Contract interpretation
Network Rail v ABC (High Court) [2019]
There have been a number of very senior decisions by the courts over the last few years which have helped to clarify the rules governing contract interpretation. This case does not alter the law but is an illustration of the application of the law in practice
Facts:
Network Rail entered into a contract under which ABC agreed to carry out power upgrade works in relation to the West Coast main line. The contract was a so called ‘Target Cost’ model. Essentially, the contractor, ABC was entitled to charge on the basis of all costs incurred in carrying out the works less ‘Disallowed Costs’ (as defined). Disallowed Costs were defined as “any cost due to negligence or default on the part of the Contractor in his compliance with any of his obligations under the Contract". The question was what did the word ‘default’ mean when used in this provision. The words ‘or default’ had been specifically added by Network Rail to an industry standard contract, the so called ICE Conditions of Contract.
Network Rail categorised various sums as Disallowed Costs on the basis that they were incurred due to ABC's breaches in failing to complete the Works without delay and by the time for completion contrary to specific clauses of the Contract. The Disallowed Costs amounted to over £13 million.
ABC argued that it was not the intention of the parties 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. ABC argued, somewhat bizarrely in our view, that ‘default’ in this context should only refer to ‘a wilful and deliberate failure’.
Decision:
As the court said “the principles of construction (interpretation of a contract) are well known and not in dispute”. The word ‘default’ in this clause carries its natural and ordinary meaning. The language of the clause was said to be ‘clear and unambiguous’. Very clear evidence from the other provisions of the contract, the factual matrix and the commercial context would be required to depart from the natural and ordinary meaning of the words.
ABC sought to place some weight on a particular clause heading notwithstanding that the Agreement specifically stated that ‘the headings shall not be taken into consideration in the interpretation or construction of the Contract’. The court endorsed an earlier judicial statement that "the heading cannot be used to cut back on the clear language used in the clause".
The court acknowledged that the addition of the words ‘or default’ to the definition of Disallowed Costs appeared to render certain other clauses redundant but it was not particularly concerned about that. This duplication was not sufficient to justify adopting an unnatural construction.
ABC also placed some reliance upon ‘commercial common sense’. In this respect the court again repeated an earlier judicial statement that ‘"Where the parties have used unambiguous language, the court must apply it." Commercial common sense can only tip the balance in favour of a particular interpretation where there are two (or more) conflicting interpretations in a clause which is ambiguous. That was not the case here. There was no ambiguity.
Finally, the court reiterated that if the ordinary and natural meaning of a contractual provision results in a contract which is disastrous for one party, that does not justify departing from the natural language of the contract.
Points to Note:
- The case provides no new law but is a useful reminder of a number of principles governing contractual interpretation and enforcement.