Merit Process Engineering Ltd v Balfour Beatty Engineering Services (HY) Ltd

This is an application by the Defendant made under CPR 62.3(2) and section 9 of the Arbitration Act 1996 to stay the action brought by the Claimant. By an order made by Ramsey J on 15 March 2012, as varied by me on 31 March 2012, the parties were ordered to serve submissions and evidence setting out their position in relation to the application which was originally listed to be heard on 4 April 2012. It was put back to 18 May 2012 at the request of the Claimant.

A preliminary difficulty was that the Claimant made it clear that it wished to rely on oral evidence and did not consent to the application being determined on the basis of witness statements alone, unless the contents of the statement of its witness, Mr Tony Wells, a director of the Claimant’s parent company, was accepted as true for the purposes of the application.

Miss Ruth Wilkinson, of Dundas & Wilson, who appeared for the Defendant, had indicated before the hearing to her opponent, Mr James Bowling, who appeared for the Claimant, that she did not wish to cross-examine Mr Wells. However, Miss Wilkinson was not prepared to accept the truth of the contents of his witness statement, a position that Mr Bowling was, unsurprisingly, not prepared to accept.

Accordingly I indicated to the parties at the outset of the hearing that the most appropriate course might be for the parties to make their submissions in the light of the evidence that had been served on the basis that if I thought it necessary to hear evidence in order to deal with the application fairly, I would adjourn it to enable the relevant witnesses to be called and cross-examined. If I felt that this was not necessary, I would determine the application on the basis of the written evidence as served. Both parties were content for this course to be adopted and so the application proceeded on that basis. This was because it seemed to me that if the Claimant were to be successful in relation to the Main Installation package on the basis of the documents, it would have no need to rely on any oral evidence.

The action brought by the Claimant relates to three separate work package contracts, if contracts they were, made with the Defendant, two of which were closely related - known as the Main Installation package and the Vacuum Drainage package - and one of which involved a wholly different project, at a different site and involving different people. That was the Isis contract.

It has been accepted by the Claimant from the outset that the Isis contract did incorporate a valid arbitration clause and that there can be no answer to the Defendant's application for a stay of the proceedings in relation to that contract. However, the Claimant submitted that the Defendant was being unreasonable by insisting on its right to have that dispute referred to arbitration if the other two disputes were to be resolved by litigation. That has given rise to a small issue in relation to costs.

So far as the Main Installation package and the Vacuum Drainage package are concerned, the former is by far the more substantial claim. The subject of the Vacuum Drainage contract is a simple claim for £12,000, said to have been deducted by the Defendant by way of retention. Under the Main Installation package the Claimant claims over £685,000 plus VAT. It is convenient to deal with that part of the application first.

The Claimant was invited to quote for the installation of certain pipework, plant and other work on a project known as the Diamond Synchrotron Project. The parties negotiated for some time during 2003 and 2004, during which the scope of the work originally contemplated was significantly reduced, but eventually - by a letter of intent dated 2 March 2004 - the Claimant was invited to start the Main Installation works under the terms of the letter pending the agreement of a formal sub-contract. As the works progressed the limit of expenditure under the letter of intent was raised in stages from the £500,000 stated in the letter to £1,600,000. The final limit was agreed in September 2004.

The main contractor was Costain, to whom the Defendant was a sub-contractor. However, the Defendant did not sign the sub-contract with Costain until 10 December 2004. It was accepted by Miss Wilkinson at the hearing before me that, whatever the extent of the agreement between the parties as to the terms of the sub-contract for the Main Installation package, there was no intention to create legal relations until the terms of the Defendant’s contract with Costain had been finalised.

After confirming that it was the Defendant's intention to enter into a contract with the Claimant for the relevant work (which I do not need to set out), the letter of intent continued as follows:

“. . .

Contract documents will be sent to you in due course. In the meantime please accept our instructions to commence the works with all due expedition and in accordance with our directions.

