BAILII [Home] [Databases] [World Law] [Multidatabase Search] [Help] [Feedback]

England and Wales High Court (Technology and Construction Court) Decisions


You are here: BAILII >> Databases >> England and Wales High Court (Technology and Construction Court) Decisions >> Alstom Signalling Ltd. (t/a Alstom Transport Information Solutions) v Jarvis Facilities Ltd [2004] EWHC 1232 (TCC) (11 May 2004)
URL: http://www.bailii.org/ew/cases/EWHC/TCC/2004/1232.html
Cite as: [2004] EWHC 1232 (TCC)

[New search] [Printable RTF version] [Help]


Neutral Citation Number: [2004] EWHC 1232 (TCC)

In The High Court of Justice
Queen's Bench Division
Technology and Construction Court

St Dunstans House
1 Fetter Lane
London
11 May 2004

B e f o r e :

His Honour Deputy Judge COLIN REESE QC
____________________

Between:
ALSTOM SIGNALLING LIMITED (trading as Alstom Transport Information Solutions)
Claimant
and

JARVIS FACILITIES LIMITED
Defendant
(No 1)

____________________

Mr Roger ter Haar QC appeared for the Claimant instructed by Lovells
Mr Martin Bowdery QC appeared for the Defendant instructed by Eversheds

____________________

HTML VERSION OF JUDGMENT
____________________

Crown Copyright ©

    INTRODUCTION

    INTRODUCTION

  1. 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 6th February 2002 which had the subject heading "Sunderland Direct – Main Commissioning Success" Alstom wrote to Jarvis in these terms:
  2. 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.

  3. The Main Contract dated 19th 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).
  4. [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".

  5. 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:
  6. 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 13th 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).

  7. 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:
  8. 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.

  9. In the tender documents the "gain" sharing provisions which were at Clauses 62.4.2 and 62.5 were more complicated than the "pain" sharing provision which was at Clause 62.4.3 and 62.4.4 (see TB 3/224 to 226). The complexity of the proposed "gain" sharing was the result of the existence of the so called "Alliance" of main-contractors. What was envisaged was "gain" sharing on the basis of Railtrack receiving 40%, Alstom receiving 30% and an Alliance fund receiving 30%. In the event, according to the updated version of Mr Irvine's note, apparently after one of the Alliance members become insolvent, Alstom proposed to Railtrack that "gain" should be shared between them on a simple 50:50 basis. I do not know whether this proposal was ever formally agreed by Railtrack but, according to a letter written by Mr Irvine on 6th February 2002, the gain share had been so revised (see TB 8/1339 cited at paragraph 11 below). Turning to the "pain" sharing provisions, which featured much more prominently in the submissions advanced in the present case, no Alliance involvement was envisaged. What was envisaged in the tender documents was equal "pain" sharing between Railtrack and Alstom up to the adjusted "Gross Maximum Cost/Price" with the whole of any excess being borne by Alstom. The invitation to contract on this basis was not accepted. Negotiations between Railtrack and Alstom resulted in an agreement "…to develop the principles of the pain limitation in accordance with the following…". The Agreement is to be found at paragraph 5 of the "Agreement of Outstanding Tender Issues" dated 13th December 1999 (see TB 3/205 to 206) in these terms –
  10. 5. Alliancing
    With regard to the Gain/Pain position as tendered, and subsequently under review, Alstom accept Railtrack principles other than unlimited pain share on the Gross Maximum Price ["GMP"[

    The Parties are in agreement to develop the principles of the pain limitation in accordance with the following for the Sunderland Metro Work:-
    Adjustment has been made to the P80 Risk level to establish a revised GMP in the value of £12,867,674. A cap on the Contractors 100% pain over the GMP has been agreed at a value of £14,117,674 after which Railtrack will reimburse the Contractor at net cost exclusive of any overhead or profit contribution.
    This shall be with a Base Tender value of £11,003,114, with a Target Price of £12,367,674.
    The above is intended to, and has been designed, to reflect a maximum loss position to Altsom where all Alstom profit and non production overhead has been eroded.
    For the avoidance of doubt, should the Leamside Works be introduced then……
    It is agreed that proposed [Key Performance Indicators] KPI's shall be developed on the Railtrack principles as tabled at post tender meetings and subject to Alliance review, synergy and acceptance with the Alliance Partners. At this stage Alstom accept the principles as detailed in the tender documents in respect of the operation and distribution on the KPI Fund.
    (TB 3/205 and 206 – my emphasis)

    The wording used is consistent with Alstom and Railtrack having agreed to develop the pain sharing provisions and recording the final agreement which had been reached between them. It is on this reading, which accords with the original version of Mr Irvine's internal note (see TB 5/358 and 359), that Alstom's case against Jarvis is premised. However, the wording is also consistent with Alstom and Railtrack having agreed in principle to develop the pain sharing provisions in the manner described without the matter being finally settled at this time. A number of later documents appear to be rather more consistent with Alstom and Railtrack regarding both pain sharing and gain sharing as matters which were the subject of ongoing negotiations (see paragraphs 24, 30 and 31 below). If that was so, at some later time Alstom appears to have accepted that the Main Contract contained a finalised pain sharing term in the terms of paragraph 5, or in terms that were substantially the same as paragraph 5. However, assuming (as Alstom allege) that final agreement on gain sharing and on limited pain sharing was reached on or before 13th December 1999, and in the terms recorded in paragraph 5, the agreed incentive scheme can be summarised as follows:

    (1) the agreed (adjustable) "Target Cost/Price" was £12,367,674;

    (2) if the "Final Cost/Price" came in below the adjusted "Target Cost/Price", the "gain" was to be shared between Railtrack, Alstom and the Alliance;

    (3) if the "Final Cost/Price" came in at a figure up to £500,000 above the adjusted "Target Cost/Price" (i.e. between £12,367,674 and £12,867,674 on the basis of the unadjusted initial figures) this first band of "pain" was to be shared equally between Alstom and Railtrack;

    (4) if the "Final Cost/Price" came in at a figure up to £1,250,000 above the adjusted "Target Cost/Price" plus £500,000 (i.e. between £12,867,674 and £14,117,674 on the basis of the unadjusted initial figures) Alstom would bear the whole of this second band of "pain"; and

    (5) if the "Final Cost/Price" came in above the adjusted "Target Cost/Price" plus £1,750,000, Alstom would be reimbursed the excess "cost/price" at net cost exclusive of any overhead or profit contribution.

    Given that the same principles were to be used in adjusting both the "Agreed Target Cost/Price" and the "Agreed Maximum Cost/Price" (see paragraph 4 above) it would seem probable that the difference between these two figures would remain constant whether the "cost/price" increased or decreased. In the event of increase, Alstom could expect to see proportionate increases in overheads recovery and profit but there is no suggestion that the pain cap was to be subject to a corresponding adjustment. On Alstom's case, it seems that there was agreement that the maximum "pain" which Alstom might be expected to bear was £1,500,000.

  11. In these proceedings Alstom's primary case is that it sub-contracted a significant part of those main contract works to Jarvis. The sub-contract is said to have been agreed in the terms of Issue 3 of the draft sub-contract documents ("the Issue 3 documents"). Although the sub-contract documents were never signed by either party, Alstom's analysis is that it made a contractual offer when the Issue 3 documents were submitted to Jarvis under cover of a letter dated 30th August 2001 (TB 7/1042 and 1043) which Jarvis later accepted. In Alstom's submission, when properly construed, the Issue 3 documents include a term that Jarvis was to receive a proportionate share of any main contract "gain" that it (Alstom) might receive from Railtrack and that Jarvis was to pay a proportionate share of any main contract "pain" for which it (Alstom) might be liable to account to Railtrack. The proportion of the "gain" or "pain" which Jarvis was to receive or pay is, it is submitted, the percentage of the final main contract value which the sub-contract works eventually represented.
  12. Alstom's primary case was developed in a number of ways – see paragraphs 19 to 21 of the Particulars of Claim – each one of which is disputed by Jarvis. The primary case can be seen to have two quite separate limbs. A documentary construction case, with alternative facets, is pleaded at paragraphs 19 and 20 of the Particulars of Claim in this way –
  13. 19. (1) the parties agreed that the Subcontract Price would be calculated in accordance with the rules contained in Schedule E [of the Issue 3 documents];
    (2) Schedule E clause 3.1 provided that one of the rules for calculating the price was the application of the Alliance Pain/Gain mechanism;
    (3) Also by Clause 3.1 the principles of the Pain/Gain Mechanism were to be based on the details contained in Schedule B, Annex B1 [of the Issue 3 documents] – these included that the percentage to be borne (or enjoyed) by Jarvis of any pain or gain would be in the same ratio as the sub-contract value bore to the main contract value;
    (4) the Railtrack/ALSTOM contract provided the mechanism for determining the amount of the pain or gain to which that percentage would be applied.
    20. Alternatively, insofar as any element [of the sub-contract "pain/gain mechanism] yet remained to be agreed, it was agreed by Jarvis' acceptance of ALSTOM's letter of 31st January 2002 as set out at paragraph 10(1) and 10(2) [of the Particulars of Claim – and as to which, see paragraph 44 below].
    (TB 1/13 and 14 – with my parenthetic clarifications)

    In the alternative, Alstom contends at paragraph 21 of the Particulars of Claim –

    …… if (contrary to ALSTOM's case, but as has been contended by Jarvis) any element of the pain/gain mechanism remained to be agreed, this Court has full power to determine what the amount of any pain to be borne or gain to be enjoyed by Jarvis should be, applying the principle set out in Schedule B Annex B1 and the provisions of Schedule E [of the Issue 3 documents].

