Alstom Signalling Ltd (t/a Alstom Transport Information Solutions) v Jarvis Facilities Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 11 May 2004 |
| Neutral Citation | [2004] EWHC 1232 (TCC),[2004] EWHC 1285 (TCC) |
| Docket Number | Claim No. HT-03260 |
| Court | Queen's Bench Division (Technology and Construction Court) |
| Date | 11 May 2004 |
[2004] EWHC 1232 (TCC)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT
Colin Reese QC
(Recorder – sitting as a Deputy Judge of the TCC)
Claim No. HT-03260
Mr Roger ter Haar QC appeared for the Claimant instructed by Lovells
Mr Martin Bowdery QC appeared for the Defendant instructed by Eversheds
This is the official Judgment of the Court and I direct that no further note or transcript be made.
INTRODUCTION
The Claimant ("Alstom") was the main contractor engaged by Railtrack plc (now Network Rail Infrastructure Ltd but, for convenience referred to throughout as "Railtrack") to carry out works, referred to as "the Sunderland Direct Project", to extend the Tyne and Wear Metro. These proceedings arise from the arrangements made by Alstom with the Defendant ("Jarvis") whereby Jarvis was to undertake certain of those works on Alstom's behalf. The works themselves were carried out over a two year period from January 2000. In a letter dated 6 th February 2002 which had the subject heading "Sunderland Direct – Main Commissioning Success" Alstom wrote to Jarvis in these terms:
Putting our commercial issues to one side, I wish to thank you for a successful commissioning. The Railtrack objective, to run Railtrack services 06:00 hours on 28 January 2002 was achieved on time. A great deal of hard work was put in by all your staff to achieve this. You successfully overcame the many problems that faced us. We still have some work to sort out post commissioning, such as speed proving, but hopefully this will not impact the project too much.
Please accept my personal thanks, and thanks on behalf of the whole project team.
We look forward to true completion of the scheme, with Metro passenger services commencing 31 March 2002. The main commissioning success is a major step to achieving this.
(TB 8/1345 —my emphasis)
It is the still unresolved "commercial issues" which were the subject of an Adjudication (see paragraphs 12(4), 12(5) and 13 below) and which now come before the Court for decision.
The Main Contract dated 19 th December 1999 (signed in about February 2000) provided for Alstom to be paid for the work on what can fairly be called a qualified "cost reimbursable basis". It is not necessary to explain all the complexities of the payment terms which were agreed between Railtrack and Alstom but, in order to understand the issues which now have to be decided between Alstom and Jarvis, the basis of the "pain/gain" incentive scheme must be explained. The commercial thinking which underlay the scheme was described by Alstom's Mr Irvine in an internal note that he prepared at the time (see TB 5/358 and 359 where the note is dated erroneously "4/1/99" rather than "4/1/00"). Mr Irvine later updated his note at the end of August 2001 (see TB 7/1048 to 1050) to reflect the continuing discussions that had been taking place between Alstom and other contractors who together formed a so-called "Alliance" on one side and Railtrack on the other side. The note explains that Alstom had begun by calculating what was called a "base tender cost". This was its best estimate of the " price (based on direct cost) to complete the contract, prior to risk assessment" (my emphasis).
[Pausing at this point, it is convenient to note that the documents show a fairly loose or imprecise usage of the terms "cost" and " price" and I shall adopt the convention of referring to "cost/ price" to try to make the position clear.]
The "base tender cost/ price" did not include a "management fee". The "management fee" was designed to cover production overheads, non-production overheads and profit. A base "management fee" was a separate figure calculated from the "base tender cost/ price".
I have emboldened the words "prior to risk assessment" in the previous paragraph. The risk assessment that was carried out lay at the heart of the "pain/gain" incentive scheme. The nature of the very detailed exercise that was carried out is apparent from Clause 62.2 of the Main Contract (see TB 3/222) and it is explained (in broad outline only) in Mr Irvine's internal notes. Furthermore, the basis of it was explored in the final part of Mr Robson's evidence (Transcript, Day 2, pages 166 to 169). What was done was this —cost risks in relation to the proposed works were identified by Alstom and by Jarvis (acting, so far as Railtrack was concerned, on Alstom's behalf in identifying cost risks in relation to the parts of the works which it expected to be asked to undertake if Alstom's tender was to be accepted). These were then discussed between Alstom and Railtrack in joint Quantitative Risk Assessment ("QRA") Workshops where an agreed Risk Log for the contract was established. Some of the identified risks were set aside as matters which were to be "owned" exclusively by Railtrack. Other of the identified risks were agreed to be suitable for potential "pain/gain" sharing as between Railtrack and Alstom. These risks were priced and then subjected to the evaluation exercise which is described in Clause 62.2 of the Railtrack Particular Conditions:
62.2.1 The total of the Schedule of Prices in Schedule 3.4 excluding Management Fee shall be the basis of the Target Price. The Schedule of Prices shall be priced at nett cost exclusive of any allowance for risk. The individual prices within the Schedule of Prices may be used Post Contract for monitoring comparison of work activity progress against expenditure.
