Carillion Construction Ltd v Devonport Royal Dockyard Ltd

JurisdictionEngland & Wales
JudgeLord Justice Chadwick
Judgment Date16 November 2005
Neutral Citation[2005] EWCA Civ 1358
Docket NumberCase No: 2005/1070
CourtCourt of Appeal (Civil Division)
Date16 November 2005
Carillion Construction Limited
Devonport Royal Dockyard Limited

[2005] EWCA Civ 1358


The Master of the Rolls

Lord Justice Chadwick and

Lord Justice Moore-Bick

Case No: 2005/1070







TCC 30/05 HT-05–82

Mr Stephen Furst QC and Miss Louise Randall (instructed by Herbert Smith of Exchange House, Primrose Street, London EC2A 2HS) for the Appellant

Mr Nicholas Dennys QC and Mr Simon Lofthouse (instructed by Pinsent Masons of 100 Barbirolli Square, Manchester M2 3SS) for the Respondent

Lord Justice Chadwick

This is the judgment of the Court on an application for permission to appeal—and on the appeal in so far as permission is granted—from an order made on 28 April 2005 by Mr Justice Jackson in proceedings in the Technology and Construction Court.


The proceedings followed an adjudication, made on a referral pursuant to section 108 of the Housing Grants, Construction and Regeneration Act 1996, of a dispute arising under a construction contract made between Devonport Royal Dockyard Limited ("DML") and Carillion Construction Limited (formerly Tarmac Construction Limited but, for convenience, "CCL" or "Carillion").


For the reasons which he set out in a written decision dated 17 March 2005 the adjudicator made a substantial award in favour of CCL. On 4 April 2005 CCL commenced proceedings in the Technology and Construction Court (under reference TCC 30/05) to enforce that decision. By an application made on the same day, CCL sought summary judgment under CPR Part 24. DML commenced proceedings in the Technology and Construction Court (under reference HT-05–82), also on 4 April 2005, seeking declarations that the adjudicator's decision was invalid and unenforceable. Both proceedings came before Mr Justice Jackson in the week commencing 18 April 2005. He gave judgment, [2005] EWHC 778 (TCC), on 26 April 2005.


The judge upheld the adjudicator's decision. He dismissed DML's proceedings. In CCL's proceedings he gave summary judgment for £12,376,454.54 inclusive of interest and value added tax. He ordered that that sum be paid by DML by 10 May 2005. He refused permission to appeal from his order.

The underlying facts


The circumstances in which the parties entered into contractual relations are described by the judge in paragraphs 8 to 13 of his judgment:

"8. Devonport Royal Dockyard refits and refuels warships and nuclear submarines for the Royal Navy. In March 1997, DML purchased the dockyard from the Secretary of State for Defence. At the time when the dockyard was privatised, it was decided that the existing facilities should be upgraded and new facilities should be provided.

9. Part of the purpose of these works was to enable the dockyard to refit and refuel Vanguard class submarines, as well as Swiftsure and Trafalgar class submarines. The Secretary of State engaged DML to carry out the whole of these works under a modified engineering contract which contained a target cost mechanism.

10. DML engaged Carillion as subcontractor to carry out one part of the works, namely the upgrading of 9 Dock. The works to be carried out at 9 Dock included replacing the dock walls and base and constructing four new buildings. These works would provide facilities for refitting and refuelling Vanguard submarines. One of the new buildings was a decontamination building which would contain apparatus for removing nuclear contamination.

Carillion started work on 9 Dock under the provisions of a written instruction to proceed dated 18 November 1998. On 10 March 1999, DML and Carillion entered into a written sub-contract under seal, whereby Carillion undertook to carry out the works at 9 Dock as subcontractor….

13. At the same time as entering into the subcontract, DML and Carillion also entered into a written agreement called the 'Alliance Agreement' dated 10 March 1999. The Alliance Agreement supplemented and in part superseded the provisions of the subcontract."


As appears from that summary, DML was engaged under a contract which contained a target cost mechanism. The concept of payment by reference to a target cost was carried into the subcontract with CCL; and, in particular, into the provisions for payment in respect of the subcontract works which are set out at clause 10 of the Alliance Agreement. Put shortly, the amount payable to CCL on satisfactory completion of the subcontract works was to be calculated by combining three distinct elements: (i) the final actual cost, (ii) an element described as "gainshare" and (iii) a subcontractor's fee.


