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||Neutral Citation Number:  EWCA Civ 936
IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE QUEEN'S BENCH DIVISION
TECHNOLOGY & CONSTRUCTION COURT
(MR JUSTICE JACKSON)
||Royal Courts of Justice
||15th June 2006
B e f o r e :
LORD JUSTICE MAY
LORD JUSTICE GAGE
LORD JUSTICE LLOYD
(DAR Transcript of
Smith Bernal Wordwave Limited
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MR D STREATFIELD-JAMES QC & MS N JEFFORD (instructed by Messrs Wragge & Co, 55 Colmore Road, Birmingham, B3 2AS) appeared on behalf of the Appellant.
MR J BLACKBURN & MR D ROYCE (instructed by Messrs Davies Arnold Cooper, London, EC4Y 8DD) appeared on behalf of the Respondent.
HTML VERSION OF JUDGMENT
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- LORD JUSTICE MAY: The term "provisional sum" is generally well understood in the construction industry. It is used in pricing construction contracts to refer either to work which is truly provisional, in the sense that it may or may not be carried out at all, or to work whose content is undefined, so that the parties decide not to try to price it accurately when they enter into their contract. A provisional sum is usually included as a round figure guess. It is included mathematically in the original contract price but the parties do not expect the initial round figure to be paid without adjustment. The contract usually provides expressly how it is to be dealt with. A common clause in substance provides for the provisional sum to be omitted and an appropriate valuation of the work actually carried out to be substituted for it. In this general sense, the term "provisional sum" is close to a term of art but its precise meaning and effect depends on the terms of the individual contract.
- There were three provisional sums in the contract dated 27 September 2000 between the claimants as employer and the defendant joint venture as contractor for the design and construction of the M6 toll road north of Birmingham. These provisional sums were 1) a provisional sum of £1,900,000 for unspecified accommodation works, 2) a provisional sum of £50,000 for aggregate tax and 3) a provisional sum of £50,000 for future mining works. In appendix 1, Schedule of Prices, the first of these was:
"To be expended under instruction by the Employer for work agreed by the District Valuer, and the Contractor as referred to in Clause 36.3 of the Conditions of Contract."
- The second was:
"To be expended under instruction of the Employer in respect of Aggregate Tax levied on the Contractor, subject in aggregate to the relevant maximum amounts provided for in Clause 36.3.3 of the Conditions of Contract."
- The third was:
"To be expended under instruction of the Employer for extra cost of undertaking Future Mining Works as referred to in Clause 36.3 of the Conditions Contract."
Note that all three provisional sums were here expressed "to be expended".
- The second part of the pricing schedule provided that the evaluation method for the first provisional sum was to be:
"By percentage complete of expenditure under employer's instructions."
- And for the third provisional sum simply:
"By percentage complete."
- The evaluation method for the second provisional sum was to be:
"As levied subject to the limits in clause 36.3.3 of the Conditions of Contract."
- The limits in Clause 36.3.3 were by reference to the amount of aggregate tax on stated tonnes of materials. The expression used for the provisional sum for accommodation works was again "expenditure".
- The defendant contractors contend that, quixotically, the terms of this contract do not provide for the provisional sums to be omitted and for them to be paid the appropriate value of the work they actually carried out on the employer's instructions, or the actual aggregate tax subject to the limits in substitution for those sums. On the contrary, they say that they are entitled to be paid the provisional sums without adjustment and, in addition, appropriate amounts for the work they are instructed to undertake or the tax that they actually incur. The claimant employer contends that the provisional sums are as usual to be omitted and that actual values are to be substituted for them.
- Mr John Marrin QC as adjudicator construed the contract on this issue in favour of the contractors. He did not accede to an alternative claim by the employer for rectification and this is not pursued. The employer subsequently brought these proceedings in which this issue was one of many issues which Jackson J, sitting in the Technology and Construction Court, decided in a judgment running to 651 paragraphs on 14 November 2005. Mercifully, the part of the judgment dealing with the issue about provisional sums is limited to paragraphs 426 to 453. I say mercifully, conscious that paragraph 1 of the judgment opened with the sentence:
"In 43 AD four Roman legions led by Claudius invaded Britain and subdued the indigenous Celtic tribes."
- There is then reference to the construction of Watling Street, which runs close to the new toll road and an allusion to a dispute about archaeology in part 16 of the judgment. It is not Jackson J's fault that the intrinsic general interest and even excitement of the judgment's opening paragraph is not maintained beyond paragraph 2.
