Network Rail Infrastructure Ltd v ABC Electrification Ltd

In these Part 8 proceedings, the Claimant, Network Rail Infrastructure Limited (“Network Rail”) seeks declarations as to the interpretation of a contract with the Defendant (“ABC”), an incorporated joint venture between Alstom Transport UK Holding Limited, Babcock Rail Limited and Costain Limited (“Costain”).

The uncontroversial background facts are as follows:

References in this Judgment to “the Contract” will be to the Original Agreement as novated and as varied by the DOV. References to “the Works” will be to Phase 3B of the WCPSU and the limited parts of Phase 3A which ABC was obliged to carry out pursuant to the Contract.

ABC is entitled to payment by Network Rail under the Contract based in part on the Total Cost ABC incurs in carrying out the works less any Disallowed Cost.

Pursuant to clause 1(1)(x) of the Contract, “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…”.

Pursuant to clause 1(1)(j)(iii), Disallowed Cost means (amongst other things to which I shall return later):

“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 words in bold were inserted into the ICE Conditions pursuant to the NR12 Amendments.

By its Part 8 Claim Form and Details of Part 8 Claim, Network Rail seeks declarations as to the meaning of Disallowed Cost in clause 1(1)(j)(iii) and in particular, as to the meaning of the word ‘default’.

ABC makes no complaint about the use of the Part 8 procedure for this claim, but it disputes Network Rail’s entitlement to a declaration in the terms sought. If the court is minded to make a declaration, it is ABC’s case, as set out in its Acknowledgement of Service, that any declaration should give the word ‘default’ a different meaning from that advanced by Network Rail.

Witness statements have been served in the Proceedings, from Mr Matthew Shotton on behalf of Network Rail and from Mr Stephen Nichol on behalf of ABC. Whilst I have read and had regard to their contents, they add little to the issue of interpretation that I must decide, and very little reference was made to them during the course of the oral submissions. It is agreed between the parties that this Part 8 Claim does not involve a substantial dispute of fact.

It is common ground that the court has a discretionary power to grant declarations, whether or not any other remedy is claimed (CPR 40.20), and that its power is to be exercised (i) with caution in considering whether or not to grant a declaration as to the proper construction of a contract and (ii) in accordance with established principles.

My attention was drawn to the notes to CPR 40.20.2 of Volume 1 of the White Book and in particular to page 1308 which makes it clear by reference to FSA v Rourke [2002] CP Rep 14 that “When considering whether to grant a declaration or not, the court should take into account justice to the claimant, justice to the defendant, whether the declaration would serve a useful purpose, and whether there are any other special reasons why or why not the court should grant the declaration”. Since the date of the hearing in this matter, these factors have been expressly referred to and followed by Birss J in Pfizer Limited v F. Hoffmann-La Roche AG [2019] EWHC 1520 (Pat) at [61]. I did not understand either party to suggest that there were any additional factors that I needed to take into account.

Before turning to consider these factors, I shall begin by addressing the question of interpretation which lies at the heart of this dispute.

There have been a number of recent cases at the highest level dealing with the principles of construction and these are well known and not in dispute. I was referred in particular to Rainy Sky SA v Kookmin Bank [2011] UKSC 50; [2011] 1 WLR 2900 per Lord Clarke at [21]-[23]; Arnold v Britton [2015] UKSC 36; [2015] AC 1619 per Lord Neuberger at [14]-[23] and Wood v Capita Insurance Services Ltd [2017] UKSC 24; [2017] AC 1173 per Lord Hodge at [10]-[15]. I have regard to these statements of principle when interpreting the Contract in this case.

Mr Stansfield QC, on behalf of Network Rail, submits that a “default on the part of the Contractor in his compliance with any of his obligations under the Contract” in clause 1(1)(j)(iii) of the Contractincludes any failure by ABC to comply with its obligations under the Contract. This construction is based on the plain and obvious meaning of the language used: the ordinary meaning of the word ‘default’ is, or includes, he says, a failure to fulfil a legal requirement or obligation.

