Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2010] CSOH 133
CA72/10	OPINION OF LORD MENZIES in the cause G4S CASH CENTRES (UK) LIMITED Pursuers; against CLYDESDALE BANK PLC Defenders: ­­­­­­­­­­­­­­­­­________________

Pursuers: Currie, Q.C., Barne; Lesley A Gray, Solicitors

Defenders: Dean of Faculty, Duncan; Dundas & Wilson C.S. LLP

29 September 2010

Introduction
[1] By services agreement between the pursuers, the defenders and Securicor Group Limited dated 2 August 2002 ("the Agreement"), the pursuers agreed to supply the defenders with cash processing services on the terms and conditions set out in the Agreement. In terms of clause 2.1, the Agreement continues until the 12^th anniversary of the date of the last execution of the Agreement unless earlier terminated in accordance with the terms of the Agreement. The Agreement has not been terminated and is therefore due to continue until 2 August 2014. The "Services Fees" as defined in the Agreement were fixed in accordance with Part 5 of the schedule to the Agreement until the seventh anniversary of 2 August 2002. There was a provision in the Agreement obliging the defenders to undertake a review of the services fees with a view to determining the services fees payable after the seventh anniversary. The parties are in dispute as to whether or not this review can result only in a decrease in the level of the services fees unless the defenders consent to an increase.

[2] Parties helpfully provided the court with full written notes of argument. I do not propose to repeat the terms of these written notes of argument in the course of this opinion, but I have taken them fully into account, together with counsels' oral submissions.

The terms of the Agreement
[3] The terms of the Agreement (no 6/1 of process), so far as relevant to the point in dispute are as follows:

"Interpretation

1.2 In this Agreement: ...

1.2.2 headings are for convenience of reference only and shall not affect the construction or interpretation of this Agreement; ...

2. DURATION

Term

2.1 The Agreement shall commence on the Commencement Date and shall continue until the Expiry Date unless and until terminated earlier in accordance with the provisions of Clause 2.2, Clause 2.3, Clause 7.12 or Clause 22.

Benchmarking

2.2 No later than the sixth anniversary of the Service Commencement Date, the Bank shall undertake a review of the Services Fees (which may include a benchmarking of the Services Fees by the Bank in accordance with Part 13 of the Schedule) with a view to determining the Services Fees payable for the Services with effect from the seventh anniversary of the Service Commencement Date and shall deliver the results thereof to the Supplier. The parties shall negotiate in good faith to agree such Services Fees based on the results of the review (or such benchmarking) and any dispute shall be resolved in accordance with Clause 12 (provided that in no circumstances shall the annual Services Fees be reduced by more than 12.5% from the amount of the annual Services Fees payable as at the seventh anniversary of the Service Commencement Date unless the Supplier otherwise agrees). If (a) the Services Fees have not been agreed or determined within four months of notification by the Bank to the Supplier of the results of the review or such benchmarking (or within such longer period as may be agreed between the parties) or (b) the Bank does not agree the amount of any Services Fees calculated as aforesaid, the Bank may terminate this Agreement with effect from the seventh anniversary of the Service Commencement Date by giving to the Supplier at least three months notice in writing to that effect in which case this Agreement shall terminate on the seventh anniversary of the Service Commencement Date.

...

12. DISPUTES

12.1 Where there is no other dispute or escalation procedure specified in this Agreement for a dispute between the parties arising out of or relating to this Agreement, that dispute shall be referred by either party, first, to the parties' Contract Managers.

12.2 In respect of matters or disputes arising out of or relating to this Agreement which cannot be resolved under Clause 12.1, the parties shall submit such matter or dispute to review by a Review Board" which "shall act as conciliator in which capacity it may:

12.2.1 conduct the conciliation process in whatever manner it considers to be appropriate;

12.2.2 issue the Supplier and the Bank its conclusion and/or recommendations in relation to the dispute. Any such conclusions and/or recommendations of the Review Board shall not be binding upon the Supplier or the Bank.

...

12.5 Notwithstanding any reference to conciliation before the Review Board of a dispute or matter pursuant to Clause 12.2 but subject to Clause 12.7 either the Supplier or the Bank may at any time (whether the conciliation subsists or not) refer the said dispute or matter to the courts of Scotland for determination.

...

