Charles Edwin Edwards MSt(Cantab) MSc(Lond) FCInstCES Barrister (Head of Chambers, Gray’s Inn Construction Chambers)
“…Socrates to Hermogenes: ‘Well, now, let me take an instance; suppose that I call a man a horse or a horse a man, you mean to say that a man will be rightly called a horse by me individually, and rightly called a man by the rest of the world; and a horse again would be rightly called a man by me and a horse by the world – that is your meaning?…”
Dialogues of Plato (Cratylus)
Charles Edwards, construction barrister and head of chambers at Gray’s Inn Construction Chambers, reviews the case of Atkins Ltd v Secretary of State for Transport [2013] EWHC 139 (TCC) which involved a dispute in connection with a contract that incorporated amended NEC3 Conditions of Contract and the interpretation and construction of the provisions relating to Compensation Events. Atkins Ltd (“the Claimant”) was the Claimant and the Secretary of State for Transport (“the Defendant”) was the Defendant.
The parties entered into a Contract on 26 February 2008 which included an amended NEC3 Conditions of Contract (“amended NEC3 Contract”). The Defendant was appointed as managing agent and contractor for Area 6 of the highways network for a period of 5 years which was subject to extension for a further 2 years. Pursuant to the amended NEC3 Contract, the Claimant was obliged to maintain the roads in Area 6 which comprised of trunk roads in East Anglia. This work consisted of routine and cyclic maintenance and winter maintenance works including remedying defects in the roads and the management of more substantial works. The Claimant was to be paid on a Lump Sum basis over the period of the amended NEC3 Contract. This was payable on a monthly basis with additional payment for mobilisation and demobilisation. Pursuant to the amended NEC3 Contract, maintenance included an obligation to remedy defects which appeared in the road surface including potholes and therefore the lump sum payment to the included work required to remedy any defects (including potholes).
A dispute arose between the parties which included the circumstances and the extent to which costs of and occasioned by repairing potholes on the trunk roads in Area 6 should be paid for and whether the Claimant was entitled to additional payment pursuant to the Compensation Event provisions under Clause 60 of the amended NEC3 Contract, in particular, under clause 60.1(11) (in relation to defects) or Clause 60.1(22) (in relation to a breach of an implied term of the amended NEC3 Contract). By way of background, the amended NEC3 Contract provided amongst other things that:
“60.1 (10) A defect in work carried out by Others live in or affecting the operation of the Area Network or any other default by Others in carrying out such work, unless the repair or rectification of the defect forms part of the Lump Sum Duties.
(11) The Provider encounters a defect in the physical condition of the Area Network which
• is not revealed by the Network Information or by any other publicly available information referred to in the Network Information,
• was not evident from a visual inspection or routine survey of the Area Network at the Contract Date,
• an experienced contractor or consultant acting with reasonable diligence could not reasonably have discovered prior to the Contract Date and
• an experienced contractor or consultant would have judged at the Contract Date to have such a small chance of being present that it would have been unreasonable for him to have allowed for it.
• Only the difference between the physical conditions encountered and those for which it would have been reasonable to have allowed is taken into account in assessing a compensation event
60.1(13) The Schemes Budget in any Financial Year is greater or less than that specified in the Network Information by a factor of more than 20%. Only the effect on the Defined Cost of the Lump Sum Duties due to the Schemes Budget in any Financial Year being greater or less than that specified in the Network Information by a factor of more than 20% is taken into account in assessing a compensation event. The first 20% of the deviation is ignored when making the assessment (but not when determining whether a compensation event has occurred).
61.3 The Provider notifies the Service Manager of an event which has happened or which he expects to happen as a compensation event if:
• the Provider believes that the event is a compensation event and
• the Service Manager has not notified the event to the Provider.
If the Provider does not notify a compensation event within eight weeks of becoming aware of the event he is not entitled to a change in the prices unless the Service Manager should have notified the event to the Provider but did not.
61.4 If the Service Manager decides that an event notified by the Provider
• arises from the fault of the Provider.
• has not happened and is not expected to happen.
• was something of which the Provider was or ought to have been aware at the time when the original prices for the work affected by the compensation event were assessed.
• has no effect upon defined cost or
• is not one of the compensation events stated in this contract.
he notifies the Provider of his decision that the prices are not to be changed.
