The Secretary of State for the Home Department v Raytheon Systems Ltd

Given confidentiality considerations and the fact that the application under review is made under the Arbitration Act 1996 and relates to a confidential arbitration, I initially ordered that the identities of the parties were not to be disclosed (subject to any application otherwise), they being referred to as Y and Z. I sought therefore to be as circumspect as is appropriate in the drafting of this judgment. Since the handing down of this judgment on 19 December 2014, the parties later agreed that this judgment can be handed down publicly. I will still below refer to the Claimant as “Y” and the Defendant as “Z”. HS means the Home Secretary

Z was employed by Y under a contract (“the Agreement”) made some years ago to design, develop and deliver very substantial technology systems. The likely value of the Agreement was a high nine figure sum, if not more. The Contract was purportedly terminated in July 2010 by Y. Issues arose relating to the responsibility for such termination and Y instituted arbitration proceedings with the arbitrators being English and American (nominated by Y and Z respectively) and the chairman being Canadian. The arbitrators produced their lengthy Partial Final Award on 4 August 2014, albeit corrected by memorandums dated 18 August and 29 September 2014. In broad terms that Award decided that Y had unlawfully terminated the Agreement, dismissing Y’s money claims, that Y had repudiated the Agreement and that Z had accepted that repudiation. The arbitrators awarded damages to Z which included £126,013,801 for what was known as claim A4 - Transfer of Assets. Other sums awarded totalled £59,581,658 plus some interest.

Y seeks to have the Partial Award set aside and declared to be of no effect. Y relies on Section 68(2)(d) of the Arbitration Act 1996 on the grounds of "serious irregularity" affecting the tribunal or the award on the basis of “failure by the tribunal to deal with all the issues that were put to it”, those issues relating to what Y articulates as important parts of its case on liability and on quantum in relation to Claim A4. These relate to two associated issues on liability and three on quantum. In broad terms, the tribunal’s failure in relation to liability is said to have been to disregard key parts of Y’s case in relation to contractual default by proceeding only to address whether there was breach by Y of a condition precedent in the termination clause and in relation to quantum to ignore Y’s case on the value of assets transferred after termination and on the need for any cost basis of evaluation to exclude costs which were attributable to default on the part of Z.

The parties have provided the Court with some 3,400 pages of documentation as well as 42 legal authorities. The prose parts of the witness statements run to 137 pages and of the skeleton arguments to 155 pages. The law and practice is largely agreed, albeit that there are some minor variants, upon which the case will probably not depend. Apart from the award, I have been referred in argument to no more than about 200 pages of the exhibits to the statements. Whilst one understands the potential impact of an application such as this succeeding or not and the desire of parties to leave no actual or imagined stones unturned, there should be a great appreciation of the need to limit the material for such an application and its defence to what is really and positively relevant, particularly where the parties are before a specialist court which has specific experience of the type of contract with which the application is concerned.

It is unnecessary for the Court to make any findings as to what the contract means. However, it is necessary to refer to a number of the terms to put the arbitrators’ approach and findings into context. Clause 11 required Z to provide the specified Services in accordance with the Agreement provisions, including the "Service Requirements", "Standards", "Good Industry Practice" and the "Quality Plans". Provision was made by Clause 12 for "Additional Services" to be called for and provided. Clauses 23 to 26 addressed delays in implementation.

Clause 23.1 required Z to "ensure that, in the design, development and implementation of the System and the delivery of the Services, each Milestone is Achieved or more before its associated Milestone Date". These Milestone Dates were identified in Schedule 2.1 Part G, Schedule 6.1 and the "Service Provider Implementation Plan". Clause 23.2 provided that Z was to notify Y "as soon as reasonably practicable" if "the design, development, testing or implementation of the System or the delivery of the Services…does not conform with the Implementation Plans and may cause Delay to", amongst other things, achieving "any Milestone by its associated Milestone Date". Within 10 days of becoming aware of such actual or potential delays, the parties were to "comply with the Remedial Plan Process to rectify any Delay" (Clause 23.3). Clause 23.4 provided that Z "shall have no claim…for any Compensation as a result of any Delay, to the extent that it is not the result of a Compensation Event”. Where the Delay arises due to a Compensation Event the provisions in Clause 25.2 were to apply. Clause 24 dealt with delays in implementation attributable to Z’s default; thus, by Clause 24.1 if any Milestone was not achieved by the requisite date, Y was to issue a Non- Conformance Report. Clause 24.2 provided for Delay Deductions as set out in Schedule 7.1 to be made for the period of culpable delay, such "Deductions" in effect being a form of liquidated damages. Clause 25 provided for delays in achieving Milestone Dates as a result of, amongst other things, an Authority Cause (defined as "any material breach" by Y, albeit that Schedule 1 - Definitions qualifies that somewhat). Without making any legal finding, it is however at least highly arguable that the provisions of Clause 25 provide for conditions precedent which required Z to give effective and timely Compensation Notices, failing which it was not to "be entitled to any Compensation or relief in respect of the Compensation Event concerned” (Clause 25.2.5). Clause 26.1 provided that where a "Delay arises from an event other than a Force Majeure Event, Compensation Event or Relief Event, the Service Provider shall be responsible for such a Delay". Clause 57.3 also required Z to give Y an "OS Relief/Compensation Notice" within 10 days of it becoming aware that a Relief Event (such as fire, explosion or strike) or Authority Cause had "adversely affected or [was] likely to adversely affect the ability of [Z] to observe and/or perform its other obligations”; if such a Notice was not provided within the requisite time-frame then Z “ shall not be entitled to any relief…in respect of the Authority Causes…” (Clause 57.3.8).

Payment to Z was governed largely by Schedule 7.1 and Annexes thereto. Although there were various phase payments, substantial payments were only payable upon achieving the various milestones. It was common ground that, at least up to the stages which had been reached by the time of termination, Z’s financial entitlements were such that its costs would significantly exceed such entitlements.

Clause 69 addresses termination rights and is probably the key clause at least so far as this application is concerned. Clause 69.1 is, so far as is material, in the following terms:

“69.1

This Clause 69.1 sets out the rights of [Y] to terminate this Agreement for cause.

69.1.1

[Y] may terminate this Agreement by giving a Termination Notice to [Z] if one or more of the circumstances set out in Clause 69.1.2 exist, each being a Default. Such Termination Notice shall specify the Default and specify whether [Y], in accordance with paragraph 2.15 of Schedule 7.1 (Charges and Invoicing), wishes to exercise its rights to recover all or part of the Clawback Eligible Payments as described in paragraph 2.15.1 of Schedule 7.1 (Charges and Invoicing).

69.1.2

The circumstances giving rise to [Y’s] right to terminate in the event of Default are:

(a)

[Z] is in material Default which it has failed to remedy in accordance with the Remedial Plan Process;

(b)

[Z] commits a material Default of this Agreement which is irremediable;

(c)

[Z] commits repeated Defaults (whether of the same or different obligations and regardless of whether those Defaults are remedied), which [Y] considers, in its reasonable opinion, collectively constitute a material Default, in which case Clause 69.1.2(a) or 69.1.2(b) shall apply;

(d)

[Z] has failed to Achieve a Key Milestone by the dates set out in the Implementation Plans or in accordance with any Remedial Plan which has been agreed under Schedule 8.9 (Remedial Plan Process), in which case Clause 69.1.2(a) shall apply…

(l)

any Programme Milestone is not Achieved within three (3) months of the scheduled date for the Achievement of the relevant Programme Milestone.