12.7 Any dispute arising in relation to the Agreement may if the Supplier and the Bank so agree in writing be referred to and finally determined by:

12.7.1 the Review Board; or

12.7.2 an independent expert agreed between them;

in each case acting as expert and not arbiter and any decision of such expert shall save in the case of fraud or manifest error be conclusive and binding on the Supplier and the Bank."

[4] Part 1 of the Schedule to the Agreement provides that the following words and expressions shall have the following meanings:

"Benchmarking means the benchmarking of the Services and the Service Levels and the Services Fees in accordance with Clause 3.11 and Part 13 of the Schedule;"

Paragraph 1 of Part 5 of the Schedule provides inter alia as follows:

"1. Services Fees

1.1 The Services Fees payable by the Bank under this Agreement shall be the sum of:

1.1.1 from the Service Commencement Date to the Transition Completion Date, £140,250 per Month (or pro rata for any period of less than a Month);

1.1.2 from the Transition Completion Date to the seventh anniversary of the Service Commencement Date, £129,000 per Month, or such other amount as may be determined under paragraph 1.2, (or pro rata for any period of less than a Month) subject to indexation adjustment in terms of paragraph 1.3.

1.2 The Services Fees payable by the Bank under this Agreement from the seventh anniversary of the Service Commencement Date shall be determined in accordance with Clause 2.2.

1.3 If the Indexation Increase in any Year is greater than 4 per cent, the Services Fees for the following Year shall be adjusted by a percentage equal to the Indexation Increase less 4 per cent. If the Indexation Increase in any Year is less than or equal to 4 per cent, the Services Fees shall remain unchanged for the following Year."

[5] Part 13 of the Schedule deals with Benchmarking, and provides inter alia as follows:

"1.1 Notwithstanding any other provision in this Agreement, the Bank reserves the right at any time after the second anniversary of the Commencement Date to require the Supplier to allow the Bank to conduct Benchmarking in accordance with this Part 13 of the Schedule with similar services offered in the market or that could be obtained by the Bank from a third party, provided that the Bank shall not be entitled to exercise this right more than once during any consecutive 24 month period after the second anniversary of the Commencement Date other than for the purposes of Clause 2.2.

1.2 In the event that the Bank notifies the Supplier that it is exercising its right under this Part of the Schedule in relation to all or any part of the Services, the Supplier shall co-operate with the Bank and the following procedures shall apply:

1.2.1 the Bank shall appoint an independent third party whose identity has been approved by the Supplier (such approval not to be unreasonably withheld or delayed) (the nominated person) to carry out an analysis of the Services and Service Levels and Services Fees and to identify whether or not it or they are competitive in the market (benchmarking analysis);

1.2.2 the Supplier shall co-operate in good faith with the nominated person in carrying out the benchmarking analysis. The nominated person shall take into account all the circumstances relevant to the Supplier's provision of the Services including the following:

(a) the range and scope of the Services being provided; and

(b) any other factors identified by the Bank or the Supplier which, if not taken into consideration, could unfairly cause the Supplier's provision of the Services or the Service Levels or the Services Fees to appear non- competitive;

1.2.3 subject to paragraph 1.2.4, the cost of carrying out the benchmarking analysis shall be borne by the Bank;

1.2.4 if the Benchmarking Report recommends a fundamental decrease in the Services Fees and the fundamental decrease in the Services Fees is accepted by the Supplier, or determined under paragraph 1.3.3, and the change is implemented under paragraph 1.3.2, the Supplier shall reimburse the Bank in respect of the reasonably and properly incurred fees it has incurred in appointing the nominated person. For the purposes of this paragraph, a fundamental decrease in the Services Fees shall be a decrease which would on an annualised basis provide a decrease in the total amount of the Services Fees equal to or more than 10%;

1.2.5 the nominated person shall, using well established and market accepted statistical and analytical approaches, prepare a Benchmarking Report for the Bank covering all aspects of the benchmarking analysis including a conclusion as to whether the performance of the Services and/or Service Levels and/or the Services Fees are competitive in the market place and, if not, recommending changes to the Services and/or Service Levels and/or any reduction in the Services Fees. The Bank shall provide to the Supplier a copy of the report or relevant extracts insofar as it relates to the Services and invite comments from the Supplier on the findings and recommendations in the Benchmarking Report;"...