If the Service Provider does not notify the Provider of his decision within two weeks of the Provider’s notification, the Provider submits quotations for the event.
62.1 After discussing with the Provider different ways of dealing with a compensation event which are practicable, the Service Manager may instruct the Provider to submit alternative quotations…
62.3 The Provider submits quotations within three weeks of the event being notified as a compensation event or within such other period as the Service Manager may agree”.
The Claimant submitted that the prevalence of potholes on the network was significantly greater than it anticipated and therefore they were entitled to additional payment pursuant to Clause 60 of the amended NEC3 Contract, in particular either under clause 60.1(11) (in relation to defects) or clause 60.1(22) (in relation to a breach of an implied term of the Contract). The Defendant disputed the Claimant’s entitlement to any Compensation Event. The dispute was referred to Adjudication and an Adjudicator was appointed who was well known and respected in construction law circles (and elsewhere). By agreement, the Adjudicator was asked to determine the issue of principle as to whether, assuming the material facts were established, there was a Compensation Event. The Claimant essentially pursued their claim on three bases. The Claimant submitted amongst other things that:
“…potholes occurring after the Contract Date are defects within Clause 60.1(11) where they exceed in volume the number of potholes that it would have been reasonable for an experienced contractor or consultant to have allowed for. As the hearing involved effectively preliminary issues, no “number” of reasonably allowable potholes was identified. The Adjudicator in his decision of 9 March 2012 rejected the two other bases of claim but accepted the Secondary Case.”
The Adjudicator found in favour of the Claimant. By way of background the Adjudicator reached his decision and records at Paragraph 5 of his decision that the relief claimed by Claimant was:
“(2) further or alternatively that a “defect in the physical condition of the area network” for the purposes of clause 60.1(11) includes a defect arising after the contract date that could not have been anticipated from (a) the Network Information, (b) visual inspection, (c) discovery with reasonable diligence, and that an experienced contractor would have judged to have such a small chance of arising after the contract date that it would have been unreasonable for it to have allowed for it in its tender…”
In the High Court, the Court set out material parts of the Adjudicator’s decision which provided useful insight into the Adjudicator’s reasoning with regard to the Adjudicator’s decision on the Secondary Case. This included the following:
“42. The Employer [Authority] next argues that the term ‘defect’ in clauses 60.1(11) is used in a generic sense, such that it refers to a type of defect. In this sense potholes as a category are a defect. The intention of clause 60.1 (11) is to compensate only for latent defects in the limited sense of unknown types of defect.
43. The consequences of this interpretation would be to make clause 60.1(11) very limited indeed. A reasonable contractor knows that potholes occur in roads from time to time, and indeed potholes are expressly referred to in the Network Information, but no pothole could ever fall within clause 60.1(11) so as to give rise to a compensation event. The same would be true of every type of defect mentioned in the Network Information and related documents.
45. I am unable to accept this part of the Employer’s argument. There is no warrant in the words of clause 60.1(11), or anywhere else in the contract, for reading the word “defect” in that clause as referring to a type of rather than an individual defect. And in my view this interpretation is as uncommercial as Atkins’ primary case, for it would turn clause 60.1(11) effectively into a dead letter. I note that the Employer did not put forward any practical example of a defect which would qualify under subclause (11)…
46. Having rejected the more extreme interpretations put forward by each party, I returned to consideration of Atkins’ Secondary Case. In my …the phrase “being present” in the fourth bullet point of clause 60.1(11) is a reference to being present at any time up to the end of the contract period. This follows not only (negatively) from my rejection of Atkins’ primary case but also (positively) from consideration of how the contract is constructed and phrase and how it works. In particular…
(c) Application of subclause (11) requires consideration of what it would have been reasonable or unreasonable for the Provider to allow for in its pricing. When tendering armed with the Network Information, it would have been reasonable for the Provider to have made allowances, in its figures for the lump sums, to cover dealing with potholes and other defects reasonably expected to occur month by month or year by year during the life of the contract. The nature of the Network Information was such as to permit such allowances to be made, based on past experience, the Provider’s expertise, judgement of commercial risks, and other relevant factors…
