Alstom Signalling Ltd. (t/a Alstom Transport Information Solutions) v Jarvis Facilities Ltd

The Claimant (“Alstom”) was the main contractor engaged by Railtrack plc (now Network Rail Infrastructure Ltd but, for convenience referred to throughout as “Railtrack”) to carry out works, referred to as “the Sunderland Direct Project”, to extend the Tyne and Wear Metro. These proceedings arise from the arrangements made by Alstom with the Defendant (“Jarvis”) whereby Jarvis was to undertake certain of those works on Alstom’s behalf. The works themselves were carried out over a two year period from January 2000. In a letter dated 6^th February 2002 which had the subject heading “Sunderland Direct – Main Commissioning Success” Alstom wrote to Jarvis in these terms:

The Main Contract dated 19^th December 1999 (signed in about February 2000) provided for Alstom to be paid for the work on what can fairly be called a qualified “cost reimbursable basis”. It is not necessary to explain all the complexities of the payment terms which were agreed between Railtrack and Alstom but, in order to understand the issues which now have to be decided between Alstom and Jarvis, the basis of the “pain/gain” incentive scheme must be explained. The commercial thinking which underlay the scheme was described by Alstom’s Mr Irvine in an internal note that he prepared at the time (see TB 5/358 and 359 where the note is dated erroneously “4/1/99” rather than “4/1/00”). Mr Irvine later updated his note at the end of August 2001 (see TB 7/1048 to 1050) to reflect the continuing discussions that had been taking place between Alstom and other contractors who together formed a so-called “Alliance” on one side and Railtrack on the other side. The note explains that Alstom had begun by calculating what was called a “base tender cost”. This was its best estimate of the “price (based on direct cost) to complete the contract, prior to risk assessment” (my emphasis).

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:

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:

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 6^th 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 13^th December 1999 (see TB 3/205 to 206) in these terms –

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 30^th 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.

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 –

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 –

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;

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

the provisions of the [Issue 3 documents]…”

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 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 17^th 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 –

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.THE DEVELOPMENT OF THE DISPUTES – ADJUDICATION – THE PRESENT PROCEEDINGS

In paragraph 1 above, attention is drawn to the terms of Alstom’s letter dated 6^th February 2002 which was written shortly after the “successful commissioning” which had allowed Railtrack to begin running services on 28^th January 2002. In that letter, the “commercial issues” had been put aside. However, the commercial issues had been addressed in Alstom’s letter of 31^st January 2002 which had the subject heading, “pain/gain”. In that letter Alstom (Mr Irvine) said –

After receiving Alstom’s letter, Jarvis agreed to the proposed meeting. It took place on 19^th 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 –

The Contract consists of the following documents:

The Subcontract Agreement

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

The Subcontract Specification…..

The following Schedules:

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)……

Alstom issued a Payment Certificate No. 31 dated 1^st 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 5^th November 2002 (see TB 8/1497 and 1498).

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 18^th December 2002. In that decision, he dealt with what he called “the Pain/Gain issue” in the following way –

The present proceedings were issued on 29^th July 2003. The trial date of 23^rd February 2004 was fixed at a Case Management Conference on 11^th 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 6^th 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 20^th January 2004 and one from Mr Irvine dated 16^th January 2004. Jarvis had submitted one signed witness statement, from Mr Robson dated 16^th 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.

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 20^th 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 22^nd 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 30^th 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 20^th 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)

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 30^th 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 24^th 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. THE FACTS

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 24^th 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 24^th 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).

By a letter dated 17^th September 1999 Jarvis’ Commercial Director Rail Projects (Mr Middleton) wrote to Alstom’s Sub-Contract Manager (Mr Blakemore) in these terms-

Under cover of a letter dated 24^th September 1999, Jarvis’ Mr Middleton put forward its formal tender to Alstom in the sum of just over £8.5m. This letter read –

It appears that Alstom submitted a tender to Railtrack on or about 30^th September 1999. The “Partnership” theme to which Mr Middleton had referred in his letter of 17^th 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 –

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 17^th November 1999 when both Alstom and Jarvis were in attendance. The material part of the minute (prepared by Faithful and Gould) reads –

Alstom and Jarvis met on 21^st 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 24^th 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 10^th January 2000. The numbered action points included –

The works got underway in January 2000. Alstom issued an authorisation [or instruction] to proceed (“ITP”) dated 17^th 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 4^th February 2000 (TB 4/438 and 439). Jarvis acknowledged the authorisation on 26^th 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 27^th April 2000, concern was expressed “… with regard to the pain/gain share agreement ……” (see TB 4/472). The specific comments that were made were –

A meeting was held on 3^rd 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” –

On 15^th 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 18^th 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 30^th May 2000, it would seem that Jarvis informed Alstom that “the proposals as at 15^th May 2000 [were] acceptable” (see TB 6/532 and 536). On 22^nd 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 8^th 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).

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 18^th 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).

