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You are here: BAILII >> Databases >> England and Wales High Court (Technology and Construction Court) Decisions >> AMEC Group Ltd v Secretary of State for Defence [2013] EWHC 110 (TCC) (08 February 2013) URL: https://www.bailii.org/ew/cases/EWHC/TCC/2013/110.html Cite as: [2013] EWHC 110 (TCC), 146 Con LR 152 |
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OF
JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT
![]() ![]() Strand, London, WC2A 2LL |
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B e f o r e :
____________________
![]() ![]() |
Claimant |
|
- and - |
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![]() ![]() |
Respondent |
____________________
(instructed by Reed Smith LLP) for
the Claimant
Ms Sarah Hannaford QC, Mr Christopher Wilson and Ms Rachael O'Hagan
(instructed by TSol) for
the Respondent
Hearing date: 19 December 2012
____________________
OF
JUDGMENT
Crown Copyright ©
The Hon Mr Justice Coulson:
1. INTRODUCTION
"Target costs mechanisms have become common place but one which imposes a substantial overrun on one party, and then on the other party when that substantial overrun reaches a ceiling, is something which the DRB had not previously encountered."
2. THE CONTRACT
"Maximum Price Target Cost Pricing Provisions
9.1 The Authority and the Prime Contractor have agreed that the following Maximum Price Target Cost (MPTC) pricing provisions shall apply to the Works carried out under this Contract. These provisions are illustrated graphically at Part 9 to the Commercial Document.
9.2 The MPTC Pricing Provisionsfor
the Works comprise the following as detailed in the MPTC Breakdown Schedule at Part 9
of
the Commercial Document:
Design &. Construction Works 9.2.1 Target Cost £120,151,499 9.2.2 Target Profit £6,728,484 (x% of
Target Cost)
(5.6%) 9.2.3 Maximum Cost £139,789,223 (Target Cost + y%) (16.35162%) 9.2.4 Maximum Price £141,615,026 (Target Cost +z%) (17.86372%)
(The % figures in the above breakdown arefor
the purposes
of
establishing revised figures if Changes in the Scope
of
Service take place as contemplated by Condition 7.12 and 12.1)
9.2.5 A sharing arrangementfor
cost under-runs between the Authority and the Prime Contractor
of
55/45 (the Authority's share shown first) between the Target Cost and Actual Cost ascertained in accordance with Condition 9.7 to 9.10.
9.2.6 A sharing arrangementfor
cost over-runs between the Authority and the Prime Contractor
of
75/25 (the Authority's share shown first) between the Target Cost and Actual Costs ascertained in accordance with Conditions 9.7 to 9.10 up to the Maximum Cost, beyond which the Prime Contractor shall be liable
for
all costs incurred in satisfying his obligation under the Contract and whereby the share line becomes 0/100 (the Authority's share first).
9.2.7 The maximum liabilityof
the Prime Contractor
for
any loss, claim or additional costs over the Maximum Price in connection with this Contract or arising from any breach
of
contract or under any indemnity hereunder, breach
of
statutory duty, in tort or otherwise at common law or otherwise howsoever arising shall not exceed the Maximum Price plus £50m (fifty million pounds sterling)
9.2.8 The Prime Contractor confirms that he estimated prices which contribute to the total costof
the MPTC Pricing Provisions, as detailed within Part 9
of
the Commercial Document, represent the best estimate
of
the likely costs
of
the Works. However, both the Prime Contractor and the Authority agree that there will be no adjustment
of
the MPTC Pricing Provisions as a result
of
any increases or decreases to the estimated prices within the MPTC Pricing Provisions, at any time during the course
of
the Contract. This Condition shall not preclude changes to the MPTC Pricing Provisions as a result
of
any other provision
of
this contract."
"6. Condition 9.2.7of
the Terms and Conditions specify that the Prime Contractor's overall financial liability shall not exceed the Maximum Price plus £50m. This pricing agreement is to provide further clarity on who has financial liability at what part
of
the overall MPTC process:
The costs shown in the above diagram represent the Target and Maximum Prices as at 14th December 2008. As a principle, the Authority will require demonstrationof
all actual costs incurred which will contribute to the £50m liability limit."
"Assessmentof
Actual Costs Incurred
9.7For
the purposes
of
assessing Actual Costs incurred by the Prime Contractor, the Prime Contractor shall, in accordance with Condition 9.11, furnish such particulars
of
costs properly incurred in connection with MPTC Pricing Provisions under the Contract as may be reasonably required by the Authority. Such costs shall be allocated in accordance with the Prime Contractor's Cost Allocation Statement at Part 14 to the Commercial Document. The Prime Contractor shall permit such particulars
of
costs to be verified by the Authority by inspection
of
his books, accounts, documents and other records.
