Lagan Construction Group v Scot Roads Partnership Project Ltd & Anr

[2022] ScotCS CSOH_92 

Lagan and the Second Defender formed a joint venture to carry out motorway upgrade works for Scot Roads. Clause 5.5.6 of a letter of credit procured by Lagan provided: 

“Project Co [Scot Roads] shall return to the Contractor by transfer into a bank account specified by such Contractor, an amount equal to such Contractor Company Contractor Security Account Balance as soon as reasonably practicable following: [two events]...”

One of the events having passed, the issue for Lord Baird was who was meant by “the Contractor” in the first line; the joint venture or Lagan? The balance of the monies, after deduction of sums due to Scot Roads, was just over £1milllion. If “the Contractor” meant Lagan, the parties were agreed that it was entitled to payment of the sums. If not, then a full hearing would be needed to determine what should happen. Reference was made to various UK authorities. Lord Baird held that: 

“The court must strive to ascertain the parties’ intention by determining what a reasonable person, having the background knowledge of the parties, would have understood by the language selected; the meaning of the words must be assessed having regard to the other relevant parts of the contract; if there are two possible constructions, the court is entitled to prefer one which is consistent with business common sense; the language used must be balanced with the factual background and the consequences of any alternative meaning;...in other words, construing a contract is a unitary exercise, not a two-stage process.” 

The Judge noted that the contract was not “happily drafted” and suggested that a style had “perhaps been borrowed” from a case where it was the contractor itself which provided the letter of credit, rather than, as here, a letter of credit was being procured by each of two members of an unincorporated joint venture. Clause 5.5.6, read as a whole, was ambiguous. It was  impossible to determine what was intended on a purely textual analysis. Therefore, to decide which of the two competing constructions should be preferred, it was appropriate to have regard to commercial common sense, and the factual matrix. 

The starting point was to consider the purpose of the funds in the Contractor Security Account. The defenders submitted that, although the primary purpose of the funds was to provide security for the first defender, there was a secondary purpose, namely, that any balance should be available for the remaining Contractor Company in the event that the other had entered insolvency, as had happened here. 

Lagan said, and the Judge agreed, that the sole purpose of the Contractor Security Account was to provide security for the first defender as the project company, not to provide a source of funds for Contractor Companies in the event of financial stress. The whole tenor of those provisions which provided for the Contractor Security Account was to ensure that the project was completed and that the first defender was able to recover the cost of making good defects. Once it was understood that the sole purpose of the funds was to provide security to the first defender, and that it was not part of that purpose to provide financial succour to the other Contractor Company, it was not commercially reasonable that the balance of the funds simply be paid to the joint venture, which itself had no obligation to reimburse the bank. 

Note: Decision over-turned on appeal. See Issue 279.

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