Midland Expressway Ltd v Carillion Construction Ltd & Ors

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:

The second was:

The third was:

The second part of the pricing schedule provided that the evaluation method for the first provisional sum was to be:

And for the third provisional sum simply:

The evaluation method for the second provisional sum was to be:

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:

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:

Clause 15.4 provided that:

Clause 36 provided as follows:

I have already referred to Clause 36.3.3.

Clause 37.1 provided that:

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:

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:

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.