9.8 Actual Costs properly incurred against the MPTC Pricing Provisions shall include but shall not be limited to:
9.8.1 Wages and salaries constituting a direct charge to the Works preformed under the Contract;
9.8.2 Materials intendedfor
incorporation in the Works performed under the Contract;
9.8.3 Overheads and administration charges appropriate to the Contract;
9.8.4 Sub-contractor and supplier costs within the Supply Chainfor
which invoices have been received by the Prime Contractor since the date
of
the last Milestone Payment which, in the reasonable opinion
of
the Prime Contractor, are anticipated to be paid to the said sub-contractor and/or supplier before satisfactory completion
of
the Milestone being claimed."
"Assessmentof
Final Price Payable
9.11 The Final Prices Payable to the Prime Contractorfor
carrying out the Works covered by the MPTC Pricing Provisions shall be based upon the Actual Costs in each case properly incurred and verified in accordance with Conditions 9.7 to 9.9. The Prime Contractor shall submit to the Authority, annually from date
of
award
of
contract and within 2 Months
of
completion
of
the Works, a Certified Cost Statement as per the sample attached at Schedule 5 detailing all costs incurred in providing Works under the Contract.
9.12 The Final Price Payable in respectof
the Works shall be calculated as follows:
9.12.1 If the Actual Costs determined in accordance with Conditions 9.7 to 9.8 are equal to the finally adjusted Target Cost, then the Prime Contractor shall be paid the finally adjusted Target Price (i.e., finally adjusted Target Cost plus finally adjusted Target Profit);
9.12.2 If the Actual Costs determined in accordance with Conditions 9.7 to 9.8 are less than the finally adjusted Target Cost, the Prime Contractor shall be paid a sum equal to:
9.12.2.1 The Actual Cost determined in accordance with Conditions 9.7 to 9.8;
9.12.2.2 The finally adjusted Target Profit; plus
9.12.2.3 45%of
the difference between the finally adjusted Target Cost and the Actual Cost determined in accordance with Conditions 9.7 to 9.8.
9.12.3 If the Actual Cost determined in accordance with Conditions 9.7 to 9.8 is greater than the finally adjusted Target Cost then the Prime Contractor shall be paid a sum equal to:
9.12.3.1 The finally adjusted Target Cost; plus
9.12.3.2 The finally adjusted Target Profit; plus
9.12.3.3 75%of
the difference between the finally adjusted Target Cost and the Actual Costs determined in accordance with Conditions 9.7 to 9.8
PROVIDED that the Final Price Payable to the Prime Contractor shall not exceed the contractually agreed Maximum Price.
…
9.15 The Final Price Payable excludes the following:
9.15.15 Any costs incurred by the Prime Contractor by reasonof
any default or breach on the part
of
the Prime Contractor and without prejudice to the generality
of
the foregoing;
9.15.16 Any sum allowed or paid by the Prime Contractor in respectof
liquidation damages;
9.15.17 Any sum allowed or paid by the Prime Contractor as damagesfor
breach
of
contract;
9.15.18 Any sums allowed or paid to the Authority resulting from any loss or damage caused to the Authority, its employees or agents as a resultof
a default by the Prime Contractor.
9.15.19 All costs relating to remedial work as a consequenceof
defects in the Prime Contractor's Works as a result
of
negligence or gross error, or
of
defects noted by the DEPM in reviewing and inspecting Works submitted
for
final inspection, or
of
construction defects becoming apparent during the Defect Liability Period
for
which the Prime Contractor is responsible to make good."
(a) Condition 9.2.5 provided that any cost under-runs between the Target Cost and Actual Cost were to be shared 55/45 between the respondent and the claimant;
(b) Condition 9.2.6 provided that cost over-runs between the Target Cost and the Actual Costs up to the Maximum Price were to be shared 75/25 between the respondent and the claimant;[1]
(c) Condition 9.2.6 also provided that the claimant was liable for
all costs beyond the Maximum Price;
(d) Once the Maximum Price plus £50 million had been reached, then Condition 9.2.7 and paragraph 6 of
schedule B
of
the JEOIPS combined to pass the liability to pay back to the respondent. As noted below, that construction is not now disputed. The remaining issue is whether what was payable by the respondent pursuant to this provision was all costs, or merely actual costs, as defined in the contract.