Consistent with this approach, paragraph 11 of the Details of Part 8 Claim asserts that

“…on a proper construction of the Contract, any cost incurred due to ABC’s failure to comply with its obligations under the Contract by ABC is a Disallowed Cost.”

The true interpretation of clause 1(1)(j)(iii) is of considerable importance to Network Rail, not least in circumstances where the completion of the Works is (as is common ground) very late. In an interim assessment of sums due to ABC, the Employer’s Representative has categorised various sums as Disallowed Cost on the basis that they were incurred due to ABC’s breaches in failing to complete the Works with due expedition, without delay, and, by the time for completion, contrary to clauses 41(2) and 43 of the Contract. The Disallowed Cost amounts to over £13 million.

It is against this background that Network Rail seeks declarations that:

Mr Sears QC, on behalf of ABC, accepts that the ordinary and natural meaning of the word ‘default’ is ‘a failure to fulfil an obligation’. In his witness statement in support of ABC’s case, Mr Nichol acknowledges that in its approach to Disallowed Cost to date, Network Rail has sought to apply clause 1(1)(j)(iii) of the Contract in a manner consistent with the declarations sought in these proceedings. However, ABC submits that it cannot have been the parties’ intention at the time of entering into the Contract

Instead, ABC contends that (i) when viewed against the background of other relevant clauses in the Contract; (ii) when consideration is given to the overall purpose of the clause and of the Contract (specifically in this case, a Target Cost Contract) and (iii) when regard is had to commercial common sense, it is plain that the word ‘default’ was intended to carry a narrower meaning.

Unhelpfully, ABC’s approach to precisely what this narrow meaning should be has fluctuated over time, with a new interpretation being advanced by Mr Sears during the course of the hearing.

Originally, ABC appears to have arrived at a similar view to that taken by Network

Since then, however, ABC has argued (in its Protocol Letter of Response dated 10

Finally, after an invitation from me at the hearing to clarify ABC’s case, Mr Sears advanced a yet further contention, namely that if, contrary to its primary case, the court is minded to grant a declaration, then such declaration should be to the following effect:

“The term ‘Disallowed Cost’ in the Contract includes any cost incurred due to default on the part of the Contractor if, and only insofar as, the default constitutes a wilfuland deliberate failure to comply with his obligations under the Contract” (emphasisadded).

As I understood his submissions, Mr Sears now abandons any suggestion that the words “serious”, “significant and material” and “persistent” should be included, although he does appear to maintain that a wilful and deliberate failure will inevitably be significant.

Whilst I accept Mr Sears’ submission that the changes in ABC’s case are not relevant to the exercise of interpretation that I must undertake in resolving this dispute, nonetheless, ABC’s various changes of position seem to me to illustrate the difficulty it has encountered in identifying precisely how the word ‘default’ should be narrowed so as to reflect what it now says must be the objective intentions of the parties. This in turn might tend to suggest that the other provisions of the Contract on which ABC relies do not provide a clear or obvious answer. I form my own view on this later in this Judgment.

In my judgment, Disallowed Cost in clause 1(1)(j)(iii) includes any cost due to any failure by ABC to comply with its obligations under the Contract. In arriving at this conclusion, I accept Network Rail’s submissions that, applying the principles of construction set forth by the Supreme Court in the three cases to which I have referred above, the word ‘default’ in this clause carries its natural and ordinary meaning.

My detailed reasons for arriving at this conclusion are set out below.

The language of clause 1(1)(j)(iii) is clear and unambiguous. Mr Sears confirmed that ABC does not contend that its language is unclear, and he also accepted that the fact that the word ‘default’ was inserted by the NR12 Amendment gives rise to the presumption that the parties intended to add something to the existing clause.

It is common ground that the natural and ordinary meaning of the word ‘default’ is a failure to fulfil a legal requirement or obligation. I would need very clear evidence from the remaining provisions of the Contract, its factual matrix and commercial context to conclude that it means something different. As Lord Neuberger said in Arnold v Britton at [17] and [18], “The exercise of interpreting a provision involves identifying what the parties meant through the eyes of a reasonable reader, and, save perhaps in a very unusual case, that meaning is most obviously to be gleaned from the language used…the clearer the natural meaning the more difficult it is to justify departing from it”. As I set out in detail below, I have been unable to identify any satisfactory or sufficient basis to reject the ordinary meaning of the word ‘default’.

