ABC Electrification Ltd v Network Rail Infrastructure Ltd
| Jurisdiction | England & Wales |
| Judge | Lady Justice Carr DBE,Lord Justice Males,Lord Justice Coulson |
| Judgment Date | 04 December 2020 |
| Neutral Citation | [2020] EWCA Civ 1645 |
| Docket Number | Case No: A1/2019/1792 |
| Court | Court of Appeal (Civil Division) |
| Date | 04 December 2020 |
[2020] EWCA Civ 1645
Lord Justice Coulson
Lord Justice Males
and
Lady Justice Carr DBE
Case No: A1/2019/1792
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT
Miss Joanna Smith QC (sitting as a Deputy High Court Judge)
HT-2019-000047
Royal Courts of Justice
Strand, London, WC2A 2LL
Marcus Taverner QC and William Webb (instructed by Trowers & Hamlins LLP) for the Appellant
Piers Stansfield QC (instructed by Eversheds Sutherland (International) LLP) for the Respondent
Hearing date: 25 November 2020
Approved Judgment
Introduction
This appeal concerns the proper construction of a Target Cost Contract based upon the standard Institute of Civil Engineers Conditions of Contract, Target Cost Version, First Edition (“the ICE Conditions”) and subject to standard amendments commonly used in the rail industry, namely standard amendments used by Network Rail Infrastructure Limited (“Network Rail”) and known as “Network Rail 12” (“the NR 12 Amendments”). Specifically, the appeal concerns the proper interpretation of the word “default” as it appears in the wider definition of the term “Disallowed Cost”.
In February 2019 Network Rail brought proceedings under CPR Part 8 against ABC Electrification Limited (“ABC”) for declaratory relief. By order dated 5 July 2019 Miss Joanna Smith QC (sitting as a Deputy High Court Judge) (“the Judge”) granted judgment in favour of Network Rail and the following declaratory relief:
“(1) The defined term ‘Disallowed Cost’ in the Contract (as more particularly defined in the Judgment) includes any cost due to a failure by [ABC] to comply with its obligations under the Contract;
(2) A cost incurred due to a failure by [ABC] to comply with the terms of the Contract including the following is a Disallowed Cost:
(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) of the Contract;
(b) Any failure by the Defendant to substantially complete the [W]orks within the time stated 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 of the Contract.”
(“the Order”)
ABC is entitled to payment by Network Rail based in part on the “Total Cost” (defined so as to exclude, amongst other things, Disallowed Cost). ABC has not completed the contract works in accordance with the contractual timetable. Network Rail has categorised costs amounting to some £13.43 million as Disallowed Cost on the basis that this sum was incurred due to ABC's breaches in failing to complete with due expedition, without delay and by the time for completion. If Network Rail's assessment is correct, the practical effect of the Order is therefore that Network Rail is not liable to pay ABC that sum.
ABC appeals against the Order (and judgment below) on the basis that the Judge erred in law: she ought to have found that, on a proper construction, a cost is only to be treated as a “Disallowed Cost” if there has been an element of fault on the part of the contractor “in the sense of blame or culpability” (as opposed to a breach of contract for which there has been no such blame or culpability). It seeks to vary the Order so as to read that:
“…the word “default” as it appears in the defined term “Disallowed Cost” in the Contract connotes fault in the sense of blame or culpable behaviour on the part of the Contractor in compliance with any of his obligations under the Contract.”
As ABC fairly recognises, this proposition is a materially modified version of the (more extreme) construction advanced below, namely that a cost was only to be treated as a “Disallowed Cost” if there had been “wilful” or “deliberate” conduct on the part of the contractor. That construction is no longer relied upon. There is no challenge on appeal to the granting of declaratory relief consequent upon the ruling on construction in principle, although that was resisted by ABC below.
As indicated, the use of the ICE Conditions as amended by the NR 12 Amendments is widespread in the rail sector. It is one of the most widely used forms of contract within Network Rail's suite of contracts. The outcome of this appeal is therefore significant for many contractors operating in the railway engineering industry.