On 6^th October 2000 Alstom sent to Jarvis a third ITP. This was said to supersede the second ITP which had been issued on 8^th 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 –

There were ongoing discussions/exchanges concerning a proposed Sub-Contract agreement leading up to Alstom sending out draft Sub-Contract documents on 14^th 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 10^th November 2000 (see TB 6/664), sent after a meeting held on 8^th November 2000, Mr Middleton stated that he considered “[Alstom’s] final proposal/position [on the pain/gain issue] remained unclear”. On 11^th December 2000 Alstom’s Mr Blakemore stated that he was awaiting (inter alia) pain/gain information (see TB 6/681). On 12^th December 2000 he sent an internal e-mail to the project manager (Mr Musker) which read –

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 14^th December 2000 was included. The response came in a letter dated 11^th January 2001 where Jarvis’ Commercial Director (Mr Middleton) wrote -

Pain / Gain percentage on [Jarvis] S/C only – Additional wording has been inserted in Annex E5 as follows:

On 9^th February 2001 Mr Blakemore wrote to Mr Middleton about the Sub-Contract agreement. He said –

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 20^th 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 22^nd March 2001 include the statement –

On 12^th July 2001, Alstom’s Mr Blakemore wrote to Jarvis in the following terms-

The intended high level meeting appears to have been postponed until 23^rd August 2001. The note of an Alstom internal review held on 21^st August 2001, which also covers some post discussion events, gives an insight into the company’s position on a number of issues relating to its relationships with (a) Railtrack and (b) Jarvis (see TB 7/998 to 1000). The note needs to be read in full but I cite below only the parts which directly address the outstanding pain/gain issue –

Notes of the meeting which took place on 23^rd August 2001 were promptly prepared by Jarvis and a copy was sent to Alstom (see TB 7/1014 to 1017). The notes show that the pain/gain issue was one of the matters to be addressed in the “long term” whereas the “finalisation of the Sub-Contract Agreement” was one of two items to be “addressed immediately”. At Item 5 it was stated that Alstom would “supply [Jarvis] with [its] proposals on the outstanding contractual issue surrounding pain/gain by… 29^th August 2001.” At Item 6 it was stated that Alstom was to issue a revised draft Sub-Contract agreement by 30^th August 2001 and that this would incorporate “the agreements reached over the past few months, leaving only the nexus materials and pain/gain proposals to resolve”. A summary financial document giving details of a revised Jarvis target cost of £8,651,231.53 was prepared and this was included in the Issue 3 documents on 30^th August 2001 (see TB 4/541). A fifth ITP was prepared, dated 28^th August 2001, and this too was included as part of the Issue 3 documents (see TB 4/537 to 540). It was said to supersede the fourth ITP which had been issued on 24^th May 2001. The authorised expenditure was increased up to the revised Jarvis “target cost price” figure of £8,651,231.53. The matters to be resolved prior to contract finalisation were dealt with as before (see paragraph 30 above) but, now only two were listed – one being the pain/gain mechanism. This ITP was countersigned by Mr Robson for Jarvis on 16^th September 2001 (see TB 7/1034).

Alstom sent out the Issue 3 documents under cover of its letter dated 30^th August 2001. In that letter, Mr Blakemore dealt with the pain/gain issue by stating:

On 12^th September 2001 Mr Middleton wrote to Alstom “looking forward to agreeing the final terms and conditions of the Sub-Contract by the end of the month” (see TB 8/1067) whilst Mr Robson wrote to Alstom in rather different terms. He noted that Jarvis was not yet in a position to sign the Sub-Contract Agreement, that payment was overdue and that the current estimate of the “target cost/price” was over £10.5 million. He concluded by proposing a further meeting (see TB 8/1076). Alstom’s Mr Taylor responded to Mr Robson in conciliatory terms on 17^th September 2001 (see TB 8/1096 and 1098). So far as the Sub-Contract Agreement’s not having been signed he said –

Adopting Mr Taylor’s expression in a letter of 10^th October 2001, Alstom and Jarvis continued to “[try] to reach a conclusion to the [Jarvis] Target Cost” (see TB 8/1111 to 1113]. In this context, Alstom stated that it wished to establish an audit trail of all the costs which Jarvis had generated on the project. When this letter was written, Alstom had issued its Certificate No. 19 in which substantial deductions from the amount claimed by Jarvis in its Payment Application No. 20 were made. In his letter of 11^th October 2001 (see TB 8/1115 to 1120), Mr Middleton asserted that the payment application was in compliance with the requirements of “Schedule F to the Conditions of Contract”, that Alstom had “no right under the contract to make [almost all of the] deductions”, that Jarvis had the “right to suspend works under Clause 39.4”, and a right to refer the “dispute or difference… with regard to… [the] valuation of Certificate No. 20… to adjudication under Clause 45.1”. Mr Middleton also maintained that Jarvis had contractual rights to have the completion date extended and the Target Cost revised. The letter concluded –

On 23^rd October 2001, Mr Irvine wrote to Railtrack in the following terms –

Further meetings took place on 1^st November 2001 (see TB 8/1199 to 1207 for Jarvis’ Minutes) and 22^nd November 2001. The discussion on 1^st November 2001 resulted in the issuing of a sixth ITP dated 9^th November 2001. By this ITP the authorised expenditure was increased to £9,500,000. The ITP was in similar terms to the earlier ITP’s and it was countersigned by Jarvis on or about 12^th November 2001 (see TB 8/1188 to 1190 and 1192). The Minutes of the meeting on 1^st November 2001 show that the outstanding contractual issues were discussed in the following way –

On 10^th December 2001, Mr Irvine responded to Mr Robson’s letter of 27^th November 2001 (see TB 8/1232 and 1233). He dealt with the issue of “contractual agreement” by asking to be advised of any progress that had been made with Messrs Meacock and Gisby and by informing Mr Robson that Alstom would be meeting with Mr Solomon [one of its Railtrack contacts] on 14^th December 2001. Also on 10^th December 2001 Jarvis submitted an updated cost forecast in which it was stated that the adjusted “Target Cost/Price” should be increased to over £11.8m and that the authorised limit on expenditure needed to be raised to ensure that Jarvis would be paid for the work it had carried out (see TB 8/1234 to 1236). In response, on 11^th December 2001 (see TB 8/1263), Mr Irvine stated that the limit on expenditure would be amended prior to 14^th December 2001. A seventh ITP was issued on 13^th December 2001 which Jarvis promptly countersigned (see TB 8/1275 to 1278 and 1289). By this ITP the authorised expenditure was increased to £10,250,000. Again, the ITP was in similar terms to the earlier ITPs.