"1.3 If the conclusion to the Benchmarking Report recommends changes to the Services and/or Service Levels and/or any reduction in the Services Fees:

1.3.1 the Supplier shall have the opportunity of making representations to the Bank with a view to establishing whether the recommendation contained in the Benchmarking Report would have the effects envisaged by the Benchmarking Report;

1.3.2 in the absence of any representations made pursuant to paragraph 1.3.1 or in respect of a Benchmarking Report in respect of which the Supplier and the Bank both agree with the recommendations made in the Benchmarking Report's conclusion, the Supplier shall amend the Services and/or the Service Levels and/or the Services Fees in accordance with the recommendations made in the conclusion of the Benchmarking Report"...

"provided always that the nature of the Change, including changes to the Services, the Service Levels and any reduction in the Services Fees shall be as stipulated in the Benchmarking Report or as otherwise agreed in writing by the Bank and the Supplier; and

1.3.3. where the Supplier makes representations pursuant to paragraph 1.3.1 or otherwise where the Supplier does not agree with the recommendations made in the Benchmarking Report's conclusion, the matter shall be dealt with as a dispute in accordance with Clauses 12.1 to 12.6 (inclusive) and, if not determined in accordance with those Clauses, the dispute shall be determined by an expert appointed in accordance with Clause 12.7.2 and, where determined in favour of the Bank, the Supplier shall implement the recommendations contained in the Benchmarking Report (as modified, if relevant, in terms of the resolution of that dispute) in accordance with paragraph 1.3.2.

For the avoidance of doubt, in no circumstances shall there be any increase in the Services Fees consequent on a Benchmarking Report unless the Bank agrees to this in its absolute discretion. If requested by the Bank, the Supplier shall provide the Bank with such information as the Bank may reasonably require in relation to the Supplier's input costs identified in the Costing Model."

Submissions for the pursuers
[6] Senior counsel for the pursuers moved me to grant decree of declarator in terms of the first and second conclusions of the summons, to sustain the plea in law for the pursuers, and to repel the pleas in law for the defenders. The issue between the parties was whether the pursuers may become entitled to an increase in services fees as a result of the operation of the procedure laid down by clause 2.2, without the agreement of the defenders, or whether an increase can only occur if the defenders, in their absolute discretion, agree to this. When the Bank undertook the review procedure provided for in clause 2.2, they instructed a benchmarking exercise to be carried out by KPMG, whose draft report dated 20 July 2009 forms number 6/2 of process. That report produced figures which enabled the parties to negotiate, but it became apparent that there was an insuperable obstacle to negotiation because there was a difference of interpretation as to the effect of clause 2.2, as summarised in the e-mail which forms number 6/3 of process.

The methods for calculating the Services Fees were set out in Part 5 of the Schedule to the Agreement. The Service Commencement Date was 5 August 2002. There were two methods of determining the Services Fees; paragraph 1.1 of Part 5 sets out the Services Fees payable until the seventh anniversary of the Service Commencement Date, and paragraph 1.2 provides that after the seventh anniversary the Services Fees shall be determined in accordance with clause 2.2. Benchmarking has a specific definition provided in Part 1 of the Schedule; the Bank has a right to conduct Benchmarking in accordance with Part 13 of the Schedule, which it is entitled to exercise every two years after the second anniversary of the Commencement Date. The purpose of the "tailpiece" of paragraph 1.3 of Part 13 (ie the last two sentences quoted at paragraph [5] above) is to ensure that, when the Bank exercises its right to carry out Benchmarking, its contractual right to receive Services for the first seven year period of the contract at a fee no higher than that set out in Part 5 of the Schedule is protected. However, paragraph 1.3 of Part 13, including the tailpiece, has no commercial or legal relevance with regard to the level of Services Fees payable after the seventh anniversary, because by reason of paragraph 1.2 of Part 5 of the Schedule these Services Fees are determined in accordance with clause 2.2. Where the Bank exercises its right to carry out Benchmarking in terms of Part 13 of the Schedule, paragraph 1.3.3 of Part 13 provides that any dispute as to the conclusion of the Benchmarking Report shall be dealt with and determined by the mechanism provided in clauses 12.1 to 12.7. These provisions all relate to Benchmarking carried out by the Bank in terms of their right to carry out Benchmarking at regular intervals. A Benchmarking exercise conducted in terms of Part 13 has two distinct aspects -

(1) A benchmarking analysis of the Services, the Service Levels and the Services Fees by the nominated person to assess whether or not the Services and/or the Service Levels and/or Services Fees are competitive in the market, and

(2) The Benchmarking Report which may recommend changes to the Services and/or Service Levels and/or any reduction in the Services Fees. Subject to any resolution or determination of disputes as to the Benchmarking Report, the pursuers may be required to amend the Services and/or Services Levels and/or accept a reduction in the Services Fees. It is clear that the provisions of Part 13 are conceived to enable the Bank to ensure that it is paying a competitive rate for the Services with power to amend the Services and/or the Service Levels and/or the Services Fees. In this context, any amendment to the Services Fees can only be downwards, unless the Bank, in its absolute discretion, agrees to an increase.

