1 Wednesday, 23 May 2018 2 (9.30 am) 3 CHAIR OF THE INQUIRY: Good morning. We have now reached 4 the stage of closing submissions and, as I indicated, 5 each party will have an hour to set out the main points 6 that they wish me to concentrate on or make any 7 additional points they wish. 8 Mr Borland. 9 Closing submissions by MR BORLAND 10 MR BORLAND: Good morning, my Lord. I would begin by 11 adopting the written submission lodged on behalf of 12 Bilfinger Construction UK Limited, and for present 13 purposes I would propose to divide those oral 14 submissions that I will make this morning under 15 reference to four questions. 16 The first question is: what were the key factors 17 from the perspective of the infrastructure consortium, 18 which I'll refer to as Infraco, in the run-up to the 19 conclusion of the final contract with tie? 20 Secondly, what was Infraco's approach in response to 21 those factors? 22 Thirdly, what were the critical provisions of the 23 contract? 24 Fourthly, what happened after the contract was 25 entered into in May 2008? 1 1 Turning to the first of those questions, my Lord, on 2 the basis of the evidence which has been led before the 3 Inquiry, in my submission there were three key factors 4 from the perspective of Infraco in the run-up to the 5 conclusion of the final contract with tie. 6 (a) the design of the project was to a very 7 significant degree incomplete. In the run-up to the 8 execution of the contract, that design was being worked 9 up by a party over whom Infraco had no control 10 whatsoever. 11 I would also observe in this connection, my Lord, 12 the Bilfinger design due diligence report of 13 February 2008 assessed the state of the design as at 14 14 December 2007, and that report concluded that at that 15 time approximately 40 per cent of the detailed design 16 was lacking. It had still not been issued. 17 That Bilfinger design due diligence report was 18 spoken to by Bilfinger's Mr McFadzen and the estimate 19 that 40 per cent of the detailed design was lacking was 20 also confirmed by three tie witnesses, namely, 21 Messrs Crawley, Glazebrook and Bell, and the references 22 your Lordship can find at paragraph 61 and 262 of the 23 Bilfinger written submission. 24 The second key factor, (b), is that the works to 25 deal with the utilities in the ground, the so-called 2 1 MUDFA works, were very far from complete in the run-up 2 to the contract between tie and Infraco being concluded. 3 Again, Infraco had no control over the MUDFA works. The 4 MUDFA works were being carried out by a separate third 5 party contractor which was part of the Carillion group. 6 The contract relative to the MUDFA works was between tie 7 on one hand and the relevant MUDFA contractor. 8 Your Lordship has heard extensive evidence that the 9 purpose of the MUDFA works was to ensure that all 10 utilities which would otherwise clash with the proposed 11 route of the trams would be moved in advance of Infraco 12 starting its works. 13 The third key factor that I would mention, my Lord, 14 is (c) that there were a number of third party approvals 15 which were necessary for the progress of the Infraco 16 works, which had not been obtained. The issuance of 17 such third party approvals was not something which was 18 in the control of Infraco. Referring again to the due 19 diligence report of February 2008, just three months 20 before the contract was eventually entered into, it was 21 recorded there that not a single design element had 22 received final approval and had been issued for 23 construction. 24 What was the result of this, my Lord? The result 25 was that there were material and unquantifiable risks 3 1 which existed at the time tie and Infraco were 2 negotiating the contract in late 2007/early 2008. 3 The second question I posed, my Lord, was what was 4 Infraco's approach in response to the existence of these 5 key factors? Put another way, how did Infraco seek to 6 approach matters in the light of those material and 7 unquantifiable risks that I will identify? 8 The Infraco approach was that where risks could be 9 identified and quantified, Infraco was prepared to 10 accept and assume those risks and price for them. But 11 where there were material and unquantifiable risks, 12 Infraco was not in a position to do that. 13 In that connection, my Lord, I would refer to the 14 evidence of Bilfinger's Mr Walker, and this is recorded 15 at paragraph 67 of the written submission, where he 16 says: 17 "Where risk could be identified and quantified, BBS 18 as a contractor were prepared to accept the risk and 19 price for it accordingly. Where the risk could not be 20 quantified or even identified in some instances, we 21 negotiated the contract to ensure the risk sat with tie 22 as the majority of the risk items were their 23 responsibility such as MUDFA design and third party 24 agreements." 