Alstom entered into a contract with Railtrack under which there was a pain/gain share provision. Alstom subcontracted part of its works under the main contract to Jarvis. The works were completed and Alstom suffered losses in accordance with the “pain” provisions of the main contract.
Alstom claimed that Jarvis had agreed a pain/gain share provision under the subcontract and sought a declaration to that effect in order to pass some of the losses it had suffered on to Jarvis. Alstom further argued that if the court found that any element of the pain/gain share mechanism remained to be agreed the court had the power to determine what the amount of any pain to be borne or enjoyed by Jarvis should be.
Jarvis claimed that a mutually acceptable pain/gain sharing mechanism with Alstom had not been agreed. Jarvis also argued that in the absence of such agreement the court did not have the power to determine what should have been agreed between the parties.
The court held that the parties had in fact agreed to a pain/gain share provision within the subcontract although the extent and the manner had not been agreed. There was an implied obligation to use reasonable endeavours to agree on the provision and in the absence of such agreement and subject to the parties having attempted to negotiate in good faith an adjudicator or judge was the person who was entitled to decide what would be a fair and reasonable mechanism to apply.
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One would normally expect the court to find that a provision that had not been agreed between the parties did not apply. In this respect the decision appears to be a departure from the normal contract formation rules and it will be interesting to see if there are further developments in this area.
With regards to this particular case though, there were two factors of great significance which swayed the court to its decision. The first was that the terms of the subcontract expressly gave the TCC the power to determine any dispute or difference between the parties. The second was that because the works had been performed the court sought to give effect to the incompletely/imperfectly expressed intention of the parties, rather than to strike them out.
The decision serves as a reminder as to the problems that may occur should terms not be agreed at the outset. It is essential that where a party is subject to a pain/gain share provision under a main contract this is reflected in the terms of any subcontract. Failure to do so may result in the matter being left for an adjudicator or judge to decide on a fair and reasonable mechanism to apply.