In determining whether to exercise any right of termination pursuant to this Clause 69.1.2 [Y] shall:

(i)

act in a reasonable and proportionate manner having regard to such matters as the gravity of any offence and the identity of the person committing it; and

(ii)

give all due consideration, where appropriate, to action other than termination of this Agreement."

I have underlined the last part of this clause and I will refer to this part of the Clause as the "Process Requirements". Clauses 69.2 to 69.4 provided for termination in other circumstances such as for convenience. Clause 69.5 provided for termination for a continuing Force Majeure Event or Relief Event.

Clause 74 provided as follows:

“74.1

The termination of this Agreement in accordance with Clause 69 or its expiry shall not affect the accrued rights of either Party.

74.2

Following the service of the Termination Notice, the Service Provider shall continue to provide the Services in accordance with the provisions of this Agreement up to and including the Exit Management Date.

74.3

Notwithstanding the termination of this Agreement for any reason, it shall continue in force to the extent necessary to give effect to those of its provisions which expressly or by implication have effect after termination."

Clause 75 provided for payments to be made on termination, there being cross-reference to Schedule 7.2 in respect thereof.

The Agreement provided for the transfer of "Assets" to Y following termination during what was called the Exit Management Period so that, presumably, Y could secure the benefit of whatever work had been done. Schedule 7.2 provided (Clause 1.5.1) that Y was to pay "the Unrecovered Costs less any Rectification Costs in respect of the Assets transferred." The term "Unrecovered Costs” was defined as being "as at the Termination Date, the costs that were forecast to be incurred by [Z] in the performance of this Agreement as detailed in the Reference Financial Model, to the extent that the same have actually been incurred (which shall be no greater than the level to which they were forecast and to be incurred in the Reference Financial Model) and which have not been recovered through the Charges or the Compensation Payment".

Extensive pleadings, witness statements and expert reports were exchanged. The hearing of the liability and quantum issues extended to 42 working days. There were lengthy opening and closing submissions in writing as well as oral presentations at the beginning and the end of the hearing.

The Partial Award ran to 267 pages of text with Annexes which included a Consolidated List of Issues prepared by the parties organised by subject matter and cross reference to the written closing submissions. The Introduction at Paragraph 5 indicated that the Agreement "imposed on [Z] a number of commercially burdensome terms" which it had agreed to accept, including the need to rely on former consortium partners who had originally bid together with Z but who had dropped out but who still remained involved with the work as well as dependence upon other stakeholders associated with Y, albeit not contracting parties. At Paragraph 7, the arbitrators explained that Z and Y "encountered differences and conflicting expectations” and these "difficulties never really abated and, in some respects, quickly grew to become major problems in the course of their ongoing dealings with one another, going on that the "interdependence between [Z] and the principal stakeholders required a high level of co-operation which in the end seldom occurred". These "contractual challenges and [Z’s] difficulties in meeting them ultimately led [Y] to terminate the Agreement, purportedly for cause, on 22 July 2010" (Paragraph 8). The arbitrators go on:

“11.

This is a complex dispute. The Agreement runs to 218 pages and cross-references nearly 60 lengthy formal and informal schedules, the "compressed" version of which fills three volumes. The parties’ pleadings, including Annexes, ran to almost 4000 pages. The tribunal received written witness statements from no fewer than 60 fact witnesses, often two and sometimes three per witness, and principal and reply expert reports from 8 expert witnesses, supplemented by joint reports from pairs of experts. The parties also delivered extensive written and oral opening and closing submissions. During the course of 8 weeks of hearing, the tribunal heard live testimony from over 50 of the factual witnesses and all 8 expert witnesses. In addition, there were several procedural hearings conducted before the final hearing, together with two days at the end devoted to oral closing argument.

12.

The evidence presented to the tribunal covered almost every aspect of the interactions between the parties over a period of more than three years. Despite its complexity, however, the many points in contention turn on three principal issues:

(a)

Was [Y’s] termination of the…Agreement lawful?

(b)

If the termination was lawful, what are the financial consequences of a lawful termination by [Y]?

(c)

If the termination was not lawful, what are the financial consequences of [Y’s] repudiation of the…Agreement?”

From Paragraphs 50 to 208, the tribunal presented its "Factual Overview". At Paragraphs 78 to 84, it considers and explains the "Gateway Mechanism" which was "to allow [Y] to monitor [Z’s] progress on the Programme" explaining that the “project was broken down into four stages known as Release Projects: RP1, RP2, RP3 and RP4” (Paragraph 78). Each Release Project was broken down into five distinct phases numbered ATP1 to ATP5 relating to “design, development, system testing, end-to-end testing and live operational testing” with the successful completion of each stage being “called a Milestone or Authority to Proceed" (Paragraph 81). The arbitrators then, in relatively broad historical terms, addressed what actually happened from the commencement of the project in 2007 with consideration of the RP1 ATP1 stage (Paragraphs 92 to 107), the RP2 ATP1 stage (Paragraphs 108 to 124), "Infrastructure and Subcontractor Issues" (Paragraphs 124 to 131), "CCN 35 and its Aftermath" referring to a Change Notice which varied the scope of RP1 amongst other things (Paragraphs 132 to 145), the "Notice of Material Default and the Remedial Plan Process" which addressed a Notice of Material Default issued by Y to Z in July 2009 relating to RP2 Milestones not being achieved and calling for Remedial Plans (Paragraphs 145 to 173), the "Reset Negotiations" which took place between February and early July 2010 and related to possible restructuring of the Agreement (Paragraphs 173 to 179), the impact of the General Election and "Steps Leading to Termination" between 12 May 2010 and 7 July 2010, when the decision to terminate was taken (Paragraphs 180 to 201) and, finally, the Termination Notice dated 22 July 2010 which also dealt with what happened following the Termination (Paragraphs 202 to 208). It is noteworthy that the arbitrators refrained in this part of the award from attributing responsibility or fault for the undoubted delays which appear to have occurred.

In Paragraphs 209 to 232, the arbitrators give a "high-level" summary of the parties’ primary positions. Y’s position was that it "acted lawfully terminating the Agreement following a long history of delays, failures in performance and incompetence on the part of [Z]" including failures to meet Milestone dates, to deliver or maintain Plans and to provide adequate Service Management and that it made efforts to maintain the Programme and to assist Z to remedy its alleged Defaults. Y’s assertion was that it acted in accordance with Clause 69.1.2 in particular it acted reasonably and proportionately having regard to the gravity of the offences and gave all due consideration to options other than termination of the Agreement. Z’s position was that the purported termination was a wrongful repudiation of the Agreement, asserting that there was no event of Default, that if any Default did occur it was caused by Y’s wrongdoing and that Y did not act in a reasonable and proportionate manner in deciding whether to terminate and did not give due consideration to action other than termination for cause. The arbitrators set out what Z alleged were Y’s failures said to have caused the Defaults to arise, including failures to manage the Programme or engage and manage the relationship with various other parties. They refer to Z’s allegations that Y did not consider termination for convenience, conclusion of the Reset negotiations or continuing the Agreement.