47. Relying on the Secondary Case, Mr…[for Atkins] contended for the conclusion that Atkins was entitled to claim the additional potholes over and above the number of potholes that it would have been reasonable for an experienced contractor or consultant to have allowed for. Mr Nicholls [for the Authority] argued, in opposition to this, that there was nothing about volume (ie excessive numbers) in the wording of subclause (11). As a matter of express language this is correct, but it is not a valid objection to Mr… contention. The relevant principle is consideration of whether it would have been unreasonable to allow for the defects which the Provider contends constitute a compensation event. Defects encountered might be outside the hypothetical reasonable allowance for a variety of practical reasons, which on particular facts might have to do with severity, number, distribution, or some other feature. Excess volume happens to be the feature which Atkins relies upon in this instance…
56…my decision is as follows:
a. As regards the meaning of clause 60.1(11)…
iii. The phrase “defect in the physical condition of the Area Network” includes one or more potholes; and the word “defect” in that phrase does not mean ‘generic category of defect’ or similar…”
The Defendant challenged the Adjudicator’s decision by referring the Secondary Case to Arbitration. As set out by the Court, this essentially related to arguments as to whether the Claimant was entitled in principle to recover for each and every pothole which it had to deal with over and above the number which an experienced contractor or consultant should reasonably have allowed for. Atkins pursued that argument and it was challenged in effect by the Defendant on the basis that the number of potholes which could reasonably have been foreseen or allowed for was immaterial and an excess over that number did not in itself give rise to a compensation event.
The Arbitrator gave his Interim Award overturning the Adjudicator’s Decision and stated amongst other things that:
“an excess volume of potholes beyond what it was reasonable to allow in the Contract is not capable of constituting “a defect in the physical condition of the area network” under Clause 60.1 (11) of the Contract.”
The Claimant applied to the High Court (TCC) under 68 of the Arbitration Act 1996 to challenge the Arbitrator’s Award. In the alternative, the Claimant sought permission to appeal under section 69 of the Arbitration Act. The Claimant submitted that the Arbitrator did not effectively or even at all address a key issue upon which it relied and it argued that the Arbitrator either came to an obviously wrong decision or decision that was in any event wrong and that permission to appeal should be granted. The Claimant also wrote to the Arbitrator on the basis that there had been or may have been a ‘serious irregularity’ within the meaning of Section 68 of the Arbitration Act 1996 and asked the Arbitrator to accept the letter as the Claimant’s objection for the purposes of Section 73(1) of the Arbitration Act 1996.
The Court referred to what the very well known, eminent and highly respected Arbitrator with immense legal experience stated in his interim Award. This included:
“3.1 Given that there has not been a full exchange of pleadings in either the Adjudication or the Arbitration and that the parties have, in effect, decided upon a “preliminary issue” without the underlying issue being fully defined, I considered it important at the outset to define the dispute upon which a decision was required.
3.2 The Notice to Refer served by the Secretary of State recites that the Adjudicator had decided that a compensation event had arisen by reason of clause 60.1(11) of the Contract and that “potholes or other defects occurring after the Contract Date are defects within clause 60.1(11) where they are over and above the number of potholes that it would have been reasonable for an experienced contractor or consultant to have allowed for”. The Secretary of State, in its reasons for contending that the Adjudicator was wrong contends that:
(i) The reference to “being present” in the fourth bullet point of clause 60.1(11) is a reference to a defect being present at the Contract Date.
(ii) The reference to “a defect in the physical condition of the area network” in clause 60.1(11), is incapable of being a reference to the volume of potholes.
3.3 Reference to the Adjudicator’s decision shows that point (i) above was expressly decided by him. Point (ii) is not included in the dispositive part of the Adjudicator’s decision but is referred to within the body of the decision (particularly paragraph 47).
3.4 After oral exchanges with the parties at the hearing, it was agreed that the findings set out in para 3.2 (i) and (ii) above were findings of the adjudicator which were challenged by the Secretary of State and accordingly that the dispute to be determined in the arbitration was whether either or both of those findings were correct. They are now referred to as issue (i) and issue (ii)…
5.1 It was agreed at the oral hearing that Atkins’ counsel would go first. Atkins’ case is therefore summarised first…
5.3 The price to be paid for the repair of defects was the lump sum, as adjusted by the compensation event regime. The parties agreed to reduce price certainty by agreeing to the compensation event regime. Clause 60.1(11) applies where unforeseeable defects are encountered and applies to lump sum work, in contrast to clause 60.1(10) which excludes application to lump sum duties.
