Serious irregularity - ss 68 and 69 Arbitration Act 1996
Atkins Ltd v The Secretary of State for Transport
Technology and Construction Court; before Mr Justice Akenhead; judgment delivered
1 February 2013
Under an amended NEC3 contract dated 26 February 2008, Atkins was employed by the Secretary of State for Transport (“the Authority”) to act as managing agent and contractor for Area 6 of the highways network for a period of 5 years. Area 6 covered Cambridgeshire, Essex, Hertfordshire, Norfolk and Suffolk. Under the Contract Atkins was required to maintain the roads in Area 6 and carry out both routine and cyclical maintenance. Atkins was required to rectify defects and Annex 2.1.1 to the Contract included potholes in a non-exhaustive list of Category 1 defects that would require prompt attention.
Clauses 60-65 provided for compensation events entitling Atkins to claim additional monies over and above what the Contract otherwise allowed for. Under cl. 60.1(11) Atkins could claim compensation for a defect that: (i) had not been revealed by the information previously available; (ii) that was not evident from a visual inspection or routine survey; (iii) that could not reasonably have been discovered prior to the Contract date; and, (iv) that “… 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.”
Clause 90.1 provided for disputes to be referred to adjudication and that if a party was dissatisfied with the Adjudicator’s decision it could refer the dispute to arbitration.
A dispute arose between the parties regarding payment for works to remedy potholes. Atkins claimed that the prevalence of potholes on the network was significantly greater than anticipated and that it was therefore entitled to payment as a compensation event under cl. 60.1(11). On 3 February 2012 Atkins referred the dispute to adjudication. The parties agreed that the Adjudicator was to determine in principle the issue as to whether, assuming the facts were established, there was a compensation event. In his decision issued on 9 March 2012 the Adjudicator rejected two of the arguments put forward by Atkins but accepted the third, finding that potholes occurring after the date of the Contract were defects within clause 60.1(11) if they exceeded in volume the number of potholes that it would have been reasonable for an experienced contractor to have allowed for.
On 4 April 2012 the Authority commenced arbitration in order to challenge the Adjudicator’s findings in favour of Atkins. The Authority submitted that the Contract provided no threshold or limit on the number of potholes Atkins might be required to repair and that Atkins’ construction of cl. 60.1(11) which treated “defect” as meaning “volume of defects” made no commercial sense.
The nub of Atkins’ case was that “a defect” could mean a pothole and that subject to meeting the first three criteria in cl. 60.1(11), point (iv) would be satisfied if the potholes claimed for would not have been allowed for by an experienced contractor because there was such a small chance of such an excessive number of potholes occurring.
On 22 November 2012 the Arbitrator issued an Interim Award finding that an excess volume of potholes was not capable of constituting a defect and therefore was not a compensation event. On 19 December 2012 Atkins wrote to the Arbitrator stating that there had or may have been a “serious irregularity” within the meaning of s.68 of the Arbitration Act 1996 (“the 1996 Act”).
On the same day Atkins commenced proceedings to challenge the Arbitrator’s Interim Award under s.68 of the 1996 Act. Atkins contended that where the Arbitrator had failed to understand the claim they had formulated and had consequently failed to deal with it, then under s.68(2)(d) of the 1996 Act this amounted to a serious irregularity that had or would cause substantial injustice. In the alternative Atkins sought permission to appeal on a point of law under s.69(3) of the 1996 Act.
Issues and findings
What approach should the Court take when determining whether or not there was a serious irregularity in an arbitration award?
The correct approach was to consider the reasoning and the overall conclusion reached to see whether in reality there was a serious irregularity. The Court was not required to engage upon a hypercritical or excessively syntactical analysis of an award.
Had there been a serious irregularity?
No. It was impossible to say that there had been any, let alone a serious irregularity in circumstances where the words used by the Arbitrator confirmed that he knew the issue, had analysed the relevant wording of cl. 60, reviewed the commercial context and produced the decision that he did.
Had there been substantial injustice?
No. The Arbitrator was not wrong in his overall reasoning and his conclusion as to the meaning of cl. 60.1(11). It followed that there could be no substantial injustice even if a serious irregularity was established.
Should permission to appeal be granted?