- The judge decided the issue with which this appeal is concerned in favour of the employer's construction, holding that the contractor's construction did not make commercial sense. This is the defendant's appeal against this part of Jackson J's decision. It is brought by permission of Gage LJ. The claimants have served a respondent's notice seeking to uphold the judge's decision for additional reasons, and have applied for and been given permission formally to amend that respondent's notice.
- The relevant parts of the contract, other than those to which I have already referred, are the definition of contract price which has the meaning given to it in Clause 36.1. The definition of "initial contract price" which is the amount stated in Clause 36.1 without any adjustment thereto in accordance with the provisions of the contract. The definition of "provisional" sum is this:
"Provisional sum means, a sum included and so identified in the Pricing Schedule for the execution of any part of the Unspecified Accommodation Works or the Future Mining Works or the expenditure of Aggregate Tax up to the maximum provided for in Clause 36.3.3, which sum may be used in whole or in part in accordance with the instruction of the Employer given in accordance with Clause 36.3."
- Clause 15.4 provided that:
"The cost of executing the Works shall be the risk of the Contractor and the Contractor shall be deemed to have satisfied itself prior to the date hereof as to the correctness and sufficiency of the Contract Price which shall cover all its obligations (whether express or implied) under this Contract."
- Clause 36 provided as follows:
"36.1 Price for Works. The contract price is £485,500,000 subject to adjustment in accordance with the express provisions of this Contract.
36.2 Adjustment of Contract Price. The Contract Price is a fixed price lump sum and shall not be subject to remeasurement or any other adjustment save in accordance with the express provisions of this contract.
36.3 Provisional Sums.
36.3.1 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 (as the case may be). If the Employer issues such an instruction such expenditure shall, subject to clause 36.3.3 be added to the Contract Price and such work shall form part of the Works (as the case may be) and the Contractor shall be entitled to a Price Adjustment on the basis referred to in clause 39.6.1 (a).
36.3.2. Without prejudice to clause 15.4, the Contractor shall be deemed to have allowed the necessary time and resources to enable the work relating to the provisional sum to be executed and satisfied itself as to all risks and matters associated with such execution, provided that any instruction for the expenditure of the Provisional Sum is given by the Employer within a reasonable time of the Effective Date, and the Contractor is not accordingly entitled to any extension of any Completion Period for the execution of work instructed in accordance with clause 36.3.1."
- I have already referred to Clause 36.3.3.
- Clause 37.1 provided that:
"Subject to the terms of clause 37 and 38 the Contractor shall be entitled to payment of the amounts set out in the Schedule of Prices in accordance with [a following table]."
- The table provided for payment "pro rata to percentage of completion", for the unspecified accommodation works and the future mining works and "monthly in arrears as levied" for the aggregate tax. "Pro rata to percentage of completion" was the expression used in this table for the majority of the conventionally priced items.
- Clause 37.2 provides:
"Subject as provided in clause 37.3 each month the Contractor shall be entitled to be paid: the amount calculated in accordance with clause 37.1 [which includes the table] and all such other amounts to which the contractor becomes entitled during that month in accordance with the express terms of the contract."
- Clause 39 provided for changes. Clause 39.6 provided for the valuation of changes. The details of this do not matter for present purposes but Clause 39.6.1 (a) was the clause to which Clause 36.3.1 directs the parties.
- The defendant's essential case, which Mr Marrin felt constrained to accept, was and is that the express and unambiguous meaning of Clause 36.3.1. is that they are entitled to an upward price adjustment for work executed or aggregate tax expended on the employer's instruction in respect of the provisional sums but that there is no express provision for adjusting the contract price by deducting the provisional sum itself. They point to the terms of Clause 36.3.1 and to Clauses 36.1 and 36.2 for the proposition that adjustments to the contract price are limited to those for which the contract expressly provides.
- In short, the defendants say that they are entitled to be paid both the original provisional sums and the actual value in accordance with the contract of the work executed and the aggregate tax paid. The defendants accept, I think, that this is quixotic but not that it is absurd. They say that there is some general sense in retaining payment of the original provisional sums for the general administrative risk inherent in initially undefined work. They say, I think, that even if it were superficially absurd, that is what the contract provided. No amount of purposive construction or implication can make the contract mean what it does not mean.
- The judge rejected the defendant's case. He decided that the total of the three provisional sums, namely £2 million, was to be deducted from the contract price. He reached this conclusion for eight reasons, to be found in paragraph 438 of his judgment as follows:
"1) A Provisional Sum is by definition a sum provided in a building contract in respect of work which cannot be sufficiently defined or properly evaluated at the time when the contract is executed. (See the first paragraph of the agreed statement.) [That is a reference to an agreed statement deriving from discussion between experts.] In practice a provisional sum is generally the best guess that can be made at the time. It is "provisional" because neither party is held to that figure, if the actual cost turns out to be higher or lower.
