Ensure your contracts reflect your intention - say what you mean (and what might happen if you don't)

15 July 2019

The decision in Network Rail Infrastructure Ltd v ABC Electrification Ltd [2019] is a clear example of the courts' approach to contractual interpretation, focusing primarily on one clause of the contract.

We review this judgment and highlight the key points.



Background

The arguments

Network Rail argued that language of the Definition Clause was plain and obvious - the word "default" meant any failure by ABC to comply with its obligations under the Contract.

ABC's position was that it could not have been the parties' intention at the time of entering into the Contract that any cost incurred by ABC as a result of any failure to fulfil its contractual obligations should fall within the Disallowed Cost.

After several clarifications, by the time of the hearing, ABC's position was that in order to constitute a "default" within the definition of Disallowed Cost it would have to constitute "a wilful and deliberate failure to comply with [the] obligations under the Contract".

TCC Decision

In short, Network Rail was successful in obtaining the declarations sought.

Miss Joanna Smith QC sitting as a Deputy Judge of the High Court held that Disallowed Cost in the Definition Clause includes any cost due to any failure by ABC to comply with its obligations under the Contract.

In accordance with the principles of construction set out by the Supreme Court in earlier decisions, the word 'default' in the Definition Clause carries its natural and ordinary meaning, not the "restrictive and narrow meaning" contended for by ABC.

Key considerations

  • In 2012, Network Rail entered into a contract with Costain Ltd to carry out works on the West Coast Main Line using the ICE Conditions of Contract, Target Cost version, First Edition, amended by Network Rail's standard amendments known as NR12 (the Contract).
  • In 2014, the Contract was novated from Costain to ABC Electrification Ltd (a joint venture between Alstom Transport UK Holding Ltd, Babcock Rail Ltd and Costain Ltd). A later Deed of Variation varied the works to be carried out by ABC.
  • The Contract provided for payment to ABC based in part on the Total Cost incurred by ABC less any Disallowed Cost, both being defined terms.
    Clause 1(1)(j)(iii) (the Definition Clause) provided as set out below. The words in bold were inserted by the NR12 amendments.
    'Disallowed Cost means: 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'. [emphasis added]
  • A dispute arose relating to payment due (or not due) to ABC and in these proceedings, in the Technology and Construction Court (TCC), Network Rail sought declarations as to the meaning of Disallowed Cost and the meaning of the word "default" within the Definition Clause.
  • In the Court's view, the language of the Definition Clause was "clear and unambiguous".
  • To conclude (as contended by ABC) that "default" in the Definition Clause had a narrower meaning i.e. limited to a "wilful and deliberate" failure to fulfil a legal obligation "would only usually be achieved by the addition of extra words. There are no additional words in [the Definition Clause]…or anywhere else in the Contract, to indicate that this is what the parties to the Contract really meant by the word 'default'."
  • The TCC did not accept that a heading to one clause can be used as a guide to the construction of a different clause, where the parties agreed in the Contract (as here) that headings are not to be taken into account in the interpretation of the Contract.
  • ABC argued that if "default" in the Definition Clause covered any failure to fulfil an obligation under the Contract, other clauses would be rendered otiose.
    The TCC however accepted Network Rail's submissions, which included that "default" had been added by the NR12 amendments, and that where amends are made to standard contract wording, it is always possible that those amends may make another part of the contract redundant. Even if that were the case, it was not a sufficient reason for the use of an "unnatural construction" of other wording.
  • There was no clear indication from other provisions in the Contract that "default" in the Definition Clause should carry a special meaning; additionally, there were no additional words "designed to restrict the ordinary and natural meaning of 'default'".
  • ABC contended that the fact that the Contract was a Target Cost Contract supported its interpretation of the Definition Clause arguing that Network Rail's interpretation would negate the pain/gain mechanism. The TCC did not accept that nature of the Contract meant that "default" in the Definition Clause must carry something other than its natural meaning.
  • ABC sought to argue that its interpretation was a matter of commercial common sense. The TCC did not accept this - it is clear from previous case law that where the parties have used language that is clear and unambiguous, it must be applied by the court, even if this works out badly for one party.

Commentary

As highlighted in our article on the key principles of contractual interpretation, the first and overarching principle is that words used in a contract will be given their natural and ordinary meaning. The decision in Network Rail Infrastructure v ABC Electrification emphasises this approach by the courts once again.

At the contract formation stage, ensure that the wording does actually reflect your intentions, and that you are certain about what you do intend - failing to do this can have costly consequences. Where bespoke amendments are being made to standard form contracts, ascertain the effect of these amends on the retained standard wording.

In short, keep in mind that where contractual interpretation is in dispute, the starting point will always be a straightforward and objective reading of the actual words of the contract - say what you mean, as you are likely to be held to what you say.

If you have any queries, contact Ashley Pigott.


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