25 Infraco could not assume unacceptable levels of risk 4 1 which were material and unquantifiable. That position 2 was spoken to by Bilfinger's Dr Keysberg, and his 3 evidence is referred to at paragraph 137 of the written 4 submission. 5 This state of affairs, my Lord, led the parties to 6 the infrastructure contract, drafting a specific part of 7 the contract which became, as the Inquiry is well aware, 8 Schedule Part 4, and the basis upon which critically the 9 parties were entering into the contract in relation to 10 risk was set out there. 11 From Infraco's perspective the essential purpose of 12 Schedule Part 4 was to make it clear that it was not 13 assuming certain contractual risks. Rather, tie was to 14 bear contractual responsibility for the risks identified 15 in Schedule Part 4. 16 Bilfinger's position before the Inquiry, my Lord, is 17 that Infraco's approach to dealing with material and 18 unquantifiable risk, namely to seek to shift it to tie, 19 such that it was tie's contractual responsibility, was 20 entirely reasonable in the circumstances. Again, 21 I would refer in that connection to the evidence of 22 Mr Walker and Dr Keysberg. 23 In the light of what I have said, my Lord, I would 24 turn to the third question that I mentioned at the 25 outset, namely what were the critical provisions of the 5 1 contract. One looks in my submission to Schedule Part 4 2 and Bilfinger's position is set out in the written 3 submission at paragraphs 64 to 161 in particular in 4 relation to Schedule Part 4. 5 There are, my Lord, certain provisions which even 6 after this time bear consideration. The first of those 7 is paragraph 3.2.1 of Schedule Part 4, which is 8 a provision that has been scrutinised by a number of 9 witnesses, and in my submission this is a very important 10 provision for the purposes of the Inquiry's remit. 11 It begins by stating: 12 "It is accepted by tie that certain Pricing 13 Assumptions have been necessary and these are listed and 14 defined in section 3.4 below." 15 The clause explicitly goes on to say that this state 16 of affairs arises "as a consequence of the need to fix 17 the contract price against the developing factual 18 background". 19 It is also stated in the clause: 20 "In order to fix the contract price at the date of 21 this agreement, certain Pricing Assumptions represent 22 factual statements." 23 In other words, the factual assumptions on which the 24 price was based and the contract proceeded were having 25 to be identified. Importantly, the clause then goes on 6 1 to acknowledge "that the parties acknowledge that those 2 Pricing Assumptions are not necessarily consistent with 3 actual facts and circumstances". So pausing here, in 4 order to allow a contract price to be arrived at at 5 a particular level, albeit qualified in a critical way 6 by the Pricing Assumptions. 7 Later in Schedule Part 4, it is provided that if any 8 of the Pricing Assumptions prove to be wrong, then 9 a Notified Departure would be taken as having occurred. 10 Lastly in relation to paragraph 3.2.1, my Lord, it 11 is acknowledged there that certain of the Pricing 12 Assumptions may result in the notification of Notified 13 Departures immediately upon the execution of the 14 contract by tie and Infraco. 15 Paragraph 3.5 of Schedule Part 4 makes it clear that 16 the contract price has been fixed on the basis of what 17 are called Base Case Assumptions which include the 18 Pricing Assumptions. It is again made clear there, "if 19 now or at any time the facts or circumstances differ in 20 any way from the Base Case Assumptions or any part of 21 them, there will be a Notified Departure which will be 22 deemed to be a mandatory tie change". 23 So standing back from the detail, my Lord, in my 24 respectful submission, it is tolerably clear from 25 Schedule Part 4 to any reasonable reader that if any of 7 1 the assumptions proved to be wrong, the contract was 2 providing the mechanism in terms of which there would be 3 deemed to be a contractual change by tie, and in terms 4 of the contract, an entitlement to further time and 5 money for Infraco would arise if the Pricing Assumptions 6 proved to be wrong. 7 That mechanism was found in Clause 80. 8 Of the Pricing Assumptions, my Lord, I will identify 9 three in particular as of importance. The first is one 10 that has been looked at on a number of occasions with 11 various different witnesses, namely Pricing Assumption 12 1. It is to the effect that the design prepared by the 13 SDS provider will not, other than amendments arising 14 from the normal development and completion of designs, 15 in terms of design principle, shape, form, and/or 16 specification, be amended from the drawings forming the 17 Base Date Design Information. 18 There is a specific exclusion from the scope of the 19 clause in relation to changes in design principle, shape 20 and form and outline specification. 21 tie and Infraco disagreed about the proper 22 interpretation of Pricing Assumption 1. The Infraco 23 interpretation was upheld at adjudication. 