Two stage tendering: TCC guidance on termination and deferred payment provisions

United Kingdom

A recent TCC decision has considered a payment dispute arising from a two stage tendering process. Two stage tendering is increasingly common in the construction industry, but court decisions as to its implications are rare. This case emphasises the need for clear drafting to deal with payment obligations in the event a building contract is not ultimately concluded between the parties.

Two stage tender procurement

Developers procuring large scale and complex projects may elect to do so using a two-stage tendering process. Typically this involves tendering the project on the basis of an incomplete design in the first stage, and then employing a contractor on a set of services under a Pre-Construction Services Agreement (“PCSA”). The contractor (now appointed under the PCSA) might advise the developer on items like cost, design, buildability, value engineering and programming, with the intention being that the parties will ultimately enter into a building contract (i.e. the second stage) with greater clarity on price, and a potential overall cost saving having tapped into the contractor’s expertise at an early stage.

A key point for parties to bear in mind is that there is no obligation under a PCSA for them to enter into a building contract with each other – or for the developer to proceed at all. In such circumstances, it is important that a PSCA clearly defines the parties’ rights regarding termination and payment. 

Almacantar v Sir Robert McAlpine

In September 2012 Almacantar engaged Sir Robert McAlpine Limited (“SRM”) under a PCSA on the landmark Centre Point Tower project in London. The PCSA was subsequently terminated by agreement in September 2014 without the parties entering into a building contract with each other.

Almacantar engaged a third party under a separate PCSA and entered into a building contract with them in December 2014 (with a start on site in January 2015). A dispute arose when SRM issued an invoice many months later for the remaining 50% of its PCSA fee, which Almacantar refused to pay.

The dispute revolved around the correct interpretation of payment and termination clauses in the PCSA with SRM arguing that its claimed entitlement to payment of £948,072.35 (plus VAT) was triggered when Almacantar entered into the building contract with the third party. SRM was initially successful at adjudication, following which Almacantar issued Part 8 proceedings in the TCC seeking a declaration that SRM was not entitled to the money.

SRM argued that because the PCSA stated that the remaining 50% of the fee was payable after the “first valuation subsequent to commencement on site under the main contract”, and that the term “Main Contract” as defined was broad enough to include a contract with any party not just SRM, the money became payable when Almacantar started works on site with the third party.

The PCSA contained specific termination provisions which allowed payment to SRM of a "fair and reasonable proportion" of the next instalment due under the PCSA. SRM argued that these provisions did not apply as termination was by agreement rather than under the contract. Alternatively, if they did apply SRM had completed the performance of all of the services at the point of termination and a fair and reasonable proportion of the final 50% instalment was 100%.

The court disagreed with SRM and held that the termination clause (which referred to termination “for any reason”) was wide enough to include termination by agreement. Further, the provision for a final “fair and reasonable” instalment post-termination envisaged a final payment application at the end of the month in which the PCSA was terminated covering services rendered up until termination, not for an application for the remaining 50% of the fee many months later.

The court also considered the second strand of SRM’s argument, that the wide definition of “Main Contract” meant that the final 50% instalment was payable to SRM upon Almacantar entering into a building contract with any party. In deciding against SRM on this point as well, the court noted the context in which the term had been deployed throughout the PCSA, deciding that in many circumstances, including this one, it could only sensibly refer to a contract with SRM, and not with any other party. The court also took note of what it considered was meant by the “commercial reality” of the situation. Almacantar was unlikely to terminate purely to avoid paying SRM its 50% fee, because it would then lose much of the benefit of SRM’s services (which it had partly paid for) and need to start again with another contractor. On the other hand, the court considered it unlikely for the parties to have intended that SRM could recover the second half of its fee after termination of the PCSA in circumstances where its services may have been of no benefit to Almacantar in engaging with another contractor.

Conclusions and implications

The use of a two stage procurement approach can be attractive for some developers undertaking substantial projects. However, it inherently carries some additional risks when services are performed at the pre-construction stage with no certainty of proceeding to development stage for either party. In the present case the contractor was unable to recover 50% of its fee. Had the case been determined the other way the developer would have had to pay for services that it may not have benefitted from.

The main point to take away for developers and contractors alike is the need for clarity of drafting to ensure the parties’ bargain is properly recorded and particularly that clear wording is in place where there is to be a mechanism for deferred payment contingent upon the conclusion of a building contract. The court’s references to “commercial reality” suggest that such mechanisms, in the absence of drafting to the contrary, may be interpreted as demonstrating an intention to share the cost of the contractor’s services wasted as a result of a failure to conclude a building contract.

References:

Almacantar (Centre Point) Limited v Sir Robert McAlpine Limited [2018] EWHC 232 (TCC)