach of the contracts would cause loss to the council, the council was entitled to sue the contractor and recover damages as though the council had been the employer under the contract. The two former Chancery Division Judges, Dillon LJ and Waite LJ held that if the finance company had sued in its own name it would have held any damages which it recovered as constructive trustee for the council.

In McAlpine Construction v Panatown[2001] 1 AC 518, 529, Lord Clyde in the lead judgment analysed the principle behind what is referred to as the Albazero exception, namely that it relates to a loss suffered by the third party transferred to the promisee who is then accountable to the third party. It is intended to provide a remedy where no other would be available to a person sustaining loss which under a rational legal system ought to be compensated by the person who has caused it. It is not to apply where as part of the contractual arrangements it was contemplated that a separate contract would be entered into with the third party.

Lord Clyde regarded the question as an issue of law. He said at page 530

“On the one hand if they (the contracting parties) deliberately provided for a remedy for a third party it can readily be concluded that they have intended to exclude the operation of a solution which would otherwise have been imposed by law – The terms and provisions of the contract will then require to be studied to see if the parties have excluded the operation of the exception.”

Lord Clyde’s approach set out at page 535 is as follows:

“It seems to me that a more realistic and practical solution is 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 than to contract a theoretical loss in law on the part of the contracting party for which he may be under no duty to account to anyone since it is to be seen as his own loss. The solution is required where the law will not tolerate a loss caused by 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 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.”

Lord Clyde went on to note that the problem

“… is one which is most likely to arise in the context of the domestic affairs of a family group or the commercial affairs of a group of companies. How the members of such a group choose to arrange their own affairs among themselves should not be a matter of necessary concern to a third party who has undertaken to one of their number to perform services in which they all have some interest. It should not be a ground of escaping liability that the party who instructed the work should not be the one who sustained the loss or all of the loss which in whole or in part has fallen on another member of the group”

Lord Clyde emphasised that the resolution of the problem in any particular case has to be reached in the light of the particular circumstances:

“Where for its own purposes a group of companies decides which of its members is to be the contracting party in a project which is of concern and interest to the whole group I should be reluctant to refuse an entitlement to sue on the contract on the ground simply that the member who entered the contract was not the party who suffered the loss or a breach of the contract. But whether such an entitlement is to be admitted must depend on the arrangements which the group and its members have decided to make both among themselves and with the other party to the contract. In the present case there was a plain and deliberate course adopted whereby the company with the potential risk of loss was given a distinct entitlement directly to sue the contractor and the professional advisers. In the light of such a clear and deliberate course I do not consider that an exception can be admitted to the general rule that substantial damages can only be claimed by a party who has suffered substantial loss.”

Lord Goff of Chieveley preferred to follow the analysis of Lord Griffiths and ask the question, “has the claimant suffered loss because it did not receive from the defendant the performance of the bargain which it had contracted for”. At page 552 he noted that:

“Lord Griffiths’ broader ground is not concerned with privity of contract as such. It is concerned with the damages recoverable by one party to a contract (the employer) against another (the contractor) for breach of contract and materials viz a building contract.”

Lord Goff at page 556 did raise an important qualification, namely that the Court must be satisfied that the claimant was seeking compensation for a genuine loss and not seeking to secure an uncovenanted profit.

Lord Goff also agreed with the view expressed by Lord Lloyd of Berwick in Ruxley Electronics Construction Ltd v Forsyth [1996] 1 AC 344, 372 when he said:

“I fully accept that the courts are not normally concerned with what a plaintiff does with his damages. But it does not follow that intention is not relevant to reasonableness at least if there are cases where the plaintiff does not intend to reinstate. Suppose in the present case Mr Forsyth had died, and the action had been continued by his executors. Is it to be supposed that they would be able to recover the cost of reinstatement even though they intended to put the property on the market without delay?”

Lord Jauncey at page 357 put this comment in the general context:

“Damages are designed to compensate for an established loss and not provide a gratuitous benefit for an aggrieved party from which it follows that the reasonableness of an award of damages is to be limited to the loss sustained.”

Lord Goff dealt with one other issue which has been referred to in this case, namely the motivation for the split into the on shore construction contract and the off shore supply contract. At page 557 he said:

“I for my part cannot see that the tax reasons underlying the arrangements in the present case have any impact on the question whether Panatown is entitled to recover substantial damages from McAlpine.”

In Catlin Estates v Carter Jonas [2005] EWHC 2315 I had occasion to consider these questions and concluded that the principle was applicable in respect of claims against professionals for the losses caused by negligence in respect of construction works.

In Technotrade v Larkstore Ltd [2006] BLR 345, Rix LJ in the Court of Appeal put the principle clearly:

“65.

The authorities in this area demonstrate the courts’ striving to ensure that wrongdoers do not escape from their liabilities by reference to the general principle that a person can only recover for his own loss because of the happenstance that a course of action lies in the hands of someone other than the person who has suffered the loss. The courts are concerned to see that justice is done between the parties.”

Arup contends that the cases demonstrate that the courts are proceeding with caution in developing the principle and that it should not apply to SCC and CEPAS.

Having considered the various contentions I conclude that CEPAS may in principle recover damages in respect of losses caused to SCC as a consequence of the breach of contract by Arup because it did not receive from the defendants the performance of the bargain which it contracted for, namely that Arup failed to provide adequate designs for use by SCC on site and failed to verify the design assumptions.

It may have been the case that a further contract was contemplated (as occurred for the ground works). But it did not happen. It would not in this case, taking all the circumstances into account, be just to deny SCC the possibility of recovering damages, because no further agreement was made with CEPAS which defined the contractual position of SCC. In this context I made it clear in my previous judgment that SCC had no direct claim against Arup. In these circumstances SCC is in precisely the “black hole” which Panatown addresses.