[7] The process provided for under clause 2.2 is different from the Benchmarking exercise provided in Part 13 of the Schedule. Although clause 2.2 is headed "Benchmarking", by reason of clause 1.2.2 this does not affect the interpretation of the clause. The task which must be performed in terms of clause 2.2 is a review of the Services Fees, with a view to determining the Services Fees payable with effect from the seventh anniversary. This is a quite distinct function from the exercise which the Bank may carry out in terms of Part 13 every two years. The review under clause 2.2 is confined to being a review of the Services Fees, and does not include a review of the Services and/or the Service Levels as provided for in a Part 13 Benchmarking exercise. A clause 2.2 review is mandatory whereas a Part 13 Benchmarking exercise is discretionary and can only be initiated by the Bank.

[8] A clause 2.2 review may (but need not) include a benchmarking of the Services Fees by the Bank, but it does not incorporate wholesale the entire provisions of Part 13 Benchmarking. If the Bank decides to carry out a benchmarking exercise in relation to Services Fees as part of the review, in terms of paragraph 1.2.5 of Part 13 to the Schedule, the nominated person will provide a report including a conclusion as to whether the Services Fees are competitive in the market place, but this report does not require to include an analysis of the Services or the Service Levels. Whether or not such a report is prepared, parties are required by clause 2.2 to negotiate in good faith to agree Services Fees and to resolve any dispute in accordance with Clause 12. If the Bank does not agree the amount of any Services Fees, the Bank may terminate the Agreement. This power in the Bank to terminate the Agreement if it does not agree to the amount of the Services Fees which will apply after the seventh anniversary is strongly supportive of the construction of the Agreement contended for by the pursuers.

[9] Senior counsel submitted that there were five indicators which supported the construction of the Agreement for which the pursuers contend:-

(i) The structure for setting the Services Fees was contained in Part 5 of the Schedule. They were fixed for the first seven years, subject to indexation adjustment. If the construction favoured by the defenders was correct, apart from indexation adjustment the Services Fees could not be increased for the final five year period of the Agreement. If that was the parties' intention, it could have been given effect much more succinctly by omitting clause 2.2 in its entirety. If the defenders' construction is correct, clause 2.2 is otiose.

(ii) The review in terms of clause 2.2 is mandatory, in contradistinction to Benchmarking, which is a right conferred on the Bank alone. This suggests that, unlike Benchmarking in terms of Part 13, the provisions of clause 2.2 were intended to protect the interests not only of the Bank but of the Supplier.

(iii) The purpose of a review under clause 2.2 is to determine the Services Fees payable from the seventh anniversary. The review procedure has its own limitation - the Services Fees cannot be reduced by more than 12.5% from their existing level.

(iv) Clause 2.2 does not import Part 13 in its entirety into the review procedure. The review procedure has a different dispute resolution provision from that applicable to Part 13 Benchmarking. The limitation of any reduction to not more that 12.5% is not repeated in the Part 13 Benchmarking procedures, and paragraph 1.3.3 of Part 13 makes different provision for determination of disputes. The schemes are distinct and different.

(v) There are a variety of provisions within the Agreement designed to protect the Bank from being overcharged in the first seven years of the Agreement. For example, clause 3.14 provides that the Supplier must increase the volume of cash supplied on an annual basis for the first seven years, and must bear the cost of doing so itself, until the review under clause 2.2. Other provisions conceived to protect the Bank from paying too much are to be found in clauses 4.3 and 4.9, and the Benchmarking provisions of Part 13 of the Schedule.

