Court overturns ruling on payment of security account balance in concluded road work contract

Court overturns ruling on payment of security account balance in concluded road work contract

A commercial judge’s decision that a clause in a road work contract stating that certain monies were to be returned to “the Contractor”, meaning a joint venture, should be interpreted instead as a relevant contractor company that was part of that joint venture has been overturned on appeal to the Inner House of the Court of Session.

A reclaiming motion was raised by Scot Roads Partnership Project Ltd and Ferrovial Construction (UK) Ltd, the latter of which was involved in a joint venture with original pursuers Lagan Construction Group Ltd, now in administration. The defenders and reclaimers argued that the Lord Ordinary had erred in his construction of the relevant clause of the contract.

The appeal was heard by the Lord President, Lord Carloway, together with Lord Pentland and Lord Boyd of Duncansby. Barne KC appeared for the pursuers and McLean KC for the defenders and reclaimers.

Commercial common sense

In June 2013 the pursuers and the second defender, Ferrovial, formed a joint venture for the purpose of carrying out works for Scot Roads on several motorways. The contract defined “the Contractor” as the joint venture, while “Contractor Company” referred to any company forming part of the Contractor. Both Contractor Companies received Letters of Credit, which were delivered to the first defender by the joint venture.

On 5 March 2018, Lagan Construction went into administration, resulting in their exclusion from further participation in the management and profits of the joint venture, albeit they would continue to share liability for losses. The first defender insisted on payment of the Letter of Credit sum into the Contractor Security Account, which was done by the bank.

In due course, the Letter of Credit Discharge Date arrived, and under clause 5.5.6 of the contract the first defender was to return “to the Contractor” an amount equal to the account balance of the Contractor Company Security Account. This was paid into an account nominated by the joint venture by letter dated 26 July 2021. It was the pursuers’ position that the monies ought to have been paid to themselves, and that “Contractor” in clause 5.5.6 ought to be read as “Contractor Company”.

The commercial judge reasoned that, having regard to commercial common sense, the purpose of the account was to provide security for the first defender, and had both Contractor Companies become insolvent it would make no sense for the funds to be retained by the joint venture. It made sense for the funds to be returned to the person who had an obligation to account to the bank. The reclaimers’ position was that there were no grounds for the judge to use an alternative meaning, the relevant parts of the contract being clear and unambiguous.

No ambiguity

Lord Carloway, delivering the opinion of the court, began: “The case falls to be determined according to the well-established rules on the interpretation of contracts, recently repeated in Paterson v Angelline (Scotland) (2022). Parties’ intention is most obviously gleaned from the language which they have chosen to use. The court should not normally search for drafting infelicities in order to justify a departure from the natural meaning of that language. It should identify what the parties agreed, not what it thinks that common sense may otherwise have dictated.”

Addressing the construction of the relevant clause, he said: “The present case is not dissimilar to Paterson and the outcome should be the same. The commercial judge was correct when he acknowledged that the clause began in an unambiguous manner. It states that Project Co are to return the monies to ‘the Contractor’ by transferring an equivalent sum into a bank account specified by ‘such Contractor’. The Contractor is, in terms of the instance of the NWA, the joint venture.”

He continued: “It is expressly not the component companies, each of which is defined instead as a ‘Contractor Company’. These terms are used carefully throughout the NWA, upon which legal advice was taken. There is no ambiguity and thus no basis upon which a search for an alternative meaning, using commercial common sense or any other aid to the construction of ambiguous phrases, could be embarked upon.”

Lord Carloway concluded: “Quantum valeat had regard been paid to commercial common sense, the court would have struggled to find that it favoured the pursuers’ construction. Where there is an agreement between two persons, one of whom is a joint venture, and surplus funds exist at the end of the contract, the obvious consequence is that those funds be returned by the party holding them to the other party, i.e., the joint venture. What might happen to them thereafter is something which ought to be regulated by the joint venture agreement between the Contractor Companies, which failing by the general law.”

The reclaiming motion was therefore allowed and the case reverted to the commercial judge to determine future proceedings.

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