    (TB 1/14)

    with the Court's power deriving from Clause 45.3 of the Special Conditions of the Sub-Contract (see TB 4/297 – the clause itself is set out at paragraph 54 below.)

    In addition to responding by disputing each of Alstom's submissions, Jarvis advances a positive case of its own. Jarvis also contends that a sub-contract was agreed in the terms of the Issue 3 documents. However, Jarvis disputes the inclusion of the pain/gain sharing term pleaded by Alstom – or the inclusion of any pain/gain sharing term. Jarvis accepts that the "pain/gain" issue was raised and considered during the course of intermittent and protracted sub-contract negotiations, between 1999 and 2002 but, it submits, the wording of Annex E5 which formed part of Schedule E to the Issue 3 documents contains a clear statement of the then current understanding of the parties -

    1.0 The Pain/Gain share shall use the basic definitions and principles described within the ITT – Section A, Binding 1, dated July 1999, Clause 61 Schedule of amendments to the Special Conditions and General Conditions.
    Details of the Pain/Gain Mechanism are to be reviewed and agreed in accordance with Action number 5 from the meeting dated 23rd August 2001. Once agreed by both parties the details shall be added to the Subcontract Agreement as an amendment.
    (TB 4/655 – my emphasis)

    and, it further submits, that no agreement on a mutually acceptable "pain/gain" sharing mechanism was reached at any time thereafter. In answer to the second limb of Alstom's primary case viz. that the Court has full power to determine the amount of pain to be borne or gain to be enjoyed by Jarvis, at paragraph 31 of the Defence it is said –

    …… it is denied that it is necessary, reasonable or appropriate for the Court to determine what should have been agreed but was not agreed regarding any pain/gain agreement as alleged or at all.
    (TB 1/91)
  14. Alstom's secondary case in these proceedings is this – if Jarvis is right that, as a matter of construction of the Issue 3 documents, no term was agreed for the sharing of the main contract "pain/gain", and if Jarvis is also right that the Court has no power to determine the amount of the "pain" to be borne or the amount of "gain" to be enjoyed by Jarvis then –
  15. 22. …. The sub-contract did not contain a complete or workable statement as to the sub-contract price which was and is an essential and necessary term of the sub-contract. In the premises the sub-contract is unenforceable.

    23. By reason of the foregoing, Jarvis's entitlement to be paid is upon a Quantum Meruit. Alstom will contend that the reasonable price to be paid to Jarvis for their work would take into account an appropriate percentage of any pain… suffered… by Alstom under the [main contract] … .

    In support of the allegation that Jarvis' entitlement is to payment upon a Quantum Meruit, Alstom relies on the following –

    "(1) the fact that from September 1999 onwards Jarvis at all times agreed to the principle that it would participate in the pain/gain share agreement;

    (2) the facts and matters set out at paragraph 5 to 8 [of the Particulars of Claim];

    (3) the provisions of the [Issue 3 documents]…"

    Under the heading "the Tendering Agreement", at paragraphs 5 and 6 of the Particulars of Claim, Alstom referred to certain clauses of a Tendering Agreement dated 24th September 1999. The clauses referred to were –

    Clause 2.1:
    "The parties agree to co-operate in the preparation and submission of the Tender and in the event of the award of a Contract to ALSTOM on terms accepted by each of the Parties in writing to perform the said Contract.
    The Tender shall be binding on the Parties and shall be complete for the purposes of the Project."
    ("Tender" was defined by Clause 1(h) as "the tender to be submitted by ALSTOM to the Purchaser for the Project".)
    Clause 5.1:
    "Each Party shall be responsible for preparing the content of the Tender for its Scope of Work and for ensuring that its Scope of Work is complete in all respects for the purposes of the Tender.

    The parties shall provide each other promptly with all information and assistance reasonably required for the purposes of the preparation submission and negotiation of the Tender."
    Clause 6.1:

    "The Parties shall discuss and agree limitations of liability and risk-sharing arrangements between themselves in respect of the performance of the Tender prior to the submission of the Tender."

    And at paragraphs 7 and 8 of the Particulars of Claim, Alstom alleged that –

    "7 By reason of their involvement in the preparation of the tender, Jarvis were aware that and agreed that
    (1) the tender to Railtrack would include a "Pain/Gain Share" provision;
    (2) by the terms of the Pain/Gain Share provision it was provided
    (a) that in principle ALSTOM would be paid upon a cost reimbursable basis;
    (b) but that this entitlement to be paid upon a cost reimbursable basis was subject to the following (among other) provisions:
    (i) that a Target Cost was agreed (subject to certain provisions to revise that cost in certain circumstances);
    (ii) that if the cost of the project fell below the Target Cost then ALSTOM would be entitled to share in the "gain" by receiving 50% of any shortfall in cost;
    (iii) that if the cost of the project exceeded the Target Cost then ALSTOM would bear 50% of the "pain" of the first £500,000 of excess cost over the Target Cost; of the next £1,250,000 of excess cost, ALSTOM would bear the whole of the "pain"; and Railtrack would bear the whole of any "pain" over and above an excess of £1,750,000;
    (3) that it was at all times the expectation that Jarvis would be the sub-contractor to ALSTOM responsible for the installation works and some elements of design on the project;
    (4) that the tender was prepared jointly on the basis that ALSTOM and Jarvis would be "in alliance" with the understanding that ALSTOM/Jarvis sub-contract would provide for ALSTOM and Jarvis to share any "gain" enjoyed or "pain" suffered by ALSTOM under the Railtrack/ALSTOM contract.
    8. As Jarvis knew, ALSTOM entered into their contract with Railtrack on the basis of the expectations and understanding set out at sub-paragraphs 7(3) and 7(4) above."

    In response to this secondary case, Jarvis takes issue with the submission that the pain/gain provision was an essential part of the sub-contract. Jarvis contends that the unsigned sub-contract could work, and that it did in fact work, without it. However, if the Court were to reject that submission and to hold that the "pain/gain" provision was fundamental or central to the formation of any sub-contract between itself and Alstom, Jarvis maintains the positive case advanced in answer to Alstom's primary case (viz. that no agreement was reached on any pain/gain provision) and submits that, in such circumstances, no sub-contract was concluded. The result of that, in Jarvis' submission, is that it (Jarvis) is entitled to be paid a reasonable price for the work and services which it carried out at Alstom's request. When the amount of that reasonable price comes to be calculated, Jarvis submits that no account should be taken of "any failure by Alstom to comply with their main contract targets allegedly agreed with Railtrack" (see paragraph 34 of the Defence).

  16. In the event, after all the main contract works had been substantially completed, Alstom accepted that there was no question of any "gain" accruing to its benefit. Railtrack contended, and Alstom accepted, that the final account should include a deduction of £1,500,000 i.e. the maximum "pain" that had been envisaged at the time the Main Contract was agreed was inflicted. The position as between Railtrack and Alstom was recorded in a "Contract Amendment Agreement" made in May 2003. An undated copy of that Agreement was forwarded by Alstom's solicitors to Jarvis' solicitors under cover of a letter dated 17th November 2003 (see TB8/1504 ff) and the date was given in a Response to a Request for Further Information concerning paragraph 24 of the Particulars of Claim (see TB1/34). By its terms Railtrack and Alstom agreed to amend the payment terms in the main contract in the manner therein described. Alstom agreed to accept payment in the sum of £26,750,000 or such lesser sum as should become payable in accordance with Appendix 1 to that Agreement in full and final settlement of all its entitlements in respect of the main contract works. The sum of £26,750,000 was stated to include a provisional sub-contract price of £12,750,000 for Jarvis' sub-contract works. This agreed provisional sum was made the subject of a new "pain/gain" sharing agreement between Railtrack and Alstom in the following terms –
  17. 3.2 The Parties hereby agree that [the provisional sum of £12.75m] represents the Final Guaranteed Maximum Subcontract Price payable by [Railtrack] to [Alstom] in respect of the Jarvis subcontract works.

    3.3 The Parties hereby agree that in the event that the Agreed Final Subcontract Price (as between [Alstom] and Jarvis) is in an amount less than the provisional Subcontract Price the amount of difference shall be a gain shared in equal proportions between [Alstom] and [Railtrack]

    3.4 The Parties hereby agree that in the event that the Agreed Final Subcontract Price (as between [Alstom] and Jarvis) is in an amount in excess of the provisional Subcontract Price the excess shall be borne solely by [Alstom]

    3.5 [Alstom] shall obtain [Railtrack's] prior written consent to the amount of the proposed Agreed Final Subcontract Price.