3. THE AWARD / THE MAJORITY VIEW
(a) The contract conditions and paragraph 6 of
JEOIPS repeatedly referred to and used the phrase "actual costs" (see paragraph 39
of
the award);
(b) If condition 9.2.7 referred to all costs, howsoever incurred, not actual costs, then large parts of
the clause were superfluous (see paragraph 40
of
the award);
(c) Conditions 9.2.6 and 9.2.7 must be read together. When they were, it was clear that the reference to additional costs in condition 9.2.7 must mean actual costs (see paragraph 41 of
the award);
(d) The claimant's contrary construction would have some very unusual results. It would mean, for
example, that the claimant would not be liable
for
the costs caused by its own breaches
of
contract, and that instead the respondent would be liable to pay such costs (see paragraph 42(1)
of
the award);
(e) The claimant's construction would mean that many express provisions of
the contract would become inapplicable once the cap
of
Maximum Price plus £50 million was reached. This would include the claimant's express obligation to remedy defects in its own work, and at its own cost, set out at condition 4.13 (see paragraph 42(2)
of
the award);
(f) The payment mechanisms in the contract related to the payment of
actual costs and were inconsistent with an obligation to pay any costs, howsoever incurred (see paragraph 42(3)
of
the award).
4. THE AWARD / DISSENTING VIEW
"Why would the Authority agree to payAMEC
anything over Maximum Price plus £50 million? The answer must be to protect the Authority and the project from
AMEC
being financially unable to complete the Contract, having absorbed £50 million
of
loss (in addition to any other losses incurred before the maximum was reached)…From
AMEC
's point
of
view another reason would be that
AMEC
could be unable to get financing or comfort from its bankers
for
such a project with all its inherent risks, unless there was some safety valve which would ensure that its losses were capped at £50 million."
5. THE APPLICABLE LAW
5.1 Section 69 of
the Arbitration Act 1996
"(1) Unless otherwise agreed by the parties, a party to arbitral proceedings may (upon notice to the other parties and to the tribunal) appeal to the court on a questionof
law arising out
of
an award made in the proceedings.
An agreement to dispense with reasonsfor
the tribunal's award shall be considered an agreement to exclude the court's jurisdiction under this section.
…
(3) Leave to appeal shall be given only if the court is satisfied—
(a) that the determinationof
the question will substantially affect the rights
of
one or more
of
the parties,
(b) that the question is one which the tribunal was asked to determine,
(c) that, on the basisof
the findings
of
fact in the award—
(i) the decisionof
the tribunal on the question is obviously wrong, or
(ii) the question is oneof
general public importance and the decision
of
the tribunal is at least open to serious doubt, and
(d) that, despite the agreementof
the parties to resolve the matter by arbitration, it is just and proper in all the circumstances
for
the court to determine the question."
In the present case, I consider that the pre-conditions at s.69(3)(a) and (b) above are fulfilled. I also take the view that, if either of
the grounds in (c) are made out, the provision at (d) would not operate to prevent the granting
of
leave to appeal.
5.2 'Obviously Wrong'
"…leave should not normally be given unless it is apparent to the judge upon a mere perusalof
the reasoned award itself without the benefit
of
adversarial argument, that the meaning ascribed to the clause by the arbitrator is obviously wrong. But if on such perusal it appears to the judge that it is possible that argument might persuade him, despite first impression to the contrary, that the arbitrator might be right, he should not grant leave; the parties should be left to accept,
for
better or
for
worse, the decision
of
the tribunal that they had chosen to decide the matter in the first instance."
"This is not however to say that, even in a one-off case, an arbitrator is to be allowed to cavort about the market carrying a small palm tree and doing whatever he thinks appropriate by wayof
settling the dispute. What it does amount to is that the Courts will normally leave him to his own devices and leave the parties to the consequences
of
their choice. They will only intervene if it can be demonstrated quickly and easily that the arbitrator was plainly wrong."
"What is obviously wrong? Is the obviousness something which one arrives at…on first reading over a good bottleof
Chablis and some pleasant smoked salmon, or is 'obviously wrong' the conclusion one reaches at the twelfth reading
of
the clauses and with great difficulty where it is finely balanced. I think it is obviously not the latter."
5.3 Questions of
General Public Importance
5.4 The Relevance of
a Dissenting View
"The differenceof
view between the experienced arbitrators in this case provides,
of
itself, ground
for
contending that the decision
of
the majority is 'at least open to serious doubt'."