[10] Looking at the Agreement as a whole, its structure is clear. The Services to be supplied are to increase gradually over the first seven years of the Agreement, and the fees for these Services will be fixed or reduced (subject to a clearly defined indexation adjustment) over the first seven year period. There will then be a review of the fees to cover the last five year period of the Agreement. Not only is this consistent with logic and business efficacy, it is supported by the terms of the Agreement itself. If the defenders' construction of the Agreement is correct, this would mean that the pursuers were locked into a twelve year contract with no realistic prospect of an increase in the Services Fees, and with no right to exercise a break option. This would be commercially nonsensical.

Submissions for the defenders
[11] In moving me to sustain the defenders' first plea in law and to dismiss the action the Dean of Faculty adopted the whole terms of his written note of argument. He began by responding to the pursuers' submission that the defenders' construction was commercially nonsensical. Under reference to Lewison on the Interpretation of Contracts at pages 39 - 40, and the cases cited therein, he submitted that an argument based upon apparent commercial absurdity had to be regarded with caution, and it was necessary to have regard to the commercial intent of both parties, not just one. An example was a rent review mechanism in a commercial lease. A landlord would frequently require a minimum yield on his expenditure, so it was common to find an upward only rent review clause. This was not a commercial absurdity. This example was relevant in the present financial climate; the value of commercial property may have declined dramatically, but this would not entitle a tenant to argue that an upward only review clause was a commercial absurdity. A party may rue the bargain he has made, but the other party has an interest which must be considered too.

[12] In the present case the pursuers negotiated a contract with the Bank for the provision of cash processing services which expressly envisaged that the cost of providing these services might reduce. The pursuers might secure the opportunity to provide such services to other banks, thereby achieving efficiencies of scale; the Bank which was first in the market would not wish to pay the highest price, merely because it was first in the market. There was therefore a clear commercial logic for the Bank in wishing to secure a downward only review provision. This was not exceptional in a service contract where the cost may reduce over time. The Agreement made express provision (in paragraph 1.3 of Part 5 of the Schedule) for indexation to cover inflation, with the pursuers agreeing to accept the impact of 4% inflation over the course of the contract without increasing the Services Fees. There was also provision (in paragraph 2 of Part 5 of the Schedule) for an adjustment of the Services Fees in the event of an increase in the volume of cash processed with the pursuers accepting the burden of an increase in volume of 12.5% without increasing the Services Fees. If the pursuers' construction of clause 2.2 was correct, this would result in the pursuers being able to recoup the effects of any inflationary increases and volume increases over the first seven years of the contract.

[13] Turning to the conclusions of the summons, it was submitted that the first conclusion is dependent on the granting of decree in terms of the second conclusion; as indicated in paragraph 23 of the defenders' Note of Argument, the second conclusion achieved nothing, and not the result sought in the first conclusion. "Benchmarking" (with a capital "B") is a defined term; where it is directed to Services Fees only, a small "b" is used but the procedure is the same. It is expressly contemplated in paragraph 1.1 of Part 13 that this process may be for the purposes of clause 2.2. The whole scheme of Part 13 makes it clear that there can be no increase in Services Fees as a result of any Benchmarking exercise. For example, paragraph 1.2.4 makes provision for the report recommending a fundamental decrease, but no provision for a fundamental increase; the report provided in terms of paragraph 1.2.5 may recommend a reduction in the Services Fees but no increase; and there is no provision in paragraph 1.3 for the Bank to make representations following the report. The meaning and effect of Part 13 is clear with or without the "tailpiece".

[14] The purpose of clause 2.2 was to obtain a determination of the Services Fees payable with effect from the seventh anniversary. That is clear from the words of the first sentence of the clause. Determination is quite different from agreement. Unless there is a procedure for determination, all that remains is an agreement to agree. There must be provision for determination in order that the Agreement is enforceable. Clause 12 does not provide for determination; it provides for conciliation and agreement, but Clause 12.7 does not oblige either party to agree to a final determination. Clause 2.2 envisages two possible paths at the seventh anniversary of the Agreement; the first relies on agreement and the second relies on determination. This contrasts with paragraph 1.3.3 of Part 13 of the Schedule, which provides that a dispute shall be determined by an expert. If there is no agreement between the parties under clause 2.2, and no determination by an expert under Part 13, the contract continues on its existing terms until the expiry date. Paragraph 1.2 of Part 5 of the Schedule provides that the Services Fees payable from the seventh anniversary shall be determined in accordance with clause 2.2. This must mean (a) by agreement, (b) by a benchmarking exercise with the determination of an independent expert, or (c) in the absence of the foregoing, Services Fees shall remain as they were prior to the seventh anniversary. There is no scope for the proposition that where there is a Benchmarking exercise carried out there can be an increase in the Services Fees. This is clear not only from the tailpiece of paragraph 1.3.3 of Part 13 of the Schedule, but from the whole Part 13 process, which provides clearly that there cannot be an increase in Service Fees in consequence of a Benchmarking. If the parties had intended Benchmarking for the purposes of clause 2.2 not to have been in accordance with paragraph 13 of the Schedule, they would have said this. They did not; instead, they expressly agreed that Benchmarking in accordance with Part 13 of the Schedule can only secure a reduction in fees. The only provisions for an increase in fees other than by agreement of the Bank was by virtue of indexation adjustment consequent on clause 4.3 and Part 5 of the Schedule, or a change of volume as set out in paragraph 2 of Part 5 of the Schedule.

