Judgment date: 8th February 2013
In this case a party had challenged an adjudicator’s decision by referring the dispute to arbitration under the contract. Dissatisfied with the arbitral tribunal’s decision, it then sought permission to appeal the tribunal’s award on a point of law. Permission was refused as the Court did not consider that s69 of the Arbitration Act 1996 had been fulfilled. Specifically, the dispute in question was not of general public importance and the arbitrator’s decision was not obviously wrong or open to serious doubt.
Technology and Construction Court, The Hon Mr Justice Coulson
Pursuant to a contract dating from March 2000, the Secretary of State for Defence (“SOSD”) engaged AMEC Group Ltd (“AMEC”) to carry out the design and construction of a facility to support nuclear submarines at HMNB Clyde. The parties agreed to a ‘Maximum Price Target Cost’ of £89 million. However, due to extensive cost and time overruns, the agreed Maximum Price at the date of the judgment was £142.1 million with AMEC expecting the ultimate cost to be as much as £235.7 million. The parties agreed that if costs exceeded the Maximum Price, AMEC would be liable for the excess costs up to a cap of £50 million. The dispute that arose between the parties revolved around; a) whether SOSD were liable to pay anything once costs reached the Maximum Price plus £50 million and b) if they were liable, were they liable for actual costs (defined in the contract as those ‘reasonably and properly incurred’) or any costs howsoever incurred (including those unreasonably and improperly incurred).
The dispute was referred to adjudication and by an adjudicator’s decision dated 8 December 2012, it was concluded that SOSD were liable to pay costs once they exceeded the Maximum Price plus £50 million, but that this liability was limited to actual costs properly incurred.
AMEC challenged the adjudicator’s decision, referring the dispute to arbitration. AMEC sought a declaration from the tribunal of three arbitrators (referred to as the ‘Disputes Review Board’ (DRB)) that it was entitled to all costs howsoever incurred once the Maximum Price plus £50 million was exceeded, whilst SOSD argued that they had no liability at all or, alternatively, a liability limited to actual costs reasonably and properly incurred. In an award dated 26 October 2012, the DRB unanimously declared that SOSD were liable to reimburse AMEC once the costs reached the Maximum Price plus £50 million. The majority considered that SOSD were only liable for actual costs reasonably and properly incurred, while the dissenting view was that they were liable for all costs howsoever incurred once the cap was reached.
On 23 November 2012, AMEC sought leave to appeal on a question of law arising out of the DRB’s award under s69 of the Arbitration Act 1996.
The issues the court had to decide were as follows:
- Whether AMEC should be granted leave to appeal under s69 of the Arbitration Act 1996. Under s69(3), the Act states that:
(3) Leave to appeal shall be given only if the court is satisfied –
(a) That the determination of the question will substantially affect the rights of one or more of the parties,
(b) That the question is one which the tribunal was asked to determine,
(c) That, on the basis of the findings of fact in the award –
(i) The decision of the tribunal on the question is obviously wrong, or
(ii) The question is one of general public importance and the decision of the tribunal is at least open to serious doubt, and
(d) That, despite the agreement of the parties to resolve the matter by arbitration, it is just and proper in all the circumstances for the court to determine the question
- At the heart of whether the application should be granted, was the issue of whether SOSD were liable for all costs, or merely actual costs as defined by the contract.
The court considered that s69(3)(a) and (b) were fulfilled and that if either of the grounds in (c) were made out, the provision at (d) would not operate to prevent the granting of leave to appeal. Therefore, the court had to decide whether the grounds in s69(3)(c) were fulfilled.
The court did not consider the majority view to be obviously wrong (s69(3)(c)(i)) or open to serious doubt (s69(3)(c)(ii)). On the contrary, the court considered the majority view to be plainly right for the following reasons:
- The majority correctly construed condition 9.2.7 (which was the provision particularly relied upon by AMEC as entitling it to be paid all costs howsoever incurred once the Maximum Price plus £50 million was reached) by reference to the other terms of the contract. In doing so, the majority had conclusively demonstrated that the entire pricing and payment regime of the contract depended on the ascertainment of actual costs as defined in the contract.
- It would be very strange, and render large parts of condition 9.2.7 and other parts of the contract superfluous, if provisions relating to the position once the Maximum Price plus £50 million had been reached suddenly abandoned the concept of actual costs.
- The majority demonstrated in their analysis that if all costs, howsoever incurred, were recoverable, this would lead to some odd results. This was not addressed in any detail in AMEC’s application nor was it explained in the dissenting view, and it was an insurmountable bar to AMEC’s construction of condition 9.2.7.
- AMEC’s construction of 9.2.7 would mean it could recover the costs of rectifying its own breaches of contract from SOSD.
The court held that another way of approaching the question raised by AMEC’s application was to consider whether or not the dissenting minority view was seriously arguable. After reviewing the minority opinion, however, the court was not persuaded that it was.
In deciding whether the application raised a question of general public importance (s69(3)(c)(ii)), the court determined that:
- The contract was originally drafted as a one off, for this particular project. It was not in standard form or in regular or widespread use.
- The DRB themselves expressly stated that they had never come across this particular approach to risk sharing before.
- The decision of the DRB was not, as a result, of general interest to the public.
For the reasons stated above, the court refused AMEC’s application for leave to appeal, determining that the provisions of s69 of the Arbitration Act 1996 had not been satisfied.
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