    (see TB 8/1513)

    The deduction of the two elements of agreed "pain", which together total £1,500,000, can be seen in the calculation which was shown as Schedule 1 to Appendix 1 of the Contract Amendment Agreement -

    Final Guaranteed Maximum Price ("GMP") £21,118,000.00
       
    LESS 50% of P80 (£250,000.00)
       
    Final GMP payable £20,868,000.00
       
    ADD sum of difference between Agreed  
    Final Actual Cost and Cap on Liability  
    (£23,860,000.00 - £21,118,000.00) £ 2,742,000.00
       
    LESS Cap amount (£1,250,000.00)
       
      £22,360,000.00
       
    ADD Fixed Fee £ 2,573,000.00
       
    ADD Fee on PMIs (balance) £ 1,817,000.00
       
    Contract Price £26,750,000.00
    (Adjustable in accordance with paragraph 3 herein)  
       
    (see TB 8/1514 - my emphasis)  

    The method or methods used to arrive at the agreed revised "Final Guaranteed Maximum Cost/Price" of £21,118,000 and the Agreed "Final Actual Cost/Price" of £23,860,000 is/are not transparent (but, in passing, I note two points – first, the agreement does not bind and cannot adversely affect Jarvis' legal rights/obligations; secondly, in the agreement it was said that Railtrack and Alstom agreed that the "Guaranteed Maximum Final Cost/Price" was deemed to be calculated in accordance with the particular conditions [of the main contract]" – see Clause 1.1 – TB8/1512). No revised "Target Cost/Price" was shown in the Contract Amendment Agreement but, when calculating its claim against Jarvis, Alstom appeared to have simply maintained the £500,000 differential and fixed on £20,618,000 as the appropriately adjusted figure.

  18. In these proceedings Alstom seeks to recover from Jarvis a contribution of £839,175 towards the total "pain" of £1,500,000 which, on the face of the Contract Amendment Agreement, it has suffered. The same sum is claimed on Alstom's primary case (i.e. as a sum due under the Sub-Contract provisions for which Alstom contends) and on Alstom's secondary case (i.e. as a sum due on a Quantum Meruit). The calculation, shown at paragraph 24 of the Particulars of Claim (TB1/16), can be seen to have been developed from the figures agreed between Railtrack and Alstom. However, Jarvis' claimed entitlement to be paid £14,108,559 has been factored into the equation in place of the provisional sum of £12,750,000. In the Further Information supplied by Alstom there is an express recognition that, assuming liability is established, the sum due from Jarvis cannot be finally calculated until the value of the Sub-Contract works is agreed or ascertained.
  19. THE DEVELOPMENT OF THE DISPUTES – ADJUDICATION – THE PRESENT PROCEEDINGS

  20. In paragraph 1 above, attention is drawn to the terms of Alstom's letter dated 6th February 2002 which was written shortly after the "successful commissioning" which had allowed Railtrack to begin running services on 28th January 2002. In that letter, the "commercial issues" had been put aside. However, the commercial issues had been addressed in Alstom's letter of 31st January 2002 which had the subject heading, "pain/gain". In that letter Alstom (Mr Irvine) said –
  21. It was always the intent of both parties to operate on a partnering basis incorporating gain/pain arrangements and to back to back these to the head contract.
    The Alstom/Railtrack pain/gain sharing was first described to Jarvis by ALSTOM in December 1999. It has not changed since then, save that the Alliance gain share has now moved to a 50/50 share with Railtrack for each contractor. Pain share was always specific to ALSTOM and did not involve the Alliance Performance.
    At a meeting in April 2000 ALSTOM and Jarvis agreed in principle to the pain/gain concept above, but with the parameters reduced in scale by a % which describes the relative size of the Jarvis/ALSTOM base costs (at the time this stood at 37%, which is quoted in the meeting notes). Today that ratio is ~50%, reflecting the relative growth of Jarvis scope. Later correspondence between Peter Middleton and myself revisited the same ground.
    Without finalising this pain/gain mechanism, the concept of a JARVIS target cost and variation is meaningless. An obvious way forward on this issue, which is jointly agreed to be outstanding, is to ratify the original concept of sharing the proceeds of Alstom's pain/gain mechanism with RT. The benefit of this would be to negate the current situation of double negotiation and to allow us to concentrate both of our efforts on the single issue of increasing ALSTOM's target cost.
    At this late stage I cannot see any alternative way of concluding the contract between us but if you have any other suggestions please advise them. I would like to convene a meeting within the next two weeks to finalise this and any other outstanding issue.
    (TB 8/1339 and 1340 – my emphasis)

    I shall have to return to this letter, which Jarvis apparently received on 6th February 2002, when I come to consider Alstom's primary case but, for now, I simply note it as the first in the series of documents where the parties set out their respective positions and which lead up to the Adjudication and then to these proceedings.

  22. After receiving Alstom's letter, Jarvis agreed to the proposed meeting. It took place on 19th February 2002. Typed minutes prepared by Jarvis and manuscript notes taken by Alstom (see TB 8/1360 to 1369) indicate that, against the background of Railtrack's stopping payments under the main contract, each party stated its very different position so far as the "pain/gain" issue was concerned. The typed Minutes contain the following section –
  23. Resolutions of the Contract
    Alstom considered that the signing of the Contract was fundamental as far as they were concerned the parties had acted on the Contract and it should therefore be signed. Jarvis agreed that both parties had acted on the Contract however there was clear evidence that there were two outstanding items these being the Pain/Gain mechanism and the resolution of certain Nexus materials.
    It was Alstom's view that a 50/50 Pain/Gain mechanism was in place and that this had been implied on the basis of a Partnership arrangement between Alstom and Railtrack and step down between Alstom and Jarvis. Jarvis did not accept this and considered that the Pain/Gain mechanism was still to be agreed this had been clearly spelt out in the document to date. Jarvis did not accept that there was any Partnership Agreement implied or otherwise. In support of this Jarvis referred to the fact that there had been originally an alliance agreement of which they are a part.
    It was Jarvis view that Alstom considered them as sub-contractors, the documentation stressed this and indeed they had been excluded from any negotiations with Railtrack in many instances at the specific insistence of Railtrack.
    Jarvis considered that the Pain/Gain mechanism was always an area which had never been agreed. Mr Robson had always expressed concerns over the non-agreement of the Contract. Since his connection with the Company almost one year ago, however the only matters outstanding had been the Pain/Gain mechanism which had not agreed on the simple basis that neither Alstom nor Jarvis could agree to a clear mechanism to which a Pain/Gain Agreement could be achieved.
    Jarvis considered that they would still consider a Pain/Gain mechanism to which Alstom responded that the "ball was now in Jarvis' court".
    Jarvis considered that as nothing was agreed there was now no way that Alstom could either imply or impose a Pain/Gain mechanism and this would have to be to the mutual agreement of both parties.
    Jarvis assessed that they would continue to increase the target cost and at which time they would be pleased to operate a Pain/Gain mechanism.
    Jarvis confirmed that current target was in the region of 12.25 million which was currently 2 million pounds above the current target leaving Jarvis exposed to the tune of 2 million pounds.
    (TB 8/1361 and 1362 – my emphasis)

    The various different manuscript notes of or relating to the meeting are consistent in showing that Jarvis positively indicated a willingness to agree to a particular pain/gain mechanism. The mechanism proposed was a comparatively simple one, namely 50:50 gain/pain sharing up to 10% of the Target Cost with Jarvis' Management Fee limited by reference to the Target Cost (see TB 8/1364, 1366 and 1368). It is clear from two of the entries that the individual who put forward that offer on behalf of Jarvis was Mr Robson (see TB 8/1366 and 1368). It was not expressly stated in the Notes themselves that the "Target Cost" which was being referred to was Jarvis' final "Target Cost/Price" but that is, in my judgment, the fair inference to be drawn. It also seems clear from the second page of one of the Alstom notes that, after considering Jarvis' offer, at that time Alstom did not wish to accept it (see TB 8/1365).