No. The point to be appealed, i.e. the proper meaning of cl. 60.1(11), had already been determined by the Court when considering Atkins’ application. Permission would have been refused in any event where on balance the Arbitrator’s decision was not obviously wrong or open to serious doubt within the meaning of s.69(3)(c) of the 1996 Act.
The principal issue raised in this case was whether or not Atkins could satisfy the requirements of sections 68 and 69 of the 1996 Act in order to challenge the Arbitrator’s award. For the purposes of considering these applications the Judge found it necessary to look at the issue of contractual interpretation raised in the adjudication and the arbitration, i.e. the proper meaning of cl. 60.1(11). Strictly speaking then, the Judge’s comments upon this aspect of the NEC3 Form are obiter. Even so, as the Judge noted in paragraph 9 of the judgment, very few cases involving disputes as to the interpretation of the NEC3 Conditions have featured in reported Court decisions so the analysis of cl. 60 will be of interest to practitioners.
The Judge agreed with the submissions of the Authority to the effect that if cl. 60.1(11) was to be interpreted in the manner contended for by Atkins then it would have converted what was a lump sum contract into a re-measurement arrangement. The Judge concluded that if this interpretation was correct then Atkins would have been in a “win/win” situation because they could have kept the whole of the lump sum if the number of potholes was less than they reasonably anticipated but would be compensated if there were more potholes than they had expected. Commercial common sense therefore supported a construction whereby each party took commercial risks.
The Judge also took into account the practical side effect that if every pothole encountered across the road network within Area 6 amounted to a compensation event, then possibly thousands of notices would have to be given under the Contract, with each one including a quotation.
The Judge stated that when considering whether an Arbitrator’s award contains serious irregularities the Court should not undertake a hypercritical or excessively syntactical analysis of the award. Rather the Court should focus on the reasoning and conclusions. The Judge was clear that parties should not try to dress up a simple error as a serious irregularity in order to try and convince a Court to interfere with an Arbitrator’s award.
Finally, on the permission to appeal point it is worth noting that the Judge concluded that the proper interpretation of cl. 61.1(11) did raise a question of general public importance in accordance with s.69(3)(c)(ii) of the 1996 Act. The Judge observed that this criterion would have been satisfied where the NEC3 Standard Form is widely used and where potholes in roads are an increasingly widespread problem in times of economic downturn, Government spending cuts and changing weather patterns.
Audit clauses - reasonable requests for documents
Transport for Greater Manchester v Thales Transport & Security Ltd
Technology and Construction Court; before Mr Justice Akenhead; judgment delivered
21 December 2012
During October 2008 Transport for Greater Manchester (“TGM”) engaged Thales under a contract (“the Contract”) to supply a new tram operating system. The original Contract sum was for £22 million. The Contract contained provisions entitling TGM and others to carry out a detailed and wide ranging audit of Thales’ documents with the purpose of verifying Thales’ compliance with its contractual obligations. Under cl. 27, Thales was required for a period of at least 12 years to maintain in a form suitable for inspection all records relating to the performance of its obligations under the Contract (“the Records”).
Clause 28.1 additionally provided that upon a reasonable request, Thales was to provide other information, records or documents in its possession or control, or in the possession or control of its auditors, agents or subcontractors, that related to the Records (“the Related Information”). Clause 28.2 provided that on giving reasonable notice, TGM, amongst others, would be entitled to inspect and make copies of the Records, the Related Information or any other documents in Thales’ possession or control which related to the carrying out of any of Thales’ obligations under the Contract.
The Contract works were delayed and during September and October 2012 Thales submitted claims for significant increased costs and an extension of time. Starting in July 2012, TGM submitted various requests to Thales for information regarding the claims. TGM stated that they wanted to inspect these documents in order to assess the claims. Thales did not provide any of the information requested.
During November 2012 TGM commenced Part 8 proceedings seeking an order for specific performance requiring Thales to disclose all of the categories of documents requested. Before the hearing Thales conceded that it would disclose some of the documents requested but the Court was left to consider TGM’s entitlement to inspect documents in a dozen or so categories. Thales raised a number of objections including that:
- the references to documents which “related” to performance or carrying out of obligations were limited so that cost records were generally excluded;
- TGM’s requests lacked clarity and so specific performance should not be ordered;
- requests for certain cost-related documents were too broad or imprecise;
- commercially sensitive documents should not be disclosable, nor should documents relating to employment records as their disclosure might offend the Data Protection Act; and,
- some of the documents requested were privileged.