From Paragraphs 233 to 635, the arbitrators analysed that which they considered to be material. They refer to the Consolidated List of Issues appended to the Award saying (Paragraph 235)"that their analysis was "guided by the Consolidated List of Issues, keeping in mind the parties’ recognition that it may not be necessary for the tribunal to determine all of the issues that the parties have identified”. They went on at Paragraph 236 saying that in this (long) part of the Award they would examine "a number of preliminary issues, the outcome of which will define the scope of its further analysis of the specific points of contention between the parties." What then followed was a detailed analysis, in effect, of whether or not (what I have called) the Process Requirements of Clause 69.1.2 were complied with. They said that they would examine "Issue B (Meaning and Effect of Clause 69)" first as "it presents some basic threshold questions that must be considered before entering into an examination of Issue A ("Termination/Repudiation"). At Paragraph 241 they listed basic threshold questions within Issue B which had to be considered before examining Issue A:

“(a)

Who made the decision to terminate? Was it the [HS] alone, the MPRG, or some combination of…officials including the HS acting with others…?

(b)

To the extent that the decision to terminate was influenced by the MPRG’s recommendations - and to the extent that the MPRG process was flawed or did not take into account the contractual requirements of termination for cause - was the decision to terminate fundamentally flawed and thereby unlawful?

(c)

In any event, even if the decision to terminate was taken by the [HS] acting alone, as argued by [Y], did [the HS] comply with the requirements found in Clause 69.1.2 (i) and (ii)? Did [the HS], in other words, or when determining whether to exercise any right of termination pursuant to this Clause 69.1.2 act in a reasonable and proportionate manner, having regard to such matters as the gravity of any event and the identity of the person committing it, and did [the HS] give all due consideration, where appropriate, to action other than termination of the Agreement?"

The arbitrators then proceeded to consider whether Clause 69.1.2 (i) and (ii) were conditions precedent or innominate terms. The arbitrators concluded at Paragraph 260 that the Process Requirements "are conditions precedent to a valid exercise of any rights of termination by [Y], rather than innominate terms" giving reasons including at sub-paragraph (d) that they were "fundamental to the exercise of [Y’s] rights of termination of the purpose of this Agreement" and at Paragraph (g):

“…The tribunal agrees that both establishing an event of Default in the first part of Clause 69.1.2 and fulfilling the mandatory requirements in the second part of Clause 69.1.2 are necessary conditions to the right to terminate the Agreement for cause."

They went on at Paragraphs 263-5 in addressing the sub-issue as to whether the requirements of Clause 69.1.2 (i) and (ii) applied solely to the decision to terminate itself or also to the decision-making process:

“263.

The introductory phrase "in determining whether to exercise any right of termination…[Y] shall…” is followed by the requirement to "act in a reasonable and proportionate manner…" and "…give all due consideration…". In the opinion of the Tribunal these phrases indicate a process by which a decision to terminate is reached. This part of Clause 69.1.2 is predicated on a right of termination already existing and requires [Y] to act in a certain manner when determining whether to exercise any such right. Thus assuming an event of Default giving rise to a right to terminate is established, any determination whether to exercise that right must be subjected to the further requirements set out in the second half of Clause 69.1.2. That is to say, the determination is bound to include the process by which such a decision is made.

264.

This conclusion does not mean, however, that the process by which the decision to exercise the right of termination is made must be elevated into a quasi-public law exercise that includes the formal requirements of administrative law…The Tribunal…finds that there is "no right to be heard" as alleged by [Z].

265.

Nothing in the wording found in Clause 69.1.2 (i) and (ii) gives rise to any suggestion that [Z] was entitled to an audience once the right to terminate had arisen. The duties described are expressly directed at [Y]. At that stage, so long as [Y] fulfils these duties and satisfies the other requirements of Clause 69.1.2, it may determine to exercise the right to terminate. That being said, however, the tribunal is also satisfied that the requirements in this Clause obliged the person considering whether to exercise the right of termination to address clearly the particular ground from which that right arose to determine whether it would be reasonable and proportionate to rely upon it and, in particular, to look at the "gravity" of any offence and the identity of the person committing it. Thus, for example, if Milestones were to be relied upon as giving rise to a right of termination, it would follow in the circumstances of this case that the person deciding whether to terminate on that basis should have reasonably addressed whether [Y] caused or contributed to the missing of those milestones. Even if [Z] had no right of audience in this decision-making, [Y] remained obliged to comply fully with the requirements in Clause 69.1.2, including taking into account whether there were mitigating circumstances that might make it unreasonable or disproportionate to exercise any right of termination, even if the existence of a material Default was established".

The tribunal then went on to examine events leading up to the delivery by Y of the Termination Notice on 22 July 2010. It examined at Paragraphs 270 to 275 the " 5 Gateways” effectively relied upon by Y as justifying the service of the Termination Notice, namely failures to achieve Milestones (for RP1, RP2 and RP3) (Gateway 1), to comply with due care, skill and diligence obligations not remedied by Z in accordance with the "Remedial Plan Process" (Gateway 2), "repeated" failures to meet Milestone dates and produce acceptable Remedial Plans (Gateway 3), failure to meet "two Key Milestones" (Gateway 4) and "Service Level Failures and Total Service Credit Deductions" (Gateway 5). The Tribunal at Paragraphs 272 to 276 determined that for Gateways 1,2 and 5 the Default had to be "material", that Gateways 1,2 and 3 presupposed that the Default had been the subject of the Remedial Plan Process and that Z had failed to remedy the Default in accordance with that Process and that Gateway 4 merely required proof of a failure to meet a Key Milestone. The arbitrators went on to find that Gateway 2 could not succeed because Notices of Material Default had not been addressed to the default in question and because the Remedial Plan Process had not been initiated in respect of such complaints. Also it was said by the arbitrators that, insofar as Gateways 1 and 3 relied upon failures to meet Milestones RP1, RP2 ATP1 and RP2 ATO, such grounds for termination could not succeed. At Paragraph 281 they said that this did not affect the position under Gateway 4.

The tribunal then considered in detail the decision-making process which led to the Notice of Termination. In this regard, it considered the various reports and recommendations provided to HS, who essentially made the decision to terminate. A Ms H’s written submissions to HS of 20 May 2010 were referred to by the tribunal; to this was attached a report of 18 December 2009 which the tribunal interpreted as mentioning "possible [Y] contributions to delay" (Paragraph 307) although this did not find its way into the body of the 20 May 2010 submission (Paragraph 308). It referred to a meeting between HS, Ms Homer and others on 24 May 2010 at which there was discussion about the "three main challenges to the Programme - delivery, affordability and data protection issues" and the "fact that Z was in material breach of contract.” Reference was made to a submission from Ms Homer to HS on 15 June 2010 (Paragraphs 314 to 318) which suggested that Z was "unable to provide the necessary capability to contracted deadlines [sic]", that due to its failures there had been " significant delays in delivering the capabilities we need" and that Z had been in material breach of contract since July 2009 failing to meet contracted milestones". The tribunal referred to various further submissions to HS (on 22 and 23 June 2010) which suggested that Z’s recent performance had improved. By 30 June 2010, the tribunal recorded at Paragraph 325 its impression that HS’ preferred approach was to reset the agreement.