    Further correspondence/discussions followed, the detail of which I do not need to describe beyond noting –

    (1) that after a meeting on 12th April 2002, Jarvis sent a first Adjudication Notice to Alstom on 15th April 2002 (see TB 8/1418 to 1425). At paragraph 2 of the Notice, Jarvis contended that it had "… commenced work pursuant to a contract agreed [with Alstom]";

    (2) although an adjudicator (Mr Peter Chapman) was identified and the parties agreed that any future disputes would be referred to him, the first adjudication did not proceed to a decision (see TB 8/1480). Alstom and Jarvis endeavoured to reduce the differences between them but, by the end of August 2002, matters were once again coming to a head. Jarvis considered that the value of its works was under-certified to the extent of £1,618,253.95 (see letters of 27th August 2002 and 29th August 2002 at TB 8/1430 and 1433 to 1444). In the response to Jarvis' letter of 27th August 2002, Alstom (Mr Fossey, its Commercial Director) wrote on 28th August 2002 stating (inter alia) –

    "… We both agree that the working contract is not the ITP [instructions to proceed] but the unsigned contract. This contract has no limit of liability, Jarvis will be reimbursed its costs, providing, of course, they are substantiated in accordance with the requirements of the contract…

    As you are aware, the pain/gain arrangements of the subcontract are sharing Alstom's head contract pain/gain. Although we have had some movement in the Target Cost recently, the formula still produces the maximum pain of £1.5m with a proportionate share falling to Jarvis…"
    (TB 8/1431 and 1432 – my emphasis)

    In the letter of 29th August 2002, Jarvis (Mr Robson, its Divisional Director) dealt with each of the disputed figures, arguing its case with some particularity. This was a lengthy letter but the only part of which needs to be specifically noted is the section under the headings "General, Target Cost" which appear on its tenth and eleventh pages –

    Prior to completion of the Works we repeatedly requested an update of the target cost. The following letters are a small extract of the correspondence on this subject.
    Our letter dated 20 December 2001 reference 81362/ALSTOM/sj/L/1135 gave a forecast of our target cost in the sum of £12,528,140.00 and requested an urgent update. Our letter dated 8 February 2002 reference 81362/Alstom/sj/L/1180 again requested an increase in the target cost to take account of variations at that time.
    In recent months we have been concentrating on providing justification and substantiation of our costs on this project. This emphasis was at your behest following our previous emphasis on providing substantiation for increasing the target cost. We acted on your assurance that we would be paid actual costs…..
    Since then we have been forced to resort to formal methods to obtain payment of monies expended on this Contract. We gave formal notice of suspension on 11 February 2002 following your failure to honour the valuation certificate. This was then followed by a Notice of Adjudication on 15 April 2002 which again was as a result of your wrongful set off.
    We are of the opinion that taking account of variations executed since our letter dated 8 February 2002; the target cost will now be greater that the costs expended to date.
    We will therefore be re-concentrating our efforts on substantiating the amended target cost figure and will be submitting our update in the very near future. We will then be pleased to enter further negotiations regarding a pain/gain mechanism, which, as you are aware was one of the items left in abeyance in our Contract Documents.
    (TB 8/1442 and 1443 – my emphasis)

    A few days later Mr Robson replied to Mr Fossey's letter of 28th August 2002. In his response of 2nd September 2002, Mr Robson stated (inter alia) –

    …… I do not accept that we have agreed to share with you the maximum pain of £1.5m within Alstom's contract, quite the opposite, since at least August 2001, I have refused to agree to such an arrangement. Will this be your next excuse not to pay us?......

    I am currently considering all the options open to me included once again serving notice of adjudication…
    (TB 8/1445 and 1446)
    (3) Alstom issued a Payment Certificate No. 30 dated 19th September 2002. Jarvis disputed the amounts certified in a letter dated 27th September 2002 which included the following passage under the heading "Target Cost" –

    We note from your letter dated 28 August 2002, that the unsigned Contract forms the Contract between Jarvis and Alstom. This document left the question of any pain gain mechanism to be agreed between the parties.
    We also note from your letter that the "Contract has no limit of liability" and that "Jarvis will be paid its costs" provided that these are in accordance with the Contract.
    In such circumstances the existence of a revised Target cost it may be argued as irrelevant in the absence of an agreed pain gain mechanism. We believe that the target cost is relevant in that in demonstrates that Jarvis actual costs are reasonable.
    We enclose for your attention a copy of our letter dated 2 April 2002, again which received no meaningful response from yourselves. In this letter we confirmed our assessment of the projected Target Cost was £13,255,872.00.
    This sum is considerably in excess of our current application in the sum of £12,840,423.00 currently claimed in our Application 31. This excludes additional works carried out since April 2002 for which we have received no formal instructions from yourselves.
    These figures can come as no surprise to you as the Target Cost was regularly updated and sent to you for comment. To date we have received no comment from you with regard to the numerous updates sent to you since the commencement of this project.

    and the letter concluded with the following statement –

    … We consider that you have not administered this Contract correctly. We have no confidence that decisions made by you will be made in a fair and reasonable manner and believe that your decisions should be reviewed by an independent third party. You should take this letter as Notice that we will be proceeding to Adjudication.
    (TB 8/1455 and 1456)

    In response to this letter Alstom gave notification that, in the future it would "… be applying the pain/gain formula to interim payments made to Jarvis…" (see letter dated 30th September 2002 at TB 8/1457 to 1458).

    (4) on 31st October 2002, Eversheds (acting on behalf of Jarvis) sent a second Notice of Adjudication to Alstom (see TB 8/1463 to 1479 and see also 1480 to 1492 for the notification to Mr Chapman and the Railtrack Adjudication Rules). In this second Notice of Adjudication, Jarvis dealt with the sub-contract in the following way-

    …5 Following a two stage tender process Jarvis commenced work in about January 2000 pursuant to a contract agreed by the parties based upon the documents set out below ("the Contract"). Although the Contract is unsigned, Alstom agreed in a letter of 28 August 2002 that the working and operative contract is the unsigned contract.
    6. The Contract consists of the following documents:
    6.1 The Subcontract Agreement
    6.2 The General Conditions of Subcontract published in 1997 by the Institution of Chemical Engineers, which may be modified or supplemented by any Subcontract's Special Conditions in Schedule B
    6.3 The Subcontract Specification…..
    6.4 The following Schedules:
    Schedule A: Main Contract particulars (which may include Special Conditions)
    Schedule B: Subcontract Special Conditions (if any) applicable to the Subcontract
    Schedule C: Description of Subcontract Works
    Schedule D: Site facilities, materials, services and other things to be supplied by the Contractor. Access to Site.
    Schedule E: Price Rates and Charges.
    Schedule F: Terms of payment
    Schedule G: Times for completion
    Schedule H: Documentation for approval
    Schedule I: Take-over procedures
    Schedule J: Performance tests and procedures
    Schedule K: Liquidated damages:
    (i) lateness in completion;
    (ii) shortfalls an performance
    Schedule L: Final documentation and manuals
    Schedule M: Quality assurance system
    Schedule N: Limitations on Sub-Subcontracting
    7. By Clause 45.1 of the Contract, as amended, any party to the Contract can refer a dispute or difference (other than a matter as to which a decision is provided by the Contract to be final and conclusive) to adjudication in accordance with the Housing Grants, Construction and Regeneration Act 1996 and any adjudication shall be undertaken in accordance with the Railtrack PLC Adjudication Rules (March 1998 Edition v.1) ('the Railtrack Application Rules' a copy of which is supplied with this Notice)……
    (TB 8/1465 and 1466)
    (5) Alstom issued a Payment Certificate No. 31 dated 1st November 2002 which showed a deduction of £750,000 against the side heading "Jarvis Pain/Gain Share" and it also showed an additional contra-charge in the sum of £81,000. The certificate indicated on its face an overpayment to Jarvis of £733,245.53 (see TB 8/1494). The legitimacy of these deductions was challenged by Jarvis in its letter of 5th November 2002 (see TB 8/1497 and 1498).

  24. The second adjudication progressed to a conclusion. At hearings which Mr Chapman convened, the parties were represented by the same Counsel who now appear before this Court. Mr Chapman gave a reasoned decision on 18th December 2002. In that decision, he dealt with what he called "the Pain/Gain issue" in the following way –
  25. It is beyond doubt – and not in contention – that the notion of a pain/ gain share was in the contemplation of the parties at the time when Alstom and Jarvis embarked upon discussions that finally resulted in the Contract being. For a 'notion' to become a contractual term upon which significant liabilities may rely, a degree of certainty as to the operation and extent that I do not find present in the Contract as formed between the parties. To my mind, the parties were still negotiating the precise terms of the pain/gain arrangements at the time the Contract was formed and these negotiations were never concluded – I suspect because it became evident to the parties that in reality it would at best be a pain/pain arrangement.
    At the second hearing, I was taken to numerous documents by Counsel from which I was to be asked to determine when the Sub-Contract was formed. As the Editors of Chitty Ed 28 point out, the exact time of the formation of a contract that is the subject of progressive negotiations is often difficult to determine. However, in this case, I am relatively confident in finding that the document sent to Jarvis and dated 30th August 2001 was the final agreement between the parties governing their commercial relationships in connection with the Sunderland Metro Project. The date of this document, i.e. 30th August 2001, is in my opinion, the date when sufficient certainty did exist as to the terms and conditions to which the parties were obliged to comply. All essential terms were expressed with sufficient clarity. I consider Mr Bowdery's equating of a pain/gain mechanism to a 'bonus' payment or a LAD provision to be compelling and I find that such a matter is a non-essential term and not fatal to the Contract formation if it is missing from the agreement. The document issue was instigated by Alstom on or around the 30th August 2001 and constitutes the Alstom offer. Jarvis accepted this offer by its continued performance of the Contract.
    The Contract document, which the parties agreed was a complete statement of the contractual rights and liabilities of the parties (Subcontract Agreement recital B), when read objectively and plainly, does not indicate that there was agreement as to the precise terms of any pain/gain sharing agreement between the parties. The words expressed in Schedule E5 were no more than an agreement to agree and, as such, are of no contractual consequence. The deletion of certain words from the original text of Schedule E5 is telling as to what the parties had agreed was not their common intent. The argument that the deletion was merely because the contract value proportions had changed from since 1999 did not sway my opinion as it would have been the simplest of amendments to change the ratio from 37% to a greater figure had this really been the intent of the parties. No additional words would have been required.
    As for the ITP's, I do not consider detailed analysis of their status is necessary. Put simply, they were no more than interim and discrete agreements that limited Jarvis' expenditure pending the next ITP and the finalisation of the Contract proper and at that finalisation all ITP's ceased to have any significance.
    I am not persuaded by the argument for implied term as put forward by Alstom. For a term to be implied it has to fulfil a number of rules as set out in the judgment of the Privy Council in BP Refinery (Westernport) Pty Ltd v. Shire of Hastings [1978] 52 ALJR 2. I find that these pre-conditions do not all exist in the present case, for example, I do not believe the implied term argued for is 'so obvious that it goes without saying'.
    Consequently, in my judgment there was no pain/gain agreement contained within the Contract upon which Alstom could rely upon to deduct sums from the Jarvis Applications.
    Having reached this decision, I need not concern myself further about the validity or invalidity of Certificate 31 and the timing of its issue.
    (TB 11/1124 to 1125 – my emphasis)

