The recent ruling on Almacantar v Sir Robert McAlpine highlighted the need for clarity in pre-construction services agreements. Karen Kirkham explains.
Design and build (D&B) still seems to be the method of choice for commercial projects, and pre-construction services agreements (PCSAs) are increasingly popular.
There are advantages to such a two stage D&B. Developers can save time and fees working with the contractor, tapping into its supply chain, in-house and external designers, design management and programming expertise. The relationship, when it works, adds value, akin to a JV or partnering arrangement.
However, it can leave the developer over a barrel if the parties fall out. This is illustrated by this case, Almacantar v Sir Robert McAlpine, decided by Mrs Justice Jefford in the Technology and Construction Court (TCC) in February 2018.
Not unusually, this PCSA had an incentivisation clause whereby only a maximum of 50% of the pre-construction services fee was payable under the PCSA itself, with a 50% “balloon payment” payable only on first valuation under the main contract once executed.
Unfortunately, the parties never agreed contract terms. McAlpine, having been required to go “open book” on overheads and profit, decided it was not prepared to enter into a D&B contract, and would only accept construction management.
The employer, Almacantar, appointed another D&B contractor, Multiplex – though whether it “terminated” McAlpine or the parties agreed a divorce was an issue.
McAlpine sat back until Multiplex’s contract was underway, then invoiced the employer for the balloon payment. It argued that this was payable under a main contract entered into for these works with any contractor. There was – contract draftsmen take note – no express provision to contradict this, so the TCC had to analyse the interaction between conflicting clauses.
As ever, the devil is in the detail. The PCSA provided at clause 5.5 that Almacantar was under no obligation to enter into contract and, if it did not, termination was “subject to” clause 16 governing payment. Under clause 12, Almacantar could terminate at will, and McAlpine upon employer breach, both upon written notice.
Under clause 21 the PCSA would automatically terminate if the deadline for entering a contract was passed. Under clause 16.4, on termination by either party, Almacantar was obliged to pay accrued fees up to termination plus “a fair and reasonable proportion of the next following instalment”.
Almacantar argued that the termination at will provision had been invoked so that clause 16.4 limiting the payment was the sole applicable clause, and that it was clear the balloon payment was only intended to apply on signing a contract with McAlpine.
McAlpine argued that because the PCSA was terminated by written agreement rather than by either party serving notice under clause 16, clause 16.4 didn’t apply and limit their entitlement. Further, the PCSA did not expressly say that the contract had to be with McAlpine.
Mrs Justice Jefford concluded that clause 16.4 applied to all terminations, including those by agreement. Any other interpretation would potentially have been unfair to McAlpine.
It could not have been the intention of the parties, for example, that if the PCSA was terminated under clause 21 by effluxion of time, McAlpine would not be entitled to receive payment under clause 16.4.
Almacantar did not stand to receive a “windfall” by avoiding the balloon payment as “it would to a greater or lesser extent lose those benefits [for which it had paid McAlpine] and have to go back to the drawing board with another contractor”.
Mrs Justice Jefford applied a commercial, commonsense approach. However, it’s worth noting that the PCSA could, and should, have made the position clearer. The JCT publishes a form of PCSA, but without detai.led template services or payment structure, which are for the parties to decide. Most are bespoke.
A lot may be at stake under a PCSA: it is important to spell out very clearly what the parties stand to gain or lose from the process succeeding or going abortive.
Karen Kirkham is head of construction at Bircham Dyson Bell.