Employers’ Instruction as Condition Precedent to Contractual Indemnity: Dragados UK Ltd v Port of Aberdeen

Introduction

Dragados UK Limited (“the Pursuer”) sued the Port of Aberdeen (“the Defender”) in the Scottish Court of Session for reimbursement of £1,247,542, alleging that under a 2020 Settlement Agreement the Defender had agreed to indemnify and reimburse costs incurred by the Pursuer in instructing its design sub-consultant, Ove Arup & Partners (“Arup”), beyond a defined scope. The Defender argued that the Pursuer’s entire claim was “irrelevant” (Scots law equivalent of “no cause of action”) and sought dismissal without enquiry. Central issues included:

• Whether the Pursuer had discharged its evidential burden as to the precise liabilities it settled with Arup;
• How clause 7.8.4 of the Settlement Agreement should be construed—specifically whether the Defender’s express instruction was a condition precedent to any indemnity obligation;
• Whether the Pursuer’s claim under Schedule Part 12 (relating to verification of “redline as-built drawings”) remained live.

Summary of the Judgment

Lord Sandison held that:

• The Pursuer need not prove the internal apportionment of its global settlement with Arup in order to advance a claim for an indemnity or reimbursement; all that is required is proof of a liability or a verified, reasonable fee incurred under the relevant contractual provisions.
• However, clause 7.8.4—which promised reimbursement of sums the Pursuer became liable to pay to Arup “in respect of any design or services … beyond the CDTC”—operated only “if and only if” the Defender or Project Manager had issued express instructions to the Pursuer to operate the existing Arup appointment beyond completion of the Contractor Design to Complete (“CDTC”).
• No such instructions were ever given; indeed, the Defender had twice made clear (January and March 2021) that no further services were desired. Consequently, the indemnity claim under clause 7.8.4 was irrelevant and refused “probation” (Scots: dismissed).
• The Pursuer’s remaining claim under Schedule Part 12 for verification fees cannot be determined at debate because it raises disputed facts requiring expert evidence. The action proceeds to proof on that limited basis.

Analysis

Precedents Cited

The Court’s interpretative framework drew on leading authorities:

• Rainy Sky SA v Kookmin Bank [2011] UKSC 50: a “unitary” approach to contract construction—give words their natural meaning, consider background, prefer business-common-sense interpretation where two readings exist.
• Scanmudring AS v James Fisher MFE Ltd [2019] CSIH 10 and Lagan Construction Group Ltd v ScotRoads Partnership [2023] CSIH 28: reaffirmation of modern interpretative principles and the role of commercial common sense.
• Murray v Caledonia Crane & Plant Hire Ltd 1983 SLT 306; Caledonia North Sea Ltd v London Bridge Engineering Ltd 2000 SLT 1123: guidance on construction of indemnity clauses in Scots law.
• Biggin & Co Ltd v Permanite Ltd [1951] 2 KB 314; Gray Construction Ltd v Harley Haddow LLP [2012] CSOH 92: principles on proof of settlement sums and reasonableness (held inapplicable to pure indemnity claims).
• Photo Production Ltd v Securicor Transport Ltd [1980] AC 827; Wood v Capita Insurance Services Ltd [2017] UKSC 24: rejection of archaic rules of interpretation for indemnities and endorsement of the modern unified approach.

Legal Reasoning

The Court applied the “unitary” interpretative exercise:

1. Examine the language of clause 7.8 as a whole, giving effect to every word (e.g. “following completion of the CDTC,” “in accordance with the instructions … only,” “open book basis”).
2. Recognise that clause 7.8.4 promises reimbursement of sums paid under the Arup Existing Appointment for work beyond the CDTC, but only once the Defender has instructed the Pursuer to operate or administer that appointment for such work.
3. Note that the Defender twice communicated its clear decision not to issue any such instructions—first in January 2021, then in March 2021—before the CDTC even completed.
4. Conclude that a reasonable commercial person would understand that no indemnity obligation could arise in the absence of the employer’s express instruction, and thus the indemnity claim is irrelevant and must be dismissed at debate.
5. Separate the validation of settlement sums (irrelevant here) from an indemnity claim—unlike damages claims, indemnities simply require proof that the indemnitee incurred a covered liability or paid a verified fee.

Impact

This decision clarifies key points for future commercial and construction settlements:

• Drafting of indemnity clauses must carefully identify and, if intended, eliminate any condition precedent—such as “employer’s instruction”—to avoid ambiguity and disputes.
• Employers can limit post-settlement exposure by embedding express instruction requirements into indemnity provisions.
• Parties need not disclose internal apportionment of a global settlement to pursue an indemnity claim; they need only prove the existence and value of the specific liability or verified fee.
• Courts will enforce the precise terms of settlement agreements, even where complex subcontract-appointment interactions arise.

Complex Concepts Simplified

• Indemnity Clause: A contractual promise by Party A to reimburse Party B for certain losses or payments B makes to a third party.
• Condition Precedent: An event or act that must occur before a contractual obligation becomes enforceable (here, the employer’s instruction).
• Settlement Agreement: An agreement to resolve all claims between the original parties, often including specific carve-outs for future costs or indemnities.
• Contractor Design to Complete (CDTC): A defined scope of incomplete design work that the main contractor remained obliged to finish after settlement.
• Arup Existing vs Arup/Employer Appointment:
  • Existing Appointment: the original subcontract between Dragados and Arup.
  • Employer Appointment: a contemplated direct contract between the Defender and Arup that never materialised.
• Refusal of Probation: Scots-law equivalent of striking out (dismissing) irrelevant or non-justiciable pleas at debate.

Conclusion

Dragados UK Ltd v Port of Aberdeen establishes that, where a settlement agreement’s indemnity is expressly made subject to an employer’s instruction, the indemnity obligation will not be triggered absent that condition precedent. The decision underscores the importance of precise drafting and highlights that, for pure indemnity claims, parties need only prove the covered liability or reasonable, verified fee—not the internal breakdown of a global settlement. While Dragados’ remaining claim under the agreement’s verification-fee provisions proceeds to proof, the clause 7.8.4 indemnity is definitively dismissed for want of the required employer instructions.