In order for Mirant to recover damages the court has, however, to be satisfied that the claimants are seeking compensation for a genuine loss and not seeking an uncovenanted profit. The court must also be satisfied on the Ruxley principle that the damages represent a genuine and quantifiable loss to Mirant (see below).

The further ground under which Mirant claims to be able to recover sums paid by SCC relates to the network of agreements between the various members of the consortium and in particular the Tripartite Agreement and the Indemnity Agreement. I will consider these agreements in the next section in relation to the specific claim to recover SCC’s delay and disruption costs in the sum of $39,731,428.

This issue raises the issue of whether the supplier consortium and the contractor consortium are liable to PEC for delay liquidated damages and specifically whether the rates of liquidated damages set out in clause 31.3 of the Construction Contract and clause 27.2 of the Supply Contract represented a genuine pre estimate of the loss suffered by PEC in the event that there was a delay to the Target Date for the commencement of successful Reliability Trials for Boiler Unit 1 and Boiler Unit 2.

The issue also raises question of whether settlement agreements Nos 1 and 2 dated 19 November 2001 represented a reasonable settlement of SCC’s liability and whether in fact the sum of $39,731,428 was in fact paid by Mirant to PEC as alleged. If payments were made by Mirant, were Mirant under a legal obligation to make such payments either

Mirant claims these damages against Arup as part of the damages which it claims were paid to PEC for delay on completion of the Project. It is claimed that as part of the same agreement Alstom paid $96,033,293 in respect of delays to completion resulting from the generator failure during the commissioning period for Boiler Unit 1. The amounts were agreed after negotiations which were conducted over a period of two years from 1999 to 2001, largely by Mr Thomson representing SCC and Mr Hall representing Alstom.

Arup claims in brief:

1.

The Boiler Foundation claims did not delay the commencement of the Plant Reliability Trials (see above).

2.

The amount was incurred by SCC and cannot be recovered by Mirant (see above).

3.

No attempt was made by SCC in the negotiations with Alstom to assert that the delay payments were penal.

4.

Damages over compensated PEC.

5.

The Settlement was global with no attempt to identify damages for boiler and non boiler delays.

6.

The claim fell outside the scope of Mirant’s contract.

On 19 November 2001 the claims were resolved in two settlement agreements. Settlement Agreement No.1 was between the employers, Mirant – Sual Corporation (formerly PEC) and members of the supply offshore consortium and the construction onshore consortium. The second Agreement was internally between members of the onshore and offshore consortia.

Settlement No.1 recorded that:

“1.

The target dates for plant reliability trials were Unit 1 and the common parts, 1 December 1998, Unit 2, 1 March 1999.

2.

On 24 September 1999 the contractors designated Unit 1 as Unit 2 and vice versa.

3.

Significant delays were expressed as a result of the failure of the Unit 1 foundations and the generator with the result that the reliability trials were not completed until (Unit 2 first in time) and the common parts, 27 October 1999 and Unit 1, 24 November 1999.

4.

The consortium had sought extensions of time for the dates for the reliability trials.

5.

Delay payments in the sum of $101,243,049 had been received by PEC comprising $73,102,859 paid by Alstom on behalf of the supplier under the supply contract and $28,009,190 paid by CEPAS as agents for SCC on behalf of the contractors under the construction contract.

6.

Other payments had been withheld by PEC in lieu of delay damages.”

Settlement Agreement No.1 provided that:

Under Settlement Agreement No.2 the parties to the consortium agreed, inter alia, that:

CEPAS contends that the relevant components of the settlements were the agreement that the cumulative liability of the parties under the supply and construction contracts in relation to late payments (LADs) was $135,764,721 and it was agreed that SCC should bear $39,731,428 of those damages as a result of delays caused by the failure of the Unit 1 boiler foundations.

The Settlement Agreements Nos 1 and 2 were arrived at (so Mirant contends) on the basis of perceived liability arising out of the network of agreements to which I referred at the beginning of this judgment and which I must now consider in a little more detail.

The National Power Corporation (NPC), a corporation owned and controlled by the government of the Philippines, was concerned to develop a new power facility to support and maintain the country’s economic growth. It invited companies to bid for what might now be known as a form of public/private partnership whereby the government agrees to grant a private company the right to construct a facility on its land at the private company’s expense and, in exchange, the private company has the right to operate the facility for a defined term, after which the facility reverts to the government. During the time when it operated the facility the private company would be provided with the fuel to generate the electricity and the procuring company (NPC) agreed to purchase electricity from the private company at rates and prices determined by the construction agreement.

Under the Energy Conversion Agreement (ECA) dated 20 May 1994 between NPC and CEPA Pangasinan Electric Limited (CEPAP) it was agreed that CEPAP would construct and operate the power station on the terms and conditions there set out.

The essential terms of the ECA were:

2. NPC was to make the site available to CEPAP from the date of the agreement until the day following the co-operation period which was to be 25 years from the later of the Target Completion Date for each unit and the actual completion date for each unit (Article 2.4).

3. NPC would construct, at its own cost, a transmission line which would permit it to receive the net capacity from Unit 1 and the power station not later than 53 calendar months and 56 months respectively from the date of the ECA (Article 13).

4. NPC was to provide the power which would enable the plant to be commissioned or tested.

5. The parties would work together to achieve timely completion of the Project and to achieve certain milestone events by target dates which were calculated by reference to a specified number of months from the date of the ECA. The target dates would be extended automatically by the number of days beyond the date, that is three calendar months after the date of the agreement, that it would take NPC to comply with its obligations under Article 3.6 and 28.4.

6. In the event that CEPAP, through no fault of NPC, failed to complete a unit within 30 days after the Target Completion Date for each unit, CEPAP was to pay a sum which was described as a “penalty in delay” which was to be secured by and limited to an amount available under a bond (Article 3.13 and Third Schedule).

7. CEPAP undertook until the transfer date to operate the power station and convert fuel supplied to electricity (Article 5.3).

