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Rainy Sky revisited – common sense in the TCC

I am always nervous when contracts that I had a hand in drafting end up in the High Court. Thankfully it hasn’t happened too often, but when it does there is an inevitable frisson as I wonder what the judge will make of it. Will he agree that my drafting means what I intended it to say? Will he give it an entirely different interpretation? Or – worst of all – will he (to quote Salmon LJ) condemn it as a “farrago of obscurities”?

Well, it happened recently in Atkins Ltd v Secretary of State for Transport, a case on the Highways Agency’s Managing Agent Contractor (MAC) form of contract. The point at issue (whether the repair of potholes was included in the provider’s lump sum price) had already been considered by two eminent silks (adjudicator Andrew Bartlett QC and arbitrator John Uff QC), who had come to opposite conclusions, so there was an extra edge to this one. Happily, common sense (as I saw it) prevailed and Akenhead J came down in “my” favour. But it got me thinking about the drafting process, shades of meaning and the intersection between words on paper and the real world.

Clarity of expression and NEC contracts

In one sense the case is of particular interest, because the MAC contract is loosely based on the NEC suite. “Loosely” because it is a term maintenance contract and was drafted before the publication of the NEC’s Term Service Contract. So, while it contains a number of provisions that foreshadow the Term Service form, it is not derived directly from it.

As it happens, the NEC “style” used in the MAC was not subjected to critical examination, although Akenhead J prefaced his remarks by noting that “some siren or other voices” have criticised the NEC conditions for “loose language”. In the event, the decision came down to a matter of construction, informed by the judge’s understanding of the commercial background. Briefly, he held that the interpretation for which Atkins contended would transfer the entire risk of excessive potholes back to the Agency, when the overall scheme of the contract clearly envisaged that Atkins would carry (and were deemed to have priced) this risk. In other words, the actual words used were less important than the message they conveyed.

In a way, this comes as something of a disappointment. The pure lawyer in me would have been much happier if the judge had been dazzled by the clarity of my crystalline drafting. However, real life isn’t like that. Plus mere words cannot hope to cover the full range of circumstances that may arise under a complex contract such as this. Perhaps the best we can hope for is to convey the right impression and leave the rest to common sense. If so, it seems as though my drafting did its job.

The AMEC case

Similar thoughts came to my mind when reading Coulson J’s decision in AMEC Group Ltd v Secretary of State for Defence. This was not one of my contracts, but a “Maximum Price Target Cost” contract let by the MoD for the construction of a nuclear submarine berthing facility on the River Clyde. The project clearly went badly wrong and the final cost exceeded the target by more than £93 million. The contract did not expressly cater for this situation, stating only that the contractor would bear the first £50 million of any overruns.

Interestingly, this case also featured John Uff QC, this time as adjudicator. He decided that the MoD would be liable for costs in excess of the £50 million cap, but limited to costs properly and reasonably incurred. The matter was referred to a three-strong dispute review board (DRB), the majority of whom agreed with Professor Uff. The dissenter considered that the MoD should be liable for all costs above the cap, however incurred – including costs attributable to the contractor’s own breaches of contract.

Until this point I had been wondering why the case had even got this far. Surely AMEC’s argument defied all commercial logic and common sense? But (so we were told) the DRB comprised two well-known QCs specialising in construction law and a distinguished former TCC judge. The case report does not reveal which was the dissenter, but clearly one of them had been swayed. So the argument must have had at least some merit (or been very persuasively put).

In any event, Coulson J took a robust line. He described the dissenter’s analysis (that the purpose of the cap was to protect the MoD from a situation where AMEC was financially unable to complete the project) as unsupported by evidence and “an unusual approach to contract construction”. More importantly, he took the view that, when read as a whole, the contract was clearly structured on the basis that costs would only be reimbursed if reasonably and properly incurred. This was as much the case in the “catastrophe” situation as for other costs. As he said, it would be a “very curious result” if all the provisions requiring proper justification of costs were “suddenly abandoned” at the point where the MoD’s excess liability kicked in. Such a “bizarre conclusion” would need to be supported by very clear words, and nothing of the sort existed here. He dismissed AMEC’s argument as “at root a semantic one” and “remarkably unattractive”.

Strong stuff indeed. I bet the draftsman breathed a sigh of relief. Semantic arguments may by their nature be unattractive, but they sometimes succeed. No doubt it had not even occurred to him (or her) that such a point might be raised, which is why it was not expressly covered off. Or perhaps he (or she) thought the point was so obvious that it did not need repeating.

Either way, we now have two recent examples of TCC judges favouring common sense over semantics and following the lead given by the Supreme Court in the Rainy Sky case. When Rainy Sky came out, I nailed my colours firmly to the mast of “commercial purpose” (see my blog post dated 9 November 2011). I am pleased to see that the spirit of Lord Hoffmann lives on.

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