In F Ltd v
M
Ltd
[2009] EWHC 275 (TCC), another case where there was a dissenting view, I said at paragraph 16:
"…a comment or observation in a dissenting opinion, to the effect that an important point has been decided by the majority without reference to the parties, will be a factor to which the court will attach weight in dealing with an application under Section 68. Depending on the circumstances, such an observation may have considerable weight, although it is unlikely that it could, on its own, prove determinative."
That was a case concerning irregularity rather than a point of
law, but the same general considerations must apply.
5.5 'Major Intellectual Aberration'
"It could properly be said that, if all the other criteria were established it would often, but not invariably, be unjustfor
an obviously wrong decision on an important question
of
law not to be put right by the court. That could be thought to be even more so if the chosen highly respected arbitrator had simply had a major intellectual aberration."
Although that passage was specifically concerned with s.69(3)(d) of
the 1996 Act, the phrase 'a major intellectual aberration' has subsequently been described as "a useful way
of
bringing to mind that the error on which we are concerned, if there be an error, must be an obvious one": see paragraph 8
of
the judgment
of
Arden LJ in HMV UK
v
Propinvest Friar Limited Partnership [2011] EWCA Civ 1708.
6. DOES THIS APPLICATION RAISE A QUESTION OF
GENERAL PUBLIC IMPORTANCE?
(a) This was originally drafted as a one-off contract, for
use on this particular project;
(b) Two or three other contracts in similar form have subsequently been let over the ten year period since this contract was first agreed;
(c) The vast majority of
the contracts let by the respondent are on standard form contracts, particularly the NEC 3 form, which does not contain the sort
of
complex shifting back and forth
of
the basic liability to pay manifest here.
7. IS THE MAJORITY VIEW OBVIOUSLY WRONG?
8. IS THE DISSENTING VIEW SERIOUSLY ARGUABLE?
(a) At paragraph 56, the dissenter says that the respondent had "no interest" in actual costs once the Maximum Price was reached. That ignores all of
the contract provisions relating to milestone payments and Final Payment, which apply once the Maximum Price was reached and which all say in terms that what matters is actual cost. It also ignores the point that, since the respondent was coming back on risk at Maximum Price plus £50 million, the respondent would inevitably be very interested in what was actual cost and what was cost that was due to the claimant's default, and therefore (at least ordinarily) irrecoverable.
(b) Critically, the observation in paragraph 56 as to the respondent's lack of
interest in actual cost in this situation wholly ignores the proviso to clause 6
of
section B
of
the JEOIPS document (paragraph 8 above) which expressly
states
that "the Authority will require demonstration
of
all actual costs incurred which will contribute to the £50 million liability limit." I consider that the respondent's emphasis on actual costs could not be plainer, and to conclude, in the face
of
those words, that it is 'implausible' that the respondent required the claimant to certify the actual costs once the Maximum Price had been reached, is wrong.
(c) Paragraph 57 talks about certainty and suggests that it is implausible to argue that the claimant's bankers would have thought that the £50 million would be limited to actual costs, so that on this basis the claimant's losses would in fact have had to have exceeded £50 million before the safety valve was triggered. But again, the answer to that is simple: that is what the contract expressly provided. Moreover, certainty is a two-way street. If the claimant was entitled to all costs incurred above Maximum Price plus £50 million, no matter how badly it performed, then in one sense it might be regarded as having an incentive to perform badly. In those circumstances, there would be no corresponding certainty for
the respondent at all.
(d) Paragraph 58 appears to make a virtue of
the size
of
the £50 million figure and then concludes that it could not mean actual costs because they would not be easy to establish. Again, with great respect to the dissenter, that simply ignores all
of
the contractual provisions which repeatedly say that the claimant needed to demonstrate actual costs (however hard or easy they may be to establish).
(e) Paragraph 59, which at first I did not understand, (because it refers to the last sentence of
condition 9.2.6 when in fact condition 9.2.6 is just one sentence) is in truth circular. It is suggesting that condition 9.2.7 is there to bail out the claimant and that therefore, in some way, questions
of
actual costs no longer matter. The conclusion does not follow: even if the clause is a bail-out, that does not mean that it was intended to make recoverable every penny spent by the claimant, no matter how improperly or unreasonably.
9. CONCLUSIONS
Note 1 Although Condition 9.2.6 referred to MaximumCost, the DRB noted at paragraph 32 of their award that this must be an error and the reference should have been to MaximumPrice. Neither party argued to the contrary at the hearing. [Back]