Both contractors and developers often enter into joint ventures to carry out a specific project. It enables parties to bid on larger projects, pool their resources, including specialised knowledge, and spread risk across the participants. The recent Technology and Construction Court (England and Wales) decision in Doosan Enpure Ltd v Interserve Construction Ltd [2019] EWHC 2497 serves as a reminder to participants in construction joint ventures of the potential pitfalls of intra-JV disputes.
Target cost contracts Under an NEC 3 Option C Contract, a target cost or price is agreed between the parties which includes the contractor's estimate of its "Defined Costs" to carry out the works, plus a fee for its costs, overheads and profit. The contractor is entitled to these costs and its fee, less any "Disallowed Costs", which becomes the final "Price for Work Done to Date". Upon completion, an assessment is made of the "Price for Work Done to Date" and the target cost, as adjusted, and any cost saving or overrun is allocated according to a predetermined formula, commonly known as a "pain/gain share" mechanism. The parties share in any saving against the target or pay their agreed share of the excess, as the case may be. Payments from the
joint venture account Doosan Enpure Limited (Doosan and Interserve Construction Limited (Interserve) entered into a joint venture agreement (JVA) to upgrade the Horsley Water Treatment Works in Northumberland for Northumbrian Water Limited (NWL). NWL and the JV parties entered into a contract based on the NEC3 Engineering and Construction Contract (ECC), including Option C (Target
contract with activity schedule). Throughout the project, the JV parties
submitted a consolidated application for payment to NWL, which consisted of a spreadsheet setting out each of the parties' costs separately. In accordance with the
JVA, monies paid under the contract with NWL were held in a joint venture account,
to be allocated between the JV parties as interim payments. In practice, those interim
payments made no assessment of the pain/gain share under the contract's target
cost mechanism.
A dispute arose between the JV parties part way through the project when Interserve refused to sign-off the release of funds from the joint venture account.
The parties disagreed over whether interim payments under the JVA should be made
on an actual cost basis or whether they should take into account the potential pain/
gain share to be assessed upon completion of the works. Interserve argued that the
JVA required consideration of the pain/gain share in relation to each interim payment
and, therefore, Doosan had already been paid more than its entitlement.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
