| Date | 23 June 2004 |
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| Judgment | Alstom Signalling Limited v Jarvis Facilities Limited, TCC 28 May 2004 |
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| The Issue | Payment and withholding issues under cost reimbursable contracts. |
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| Implication |
Under cost reimbursable contracts, the amount due will generally be the amount properly certified as due by the paying party. A withholding notice will therefore not be required to make reductions upon the contractor's application. |
printIn December 1999, Alstom Signalling was appointed main contractor by Railtrack to design, manufacture and install plant for the Sunderland Tyne and Wear Metro. Alstom in turn engaged Jarvis to design, supply, install, test and commission signalling and telecommunications equipment for the project. In common with the main contract, the subcontract was based upon the IChemE model form for process plants, a cost reimbursable form of contract incorporating a target cost. The general scheme under the subcontract was therefore that Jarvis would be paid what the works cost, plus a management fee. At the end of the works, the total amount paid to Jarvis would be compared with the agreed target cost as adjusted under the terms of the contract and if Jarvis had been paid less than the target cost, it would become entitled to a share of the cost under run. Alternatively, if the works cost and management fee paid to Jarvis exceeded the target cost, Jarvis would be obliged to bear part of that over run. Arrangements such as these in target cost contracts are often called "pain/gain" agreements. From a contractor's point of view, the commercial success of the project will generally be dictated by the extent of pain or gain to be carried by it. Detailed attention must therefore be paid to the commercial management of such projects. Contractors will often augment their quantity surveying resource on such projects as it is essential to maintain detailed records of all costs incurred in carrying out the project works to ensure full reimbursement, whilst at the same time it is critically important to manage the target. The target requires to be treated in much the same way as a lump sum contract. Claims for variation to the work scope and events causing delay and disturbance will be submitted in the time honoured fashion to ensure that the target is correctly lifted, thereby maximising the contractor's potential gain under the "pain/gain" share mechanisms. The initial target cost expressed in the subcontract with Jarvis was £10.2 million. By completion, Jarvis' reimbursed cost had exceeded £14.2 million. A similar story, in terms of cost growth, had occurred under the main contract between Alstom and Railtrack. The targets had not moved upwards to a similar extent. Alstom indicated that it had carried a "pain" of approximately £1.5 million under its contract with Railtrack and that, under the subcontract, Jarvis should reimburse "pain" calculated at over £800,000. That however was only one element of a very complex dispute which was emerging between the parties which took shape in a series of adjudications, the first of which was initiated by Jarvis. Jarvis sought payment of approximately £1.5 million on an interim application for payment following completion of the works. Jarvis argued that in the absence of specific queries raised in connection with its application for payment, the amount it had applied for represented the amount due under the sub-contract. This was, in their words, a "self certifying cost reimbursable contract". In the absence of a withholding notice, for example in respect of the "pain/gain" share calculated by Alstom, Jarvis should be paid the entirety of the amount due. Moreover, according to Jarvis, the pain/gain share mechanism had not properly been incorporated into the subcontract and therefore had no application. Alstom countered these points by saying that it had raised relevant queries upon the application, that it was entitled to make a deduction in respect of the pain/gain mechanisms and that, in any event, no notice of withholding was required because any calculation in respect of "pain" under the subcontract went to determining the amount due. It was not as such a withholding against the amount due. On all of these points, the adjudicator agreed with Jarvis and ordered that Alstom should pay Jarvis the sum of £1.5 million in its entirety, together with interest. Alstom complied with that decision and expected that there would then follow further discussions about the final account. Jarvis took the position however that since it had obtained a decision in its favour, it would talk only on its own terms. It cancelled meetings, took the view that there was nothing to discuss and declined to allow Alstom to carry out an audit of its reimbursable costs. When these issues came before His Honour Judge Humphrey Lloyd QC on enforcement of the adjudicator's decision, Judge Lloyd, in his customarily forthright manner, described Jarvis' attitude as offensive. Despite having obtained an adjudicator's decision in respect of the interim amount due, the dispute was far from resolved. Moreover, Jarvis had not yet finished totalling up its reimbursable costs and a further interim application was submitted for payment of an additional £1.3 million. Extensive correspondence ensued in respect of this application, with Alstom requesting further details including invoices and authenticated receipts for payments claimed to have been made by Jarvis in connection with the works. Two further adjudications were commenced and again the adjudicator held entirely in favour of Jarvis, ordering that it was entitled to be paid the full amount of its latest application. On hearing these matters in court, Judge Humphrey Lloyd disagreed with the adjudicator's approach. The issuing of a withholding notice was irrelevant to establishing the amount due under the subcontract. The amount due was not the amount applied for by Jarvis, but the amount that Alstom objectively and reasonably considered to be due, taking into account the queries which Alstom had raised upon the application. In conclusion, Jarvis was not entitled to summary judgment and the adjudicator's decision was set aside.
CJ-0425
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