5.4 The purpose of clause 60.1(11) is to protect the contractor from hardship in the event that defects are encountered in the network which it could not have foreseen, and therefore could not have allowed for in its tender price. That protection enables the contractor to reduce its lump sum bid and that is to the employer’s benefit: the employer gets what it pays for.
5.5 If the Secretary of State’s construction were correct the contractor would be taking on the risk that the government might reduce all funding of the network to nothing. That would be an extraordinary risk for the contractor to take on unless there was some mechanism contained in the contract for compensating the contractor in those circumstances. Clause 60.1 (13) does not provide such protection because it applies only to the “Defined Cost” of the Lump Sum duties and not to the Lump Sum itself.
Summary of the Authority’s Case
6.1 Clause 60.1(11) applies solely to defects which appear after the Contract Date due to a cause which existed at the Contract Date (being present) and which were not and could not have been foreseen by the contractor. The clause thus applies to latent defects in the sense of an unknown type of defect.
6.2 The Contract requires Atkins to repair defects, which expressly includes potholes. The Contract provides no threshold or limit on the number of potholes Atkins might be required to repair. A construction of clause 60.1(11) which treats “defect” as meaning “volume of defects” removes the point of a lump sum contract and makes no commercial sense. On its true construction, clause 60.1(11) does not provide for a compensation event if the contractor encounters an unforeseen “volume of defects” after the Contract Date. Atkins’ construction of Clause 60.1(11) as providing for compensation where an unforeseen volume of defects is encountered ignores the clear words used, both as to “defect” and “being present”.
6.3 Atkins’ case is not that any individual pothole is said to be unforeseen, but that the volume of potholes is unforeseen. This is not addressed by clause 60.1(11) nor can such a claim be brought within its terms.
6.4 The Authority accepts that a failure to implement Schemes (no such failure being accepted) might lead to a higher incidence of potholes. While other factors also affect the incidence of potholes, particularly weather, this situation is addressed by clause 60.1(13) which protects both parties, unlike clause 60.1(11), and does allow adjustment of the Lump Sum price, contrary to Atkin’s submission.
6.5 On the case advanced by Atkins, there is no clear basis upon which it can be known when the compensation event has arisen. The contractor is required to give notice under clause 61 of the “event” within eight weeks. That event must be the first pothole to occur after the notional number or volume of potholes to be anticipated by the experienced contractor had been exceeded: every pothole thereafter would require notice and would require the compensation event procedure, including provision of a quotation, to be operated. This would be unworkable and cannot have been intended…
Consideration of Issues
7.9 Turning to issue (ii), the question is whether a “volume of defects” or “a number of defects” can, purely by virtue of its volume or number, constitute a “defect” within the meaning of sub-clause (11). In this case Atkins necessarily accept that a number or volume of defects up to the limit contended for (which has not otherwise been defined or described in any version of Atkins’ case) does not comprise a defect within the clause. Furthermore, while the “excess” volume or number is said to constitute the “defect” within sub-clause (11), it is clear that this volume or number will or may consist of an indeterminate number of individual potholes (the separate causes of which are immaterial) distributed anywhere across the network and being encountered over an indeterminate period of time.
7.10 Plainly the foregoing description creates a host of practical problems as compared to the well understood process of notifying and pursuing a claim in respect of one discrete defect occurring at a particular place and a particular time. It was pointed out in argument that the parties had considered ways in which these procedural difficulties could be regulated and brought under control. I have no doubt that engineers on both sides would readily contrive some system to bring order and might well agree on a numerical basis from which to assess the “excess” number or volume of potholes being present over a given period or area. Such rationalisation, however, is not in point as regards the essential question whether an excess number or volume can constitute a defect falling within the wording of sub-clause (11) as properly interpreted…
7.12 In the Arbitration the Authority, through Mr Lewis, has restated its opposition to this part of the Adjudicator’s decision. The Authority relies in part on its interpretation of the words “being present”, which I have not construed in the manner contended for by the Authority. However reliance is also placed on the proper meaning of the word “defect” (singular) and on the practical difficulties involved in determining whether and when the “event” relied on under sub-clause (11) can be said to occur. Mr Lewis placed particular emphasis, rightly in my view, on the extensive notice provisions under the Contract requiring not only notice of the occurrence of the event to which the Service Manager is required to respond, but discussions between the Provider and the Service Manager which may involve submitting quotations in order to determine how the notified defect is to be dealt with.