The meaning for which ABC contends, namely a ‘wilful and deliberate’ failure to fulfil a legal requirement or obligation is a meaning that would only usually be achieved by the addition of extra words. There are no additional words in clause 1(1)(j)(iii), or anywhere else in the Contract, to indicate that this is what the parties to the Contract really meant by the word ‘default’. None of the other six limbs of the definition of Disallowed Cost in clause 1(1)(j) of the Contract requires an assessment of ABC’s state of mind. Further, standing back, I agree with Mr Stansfield that the concept of a wilful and deliberate breach would be a very unusual concept to incorporate into a payment provision designed to assist the Employer’s Representative to identify the Total Cost. Indeed, the idea that the Employer’s Representative would have to enquire into ABC’s state of mind in relation to each and every breach of contract before it could determine whether such breach gave rise to Disallowed Cost would lead (at best) to uncertainty and (at worst) to an almost unworkable cost mechanism. Absent use of the words ‘wilful and deliberate’ it is difficult to see how the court can conclude that the parties nevertheless meant to give the word ‘default’ such a restrictive and narrow meaning.

I reject ABC’s submission that the provisions of clause 65 of the Contract provide

Mr Sears drew my attention to clause 39 of the Contract which includes use of the word ‘default’ and suggested that in this clause too, the ordinary and natural meaning of that word must give way to a narrower meaning restricted by reference to the words ‘wilful and deliberate’. I reject this argument, which finds no support in the clear and unambiguous language of the Contract.

Mr Sears made a similar submission about the use of the word ‘default’ in clause 43A(4) of the Contract, which precludes an extension of time in the event of delay of the type identified in this provision “to the extent that any such event, cause or circumstance is caused by the Contractor’s default or the effects of any such delay are capable of being mitigated by the Contractor”. However, there is nothing in this provision which supports the proposition that the Contractor’s default should be ‘wilful and deliberate’, or indeed that it should look for its meaning to the wording of clause 65. In circumstances where the delay events identified in clause 43A would appear, at least in the ordinary course, likely to have been caused by others (including, by way of example, “default by Employer”), clause 43A(4) appears to be a sweep up provision, designed to ensure that ABC cannot benefit from an extension of time in circumstances where it has caused the delay event and must take proper steps to mitigate the effects of any delay. In my judgment it lends no support to ABC’s argument.

Finally, on the specific meaning of the word ‘default’, Mr Sears suggested for the first time during his oral submissions that the word ‘default’ would carry a restricted meaning wherever it appeared in the Contract. I have not been asked in these Part 8 proceedings to construe the meaning of ‘default’ as it appears in every provision of the Contract and Network Rail has had no opportunity to consider every example of its use. In the circumstances I certainly do not intend to make any findings on general usage and I note that (as appears from clause 43A) the word ‘default’ is used on at least one occasion to refer to the conduct of the Employer. However, I simply observe for present purposes that it would be extremely surprising indeed if on each of the various occasions that the word ‘default’ is used in this Contract it was intended to mean ‘wilful and deliberate default’ notwithstanding that there is nothing in the Contract to support such an unusual and unnatural meaning.

Looking at clause 1(1)(j)(iii) in its context and against the background of the Contract as a whole, I can see no proper basis for concluding that the parties must have intended the word ‘default’ in that provision to carry a different meaning from its ordinary and natural meaning, much less that I could properly arrive at the conclusion that the parties intended the word ‘default’ to be restricted in its meaning by reference to ‘wilful and deliberate’ conduct. I address ABC’s submissions in the following sub-paragraphs:

Absent a clear indication from other provisions of the Contract that the word ‘default’ in clause 1(1)(j)(iii) is to carry a special meaning, the construction for which ABC contends can only involve the necessary addition of words designed to restrict the ordinary and natural meaning of ‘default’. But, as I have already said, I can find nothing in the Contract to assist on precisely what those words should be. Before accepting an unusual interpretation restricted by the addition of words which would need to be read in to the Contract the court would need to be satisfied, not only that the parties had made a mistake in referring to a ‘default’ without qualification, but also as to precisely the words that they had intended to use (see Arnold v Britton per Lord Hodge at [78]). My analysis above shows that there is nothing in the Contract to support the proposition that the parties intended the word ‘default’ to be restricted purely to wilful and deliberate failure to comply with the obligations under the Contract.