[15] The pursuers' contention that their construction was supported by the fact that clause 2.2 has a dispute resolution provision distinct from Part 13 was misconceived. Two avenues might be pursued under the clause 2.2 process - (1) Negotiation might result in agreement (which might include the resolution of disputes procedure set out in clause 12), or (2) There might be a Benchmarking process that results in a determination by an independent expert under Part 1.3 of Part 13 to the Schedule. Each is provided for in clause 2.2, and each serves a different purpose.

[16] None of the five indicators relied on in the pursuers' submission supports their construction of the contract. Taking these in turn:-

(i) It is not correct to suggest that there was no point in having clause 2.2 if the construction urged by the defenders was correct, because absent an agreement with the Supplier and absent a reference to Benchmarking, the Bank may enjoy the benefit of a break option after seven years. Clause 2.2 provides for that break option. In any event, the suggestion that the parties might have framed their Agreement differently is not a convincing argument.

(ii) It is correct that clause 2.2 is mandatory, but that fact advances the argument nowhere - it entitles the Bank to utilise Benchmarking as a means of determination.

(iii) While it is correct that clause 2.2 has a limitation on any reduction of not more that 12.5%, there is no reference at all in the clause to any increase of fees. The pursuers' argument is one sided; even if there is a reduction in comparible fees of 50% in the market place, the pursuers' fees cannot fall by more that 12.5%. There is no mention of any increase.

(iv) It matters not whether the tailpiece to paragraph 1.3 of Part 13 is imported into clause 2.2 or not - if the rest of the Part 13 procedure is imported, that is sufficient to support the defenders' construction.

(v) With regard to the pursuers' argument about other terms of the agreement (eg. Clauses 3.14, 4.3 and 4.9) the pursuers suggest that it makes no commercial sense to require them to provide services at less than the market rate. However, there are myriad provisions in this Agreement which limit the extent to which fees can be based on market rates. There are numerous examples of caps or limitations, not least within clause 2.2 itself.

[17] Paragraph 1.1 of Part 13 of the Schedule clearly envisaged that the process of Benchmarking set out in Part 13 would be used for the purposes of clause 2.2 - this is stated in terms. Clause 2.2 provides that where benchmarking of Services Fees is carried out as part of the review, it shall be in accordance with Part 13 of the Schedule. The pursuers have failed to make out any case for departing from the express terms of the Agreement, and in particular there is no case made out for benchmarking of Services Fees not in accordance with Part 13 of the Schedule. The action should accordingly be dismissed.

Reply for the pursuers
[18] Senior counsel for the pursuers did not suggest that the first conclusion of the summons was dependent on the second - the second conclusion was included because the pursuers understood the defenders to be focusing their arguments on the "tailpiece" of paragraph 1.3.3 of Part 13, but it may be that the second conclusion is redundant. The first conclusion can stand on its own.

[19] There were two fallacies in the submissions for the defenders -

(1) That clause 2.2 cannot provide a determination of Services Fees, and so on the pursuers' construction is only an agreement to agree; and

(2) If the mechanism under clause 2.2 fails, the contract would continue on its existing terms until the expiry date.