The arbitrators went on to refer to the MPRG process which involved a review of all relevant major projects which were "high risk, high value and/or carried major reputational risks" (Paragraphs 327 to 350) and its recommendation that the Agreements be immediately terminated for cause. The HS was made aware of this recommendation on 1 July 2010 (Paragraph 351) and the tribunal went on to consider what HS received by way of further advice and her view that she was still keen to "reset" the Agreement (Paragraph 355). HS actually received the MPRG recommendation on 6 July 2010 and various further submissions which she received from Ms H (Paragraph 360). The arbitrators recorded that on 7 July 2010 HS made the decision to terminate a contract with Z, saying in evidence “that the reasons for doing so were Z’s history of not delivering on time and my lack of confidence that it would do so in the future" (Paragraphs 362-4).

There then followed at Paragraphs 380 to 390 subheadings entitled "The tribunal’s analytical framework" and "Reasonableness and Proportionality". At Paragraphs 380-2 they said this:

“380…the tribunal proposes to examine, firstly, the process by which the decision to terminate was taken and then, if required, the substantive grounds for termination on which the decision to terminate was taken.

381.

For the purposes of the tribunal’s analysis in the remainder of this section, it is assumed, without so concluding, that by mid-May 2010 there was a relevant Default under Clause 69.1.2 (a) - (l). In other words, it is assumed that by that date there were circumstances giving rise to a prima facie right to terminate.

382.

This working assumption is made in order to focus initially on [Z’s] submission that [Y] breached its duty in relation to the requirements found in the second part of Clause 69.1.2."

The arbitrators raised broad questions as to compliance with the Process Requirements and set a number of questions, including: who was the decision maker (found to be HS), in relation to missed Milestones did HS give sufficient consideration to Y’s possible contribution to Z’s alleged failure to deliver on time, did HS take into account extraneous considerations or, alternatively did HS fail to consider matters that should have been considered, did Y failed to take into account Z’s financial position, what significance should be attributed to amongst other things MPRG’s 6 July 2010 recommendation, did HS give sufficient consideration to Y’s possible contribution to the failure of the Remedial Plan Process and what was the relevance of Service Management issues?

The tribunal at Paragraph 624 of the Award listed its conclusions in relation to whether Y has complied with the Process Requirements:

“The tribunal has found four instances in which [Y] failed to meet its obligations under Clause 69.1.2 for Agreement with respect to the exercise of any right of termination it may have had. In particular:

(a)

[HS] failed to address in any adequate fashion the difficult question of whether and, if so, to what extent [Y] had caused or contributed to the Defaults on which [HS] was relying to terminate the Agreement;

(b)

[HS] relied upon and deferred to the recommendation of the MPRG…[HS’] reliance upon and deference to the MPRG’s recommendation was flawed and similarly not compliant with Clause 69.1.2 (i) of the Agreement.

(c)

[Y] invoked [Z’s] alleged failures to remedy Defaults in accordance with the Remedial Plan Process in the Termination Letter in circumstances where [Y] had:

(i)

Abused the Remedial Plan process;

(ii)

Required [Z] to perform the Agreement after [Y] had rejected [Z’s] Second Remedial Plan, thereby losing the right to terminate for [Z’s] failure to remedy alleged Defaults in accordance with the Remedial Land Process,

(iii)

Unfairly keeping [Z] in a contractual limbo for six months (although three months was subject to a standstill) during which time [Z] continued to perform under the CAP agreement; and

(d)

[Y] invoked alleged Service Management failures as grounds for termination of the Agreement in circumstances in which:

(i)

At least 6 of the alleged Service Management Failures did not occur and the Service Credit Cap limits giving rise to termination rights have not been exceeded (i.e. there had been no material Default);

(ii)

Even if such events had occurred, they were merely "bedding-in issues, the last of which took place 6 months prior to [Y’s] termination of the CAP agreement”; and

(iii)

[HS] did not appear to have been advised of the existence of alleged Service Management issues, and was therefore not in a position to consider the reasonableness and proportionality of termination on the basis of Service Management failures."

The tribunal went on at Paragraph 626 that it was “mandatory" that Y fulfilled the Process Requirements "if it was to lawfully terminate the Agreement for cause" and that Y had failed to comply with those requirements, thus breaching its duty "to act reasonably and proportionately when determining whether to exercise the right of termination in June and July 2010." The consequence in effect was that by not following the requisite Process Requirements and by purporting to terminate under the contract Y was in repudiatory breach of contract which repudiation was accepted by Z (see Paragraphs 627 to 635).

The tribunal then moved on to quantum from Paragraphs 636 to 806, listing at Paragraph 637 Z’s "principal and/or alternative claims: A1(i) being for some £434 million for "repudiation - expectation damages" and A1(ii) alternatively being some £321 million for "termination for convenience". Claims were then listed: A2 (repudiation - reliance damages - some £285 million), A3 (unjust enrichment - some £306 million), A4 (transfer of assets – some £126 million or alternatively £144 million), A5 (outstanding debt and retention claims - some £23 million), A6 (amounts relating to claimed changes - some £13 million) and A7 (other losses - some £11 million). The total listed by the tribunal was almost £483 million and it is thus clear that they were under the apprehension (broadly correctly) that a number of these claims were alternative. The tribunal found at Paragraphs 685 and 687 that a contractual cap imposed a limitation of just under £50 million on Z’s A1(i), A1(ii) and A2 claims but not in relation to its alternative claim A3.

At Paragraph 689, the tribunal confirmed that: "…notwithstanding the termination, the parties operated the Exit Management provisions under the Agreement, although [Z] reserved its position as to [Y’s] entitlement to do so. In summary [Y] asked certain assets…to be transferred to it." It then refers to the fact that the parties were agreed that Z was "entitled to be recompense for the costs it incurred in providing those assets, insofar as Z had not already been paid for such assets." This is a reference to the Transferred Assets claim A4 which is the subject matter of challenge on this application. In Paragraph 690 the tribunal quote from Z’s Closing Submissions accepting that the value of the Transferred Assets (the "Unrecovered Costs") was also included within Claim A1. That A1 claim is summarised at Paragraph 695 as including "Unrecovered work in progress" (nearly £248 million), "Unrecovered Exit Management costs" (£3.8 million), various other costs as well as a claim for loss of profit of just over £95 million. At Paragraph 698, the tribunal summarises Z’s basis of calculation as being the difference between “the amount it expected to receive less the costs it expected to incur and what in fact it has received and the costs it has incurred at the date of termination plus costs incurred as a result of the termination”. It records at Paragraph 699 that Y maintained that Z had “put forward a global claim comprising all of the expenditure it considers it would have incurred, regardless of whether those costs would have been recoverable under the Agreement”, going on that the calculations "wrongly assume that any increase in the costs above the amount [Z] estimated at the time it entered into the Agreement was as a result of delays and problems caused by [Y]…”

The tribunal went on to consider the differences between the quantum experts, Mr Taub and Mr Boulton, the principal one being referred to at Paragraph 706, namely Mr Boulton’s assumption "that all or the vast majority of the costs incurred were or would have been recoverable under the Agreement [including] all costs incurred due to delays and other problems encountered in the course of performance of the Agreement." It found at Paragraph 707 that in respect of the A1 claim on the basis of Y’s expert analysis at least the amount of the contractual cap was due and accordingly that sum was awarded in respect of Claim A1.