I am not persuaded that the fact that this is a Target Cost Contract affects the approach I should take to interpretation.

Mr Sears submitted that the “apparent intention” of the parties in a contract of this type is that the risk of cost increases due to, for example, defective work, will be shared between them. He pointed to clauses 39 and 49 (both referred to above) and suggested that these clauses clearly showed the intentions of the parties as to the distribution of risk. He also sought to rely upon clause 8(7)(a) (Footnote: ²) which he described as a significant clause; it cannot have been the parties’ intention, he argued, that Network Rail should escape all risk of increased costs resulting from a failure to carry out the Works in an economic and efficient manner. This would negate the pain/gain share mechanism (as provided for in clause 60 of the Contract and which depends upon the relationship between the Target Cost and the Total Cost). Mr Sears also pointed to the Good Faith provisions in the Contract and said that his interpretation was entirely consistent with the overarching ethos of collaboration.

However, as Mr Stansfield submitted, the intention of the parties is apparent from all of the terms of the Contract, including the provisions of clause 1(1) as to the meaning of Disallowed Cost which, in my judgment, make it plain that the Contractor was intended to bear the risk of his own breach of Contract. Disallowed Cost is deducted from the Total Cost before the Contractor’s Share is calculated and I agree that, in the circumstances, it is difficult to see how the application of the Contractor’s Share has any bearing on the proper interpretation of Disallowed Cost, much less how it supports a conclusion that the parties intended clause 1(1)(j)(iii) only to apply to breaches of Contract that were wilful and deliberate. I agree with Mr Stansfield that there may be risks which the parties factored in to the Total Costs which do not involve defective work or delay on the part of the Contractor and that, in the circumstances, it would not be right to conclude that the mere fact that this is a Target Cost Contract leads inevitably to the conclusion that the parties agreed to share the risk of a breach of the Contract provisions by the Contractor such that the word ‘default’ in clause 1(1)(j)(iii) must carry something other than its natural meaning.

I reject ABC’s submission that as a matter of commercial common sense and/or commercial reality, the word ‘default’ cannot have been intended to cover any failure by ABC to comply with its contractual obligations, no matter how small and insignificant. To my mind, the words of clause 1(1)(j)(iii) are clear. This is not a situation in which I am dealing with two conflicting interpretations in an ambiguous clause, where it may often be appropriate to adopt the interpretation which is most consistent with business common sense. As Lord Clarke made clear in Rainy Sky SA v Kookmin Bank at [23] “Where the parties have used unambiguous language, the court must apply it.” The same point applies insofar as Mr Sears maintained the suggestion that a wilful and deliberate default must mean a ‘significant’ default such that the parties cannot have intended any cost to be captured by the clause. If the parties had wished to limit Disallowed Cost under clause 1(1)(j)(iii) to cost of a particular level, they could have done so. I agree with Mr Stansfield that importing a requirement for costs to be ‘significant’ into this provision would be likely to create ambiguity and not certainty. It would not be consistent with the natural meaning of the words used or with commercial common sense.

Mr Sears accepted that the Contract was not to be construed with the benefit of hindsight and that commercial common sense cannot be invoked retrospectively.

Turning back to the factors to which the court must have regard in the exercise of the discretion to grant declaratory relief, I did not understand Mr Sears to make any particular submissions as to the justice to Network Rail or to ABC. However, in light of my decision as to the true interpretation of clause 1(1)(j)(iii), it seems to me that justice supports the grant of declaratory relief in favour of Network Rail, subject to the question of whether such declaratory relief would serve a useful purpose and whether there are any other special reasons why the court should not grant relief. In this context I have some sympathy with Mr Stansfield’s argument that the need for this declaration has arisen because of ABC’s change of position as to the true interpretation of clause 1(1)(j)(iii).

