EWHC 1769 (TCC)
Network Rail sought a declaration as to the interpretation of a contract with ABC, an incorporated joint venture, relating to the West Coast Main Line. The contract incorporated the terms of the ICE Conditions of Contract, Target Cost version, 1st edn, subject to a schedule of standard amendments used by Network Rail known as NR12. ABC’s entitlement to payment was based in part on the Total Cost ABC incurred in carrying out the works less any Disallowed Cost. Under clause 1(1)(x) of the contract, “Total Cost means all cost (excluding Disallowed Cost and items covered by the Fee) incurred by the Contractor for the carrying out of the Works…” Pursuant to clause 1(1)(j)(iii), Disallowed Cost means:
“any cost due to negligence or default on the part of the Contractor in his compliance with any of his obligations under the Contract and/or due to any negligence or default on the part of the Contractor’s employees, agents, sub-contractors or suppliers in their compliance with any of their respective obligations under their contracts with the Contractor.”
The words in bold were inserted into the ICE Conditions pursuant to the NR12 Amendments.
Network Rail sought a declaration, using the Part 8 Procedure, as to the meaning of Disallowed Cost in clause 1(1)(j)(iii) and in particular, the meaning of the word “default”. Network Rail said that a “default on the part of the Contractor in his compliance with any of his obligations under the Contract” in clause 1(1)(j)(iii) included any failure by ABC to comply with its obligations under the Contract. This was said to be based on the plain and obvious meaning of the language used. The ordinary meaning of the word “default” was, or included, a failure to fulfil a legal requirement or obligation. Network Rail said that: “on a proper construction of the Contract, any cost incurred due to ABC’s failure to comply with its obligations under the Contract by ABC is a Disallowed Cost.” In an interim assessment of sums due to ABC, the Employer’s Representative included as Disallowed Cost sums incurred due to ABC’s breaches in failing to complete the Works with due expedition, without delay and, by the time for completion. This Disallowed Cost amounted to over £13million.
ABC accepted that the ordinary and natural meaning of the word “default” was “a failure to fulfil an obligation”. However, ABC said that it could not have been the parties’ intention at the time of entering into the Contract that Network Rail should be allowed to deduct any cost incurred by ABC as a result of any failure to fulfil its contractual obligations. Instead, ABC said that (i) when viewed against the background of other relevant clauses in the Contract; (ii) when consideration was given to the overall purpose of the clause and of the Contract (specifically, in this case, a Target Cost Contract) and (iii) when regard was had to commercial common sense, it was plain that the word “default” was intended to carry a narrower meaning.
One difficulty for ABC was that its approach to precisely what this narrow meaning should be changed over time, with a new interpretation being advanced during the course of the hearing. The Judge said that ABC’s various changes of position illustrated the difficulty it had encountered in identifying precisely how the word “default” should be narrowed so as to reflect what it said must be the objective intentions of the parties. This, in turn, tended to suggest that the other provisions of the Contract on which ABC relied do not provide a clear or obvious answer.
The Judge agreed with Network Rail. Disallowed Cost in clause 1(1)(j)(iii) included any cost due to any failure by ABC to comply with its obligations under the Contract. In arriving at this conclusion, Deputy Judge Smith QC accepted Network Rail’s submissions that the word “default” carried its natural and ordinary meaning. The language of the clause 1(1)(j)(iii) was clear and unambiguous. The fact that the word ‘default’ was inserted by the NR12 Amendment gave rise to the presumption that the parties intended to add something to the existing clause. It was common ground that the natural and ordinary meaning of the word ‘default’ was a failure to fulfil a legal requirement or obligation. Any Judge would therefore need very clear evidence from the remaining provisions of the Contract, its factual matrix and commercial context to conclude that it means something different. Lord Neuberger had said in Arnold v Britton  UKSC 36:
“The exercise of interpreting a provision involves identifying what the parties meant through the eyes of a reasonable reader, and, save perhaps in a very unusual case, that meaning is most obviously to be gleaned from the language used…the clearer the natural meaning the more difficult it is to justify departing from it.”
The meaning proposed by ABC, namely a “wilful and deliberate” failure to fulfil a legal requirement or obligation, was a meaning that would only usually be achieved by the addition of extra words. There were no additional words in clause 1(1)(j)(iii), or anywhere else in the Contract, to indicate that this was what the parties to the Contract really meant by the word “default”. Further, the references to other contract provisions featuring the word “default” did not help. They were found in the heading, but not substance, of an unconnected termination provision and in any event the Contract said that headings were to be ignored for the purposes of construction.
Finally, the Judge rejected the suggestion that as a matter of commercial common sense and/or commercial reality, the word ‘default’ cannot have been intended to cover any failure by ABC to comply with its contractual obligations, no matter how small. The words here were clear. This was not a situation where there were two conflicting interpretations in an ambiguous clause. The intention of the parties was apparent from all of the terms of the contract, including the provisions of clause 1(1) as to the meaning of Disallowed Cost which, the Judge considered, made it plain that the contractor was intended to bear the risk of his own breach of contract. Disallowed Cost was deducted from the Total Cost before the Contractor’s Share was calculated. Words used in a contract will be given their natural and ordinary meaning.