Morgan Utilities, MUL, alleged that it had entered into an oral agreement at meeting with Scottish Water Solutions (SWS) for the works which it was to undertake. The oral agreement was not minuted or committed to writing, apart from a manuscript note by MUL’s Mr. Tyson. Because of this the parties disputed the basis upon which MUL was to carry out the works for SWS. MUL claimed payment of £3,520,255.50, which it said was the difference between what it had been paid and what it should have been paid under the alleged agreement.
From 1999, MUL had worked for one of Scottish Water’s statutory predecessors, Scotland Water, in Lothian and the Borders. In 2001, MUL had entered into a similar contract with West of Scotland Water, another of Scottish Water’s statutory predecessors for similar work in Dumfries and Galloway. Scottish Water was a company established under section 20 of the Water Industry (Scotland) Act 2002, and its shareholders were a number of companies, including United Utilities Contract Solutions, and Morgan Est, an associated company of MUL.
In early 2003, the parties had begun negotiations to extend the two contracts. Because the rates it was charging for the Lothian and Borders work was unprofitable, MUL wanted an arrangement for a rate for both areas which in combination would be profitable for them. by the summer, the parties had negotiated an amalgamated contract which covered the work in both regions, with more favourable rates than MUL had enjoyed in Lothian and the Borders. There was also the prospect that the predominantly rural works in Dumfriesshire and Galloway would make up for the more expensive works in Lothian and Borders and thereby allow the amalgamated contract to be profitable. This amalgamated contract took effect from 1 July 2003, and was subject to an extension to 30 June 2004. Whilst there was no guarantee that Scottish Water would give MUL a set amount of work, the parties’ shared understanding was that MUL would earn not less than £5.5m in the two years to 30 June 2004. MUL also understood that that it would carry out any work which Scottish Water instructed in Lothian and Borders outside Edinburgh or in Dumfriesshire and Galloway.
The privatisation of Scottish Water, which was now a consortium of companies, led to some changes in their working practices. It proposed that its infrastructure works would be provided through its own SWS, Scottish Water Solutions Ltd., the current defenders. Scottish Water’s Mr. Carr became concerned about how MUL would fit into this new structure. MUL had not been involved in any of the discussions which had established SWS. There were discussions about rates. MUL was keen to keep working with SWS. In 2003, hose involved in the creation of SWS spent several months negotiating a Services Agreement which set out which projects which Scottish Water was going to keep and which were to be transferred to SWS. While it was envisaged that SWS would take over responsibility for all of Scottish Water's capital programme, there were projects which were in the course of execution and which Scottish Water was managing. Initially, it had been intended that Scottish Water and SWS would sign the Services Agreement in March 2003 but repeated delays in the completion of the negotiation forced them to operate under the Letter of Intent until the Services Agreement was signed on 9 September 2003. There were three categories of contract under the Services Agreement: allocated contracts, managed contracts and legacy contracts. Allocated contracts were contracts which SWS would place with a contractor which was a member of one of the consortia involved in SWS. Managed contracts were contracts which Scottish Water had already placed and for which SWS took over responsibility for administration. Scottish Water remained the employer of the contractor under such a contract and paid SWS a fee for its administration. Legacy contracts were contracts which Scottish Water had placed and for which it retained responsibility without any involvement on the part of SWS. MUL became concerned that these changes might mean that it lost the work, and sought clarification of the situation. There was some concern at SWS about the viability of MUL being paid on a cost plus basis. There were some meetings, and from the evidence the judge was satisfied that it had been agreed in principle that MUL would be an in-house delivery partner. However, there remained some uncertainty about the amalgamated contract and MUL’s costs.
MUL wrote to SWS referring to a meeting on 3 September with SWS’ Mr. Sloss. It stated:
"Outlined below is our confirmation of the agreements reached therein. With regards to all Works undertaken for Scottish Water since 1st of July 2003, it is our understanding that these will be undertaken in accordance with the generic self-delivery contract."
On 13 November 2003, MUL submitted to Scottish Water its statement of costs for works which it had undertaken in Lothian and Borders in the period from 1 July 2003 and 26 September 2003. The letter was stated to be for the attention of Mr. Steven Downie and was copied to Mr. Sumption and Mr. Sloss of SWS. In that letter Mr. Tyson again referred to the agreement with Mr. Sloss of SWS at the meeting of 3 September 2003 and to MUL's letters of 18 September and 29 October 2003.
SWS failed to reply to MUL’s repeated assertion that that an agreement had been reached on 3 September 2003. Neither SWS not Scottish Water explained that in their understanding there were different employers in relation to work in Dumfriesshire and Galloway on the one hand and work in Lothian and Borders on the other. As a result, MUL proceeded with the works in Lothian and Borders without having obtained the confirmation which it sought from SWS. MUL submitted claims to Scottish Water for the works which it carried out in Lothian and Borders and Scottish Water paid for them. MUL also submitted claims to SWS for those works based on its understanding of an agreement with SWS.
In an attempt to clarify what was going on, there was a meeting on 3 February 2004. There was no formal minute of what transpired. The only document was a manuscript note made by MUL’s Mr. Tyson. At the meeting, Mr. Tyson maintained that SWS should be paying MUL for the Lothian and Borders work. SWS seemed uncertain about the status of this contract.
In the months that followed, Scottish Water paid MUL certain sums for the Lothian and Borders works on the basis of the amalgamated contract but MUL's submissions to SWS on the basis of cost were not paid.
The court had to decide whether there had been an intention to contract on 3 September 2003, and whether there had been sufficient agreement for a contract to be reacted.
There were a number of factors which persuaded the judge that the parties had not intended to into a binding contract at the meeting on 3 or 4 September 2003. Firstly, the meeting had been informal. There had been no formal minutes. Mr. Sloss had no other officer with him, and his understanding had been that MUL’s Mr. Carr had come for a “chat”. Mr. Leach, the regional director of Morgan Est, had characterised the meeting as characterised the nature of the discussion as achieving an understanding rather than a contractual negotiation. Whilst there was scope for a contract to come into existence without detailed negotiation of its terms, the judge found Mr. Leach's characterisation telling. In addition, there was the relative complexity of the arrangement by which the contract works would be transferred from the amalgamated contract to the new SWS system of a generic self-delivery contract. There was no agreement of the scope of the works, or a target cost for those works. It was unclear as to how MUL’s cost plus arrangement would work, and there was no agreement about the start date of the new arrangement, or whether MUL would repay Scottish Water sums already paid under the amalgamated contract and obtain the full sum due for the works under the new arrangement from SWS.
The behaviour of Mr. Sloss and Mr. Steven Downie, the project manager who was responsible for administering those works, did not demonstrate the same understanding of the alleged contract as did MUL’s correspondence after the event. In addition, the judge was not persuaded that Mr. Sloss had the apparent authority to enter into a contract with MUL. His position and title did not contain a representation of the power to contract. Mr. Sumption and not he was responsible for commercial services, which included the negotiation of contracts.
Morgan Utilities Ltd. v Scottish Water Solutions Ltd.,  CSOH 112
Pre-publication offer: RICS guidance note on acceleration Click here to read more and order now