The Background

Imagine millions of pounds relying on an interpretation of a single word. A single word to determine the meaning of a contract’s clauses and the placement of liabilities. This is exactly what happened between Network Rail Infrastructure Limited (“Network Rail”) and ABC Electrification Ltd (“ABC”), an incorporated joint venture between Alstom Transport UK Holding Limited, Babcock Rail Limited and Costain Limited (“Costain”). Network Rail, as the Claimant, was seeking declarations in Part 8 proceedings as to the interpretation of the contract.

In 2012, Network Rail originally entered into an agreement with Costain to carry out works for Phase 3B of the West Coast Power Supply Upgrade Project. Phase 3B involved a section of the West Coast Main Line running between Whitmore in Staffordshire and Great Strickland in Cumbria. The Agreement incorporated the terms of the ICE Conditions of Contract, Target Cost version, First Edition subject to a schedule of standard amendments used by Network Rail known as NR12. In March 2014, this Agreement was novated from Costain to ABC by way of a Deed of Novation. Further, a Deed of Variation was executed by ABC and Network Rail which varied the works to also include works within Phase 3A.

The Issue

The dispute centred around the definition of Disallowed Cost and in particular the meaning of the word ‘default’ which was included within the definition as set out in clause 1(1)(j)(iii) of the contract, which stated: “any cost due to negligence or default on the part of the Contractor in his compliance with any of his obligations under the Contract and/or due to any negligence or default on the part of the Contractor’s employees, agents, sub-contractors or suppliers in their compliance with any of their respective obligations under their contracts with the Contractor”.

The contract was a Target Cost contract and the difference between the Total Cost less any Disallowed Cost and the Target Cost would be split between the two parties. The project was significantly delayed and the costs increased. The effect of the declarations sought by Network Rail crystallises the amount of Disallowed Cost that can be deducted under the contract if the delays and additional costs were the result of ABC’s ‘default’. It will still be necessary to determine which party is ultimately responsible for the delays and associated costs.

The Arguments

• Network Rail argued that ‘default’ was to have its original and natural meaning here and “the ordinary meaning of the word ‘default’ is, or includes… a failure to fulfil a legal requirement or obligation.” [1] Through this definition, any cost incurred due to ABC’s failure to comply with its obligations under the contractis Disallowed Cost. In Network Rail’s argument, ABC’s failure to comply with obligations under the contract would include:
• (a) any failure by ABC to start the Works on or as soon as reasonably practicable after the Works Commencement Date and/or thereafter to proceed with the works with due expedition, contrary to clause 41(2);
• (b) any failure by ABC to substantially complete the works within the stated time for completion (or such extended time as may be allowed under clause 44 or revised time agreed under clause 46(3)) calculated from the Works Commencement Date, contrary to clause 43. ABC’s argument changed over time but ultimately, ABC accepted the above position but contended “that the word ‘default’ was intended to carry a narrower meaning.” [2] ABC considered that the definition of ‘default’ was in relation to a wilful and deliberate failure to comply with their contractual obligations.

The case considered multiple different clauses within the contract which contained the word “default” and the application of commercial common sense. None of the analyses undertaken supported the arguments of ABC.

The Outcome

The TCC favoured Network Rail’s interpretation of ‘default’ to be a failure to fulfil a legal requirement or obligation and granted the declarations sought by Network Rail in full. There was no valid reason to consider that ‘default’ was specific to wilfulness and deliberately breaking obligations within the contract as argued by ABC. If ABC was correct, it would be safe to assume the clause would be much more descriptive with additional wording used in order to express this specificity. Unfortunately for ABC, the TCC’s decision in relation to the definition of this one word leaves ABC exposed to Disallowed Cost of £13 million. This case may come as a surprise to Contractors who would most likely consider the clients contractual remedy for delay by contractors is liquidated and ascertained damages and that being able to disallow costs for default associated with Contractors delay was not the commercial bargain. Contractors need to be aware that whilst this contract had been amended by Network Rail to be specific about contractor default, there are other standard cost based contracts where the same situation could be implied. It would be advisable for Contractors to add this issue to their contract check lists and seek specialist advice if there is any doubt. Contractors are advised to carefully review their contracts and contract amendments to ensure that the commercial bargain is properly reflected.

References

[1]Network Rail Infrastructure Ltd v ABC Electrification Ltd [2019] EWHC 1769 (TCC) at [14]

[2]Ibid at [19]