Further updated “target cost/price” documents were submitted by Jarvis on 20^th December 2001 (TB 8/1304 and 1305), 9^th January 2002 (TB 8/1320 and 1321), 11^th January 2003 (TB 8/1329 and 1330), 21^st February 2002 (TB 8/1375 and 1376) and 2^nd April 2002 (TB 8/1415 to 1417). In the last of those updates Jarvis was forecasting a final cost of just over £12.5m and stating that the revised “target cost/price” had risen to over £13.25m.

On 14^th January 2002, Mr Robson met Mr Irvine to be told the outcome of Alstom’s discussions with Mr Solomon (of Railtrack). What he was then told set the scene for the development of commercial dispute which I have already sufficiently described at paragraphs 11 and 12 above.

The amounts certified and paid by Alstom to Jarvis as the project proceeded were summarised in a table forming part of Jarvis’ written submissions, where they were compared with the total expenditure authorised in seven ITPs that I have mentioned above in chronological sequence. The table showed –

The Issue 3 documents, which both parties contend are the Sub-Contract documents were not sent out until 30^th August 2001 (see paragraph 34 above). Both parties contend that a Sub-Contract which operated retrospectively to govern their commercial relationship came into existence at some time thereafter. When considering the primary cases it is only necessary to consider when and how an enforceable Sub-Contract came into existence, if it did indeed come into existence (see paragraph 22 of the Particulars of Claim at TB 1/14 and 15), in order to determine the alternative case pleaded by Alstom at paragraph 20 of the Particulars of Claim (see paragraph 7 above). However, these matters might also be relevant to the parties’ respective secondary cases.

Alstom’s case is at paragraph 10 of the Particulars of Claim. Alstom contends that the Sub-Contract was concluded as follows –

In my judgment, if the position is considered from 30^th August 2001 onwards, the facts set out in paragraphs 11, 12 and 35 to 41 (inclusive) show clearly that the parties did not agree a Sub-Contract before the works were successfully commissioned with Railtrack beginning to run services at 06:00 hours on 28^th January 2002. Neither party pressed the other to sign the Issue 3 documents as they stood but, each was confident that, save for agreement to the “pain/gain mechanism” (finalisation of which was not necessary prior to signature in view of the wording of Annex E5 – cited at paragraph 7 above) and the conclusion of discussions concerning the appropriate revision of the “target cost/price”, there was agreement to the terms upon which (in due course) they would formally be contracting. In practice, they were implementing those terms day to day.

Whilst I accept Alstom’s submission that its letter of 31^st January 2002 constituted an offer to conclude the Sub-Contract on the terms of the Issue 3 documents as specifically clarified in the letter itself viz. with the “pain/gain” mechanism being that which Alstom had consistently stated wished to see, in my judgment Jarvis did not accept that offer in the manner alleged viz. by serving either its first or second Notice of Adjudication, or at all. At the meeting on 19^th February 2002, consistently with Jarvis’ previous statements concerning the “pain/gain mechanism”, that offer was quite unequivocally rejected (see the minutes cited at paragraph 12 above). It follows that the alternative case pleaded by Alstom at paragraph 20 of the Particulars of Claim (see paragraph 7 above) fails.

Although the parties kept the sub-contract negotiations open until some time in 2002, in my judgment there came a time when each accepted that negotiation had ceased and when each indicated to the other that it was prepared to be bound by the terms of the Issue 3 documents as they stood. In my judgment, given the sequence of events from September 2001 to February 2002, there was no continuing (or outstanding) offer on the part of Alstom to contract on the terms of the Issue 3 documents which Jarvis could accept by serving its first Notice of Adjudication (which positively asserted the existence of such a sub-contract). What there was at that time can fairly be described as a “stand-off” or “stalemate”. However, by serving the first Notice of Adjudication, Jarvis effectively recognised that the negotiations had ended and it then offered to contract on the terms of the Issue 3 documents. At some stage, and according to each party’s pleadings the letter of 28^th August 2002 is the relevant document, Alstom accepted that offer. Accordingly, in my judgment this is a case where, subject to the resolution of the issue raised at paragraph 22 of the Particulars of Claim, some months after all the works had been practically completed sub-contract terms were finally agreed to cover those works.

