| Date | 1 February 2006 |
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| Judgment | Midland Expressway Ltd v Carillion Construction Ltd & Others, TCC 24 November 2005 |
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| The Issue | Whether terms within a standard PFI building contract contravene the requirements of the HGCRA. |
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| Implication |
Whilst PFI concession contracts are exempt from the HGCRA, the construction agreements entered into by the concession company are not. Clauses which amount to ‘pay when paid’ or which seek to restrict the contractor’s right to refer disputes under the construction contract to adjudication will be unenforceable. |
printThe provisions of the Housing Grants, Construction and Regeneration Act sit uncomfortably with the contractual arrangements which are generally adopted for private finance initiative (PFI) projects. The concession company which has entered into the PFI contract will not obtain any revenues until the construction works are completed. Down the line therefore, in its contract with the building company, it will try to ensure as far as possible that the building works are completed for a fixed sum of money and that any claims that the building contractor may have under that contract cannot be recovered except to the extent that the concession company can recover those monies simultaneously up the line from the project authority. Complex and extremely wordy contractual arrangements are generally put in place to achieve this end but in the recent case of Midland Expressway v Carillion Construction and Others, those provisions were held to fall foul of the HGCRA and were therefore held to be unenforceable. Midland held the PFI concession for the new M6 toll road under a project agreement with the Secretary of State for Transport. Midland entered into a construction contract with a joint venture comprising Carillion, Alfred McAlpine, Balfour Beatty and Amec. Although the toll road was opened to the public in December 2003, there were a considerable number of contractual disputes between the parties which became the subject of numerous adjudications and litigation. One such dispute which the parties were unable to resolve by agreement concerned the valuation of a change instructed by the project authority concerning the tie-in of the new motorway to the existing motorway at its north and south ends. The alignments at these tie-ends were difficult. The southern tie-in involved widening the existing M6 motorway for a distance of about one kilometre before the tie-in. The road layout then permitted a gradual and progressive take-off of traffic over that stretch of motorway. The tie-in at the northern end was more complicated because the two motorways met at different levels and it was necessary to construct a take-over lane on a large embankment. The tie-ins became known as “tiger tails” reflecting the road markings which were used to divert motorists through the junctions. Carillion made an application for payment in respect of the tiger tails in excess of £11 million. Under the concession agreement however, the Secretary of State paid Midland an amount of only £1.5 million for this work. In due course, Carillion commenced adjudication to claim what it saw as its full entitlement under the building contract. The concession agreement between the Secretary of State and Midlands provided that if he chose, the Secretary of State could join in the adjudication with Carillion and become a party to the adjudicator’s ruling in relation to the matters in dispute. He chose not to do this however and indicated to Midland that he would await the outcome of the adjudication with Carillion before he would take any further steps. Concerned that it would be caught in the middle, Midland therefore issued proceedings against Carillion seeking an injunction to prevent the adjudication from proceeding. That application came before Mr Justice Jackson in the Technology and Construction Court on 14 November 2005 during which Midland argued a number of points in support of its case. Firstly Midland argued that the change instruction issued by the Secretary of State in relation to the tiger tails effectively gave rise to dispute between the Secretary of State and Carillion in which Midland was no more than a conduit. The dispute concerning the valuation of these works was therefore not a dispute arising under the construction contract. The judge rejected those contentions. If Midland were correct in its assertion that a provision of the construction contract prevented Carillion from pursuing its claim or receiving payment until payment had been made under the concession agreement, Carillion would argue that those provisions contravened the HGCRA. Accordingly, whether Carillion were right or wrong in these assertions, there clearly would be a dispute in connection with the construction contract. Midland then relied upon clause 7.4 of the construction contract which provided that the contractor would be prevented from taking any steps to enforce a right under the contract that until that right had been resolved under the concession agreement. Justice Jackson concluded that that provision fell foul of Section 108 of the Construction Act which gave Carillion the right to refer these matters to adjudication at any time. He agreed with decisions given in the two cases of Mowlem v Hydratight and R G Carter v Nuttall, both in June 2000, where the contracts contained perfectly sensible provisions deferring for a modest period the time at which the contractor could commence an adjudication. In each of those cases, the provisions were held to be contrary to Section 108. As a final throw of the dice Midland argued that whilst Carillion could make its claim for additional payment, the contract scheme was such that Carillion could not receive payment in respect of those claims until Midland had received corresponding sums under the concession agreement. Carillion argued that this provision was contrary to Section 113 of the Construction Act which outlaws, with certain exceptions, ‘pay when paid’ provisions. Again the judge agreed with Carillion. The convoluted wording of the contract did not escape the fact that this provision amounted to a pay when paid clause which was unenforceable. In conclusion, despite every attempt in the construction contract to prevent this happening, Carillion were entitled to proceed with their adjudication and the injunction sought by Midland was refused.
CJ-0604
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