Developer of unprofitable Aberdeen flats loses appeal against breach of contract action by project manager

The Inner House of the Court of Session has refused a reclaiming motion by a development company ordered to pay over £200,000 to a project management firm it contracted to manage a development in Aberdeen after being found in breach of contract.

Developer of unprofitable Aberdeen flats loses appeal against breach of contract action by project manager

A commercial judge originally found Mile End Developments Ltd, the defender in the original action, had not been entitled to terminate the contract it had with Crimond Estates Ltd in respect of a project in Aberdeen. The defender appealed, arguing that the Lord Ordinary had erred in his interpretation of a reasonable remuneration clause in the contract.

The reclaiming motion was heard by the Lord President, Lord Carloway, sitting with Lord Woolman and Lord Pentland. MacColl QC appeared for the defender and reclaimer, and Johnston QC for the pursuer and respondent.

Insufficient profits

In 2013, the defender contracted the pursuer to provide project management services for a development on the site of Mile End School in Aberdeen. Following a series of complications, the defender terminated this contract in 2016 on the ground that the agreed budget for the contract had been exceeded by more than the contractually allowed margin of 5%.

The pursuer alleged that this termination was in breach of contract and raised an action for damages in the Outer House. Following proof, the commercial judge found that the defender had in fact approved the expenditure that had taken the project over budget and was thus not entitled to terminate the contract on that ground.

No damages were found to be payable for the breach as there were insufficient profits to entitle the pursuer to its agreed profit share. However, an alternative claim for reasonable remuneration for the pursuer’s services under clause 3.12 of the contract was successful, with the commercial judge awarding £211,831.63 to the pursuer.

It was argued by the defender that the clause only applied where the termination of the contract was lawful. Alternatively, if that argument was wrong, the judge should have held that the damages payable under the clause should be calculated so as to reflect an assessment of the quality of the services provided, which would have resulted in a substantially smaller award.

Anomalous outcome

The opinion of the court was delivered by Lord Pentland. He said of the construction of clause 3.12: “The starting point (and also the end point) is that the clause does not say that the termination has to be valid or lawful. It states only that termination has to be in terms of clause 6.2.7. That is in fact what happened in November 2016 when the defender sent the termination notice; it did so in terms of clause 6.2.7.”

He continued: “We can see no reason why the parties would have agreed that an entitlement to reasonable remuneration would arise where there was a valid termination but not where termination was in breach of contract. That would mean that the defender would be left better off in circumstances where its termination of the contract was unjustified. It is unlikely that the parties would have chosen to create the potential for such an anomalous outcome.”

Turning to whether the award represented reasonable remuneration, Lord Pentland said: “There is nothing said in clause 3.12 about reasonable remuneration being based on the quality of the services provided by the pursuer. There is no mechanism in the clause for carrying out an exercise of evaluating the quality of the pursuer’s services. What the clause does contain is a definition of reasonable remuneration. It is to be based on the open market rate for a project manager engaged on a similar development.”

He explained further: “This does not justify wider factors extending to the quality of the services or the time spent on them having to be factored in. We agree with the commercial judge that assessment of quality would be a laborious exercise with substantial scope for disagreement. As he observed, it would introduce unacceptable uncertainty as well as a need for the application of subjective judgement in relation to every aspect of the service provision.”

The reclaiming motion was therefore refused. An alternative argument that remuneration was not payable until another sum had been paid was also rejected by the Inner House.

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