A recent decision in the Technology and Construction Court regarding the final price payable on a design and construct contract (incorporating a Maximum Price Target Cost provision) illustrates the requirements for an application under section 45 of the Arbitration Act.

Facts

In Secretary of State for Defence v Turner Estate Solutions Limited [2015] the Honourable Mr Justice Coulson considered the Claimant’s application under section 45 of the Arbitration Act 1996 (“the Act”) for the court to determine two preliminary questions of law.

This claim arose out of works carried out by Turner Estate Solutions Ltd (TES) for the Secretary of State for Defence (SSD) at HMNB Clyde. The parties contracted under a Maximum Price Target Cost agreement (MPTC). The philosophy behind such an agreement is to allow the parties to share the burden/benefit of any cost over- runs.

The contract was intended to operate on an ‘open book’ basis, whereby TES’ accounts could be interrogated by SSD, thus allowing the actual costs to be verified. These actual incurred costs (plus an allowance for profit) formed the basis of the remuneration, but the Final Price Payable (FPP) was calculated on a comparison between the actual costs and target costs (under the ‘pain/gain’ share mechanism).

Construction works proved problematic and TES’ actual costs were significantly higher than the payment it would have received pursuant to the FPP provision under the contract.

TES submitted that as both parties had stopped applying the target cost adjustment process part way through the duration of the contract, that the contractual arrangements regarding Maximum Price/Target Cost were not operable, and that it should be allowed its actual costs as well as an allowance for profit.

The law

Section 45 of the Act allows parties in arbitration proceedings to refer questions of law to the court which arise in those proceedings. Mr Justice Coulson noted the lack of appropriate authorities in relation to the Act before referring to the case of Taylor Woodrow Holdings Ltd and another v Barnes and Elliot Ltd [2006] and citing Lord Justice Jackson (as he was then):

“…it seems to me highly desirable to establish what is the legal basis of the Contractor’s claim, before the parties spend substantial sums of money on marshalling and presenting both factual and expert evidence on the individual heads of claim. In my view, it is cost–effective from the point of view of both parties to resolve the question of law now, and this course is likely to lead to a saving of costs…”

Mr Justice Coulson referred to five matters which must be taken into account when assessing the merits of an application under the Act, there must be:

  • A question of law
  • Which substantially affects the rights of the parties
  • Which is being referred to the court either with the agreement of the parties or with the permission of the tribunal; and (if the latter)
  • The determination of the question is likely to produce substantial savings in costs
  • The application is made without delay.

TES were seeking £68 million in excess of that to which it would be entitled to under the MPTC provision; SSD were counterclaiming for overpayment. SSD made an application under section 45 of the Act for the court to determine two preliminary issues:

  1. Whether the target cost could be adjusted in respect of a change which should have been the subject of an adjustment during the design and construction period.
  2. If not, how the FPP was to be determined under the contract.

Mr Justice Coulson first held that the application was “firmly” within section 45 of the Act.

As to the preliminary issues, Mr Justice Coulson found in favour of SSD. He ruled that TES’ construction of the contract flouted business common sense and failed to take into account the construction of the contract as a whole. The contract had to be construed in accordance with business common sense (citing McAlpine Humberoak Ltd v McDermott International Inc).

Mr. Justice Coulson appeared to have been influenced by an example highlighted by Counsel for SSB which cited that on TES’ pleaded case, had there been a change on the last day before practical completion, it would follow that the change (despite its low value and occurring too late to create an incentive in terms of the Target Cost) would result in neither the Target Cost nor the FPP operating at all; the commercial bargain between the parties could be fundamentally altered by such a small procedural failure.

Commentary

Whilst the decision on the preliminary issues was hardly surprising, the case provides a useful reminder of the potential benefits of an application under Section 45 of the Act. This was particularly so in this matter, where the calculation of the FPP was the principle issue in an arbitration which had been going on for many years.