8. Throughout the period from the testing to commissioning of Unit 1 until the transfer date, NPC was to deliver at its own cost “fuel required by CEPAP and necessary for the power station to generate electricity” (Article 6.1).

9. Subject to NPC supplying the necessary fuel and electricity, CEPAP agreed to convert such fuel into electricity and NPC agreed to take and pay for all the electricity required by NPC (Article 7.1)

10. Payment was to be made by NPC to CEPAP in accordance with the schedule set out in Article 7 of the ECA.

11. On the transfer date CEPAP was to transfer to NPC all rights and title in the power station. No compensation was payable to CEPAP for the transfer.

12. It was a term of the ECA (Article 19.3) that the parties would conclude an agreement whereby Pangasinan Electric Corporation (PEC) would become a party to the ECA and would be responsible for performing the work in the Philippines.

13. Pursuant to an accession undertaking of the same date as the ECA, 20 May 1994, and made between NPC, CEPAP and PEC, it was agreed that PEC should become a party to the ECA. PEC was part of the same group of companies as CEPAP but approximately 8 per cent of the share capital of PEC was owned by outside investors who were involved in funding the Project, namely the International Finance Corporation and the Commonwealth Development Corporation.

14. The contracts for the design and construction of the power station were to be negotiated by PEC which would, in relation to construction contracts, be the ultimate employer.

The claimant says that it was apparent that if the completion of the power station was delayed, CEPAP would be deprived of income which it would have earned from the production and sale of electricity. I have already made reference to this in the section considering the Transmission lines. It was also apparent that under Article 3.13 and the Third Schedule of the ECA that CEPAP would be liable to pay a “penalty in delay” to NPC unless it could demonstrate an entitlement to an extension of time.

For reasons to which I have already referred, the procurement of the power station was split into two turnkey contracts, the offshore supply contract and the onshore construction contract. As I have already found, the purpose of the split was to limit liability for Philippine tax.

As I have already outlined there were two further agreements. First there was an agreement in relation to work and services to be undertaken under the supply contract. This was between the offshore Alstom companies, Power Plants and Stein and CEPAS. A similar agreement was entered into between the onshore Alstom companies, Turbine Generator and Electro Mechanique and SCC in relation to onshore services.

Both contracts imposed obligations on the contractors to achieve completion of the work by certain milestone dates and imposed an obligation to pay liquidated damages (LADs) for delay in the event of a failure to meet them. In the case of the supply contract the provisions are contained in clauses 26.1 (Completion) and 27.2 (LADs) and for the construction contract the relevant provisions are clauses 30 (Completion) and 31.1 and 31.2 (LADs).

In each contract liquidated damages are to be assessed by reference to a daily rate applicable to each Unit. The sums specified are $69,000 for each day up to 84 days and $205,000 for each day between 85 and 168 days. From 169 to 252 days the scale is $334,000 for Unit 1 and $685,000 for Unit 2 and over 252 days it is $685,000 per day for each unit. Mr Metcalfe was unable to provide any documentary evidence of how the sums were arrived at. This is, perhaps, not entirely surprising since he said that they were based on a previous contract at Pagbilao. He said that he asked how those rates were arrived at but did not obtain a satisfactory answer.

Members of both consortia also entered into a Tripartite Agreement dated 9 January 1995. This was between PEC and the members of the consortia and was designed to nullify the possible effect of separate agreements.

It provided:

“1.1.1.

Although for the avoidance of doubt the Supplier and Contractor are separately liable for, respectively, the supplied works and the works, in order to ensure that the Plant is constructed and commissioned as specified in clause l.l.l of the construction contract and will meet the requirements both as to time, availability and performance, the supplier agrees that if there has been delay or failure in performance of any of

i.

the supplied works including but not limited to indirect or consequential delay, damage or loss; and

ii. the works including but not limited to indirect or consequential delay, damage or loss; and”

(b)

if the employer is or but for any dispute as to respective responsibilities between the supplier and the contractor would be entitled as a result of such delay or failure to claim or receive liquidated or other damages pursuant to either or both of the supply contract and the construction contract as the case may be (i) in and in respect of sub-clause (ii) above only the supplier is responsible for the whole or any part of such delay or failure.”

“Then and in any such case the supplier will promptly make the full amount of all payments (irrespective of the degree of the supplier’s responsibility for such delay or failure) necessary in order to satisfy the employer’s claim for such damages both on its own behalf (to the extent applicable) and on behalf of the contractor as agent for the contractor and the contractor hereby irrevocably authorises the supplier to make such payments on its behalf. If in any case the parties do not agree as to whether or as to the extent to which the supplier is liable for the purposes of this Agreement and as between the supplier and the employer notwithstanding the provision of clause 9, the supplier shall be deemed to be responsible and be liable to make the full amount of all necessary payments in accordance with the preceding sentence. If the parties agree that the supplier has no liability the employer shall pursue its remedies against the contractor.”

By a Deed of Guarantee dated 12 July 1995 between CEPAS and PEC, CEPAS guaranteed the performance of SCC under the Construction Agreement.

By a further Deed of Guarantee also dated 12 July 1995, also between CEPAS and PEC, CEPAS guaranteed the performance of SCC under the Tripartite Agreement.

It is now necessary to consider further the relationship between Arup and CEPAS. In my judgment in the Preliminary Issues given on 2 December 2003 I considered the circumstances leading up to the employment of Arup on 29 May 1995.

I concluded that:

The Revision C offer from Arup contained the following preamble:

“A consortium comprising CEPA Slipform Engineering Limited (Slipform) and GEC Alstom (GECA) has been established to undertake the construction of a 2 x 600 MW capacity coal fired power station to be constructed at Sual in the Philippines. Slipform has requested Ove Arup & Partners (Arup) to submit technical proposals and a commercial bid for the design of the civil engineering works which will be fabricated and constructed by Slipform. This document constitutes Arup’s offer.”

