Creditors for Interserve JV suing Derbyshire councils over contract cancellation

Administrators at one of Interserve Construction’s failed joint ventures (JVs) are pushing to recoup millions in a legal case against Derbyshire councils.

Interserve Construction, now rebranded as Tilbury Douglas, built up a catalogue of large jobs in the energy from waste (EfW) sector, some of which it split with joint venture partners. One of those was a 27-year long, £950m contract it scored in a JV with Renewi, to build and operate an EfW plant in Sinfin in south Derby.

But Derby City Council and Derbyshire County Council cancelled that contract in August 2019 on the back of a two-and-a-half-year-long delay. That led to four lenders at the JV, which was called Resource Recovery Solution (Derbyshire) Holdings Limited (RRS), placing the firm in administration a month later.

Interserve Construction  was forced to write off a £22m investment in the JV. Problems in the EfW sector cost Interserve Construction hundreds of millions of pounds, causing it to make a litany of profit warnings which had an impact on Tilbury Douglas’ finances up until the beginning of 2023.

Teneo Financial Advisory, the administrators for Resource Recovery Solution (Derbyshire) Holdings Limited (RRS) are now pursuing the JV’s former clients – Derbyshire County Council and Derby City Council – for a payout following the contract cancellation.

Teneo says the business is owed £186.7m, while the councils claim that defects and delays to work mean they  are owed £9m.

The disagreement hinges on the understanding of a document drawn up and included in the contract before the work started, defining the adjusted estimated fair value of the contract (AEFV) – a value setting out how to determine compensation if the contract should break.

The model to decide the AEFV “runs to some 1,500 pages and contains hundreds of inputs”, according to court documents – which add that the model inputs are “driven by a number of different technical assumptions” that account for the “extremely large difference in valuation of AEFV”.

Principal differences focus on the extent of rectification work required to the boilers, which the councils say “need to be replaced”. The JV maintains they do not need replacing.

Teneo and the two councils are also disputing how much compensation the client should be given for electricity which was not produced due to the delays and the cost of rectifying the site, as well for the money it will spend re-procuring an operator and maintenance for the site.

The case itself will focus on how much the councils will need to fork out to complete the construction and servicing work to the “standard required” after the JV was taken off the project.

The case is set to go to court in June 2024 after the councils failed to strike out the case. They had claimed RRS has “no real prospect of succeeding” in its claim.

Mr Justice Constable resolved that the case should go ahead, as the clause writeup mean various meanings can be taken from it. He said there is a “tension on the face of the contract” between basing who pays compensation on a “deemed new contract” and an assessment by the councils regarding what actually needs to be done to complete the job.

“A full understanding of the technical and economic implications of the parties’ competing constructions” that the court should take into account in the case, meaning that the case should proceed, Constable added in a preliminary judgement.

Construction News contacted Teneo, Derby City Council and Derbyshire County Council for comment.

After Interserve Construction was renamed as Tilbury Douglas, the firm split from the Interserve Group in June 2022.

Three and a half years after the Sinfin contract was cancelled, Tilbury Douglas said that it had resolved all of its legacy EfW issues, which left it in a “stable position” looking forward.

A spokesperson for Derby City Council and Derbyshire County Council said: “Administrators for RRS have chosen to have the adjusted estimated fair value decided through the courts.

“We believe that we’re in a better position as a result of the applications and judgment and we are robustly defending RRS’ claim to protect the interest of Derby and Derbyshire council tax-payers.”

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