2) It is a necessary feature of the Provisional Sum mechanism that when the actual value of the work in question is identified and added to the contract price the provisionally estimated value is deducted. If the Provisional Sum is not deducted a) the whole system breaks down; b) the contractor is paid twice over; and c) the Provisional Sum loses its provisional quality. The so called Provisional Sum becomes a fixed and definite sum which the contractor is bound to receive in any event (even if he does nothing to earn it.)
3) Clause 36.3.1 is not a happily drafted clause. Nevertheless the meaning of that clause is perfectly clear. It is as follows. If the employer instructs the contractor to pay sums of money (e.g Aggregate Tax) or to carry out works in respect of an item for which a provisional sum is stated in the pricing schedule then the contract price shall be adjusted accordingly. In other words, the contractor shall receive in lieu of the Provisional Sum an amount assessed by reference to the actual expenditure incurred or the actual work done'.
4) If no work is instructed or executed in respect of a Provisional Sum item (as happened here in respect of future mining works), then clause 36.3.1 is not triggered at all. In those circumstances the entire Provisional Sum allocated to that item must be deducted. I say this because a) that is the natural and obvious meaning of paragraphs 18, 19 and 20 of Part A of Appendix 1 to the contract; b) the very words "Provisional Sum" mean a sum which must be deducted if the relevant item of work is not done; c) any other interpretation of the contract would be absurd. The absurdity arises in this way, it would mean that if the contractor does a small amount of work in respect of the Provisional Sum item, he receives a small payment; if the contractor does nothing at all in respect of such an item, he receives a much larger sum."
The adjudicator addressed this conundrum at paragraph 27 of his decision:
"5) The last line of part A of appendix 1 to the D&C Contract reads 'Value of Non MSA Work, £484,507,354.00 including provisional sum items 18, 19 and 20'. There would be no point in stating that the contract price includes the three provisional sums if those sums were payable in any event.
6) The definition of provisional sum in Clause 1.1 is inconsistent with the interpretation for which Canberra contend. Note the words 'which sum may be used in whole or in part'.
7) Clause 36.3.1 refers to price adjustment. The term 'price adjustment' is defined in Clause 1.1 so as to include additions to and deductions from the contract sum.
8) When pressed by me in argument Mr Stretfield-James conceded that his proposed construction of Clause 36.3 had 'a surprising feel'. That is an elegant understatement. In my view the interpretation for which Canberra contend does not make commercial sense."
- Those reasons are, in my judgment, generally persuasive; although it is perhaps fair to say that they do not face head on the submission that clauses 36.1 and 36.2 say that the contract price is not to be adjusted except in accordance with express provisions and that Clause 36.3 does not expressly in terms provide for the provisional sums to be omitted.
- Mr Streatfield-James submits that the judge's second reason was not open to him, since it was agreed in effect that the term provisional sum is not a term of art and that its meaning and effect depend on the terms of the individual contract. The meaning given by the judge to clause 36.3.1 is not, as he said it was, perfectly clear; on the contrary, its meaning is clearly that for which the appellants contend. The judge only reached his conclusion by reading in words which the clause will not bear. One difficulty is that if no work or expenditure were instructed for the provisional sums, there is no provision at all for the sums to be deducted. There was no basis, it is submitted, for the judge's conclusion that the entire amounts should be deducted.
- It is submitted that the words in paragraphs 18, 19 and 20 of appendix 1 do not support the judge's conclusion; they simply refer back to Clause 36.3. The judge's absurdity depended on his erroneous conclusion that, if no work was instructed or aggregate tax expended, the provisional sums were to be deducted in full. The judge's reliance on Part A of Appendix 1 was erroneous. The judge wrongly relied on the definition of provisional sum because that definition, too, takes you back to Clause 36.3 and does not affect the appellant's case. There is no inconsistency. The definition of price adjustment as including a deduction from the contract price does not help, because for the provisional sums Clause 36.3 only provides for the addition of a sum, not a deduction.
- Mr Streatfield-James has orally taken us through the various parts of Clause 36.3, in particular Clause 36.3.1, and has pointed to syntactical difficulties with the first part of the clause and makes submissions in relation to the operation in the light of that of the second part of the clause.