To assist resolution of the issue, the court has had the benefit of written and oral submissions from Mr Marcus Taverner QC and William Webb for ABC, neither of whom appeared below, and Piers Stansfield QC for Network Rail (who did appear below).
The Contract
ABC is an incorporated joint venture between Alstom Transport UK Holdings Limited, Babcock Rail Limited and Costain Limited (“Costain”). By a contract dated 20 December 2012 Network Rail engaged Costain to carry out works for Phase 3B of the West Coast Power Supply Upgrade Project Phase 3 (“the WCPSUP”). Phase 3B involved works to a section of the West Coast Main Line running between Whitmore in Staffordshire and Great Strickland in Cumbria. The contract incorporated the ICE Conditions subject to the NR 12 Amendments.
By a deed of novation dated 31 March 2014 the contract was novated by Costain to ABC. By a deed of variation executed by ABC on 22 September 2014 and by Network Rail on 19 January 2015 the works were varied so as to include works within Phase 3A of the WCPSUP, involving a section of the West Coast Main Line running between North Wembley and Whitmore (“the Deed of Variation”).
I refer in this judgment to the contract as novated and varied as “the Contract”. References to “the Works” are references to the Phase 3A and 3B works that ABC was contracted to perform under the Contract.
The definition of Disallowed Cost
As indicated, the Contract was a Target Cost Contract. Thus ABC is entitled to payment based on the costs of the works carried out, rather than on the basis of any pre-agreed lump sum price or unit rates. Specifically, ABC is to be paid the following sums:
i) The Total Cost (see Clause 60(1)(a));
ii) Incentive Payments (if any) (see Clause 60(2)(a);
iii) The Fee, broadly intended to cover head office overheads and profit (see Clause 60(3));
iv) The Contractor's Share arising from what is described as the pain/gain share mechanism (see Clause 60(5)).
“Total Cost” is defined in Clause 1(1)(x) of the Contract as follows:
““Total Cost” means all cost (excluding Disallowed Cost and items covered by the Fee) incurred by the Contractor for the carrying out of the Works ascertained in accordance with the Appendix — Part 4.”
There is no limit on the amount of Total Cost. Instead, pursuant to Clause 60(5), the Total Cost falls to be measured against the Target Cost. Broadly speaking, if the Total Cost is lower than the Target Cost, ABC is entitled to be paid a “gain share”; if the Total Cost is higher than the Target Cost, ABC is required to pay a “pain share” (at varying levels depending on the applicable differential percentage band).
“Disallowed Cost” is defined in Clause 1(1)(j), which is central for present purposes:
““Disallowed Cost” means
(i) the cost of work of repair amendment reconstruction and rectification or making good defects where such work is carried out to parts of the Works supplied or carried out by sub-contractors and is required under the terms of the sub-contract to be at the sub-contractor's expense
(ii) the cost of repair amendment reconstruction rectification and making good defects after the date of substantial completion which in the opinion of the Engineer is necessary solely due to the use of materials or workmanship not in accordance with the Contract
(iii) 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 compliance with any of their respective obligations under their Contracts with the Contractor
(iv) any cost which cannot reasonably be justified by the Contractor's accounts and records
(v) the cost of plant materials equipment and resources not used in carrying out or providing the Works
(vi) any such cost identified in the Contract as a disallowed cost or as part of the Fee or which does not form part of the Total Cost and
(vii) any cost which was not properly and necessarily incurred in carrying out or providing the Works.”
The words in bold above were introduced pursuant to the NR 12 Amendments.
The judgment below
In summary, the Judge held that, applying the relevant principles of construction, the word “default” in Clause 1(1)(j)(iii) carried its natural and ordinary meaning:
i) The language of the clause is clear and unambiguous. A meaning of “wilful and deliberate” failure would only usually be achieved by the addition of extra words. The concept of default in Clause 65, a termination provision, did not support such a construction, any more than did the use of the word “default” in Clauses 39 and 43A(4);
ii) There was no proper basis for concluding that the parties must have intended the word “default” in the clause to carry a different meaning from its natural and ordinary meaning by reference to its context or the background of the Contract...
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