I have already made findings in relation to Issues 1 and 2 set out above, i.e. Arup’s responsibility for delay and Mirant’s ability to claim for losses incurred by SCC. I now consider the remaining issues.

Mirant claims that the settlement agreements dated 19 November 2001 were reasonable. The claimant’s case is that after the two failures of the boiler foundations and the generator, the delay for Unit 2 was 298 days and that for Unit 1 was 238 days. This equated to an entitlement to liquidated damages for PEC amounting to US$154,052,000. The agreement reached between the two consortia and PEC was that PEC would grant short extensions of time for Units 1 and 2 amounting to 18 days for Unit 1 and 13.5 days for Unit 2. This reduced the total sum payable to US$132,474,500 to which agreed interest of US$3,290,221 should be added.

Mirant submits that if the liquidated damages were recoverable by PEC then their quantum, subject to any negotiated reductions, was dictated by the agreed rates for those damages in the Supply and Construction Agreements. In all the circumstances Mirant says the settlement as a whole was reasonable.

Settlement Agreement No.2 was concerned with the apportionment of damages between SCC and Alstom. Mirant contends that there was extensive negotiation as to the extent of delay for which each was responsible and the amount of damages which each should pay as a result of the stepped nature of the liquidated damages in the supply and construction agreements. Mirant says that the settlement was reached after a genuine arm’s length negotiation in a complex and difficult dispute. If the parties had not settled, a lengthy and expensive arbitration would have taken place. They note that Mr Thomson, a very experienced commercial solicitor, was conducting arm’s length negotiations on behalf of Mirant.

Further, Mirant claims that it was entirely reasonable for the parties to agree that responsibility for delay caused by the failure to the boiler foundations lay with SCC and not with Alstom. SCC was the only non-Alstom company in the consortium. CEPAS claims that in reality, it, not SCC, as the only company in the offshore consortium with which Arup was in contract, should be responsible for the delay caused by Arup’s breach of contract. If I am satisfied that the apportionment was made after a genuine negotiation, Mirant claims that the burden is on Arup to prove that the settlement was unreasonable - see Lord Loreburn’s speech in Lodge Holes Colliery, cited at para 29 above.

I am also asked to conclude that the payments made by reference to Steam to Set (Alstom) and First Fire (SCC) were highly technical. No doubt it would also have been regarded as a technicality that neither date was the reference date under the contract. It is claimed that apportionment on the basis of the commencement of the reliability trials would have been difficult, since that date was preceded by the generator failure for which Alstom was taking responsibility.

In relation to Arup, Mirant contend that Arup’s actual and imputed knowledge of the nature of the Project as derived principally from 29 May 1995 Letter of Intent and the Revision C offer is of relevance to the foreseeable consequences of its failure to perform its obligations under the contract. At the date of the Revision C offer Arup was unaware of the split between offshore and onshore works. At about the time when the Letter of Intent was signed, Arup became aware of the split Turnkey structure. The documents included a copy of part of the Tripartite Agreement and various sheets describing the organisation of the consortia.

It is said by Mirant that the offer did not draw a distinction between the entity which was responsible for the design of the power station, CEPAS, and that which was responsible for its construction, SCC. Finally, Mirant contends that Arup knew that the designs were prepared for use by SCC (see my judgment on the Preliminary Issues, para 289).

CEPAS claims that the payment of LADs was factually and legally a loss to CEPAS. CEPAS made the payments to PEC via various inter-company arrangements and did so because it was the company which was liable to pay PEC liquidated damages.

It acknowledges that this was not the basis on which the Settlement Agreement was reached. Under the Settlement Agreement SCC agreed to pay liquidated damages to PEC for the delay which it says resulted from the problem with the Unit 1 boiler foundations. This it claims is of no consequence. I am urged to conclude that CEPAS suffered loss as a matter of fact and law.

CEPAS also claims that the defects in the boiler foundation designs properly constituted a breach of the supply contract for which as between SCC and CEPAS, CEPAS was responsible and as between CEPAS and the Alstom companies in the supply consortium CEPAS was again responsible. (See clause 1.1.1 of the Supply Consortium Agreement.) In short it claims that Arup’s negligent design rendered CEPAS liable to PEC for the consequences.

It also claims under the provisions of the Tripartite Contract which I have already cited, that where the loss to PEC is caused by the supplied works, the supplier, CEPAS, is under an obligation to pay liquidated damages and compensate for any other loss. Again it is said to be irrelevant that the experienced former partner of Mallesons, Mr Thomson, erroneously, as they say, failed to appreciate that the responsibility for the delay was with CEPAS and not SCC. This does not mean that CEPAS does not have any liability.

It notes that if delay had been caused by the Transmission Lines, Alstom would have been entitled to an extension under the contract and that this would have formed part of the negotiations.

If I am against Mirant on this argument it claims in the alternative that even if the primary liability to pay LADs is on SCC, the Deed of Indemnity required CEPAS to indemnify PEC with respect to SCC’s liability – see Ms Lam’s evidence. It claims that it did so. However, the arrangement was that CEPAS made loans to SCC at a time when CEPAS was technically insolvent and so the sums should be treated as inter-company transfers. They were in fact, so it is contended, handled by related companies by way of set-off. PEC was not a wholly owned subsidiary of the group (8% of its shares are held by outside shareholders) so the payment to PEC, so they say, is not correctly characterised as an inter-company transfer.

Mr Thomson gave evidence about the liquidated damages settlement agreement. He admitted frankly it was done on the basis of a global settlement. He said that questions of extensions of time were “a heavily vetted process”. He made it clear that Mirant wanted to ensure that PEC maximised its liquidated damages.

In relation to the apportionment between Alstom and SCC, Mr Thomson said

“The issue is out of the apportionment – how much of that liquidated pool was to be borne by SCC and how much by Alstom and the advantage of acting for SCC was that it was an associated company with PEC, which was holding on to the money, so it took a year or so to try and maximise the commercial benefit and minimise SCC’s contribution.”