The answer to the second of these lies in Part 5 of the Schedule, paragraph 1.2 of which provides that the Services Fees payable from the seventh anniversary shall be determined in accordance with clause 2.2. If clause 2.2 cannot provide a result and the parties remain in dispute, the court may have to set a reasonable fee. With regard to the first point, neither clause 2.2 nor Part 13 produces a determination other than by agreement or by means of the clause 12 dispute resolution mechanism. All that the nominated person does in terms of a Part 13 Benchmarking exercise is to provide information and recommendations, and if parties do not agree as a result, clause 12.5 provides for a determination of a dispute by the courts of Scotland. The submission for the defenders that there is no provision for determination in clause 2.2 if the Part 13 Benchmarking procedure is excluded is wrong, because clause 2.2 provides that any dispute shall be resolved in accordance with clause 12, and clause 12.5 entitles either party to refer any dispute or matter to the courts of Scotland for determination. There is accordingly no substance in the argument that, on the pursuers' construction, clause 2.2 is no more than an agreement to agree - enforcement by referral of any dispute to the courts is expressly provided for. The argument for the defenders that the provision of a break after seven years provides adequate content to clause 2.2 is equally misconceived; if this argument were correct, the rest of clause 2.2 would be redundant, and there is a general presumption against redundancy when construing contractual terms.

Response for the defenders
[20] The Dean of Faculty asked what would be referred to the court under clause 2.2, if there was no agreement between the parties and no Benchmarking exercise had been carried out? In such a situation, clause 12.5 takes the parties nowhere; the court will not make the parties' contract for them. This falls to be contrasted with paragraph 1.3.3 of Part 13 of the Schedule, which brings finality by requiring the dispute to be determined by an expert. Such a determination can only result in maintenance of the status quo, or a reduction in the Services Fees. It cannot result in an increase.

Discussion
[21] A clause 2.2 review is a different and distinct procedure from a Benchmarking exercise under Part 13 of the Schedule. A review is mandatory, and looks forward in time to the setting of the level of Services Fees (and only the Services Fees) during the last five year period of the Agreement commencing on its seventh anniversary. It appears to me to be intended to consider the interests of both parties, and requires negotiation in good faith by both parties. By contrast, the decision whether or not to carry out Benchmarking in terms of Part 13 of the Schedule rests entirely within the discretion of the Bank, and such Benchmarking is designed to protect only the interests of the Bank. It is directed to the present rather than the future, and is designed to ensure that the range and scope of Services being provided are competitive and adequate, that the Service Levels are met or exceeded, and that the Bank is not being overcharged for the Services provided.

[22] A Benchmarking exercise under Part 13 of the Schedule may happen every two years if the Bank wishes this. A clause 2.2 review must happen before the seventh anniversary. The review may (but need not) include a benchmarking of the Services Fees by the Bank in accordance with Part 13 of the Schedule. This highlights the point that a review and a Part 13 Benchmarking are not the same thing, and that procedures or provisions which apply to one do not necessarily apply to the other. The fact that all references to benchmarking in clause 2.2 are with a small "b" not a "B", also illustrates this point - Benchmarking is a term defined in Part 1 of the Schedule and encompasses Services, Service Levels and Services Fees, whereas benchmarking in clause 2.2 relates only to Services Fees.

[23] The review is greater that any benchmarking conducted as part of it. It has a different purpose, and a different focus. It may include a benchmarking of the Services Fees, but whether or not such a benchmarking has been carried out, it is clear that it cannot be the sum total of the review which clause 2.2 requires the Bank to undertake. It is the review which is to be undertaken with a view to determining the Services Fees payable with effect from the seventh anniversary, and it is the results of the review (not just the results of any benchmarking of Services Fees which may have been undertaken as part of that review) which must form the basis for negotiations in good faith between the parties to agree the Services Fees for the period after the seventh anniversary. The words in parenthesis at the foot of page 14 and the top of page 15 make it clear that if there has been benchmarking of Services Fees, this must be the subject of negotiation in good faith, but the overarching process provided for by clause 2.2 is the review.

[24] Looking to the Agreement as a whole, its scheme is clearly that Services Fees will be fixed for the first seven years, subject to closely defined and limited procedures for indexation adjustment to take account of inflation, and adjustment to take account of increased volumes of cash. In each case, the burden of the first part of any increase falls on the pursuers, who must continue to maintain the Services and Service Levels without any increase in Services Fees until a specified percentage increase in inflation (or volume as the case may be). Benchmarking in terms of Part 13 is designed entirely in the interests of the Bank, and will only occur if the Bank wishes it. It is understandable that the Bank wishes to enjoy the benefits of economies of scale which may accrue if the pursuers extend the provision of Services to other customers, and it is understandable that the Bank wishes to ensure that the Services and Service Levels which it receives are at least as good as those provided elsewhere in the market place. It is entirely understandable that the whole tenor of the Part 13 provisions as to Benchmarking (including the "tailpiece" to paragraph 1.3.3) is concerned with reductions in Services Fees, and that no provision is made for increases unless the Bank agrees to this in its absolute discretion.