    As Mr ter Haar QC (who appears for Alstom) acknowledged, that although these proceedings are not formally appeal from Mr Chapman's decision, they are "in effect an appeal in reality" (see Transcript, Day 1, page 5, line 3). Whilst Mr ter Haar submitted that Mr Chapman had reached wrong conclusions for wrong reasons, Mr Bowdery QC (who appears for Jarvis and whose submissions Mr Chapman appears to have accepted) submitted that the Court would find it "difficult to improve upon the analysis provided by [Mr] Chapman".

  26. The present proceedings were issued on 29th July 2003. The trial date of 23rd February 2004 was fixed at a Case Management Conference on 11th September 2003 when it was estimated that 8 days would be needed to deal with all issues. By the time of a Pre-Trial Review which was held on 6th February 2004, the parties had come to consider that it would be better to address liability issues only at the forthcoming hearing and the time estimate was reduced to 4 days. At that time, both parties envisaged that the witnesses, whose statements had already been served, would be called to give evidence. Alstom had submitted two signed witness statements, one from Mr Blakemore dated 20th January 2004 and one from Mr Irvine dated 16th January 2004. Jarvis had submitted one signed witness statement, from Mr Robson dated 16th January 2004. However, by the time that he came to open the case, Mr ter Haar had concluded that no witness evidence was necessary (see Transcript, Day 1 at pages 6 to 10). The admissibility of evidence was debated a little later in the day (see Transcript, Day 1 at pages 79 to 93). During that debate Mr ter Haar confirmed that, having heard what Mr Bowdery had had to say and thought further about the position over the short adjournment, Alstom did not intend to call any evidence. However, Mr Bowdery maintained his submission that there were certain issues in relation to which evidence was properly admissible and, in due course, Mr Robson was called. Approximately two thirds of the second day of the hearing was taken up with cross-examination and re-examination of Mr Robson. I had indicated during the course of the debate on Day 1 that, insofar as Mr Robson was used as a vehicle to introduce contemporary documentation that had passed between or was common to the parties, it did not seem to me that his evidence was likely to be of assistance (see Transcript, Day 1, page 84). Having read his witness statement and heard his answers in both cross-examination and re-examination, my views in that respect have been amply reinforced. However, in a number of other respects, where Mr Robson gave direct evidence concerning matters with which he had been personally involved after he joined Jarvis in January 2001, his evidence, which I accept, was of assistance.
  27. (1) Mr Robson explained that shortly after he joined Jarvis he was briefed about the project. He was advised that draft sub-contract documents had been received under cover of Alstom's Mr Blakemore's letter 14th December 2000 (see paragraph 27 below). The difference of view between Alstom and Jarvis concerning the type of pain/gain mechanism to be included as part of the proposed sub-contract was explained to him and, in particular, the Jarvis position was explained to him in the way that he summarised it at paragraph 17 of his witness statement –
    …… the Jarvis position on the incorporation of pain/gain into the sub-contract agreement was very clear to me:

    (TB 1/228)

    As a result of the briefing(s) he received, Mr Robson understood that although the Sub-Contract Agreement had not been signed, Alstom and Jarvis were:

    "working to the unsigned Sub-Contract [with] for example, the applications for payment and certificates… being issued in accordance with the unsigned sub-contract".

    (see paragraph 22 at TB 1/229)

    (2) Mr Robson attended a meeting on 20th March 2001, the object of which was to review the then outstanding sub-contract matters and to provide an agreed programme to conclude the sub-contract. A document entitled "Notes/Action from meeting…" was prepared by Alstom and circulated on 22nd March 2001 (see TB 7/768 to 771 – see the citation at paragraph 30 below). An updated version of the document was prepared by Alstom and circulated on 30th April 2001 (see TB 7/818 to 823 – also cited at paragraph 30 below). At paragraph 28 of his witness statement, Mr Robson said of the meeting on 20th March 2001 –
    I recall that at the meeting on 20 March 2001 Alstom was specifically asked to explain the arrangement as regards the pain/gain mechanism that was in place between Alstom and Railtrack, and Alstom's proposal as to how a pain/gain mechanism should operate as between Alstom and Jarvis. They were not able to do so. This is why the notes of the meeting….. indicate that further information on this issue was required from Alstom ……..
    (TB 1/230)

    and, after referring to the Notes of that meeting and the notes of a Railtrack/Alstom meeting which took place on 28th March 2001 (again cited at paragraph 30 below), he said at paragraph 32 of his witness statement –

    Alstom were uncertain about the arrangement they had with Railtrack, and therefore were not able to put any proposals to Jarvis [during the period March through June 2001].
    (TB 1/231)
    (3) Dealing with the position following the publication of Mr Chapman's adjudication decision, Mr Robson stated at paragraph 56 of his witness statement, that Alstom had not made any deduction for "pain" but a substantial sum remained in dispute. Jarvis had made application for further sums but these had not been certified by Alstom (see TB 1/237).

    (4) Mr Robson explained the very simple pain/gain mechanism which Jarvis proposed in the course of discussions with Alstom viz. 50:50 on pain and gain measured against the "Target Cost/Price" and he put this into the overall context of the ongoing discussions between Railtrack and Alstom (see Transcript, Day 2, page 83 to 90 and 130). Mr ter Haar attacked the accuracy of this part of Mr Robson's evidence but, subject to the one caveat which I mention below, I accept what he said. In this regard, two particular points should be noted. First, on two occasions Mr Robson referred to his having written a letter to Mr Irvine (see page 84, lines 19 to 23 and page 90, lines 3 to 9). No bundle reference was give for this letter during his evidence (or later), and I am not aware of seeing it at any time. It is possible that such a letter was written or it is possible that Mr Robson was mistaken in his recollection that Jarvis put forward its suggested pain/gain mechanism in a letter. That brings me to the second point, subject to an apparent inconsistency between earlier and later answers as to whether Jarvis had proposed unlimited or limit pain sharing, the substance of Mr Robson's evidence concerning the pain/gain mechanism suggested in discussions with Alstom is amply supported by the various (Alstom) manuscript notes of the meeting on 19th February 2002 to which I have already referred (see paragraph 12 above). In those circumstances, in my judgment, it matters little if he was mistaken in thinking that this had been specifically addressed in a letter – the fact is, it was addressed in the way that Mr Robson said - albeit, he did not give details of the proposed pain cap – merely saying that "pain would be capped at a certain level" (see page 90, line 8).

    (5) Mr Robson explained that Jarvis was always confident that it could earn "gain" against "[its] own target costs" and that "right up until the Summer of 2001 Alstom [was] trying to convince [Jarvis] that [it was] into a gain situation" (see Transcript, Day 2, page 110).

    (6) Mr Robson accepted that the suggestion made by Alstom, in the latter part of 2001, to abandon any "pain/gain" provision in the Sub-Contract was contingent on an agreement being reached with Railtrack to remove pain/gain from the main contract (see Transcript, Day 2, pages 137 to 140).

    (7) Mr Robson accepted, as any commercial man in the industry would be bound to recognise, that:

    "there is a world of difference commercially... between a pure cost reimbursable contract without any form of target cost or pain/gain arrangement, and a cost reimbursable contract which has an incentivisation mechanism built into it."

    However, he did not accept that this was a case where there had been a fully reimbursable contract (see Transcript, Day 2, pages 141 and 142).