24 What we know is that eventually tie was in receipt 25 of event from the then dean of Faculty, the now 8 1 Lord Keen, that Infraco's interpretation of Pricing 2 Assumption 1 was correct. 3 The second Pricing Assumption which is critical in 4 my submission, my Lord, is Pricing Assumption 24. It 5 provides that the MUDFA contractor shall have completed 6 diversion of any utilities in accordance with the 7 requirements of the contractual programme. That is 8 related to the third important Pricing Assumption, 9 namely number 32, which is to the effect that the 10 programming assumptions set out in Schedule Part 15, 11 which relates to the contract programme, remain true in 12 all respects. 13 If one looks, my Lord, at Schedule Part 15, and in 14 particular Schedule Part 15(b), there is importance, in 15 my submission, in paragraphs 3.1 and 3.2. They provide 16 that the programme was based on the completion of the 17 MUDFA works by specifying dates and that the Infraco was 18 not required to undertake any works before the MUDFA 19 contractor had completed its works. 20 I would also mention for completeness, my Lord, 21 paragraph 9.1.3 in Schedule Part 15(b) which states that 22 there shall be no slippage in the MUDFA programme. 23 As I mentioned in passing, my Lord, Clause 80 was 24 also of importance, providing the mechanism by which 25 there would be entitlement to time and money in the 9 1 event of tie changes. The proper construction of 2 Clause 80 was also contentious between tie and Infraco, 3 and was eventually the subject of a decision by 4 Lord Dervaird in August 2010 in terms of which 5 his Lordship found in favour of Infraco. 6 In summary, my Lord, Bilfinger's position in 7 relation to the contract as it was eventually entered 8 into was that it was very clear. Schedule Part 4 9 specifically, and the accompanying provisions, clearly 10 identified the basis for Infraco's price for the 11 project, ie the Base Case Assumptions, and the Pricing 12 Assumptions. These were contractual assumptions on 13 which that price was based and by this means the risks 14 for which tie would bear contractual responsibility were 15 identified. 16 It was, accordingly, enshrined in the contract, in 17 my submission, that the Infraco price was heavily 18 qualified. On no reasonable view could the price be 19 regarded as fixed. Indeed, Schedule Part 4, as 20 I mentioned earlier, expressly acknowledges the 21 possibility of immediate Notified Departures upon the 22 signature of the contract. 23 Schedule Part 4 identified what was to happen under 24 the contract if any of those contractual assumptions 25 proved to be wrong. 10 1 It is also notable, in my submission, my Lord, that 2 the principal solicitor acting for Bilfinger in relation 3 to the contract negotiations -- that was Mr Laing -- 4 made it clear how he envisaged the contractual mechanism 5 in Schedule Part 4 working and he did so prior to the 6 contract being entered into. 7 I refer in particular to the email which Mr Laing 8 sent to tie's representatives and to tie's solicitors on 9 26 March at 16.23. 10 Mr Laing sent a chasing email on 31 March 2008 on 11 the same subject at 10.21. 12 Using the example of design, in the 26 March email, 13 Mr Laing highlighted the fact that the contract was 14 going to be based on a design and delivery programme 15 which was inevitably outdated; and that as a result, 16 there would be an immediate Notified Departure on the 17 contract being entered into. 18 In his 26 March email, Mr Laing asked whether that 19 was understood and agreed. 20 The Inquiry has also seen the email which followed 21 on from Mr Laing's email, sent by tie's Mr McEwan to 22 DLA's Mr Fitchie. I refer to the email of Mr McEwan on 23 31 March 2008 at 10.42. 24 In this email Mr McEwan acknowledged that what 25 Mr Laing had said in his earlier email was "factually 11 1 correct". Hence there can, in my submission, be no real 2 doubt that tie's representatives were fully aware of how 3 the critical contractual mechanism would work. The 4 Inquiry has also seen a further email from Mr McEwan, 5 sent on 31 March 2008, and timed at 15.44, an email 6 which was copied to Messrs Bell and Gilbert of tie 7 additionally. 8 In that email to Mr McEwan, which was from DLA's 9 Mr Fitchie, Mr Fitchie also acknowledged that what 10 Mr Laing had said was correct. 11 Importantly, my Lord, Mr Fitchie went on to explain 12 the options open to tie, given the Schedule Part 4 13 mechanism, and the reality that Notified Departures were 14 certain to occur, given the Pricing Assumptions and the 15 fact that inevitably they were not going to turn out to 16 be correct. 17 One of the points made by Mr Fitchie in his email 18 was that tie could seek to capture as many of these key 19 changes that tie knew would happen, and attempt to fix 20 their time and cost implications and deal with that 21 upfront in the contract; it was an option which 22 Mr Fitchie identified to tie's representatives. 