TGM argued for a broad definition of the Contract and asserted that each of the categories of documents requested were disclosable under clauses 27 and 28.
Issues and findings
Was TGM entitled to an order for specific performance?
Yes, in relation to the majority of the categories of documents requested. TGM had established that the documents had been requested in order to verify Thales’ compliance with its obligations under the Contract. Clauses 27 and 28 encompassed the provision not only of source or basic records relating to Thales’ performance and supply but also of other documents which related in a broad sense to performance and supply.
It was common ground that the test here for disclosability was a matter of contract and the Judge’s conclusions turned upon the proper construction of clauses 27 and 28. Whilst the Judge found that the requests for documents or information had to be reasonable, so that if they were not, Thales did not have to comply, he concluded that most of the categories of documents sought by TGM’s requests were reasonable and in compliance with the terms of the Contract which were to be broadly interpreted. In particular the Judge noted the frequent use of the words “related to” in clauses 27 and 28 and found that these general words did not suggest that the requests for documents were to be limited.
Therefore, Thales was ordered to provide access to a wide range of information including commercially sensitive documents, documents containing confidential information or personal data and company board minutes. Unusually for a construction contract, the relief ordered was specific performance rather than disclosure in accordance with CPR Part 31. The range of documents that are to be disclosed under an audit clause may be wider or narrower than that required under CPR Part 31, and unless expressly catered for in the clause, issues of proportionality should not arise. The scope of a contractual audit clause will always depend upon the precise wording. As with any contractual term, an audit clause that is not clearly worded may be more difficult to enforce.
The judgment also briefly touches upon the issue of litigation privilege. Thales argued that some of the reports identified in TGM’s requests had been prepared for their legal department with the dominant purpose of gathering information for use in contemplated adjudication and/or litigation. The Judge declined to make a decision on the evidence before him and allowed Thales an opportunity to submit further witness evidence to enable the Court to form a view as to the dominant purpose of the reports and other issues relating to privilege.
Primary and secondary obligations - whether instrument comprised on-demand bond
Wuhan Guoyu Logistics Group Co Ltd and another v Emporiki Bank of Greece SA
Court of Appeal (Civil Division); before Lord Justice Longmore, Lord Justice Rimer and Lord Justice Tomlinson; judgment delivered 7 December 2012
Wuhan Guoyu Logistics Group Co Ltd and Yangzhou Guoyu Shipbuilding Co Ltd (“the Sellers”) jointly operated a shipbuilding company in Yangzhou, China. On 29 November 2006 the Sellers entered into two contracts with Swissmarine Inc of Liberia for the construction of two 57,000 DWT bulk carriers known as Hull GY402 and Hull GY404. During November 2007 the contracts were novated to Kantara Navigation Limited and Tamassos Navigation Limited (“the Buyer”), respectively. The price for Hull GY404 was to be US$41,250,000 payable in five instalments. Under Article 3(b) of the contract for Hull GY404 (“the Shipbuilding Contract”) the second instalment of US$10,312,500 was payable following the provision by the Sellers of a Refund Guarantee and the Buyer’s receipt of notification from the Sellers that the first 300m of steel plate had been cut, as confirmed and approved by the Buyer’s representative.
The Shipbuilding Contract also required the Buyer to arrange an irrevocable letter of guarantee in a prescribed form to cover payment of the second instalment. In compliance with this requirement, on 14 December 2007 Emporiki Bank of Greece (“the Bank”) issued a guarantee (“the Letter of Guarantee”) to the Sellers. The Letter of Guarantee included wording to the effect that the Bank irrevocably, absolutely and unconditionally guaranteed as the primary obligor and not merely as the surety, the due and punctual payment by the Buyer of the second instalment. The Letter of Guarantee also provided that the Bank would pay the second instalment plus interest upon receipt by the Bank of the Sellers’ written demand stating that the Buyer had failed to pay for a period of 20 days after the second instalment fell due.