Claims A2 and A3 were addressed in short order, A2 (at Paragraph 709) on the basis that A2 was caught by the contractual cap and A3 (at Paragraph 710) because Z had accepted that if the tribunal awarded the capped amount it had no separate claim.

Paragraphs 711 to 730 addressed the "Transferred Assets" claim (now the subject matter of challenge on this application). The tribunal summarised the history at Paragraph 711 to the effect that Y gave instructions in July 2010 pursuant to the Exit Management provisions of the Agreement and identified the assets which it required Z to transfer and that Z in agreeing to transfer such assets reserved its position that the Exit Management provisions had no contractual force following the repudiation. It referred to Y’s argument as to how the Assets were to be valued under the Agreement (Paragraph 713). It went on to identify the basis of Z’s claim (£126,013,801 as cost plus 15% profit margin). The tribunal explained that this cost was arrived at:

“714…by calculating the percentage of [Z’s] costs incurred on the whole project that had been recovered and applying the unrecovered percentage to the cost of the assets transferred to [Y]. Thus [Z] maintains that it incurred costs totalling £413,021,490. It has been paid £141,598,315 and has therefore recovered 34.3% of its costs; 65.7% are unrecovered.

715.

[A witness] lists the assets included in the Asset Register and the costs allocated to those assets…He identifies the sum of £191,753,736 as attributable to the assets that were…transferred. As he explains, the assets comprise not merely hardware, software and such like, but "[a]ll of [Z’s] cost base (and its subcontractor costs) [that were] involved (directly or indirectly) in the provision of these Assets.

716.

On the basis that the cost of the transferred assets is £191,753,736 and [Z] has recovered 34.3% of these costs through payments from Y, the remaining balance, 65.7% of £191,753,736, results in [Z’s] claim of £126,013,801…

717.

It is therefore apparent that [Z] has not followed the contractual route to arrive at Unrecovered Costs and there is reason to believe that sum claimed would not approximate with the Unrecovered Costs, calculated in accordance with Agreement.”

The tribunal went on:

“719.

That is not, of course, fatal to [Z’s] claim. Since the tribunal has found that [Y] repudiated the contract, [Z] was released from further performance of its obligations under the Agreement, including the performance of the Exit Management provisions. As recorded above, [Z] reserved its position and therefore in transferring the assets at the request of [Y], [Z] was conferring a benefit on [Y]. The entitlement to a remedy arises from the fact that [Y] purported to exercise a right which it knew (and accepts) would entitle [Z] to additional payment, on the assumption that it had properly terminated the Agreement. However [Y] also knew that [Z] disputed the termination and that it contended that [Y] had repudiated the Agreement. Thus, as recorded above, [Z] reserved its position when agreeing to transfer the assets which are the subject of [Z’s] Damages Claim A4. In the tribunal's view, in these circumstances, were [Y] to retain the benefit of the Transferred Assets without payment to [Z] , this would give rise to unjust enrichment. Z is accordingly entitled to maintain a claim in unjust enrichment."

The tribunal then went on to summarise over four paragraphs some of the evidence relating to the costs of and/or value of the Transferred Assets, including some evidence about what the costs might have been or were forecast to be to the effect that, although Z was claiming £126.1m in relation to assets which it forecast would cost £50.4 million and in respect of which it had been paid £42.2 million. At Paragraph 724, the tribunal continued:

“The state of the evidence is not satisfactory; in particular, there is considerable uncertainty as to the sums which had already been paid in relation to the transferred Assets. However since the tribunal is attempting to assess the value of the unjust enrichment, it can only proceed on the basis of the cost to [Z] of producing the relevant assets, les the sums paid. In this connection the costs forecast by the RFM is strictly irrelevant. Nevertheless the tribunal notes two matters:

(a)

It is common ground the payment structure under the Agreement was "sculpted” so that [Z] would be operating at a loss during the earlier part of the project. It is therefore to be expected that the costs [Z] incurred would not be matched by the payments made under the Agreement by the Authority…”

The tribunal continued towards its overall finding:

“725.

One further concern is that [Z’s] calculations do not seek to allocate any of the payments made by [Y] [for] the transferred assets; its calculation is simply based on an average…

726...[Y] acknowledges that [Z’s] “claim for Transferred Assets is not included in its primary A1 counterclaim, as that claim already includes all of the costs that [Z] has incurred in connection with the Agreement." Nonetheless, the tribunal has considered whether the capped amount to be awarded in relation to [Z’s] A1(i) claim must necessarily include some portion of the costs incurred to produce the Transferred Assets….The tribunal has not been assisted by either party in relation to potential overlap, but by a majority determine that if there was any such overlap the onus would have been on [Y] to show it and it has not endeavoured to do so in any of its submissions.

727.

Having regard to all these submissions, the tribunal finds that, on the balance of probabilities, Z’s calculations are broadly correct and the tribunal proposes to adopt them in its valuation of [Z’s] Claim A4 on the basis that they fairly reflect the net value of the Transferred Assets, the benefit of which [Y] has taken.

728.

Thus the tribunal accepts that the cost to [Z] of producing the assets which were transferred to [Y] was £191,753,736 and that it had already been paid 34.28% of its costs by the date of termination, leaving a net claim of £126,013,801."

The tribunal declined to add the 15% profit uplift and by a majority at Paragraph 730 awarded the sum of £126,013,801 as damages for Claim A4.

The material parts of Section 68 of the Arbitration Act 1996 provide as follows:

“(1)

A party to arbitral proceedings may…apply to the court challenging an award in the proceedings on the ground of serious irregularity affecting the tribunal, the proceedings or the award…

(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;

(3)

If there is shown to be serious irregularity affecting the tribunal, the proceedings or the award, the court may—

(a)

remit the award to the tribunal, in whole or in part, for reconsideration,

(b)

set the award aside in whole or in part, or

(c)

declare the award to be of no effect, in whole or in part.

The court shall not exercise its power to set aside or to declare an award to be of no effect, in whole or in part, unless it is satisfied that it would be inappropriate to remit the matters in question to the tribunal for reconsideration.”