No clear apportionment was negotiated between the causes of delay but the effect of the Settlement Agreements was to apportion the delay as 3 months to the Boiler foundations and 6 months to the failure of the generator. The Board Minute of 13 September 2001 emphasises that Mirant had been able to limit its payment to Alstom to $2.5m.

Arup notes that there have been in effect three settlements: the draft Acceleration Agreement following meetings on 4 and 5 February 1998 in respect of which Mirant seeks to recover $15,799,777 by way of alleged delay and disruption and $10,273,060 by way of acceleration measures (which I will address separately), and the two Settlement Agreements dated 19 November 2001 which I have already described. It contends that I must have some regard to the February 1998 agreements in considering the two Settlement Agreements.

Arup contends that Mirant cannot use any of the agreements to measure the loss that it allegedly suffered. It contends that:

1. Each of the settlements was known to be a global settlement for a number of delays or events, some of which were plainly not the liability of Arup.

2. No attempt was made at the time of payment or subsequently to quantify or even consider what part of the settlements related to the failure of the foundations.

3. The problem of global settlements was compounded because the Acceleration Agreements which preceded them were also made as global settlements without verification of the figures for a variety of reasons unrelated to the boiler foundations.

4. The Settlement Agreements Nos.1 and 2 were unreasonable vis á vis Arup as no attempt was made to isolate the boiler foundations or consider separately the interests of PEC, Mirant and SCC. Despite the allowance made for extensions of time these were not the sum total of the extensions of time to which SCC was entitled under the contract.

5. The contractor was entitled to an extension of time in relation to the delays to the Transmission Lines and the New Labrador Substation so as to extinguish any liability for LADs in relation to the boiler failure.

6. The LADs were a penalty and therefore unenforceable.

7. Even though LADs were paid CEPAS suffered no loss.

8. The liquidated damages settlement is not recoverable because it was designed to maximise Arup’s liability and it is impossible to know what the true figure is (assuming liability).

It claims that Mirant’s claim in respect of Settlement Agreements 1 and 2 fail at the following hurdles:

I am able to reach the following clear conclusions on the issues raised by the parties on the evidence before me.

This raises the following evidential questions (in addition to the issue of whether the works on the boiler foundations caused delay to the commencement of the reliability trials):

“(a)

Is the sum claimed reasonable; if not, what is a reasonable sum?

(b)

to what extent, if at all, is there a causal nexus between any delay caused by the settlement to the boiler foundations and the time-related costs allegedly incurred by Mirant?

(c)

which costs, if any, were incurred as a result of the failure of the boiler foundations?”

Mirant makes the claim of $1,467,180 as the additional costs which CEPAS says it incurred by reason of the three months delay (after taking into account the effect of the acceleration of the works) to the completion of the Project caused by the failure of the G2 and G5 boiler foundations. The claim is based on a monthly cost of $489,060. Mr Lechner supports this figure based on his assessment of monthly time-related costs.

Mr Hackett, Arup’s expert, arrives at a monthly figure of $375,000 (subject to liability). The main difference between the experts is that Mr Hackett makes no allowance for CEPAS overheads. The other important difference is that Mr Lechner uses data derived from 1998 cost records whereas Mr Hackett uses 1997 cost records.

Mr Hackett is criticised by Mirant for taking a “claims” minded approach. It is said that his approach to record keeping might be appropriate in respect of a UK claim but is unrealistic in relation to this project. Although such a plea would be consistent with Mirant’s criticism of Mr Elliott’s regime it sits a little uncomfortably with the American style approach after June 1997.

Mirant says that in evidence Mr Hackett effectively conceded that some allowance should be made for overheads and that I should arrive at an appropriate figure.

I have found that Arup is not responsible for any delay to the completion of the Project so Mirant cannot in any event recover under this head of damage. I note that a claim effectively for overheads is made in relation to the cost of remedial works. If I had had to arrive at a figure it would be $400,000 a month.

In relation to the claim for $15,799,777 for additional preliminaries and disruption costs, the main issue is whether the acceleration agreement was concluded to overcome delays caused by work to the boiler foundations or to overcome delays which occurred for other reasons, in particular delays to the civils.

Similarly in relation to the payment of $10,273,060 Mirant claims that the parties reached an agreement that the works should be accelerated in the apprehension (which was correct) that the boiler foundation had caused 5 months of critical delay and that this was the predominant reason for making the payment.

The quantum experts Mr Lechner and Mr Hackett considered the payments of $15,799,777 In the event of liability being established Mr Hackett raised the following specific questions on the figures:

Mirant says that the onus is on Arup to challenge the sums claimed as paid to Alstom and its sub-contractors. Arup had access to and inspected Alstom’s documents. If Arup wished to press the point it should have obtained access for Mr Hackett to Alstom’s documents so that he could verify Mirant’s claim and it failed to do so. Mr Hackett agreed that all the sums were paid by CEPAS/SCC to Alstom. Mirant claims that this is sufficient for it to prove its case.

There is one specific matter relating to NEIE’s costs. It appears that $3.1 million was paid by Alstom to NEIE but that Alstom recovered $4 million from SCC. It is said by Mirant that despite the fact that Clause 7.5.4 of the Consortium Contract provided that as a generality profit is not recoverable as between consortium members this is irrelevant because the acceleration agreement was negotiated to deal with the particular situation that had arisen. I have heard no justification for the substantial profit that Alstom made and would regard such an increase as unreasonable and irrecoverable.

The claim for $10,273,060 for acceleration has been the subject of an agreement between the quantum experts Mr Lechner and Mr Hackett. It is clear that they did not find it easy to work together and the result represents a welcome narrowing of views.

Mr Lechner traced invoice amounts to receipts and cheque vouchers where they were available. Where they were not available he relied on either the available Alstom receipt or SCC cheque voucher to verify payment. He concludes that nearly 70 per cent of the acceleration milestone payments are supported by Alstom receipts and SCC cheque vouchers. This amounts to US$7,191,420. He concludes on this basis that US$9,460,095 was paid to Alstom in respect of acceleration measures.