These instructions are given to you subject to contract (and include the provision of a Performance Bond to the Value of £80,000 or 5% of your agreed Contract Value) the conditions of which will be HY/SUBCO/1 Edition 1 July 2001 Revision, but it is agreed that if the contract is not concluded between us, subject to the following restriction, you will be entitled to re-imbursement of your actual costs, properly and exclusively incurred in complying with these instructions, but you will have no entitlement to claim loss of profit or any other consequential loss, cost or expense.

Interim payments will be made to you. The first Valuation Date will be . . .

Your entitlement to re-imbursement in complying with these instructions is limited to an amount not exceeding £500,000 (Five Hundred Thousand Pounds) unless, further instructions are given to you by [the Defendant] in writing expressly or clean this financial limit. You are also required to:

● Forward a copy of your current Employers Liability and Public Liability insurances, and the completed Acknowledgement Slip from our "Health Safety & Environment Guide for Sub-Contractors" prior to commencement of any works on site.

● . . .

All of the above requirements must be satisfied prior to commencement of any works on site. Please signify your acceptance of the terms of this instruction by signing and returning to us a copy of this letter.”

(My emphasis)

It is to be noted that this letter contained no limitation as to the period for which it would remain valid.

The following day, 3 March 2004, Mr Wells, acting on behalf of the Claimant, sent an e-mail to Andrew Edwards, then a Senior Buyer of the Defendant, in the following terms:

“Confirming yesterday's discussion:

5% limit on liquidated damages is accepted

We will provide a 5% (GBP 80,000) bond until December 04

We will provide a milestone payment schedule by Friday 12 March

If you send through a copy of your T&Cs, we can start to review.”

On 5 March 2004, Mr Edwards replied as follows:

“Confirm all acceptable. Attached doc for your perusal. It's not yet complete as we still have loose ends to tie up with Costain so the contract specifics are still missing.”

On 24 March 2004 Mr Edwards had a meeting with Mr Wells and a Mr Iain Paterson, the Commercial Manager of the Claimant, and on the following day, 25 March, he sent an e-mail to Mr Wells, copied to Mr Paterson, in the following terms:

“Further to our meeting yesterday with Iain, we seem to have one outstanding item, being settlement discount being included. As I recollect we agreed on an overall cost of £1,550,000.00 for the project, but still had issues over the payment being 60 days and also the fact that we could not make any payment for anything off-site.

We agreed that we would raise the contract figure to £1,600,000.00 on the basis that £22,000.00 would accommodate your financing the project costs due to non-payment off site and £28,000.00 for the deduction of 2.5% settlement discount in order that we could make payment in 35 days from application dates agreed.

If you are now stating this causes a problem then we have no alternative but to reduce the contract price by £28,000 and revert to 60 days payment terms.”

On receiving this Mr Wells sent Mr Edwards a short e-mail saying that he would call him the following day to discuss and “agree something fair and reasonable”. On the following day, 26 March 2004, the two of them spoke on the telephone, after which Mr Wells sent the following e-mail to Mr Edwards:

“Confirming our conversation this morning.

We accept your proposal of 30-35 day payments, with valuations of onsite materials only; at a price of GBP 1,600,000.

. . .”

This suggests that the Defendant's proposal described in the e-mail of 25 March 2004 was agreed.

However, on 30 March 2004 Mr Paterson sent an e-mail to Mr Edwards in the following terms:

“I understand that the only outstanding issue related to the 2.5% Discount Clause in the Sub-Contract is now resolved with Tony.

To confirm, the agreement reached is that the Sub-Contract Amount is £1,637,500.00 which is subject to 2.5% Discount. Payment Terms to be based on 35 days.

Therefore all remaining terms are now agreed in principle - could you please therefore confirm when we can anticipate receiving the formal sub-contract for signature.

. . .”

There was no reply to this e-mail.