23 An email which followed Mr Fitchie's email was one 24 sent by tie's Mr McEwan to Mr Bell, again on the same 25 day, 31 March 2008, timed at 15.53. 12 1 Mr McEwan says in that email that if Mr Fitchie's 2 suggestion of trying to deal with the time and cost 3 implications of the changes which would happen were to 4 be pursued, "we will end up opening up the whole can of 5 worms on the Infraco contract cost overall". Rather 6 than do that, Mr McEwan advocated getting the deal 7 signed and then fighting the Notified Departures "tooth 8 and nail". 9 It will be a matter for your Lordship as to whether 10 that particular strategy was adopted by tie. From the 11 perspective of the Infraco, it was. 12 The fourth question which I posed at the outset, 13 my Lord, was: what happened after the contract was 14 entered into? Well, in short, critical risks, which 15 under the contract were the responsibility of tie, 16 manifested themselves. Notwithstanding that, the 17 manifestation of risk and which party had assumed 18 contractual responsibility for them, proved to be highly 19 contentious matters. 20 Of the risks which manifested themselves, as far as 21 Infraco was concerned, the MUDFA issue was the biggest 22 delaying factor. As I've noted, the contractual 23 provisions in the final contract of May 2008 were framed 24 on the basis that the MUDFA works should all be 25 completed before the Infraco works were to be started. 13 1 That did not prove to be the case. Indeed, rather 2 than being finished before Infraco was due to start in 3 the summer of 2008, the MUDFA works were years late in 4 completing, and indeed were still ongoing after 2011 5 through to 2012. 6 As at June 2011, a Bilfinger witness, Mr Foerder, 7 and this is in his witness statement, my Lord, at 8 paragraph 287(g) and paragraph 295, Mr Foerder as at 9 June 2011 was able to identify at that point in time 700 10 utility clashes arising from the MUDFA works. The 11 Inquiry's own statement of main documents and events, 12 and I refer here, my Lord, to paragraph 14.40, similarly 13 identifies that in summer 2011, there were at least 550 14 potential utility clashes which were operative. So 15 whichever figure one adopts, there were, several years 16 after the MUDFA works should have been completed, still 17 material utility clashes affecting the Infraco works. 18 I would also note, my Lord, the evidence of 19 Mr Weatherley of Turner & Townsend who came on to the 20 project after the disbandment of tie and following the 21 mediation, who said that the main cause of delay after 22 the mediation continued to be utility clashes. The 23 references to his evidence can be found in Bilfinger's 24 written submission, paragraphs 226 to 227. 25 In seeking to assess objectively, my Lord, what was 14 1 the predominant cause of the project being delayed and 2 running over budget, Bilfinger's position is that the 3 MUDFA issue was the critical delaying factor throughout 4 the project up to the mediation at Mar Hall, and indeed, 5 it continued to have effect thereafter. 6 I refer, my Lord, and adopt the position as set out 7 at paragraphs 218 to 235 of the written submission in 8 that connection. 9 I would also commend, my Lord, to the Inquiry the 10 evidence of Mr Foerder, Bilfinger's project manager, who 11 was plainly an individual who would have very great 12 insight into what the real cause or causes of delay were 13 at the coalface, so to speak. His position, very 14 clearly, was that the MUDFA issue was the critical cause 15 of delay. 16 As I've said, that evidence was supported amongst 17 others by an independent witness, as I would describe 18 it, in the form of Mr Weatherley, who described 19 utilities as the biggest risk on the project. 20 In my submission, my Lord, it's also a matter of 21 common sense. 22 In seeking to assess the project, my Lord, in my 23 submission one can also legitimately look at the results 24 of the adjudications. Adjudication was a form of 25 dispute resolution prescribed by the contract. There 15 1 were, as the Inquiry is well aware, a number of 2 adjudications on this project. Many of them raised 3 points of principle in relation to the contract itself 4 which were the subject of dispute between the parties, 5 and indeed might reasonably be regarded as points which 6 were fought tooth and nail, to use that expression. 7 In my submission, my Lord, it is plain, if one 8 scrutinises the adjudication decisions objectively, that 9 tie lost every single significant point of principle at 10 adjudication, culminating in the decisive Dervaird 11 adjudication decision of August 2010 which Infraco won. 12 For the detail of that, my Lord, I would refer the 13 Inquiry to the summary of the adjudications provided in 14 the schedule to Mr Foerder's written statement and also 15 paragraphs 266 to 302 of the Bilfinger written 16 submission. 17 I also rely, my Lord, in an assessment of the 18 adjudications, on the note prepared by Edinburgh City 19 Council's Mr Nick Smith in December 2010, and his 20 assessment in relation to the adjudications at that time 21 was essentially that Infraco had played 15 and won 13. 