ABC contends that the declarations sought would serve no useful purpose because they are in broad terms and are highly fact dependent. It submits that, even if granted, the declarations sought will not establish any actual entitlement for Network Rail to make a deduction. Any such entitlement will depend upon, not only establishing the contractual right, but also establishing that all the costs which it seeks to deduct were incurred as a result of culpable delay on the part of ABC. A full trial will be required to resolve the issues of fact that will inevitably arise and the making of a declaration in these proceedings will save neither time nor money.

Further, ABC identifies two special reasons why the court should not grant the declarations sought. First, it points out that (as Mr Nichol confirms in his statement) the use of ICE Conditions subject to NR12 Amendments is widespread in contracts in the rail sector. However, these contracts may be made and operated in different factual contexts. ABC says that a declaration as to the meaning of the Contract in this case may have potentially significant and unknown consequences in relation to other similar contracts. Second, it says however that because NR12 is not a standard form (but simply a schedule of amendments incorporated by Network Rail into the ICE Conditions), this is not a case where the proposed declaration will create any certainty in relation to the meaning and widespread operation of one of the recognised standard forms of contract.

I have considered these arguments with care, but I am satisfied that this is an appropriate case in which to make the declarations sought and that the factors identified on behalf of ABC do not militate against that conclusion.

I accept Mr Stansfield’s submissions that in circumstances where, as ABC acknowledges, Network Rail has sought to apply clause 1(1)(j)(iii) in a manner consistent with its interpretation and Network Rail relies on that interpretation to justify a deduction of over £13 million for “ABC Delay – Staff”, the declarations sought would plainly serve a useful purpose. Network Rail relies on breaches of clauses 41(2) and 43 in making its deduction. Whilst there may well be ongoing disputes of fact between the parties to these proceedings which may ultimately require some form of dispute resolution, the determination of the threshold question of whether Network Rail is entitled to make a deduction on grounds of simple noncompliance with contractual obligations is very likely to assist the parties to resolve some of the issues between them without necessarily resorting to further legal proceedings (a point that I understood Mr Sears to concede during the hearing). I agree with Mr Shotton when he says in his witness statement that a combination of the court’s view on the question of interpretation of clause 1(1)(j)(iii) and subsequent agreement between the parties as to its application, or determination of its application in adjudication, is likely to be the most cost effective and efficient means of resolving future disputes between the parties.

I am not persuaded by the suggestion that I should refrain from granting a declaration on interpretation in relation to this Contract for fear of the possible impact on other contracts. Whilst I have no doubt that my decision on the interpretation of the NR12 Amendment may be relevant to other contracts, that does not seem to me to be a valid reason for refusing to make the declarations sought. First, in giving this judgment I have decided the issue of interpretation in any event (and was not invited to do otherwise) and I am not clear why the granting of a declaration in Network Rail’s favour will make matters worse. Second, I fail to see how a declaration as to the interpretation of the NR12 Amendments to this Contract will adversely affect the position for other similar contracts. If their factual backgrounds are different then no doubt there would be scope for different construction arguments by reference to their individual circumstances. If their terms, amendments and factual background are the same, then certainty will be achieved by my decision as to the meaning of the very specific amendment with which this case is concerned. Third, there seems to me to be no way of determining the true and proper interpretation of a contractual provision in proceedings of this type, or indeed in a Part 7 trial, without potentially affecting others, whose contracts may contain similar words and phrases. As Mr Shotton says in his statement, “this court has frequently expressed views on the interpretation of standard forms of contract and, far from being a disadvantage, the additional certainty created by the decisions of this court regarding the interpretation of those terms is one of the main benefits of using a standard form”. Whether or not it is correct to regard the NR12 Amendments as a “standard form contract” does not seem to me to make any difference.

In all the circumstances, the justice of this case requires the court to grant declarations in the terms sought. I shall hear further from the parties as to consequential matters if these cannot be agreed on paper.