The Sellers claimed that the first cutting of the steel took place on 18 April 2009 but the Buyer disputed this as its representative had not been present. On 29 April 2009 the Bank received a Refund Guarantee but this was not in the form prescribed by the Shipbuilding Contract. Following further exchanges the Sellers agreed to issue a revised version but did not do so. On 11 May 2009 the Sellers issued an invoice for the second instalment together with a certificate to the effect that the steel cutting for Hull GY404 had been carried out on 18 April 2009 at the Sellers’ shipyard. The certificate had been signed by the Sellers and by a Bureau Veritas surveyor but not by the Buyer as again, its representative had not been present.
The Buyer’s position was that the second instalment had not fallen due because the criteria in the Shipbuilding Contract had not been satisfied where: (i) it was not clear that 300 m of steel plate had in fact been cut; (ii) that the steel cutting had not in any event been approved by its representative; and (iii) the Refund Guarantee provided by the Sellers was not in the form prescribed by the Shipbuilding Contract. The Buyer and the Sellers subsequently commenced arbitration proceedings in relation to these and other disputes under the Shipbuilding Contract.
On 22 June 2011 the Sellers submitted a demand for payment to the Bank. The Bank did not pay and in 2012 the Sellers issued an application for summary judgment contending that the Letter of Guarantee was in the nature of an on-demand bond so that payment was due upon a receipt of their written demand, irrespective of the contractual position between the Buyer and the Sellers. The Bank contended that the Letter of Guarantee was in the nature of a true guarantee so that its liability was contingent on resolution of the dispute raised by the Buyer over whether the second instalment was actually payable in accordance with the terms of the Shipbuilding Contract.
At first instance, Mr Justice Christopher Clarke found that whilst some of the wording suggested primary obligations, the Letter of Guarantee also included the classic language of a guarantee, so that when looked at as a whole, it could not be regarded as an on-demand instrument. The Sellers appealed.
Issues and findings
Was the Letter of Guarantee a true guarantee that gave rise to contingent obligations only?
No. Where, as in this case, the document related to an underlying transaction between parties in different jurisdictions, had been issued by a bank, contained an undertaking to pay “on demand” and did not include any provisions excluding or limiting the defences available to the guarantor, the presumption should be that it was an on-demand instrument.
Longmore LJ delivered the leading judgment in the Court of Appeal and began by confessing to facing some difficulty where the Letter of Guarantee included wording that pointed towards an on-demand obligation but also wording that pointed towards a guarantee. He made it clear that the Court would not adopt an approach based upon comparing the number of “pointers” in a document which suggested an on-demand obligation with those that suggested a guarantee, with the higher number prevailing.
Longmore LJ reiterated the principle that where certain phrases appear, they may give rise to a presumption as to the proper meaning of the document. Applying this principle, Longmore LJ placed considerable reliance upon the guidance set out in Paget’s Law of Banking to the effect that where an instrument: (i) relates to an underlying transaction between parties in different jurisdictions; (ii) is issued by a bank; (iii) contains an undertaking to pay “on demand” (with or without the words “first” and/or “written”); and, (iv) does not contain any provisions excluding or limiting the defences available to a guarantor, then there is a presumption that the instrument should be construed as creating on-demand obligations.
Longmore LJ considered that at first instance, the Judge had construed the Letter of Guarantee in isolation and fallen into error by not giving enough weight to the presumption described in Paget and the relevant authorities that supported it. It seems clear that Longmore LJ was aiming to achieve a degree of consistency in the approach to be adopted by the Court when faced with disputes over whether or not an instrument is on-demand or a guarantee. As it is, the Court of Appeal’s judgment should be of some comfort to those claimants who can satisfy all or most of the criteria giving rise to the presumption described in Paget but it remains difficult to set out a definitive list of factors which determine whether an instrument is a true guarantee or is on-demand.
Longmore LJ noted that in most disputes over the meaning of guarantees the Court will be called upon to consider numerous previous authorities in order to determine how near or how far the document in question differs from documents construed in past cases. Absent clear wording and a willingness to dispense with some of the archaic phrases that still appear in guarantees, it seems likely that disputes based upon competing authorities will still end up in Court, with this judgment now added to the pick and mix selection of decisions from which parties may seek to fashion arguments on interpretation.