22 In my submission, that was a fair summary of the 23 position. 24 It was of course, my Lord, open to tie to challenge 25 any of those adjudication decisions by seeking to have 16 1 their result reversed in court. None of those 2 adjudication decisions was ever challenged by tie. 3 Those adjudication decisions therefore stand as 4 determinative of the parties' rights and obligations 5 under the contract. 6 The legal advice that tie was receiving towards the 7 end of 2010 is also in my respectful submission 8 significant in assessing the project, my Lord. At that 9 time consideration was being given by tie as to whether 10 it could validly terminate the Infraco contract. The 11 advice from two eminent senior counsel was that tie did 12 not have valid grounds for termination. The evidence 13 records that tie had received advice from the then dean 14 of Faculty, now the Lord Keen, that there were "strong 15 contractual reasons" against termination. In addition, 16 the Dean did not consider that there was a sufficiently 17 strong factual basis which had been put forward which 18 would have justified tie terminating the contract. 19 Indeed, the Dean's advice was that had tie sought to 20 terminate the contract towards the end of 2010, that 21 would have been a wrongful repudiation of the contract 22 by tie. 23 The Dean of Faculty's advice was reinforced by 24 separate advice taken from Nicholas Dennys QC, an 25 eminent English construction silk, and his view was that 17 1 the grounds set out in the Remediable Termination 2 Notices which had been prepared by tie did not 3 demonstrate that there had been any breach of contract 4 by Infraco. He concluded by advising "strongly" that 5 tie should not terminate the contract on the basis of 6 what had been put before him. 7 In the end, my Lord, the disputes on the project 8 were the subject of a commercial compromise in the form 9 of the 2011 Settlement Agreement, and I refer and adopt 10 what is set out in paragraph 431 and subsequently of the 11 Bilfinger written submission. 12 Negotiation of that commercial compromise involved 13 input from representatives of Edinburgh City Council, 14 the Scottish Government, and Transport Scotland on one 15 side, as well as representatives of Infraco on the 16 other. 17 CHAIR OF THE INQUIRY: What distinction do you draw between 18 the Scottish Government and Transport Scotland? 19 MR BORLAND: Essentially none, my Lord, but I point out -- 20 I identify those parties as there were representatives 21 of each of those entities involved. 22 The principal evidence on the Bilfinger side came 23 from Dr Keysberg and he described the eventual deal as 24 "a fair compromise". The Council's position in its 25 written submission, my Lord, at paragraph 20.6 is that 18 1 it was the best deal which could have been achieved in 2 difficult circumstances. Again, in my respectful 3 submission, that can be legitimately considered a fair 4 summary of the eventual position. 5 After the Settlement Agreement was reached in 2011, 6 tie was in essence disbanded and the project proceeded 7 to a conclusion in a regular fashion and without any 8 further material disputes breaking out. 9 My Lord, that concludes the additional submissions 10 that I would wish to make on behalf of Bilfinger 11 Construction UK Limited, and I'm grateful for the 12 opportunity of adding to the written submission. 13 CHAIR OF THE INQUIRY: Thank you very much, Mr Borland. 14 Could I just ask about the adjudications and the extent 15 to which I am undertaking a different exercise from the 16 narrow exercise undertaken by each adjudicator. Do you 17 accept that, and if so what do you make of that? 18 MR BORLAND: My Lord is clearly entitled, given the width of 19 the remit, to look beyond the adjudication decisions, 20 but, as I've submitted, notwithstanding that, the legal 21 position is that in terms of the contract, those 22 adjudication decisions regulate the parties' rights and 23 obligations at law in terms of the disputes that were 24 referred. Those adjudication decisions were not 25 reversed or sought to be reversed by either party. So 19 1 the legal position between the parties is in my 2 submission fixed by those adjudication decisions. But 3 I would not suggest, my Lord, that there is an undue 4 constraint on that basis on the Inquiry to look at 5 a wider picture. 6 CHAIR OF THE INQUIRY: Thank you. Thank you very much, 7 Mr Borland. It was very useful. What we'll do now is 8 we'll have a break of 15 minutes for the benefit of the 9 shorthand writers and we'll resume again at 10.30, 10 although the clock seems to be an hour behind. So we 11 will resume again at 10.30. 12 (10.07 am) 13 14 15 16 17 18 19 20 21 22 23 24 25 20 1 INDEX 2 PAGE 3 Closing submissions by MR BORLAND ....................1 4 5 Closing submissions by MR FAIRLEY ...................20 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 36