7.13 …submitted that difficulties of giving notice and of complying with other related provisions under the Terms of Contract could not affect the construction of sub-clause (11) itself. While this submission has some force, it cannot be accepted as rendering these associated provisions irrelevant. They are, of course, part of the same contract and each of the terms is to be construed having regard to the whole. The immediate point, however, is that, in practical terms, the “defect” being contended for by Atkins is bound to lead to a dispute as to whether the notice provision has been complied with. It also gives rise to the question whether these provisions are capable of being complied with. The notice provision is not a mere formality since Clause 61.3 expressly provides that:
If the Provider does not notify a compensation event within 8 weeks of becoming aware of the event, he is not entitled to a change in the prices unless the service manager should have notified the event to the Provider but did not.
7.14 There are other requirements for the Provider to submit his quotation for dealing with a compensation event within 3 weeks of the event being notified or such other period as the Service Manager may agree. Given the circumstances outlined above, of the relevant events occurring at widely spaced locations and at different times, it is inevitable that the parties would be forced into a rationalisation amounting virtually to re-writing of the Contract to accommodate such a compensation event, particularly bearing in mind the inevitability of a major argument as to what constitutes a “reasonable allowance”, whether for volume or numbers of defects. It is in this sense that the provisions as to notice and requirements for quotations are, in my view, relevant to the question whether the claim as asserted by Atkins falls within the wording of sub-clause (11)…
7.17 Returning to the main issue of construction, the question is whether the claim that Atkins wish to pursue can properly fall within sub-clause (11). This is ultimately a matter of construction of the words of the sub-clause. Starting with the last three lines of the printed clause, it can certainly be said that an excess number of potholes over and above that “for which it would have been reasonable to have allowed” may fall within these words which are, however, intended to limit the claim which can be made. In other words the Contractor cannot claim in respect of physical conditions which it would have been reasonable to allow for. Only the difference can form the basis of the claim. However, the claim must comply with the whole clause and with what is to be taken as the intention to be derived from the words used.
7.18 Before turning to this, it may be noted that the last three printed lines do not use the word “defect” and refer only to “physical conditions”. It is the opening words of sub-clause (11) that refer to “a defect in the physical condition of the area network …”. As noted, “defect” is in the singular, suggestive of an occurrence of isolated or limited extent. In response to this argument, Mr…contended that the occurrence of “rock”, being a typical ground of a claim for unforeseen conditions, was likely to occur in different locations. While that may be so, it does not follow that each occurrence or group of occurrences of rock are not to be treated as an individual “defect” to which notice provisions and other requirements of the Contract would apply individually. It can readily be accepted that the use of “defect” in the singular is not conclusive, but it is at least a pointer to the intention of the clause.
7.19 While the argument is centred on the fourth bullet point for the purpose of the “unforeseen defects” claim, it is relevant to consider all the bullet points. With regards the first it can be said that defect is assumed to be of such a nature as to be capable of being revealed by the Network Information or other publicly available information. Likewise as regards the second bullet point, a defect is something which may or may not be evidenced from visual inspection or routine survey of the contract date. Thirdly, a defect is something which may or may not be capable of discovery acting with reasonable diligence prior to the date of the Contract. Putting those three bullet points together, it can be said they contemplate something with a physical existence which may or may not be capable of being foreseen from the material available at the Contract date.
7.20 Finally, the fourth bullet point requires the defect, in the judgment of a hypothetical experienced contractor or consultant at the Contract date “to have such a small chance of being present that it would have been unreasonable for him to have allowed for it”. It is necessary here to note that the test is not, as the Adjudicator appears to have read the clause “whether it would have been unreasonable to allow for the defects”, but whether the relevant judgment was such that it would have been unreasonable to have allowed for the defect at all because there was “such a small chance of [its] being present”.