In his witness statement prepared for the hearing, Mr Wells said: “We were of the view that the price for the works should be £1.6m net of Main Contractor’s Discount ("MCD") of 2.5% (£40,000), whereas [the Defendant] were of the view that the price of £1.6m should be gross of MCD".

Mr Wells also dealt in his witness statement with the conversation with Mr Edwards that took place on 26 March 2004. He said this:

“37.

. . . We were only able to agree that the contract price should be £1.6 m, and that we could only apply for payment in respect of on-site materials. This price compensated us for financing the purchase of offsite materials. As to the issue of MCD, I believed that by the end of the conversation we had not reached agreement on whether the £1.6 million did or did not include any allowance for the MCD.

38.

It was important to us that the £1.6 m did not include MCD because £40,000 (i.e. 2.5% MCD) would have a significant impact on the profitability of the project for us especially in the light of the reductions to the sub-contract sum already negotiated by [the Defendant]”

This account, made some 8 years after the conversation in question, does not sit easily with Mr Wells’s e-mail of 26 March 2004, sent immediately after the conversation, in which he appeared to be saying that he had agreed to a price of £1.6 million. It also sits uneasily with Mr Paterson's e-mail of 30 March 2004 in which he referred to a price of £1,637,500, which was neither 2½% of £1.6 million nor a figure that had been mentioned in any of the previous e-mails.

However, as I have already indicated, no one on behalf the Defendant replied to Mr Paterson's e-mail of 30 March 2004 in order to point out that the agreed figure was not £1,637,500, but £1.6 million (if that was still the Defendant's position). There matters rested for some months and in the meantime the Claimant continued to work under the terms of the letter of intent.

The debate eventually resumed in March 2005 when the Defendant sent a letter, dated 21 March 2005, enclosing the sub-contract agreement including the Conditions of Sub Contract, HY/SUBCO/1 Edition 1 Sept 2003 Revision. I note that this was not the same revision as was referred to in the letter of intent, but it has not been suggested that anything turns on this. The important point is that, in the form sent, it included a dispute resolution procedure that required any dispute to be referred to arbitration. It is common ground that this, if incorporated into the sub-contract, was a valid arbitration clause.

On 5 April 2005 the Claimant acknowledged the letter and requested that the sub-contract be re-issued "with the following amendments in line with our agreement". The various amendments were then set out, of which only two have been relied on by the Claimant. They are:

“Sub Contract Sum: Amend to reflect agreed amount of £1,637,500 (as attached E-Mail I Paterson to A Edwards dated 30/3/04)

. . . Employers Liability £10 m/Public Liability £5 m”

To this the Defendant replied as follows on 22 April 2005:

“Further to your letter . . . dated 5 April 2005, I have made the relevant amendments requested, however, some items have remained unchanged and I detail those below:

1.

Contract Value remains as £1,600,000.00. The original agreed value was £1,550,000.00, however [you] were looking for payment on account of materials due to the time frame between the manufacture of the racks and delivery to site being some time. We were unable to accommodate this, also the subject of the 30/35 day payment option. In order to make a reasonable compromise it was agreed that we would increase the Contract Value to £1,600,000.00 to accommodate your financing costs and to offer a part gesture toward [you] for offering the 2.5% Settlement Discount.

2.

. . .

3.

Article 1.3 Page 8 Item (d) Any shortfall is covered by Site Insurances

This produced the final letter in the exchange, dated 9 May 2005, from the Claimant. It read as follows:

“Further to receipt of your letter dated 22 April 2005 as referenced above, we are very concerned that the proposed Contract Value does not reflect the final agreement between yourself and our Mr T Wells and respond to the individual points using your annotation:

1.

We confirm the following and attach supporting correspondence

[The relevant e-mails of March 2004 - to which I have already referred above - were then listed]

The agreed value was £1,637,500 less 2.5% discount for 30/35 day payment terms - please therefore amend.

2.

Noted.

3.

Do not fully understand your comment - if the intention is that any shortfall between [the Claimant] insurance level of £5 m and the stated £10 m level, is to be covered by Site Insurances, then where is this stated. We would anticipate this being documented.”