Mr Hackett, Arup’s quantum expert, notes that the cheque vouchers evidence an intention to pay rather than a payment. He doubts the reliability of many of the vouchers since the dates on which authorisation was give precede the date of the invoice.

He concludes that if the milestone dates in the draft incentive agreement were to be enforced Alstom would be entitled to a payment of $7,350,000. He is satisfied that $6,975,000 had been verified. He notes that SCC later withheld $2,800,000 because the draft completion acceleration agreement had not been signed. If this sum is deducted, it would give a net figure against the sum claimed of $7,473,060.

The figures are computed on the basis of three scenarios: (a) the figures agreed as verified without reference to missed milestones, total US$9,460,095 with US$820,375 unverified; (b) milestone targets with a grace period of five days (relevant to payments to NEIE), US$8,921,658; and (c) milestone strictly applied, US$7,350,408.

The issue I have to decide is whether, if I had not made my findings that Arup was not liable for that period of delay which was caused by SCC’s lack of urgency in agreeing with Alstom and implementing a solution to the boiler foundation problem, Arup would be liable to pay the acceleration and incentive claims.

Mirant’s case is that the parties reached an agreement that the work should be accelerated “in the apprehension that the boiler foundation delay had caused five months of contractual delay to the completion of the Project. They would not have entered into the settlement if they had not had the apprehension”. It is argued that the parties entered into the draft acceleration agreement therefore as a result of the boiler foundation failure and not as a result of any other delay.

Mirant contends that it is clear on the evidence that the boiler failure was the only reason why the acceleration payment was contemplated at all. The critical delay of five months was so great that it needed to be tackled urgently. Secondly, it brought the delays back in line with the civils.

If I am against Mirant on this argument I am invited to pro-rate the acceleration payments between the boiler foundation failure and the civils.

Arup’s case on liability to pay both the acceleration claim and the incentive claim is

Mr Benfield, who had recently become involved as Mr McManus’s replacement, confirmed that it was “our desire and goal to resolve all outstanding issues so that we could move the Project forward without discussions on claims at that point”. Mr Benfield confirmed that no distinction was drawn between payments attributable to the boiler failure and payments in respect of other claims and delays.

I am asked by Arup to note the background history between Alstom and SCC, which I have recorded in the factual narrative. In the view of Alstom (and Southern’s employees) the Project was in substantial difficulties when Mr Elliott left in June 1997. This applied not just to problems with the boiler foundations but also to the increasing delays even against the March 1997 Rev E programme.

It is clear from the documentary and oral evidence that the situation worsened before it improved. It took until November/December 1997 for the new management to get a grip on the Project. What was required in early 1998 was a fresh start and improved co-operation between the onshore consortium members. I am satisfied that this was as important a motivation for the acceleration payments as reducing delays caused allegedly by the boiler foundations and the civils and in putting the Project back on schedule.

I accept the evidence of Mr Benfield at day 6 page 74, that “everyone was saying that we need to co-operate to accelerate and make the schedule up as much as possible”… “The analysis we performed was only one that evaluated the potential cost impact of LD (delay payments) and our own additional overhead and penalties possibly payable through the Energy Conversion Agreement versus the cost of the acceleration scheme and settlement of the damages or claims”. I am satisfied that the draft acceleration agreement was indeed a global sum to settle all outstanding claims and provide a fresh start.

Mirant contends that the sums of $15,799,777 and $10,273,060 were paid as a consequence of boiler foundation failure and were reasonable. Arup contends that the settlements were unreasonable. First it contends that it was entered into on the wrong premise that the Unit 1 boiler was five months in delay.

Frank & Vargesson (F & V) had been employed to investigate Alstom’s claim. In its preliminary report in December 1997 it had indicated that actual delay could not be determined from the information currently available but it would expect there to have been a reduction of one to two months from the five months delay when the original delay was established. This incidentally is in line with the investigations which have since been undertaken.

The covering letter from Mr Sayers of F & V dated 10 December 1997 made it clear that F & V required a substantial amount of information from Alstom to support its claim. It also referred to the need for record keeping of failure/breach as late information by GECA which could be used to offset future liabilities which might arise.

Once the draft acceleration agreements were reached on this rather unscientific basis, SCC dispensed with F & V’s services, so their investigation was never completed. Mr Kuester said that the reason why they settled with Alstom when they did was “We did not have the luxury of going through a several months’ study to assess the claim. We were losing time and we needed to move forward with the Project”.

Mr Benfield confirmed in oral evidence that no analysis of any of the claims was undertaken and that he wished to resolve the claims without delay. As he put it, “The analysis we did was an overall economic analysis of the impact versus the cost for damages and the benefits to the Project of acceleration, not a detailed analysis by milestone or claim by claim”.

In reaching my conclusion I remind myself of the elements of the law relating to settlement of claims and in particular that the claimant must prove that the defendant is liable to the claimant for a loss which can be measured by reference to the settlement.

In this case it would be impossible to do that even if I had found that Arup was liable for the whole of the delay to the work on the boiler foundations. The delay to the civils started before the boiler foundation failure. The precise extent of the delay to the civils was not measured either at the time nor by the programming experts. I am not able to reach any precise conclusion on the basis of the evidence before me. I find that the claimant had, at least in 1999, documents in its possession which might well have enabled me to reach clearer conclusions but I am satisfied that the civils were at least three months in delay on average and in some respects significantly more by February 1998 and had been in much greater delay. I note that the civils had been in increasing delay until the late Autumn 1997 and the payments were made to reflect the progress that had already been made in arresting the continuing delay and turning the project round as well as the continuing progress that it was expected would continue to be made (see also my answer to Issue 2 above).