[25] I agree with senior counsel for the pursuers that clause 2.2 does not import the provisions as to Benchmarking in Part 13 of the Schedule wholesale. That is because it is concerned not with a Part 13 Benchmarking exercise (which by definition includes consideration of Services and Service Levels), but only with benchmarking of Services Fees. I do not consider that the construction of clause 2.2 contended for by the defenders to the effect that Services Fees for the period after the seventh anniversary can only reduce or remain at their existing level but cannot be increased as a result of a clause 2.2 review is correct. If it were correct, there would be little, if any, point to clause 2.2. It is true that the clause provides the Bank with an option to terminate the Agreement after seven years, but if this is its only object it is a remarkably convoluted way of providing a break clause, and it would mean that much of the clause is redundant. I prefer a construction which accords with the scheme of the Agreement when read as a whole, and which avoids such redundancy.

[26] It may be that, if the Bank instructs benchmarking of the Services Fees as part of a clause 2.2 review, any benchmarking report prepared by a nominated person for this purpose would only be able to recommend that Services Fees should remain as they are or should be reduced. I express no view on this. However, in that event, the benchmarking report would still only be an element in the clause 2.2 review process. In that event although there might be no increase in the Services Fees as a result of that report unless the Bank agreed to this in its absolute discretion, it would still be open for there to be an increase in Services Fees as a result of the review, if other factors supported this. If the Bank is not happy with this result, its remedy is to terminate the Agreement as provided for in clause 2.2. I am not persuaded that a review under clause 2.2 cannot result in an increase in Services Fees unless the Bank agrees to this in its absolute discretion.

[27] I was initially attracted by the submission for the defenders that unless the whole provisions of Part 13 of the Schedule were imported into clause 2.2, there was no method of determining (in distinction to agreeing) Services Fees. As the Dean of Faculty pointed out, paragraph 1.2 of Part 5 of the Schedule requires the Services Fees payable from the seventh anniversary to be determined in accordance with clause 2.2, and clause 2.2 itself requires the Bank to undertake a review of the Services Fees with a view to determining the Services Fees payable with effect from the seventh anniversary. If there were no mechanism for determination, it might be argued that this was no more that an agreement to agree. However, clause 2.2 provides that any dispute shall be resolved in accordance with clause 12; although clause 12 contains much about negotiation and conciliation procedures, clause 12.5 makes clear provision for any dispute to be referred by either party at any time to the courts of Scotland for determination. This applies both to a clause 2.2 review, and to a Part 13 Benchmarking. I consider that if negotiations based on the results of a clause 2.2 review are not successful, this must constitute a dispute between the parties which would entitle either party to refer the matter for determination to the courts. It follows that this is not merely an agreement to agree, but an enforceable contractual provision for the determination of disputed Services Fees in the relevant period.

[28] I am not inclined to place much, if any, weight on the submission for the pursuers that a construction of the contract which is favourable to the defenders would make commercial nonsense. While such a construction would favour the defenders at the expense of the pursuers, the Court will not rewrite parties' contracts for them. If a party has entered into a bad bargain which he subsequently regrets, he cannot (in general) cry to the Courts to be rid of it. I share the view expressed by Lord Donaldson MR in "The World Symphony" [1992] Lloyd's Rep 115 (quoted in Lewison on the Interpretation of Contracts at page 40) that "arguments based upon apparent commercial absurdity need to be regarded with caution...". As the Dean of Faculty observed, upward only rent review clauses are often found in commercial leases, and do not necessarily of themselves result in the conclusion that they are commercially absurd. The conclusion that I have reached is not based on a view that the contrary argument is commercially absurd. It is based on a construction of the terms of the Agreement as a whole and of clause 2.2 in particular.

[29] For the reasons given above, I shall sustain the plea-in-law for the pursuers to the extent of granting decree in terms of the first conclusion of the summons. I shall repel the pleas-in-law for the defenders. I do not find it necessary to grant decree in terms of the second conclusion of the summons.