  28. In Mr ter Haar's submission, when considering each of the limbs of Alstom's primary case, the only relevant/admissible documents are the Issue 3 documents which were submitted to Jarvis under cover of the letter dated 30th August 2001 (TB 7/1042 and 1043, TB 3 and TB 4) and the tender documents which Jarvis submitted to Alstom under cover of its letter dated 24th September 1999 (see TB 4/332 and TB 2A). Criticism was made of Mr Bowdery's wish to rely on other contemporary documents to be found in chronological bundles. Although I was given various different bundle references from time to time during the course of the case, in an attempt to differentiate clearly between documents which are agreed to be admissible and those where admissibility is in issue, I have endeavoured to refer to the copies in Trial Bundle 3 or Trial Bundle 4, rather than the copies in the chronological bundles, whenever admissibility is not in issue because an earlier document was included in Annex B1 of the Issue 3 documents.
  29. THE FACTS
    THE FACTS

  30. In the summer of 1999 when Alstom was minded to tender for the Sunderland Direct Project which Railtrack wished to let. Contact was made with Jarvis, the local rail infrastructure maintainer. In the early stages of tender preparation, there appears to have been some uncertainty as to the nature of the commercial relationship which might be created between Alstom and Jarvis for the purposes of the proposed work but this was quickly resolved. It was resolved prior to 24th September 1999 when Jarvis submitted its formal tender to Alstom (see paragraph 18 below). It seems that Railtrack had made it clear that any contract it awarded would be awarded to Alstom. The Amended draft of the Tendering Agreement, which was one of the documents Jarvis submitted to Alstom on 24th September 1999, referred to the parties' wish "…. to co-operate in the preparation, submission and negotiation of the tender for the Project" (Recital C). Furthermore, if Alstom was to be awarded the contract for the Project "on terms acceptable to both parties", it was said that "the parties wish to co-operate in the performance of the Contract" (Recital D – see TB2A/6). There is no doubt that Jarvis did in fact assist Alstom in the preparation of its tender by submitting "exclusive prices" for those parts of the works that they intended Jarvis to undertake if the tender was accepted (see TB 4/313).
  31. By a letter dated 17th September 1999 Jarvis' Commercial Director Rail Projects (Mr Middleton) wrote to Alstom's Sub-Contract Manager (Mr Blakemore) in these terms-
  32. We write with reference to your telephone conversation with our Mr Mick Martin earlier today.
    We hereby agree in principle to develop and negotiate with yourselves the works contemplated on a partnering basis, which will incorporate a mechanism for "pain/gain" share arrangement.
    This will be achieved by establishing cost rates for services provided to which a fee for overheads and profit will be applied.
    (TB 4/330 – my emphasis)

    and by a letter dated 23rd September 1999 Jarvis' Operations Director Rail Projects (Mr Murdoch) wrote to Alstom's Mr Blakemore in these terms –

    Following on from our meeting of Tuesday 21st September 1999, we have addressed those actions presented to us, and respond as follows:-
    1) As requested, we have reviewed our rates in respect of plant, transport, portakabins, etc. This further investigation has only confirmed our comments at the meeting, that the rates are competitive, and are consistent with those negotiated with Railtrack, and as currently applied against the Level Crossing Partnership Contract, which is operated on an "auditable" open book basis. We are therefore unable to offer any reductions against these elements of our price.
    2) I have discussed at length with our Commercial Director, your proposal for Jarvis to accept a subcontract, incorporating a pain/gain share payment structure. The proposal being that the Jarvis share of any pain or gain would be a product of the Jarvis subcontract price, expressed as percentage of the main contract price, which currently stands at approximately 40%.
    I can confirm that we would be prepared to accept this proposal in principle, subject to agreeing a mutually acceptable mechanism for its administration and application.
    I trust that we have interpreted your requirements correctly, however, should you require any further information or clarification, please do not hesitate to contact me.
    (TB 4/331 – my emphasis)

  33. Under cover of a letter dated 24th September 1999, Jarvis' Mr Middleton put forward its formal tender to Alstom in the sum of just over £8.5m. This letter read –
  34. We are writing in response to your request for Signalling and Telecommunications works at the above project. This letter and the documents herein form the basis of or offer to yourselves:-
    Section 1 - Tender Agreement.
    Section 2 - Itemised breakdown of our scope of works including material supply lists for telecomm and level crossings that are included within our offer.
    Section 3 - The completed Contract Price Analysis for Pelaw to South Hylton and for Pelaw to Leamside. The prices within the CPA and our preliminaries build up are inclusive of 14.5% management fee and a further 0.75% to cover insurance's.
    Section 4 - The completed Jarvis risk register, costed at optimistic, most likely and pessimistic.
    Section 5 - A full and completed breakdown of Jarvis allowance for Project Management Site Establishment and Construction Plant.
    Section 6 – A contract programme for the signalling works that reflects the outputs used in the production of our prices.
    Section 7 – A description of the proposed methodology for performing the signalling and telecommunication work.
    Section 8 – Completed Forms C and H sections of the tender evaluation data.
    Section 9 – Jarvis Safety Case Information.
    In acknowledging that Alstom's main contract conditions are based upon I Chem E Model form of Conditions of Contract for Process Plant, 1992 (Green Book), our subcontract tender is therefore based upon I Chem E Model form of Conditions of Subcontract, for Process Plant, Second Edition (Yellow Book).
    Prior to award of contract we will need to agree mutually acceptable amendments to accommodate the details and scope of our subcontract.
    However, for the avoidance of doubt, we would confirm the following:

    We understand that you would like further dialogue relating to a "pain share gain share" agreement, we agree in principle with this idea based on the following understanding:-
    1. Our Management fee is considered fixed against the scope of works defined in this document.
    2. Any additional costs incurred against the risk register shall be reimbursed at our rates plus the appropriate management fee.
    3. All scope creep or variation items shall be reimbursed at our rates plus the appropriate management fee.
    4. The apportionment of risk and gain shall in principle be inextricably linked to the value of our works. This is subject to performance parameters being in place to protect each party's interests.
    Our price for carrying out these works is £8,583,938.14 (Eight Million, Five Hundred and Eighty Three Thousand, Nine Hundred and Thirty Eight Pounds and Fourteen Pence) exc, VAT and exclusive of risk register costs (see section 4).
    Whilst writing we would also like to confirm that a further 2.5% discount would be offered off both our Overhead Line Price and our Signalling Price if we were successful in securing both packages with Alstom.
    We do hope we have interpreted your requirements correctly, in the meantime if you require any further information, please do not hesitate to contract the writer.
    (TB 4/332 to 334 – my emphasis)

    To my mind, a difference between Mr Middleton's views on the pain/gain issue as they were expressed in the formal tender and Mr Murdoch's views in his letter dated 23rd September 1999 is obvious. I do not accept Mr ter Haar's submission that the two letters can be read consistently on the basis that it is inherently unlikely that Mr Middleton would put forward something different from that which his superior had proposed on the previous day. In my judgment, that is exactly what he did and it was he, not Mr Murdoch, who played a prominent role in the negotiations which took place over the months and years which followed.

  35. It appears that Alstom submitted a tender to Railtrack on or about 30th September 1999. The "Partnership" theme to which Mr Middleton had referred in his letter of 17th September 1999 was espoused by Alstom in the tender (see TB 2/12, 13, 17 and 200). When addressing the commercial issue of "damages, losses and liabilities", Alstom stated that it wished to discuss and limit total liability. It was suggested that such a limitation would minimise cost and that Alstom felt –
  36. … that in an alliance, the pain/gain models will provide sufficient stimulus for timely completion and any onerous additional safe guards will only result in additional costs.

    (TB 2/200)

    It should, perhaps, also be noted that the Risk Register which Jarvis had submitted, as Section 4 of its tender, was subsumed into the overall Alstom Risk Register. It was the April 2001 revision of this overall main contract Risk Register which, in due course, was included in the Issue 3 documents (see Annex E4, TB 4/643 ff).

    A meeting was fixed for 6th October 1999 to review tender progress and to consider (inter alia) contractual matters including "how we work the pain/gain share that [Railtrack] want [including liquidated damages]" (see TB 5/61). Manuscript notes of that meeting, which appear to be Alstom's notes (see TB 5/62 to 64), record very clearly the essential difference of view on the pain/gain issue –

    JARVIS – Gain/Pain – limited to works under their control (run their own A/C)
    …
    Alstom want pain/gain on overall project – not as per Jarvis' share

    (see TB 5/63 and 64)

    The formal notes which Alstom prepared and which were issued on 12th October 1999 (see TB 5/77 to 80) expressed the matter in terms which were perhaps less direct –

    ALSTOM expressed the need for Jarvis to be have the same mutual objectives as ALSTOM, supported by the right contract arrangements. ALSTOM believe that the best arrangement is for Jarvis to share pain/gain/liabilities in the ratio of the contract values. Jarvis were concerned that they lacked control outside of their contract, and felt a Jarvis specific incentivisation model could be created. ALSTOM explained the likely participation through the steering group, and the difficulties that further (currently 6 models in play) cost models would create. Jarvis are to reconsider.
    It was mutually agreed to explore whether there are better contract formats (currently I Chem E Yellow Book), more suited to a partnering type subcontract.