The legal teams are, properly, in agreement to a very large extent as to what the law and practice are in relation to applications under Section 68(2)(d) of the Arbitration Act 1996. I can summarise it as follows:

The Grounds of Challenge lodged by Y summarise the Grounds relied upon justifying its application under Section 68(2)(d). Liability Grounds 1 and 2 are respectively that the tribunal failed to deal with or address in any way:

“3.1

the legal consequences of the fact that [Z] did not comply with the contract provisions, as it was required by the [Agreement] to do, in order to be entitled to contend that failure to achieve contractual Milestones was other than the sole responsibility of [Z]…and

3.2

although it is common ground that the Tribunal had to judge the reasonableness and proportionality of the termination for cause pursuant to Clause 69.1.2(i) the tribunal failed to make any assessment of the nature and seriousness of any relevant Default(s) on the part of [Z] which prima facie entitled a termination for cause, in order to consider whether, in light of the same, it was objectively reasonable and proportionate to terminate the Agreement.”

The three “Quantum Grounds", 1, 2 and 3 respectively, are that the tribunal failed to address the following in respect of the Transferred Assets Claim A4:

“4.1

that the calculation of compensation should follow the method agreed by the parties in accordance with express provisions;

4.2

that the assessment of compensation should not exceed the amount that would have been recoverable had the agreement been performed according to its terms.

4.3

that [Z] should not be permitted to recover sums on a global basis without any consideration of its own actual or possible breaches of contract."

Broadly, Y's position, in respect of the Liability challenges, is that the tribunal ignored or overlooked its "central argument" that, because Z had not served proper notices and consequential material under Clauses 23 and 25 substantiating its case that it was not responsible for delays, contractual responsibility for the missed contractual Milestones lay solely with Z (Liability Ground 1). It goes on that despite the fact that there was extensive evidence and argument about Z’s “Defaults” such as there was an expectation that the Tribunal would determine the rival contentions and because the tribunal itself considered that Y had made no adequate assessment of the nature and seriousness of any relevant Default which prima facie entitled it to terminate, the tribunal itself carried out no such assessment (Liability Ground 2).

In relation to the Liability challenges, again, broadly, Z’s position is that, for the reasons which the tribunal itself gave, it was not necessary or essential to address the issue as to the extent to which contractually Z was actually in breach of contract or in Default because the Process Requirements, which went to process, were not complied with; put another way, the tribunal, it argues, found that the Process Requirements were a condition precedent which was not complied with and therefore the termination by Y was unlawful, such that it was unnecessary to determine the extent to which Z was actually in Default (Liability Ground 1). As for Liability Ground 2, Z argues that the tribunal found that issues as to the actual nature and seriousness of any Defaults on the part of Z did not arise because HS’ decision-making “process” did not comply with the condition precedent to the right to terminate. It argues overall that Y’s challenge is essentially on analysis put forward on the basis that the arbitrators were wrong and is in reality a challenge to the correctness of the decision. It argues overall that there is no substantial injustice because there were three other free standing breaches of the condition precedent about which there is no challenge so that, in consequence, the termination was still unlawful and in effect the application on these two Liability Grounds gets Y nowhere.

So far as the Quantum Grounds of challenge are concerned, Y argues that the tribunal failed to consider and deal with important issues namely whether Z’s Transferred Assets claim should be assessed in accordance with the terms of the Agreement, whether the unjust enrichment claim should be limited to what Z was entitled to if the Agreement had been performed and whether it could properly be assessed on a global cost basis without any consideration of Z’s own actual or potential breaches of the Agreement.

Z argues that in reality none of these arguments was put to the tribunal and they did not represent issues which had to be dealt with by the tribunal. For instance it is said that, in relation to the global costs point (Quantum Ground 3), this was only argued in relation to "Unrecovered Costs" in the context of Claim A1 and not in relation to Claim A4. In any event, it is argued that the tribunal did deal with the first two issues at Paragraph 718 to 719 and 724 of the award.

There are issues between the parties as to what the appropriate relief should be in the event that the court finds that any of the challenges are justified. I will deal with those as necessary but not necessarily in this judgment.

The two Liability Grounds of challenge are obviously connected and both arise out of the fact that the arbitrators decided that it was unnecessary to consider or make findings about the responsibility for the delay, disruption and inefficiency which had occurred prior to termination. An important aspect of this necessarily would have involved a consideration of the legal (contractual) consequences of the (alleged) failure on the part of Z to submit delay and compensation event notices within the contractual time constraints as set out in Clauses 23 and 25 of the Agreement. Put simply, and the argument is a relatively common one in construction, engineering and technology contracts, the contention is that the consequence is that there is no relief by way of extension of time or of financial compensation if the requisite notices are not served in time and the contractor’s contractual obligation remains one of complying with the contractual terms as to progress, completion and, in this case, milestones. To the extent that the argument is a good one on any given contract, the contractor will remain fully responsible for achieving the contractual dates for completion and will be liable to liquidated damages type charges for any failure to complete.

There is no doubt, and there was no dispute before the Court, but that this issue was an issue in the arbitration which, in the ordinary course of events and if it was necessary to do so, would have had to have been dealt with the arbitrators. There is no suggestion that it was not a wholly arguable point and, from what I have seen of the Agreement, I would accept that it was a reasonably arguable point.

The reason that the tribunal did not address that issue and indeed did not address the questions of the impact of the absence (if that was the case) of requisite notices under Clauses 23 and 25 and of responsibility for the delay, disruption and inefficiency which had occurred on this project was that it found that the Process Requirements in Clause 69.2 were conditions precedent and that Y had not complied with or satisfied those conditions precedent in the process leading up to the termination in late July 2010. The tribunal has been, in its award, transparent as to the steps it took in this regard: it explained, for instance, at Paragraph 241, that it proposed to examine compliance with the Process Requirements first. Later it addressed the issue as to whether the Process Requirements were conditions precedent (deciding at Paragraph 260 that they were). Then it moved on to consider the decision-making process leading up to the Termination and the extent to which Y failed to comply with the conditions precedent, ultimately finding that there were four respects in which it had failed to meet its obligations under such conditions precedent.

I have formed the view that Liability Ground 1 (which is relatively narrow in scope) has not been established. The tribunal decided, not irrationally, that, when considering the words in the Process Requirements (Y should "act in a reasonable and proportionate manner having regard to such matters as the gravity of any offence and the identity of the person committing it”) this would at least include a consideration of whether Y had caused or contributed to the missing of milestones (see for instance Paragraph 265). This was not irrational because, if “Defaults” had been committed by Z (thus triggering the implementation of the Process Requirements), the wording of the Process Requirements would be largely superfluous because the conditions precedent in this regard would already be established. Thus, even if Z was, by operation of Clauses 23 and 25 and by any failure to serve timely notices, to be considered as being wholly responsible under the contract for all the delay and even if for the sake of argument all of that delay had been caused by for instance late approvals from or new changes instructed by Y, the arbitrators were saying, in effect, that the Process Requirements required Y (through HS in this case) to have regard to Y’s responsibility in fact (if not contractually) for the Default in question.