The response to the remaining points in the Defendant's letter was “Noted”, and one typing error was pointed out.

No further correspondence followed and in the meantime the work continued. The Claimant never signed or returned the contract documents.

The Appendix to the Sub Contract Conditions provided, in relation to Article 1.3 (d) of the Particulars of the Sub Contract, as follows:

“Level of Insurance (Referred to in Condition 4 (3) and to be £5,000,000 for any one occurrence unless otherwise stated):

£10,000,000”

Clause 4(1) of the Contract conditions provided that the Claimant was to be liable for and was to indemnify the Defendant in respect of personal injury to, or the death of, any person arising out of or occurring in the course of the works, and clause 4(2) contained a similar provision in relation to damage to property. Clause 4(3) required the Claimant to insure against all liability arising, or likely to arise, under the two previous clauses in an amount of not less than £5,000,000 for any one occurrence, "or such other limit as may be detailed in the Appendix to the Articles of Agreement".

Thus far, therefore, it seems reasonably clear that the level of insurance required in respect of both personal injury and public liability was to be £10 million, and not £5 million. However, it is not clear why the Claimant, in its letter of 5 April 2005, referred to the requirement for Employers Liability cover as being £10 million and Public Liability cover £5 million, rather than the level for both being £10 million.

The Defendant’s response, in its letter of 22 April 2005,that "Any shortfall is covered by Site Insurances", does not shed very much light on this. What it appears to have been saying is that any shortfall in the cover taken out by the Claimant would be made up by some form of contract works insurance taken out by the Defendant, on which the Claimant would presumably be a named insured, so that the Claimant would not be in breach of the sub-contract if it carried insurance only to the limit of £5 million.

However, as I read the Claimant's letter of 9 May 2005, it was not unduly troubled by the Defendant’s response: it appeared to be saying that if the position was, or was to be, as stated by the Defendant, then this needed to be made clear in the contractual documentation. By implication, therefore, the Claimant was indicating that if this was done it would have no problem with it. That was hardly surprising, since the Defendant’s proposal appeared to amount to leaving the Claimant’s insurance arrangements as they were.

Mr Wells dealt briefly with the insurance position in his witness statement. However, he did not distinguish between the different levels of cover for the Employers Liability insurance and the Public Liability insurance that were referred to in the Claimant's letter of 5 April 2005. He went on to say this:

“We responded on 9 May 2005 explaining that we did not understand what this meant, and that we required the subcontract to document that we only needed insurance of £5m. That point was never responded to by [the Defendant]."

I do not consider that this passage accurately reflects the contents of the Claimant’s letter dated 9 May 2005. As I have already said, I consider that the Claimant was saying that, if the position was to be as set out in the Defendant's letter, then it should be clearly reflected in the contract documents. In my view, unless the Defendant disagreed with the Claimant’s observation, this did not call for a response from the Defendant.

It must be remembered also that by this time the work had been proceeding for well over a year under the terms of the letter of intent and, presumably, on the basis of the insurance arrangements as disclosed by the Employer’s Liability and Public Liability policies provided by the Claimant in response to the penultimate paragraph of the letter of intent.

The final exchange of letters dated 22 April and 9 May 2005 strongly suggests that the parties had not agreed the contract price. The Claimant was asserting that it was £1,637,500 and the Defendant was asserting that it was £1,600,000.

This difference essentially, although not exactly, reflected the 2.5% main contractor’s discount. It had been a bone of contention from the time of the original negotiations in March 2004. Whilst at one point - when Mr Wells sent his e-mail of 26 March 2004 - it looked as though agreement had been reached, the position was then contradicted (or, as the Claimant might say, clarified) by Mr Paterson's e-mail of 30 March 2004.