I have introduced the parties’ respective primary cases at paragraph 7 above. Given the agreement to contract on the terms of the Issue 3 documents, what “pain/gain” agreement, if any, do they contain ? I have it in mind that Clause A of the Sub-Contract Agreement provided that “the following documents only and their annexes, if any, shall together constitute the sub-contract ….” (see TB 3/5) and that Clauses B, C and D of the Sub-Contract Agreement provided as follows –

Schedule B contained the Special Conditions and/or Particular Conditions of the intended Sub-Contract. Annex B1 was described as being a “Schedule of Post Tender Amendments” and this was defined to mean “A Schedule of any amendments to the Sub-Contract expressly agreed between [Alstom] and [Jarvis]” (see TB 4/284). Understandably, in Clause 2.2 of Schedule B, the Schedule of Post Tender Amendments was the second document in the order of priority which was to “apply in the event of conflict ...” between the contents of the various sub-contract documents (see TB 4/285). Whatever the draftsman of the tender documents may have contemplated, the parties did not in fact prepare a schedule of the amendments upon which they were agreed. The only “schedule” in Annex B1 was a chronological list of documents, unannotated copies of which then followed. In such circumstances, in my judgment, it is necessary to read through the documents as a whole, in chronological order, to ascertain what amendments to the proposed sub-contract documents had been agreed and remained agreed between Alstom and Jarvis. In my judgment, in a case such as this, evidence of the pre-contract negotiations (normally not admissible when the finalised document(s) are construed and expressly excluded by Clause B of the Sub-Contract Conditions) must be considered to the extent that the parties have chosen to include such material within the body of the Sub-Contract. On a fair chronological reading of all the entries in relation to proposals for a “pain/gain” mechanism which are to be found in the documents included in Annex B1, all (or almost all) of which I have included in my lengthy summary of the facts, what is found is –

A significant part of Schedule E had been the subject of reconsideration/revision. It is apparent that the mixture of earlier text and later revisions did not result in the inclusion of a coherent text in the Issue 3 documents. What was in fact set out in Annex E5, which was the place where Clause 3.1 envisaged “the percentages” would be stated, were the passages which I have already cited at paragraph 7 above. For ease of reference, I set them out again below together with the wording of the earlier draft which had been made the subject of a pleadings-style transparent deletion –

In my judgment, on a fair reading of Annex B1 and Schedule E, no inconsistency is to be found. The terms of the second paragraph of Annex E5 and the latest document included in Annex B1 viz. the fifth ITP (see immediately above) are manifestly consistent. When read fairly, whilst the documents in Annex B1 demonstrate unequivocal agreement in principle to the incorporation of a pain/gain share term, they clearly show that no agreement had been reached on the detail.

The parties did not in fact agree on a pain/gain mechanism after 30^th August 2001 but, in due course, they did agree to be bound by the Issue 3 documents. Does that mean, as Mr Bowdery submitted, that Jarvis’ sub-contractual financial entitlement is to be calculated in accordance with the payment provisions contained in the Issue 3 documents without any consideration of “pain/gain” issues ? Or, is the consequence, as Mr ter Haar submitted, that there remains a “difference” between Alstom and Jarvis which the Court is empowered to determine?

Mr Bowdery developed his submissions in this way – this was, he said, a case where there was nothing more than an “agreement to agree” on something which was, contractually, an inessential Sub-Contract term. No agreement was reached and, accordingly, that was the end of the matter. He referred to the oft cited observations of Bingham J (as he then was) and Lloyd LJ in Pagnan SpA v. Feed Products Limited [1987] 2 Lloyds Rep. 601 at 610/611 and 619. In the judgment of Lloyd LJ the principles to be derived from earlier authorities were conveniently re-stated. Those principles included –

Mr Bowdery relied particularly on the second, fifth and sixth of Lloyd LJ’s principles, submitting that they were relevant to the facts and circumstances of this case. In his submission, the parties’ enthusiasm for a pain/gain share arrangement ebbed and flowed as the project developed and it could not be said that a pain/gain arrangement was an essential requirement for either party. As he summed it up - the unsigned sub-contract could work and did work without a pain/gain agreement; it did so during the lengthy negotiations; and, during the latter part of 2001 both parties had contemplated moving forward without any pain/gain term forming part of their agreement. He suggested that in such circumstances, far from being fundamental, a pain/gain agreement should be considered an “inappropriate embellishment to this sub-contract”. And, he submitted that when what the parties had left to be agreed was an appropriate pain/gain mechanism, it was unnecessary, unreasonable and beyond the Court’s powers to intervene by determining and imposing a pain/gain mechanism. In this context, he relied upon the observation of Lord Ackner in Walford v Miles [1992] 2 AC 128. That was a case where Plaintiffs had agreed, “subject to contract” to purchase a company and the premises from which it traded. The Defendants decided to break off negotiations. The Plaintiffs alleged that, so long as the Defendants continued to desire to sell the business/property, they were legally bound to continue to negotiate with them in good faith. The House of Lords disagreed. The only speech was that of Lord Ackner who dealt with the general principles in this way -

“The reason why an agreement to negotiate, like an agreement to agree, is unenforceable, is simply because it lacks the necessary certainty. The same does not apply to an agreement to use best endeavours. This uncertainty is demonstrated in the instant case by the provision which it is said has to be implied in the agreement for the determination of the negotiations. How can a court be expected to decide whether, subjectively, a proper reason existed for the termination of negotiations? The answer suggested depends upon whether the negotiations have been determined “in good faith”. However the concept of a duty to carry on negotiations in good faith is inherently repugnant to the adversarial position of the parties when involved in negotiations. Each party to the negotiations is entitled to pursue his (or her) own interest, so long as he avoids making misrepresentations. To advance that interest he must be entitled, if he thinks it appropriate, to threaten to withdraw from further negotiations or to withdraw in fact, in the hope that the opposite party may seek to reopen the negotiations by offering him improved terms. Mr. Naughton, of course, accepts that the agreement upon which he relies does not contain a duty to complete the negotiations. But that still leaves the vital question – how is a vendor ever to know that he is entitled to withdraw from further negotiations? How is the court to police such an “agreement?” A duty to negotiate in good faith is as unworkable in practice as it is inherently inconsistent with the position of a negotiating party. It is here that the uncertainty lies. In my judgment, while negotiations are in existence either party is entitled to withdraw from those negotiations, at any time and for any reason. There can be thus no obligation to continue to negotiate until there is a “proper reason” to withdraw. Accordingly a bare agreement to negotiate has no legal content.”