- The respondents have their amendment to the Respondent's Notice seeking to propound what for the court was a new and ingenious argument. It is in outline as follows: The first sentence of Clause 36.3.1 is ungrammatical because you do no expend work. Expend must refer to the provisional sum for aggregate tax and execute to the work in the other two provisional sums. When you come to the second sentence of Clause 36.3.1, it is the expenditure on aggregate tax only which is to be added to the contract price. The work for the other two provisional sums simply forms part of the works and the contractor is entitled to a price adjustment for it on the basis referred to in clause 39.6.1(a). Absent the provision for the value of this work to be added to the contract sum, the price adjustment may flexibly omit the provisional sum and include the actual value of the work.
- This analysis, it is said, is encouraged by the words in brackets "as the case may be", and the reference to Clause 36.3.3, which concerned only the provisional sum for aggregate tax. This construction, as I understand it, would mean that the contractor was paid the £50,000 for the provisional sum for the aggregate tax, plus whatever tax was levied subject to Clause 36.3.3, but that the other two provisional sums were not paid. Although there is some latter-day force in the grammatical analysis of the first sentence at 36.3.1 and although we have not found it necessary to hear Mr Blackburn on this point, I regard this construction in the round producing a different result for the aggregate tax provisional sum as, if anything, more absurd than the appellant's construction. It cannot in my view have been the presumed intention of the parties to produce a different regime for one of the provisional sums from that for the other two nor does it chime with the expression, 'instruction for the expenditure of provisional sum' in Clause 36.3.2 to which I shall come in a moment.
- In my judgment, the judge's conclusion that the provisional sums were to be omitted from and the appropriate actual amount included in the adjusted contract price was correct, essentially for the reasons which he gave. But I shall state my essential reasons in my own words.
- As I have said, the term "provisional sum", by the very use of the word "provisional", indicates that the parties do not expect that sum to be paid without adjustment. The appellant's construction in my view offends this expectation. A provisional sum is there essentially for the employer to spend or not as the relevant contingency arises. This accords with its definition in this contract, which provides for all three provisional sums that they "may be used in whole or in part in accordance with the instructions of the employer". The subsequent reference to clause 36.3 is a signpost not a limitation. The essential point is that the sums are there to be used or not in accordance with the employer's instruction. To the extent that they are not so used they are not payable.
- Thus although it would have been more elegant and saved a lot of lawyer's fees if the contract had provided in terms for the provisional sums to be omitted and the actual expenditure paid instead, provisional sums are by definition in this contract only payable at all if and to the extent that the employer so instructs. The same in my judgment is the effect of Clause 36.3 in the context of the contract as a whole. I agree that something is mildly wrong with the structure and syntax of Clause 36.3.1. But that clause expressly provides for the employer to instruct the contractor in respect of provisional sums and the concept is maintained in Clause 36.3.2, where there is explicit reference to "any instruction for the expenditure of the provisional sum". Although the provisional sum is in the singular it plainly refers generically to any of the provisional sums, see the preceding words "to enable the work relating to the provisional sum to be executed", and not only to the provisional sum for aggregate tax. So the expenditure of the provisional sum is there for the employer to instruct. Compare the near identical wording of Clause 13.3 of the most commonly used standard form of building contract. If he does not instruct, the sum is not spent and is not payable. If he does so instruct, what is payable is the actual value in accordance with Clause 39.6.1 (a) of the work or, subject to Clause 36.3.3, the actual amount of the tax levied. There is thus adjustment in accordance with the express provisions of the contract and no difficulty arises with Clauses 36.1 and 36.2.
- The other relevant provisions of the contract confirm this construction. The table in clause 37 provides for payment entitlement to be pro rata to percentage of completion or monthly in arrears as levied. There is no provision for payment of the original provisional sum in addition to which Clause 37.2 might otherwise conceivably apply. There is provision for the contractor to claim "further sums which the contractor considers to be due to it under the contract" under the final certificate provisions in Clause 38.5.1, but there is no sense at all in the contractor being paid £2 million at the final certificate stage only, when there is no work or expenditure that that sum alone represents.
- Appendix 1 provides expressly for each of the provisional sums to be expended under instruction of the employer, thus restating the position that the sums are there to be expended or not as the employer instructs. The subsequent schedule restates that the valuation method is by percentage completed expenditure under employer's instructions or for the aggregate tax as levied. I do not myself get any help from the subsequent statement that the value of non-MSA works is £484,507,354.00 including the provisional sums.
- For these reasons I would dismiss this appeal.
- LORD JUSTICE GAGE: I agree.
- LORD JUSTICE LLOYD: I also agree.
Order: Appeal dismissed.
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