7.21 Correctly read, the fourth bullet point alone, in my view, makes it extremely difficult to bring Atkins’ claim within the words. For there to be any such claim, Atkins accept that they must be deemed to have allowed for a volume or number of defects which are within the hypothetical limit. To describe the excess volume or number as an occurrence with “such a small chance of being present that it would have been unreasonable … to have allowed for it” would surely be a misuse of words. What Atkins are saying, as apparently reflected in the Adjudicator’s decision, is that it was reasonable to allow for a certain volume of potholes within their price. That may well be so, but it does not follow that any additional volume or number of potholes can fall within sub-clause (11).
7.22 The effect of Atkins’ contention is not only, as the Authority contends, to breach the lump sum provision, but to turn the Contract into a re-measure provision by which, after some notional but unstated limit, the Contractor would be entitled to claim payment progressively as further potholes were encountered. Whether this would operate during the whole period of the Contract, so that the hypothetical allowance would have to be wholly expended before any payment became due, or whether it would operate on an annual basis, or whether it would operate on an area basis, are questions which have not been addressed. In my view they add further layers of complexity which have no place within the terms of sub-clause (11) and further militate against the interpretation contended for by Atkins.
7.23 The difficulties of bringing the claim within the words of sub-clause (11) as discussion above, are sufficient to reject Atkins’ claim on balance. However, when coupled with the difficulties involved in complying with the notice provisions and other measures aimed at dealing with compensation events, the case against Atkins’ contentions becomes overwhelming. In my view, the claim to be brought by Atkins cannot, on a fair and objective reading of the words, be brought within sub-clause (11). Issue (ii) is therefore to be resolved in favour of the Authority.
8. Disposition
8.1 For the reasons set forth above I find and declare that:
(i) The reference to “being present” in the fourth bullet point of clause 60.1(11) is a reference to a defect being present at any time during the contract period.
(ii) An excess volume of potholes beyond what it was reasonable to allow in the Contract is not capable of constituting “a defect in the physical condition of the area network” under Clause 60.1(11) of the Contract…” [Emphasis added]
Section 68 of the Arbitration Act 1996 provides as follows:
“68 Challenging the award: serious irregularity.
(1) A party to arbitral proceedings may (upon notice to the other parties and to the tribunal) apply to the court challenging an award in the proceedings on the ground of serious irregularity affecting the tribunal, the proceedings or the award.
A party may lose the right to object (see section 73) and the right to apply is subject to the restrictions in section 70(2) and (3).
(2) Serious irregularity means an irregularity of one or more of the following kinds which the court considers has caused or will cause substantial injustice to the applicant— ….
(d) failure by the tribunal to deal with all the issues that were put to it;…”.
The Court considered amongst other things, the fourth requirement in Clause 60.1(11) of the amended NEC3 Contract which stated that:
“The Provider encounters a defect in the physical condition of the Area Network which…
• an experienced contractor or consultant would have judged at the Contract Date to have such a small chance of being present that it would have been unreasonable for him to have allowed for it.”
In considering the fourth requirement, the Court was of the view that there was nothing in the language which expressly suggests that the number of defects is a key or important element in the Compensation Event equation and furthermore, this requirement made it extremely difficult to conclude that an excess number of potholes over and above a reasonable maximum number which could be considered to have been allowed for can form the basis for establishing that the encountering of one or more potholes above that number as one or more Compensation Events.
The Court agreed with the Arbitrator’s observation that to “describe the excess volume or number as an occurrence with ‘such a small chance of being present that it would have been unreasonable…to have allowed for it’” is “a misuse of words”. The Court did not consider that there was any commercial logic or common sense in defining Clause 60.1(11) as enabling the volume of individual defects to be part of the equation. The Court pointed out that:
“…the concentration in the sub-clause is on “a defect in the physical condition” (a pothole in this instance) which would objectively be judged initially as having had such a small chance of being present that it would not reasonably have been allowed for within the pricing. There is of course something on which this fourth requirement can bite which is the cause and origin of the pothole in question. If for example the potholing is caused by exploding army ordnance, by a wholly unforeseeable deterioration of the carriageway attributable to design, materials selection or construction defects in the original road construction taken over by Atkins, by deterioration in the carriageway caused by unforeseeably bad or unseasonable weather which the carriageway was never designed or expected to cope with or by the failure of statutory undertakers’ piping under or near the roads, it may well be that, subject to the other three requirements being met and to the evidence, the fourth requirement may also be met. It would then follow that the foreseeable number of potholes overall or on different sections of the roads in question is immaterial and the fact that substantially less potholes are encountered than reasonably envisaged at February 2008 would not prevent recovery for dealing with potholes caused by factors which are not excluded by the four bullet point requirements…”.