The settlement itself must be shown to be reasonable. Even in the difficult circumstances in which SCC found itself in relation to the progress of the Project and its dealings with Alstom, I do not regard it as reasonable for it to have reached the settlement of all its outstanding claims with such a minimal analysis.

Further, it is clear to me that the settlement was predicated in part at least on the erroneous basis of a five-month delay to the boiler foundation steelwork when in fact the total delay was (a substantial part not being attributable to Arup) at that stage no more, and probably less, than three months and there were civil delays, some of which exceeded that time and had already started to be accelerated. If, as the claimant contends, the only reason for the agreements was to reduce the delay to the boiler foundation from five months to three months, then the settlement was based in my view on a misapprehension and one which could well have been avoided if any appropriate investigation had taken place.

I have serious doubts as to whether this was SCC’s dominant reason for agreeing to make the payment. The dominant reason was that it was necessary, in view of all the problems which the Southern team had found when they came on site, for SCC to make a substantial payment to Alstom in order to put the working of the consortium on a positive and constructive basis and to reduce the delays to the civils to an acceptable level. I am satisfied that Arup is not liable to pay the cost of either the acceleration or the incentive agreement between SCC and Alstom.

The figure (as a figure) is not disputed by Arup but Arup disputes the liability to pay the premium. On the basis of my primary finding that Arup is not responsible for any additional delay, this claim cannot succeed.

However I should set out the contentions and the evidence and reach a conclusion on the basis that I am wrong on my main finding.

Mirant’s case is that as a result of the delayed completion of the Project (it contends as a result of the problems with the Unit 1 boiler foundations) SCC was required to extend its insurance cover under clause 28 of the draft Acceleration Agreement. Mirant contends that it was required to purchase the insurance cover. If Arup is found to be responsible for only part of the delay, Mirant contends that it should pay a pro rated proportion of the cover.

Mirant relies on the following evidence. The endorsement of policy reference No.CAR 001-00204 indicates that the insurers agreed that the period of the original cover was extended by three months for both units at a cost of US$621,607. The debit note recording the premium to be paid by SCC to the Insurance Brokers has been disclosed. Mr Benfield gave his approval that payment should be made. Mr Benfield said in oral evidence that it was necessary to extend the insurance cover.

Mr Hackett said that he could not understand why SCC needed to purchase three extra months’ cover when the existing policy had in it what amounted to the availability of an extension of time of two months. I agree with Mr Hackett’s conclusion.

Mirant contends that I should find on the balance of probabilities that the premium was paid. They contend that if it had not been paid this would have been objected to by the lenders who would not have agreed to the Project being left without cover. Further, the insurers accepted claims relating to the extended period and would not have done so if the cover had not been in place.

Arup contends that even if the payment had been made (and Mirant was to succeed in its other contentions) it is not liable because SCC already had cover extending two months beyond the completion date and in any event in relation to the fact that the policy seemed to have built-in buffer period, Mirant contends that the Project may have needed cover beyond reliability trials and that Mirant was entitled to maintain the buffer which it had originally purchased. Arup also contends that if it was purchased, insurance for any additional period should have been purchased at a lower premium.

Having considered the matter it seems to me that if a claim is being made for a sum as large as $621,607, Mr Hackett is right and there should be some proof of purchase of the three extra months’ cover. I am not satisfied in any event on the basis of the evidence that I have heard that such cover was necessary because the additional time was covered by the buffer.

This raises the following issues (apart from whether the boiler foundation problems delayed the commencement of the Reliability Trials and whether CEPAS can recover for SCC’s losses and whether Arup is liable in relation to the acceleration agreement – see above):

This claim of $5,727,000 is based on a monthly loss of $1,909,000. It mirrors Mirant’s claim for three months of time-related costs. Again Mr Lechner uses 1998 figures whereas Mr Hackett uses 1997 figures.

The additional time-related costs relate to:

Since it is clear on the basis of findings which I have already made, I deal briefly with these issues.

Mr McManus at a very late stage disclosed documents that he had discovered on the servers at the Southern Company. Mr Hackett has used them to revise his calculations. It is Mirant that contends they are unreliable. It does so for the following reasons:

Mr Lechner’s final figure set out in Appendix 6 (prepared at my request during the trial - Scenario C of the Second Joint Statement) showed an average monthly time-related cost of $1,045,190. For a three month period the figure would be $3,135,170. I am asked to prefer this figure to Mr Hackett’s lower figure.

In relation to the individual items I accept that bonuses paid to expatriate staff were a normal part of their overall salary package and therefore recoverable as part of salary.

I have more difficulty with the overhead for the Manila Office since there are no reliable figures. The experts are agreed that a sum is recoverable if it can be quantified. With some misgivings I accept that the sum in agreed Scenario C would have been recoverable.

Similarly, I accept Mirant’s contention in relation to diesel used at site, water used at site and equipment hired. I therefore accept Mr Lechner’s monthly figure of $1,045,190.

However, for reasons which I have already set out, I find that the sums claimed were not caused by the failure of the Unit 1 Boiler foundations.

Mirant does not pursue this claim.

Arup has a number of defences:

Mirant claims the sum of US$1,522,888 in respect of the cost of remedial works. In relation to the figures, Mr Lechner says that that sum is the sum which SCC is liable to pay. Mr Hackett says that US$1,408,806 was paid in respect of the direct costs for rectifying the failed boiler foundations.

Two issues arise in relation to the figures. The first question, namely whether it was reasonable for Stein to dismantle the steelwork and then re-erect it has already been answered in Mirant’s favour. The second question is whether or not the sums expended were reasonable. Mirant contends that the sums were paid as part of the draft Acceleration Agreement and the onus is on Arup to show that they were unreasonable.

Mr Hackett makes a number of general points (which are rejected by Mirant).

Mirant’s contention is that Mr Hackett’s approach is unrealistic and disproportionate.

In relation to specific items Mr Hackett made the following points:

1. He appeared to query the claim for $100,000 for the GWS crane. In the event Mr Hackett accepts that the cost was incurred and does not say that it was unreasonable.