[1992] 2 AC at page 138

Mr ter Haar developed his submissions that the Court had power to determine the amount of any “pain” to be borne or “gain” to be enjoyed by Jarvis in this way -

Mr ter Haar reminded me that in Sudbrook Trading Estate Limited v. Eggleton [1983] AC 444, the majority of the House of Lords had rejected the submission that option clauses in leases, which gave the tenant the right to purchase the reversion if notice was given within a specified period, constituted nothing more than unenforceable “agreements to agree”. The purchase price in each of the option clauses was identically worded, save that minimum prices varied –

Sudbrook was not a commercial contract but the basic principle could be seen to have been applied in a number of commercial cases to which I was referred. They were the decision of the Privy Council in Queensland Electricity Generating Board v. New Hope Collieries Pty Ltd [1988] 1 Lloyds Rep 205, the decision of the Court of Appeal in Didymi Corp v. Atlantic Lines and Navigation Co Inc [1989] 2 Lloyds Rep 108 and the decision of the Court of Appeal in Mamidoil-Jetoil Greek Petroleum Co. S.A. v. Okta Crude Oil Refinery [2001] EWCA Civ 406: [2001] 2 Lloyds Rep 76.

The Queensland Electricity case concerned a 15 year coal supply contract between the Respondent Colliery and the Appellant Electricity Board. The price was agreed for first 5 years with the agreement containing base prices which were adjustable by reference to “escalation” and “price variation” provisions. For sales/purchases after the first 5 years the general terms of the agreement were to continue but the base price and the price variation provisions were to be agreed. The agreement contained a comprehensive arbitration clause for the resolution of disputes or differences. It was argued by the Board that, after the first 5 years, the agreement constituted an unenforceable “agreement to agree”. The argument was rejected. In giving the Advice of the Privy Council Sir Robin Cooke noted that the terms of the agreement indicated that it was intended by the parties to have legal effect for more than the first 5 years. He continued –

“… What other reasons could there be for making such elaborate provisions, emphasising its long term nature? At the present day, in cases where the parties have agreed on an arbitration or valuation clause in wide enough terms, the Courts accord full weight to their manifest intention to create continuing legal relations. Arguments invoking alleged uncertainty, or alleged inadequacy in the machinery available to the Courts for making contractual rights effective, exert minimal attraction…

…..

In accordance with the approach adopted in those cases, their Lordships have no doubt that here, by the agreement, the parties undertook implied primary obligations to make reasonable endeavours to agree on the terms of supply beyond the initial five-year period and, failing agreement and upon proper notice, to do everything reasonably necessary to procure the appointment of an arbitrator. Further, it is implicit in a commercial agreement of this kind that the terms of the new price structure are to be fair and reasonable as between the parties. That is the criterion or standard by which the arbitrator is to be guided. If there are cases where the true meaning of the contract is that the arbitrator is to aim, not at objectively fair and reasonable terms, but merely at some result which appeals to him subjectively, they must be rare indeed and the present is certainly not one of them. The statements of basic intention in the recitals and in Cl. 9.1, together with the detailed pricing provisions for the first five years, supplement the ordinary implication of a fair and reasonable test. They lay down broad guidelines as to the object to be achieved; and how the system has worked during the first five years is likely to provide the arbitrator with much help in determining what is fair and reasonable for later periods.

([1989] 1 Lloyds Rep at page 210 – my emphasis)

In the Didymi, the Court was concerned with the enforceability of a clause in a charter-party which provided for the hire charges to be equitably increased or decreased in the event that the vessel’s speed and/or fuel consumption varied from certain stipulated values. The owners claimed entitlement to increased hire charges. Although the charter-party contained an arbitration clause, High Court proceedings raising preliminary points of law, were commenced. The charterers argued (inter alia) that the clause in question did not constitute a concluded agreement capable of enforcement. In the Commercial Court, Hobhouse J rejected that argument saying –

“… [the provision] contains what are clearly intended to be words of obligation: “Owners shall be indemnified”; “such increase to be calculated”. This is not tentative: it is a liability which is capable of calculation. If the legal effectiveness of this provision is to be attacked it must be because, in truth, the liability is not capable of calculation or assessment and therefore is too vague or too uncertain to be the subject of a legally enforceable obligation…

…..

However,… I do not consider it right to categorise the provision as merely an agreement to agree. The words of a contract are used objectively to state the intention of the parties to the contract. They may do so skilfully or clumsily, but the function of the Court is to extract from the words used their objective intention. The words of this paragraph do not disclose an intention merely to require an agreement. The words “to be mutually agreed” are directory or mechanical and do not represent the substance of the provision…”

(see [1988] 2 Lloyds Rep at page 111)

and, in dismissing the appeal, Bingham LJ (as he then was) said –

“… I ask this question: Does the provision in issue in this case relate to an essential term of agreement or to the existence of any contract at all, or does it relate to a subsidiary and non-essential question of how a contractual liability to make payment according to a specified objective standard is to be quantified ? I consider that this provision falls plainly in the second category.

The substantial provision in sub-cl. (4) is that the –

… Owners shall be indemnified by way of increase of hire, such increase to be calculated…

The procedure for calculation is in my judgment a matter of machinery, and I conclude that there was here a binding obligation to which effect can be given as a matter of contract.”

