Atkins Ltd v Secretary of State for Transport

[2013] EWHC 139 (TCC)

Atkins sought to challenge an arbitrator’s award under section 68 of the Arbitration Act 1996 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. The dispute arose out of a management and construction contract for a number of trunk roads in East Anglia. Atkins came across a greater number of potholes (which it had to repair) than it had expected and claimed extra payment, on the basis that this constituted a compensation event under the contract. An adjudicator had agreed with Atkins, but the Authority successfully took the dispute to arbitration.

The Contract contained a version of the NEC3 Conditions, albeit somewhat modified. Mr Justice Akenhead noted that whilst the NEC3 terms are seen by many as providing material support to assist the parties in avoiding disputes and ultimately in resolving any disputes that do arise, there are also:

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.”

The contract was on a lump sum basis subject to Atkins’ right to claim relief if a “compensation event” occurred. Sub-clause 60.1(11) stated that a compensation event arose where:

The Provider encounters a defect in the physical condition of the Area Network which

  • is not revealed by the Network Information or by any other publicly available information referred to in the Network Information,
  • was not evident from a visual inspection or routine survey of the Area Network at the Contract Date,
  • an experienced contractor or consultant acting with reasonable diligence could not reasonably have discovered prior to the Contract Date and
  • 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.

Only the difference between the physical conditions encountered and those for which it would have been reasonable to have allowed is taken into account in assessing a compensation event.”

Atkins placed some reliance on the fourth requirement of the subclause. However, the Judge noted that there was nothing in the language of the clause which expressly suggested that the number of defects was an important element in the compensation event equation. This meant that it was very difficult to conclude that an excess number of potholes over and above a reasonable maximum number which could be considered to have been allowed for can form the basis for establishing the encountering of one or more potholes above that number as one or more compensation events.

The Judge felt that one had to ask whether as a matter of an overall businesslike or commercial interpretation this bullet point requirement must be read as meaning in effect that, where the number of potholes (in this instance) has exceeded the number which might be determined as being a maximum that an experienced contractor/ consultant might reasonably have allowed for in its pricing, each and every pothole encountered above that number is a defect which such a contractor/consultant would not reasonably have allowed for. As a first point, the Judge commented on the practical difficulties of determining how many potholes would constitute an excessive number. It would be “an extremely difficult and probably artificial exercise” to try and establish this.

Further, the Judge did not consider that there is any commercial logic or common sense in defining the contract as enabling the volume of individual defects to be part of the equation. The concentration in the sub-clause was on “a defect in the physical condition” (a pothole in this instance) which would objectively be judged initially as having had such a small chance of being present that it would not reasonably have been allowed for within the pricing.

Taking a commercial view, the Judge noted that the contract was a lump sum as opposed to a re-measurement contract. This meant that the parties collectively take a risk that the defects to be addressed will be more or less in number and in terms of expense than the contract lump sums may allow for. Thus, the Authority may end up paying much more than it might have done through the lump sum if the defects turn out to be a lot less than the lump sum may have allowed for; Atkins would then make correspondingly additional and nonanticipated extra profit. Conversely, the Authority may end up paying less if the defects to be addressed turn out to be more in number with Atkins making less profit or incurring more cost than it had anticipated. The Judge concluded that:

There is nothing commercially unfair or indeed unusual in the parties taking these sorts of risk.“

The Authority also raised the issue of the number of compensation event notices that would be required if Atkins’ interpretation was accepted - essentially a separate notice would be required for each pothole. Whilst the Judge felt that this was a “fair point”, it was not one which could be said to be determinative of the issue.

In cases such as these, the Court can only intervene under s.68 in respect of any established irregularity “as has caused or will cause substantial injustice”. The Judge did not consider that the arbitrator was wrong in his overall reasoning and conclusions. It therefore followed that there was no substantial injustice.