It may of course be said that the tribunal was wrong as a matter of contractual construction to conclude, as it must have done, that the contractual argument (that non-compliance with the notification requirements in Clauses 23 and 25 meant in effect that contractually Z was responsible for all the delay which had occurred) did not, so to speak, trump the Process Requirements, as interpreted by the tribunal. I say that the tribunal must have concluded this, although it does not do so in express words. However, for instance, at Paragraph 408 of the award, in dealing with HS’ evidence on the issue as to whether the HS had given sufficient consideration to Y’s possible contribution to Z’s failure to deliver on time, the tribunal refers to HS’ impression that from the absence of complaint through the Clauses 23 and 25 procedures in effect in consequence she believed that responsibility for delays lay almost entirely with Z.

Moving on to Liability Ground 2, this is somewhat more complex. It was Y’s case that all or substantially all the delay was the actual fault and responsibility of Z; to that, as a matter of evidence, reliance was placed on the absence of notices under Clauses 23 and 25 to support this actually fundamental case. In essence, the arbitrators never grappled with this point, preferring in effect to say that because the Process Requirements are just that, namely a process, HS in this case for Y had to be seen to go through the process, even if the result was such as to lay the real fault and responsibility for the delays entirely at the door of Z. Because the arbitrators found that in a number of what they believed were important respects HS, either on the basis of inadequate or incomplete briefing or otherwise, did not consider whether, and if so to what extent, Y had caused or contributed to any of the Defaults and relied upon and referred to the MPRG recommendation, although the process which led to that recommendation was non-compliant with Clause 69.1.2(i), it never got around to considering what might have been considered to be a basic point, which was Y’s case that substantially all the delay was down to Z. There was a concentration on what HS did or did not do in relation to the possible responsibility of Y in fact for the delays but the tribunal did not consider the scenario that Z may have been responsible for all the delay.

I would be more understanding of the tribunal’s position if it had actually addressed that scenario. The nearest that the tribunal gets to this is at Paragraph 413 of the Award when it says this:

“The tribunal is expressly not finding that a full and proper consideration of [Z’s] complaints against [Y] in June and July 2010 would have necessarily caused [HS] not to decide on termination for cause. It is the tribunal’s finding that [HS] was not, in fact, fully or even adequately informed of [Y’s] possible complicity in the Programme delays on which [HS], like MPRG, intended to rely for termination. She was not, therefore, able to do what Clause 69.1.2 (i) required. What may have seemed reasonable to [HS] on 7 and 8 July was deficient because of her limited insight into the history of the Agreement and the possible causes of delay."

At first blush, Z’s argument (that the tribunal was there making it clear that this was an important failure of the process and therefore in effect leading to non-compliance with the condition precedent Process Requirements) is not unattractive. However, the tribunal makes much of the fact that Z was alleging significant contributions to the delays by Y (see for instance Paragraph 410 of the award) but also of the fact that reports on submissions to HS consistently avoided any suggestion of Y either causing or contributing to the delays (see for instance Paragraph 412). The tribunal does not however consider whether it was factually justified for those making submissions to HS not suggesting that Y caused or contributed to delays. Put another way, the tribunal attributes a failure to comply with the conditions precedent to a failure to address possible (and one presumes something more than fanciful) contributions to causing delay by Y, primarily by employees or other agencies, but it does not consider what might be considered to be a very obvious material issue, which was Y’s case that Z was wholly or substantially responsible for all the delay. Put yet a third way but rhetorically: could HS or those advising HS be criticised as not complying with the Process Requirements if all the delay was in fact caused and contributed to only by Z?

I do not have to say that it would be impossible for the tribunal to conclude in principle that, even if the total responsibility for all the delay was in fact that of Z and not that of Y or other agencies, there was still non-compliance. I have little doubt however that, if the tribunal had considered the issue in such terms, there is a real chance that it would have to reconsider some of its key findings. If it had done so, that might well have led to the need to consider the actual facts and the actual causes of responsibility for the delays which occurred and to a realisation that there could be no easy short-cut..

I therefore conclude that Liability Ground 2 has been established.

Before turning to a full consideration of the question as to whether the failure to deal with this issue has led to substantial injustice, Mr Smouha QC has urged the Court to find that there cannot be substantial injustice because the tribunal found, ultimately at Paragraph 624 of the award, that there were four grounds on which the conditions precedent within the Process Requirements had not been met, three of which he suggested were not related to the failure to meet the requisite milestone dates and there is no challenge in relation to those three findings. The difficulty that I have with this argument is that it is very difficult to say what the tribunal would have decided in these three other respects and their overall impact on the process exercise if it had addressed the impact on the Process Requirements exercise of the question of overall responsibility for the delays. Furthermore, the non-compliance with the condition precedent relating to HS’s reliance upon and deferring to the MPRG recommendation was factually tied up with the milestone delay, if not entirely and, thus, it is difficult to say that a different consideration by the tribunal of the factual responsibility for all the delay could not well have led to a different outcome on that suggested non-compliance. In relation to the other two non-compliances relied upon, these relate to different Defaults to be relied upon for Termination (Y’s responsibility for alleged failures in the Remedial Plan Process and the non-occurrence of a number of Service Management failures and the delay since other alleged Service Management failures). The problem here in relation to these two latter non-compliances is that the arbitrators have not applied their minds (unsurprisingly) to the permutation as to what might be the case if the first two non-compliances were not non-compliances at all and as to whether there could be effective compliance justifying a termination on milestone delay Default if not on other grounds. I certainly do not consider that it is fanciful for Y to argue that Termination could be justified if the Process Requirements were satisfied in relation to at least one valid Default ground of termination.

I am satisfied that there is substantial injustice here, either because the tribunal did not obviously consider in principle whether there could be or was compliance with the Process Requirements in circumstances in which the entire responsibility for the milestone delay was that of Z and/or whether the substantial responsibility for such delay was that of Z. The substantial injustice arises not simply from the fact that these issues were not clearly dealt with. They arise in the context that both parties spent a large amount of time, resources and indeed money in presenting their cases and evidence as to responsibility for the delays, disruption and inefficiencies. The fact that these issues were not addressed even in the context of compliance with the Process Requirements might well lead an objective party or informed bystander to consider that the tribunal was simply seeking to avoid getting into the detail. I do not suggest however that, subjectively or consciously, that is what the tribunal was here actually doing.

I can deal with Quantum Challenge 1 simply. The arbitrators decided in Paragraph 719 that because Y had repudiated the Agreement Z was released from further performance of its obligations including the performance of the Exit Management provisions; it is from those provisions that the evaluation of the Transferred Assets by reference to "Unrecovered Costs" was to take place. Although one could didactically criticise the arbitrators for not going into some more detail, it is clear that they were saying that, by reason of the repudiation by Y (accepted by Z), the contractual route (see reference in Paragraph 718) did not have to be followed and Z had an unjust enrichment entitlement in effect as a restitution route remedy. It could be said that some arbitrators might have spelt out that the effect of an accepted repudiation in English law is that the parties are released from further performance and that the consequence of that is that neither party can then proceed on the basis that such further performance could or would produce a certain result which in some way contractually limits or defines what compensation the innocent party to the repudiation is entitled to. It could be said that the arbitrators could have given more reasons but that is an insufficient criticism under Section 68(2)(d). In so far as there was an argument by Y (and there may well have been) that the Agreement did operate to dictate what was to be paid to Z for the Transferred Assets, the arbitrators answer that in Paragraph 719 of the award by saying that those provisions were not to be performed following the accepted repudiation. It is necessarily implicit in what the arbitrators are saying that there was no contractual framework which the parties had left in place to regulate compensation following repudiation on the part of Y. I therefore dismiss Quantum Challenge 1.