([1988] 2 Lloyds Rep at page 115)

He also accepted the owners’ secondary submission, based on the Sykes case, that any defect in the provisions was cured by the arbitration clause which enabled any lack of agreement to be overcome (see again, page 115 of the report).

Mamidoil was the most recent of the cases cited. A long term (10 year) contract for the handling of crude oil was considered. The handling fee was fixed for the first 2 years of the contract. The parties then agreed fees for further periods up to the end of 1999. As a result of changed ownership/control the Refinery wished, if it could, to put an end to the contract when the period over which the agreed price applied expired. Although the contract contained an arbitration clause, a number of legal issues were raised in High Court proceedings. The Refinery argued that the 10 year term was a maximum term for which the contract might last but, the continuation of the contract beyond the initial period for which the handling fee had been fixed was dependent on agreement(s) being reached as to the handling fee. The counter-argument was that this was a 10 year fixed term contract and, in the absence of agreement on the handling fee after the end of the initial period, a reasonable fee was to be fixed. The judgment of the Court of Appeal was given by Rix LJ. Between paragraphs 50 and 68 of the judgment, he undertook a helpful review of many of the earlier authorities (but I note that neither Queensland Electricity nor the Didymi featured in this review) which I have read and noted. I too was specifically referred to the majority of those authorities in the course of argument but I see no need to cite them in the Judgment. After completing his review Rix LJ stated his conclusions in this way –

“69.

In my judgment the following principles relevant to the present case can be deduced from these authorities, but this is intended to be in no way an exhaustive list:

Each case must be decided on its own facts and on the construction of its own agreement. Subject to that:

Where no contract exists, the use of an expression such as “to be agreed” in relation to an essential term is likely to prevent any contract coming into existence, on the ground of uncertainty. This may be summed up by the principle that “you cannot agree to agree”.

Similarly, where no contract exists, the absence of agreement on essential terms of the agreement may prevent any contract coming into existence, again on the ground of uncertainty.

However, particularly in commercial dealings between parties who are familiar with the trade in question, and particularly where the parties have acted in the belief that they had a binding contract, the Courts are willing to imply terms, where that is possible, to enable the contract to be carried out.

Where a contract has once come into existence, even the expression “to be agreed” in relation to future executory obligations is not necessarily fatal to its continued existence.

Particularly in the case of contracts for future performance over a period, where the parties may desire or need to leave matters to be adjusted in the working out of their contract, the Courts will assist the parties to do so, so as to preserve rather than destroy bargains, on the basis that what can be made certain is itself certain. Certum est quod certum reddi potest.

This is particularly the case where one party has either already had the advantage of some performance which reflects the parties’ agreement on a long term relationship, or has had to make an investment premised on that agreement.

For these purposes an express stipulation for a reasonable or fair measure or price will be a sufficient criterion for the Courts to act on. But even in the absence of express language the Courts are prepared to imply an obligation in terms of what is reasonable.

Such implications are reflected but not exhausted by the statutory provision for the implication of a reasonable price now to be found in s. 8(2) of the Sale of Goods Act, 1979 (and, in the case of services in s. 15(1) of the Supply of Goods and Services Act, 1982).

The presence of an arbitration clause may assist the Courts to hold a contract to be sufficiently certain or to be capable of being rendered so, presumably as indicating a commercial and contractual mechanism, which can be operated with the assistance of experts in the field, by which the parties, in the absence of agreement, may resolve their dispute.”

([2001] 2 Lloyds Rep at pages 89/90 – my emphasis)

When he turned to consider the facts of the case itself, he said –

Having considered the parties’ respective submissions, in my judgment Mr ter Haar’s submission that this is a case where there is a “difference” as to the pain/gain mechanism which the Court is empowered to determine, is correct. I give my reasons for accepting that submission at paragraphs 61 to 64 below. However, I do not agree that, when determining the “difference”, the Court is constrained to the extent that Alstom apparently contemplates at the end of paragraph 21 of the Particulars of Claim viz. “… applying the principle set out in Schedule B Annex B1 and the provision of Schedule E [of the Issue 3 documents]” (see TB 1/13 – and see further at paragraph 70 below).

This is not a case where uncertainty arising from the parties’ inability to agree on an essential term has prevented the conclusion of a contract. In other words, it is not a case of the type which the House of Lords had to consider in Walford v. Miles (supra) where one party had exercised its right to withdraw from negotiations “… at any time and for any reason”. Although in this case the negotiations were unusually protracted, eventually Alstom and Jarvis did agree to contract in the terms of the Issue 3 documents. Those documents contain pain/gain provisions in terms which (to my mind) are far from tentative; the words used include words of obligation.

In this case, from the outset there was agreement in principle that the Sub-Contract terms would include a pain/gain provision. This agreement was reaffirmed on every occasion when the matter was under serious consideration including (a) its specific reaffirmation in Annex E5 at the end of August 2001, (b) when the seventh ITP was issued on 13^th December 2001 which showed the pain/gain mechanism as an outstanding item which remained to be resolved (and it is to be noted that Jarvis’ Mr Middleton promptly countersigned that document), (c) at the meeting held on 19^th February 2002 - although Jarvis stressed that the mechanism had never been agreed (i) its own minute of that meeting very clearly recognised a continuing agreement in principle and (ii) Alstom’s manuscript notes of that meeting record Jarvis’ proposals for a pain/gain mechanism which it then put forward for agreement (see paragraph 12 above) – and, (d) as late as 27^th August 2002 Jarvis stated it remained willing “to enter further negotiations regarding a pain/gain mechanism” (see paragraph 12(2) above).

