No Pain, No Gain – English Court Finds That Interim Payments Under A Joint Venture Contract Should Not Be Adjusted For Cost Overruns

Author:Mr Timothy Hill, James Kwan, Damon So, Nigel Sharman, Joseph Kim, Joyce Leung, Nabeel Ikram, Alex Wong and Tony Marshall
Profession:Hogan Lovells
 
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Construction companies entering into joint venture (JV) contracts should be cautious of entering into agreements where the responsibility for, and timing of cost overruns is not tightly specified, to avoid unexpected surprises.

In Doosan Enpure Limited v. Interserve Construction Limited [2019] EWHC 2497 (TCC), Mrs. Justice Jefford made obiter comments that should cause parties to reflect on their obligations under contracts under the NEC3 Option C contract.

Follow the formula

Doosan Enpure Ltd. (Doosan) entered into a joint venture agreement (JVA) with Interserve Construction Ltd. (Interserve) for the purpose of carrying out upgrade works at a treatment plant operated by Northumbrian Water under the NEC3 form with Option C (NEC3).

The procedure adopted for payment under the JVA was that Doosan and Interserve would each produce a monthly spreadsheet and payment certificate showing the payments to which each of them was entitled from the JV account. The first 30 certificates were approved in quick order.

When Doosan invited Interserve to approve number 31, Interserve refused to do so, on the basis that there was a risk that the amount certified on an interim basis in respect to the work done would exceed the amount it could expect to recover as a result of the painshare/gainshare provisions of the contract.

According to NEC3, parties agree on a target cost or price to include the contractor's best estimate of its cost to carry out the works, as well as a fee for costs, overheads, and profit. Upon completion, an assessment is made of the "price for work done to date", and any overrun or cost saving is allocated according to a formula, commonly described as a "painshare/gainshare" mechanism.

The court found that the painshare/gainshare provisions of NEC3 were incorporated into the JVA. The question before the court was whether adjustments could be made under the NEC3 to

interim payments due before the completion of works, to allow for deductions that would likely need to be made at completion of any event.

The final countdown

Justice Jefford considered it was clear from clause 53.3 of NEC3 that the comparison of the price for work done to date to the total of the prices, had to be carried out at completion of the whole of the works and once the price for the work done had finally been established.

According to the clause:

"The project manager makes a preliminary assessment of the contractor's share at completion of the whole of the works using...

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