TCC considers pain/gain share mechanism in NEC3 Option C (target cost) contract
Doosan Enpure v Interserve Construction  EWHC 2497 (TCC)
This case concerned a dispute between JV partners about the release of interim payments from the JV account. In a judgment handed down on 25 September 2019, Jefford J held that Doosan was entitled to the release of more than £5 million.
In March 2016 Doosan and Interserve entered into a Joint Venture Agreement (“JVA”) to carry out a £46 million upgrade to the Horsley Water Treatment Works in Northumbria. The JV was engaged by Northumbrian Water on the NEC3 Option C (target cost) form of contract.
The works began on 21 March 2016 and Northumbrian Water made monthly interim payments into the JV account, which were paid out in agreed shares to the JV partners. About 2½ years into the project, Interserve refused to authorise the release of any further interim payments from the JV account, on the basis that Doosan had already been paid in excess of the sum to which it would ultimately be entitled.
The rival arguments
Interserve contended that Doosan was only entitled to interim payments net of adjustments to reflect the “pain/gain share” arrangement under NEC3 Option C, together with further related adjustments that fell to be made under the JVA to reflect issues between the JV partners.
Whilst most of the arguments raised by the parties and determined in the judgment concern the precise terms of the JVA, this case is of wider interest because it is believed to be the first judicial consideration of the operation of the pain/gain share mechanism in the NEC3 Option C (target cost) form of contract.
Doosan argued that the JVA mirrored the position under the head contract, and that under NEC3 Option C the contractor is entitled to be paid its costs as the works proceed, with the pain/gain share reconciliation taking place only on completion of the works. Interserve contended that the pain/gain share mechanism in NEC3 Option C does not only apply on completion but can be applied at an interim stage.
The Judge’s conclusion
Jefford J held as follows:
“Convoluted though these provisions may appear, their intention is clear. During the course of the works, the Contractor is paid by reference to the Price for Work Done to Date which reflects what the Contractor has paid and which falls within the definition of Defined Cost plus the Fee. The Prices operate as the target cost. Following completion of the works, there is a comparison of the Price for Work Done to date with that target and an assessment of the extent to which the Contractor will benefit from any saving (against the target) or bear the cost of any overrun. That is the pain/gain sharing nature of the contract and the allocation of pain and gain occurs after the completion of the works and not on an interim basis. That, in my view, is clear from clause 53.3. There is no other provision for the assessment of the Contractor’s share at any earlier stage. On behalf of Interserve, Mr Hussain QC did not accept that position and argued that there was nothing in these clauses that prevented the pain/gain share being applied at an interim stage. There is, however, no indication in the Contract of any mechanism by which it could be so applied. It was argued that it was not necessary for me to decide the construction of the Contract, but, to the extent I have set out, its meaning seems to me to be clear.”
The Judge went on to conclude that Doosan’s interpretation of the JVA was correct and to grant a declaration that Doosan was entitled to the release of its share of the interim payments made by Northumbrian Water into the JV Account (amounting to £5.3 million).
Crispin Winser acted for Doosan, instructed by Pinsent Masons LLP.
Click here for the judgment.