Whilst, as I have said, agreement in principle existed from the outset, it is equally true to say that practically from the outset – see manuscript notes and typed minutes of the meeting of 6^th October 1999 to which I have referred at paragraph 19 above - there were different views as to the manner in which effect was to be given to it. Was it to be dealt with in the manner Alstom favoured viz. a direct proportion of whatever “gain” Alstom might achieve or whatever “loss” Alstom might suffer being passed on ? Or, was it to be dealt with in the manner Jarvis favoured viz. a formula based on and referable to the sub-contract value which would, so Jarvis thought, give it greater control over its own destiny ? If I approach the matter by asking myself the rhetorical question posed by Bingham LJ in the Didymi (rather than concentrating on the Advice of the Privy Council in Queensland Electricity as I did at paragraph 61 above), my answer to that question is this –

It is significant that the Sub-Contract works have been carried out and completed. As in the Didymi, the dispute in this case has arisen after the contract has been performed. This point again links directly back to the points made in paragraph 61 above. In my judgment, in such cases the Courts should seek to give effect to the incompletely/imperfectly expressed intention of the parties if that can reasonably be done. I would respectfully echo, as Mr ter Haar urged that I should, the words of Sir Robin Cooke – “… arguments invoking alleged uncertainty, or alleged inadequacy in the machinery available to the Court for making contractual rights effective exert minimal attraction” (see paragraph 57 above).

Although I believe that Mr Chapman was right to conclude that the pain/gain deduction which Alstom had made from monies otherwise due could not possibly be justified at the time he was considering the matter, his reasoning rules out any possibility of any pain/gain deduction ever being justified. My analysis of the parties’ legal rights/obligations differs in a number of respects from Mr Chapman’s (see paragraph 13 above for the relevant part of his decision). Mr Chapman decided that, although “the notion of a pain/gain share was in the contemplation of the parties…” their failure to reach agreement “… as to the precise terms of any pain/gain sharing agreement” meant that there was never anything more than “an agreement to agree… of no legal consequence”. For the reasons I have endeavoured to explain, I respectfully take a different view. In my judgment, there was more to the parties’ pain/gain understanding that a mere “notion” and their failure to agree on “precise terms” was not fatal. However, having identified a difference which the parties themselves were unable or unwilling to settle, Alstom needed to refer the difference to adjudication, or to the High Court for final determination, before a precise or specific right to adjust Sub-Contract payments to reflect pain (or gain) could become established.

How should the “difference” between Alstom and Jarvis as to pain/gain mechanism be resolved ? At paragraph 21 of the Particulars of Claim (TB 1/14) Alstom contends that the Court should apply “… the principle set out in Schedule B Annex B1 and the provisions of Schedule E [of the Issue 3 documents]”. No alternative approach was contemplated by the pleader. At paragraph 31 of the Defence (TB 1/91) Jarvis disputes the necessity for or the appropriateness of the Court’s making any determination. The pleader did not contemplate the possibility that the Court might take a different view. He did not go on to plead a positive alternative case.

So far as Alstom’s pleaded case is concerned, my views on “… the principle set out in Schedule B Annex B1 and the provisions of Schedule E [Issue 3 documents]” are apparent from paragraphs 49 to 51 above. Whilst the documents in Annex B1 contain the pain/gain mechanism which Alstom consistently put forward (see paragraphs 11, 19, 23 and 27 above) it was a mechanism which Jarvis consistently rejected (see paragraphs 12, 19, 22, 28 and 29 above). Given Alstom knew of Jarvis’ opposition to its proposals for directly proportional participation in the overall main contract pain/gain mechanism on 6^th October 1999 (if not earlier), that Alstom took a calculated risk when it proceeded to conclude its contract with Railtrack knowing of Jarvis’ views, that Jarvis has consistently maintained its opposition to those proposals and that Alstom was content to leave matters unresolved when the Issue 3 documents were prepared (and with its own proposals transparently struck through) it must be right to conclude that Alstom was genuinely willing to consider some different basis for Jarvis’ participation. In all the circumstances of the case I do not think the Court should now determine that the Sub-Contract should contain this particular pain/gain mechanism.

The fundamental issue which Jarvis raised at the meeting on 6^th October 1999 (see paragraph 19 above) and again in the position paper which formed part of the package of documents submitted to Alstom in April 2000 (see paragraph 22 above) and which it continued to raise thereafter (see e.g. paragraph 29 above) was simply this – its share of any pain or gain should be based on or related to the “cost/price” of the parts of the works for which it was itself directly responsible. In my judgment Jarvis’ unwillingness to accept risk in respect of Alstom’s own performance and/or other subcontractor’s performance could not be said to be an unreasonable stance for a major sub-contractor to take. Certainly in late 1999, 2000, 2001 and the early part of 2002 whilst Alstom continued to advocate its preferred alternative, Alstom did not ever suggest that Jarvis was taking an unreasonable stance. I also take note of the following facts which indicate to me that Alstom was genuinely willing to consider the different basis for Jarvis’ participation which it (Jarvis) had put forward. First, during 2000 Alstom and Jarvis were agreed that their Sub-Contract would not be concluded until after a revised “Target Cost/Price” for Jarvis’ work had been set. Secondly, in August 2001 Alstom considered that a Sub-Contract should be concluded including a term that agreement on the precise terms of the pain/gain mechanism was postponed (see paragraphs 30 to 34 above). Thirdly, later in 2001 and into 2002 it seems clear that (for whatever reason) Alstom and Jarvis decided to concentrate their attention on establishing “Final Cost/Price” and less attention was given to the updating of the “Target Cost/Price”. Fourthly, having left the matter in abeyance for so long, it was not until the early part of 2002 when it became clear that Railtrack was likely to maintain what both Alstom and Jarvis regarded as a relatively “hard line” that they refocused their attention on their unresolved position as between themselves. It was then, in February 2002, that Jarvis made an offer to agree a pain/gain mechanism in very precise or specific terms viz. 50:50 sharing of pain or gain, with the pain being limited to a maximum of 10% of the adjusted Sub-Contract “Target Cost/Price” and with its Management Fee limited to the amount recoverable by reference to that adjusted “Target Cost/Price” (see TB 8/1364 to 1369 and see paragraph 12 above). That offer was not accepted by Alstom at the time and Alstom has not subsequently stated that an offer of that sort would be acceptable. However, it is also right to say that Alstom has yet to suggest any other mechanism which could be applied if, contrary to its oft stated preference, Jarvis’ participation in any pain or gain is to be calculated by reference to the Sub-Contract figures.