Moving on to Quantum Challenge 2, this is somewhat more complex. Y says that it did argue that, even if Z was entitled to its unjust enrichment restitutionary remedy for the Transferred Assets, the allowable sum or value to be put on this was still to be determined by reference to the contractual value. Reliance was placed on the Commercial Court decision in Robert Taylor v Motability Finance Ltd [2004] EWHC 2619 (Comm) in which Cooke J said this:

“…there can also be no justification, even if a restitutionary remedy is available, for recovery in excess of the contract limit. Such recovery would itself be unjust since it would put the innocent party in a better position than he would have been in if the contract had been fulfilled. In deciding any quantum meruit regard must be had to contract as a guide to value put upon the services and also to ensure justice between the parties."

This substantive argument is one well-known in the TCC (and indeed other courts) to the effect that, if the services or thing provided by a supplier is something which was to be supplied under a contract prices and values for which had been agreed, but the contract for one reason or another is not or is no longer enforceable, then the quantum meruit or reasonable price is often to be determined by reference to what the parties had otherwise agreed.

The issue about the evaluation of Claim A4 listed as Annex 5 to the Award was in broad terms (at Page 37):

“What monetary award (if any) is [Z] entitled to either on the basis of (i) the provisions of the Agreement; or (ii) [Y’s] alleged unjust enrichment, representing the value of the Transferred Assets that were transferred… at [Y’s] request following termination of the Agreement?"

However, looking at Paragraphs 722 to 725 of the award, the essence of what the arbitrators are saying is that it was very difficult to discern what was or would have been due under the Agreement. For instance at Paragraph 724, they describe the evidence as unsatisfactory and they feel constrained to fall back on the basis of evaluation relating to the cost to Z “of producing the relevant assets less the sums paid”. One might say that this approach was wrong as a matter of law or indeed of fact, on the basis that the Motability decision suggests otherwise and that the onus of proof was on Z and it might be said that Z had not proved its case even on a cost basis (particularly if it's evidence was not "satisfactory". However, the Court should not, on an application under Section 68(2)(d), allow an application if all that is being complained about is that the arbitrators were in error of fact or law. It should be pointed out that the Dispute Resolution Procedure (Schedule 8.3 to the Agreement) provided in Clause 2.6.4 that the right of either party to appeal on the question of law was excluded; there is in any event no right to appeal or to seek to appeal as such in respect of a challenged finding of fact.

Therefore, irrespective of whether an issue was raised on the applicability of the Motability approach to evaluation of restitutionary claims in relation to Claim A4, it can, properly, be said that in effect the arbitrators did address it by saying that it was difficult to determine what was or would have been due under the Agreement and that, rightly or wrongly, it felt obliged to fall back on the cost approach. For instance, the costs forecast basis was, the arbitrators noted, likely to be “skewed” in effect against Z by the payment structure under the Agreement being "sculpted". One might say that this was, again, in law or in fact, wrong but that is not a proper basis of challenge under Section 68(2)(d). The fact that some arbitrators might simply have said that Z had not proved its case in this context is not enough for such a challenge.

I therefore dismiss the challenge on Quantum Ground 2.

Quantum Ground 3 however raises a much more serious issue. Assuming, as the arbitrators did, that they had to and should go down the cost route of evaluation of the unjust enrichment, which is readily comprehensible as a pragmatic and practical solution, the background, of which the arbitrators were well aware having heard evidence and argument about it over 42 days, was that both Z and Y had been arguing that the fault and responsibility for the apparently undoubted delay, disruption and inefficiency in the delivery of the project which had occurred was the other party’s. This was not simply an argument about whether or not Z had served contractual notices claiming for delay or compensation events; there were substantive issues as to the fault and responsibility for that delay, disruption and inefficiency. At the very least, given the arbitrators’ experience and in particular the known experience of at least one of the members of the tribunal in the construction and technology field (and indeed in the TCC), it must have been within their collective horizon of knowledge that Y was arguing that all or at least most of the delay, disruption and inefficiency was the actual fault of Z and that, if one was to base an unjust enrichment award on total costs incurred, at least a credible argument might have been that one needed to take out of the evaluation costs attributable to delay, disruption and inefficiency which was the fault of Z. Of course, there is virtually nothing in this nearly 300 page award about who was responsible or at fault in respect of the delay, disruption and inefficiency which seems to have occurred, given that it was common ground that key Milestones had not been achieved and by the time of the termination had been substantially delayed.

The issue therefore comes down to whether there was before the arbitrators an issue that in relation to Claim A4 that, if the arbitrators were to go down the cost route approach to evaluate the unjust enrichment said to have occurred as a result of the transfer of the Assets, account should be taken of the extent to which those costs related to any delay, disruption and inefficiency which was the fault or responsibility of Z. I understand that it is common ground that, if this issue was sufficiently raised before the arbitrators, they did not address it. That in any event would be a proper concession given that nowhere do the arbitrators review who was to blame for the delay, disruption and inefficiency and given that in consequence no account was taken of this in the award.

I have formed the very clear view that this issue was raised and in forming this view I have had regard to the following factors:

It follows that the arbitrators overlooked the need to address the issue of Claim A4 being a global claim and therefore to address the fault and responsibility of Z (if any) in relation to the delay, disruption and inefficiencies which it seems to have been common ground had occurred to a significant extent before the termination. They therefore failed to deal with this issue. It was a very important issue, not least because the consequence of the failure has been that some £126 million has been awarded to Z. It almost goes without saying that, necessarily, there has been substantial injustice because the arbitrators have not addressed the key issues as to (a) whether or not there were problems which were the fault and responsibility of Z and (b) if so, what impact that had on the cost recovery claim which formed the basis of the substantial award in relation to Claim A4. This cannot be classified as anything less than substantial injustice because the arbitrators have not applied their minds to the issue at all and any right minded party to arbitration would feel that justice had not been served.

In my judgment, there has been serious irregularity on the grounds set out in Section 68(2)(d) in relation to matters raised as Liability Ground 2 and Quantum Ground 3 and substantial injustice has resulted from the tribunal’s omission to deal with such matters.

I leave open the question of what the appropriate relief is. I did hear substantial argument about this but I indicated that I might consider it appropriate to hear the parties again in the light of any specific permutation of findings. Given that I have rejected three grounds of challenge and allowed two, I propose to hear the parties at the hearing to be fixed after the hand down of this judgment.

Given the sensitivities which had been raised in correspondence between Counsel (particularly for Y), I would propose to hand the judgment down on 19 December 2014 with a direction that its contents may be communicated only to the legal teams and senior representatives of Y and Z. I will extend time for applications for permission to appeal until a further hearing which should be fixed in the first half of January 2015 if at all possible. That hearing will address the appropriate relief to be granted as well as any issues as to costs.