    The contract negotiations are to be concluded.

    (TB 5/78 and 79 – my emphasis)

  37. As had been envisaged in the Amended draft Tendering Agreement, Alstom and Jarvis co-operated with one another during the post-tender negotiations with Railtrack. Various documents which evidence that co-operation were included in Annex A1 of Schedule A to the Main Contract Conditions (see TB 3/55 ff) and many of these were also later included in Annex B1 of Schedule B in the Issue 3 documents (see TB 4/305 ff). I draw specific attention to the minuted discussion of the relationship between Alstom and Jarvis at the meeting with Railtrack on 17th November 1999 when both Alstom and Jarvis were in attendance. The material part of the minute (prepared by Faithful and Gould) reads –
  38. Q. Actual costs of sub-contractors and affiliates will be reimbursed whether working on site or elsewhere?

    A. Discussion followed as to the relationship between Alstom and Jarvis. They are partners but formally sub-contractors and have avoided putting mark ups on which would normally [be] 10 – 15% which is a big saving …….
    (TB 3/187 and 188)

    I have also drawn specific attention to the Agreement of Outstanding Tender Issues dated 13th December 1999 which Alstom sent to Jarvis on 17th December 1999, earlier in this Judgment. It was sent in order that it could be discussed at the next planned meeting (see TB 3/205 to 211 and TB 4/414 to 421 – the date of "17/11/99" stated on the fax cover sheet at page 414 was obviously erroneous).

  39. Alstom and Jarvis met on 21st December 1999. The document entitled "Notes/Actions from [that meeting]" (TB 4/427 to 429) records that Alstom expected to receive a Letter of Intent from Railtrack before 24th December 1999. The expected letter was to instruct the Sunderland Direct Project, excluding the work referred to as "Leamside". Provision was to be made for the "seamless" introduction of the Leamside work during the implementation of the Project. Jarvis wished to receive a "letter to proceed" from Alstom prior to intended mobilisation on 10th January 2000. The numbered action points included –
  40. ACTION 5: Gain/Pain model Jarvis – 10.01.00
    Jarvis to confirm that they accept the model as advised
    by Jim Musker by e-mail dated 23.12.99.

    (TB 4/428)

    The e-mail itself was not included in Annex B1 of the Issue 3 documents but the spreadsheet which was attached was included (see TB 5/274 and 275; TB4/436). The pain/gain model was shown on the spreadsheet under the heading "Summary" –

      Leamside Sunderland Direct
         
    Alstom / RT Contract 11,003,114 7,354,317
    Alstom Man Fee 2,572,611 1,464,975
    Jarvis % 0.347 0.458
    Jarvis Risk at P50   472,887
    197,648    
    Jarvis Target Price 4,460,084 3,623,638
    Jarvis Risk at P80   173,275
    20,284    
    Jarvis GMP 4,633,358 3,848,023
    Pain Gap Leve 5,083,455 TBA

    On 4th January 2000 Jarvis (Mr Farmer) was addressing the matters which had been raised at the meeting on 21st December 1999. In an e-mail he asked Alstom to forward (inter alia), "Synopsis of Model Particulars for Alstom pain/gain share", ending his e-mail with an apology if anything he was requesting had already been sent (see TB 4/430). Apparently, the main matter which Mr Farmer was addressing at that time was the division of Jarvis' price between the Sunderland Direct Works and the Leamside Works (see TB 4/430 to 435). There is nothing in the documents later included in Annex B1 of the Issue 3 documents which would suggest that Jarvis did in fact positively confirm acceptance of the gain/pain model, which Mr Musker had forwarded, by 10th January 2000 or at all. In my judgment, the fair inference to be drawn is that the model was received by Jarvis; that Jarvis noted it as Alstom's current proposal; and that no comment on it was sent back to Alstom.

  41. The works got underway in January 2000. Alstom issued an authorisation [or instruction] to proceed ("ITP") dated 17th January 2000 which authorised expenditure to a limit of £200,000. This first ITP included a statement that the intention was to have a contract in place by 4th February 2000 (TB 4/438 and 439). Jarvis acknowledged the authorisation on 26th January 2000, making a number of comments on its terms (TB 4/440 to 447). So far as the date for having a contract in place was concerned, Jarvis said "acknowledged, subject to the timely resolution of actions arising from this letter". The main contract documents were signed in February 2000 but discussions continued between Alstom and Jarvis concerning their commercial relationship. Some degree of mutual irritation or slight tension is apparent in the documents which were exchanged in April 2000 (see TB 4/451 to 483) but, only two points of possible relevance to the matters now in dispute need be noted. First, the Jarvis team was engaged in calculating the "cost/price" which it intended to put forward to Alstom as the "target cost/price" to be agreed for its portion of the works (see, e.g. TB 4/460 and 462). Secondly, when Jarvis put forward its proposed "target/cost price" on 27th April 2000, concern was expressed "… with regard to the pain/gain share agreement ……" (see TB 4/472). The specific comments that were made were –
  42. Jarvis have reviewed the pain/gain share model enclosed with the Alstom letter dated the 2nd February 2000. It appears to us that the model is still to be finalised.

    The model appears to be very complex and therefore we have reservations with regard to the actual operation of the model. Jarvis would like for a working model demonstration to be issued using "best" and "worst" case scenarios and theoretical figures/calculations. This process should then remove any doubt as to the precise mechanism/working and implementation of the model. In addition, the model appears to only address the pain/gain share with respect to the main contractor(s) relationship with Railtrack and not sub-contractors of the main contractor(s).
    We must, therefore, inform Alstom that we reserve our position on this matter and standby on our previous comments that any pain/gain share should be based purely on those parts of the project that are directly in our control.
    (TB 4/480 – my emphasis)

    Alstom's letter dated 2nd February 2000 was not included in Annex B1 in Issue 3 of the draft sub-contract documents. It is included in the chronological bundles (TB 5/345 to 376). The enclosed pain/gain share model was the earlier version of Mr Irvine's internal note (see TB 5/358 and 359).

  43. A meeting was held on 3rd May 2000 at which the outstanding commercial issues were discussed between Alstom and Jarvis (see TB 4/484 to 486). The minutes of that meeting include at Item 3, under the heading "Gain/Pain" –
  44. Gain/Pain Gain/Pain 17
    (TB4/485 – my emphasis)

    There is nothing in the documents later included in Annex B1 of the Issue 3 documents which would suggest that Jarvis did in fact respond to Alstom's proposal by 5th May 2000 or at all. In my judgment, the first bullet point indicates that there had been agreement in principle that the sub-contract would have a term dealing in some way with the gain/pain issue but the second bullet point is to be read disjunctively. In other words, Alstom made a specific proposal but Jarvis did not signify its agreement to that proposal. Jarvis was to go away and consider the specific proposal, responding to it within the next two days. The minutes of the meeting were not produced until 10th May 2000, some five days after the response had apparently been expected. In my judgment, the fair inference to be drawn, assuming in Alstom's favour that the minute taker had not misunderstood what was said in regard to a response, is that no response or no formal response was made by Jarvis. Furthermore, for whatever reason, at the time Alstom did not follow upon the specific proposal with Jarvis in order to extract a positive response.

  45. On 15th May 2000 Alstom sent to Mr Beavis of Jarvis copies of documents which related to the proposed "Alliance Gainshare and Charter" which had been discussed between Alliance members and which, if agreed, were to be "taken" to Railtrack. This document related only to possible "gain" sharing arrangements. (Its contents were not the subject to any detailed scrutiny at the trial but, on reading it, it is not immediately apparent how the proposals fit in with there being already finalised main contract terms.) Alstom invited Jarvis' comments by 18th May 2000 (see TB 6/495 to 500) and, from the observations made by Mr Beavis in his project manager's reports for the period to 30th May 2000, it would seem that Jarvis informed Alstom that "the proposals as at 15th May 2000 [were] acceptable" (see TB 6/532 and 536). On 22nd May 2000 Alstom sent Jarvis copies of its observations on those proposals and the summary of all the responses (see TB 6/516 to 518, 520 to 526). On 8th June 2000 Alstom sent to Jarvis a second ITP, increasing the limit on expenditure from £200,000 to £700,000 (see TB 4/487 and 488).
  46. Over the summer of 2000 there were discussions between Railtrack and Alstom/ Jarvis concerning proposed revisions to the "target cost/price" (see TB 6/539 to 621). The details of the discussions do not matter but the record shows that Alstom and Jarvis were co-operating in the exercise (see, e.g. TB 4/489 and 490) and that they were agreed that no sub-contract agreement would to be made until after the revised "target/cost price" had been set (see TB 6/600 and 601). Updated Alstom and Jarvis "base price compilations" were forwarded to Railtrack on 18th September 2000 (see TB4/491 to 520; Jarvis' figures can be seen at page 497 onwards; its revised "target cost/price" was £6,840,128 as shown at page 498).
  47. On 6th October 2000 Alstom sent to Jarvis a third ITP. This was said to supersede the second ITP which had been issued on 8th June 2000 (see TB 4/523 to 525). This third ITP increased the limit on expenditure to £2,400,000. At paragraph 3 of that ITP it was said –
  48. Matters to be resolved prior to finalising the Contract between us.
    Agreement of target cost and risk register.
    Final Issue Signature of Subcontract Agreement.