2. Mr Hackett claims that the cost of NEIE extracting and rebuilding the foundations should have been $300,000 and not $334,000. He arrives at this conclusion by applying rates from a different power station. I am prepared to allow this claim for $334,000, i.e the sum claimed.

3. Mr Hackett questions the figure of $271,000 for additional temporary equipment. In the event Mr Hackett does not say that the sum is unreasonable.

4. The claim for $149,000 for bolts is queried on the basis that he cannot be sure that the bolts were not used elsewhere. I found no evidence that Alstom was making a dishonest claim. If such a serious allegation was being pursued it would no doubt have been put to Mr Hall.

5. Mr Hackett is unable to support the claim of $154,000 for additional Alstom staff. Again, this matter was not put to Mr Hall. I am prepared to allow the claim in full.

6. Mr Hackett says that the sum of $35,000 claimed for additional support staff is unsubstantiated. There is no proof that the staff actually worked the hours claimed. Again I am not prepared to disallow the claim. If the matter had been seriously contested by Arup it would have been put to Mr Hall.

7. Alstom paid $82,000 to consultants. Mr Hackett queries the sums paid to Mr Wigginton and Mr Hawkins. I have seen the extensive documentary evidence from Mr Wigginton and Mr Hawkins. In addition, Mr Hawkins has twice given evidence before me. The cost claimed is reasonable and I will allow it.

8. Mr Hackett says that the sum for overheads of $266,000 claimed is not substantiated. Mirant claims that a reasonable sum for overheads should be allowed even if it cannot be fully substantiated. It seems to me that the sums claimed are reasonable and recoverable.

9. The sum claimed of $72,000 for the PSC hydraulic boiler lift is agreed to be referable to work on the boiler and to have been paid. It is said by Mirant that depending on the assessment as to whether delays to the drum lift were caused by other civil delays they would not be referable to the boiler foundation failure. In line with my previous findings I conclude that this delay is not referable to the boiler foundation failure and cannot therefore be recovered.

I conclude therefore that Mirant are entitled to recover the sum of $1,522,888 less $72,000, i.e. $1,450,888 in respect of direct rectification works to replace the failed boiler foundations subject to consideration of Arup’s remaining issues that the sum having been paid by insurers cannot now be recovered by Mirant and that the costs fall outside Mirant’s contract.

The principle relied on by Arup is that the law does not allow an action between two or more persons who are insured under the same policy against the same risk – see Petrofina UK x Magnaload [1984] QB 127 applying a decision of the Supreme Court of Canada.

In Co-op Retail Services v Taylor Young Ltd [2002] 1 WLR 1419, the House of Lords had reason to consider the extent of the principle. In his speech Lord Hope referred to Lloyd J’s consideration of the rule in The Yarim [1979 Lloyds Rep 45.55:

“In my judgment the reason why an insurer cannot normally exercise a right of subrogation against a co-assured rests not on any fundamental principle relating to insurance but on ordinary rules about circuity.”

Although the following reasoning did not form part of the decision the following passage in Lord Hope’s speech is very persuasive:

“65.

Although your Lordships do not need to resolve the issue in this case it seems to me that there is much force in the point that the rules about circuity of action do not provide the explanation. I would prefer to say that the time basis of the rule is to be found in the contract between the parties. In Hopewell Project Management Ltd v Ewbank Preece” [1994] 1 Lloyds Rep 448,458, Mr Recorder Jackson QC said that in his view it would be nonsensical if those parties who were jointly insured under a contractors’ all risks policy could make claims against one another in respect of damage to the contract works, that such a result could not possibly have been intended by those parties and that had it been necessary for him to do so he would have held that there was an implied term to that effect. I would be content to accept that as a satisfactory basis for the rule on which, had it been necessary for them to do so, Wimpey & Hall would have been entitled to resist this claim (1437-1438).

On 20 June 1996 CEPA purchased a policy of insurance to cover losses from material damage to the insured property, third party losses and insurance against losses resulting in delays in the start up of this power station. The insured included (a) the members of the Consortium and their affiliates, (b) the parties to the Supply Agreement and the Construction Agreement, (c) contractors and sub-contractors when working on site, and (d) consultants and sub-contractors in relation to their subcontracting services on site.

Mirant contends that the principle in Petrofina UK v Magnaload can only have effect when:

Mirant contends that:

(2) Arup are not contractors or sub-contractors under the Policy. In Hopewell Project Management v Ewbank Preece [1998] 1 Lloyds Rep 448 Mr Recorder Jackson QC said that the terms contractor and sub-contractor were in his experience invariably used to refer to persons, firms or companies that carry out physical works of construction.

(3) This Policy does provide some cover for work by Consultants but this is limited to work carried out on site (see Paragraph 1(4) of the Schedule).

(4) The services in respect of which Arup has been held liable are design services which were carried out off site and are not therefore covered by the Policy.

(5) PEC was not co-insured with SCC, CEPAS and Alstom in respect of losses for delay either in the supply or construction consortia. Under the terms of Clause 3 only those LADs recoverable in respect of delayed commencement were those received under the terms of the Supply and Construction contracts between PEC, SCC, CEPAS and the Alstom companies.

(6) An express contractual agreement between PEC, SCC, CEPAS and the Alstom companies supersedes any implication that might be derived from the fact of co-insurance.

(7) In any event appropriate credit has been given in respect of the Insurance Settlement.

This is a complicated and difficult issue. I am not, on the basis of the existing submissions, prepared to reach a final conclusion without hearing further oral argument.

For reasons which I have set out in considerable detail I reject all Mirant’s claims except for the cost of the remedial works on the Unit 1 Boiler foundations. I would have given judgment for Mirant in the sum of $1,450,888 but taking into account agreed credit to be given by Mirant for payment of insurance monies the claim is dismissed.

Contentions of the Parties (601)

The Law (610)

Conclusions (628)