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NEC3

21 March 2013

Introduction

The recent decision of Atkins Limited v The Secretary of State for Transport [2013] EWHC 139 (TCC) is a rare beast, being a dispute arising under the NEC3 form.

The case involved complex questions of contract interpretation. Giving judgment, Mr Justice Akenhead noted;

"There are some siren or other voices which criticise these Conditions for some loose language, which is mostly in the present tense, which can give rise to confusion as to whether and to what extent actual obligations and liabilities actually arise."

Despite this, the court had no difficulty in interpreting the compensation event provisions set out in the amended NEC3 form and applied the basic principles of contract interpretation we know so well from Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] WLR 896 and Chartbrook Limited v Persimmon Homes Limited [2008] EWCA Civ. In light of this, is it time for the sirens to stop singing?

The decision

Atkins sought to challenge an Arbitrators award on the grounds that there was a serious irregularity, said to be a failure on the part of the Arbitrator to determine the issue put to him. Alternatively, Atkins sought permission to appeal the award. Mr Justice Akenhead found that there was no serious irregularity and stressed that in any event the Court could only intervene if an established irregularity "has caused or will cause substantial injustice" - which were not present here since Mr Justice Akenhead did not consider that the Arbitrator was wrong in his overall reasoning.

Interpretation of the NEC3 form

The underlying issue between the parties was the interpretation of the compensation event provisions of an amended NEC3 contract, being for routine maintenance to an area of the highways network over a five year period. The dispute related to whether Atkins could recover the costs of repairing what it considered to be an excessive number of potholes.

The contract identified a compensation event in the terms set out below, which is very similar in terms of terminology and language to clause 60.1(12) of the standard NEC3 conditions:

"The Provider encounters a defect in the physical condition of the Area Network which … an experienced contractor or consultant would have judged at the Contract Date to have such a small chance of being present that it would have been unreasonable for him to have allowed for it."

It was common ground between the parties that a pothole was a defect for the purposes of the contract. However, Atkins said that it was entitled to compensation for each and every pothole encountered above the number which might be determined as a maximum that an experienced contractor might reasonably have allowed for. In contrast, the Secretary of State said that a volume of potholes which could reasonably have been foreseen or allowed for was immaterial and an excess over that number did not in itself give rise to a compensation event; the clause was intended to deal with latent defects which existed at the Contract Date but could not have been foreseen by the contractor.

Mr Justice Akenhead considered that the wording of the amended compensation event condition was clear. He did not think that an excess volume of potholes was an occurrence with "such a small chance of being present that it would have been unreasonable … to have allowed for it" and highlighted the "very real practical difficulties" of trying to determine the number of potholes an experienced contractor might have allowed for.

He also considered whether "as a matter of an overall businesslike or commercial interpretation" the compensation event clause could be interpreted as Atkins claimed. He highlighted that the contract was, broadly, a lump sum as opposed to a re-measurement contract, under which the parties had allocated risk in relation to defects, which he thought was not commercially unfair or unusual.

Mr Justice Akenhead considered that there was no "commercial logic or common sense" in defining the compensation clause as interpreted by Atkins. It would mean Atkins took no commercial risk since it ended up in a win/ win situation in which it would keep the whole of the lump sum, if the number of potholes was less than reasonably anticipated but almost automatically get additional payments if that number exceeded what was reasonably anticipated

Comment

Whilst Mr Justice Akenhead saw fit to repeat some of the criticisms of the NEC3 form, he did not in practice appear to have any difficulty interpreting the terms in question, which included language in the present tense. He applied without comment the basic principles of contract interpretation set out in Investors Compensation Scheme Ltd and Chartbrook. This lack of struggle reflects the other occasions on which the Courts have considered the NEC3 form, including Mr Justice Jacksons (as he then was) consideration of the role of the project manager when certifying cost in Costain Ltd and anor v Bechtel Ltd and anor [2005] TCLR 6 (TCC).

However, it is true that the NEC3 does raise some interesting and difficult contract interpretation points which do arise out of loose language. For example, what does the phrase "act … in a spirit of mutual trust and co-operation" actually mean? It is not difficult to see that it might be used as a stick with which to beat a contractual counter party in the event that relations on a project turn sour (see Costain). Until such language is the subject of Court decisions, certainty as to its meaning is likely to remain elusive. It is for this reason that the sirens sing.

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If you would like more information on this topic please contact Tim Claremont 0115 976 6520 or Mike Sadler 0115 976 6599.

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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