Miss Wilkinson submitted that the price of £1.6 million had been agreed and that the only difference between the parties related to the application of the main contractor’s discount and that this did not constitute an essential term of the agreement. She seemed reluctant to accept that what this meant in practice was that there was a difference in the two parties’ positions on the contract price of about £40,000. In my judgment, this issue cannot be finessed by describing the difference as a difference about the application of the main contractor's discount. The reality disclosed by the exchange of letters between March and May 2005 was that, as far as the price was concerned, the parties were £37,500 apart.

£37,500 may not seem a substantial amount by comparison with a contract price in the region of £1.6 million, but I cannot see how it can be regarded as either de minimis or otherwise non-essential. Mr Bowling submitted that contractors' profits on projects such as this are not uncommonly of the order of 2-3%, in which case the 2.5% main contractor's discount would be very relevant. Whilst Mr Bowling's submission is not evidence, it is within the knowledge of the court that the margins on contracts such as this can be low. Further, his submission was supported by the witness statement of Mr Wells, who said that the application of the main contractor's discount would have a significant impact on the profitability of the project.

The other difficulty facing the Defendant is that there was no machinery agreed by the parties by means of which a fair price could be arrived at. I can see that it might be open to a party to argue that a disagreement about the final contract price might not be a bar to a finding that the parties had concluded a contract if there was a machinery, independent of the parties, by which the price could be fixed. However, there is nothing of that sort in this case.

In the Defendant's written submissions reliance was placed on the Claimant’s conduct after May 2005 and, in particular, the basis of its present claim for breach of contract which, the Defendants submit, is inconsistent with the assertion that there was no contract between the parties. The short answer to this submission is that it is not legitimate to use as an aid in the construction of the contract anything which the parties said or did after it was made: see James Miller & Partners v Whitworth Street Estates [1970] AC 572, at 603. The subsequent conduct of the parties may be used as evidence that they varied the contract or entered into a fresh one, but that is not suggested here.

Accordingly, unless compelled to a contrary conclusion by authority, I would hold that by 9 May 2005 the parties had not concluded a binding agreement - because they had not agreed on the price - so that the work was still being carried out under the terms of the letter of intent.

It is well established that parties may commit themselves to binding legal relations even though there are further terms still to be agreed or some further formalities to be fulfilled: see, for example, Pagnan SpA v Feed Products Ltd [1987] 2 Lloyd's Rep 601. In that case Lloyd LJ said, at 619:

But, as Lloyd LJ went on to observe in that case, the more important the term is the less likely it is that the parties would have left it for future decision. One would have thought that on almost any view the contract price is likely to be an important term in a contract such as this. If it depends only on factors that are capable of being independently assessed by a third party, such as the type or quality of a consignment of coal, then it might be that the parties would be content to leave those matters, and hence the price, to be determined by some independent third party. That is not the case here. The price for the Main Installation package was a matter for straight negotiation: the outcome would depend solely on how far each party was prepared to move.

I can find nothing in the exchange of letters in April and May 2005 that suggests that the Claimant was prepared to be bound by all the other terms, and to enter into a contract accordingly, leaving just the price - or the application of the main contractor's discount - to be negotiated at some stage in the future.

The situation in this case is not that dissimilar from the position in Jarvis Interiors v Galliard Homes [2000] BLR 33, where the parties had shaken hands on the price but the court found that the parties’ intentions as to the scope of the works and, in particular, the payment for variations, was uncertain. The Court of Appeal held that that uncertainty was such as to prevent an enforceable contract from coming into being. A relevant factor in that case, as in this case, was the provision in the letter of intent that if there was no formal contract, Jarvis would nonetheless be reimbursed for "all fair and reasonable costs incurred”.

In this case the Claimant was entitled to reimbursement of its “actual costs, properly and exclusively incurred in complying with” the letter of intent. Since that arrangement was stated to be "subject to contract", the parties’ relationship would be covered by the letter of intent until formal terms were agreed. It was not suggested by Miss Wilkinson that the arbitration clause in the form of subcontract was in some way to be implied into the contract created by the letter of intent.