The Court also noted that no practical example of defects qualifying under Clause 60.1(11) was given to the Adjudicator by the Defendant in argument which is unfortunate because there are ready examples such as those set out above by the Court. The Court further pointed out that commercially the amended NEC3 Contract was broadly a lump sum contract as opposed to a re-measurement contract and therefore the parties took the risk that the defects to be addressed could be more or less in number and in terms of expense than the contract lump sums may have allowed for. In those circumstances, the Defendant could end up paying much more than it might have done through the lump sum if the defects turn out to be a lot less than the lump sum may have allowed and conversely, the Claimant would then make additional and non anticipated profit. Alternatively the Defendant may end up paying less if the defects to be addressed turned out to be more in number and therefore the Claimant would make less profit and incur more cost than it had anticipated. The Court stated amongst things that there was nothing commercially unfair or indeed unusual in the parties taking these sorts of risk, otherwise the Claimant’s position would be that there is no commercial risk and indeed there is only what some will call a “win/win” situation in that the Claimant keeps the whole of the lump sum if the number of potholes is less than reasonably anticipated, but it almost automatically gets additional payments if that number exceeds what is reasonably anticipated.
In conclusion the Court stated amongst other things that:
“…I consider that it is very important that, where the Court is asked to conduct an exercise to determine whether or not in reality and substance an arbitrator has failed to deal with all the issues put to it within the meaning of Section 68(2) (d), the Court is not required to carry out a hypercritical or excessively syntactical analysis of what the arbitrator has written. This is particularly so where the arbitrator in question is not only eminent and highly respected in his field but also has immense legal experience in the relevant field of law concerned. In a clear and obvious case, of course the Court will find that the ground exists and can then move on to consider whether or not the circumstances merit interfering with the award…
It may be helpful if I approach the serious irregularity point from the reverse. The Court can only intervene under Section 68 in respect of any established irregularity “as has caused or will cause substantial injustice”. For the reasons given above, I do not consider that in the result the arbitrator was wrong in his overall reasoning and conclusion or that Atkins is right in its assertion as to what the Contract means. It follows that there is no substantial injustice even if an irregularity was established…”.
It should be clear from the earlier parts of this judgment that I do not consider that the arbitrator was wrong. So far as permission to appeal is concerned, even less so do I consider that it could be said that he was “obviously wrong”. There was, rightly, no real argument that the determination of the point in issue would substantially affect the rights of the parties and that the question was one which the arbitrator was asked to determine and, therefore, the threshold criteria set out in sub-sections 69(3)(a) and (b) of the Act are satisfied.
It becomes in one sense a technicality as to whether I give permission to appeal or not because I have felt it necessary to answer the issue as a matter of construction for the purpose of determining the application under Section 68. But for that application, I would have found that the question of law, that is the construction of Clause 61.1(11), did raise a question of “general public importance” because the Contract is not a one-off contract, it is widely used throughout the country, it incorporates the NEC3 conditions albeit somewhat amended…”. [Emphasis added]
Conclusion
In summary, it follows from the above that the Court dismissed the claims made by the Claimant under sections 68 and 69 of the Arbitration Act 1996. The court’s view was that potholes fell within the definition of defects and were therefore capable of giving rise to a compensation event, but nevertheless, the was nothing in the language of Clause 60.1(11) which expressly suggested that the number of defects was a fundamental element in the compensation event equation and there was no commercial logic or common sense to in defining Clause 60.1(11) as enabling the volume of individual defects to be part of the equation.
The above is for general information only and to encourage discussion and does not constitute legal advice. The author does not assume any responsibility for the accuracy of any statements made and appropriate legal advice should be taken and relied upon before taking or omitting to take any action in respect of any specific matter. If the facts and matters referred to above are relevant to you or your organisation, then please do not hesitate to contact me in chambers to see how I can assist you or your organisation.
Charles Edwin Edwards MSt(Cantab) MSc(Lond) FCInstCES Barrister
(Head of Chambers)
Gray’s Inn Construction Chambers
60 Gray’s Inn Road
London
WC1X 8AQ