62.2.2 The Tenderer [Alstom] shall provide a priced risk log identifying what he considers to be the risks inherent in his tender and indicating most likely, optimistic and pessimistic costs.
62.2.3 At Post Tender Stage but prior to award a joint QRA workshop will be held with Railtrack and the Contractor [again, Alstom] to establish the agreed Risk Log for the Contract. This will be reviewed by the Employer's Representative and the Contractor and upon their agreement the 50% probability addition of risk [the so-called P50 figure] generated will form the Agreed Target Price.
62.2.4 The 80% probability addition of risk [the so-called P80 figure] generated by the QRA will form the Agreed Gross Maximum Price.
62.2.5 The Risk Analysis as detailed in 62.2.3 and 62.2.4 will be produced with the aid of Primavera P3 Montecarlo Simulation Software in order to produce cost probability graphs with P50/P80 figures.
(TB 3/222 —Railtrack's emphasis and my clarifications)
Although the tender documents sent out by Railtrack had envisaged that the "management fee" would be a fixed amount "payable outwith the incentivisation mechanism" (see Clause 61.1 at TB 3/218), in post tender negotiations the parties agreed to vary this (see paragraph 5 of the "Agreement of Outstanding Tender Issues" dated 13 th December 1999 at TB 3/206). The logic which underlay this agreement was explained by Mr Irvine in his internal note – Railtrack and Alstom agreed that a full pro-rata increase should be made to the base "management fee" up to the level of the "Agreed Target Cost/ Price" and that a further limited pro-rata increase should be made to the overheads elements only up to the level of the "Agreed Gross Maximum Cost/ Price" (ie. Alstom's profit was to be capped at the "Agreed Target Cost/ Price" level).
The "Agreed Target Cost/ Price" and the "Agreed Gross Maximum Cost/ Price" were to be adjustable (see Clauses 62.3.1 and 62.3.2 at TB 3/223). Each was to be increased or decreased using the same principles to reflect costs resulting from any of the following:
62.3.1.1 Variations to the Works (Clause 17) provided that such Variation shall be a specific alteration made by [Railtrack] to the type and/or extent of [Alstom's] Services and/or to the Plant and shall not in any way be on account of any change in or development of the design or the Specification or of the method of carrying out the Works made by [Alstom]. It is intended that Scope Creep be included as a risk item and therefore form part of [Alstom's] Agreed Target Cost. Approval by [Railtrack] of any proposals by [Alstom] shall not constitute a Variation.
62.3.1.2 Any additional expense reasonably incurred, or loss reasonably suffered by [Alstom] as a result of any breach of Contract by [Railtrack], pursuant to sub-clause 14.4 of the Conditions of Contract. (Any monies paid to any Sub-Contractor arising out of the negligence, default, lack of skill and care or breach of Contract by [Alstom], his servant or agents or Sub-Contractors shall not adjust the Agreed Target Price, nor shall they be paid).
62.3.1.3 Any statutory or other obligations as defined in Sub-Clause 6.2 of the Conditions of Contract except that any such extra costs shall only adjust the Agreed Target Price to the extent that they were neither included nor capable of being included in the Agreed Target Price.
62.3.1.4 Matters outside [Alstom's] control including force majeure but shall exclude exceptionally adverse weather conditions which shall be included as an [Alstom] risk item.
The benchmark by reference to which "pain" or "gain" was to be assessed was the properly adjusted "Target Cost/ Price". The "Contract Price" which Alstom was to be paid was "the final figure after adjustment for the incentivisation mechanism…" (see Clause 61.1 at TB 3/218). The "Contract Price" which would be payable was to depend on the relationship between the adjusted "Target Cost/ Price" and the "Final Actual Cost/ Price". If the "Final Actual Cost/ Price" was to come in below the adjusted "Target Cost/ Price" there would be a "gain" to be shared; if the "Final Actual Cost/ Price" were to come in above the adjusted "Target Cost/ Price" there would be "pain" to be shared.
In the tender documents the "gain" sharing provisions which were at...
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