However, I consider that the contrary applies in relation to the insurance provisions. It seems to me that either the Claimant had agreed that the insurance position should be left as set out in the Defendant's letter of 22 April 2005 or, less likely, it was prepared to leave the detail of the insurance arrangements to be resolved at a later stage. For the reasons that I set out above, I can see nothing in the letter of 9 May 2005 that indicates that the Claimant was taking the view that any remaining uncertainty about the insurance arrangements was some form of deal breaker.

I therefore reject Mr Bowling’s submission that there was an absence of agreement about the insurance arrangements from which it should be inferred that the Claimant was not prepared to enter into a contract as at 9 May 2005.

For these reasons I conclude that the Main Installation package was not carried out under the terms of any sub-contract that included an arbitration clause. Accordingly, the Defendant's application for a stay of the proceedings insofar as they relate to the Main Installation package fails.

In the light of these findings, the Claimant has no need to rely on the oral evidence of Mr Wells and therefore the question of adjourning the application so that witnesses can be cross-examined does not arise.

This package was closely related to the Main Installation package in that it involved work on the same project at the same site.

In this case there is just one document. On 31 March 2005 the Defendant wrote to the Claimant enclosing two signed copies of the contract documents for the work package for counter signature by the Claimant. There appears to have been no dispute about the price. As far as I can tell, the only matter that might have given rise to objection was the proposed insurance arrangements, which I understand to have been on the same terms as those in the documentation for the Main Installation package. However, for the reasons that I have given in relation to the Main Installation package, I find that this was not a matter which the Claimant regarded as necessary to have finalised before entering into the sub-contract.

Following receipt of this letter and the enclosed documents the Claimant proceeded to carry out the work. The evidence in the witness statements before the court does not suggest that there was any further discussion about the contents of the contract documents. In these circumstances, this seems to me to be a straightforward case of acceptance by conduct of the offer represented by the Defendant’s letter enclosing the proposed sub-contract documents.

Accordingly I find that a sub-contract did come into existence in respect of the Vacuum Drainage package upon the terms set out in the documents enclosed with the Defendant’s letter of 31 March 2005. Those terms included an arbitration clause and so the proceedings in relation to the Vacuum Drainage package must be stayed pursuant to section 9 of the Arbitration Act 1996.

There is no dispute that this package also must be stayed pursuant to section 9 of the Arbitration Act 1996.

Insofar as the Main Installation package is concerned, the Defendant's application for a stay fails. In relation to the Vacuum Drainage and Isis packages, the application succeeds and so the proceedings in relation to those two packages must be stayed.

In this judgment I have concluded that, as at 9 May 2005, the Main Installation package was not being carried out under the terms of any sub-contract that included an arbitration clause. I have not considered the state of the contractual relationship between the parties at any time after 9 May 2005 because that is the only date on which it was alleged by the Defendant that a formal sub-contract was concluded. Mr Bowling submitted that significant work was carried out by the Claimant which was outside the scope of the original letter of intent (as varied by the increase in the financial limit). In addition, he said that the Claimant sustained loss and expense caused by suspensions ordered by Costain. These losses, together with the cost of additional work, form part of the claim made by the Claimant in relation to the Main Installation package. The Claimant's entitlement in respect of these matters was not a question that I had to decide on this application and, accordingly, I have reached no conclusions about it. It is a question that must be left for determination in the action.

In the light of my conclusions on this application the Claimant’s application for costs in relation to the Isis package would appear to have no prospects of success, although I will afford the Claimant the opportunity to be heard on this if it wishes.

As to the costs of the application generally, my provisional view is that the Defendant should pay the costs even though it was successful on the Vacuum Drainage package. This is because the real issues in the application concerned the Main Installation package and on those the Defendant lost. I am assuming for this purpose that any costs attributable to the Isis package will be de minimis. However, I will make no order to this effect without giving the Defendant an opportunity to be heard, unless the parties can agree upon an appropriate order.