    Once these matters are agreed it is ALSTOM's ……….. intention that they will be contained in the Contract

    (TB 4/524)

  49. There were ongoing discussions/exchanges concerning a proposed Sub-Contract agreement leading up to Alstom sending out draft Sub-Contract documents on 14th December 2000 (see RB 6/687 to 688). These documents included an Annex E5 to Schedule E in the terms cited below. During the course of those discussions/exchanges, in an e-mail of 10th November 2000 (see TB 6/664), sent after a meeting held on 8th November 2000, Mr Middleton stated that he considered "[Alstom's] final proposal/position [on the pain/gain issue] remained unclear". On 11th December 2000 Alstom's Mr Blakemore stated that he was awaiting (inter alia) pain/gain information (see TB 6/681). On 12th December 2000 he sent an internal e-mail to the project manager (Mr Musker) which read –
  50. Subject: Jarvis Scope and Target Price

    Jim,

    David Wood has advised me that we do not have an agreed target price with [Railtrack].

    I am about to use the £6,480,128.96 agreed figure with Jarvis in the subcontract and will require a requisition to support this figure in addition to the last one raised by the ITP up to the value £2.4m.

    Please confirm that I can go ahead with this figure and therefore send a requisition for £6,480,128.96 stating clearly on the requisition that it replaces previous requisitions issued (please list the requisition numbers).

    I propose that I suggest the following gain/pain mechanism which is based on the agreement obtained at the meeting between [Alstom] and Jarvis on the 3.5.00 in York:-

    Jarvis = ALSTOM x 6
    Gain / Pain Gain / Pain 17

    Based on a ratio of contract values (37%) as at 28 April 2000.

    Please see the attached schedule E annex E5:-
    Do you agree with the above schedule. I know it has flaws in terms of our Pain Gain, however, please suggest any acceptable alternative?

    (TB 6/682)

    The attached Annex E5 to Schedule E of the proposed draft Sub-Contract documentation read –

    Gain / Pain Mechanism

    1.0 The Gain / Pain share shall use the basic definitions and principles described within the ITT – Section A, Binding 1, dated July 1999, Clause 61 Schedule of amendments to the Special Conditions and General Conditions.
    2.0 The allocation of the Gain / Pain Share between the Contractor and Subcontractor shall be based on the principles agreed during the meeting dated 3rd May 2000, between the Contractor and the Subcontractor in York (see Annex B1 – Post Tender Amendments between the Contractor and the Subcontractor item 35).
    Jarvis = ALSTOM x 6
    Gain / Pain Gain / Pain 17

    (Based on a ratio of contract values (37%) as at 28 April 2000.)

    3.0 The gain shall be paid where the Agreed Final Actual Cost is less than the Agreed Final Target Price subject to 5.0 below.

    4.0 Where the Agreed Final Actual Cost exceed the Agreed Final Target Price but is less than the Agreed Final Maximum Price, the excess shall be shared by the same percentages as detailed in 2.0 above.

    5.0 The full amount of any gain shall be released in full providing Completion on time has been achieved (21st September 2001).
    Should completion be up to one month late (1st October 2001) then any gain shall be reduced by one third.
    Should completion be up to two months late (1st November 2001) then any gain shall be reduced by two thirds.
    Should completion be over two months late then no gain shall be paid.
    6.0 In summary, the Subcontractor shall be entitled to a share of any gain or excess in accordance with the formula set out in 2.0 above, providing the same position applies to the Contractor in the contract with the Employer.
    (TB 6/684 and 685)

    and, on 14th December 2000 it was Mr Blakemore who signed the letter under cover of which the draft Sub-Contract documents were sent out (TB 6/687 and 688). He referred in that letter to the "pain/gain mechanism proposal … contained in Annex E5". (my emphasis) He asked Jarvis to review and confirm its acceptance of the document by return.

  51. Although none of the documents to which I have referred in paragraph 27 above were included in the Issue 3 documents when they were sent out in August 2001, Jarvis' response to Alstom's letter of 14th December 2000 was included. The response came in a letter dated 11th January 2001 where Jarvis' Commercial Director (Mr Middleton) wrote -
  52. You are aware that we have a number of queries on this document as outlined in the meeting in our York Office yesterday, we understand you are considering such matters and look forward to receiving your comments in due course.

    In the meantime we attach a duly authorised copy of your facsimile dated 6th October 2000, which can now be included in the aforementioned Sub-Contract Agreement.

    Should you have any further queries please do not hesitate in contacting the undersigned.

    (TB 4/526)

    The areas of debate at the meeting held in Jarvis' York office on 10th January 2001 are apparent from the e-mail which Mr Blakemore sent to Mr Middleton on 12th January 2001 (see TB 6/698 and 699). He dealt with the pain/gain issue at item 7 as follows –

    7. Pain / Gain percentage on [Jarvis] S/C only – Additional wording has been inserted in Annex E5 as follows:
    at the end of clause 2, insert – "The allocation shall apply to the Subcontract only between the Subcontractor and the Contractor and shall be based on the agreed final Target Cost".
    (TB 6/698-9 – my emphasis)

    Jarvis' "main comments" on the wording of the draft Sub-Contract documents were sent by Mr Jackson (Jarvis' site commercial manager) to Mr Blakemore on 31st January 2001 (see TB 6/718 and 719 – and see 716 for the pie charts). He dealt with the proposed "Schedule E5 Pain Gain Mechanism" by stating -

    After the allocation relationship 2.0 we need to add in "The overall Alliance Pain/Gain is as detailed on the attached Pie Charts as agreed at the Alliance Board Meeting dated 11/9/00" … I have a copy of this at site, however it is in colour Barry Blakemore also has a copy dated 11/9/00. I have asked David Wood to send it to you and me.
    (TB 6/719)
  53. On 9th February 2001 Mr Blakemore wrote to Mr Middleton about the Sub-Contract agreement. He said –
  54. Further to my e-mail of 22nd January 2001, listing outstanding issues relating to the Subcontract I understand that we have addressed and agreed to the Engineering scope and responsibilities (point 3) and the words to be inserted in Schedule E., Clause 3.4 – Leamside (point 4).
    We have remaining two outstanding points (The Collateral Warranty with Railtrack and the Parent Company contract Performance Guarantee and the Pain / Gain Mechanism), which I feel should be carried out in parallel with the signing of the Subcontract, both parties having a clear understanding and commitment to resolve both issues to conclusion within 30 days and the Subcontract can be varied accordingly. I can re-issue the Subcontract with a supporting letter inserted in the appropriate places.
    The Collateral Warranty with Railtrack and the Parent Company Contract Performance Guarantee. This actions remains with yourselves. Please advise the position?
    The pain / gain mechanism - I suggest that we have a further discussion and I shall arrange a meeting accordingly.
    I will update the Subcontract to issue 2.0 and scope to issue 3, reflecting the changes agreed. I will send two fully numbered copies for you to sign under seal and return to the undersigned.
    Please confirm your acceptance of the above proposal and I shall despatch copies accordingly.
    (TB 7/731 and 732)
    Jarvis' reply came in a lengthy letter from Mr Middleton dated 14th February 2001.
    With reference to your letter dated 9th February 2001 and our telephone conversation yesterday, my comments are as follows:-

    I agree that this whole process has taken up a disproportionate amount of time, however, I believe this is due to the hybrid nature of the Contract. In an effort to finalise mattes I set out below what I understand to be the current status of the outstanding matters to be agreed between us. …..
    Annex E5 Pain/Gain Mechanism
    You are completely aware of our position on this matter in that any pain / gain arrangement would only apply to this Sub-Contract your e-mail dated 12th January 2001 confirms this.
    We must also agree a cap on any pain arising from the operation of this Sub-Contract, we understand you have achieved this within the Main Contract. Obviously the status of the Risk Register impacts upon this issue. …….
    (TB 7/736 to 738 – my emphasis)
  55. Discussions/exchanges between the parties continued on an intermittent basis in the months that followed but little (if any) progress was made in resolving the outstanding issues. There was an important meeting on 20th March 2001 to which I have already referred when commenting on Mr Robson's evidence at paragraph 14(2) above. The "notes/actions from [that] meeting …" prepared by Alstom and circulated on 22nd March 2001 include the statement –
  56. Annex E5 – Pain / Gain Mechanism
    After a brief explanation ALSTOM to issue a copy of the Information on Pain / Gain together with detailed wording to support the Pie Charts.
    Action David Wood
    Action Jarvis to respond to the principles of Pain / Gain.

    (TB 7/771)

    In an und