The final actual cost was to be determined by reference to appendix C to the Alliance Agreement, which defined the "actual costs" which CCL was entitled to recover from DML. The "gainshare" element was a proportion of the difference between the final actual cost and "target cost". If target cost exceeded the final actual cost—so that, in effect, the project came in under budget—DML and CCL shared the unspent difference in the proportions 30:70. In such a case the gainshare element in the amount payable to CCL was 70 per cent of the excess of target cost over final actual cost. But if the final actual cost exceeded target cost—so that there was an overspend on budget—the difference was shared in the proportions 60:40. In such a case CCL bore 40 per cent of the excess of final actual cost over target cost: the gainshare element became a "painshare".


"Target Cost" was defined in the Alliance Agreement as the sum of "Base Cost" and "Contingency". Base cost was the parties' estimate of final actual cost. Contingency was a sum agreed between the parties in respect of the project risk. Clause 10.1 of the Alliance Agreement provided that "subject to further adjustment in accordance with Clause 13" target cost was to be £56,034,567. That figure was the aggregate of £48,034,567 in respect of base cost and £8,000,000 in respect of contingency. Base cost comprised CCL's cost estimate (£41,065,067) and "Provisional Sums" (£6,969,500). The third element—the subcontractor's fee—was quantified in clause 10.1 of the agreement at £3,165,433.


Clause 13 of the agreement provided for adjustment to target cost—and to the subcontractor's fee—in the event that DML issued a variation order arising from one or other of the following: (i) adjustment of provisional sums (£6,969,500) to firm prices, (ii) variation to the subcontract works arising from circumstances under which DML had the right to specific recovery from the Ministry of Defence (" MoD" or "the Authority") and (iii) variation to the subcontract works resulting from "scope swapping" (authorised by DML) between the various subcontractors working in and around 9 Dock. The amount of the adjustment to target cost was to be calculated "in accordance with the Schedule of Cost Components as defined in the Subcontract". In effect, therefore, adjustment to target cost reflected an adjustment to base cost—that is to say, an adjustment to the parties' agreed estimate of final actual cost. Adjustment to target cost led to a consequential adjustment to the subcontractor's fee. The fee was to be increased by 6.2 per cent of the increase in the agreed estimate of the actual cost.


It can be seen, therefore, that target cost was integral to the calculation of the amount payable to CCL on satisfactory completion of the subcontract works. First, target cost was the basis of the reward/risk incentive underlying the gainshare/painshare element. Second, the subcontractor's fee was based on one of the elements (base cost) which was comprised in the calculation of target cost.


The judge described the circumstances in which adjustments were made to target cost at paragraph 17 of his judgment:

"17. Substantial delays occurred during the course of the works as a result of design matters for which Carillion was not responsible. Whether some lesser part of the delays can be blamed upon Carillion may be an issue between the parties for future resolution. Suffice it to say that during the course of the works a series of six amendments were made to the Alliance Agreement, which reflected the delays and cost overruns and which provided for additional payments to be made to Carillion."


Nothing turns on the amounts by which target cost was adjusted under the first two amendments. Amendment 3, dated 24th August 2001, was subject to a proviso—set out in a covering letter from DML to CCL of the same date—which is of importance:

"1. This amendment to the Target Cost and the Total Alliance Cost Provision is made 'on account' for the purposes of providing an interim uplift. It is provided on a 'without prejudice basis' and is subject to review arising out of the final agreement reached with the authority and DML and in accordance with this Alliance Agreement."

Amendment 3 was made at a time when DML was in negotiation with MoD for a substantial increase to the pricing of the main contract. In a letter to CCL of 3 July 2001, DML had written that, in the event that it negotiated a financial settlement with MoD, then the target cost in CCL's subcontract would be adjusted accordingly. A worked example was then set out, showing how the target cost might be increased. By amendment 3, target cost was increased to £81,715,695. The subcontractor's fee was increased to £4,780,273. The aggregate of those sums (the Total Alliance Cost Provision) was £86,495,968.


Amendment 4 to the Alliance Agreement was dated...

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