Had Alstom at any stage proposed or counter-proposed a specific mechanism for pain/gain sharing which had acknowledged or accepted this fundamental issue which, from October 1999 onwards Jarvis has been consistently raising, the Court would probably have been able to consider alternative proposals – I say that because, in my judgment, Jarvis’ proposals fall within the range of fair and reasonable proposals which the parties might have agreed; and, in all probability any proposals made by Alstom would also have deserved serious consideration. However, given the absence of any such proposals or counter-proposals and in the light of the way each party has elected to present its case in these proceedings, the options presently open to the Court are –

What is the extent of the material which the Court should consider before making its determination ? In his submissions, Mr ter Haar appeared to suggest that the inquiry should be a narrow one – with attention being given only to those documents included in the Issue 3 documents. Whilst I accept that orthodox principles need to be applied when the Issue 3 documents are construed – (so that, for example, evidence of prior negotiations must be restricted to the documents which the parties elected to place in Annex B 1 to Schedule B - and possibly other documents expressly referred to in those documents which might also need to be read to understand something mentioned in a scheduled document - alterations made during the negotiations cannot be compared with earlier wording and subsequent acts or statements cannot be taken into account) – I can see no reason for similarly restricting the materials considered when, as in this case, the Court is invited to determine an unresolved difference. In my judgment, the Court should be fully informed of the background to and/or the development of the “difference”. The Court should be able to consider the arguments which the parties themselves developed during the course of their negotiations, the reasons why negotiations broke down or were not pursued, the reasons why the arguments were left in abeyance and not brought to a head and any and all potentially relevant further matters raised during the course of the proceedings. The Court has to determine what is the pain/gain mechanism which is to apply in this retrospectively operative Sub-Contract. Given the views I have expressed at paragraphs 67 and 68 above, in my judgment, in the circumstances of this case, the mechanism will be one which relates directly to Jarvis’ Sub-Contract parameters but, given that the intention was for Jarvis to participate in a Main Contract pain or gain, the existence of such a pain or gain must be a built in precondition of Jarvis becoming entitled or liable to potential participation. Given what I have already said at paragraph 69 above, I decline to express any further views at this stage.

Should the Court of Appeal be persuaded to take a different view of the primary cases, the parties’ respective secondary cases, which I have introduced at paragraph 8 above would have to be decided. The premise of each party’s secondary case is the absence of an enforceable Sub-Contract with the consequence that Jarvis must be entitled to be paid on a Quantum Meruit basis for the works it undertook at Alstom’s request and for Alstom’s benefit. It is common ground that there must be such an entitlement in those circumstances and, it is also common ground that the starting point for calculation of any Quantum Meruit must be the rates/prices etc. which were intended to be included in the Sub-Contract (which both parties anticipated would be made). These rates/prices had been used when interim payment applications were prepared by Jarvis and they had been the basis for consideration/approval by Alstom. Should the sum thus calculated then be adjusted to take into account pain or gain ? In Mr Bowdery’s submissions, no adjustment would be appropriate. In Mr ter Haar’s submission, there should be an adjustment which reflected the arrangements which Alstom had wished to see included in the Sub-Contract. The parties developed their cases in written submissions which were submitted after the oral closing arguments had been completed.

In my judgment, Alstom’s pleaded secondary case fails because the factual basis for this claim is not made out. The allegation made in paragraph 22 of the Particulars of Claim is that the Issue 3 documents “lacked 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” I do not accept Mr ter Haar’s submission that, in the absence of the pain/gain term for which Alstom contend, the Sub-Contract would lack an essential term, namely a complete or workable statement as to the Sub-Contract price. On this aspect of the case, in my judgment, the facts which I have summarised at paragraphs 30 to 40 above are inconsistent with a finding that a pain/gain term was an essential component of the Sub-Contract price. Unhesitatingly, I prefer Mr Bowdery’s submission that a “pain/gain mechanism” constituted an “inessential” Sub-Contract term in the sense that the Sub-Contract could operate without it.

Given my findings at paragraph 72 above and the fact that Jarvis’ pleaded secondary case represents Mr Bowdery’s ultimate fall back position, it is unlikely that Quantum Meruit remuneration will ever need to be calculated. However, in case it does, I conclude by briefly stating my conclusion concerning the possible relevance of the parties’ established agreement in principle and disagreement as to the mechanism for achieving Jarvis’ pain/gain participation.

Alstom claimed a declaration in the following terms –