| Date | 2 August 2006 |
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| Judgment | Midland Expressway v Carillion Construction & Others, CA 15 June 2006 |
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| The Issue | The administration of provisional sums within a construction contract. |
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| Implication |
Even where a contract fails correctly to set out the rules for expenditure of a provisional sum, it will nevertheless be generally understood that the provisional sum is to be omitted in computing the final account and an appropriate valuation of the work actually carried out substituted for it. |
printThe term ‘provisional sum’ is generally well understood in the construction industry. It is used in construction contracts to refer either to work which may or may not be carried out at all, or to work whose content is undefined. In either case, the parties will not attempt to price it accurately when they enter into their contract. Instead, the provisional sum is usually included within the contract price as an approximate guess. The contract normally provides expressly how it is to be dealt with. A common clause provides for the provisional sum to be omitted and an appropriate valuation of the work actually carried out substituted for it. In this broad sense, the meaning of the term ‘provisional sum’ is generally understood by everyone, but its precise meaning and effect depends on the terms of the individual contract. Indeed, the unamended standard forms are generally quite reliable in explaining the manner in which the expenditure of any provisional sums is to be handled. The JCT standard form of contract with quantities for example, goes to some length to explain that provisional sums should be classified into “defined” and “undefined” work by reference to the rules contained within the standard method of measurement. If applied correctly, this will avoid the common argument concerning whether a contractor is entitled to an extension of time and indirect costs for carrying out work instructed against a provisional sum. If the provisional sum is for defined work, there will be no entitlement to such claims. The contractor is deemed to have made appropriate allowances elsewhere in its tender. Problems arise however when bespoke or amended contract forms are used. To what extent can the parties rely upon this industry understanding of the operation of provisional sums if the contract terms fail to confirm the accepted orthodoxy? In two cases, the courts have been quite liberal in holding that a provisional sum is to be treated in the accepted manner, despite that the contract confused or contradicted this approach. In St Modwen Developments v Bowmer & Kirkland in 1996, the employer had used a provisional sum as a vehicle for the nomination of a subcontractor with the intention of avoiding responsibility for the performance of the subcontractor. This approach had become quite commonplace in the industry at that time. The tendering contractor had been invited to price his preliminaries costs on the intended subcontract works and in an effort to win the job, had priced this as “included”. The argument which then ensued was quite predictable. The employer said that the contractor’s preliminary costs were included elsewhere in the tender price and therefore, in adjusting the provisional sum, the employer should pay only the subcontractor prices and nothing else. The contractor, on the other hand, argued that the word ‘included’ meant “included in the provisional sum”. In expending the provisional sum it should be paid the costs of the subcontractor, together with the main contractor’s reasonable additional costs. Despite that the contract was not being used in its intended manner, the court agreed with the contractor. The provisional sum was to be omitted and the subcontract work was to be valued as a variation according to the normal valuation rules. This included an entitlement to claim the reasonable additional preliminary costs attached to the employment of the subcontractor. If the work was to be regarded as provisional and therefore unquantifiable at the date of the contract, so too were the main contractor’s preliminary costs in relation to carrying out that work. In the recent case of Midland Expressway v Carillion Construction & Others, a quite different problem in relation to provisional sums arose. The contract was for the construction of the M6 toll road. Clause 36.3.1 said “the employer shall be entitled to instruct the contractor to expend or execute in whole or in part any work in respect of which a provisional sum is stated in the pricing schedule. If the employer issues such an instruction, such expenditure shall be added to the contract price on the basis referred to in (the valuation of variation clause). Carillion spotted that though it should be paid for work instructed against the provisional sums, nowhere in this clause was there a requirement to deduct the provisional sum itself. It therefore claimed an entitlement to be paid for the work it carried out and, in addition, to be paid the entirety of the provisional sums entered into the contract. Counsel for Carillion accepted that this interpretation had a “surprising feel”. Lord Justice May, in the Court of Appeal, commented that this was an “elegant understatement”. In his view, the very use of the word “provisional” indicated that the parties did not expect that sum to be paid without adjustment. Carillion’s interpretation offended that expectation. Lord Justice May noted that, although it would have been more elegant and saved a lot of lawyer’s fees if the contract had provided for the provisional sums to be omitted and the actual expenditure paid instead, provisional sums were by definition in this contract only payable at all if and to the extent the employer so instructed.
CJ-0630
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