Court rules on meaning of “default” in construction contract

06 November 2019, Construction, Newsletter, by Joseph Chung,

In the recent case of Network Rail Infrastructure Ltd v ABC Electrification Ltd [2019] EWHC 1769 (TCC), England’s Technology and Construction Court had to interpret the term “default” in a construction contract which incorporated the terms of ICE Conditions of Contract Target Cost Version, First Edition (ICE Conditions), subject to a schedule of standard amendments used by Network Rail, known as N12 (N12 Amendments). The N12 Amendments added words into the definition of “Disallowed Cost” (as italicised and highlighted below). The Court rejected ABC’s argument that the word “default” in the definition meant “wilful and deliberate” failure to fulfil a legal requirement or obligation. It held that the natural and ordinary meaning of “default” is a failure to fulfil a legal requirement or obligation and there were no words in the definition or elsewhere in the Contract to indicate that by the word “default”, the parties were referring to a “wilful and deliberate” failure to fulfil a legal requirement or obligation.             

Under the Contract, the Defendant contractor, ABC, was to be paid the “Total Cost” it incurred less any “Disallowed Cost”. Those terms were defined in the Contract as follows:

  • Total Cost:  “…all cost (excluding Disallowed Cost and items covered by the Fee) incurred by the Contractor for the carrying out of the Works…" 
  • Disallowed Cost: “…"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, subcontractors or suppliers in their compliance with any of their respective obligations under their contracts with the Contractor".

A dispute arose between the parties as to the meaning of “default” in the definition of “Disallowed Cost”, which word had been introduced as a result of the N12 Amendments. Network Rail argued that “Disallowed Cost” included any cost due to a failure by ABC to comply with its obligations under the Contract. ABC argued that “Disallowed Cost” included any cost incurred due to default on the Contractor’s part if, and only insofar as, the default constituted, a wilful and deliberate failure to comply with its obligations under the Contract.      

The Court held that “Disallowed Cost” included any cost due to any failure by ABC to comply with its obligations under the Contract because:-

  • The language of the clause in question was clear and unambiguous.
  • The natural and ordinary meaning of “default” is a failure to fulfil a legal requirement or obligation. The Court would need very clear evidence from the remaining contractual provisions, its factual matrix and commercial context to conclude that it meant something different and in this case there was no basis to reject the ordinary meaning of “default”.
  • The fact that the word “default” was inserted as a result of the N12 Amendments gave rise to the presumption that the parties intended to add something to the existing clause.
  • The meaning for which ABC contended (i.e. “wilful and deliberate” failure to fulfil a legal requirement or obligation) is a meaning that can usually only be achieved by the addition of extra words and there were no such additional words in the relevant clause or elsewhere in the Contract. Further, the concept of a wilful and deliberate breach would be a very unusual concept to incorporate into a payment provision designed to assist the Employer’s Representative to identify the “Total Cost”. The idea that the Employer’s Representative would have to enquire into ABC’s state of mind in relation to each and every breach of contract before it could determine whether such breach gave rise to Disallowed Cost would lead (at best) to uncertainty and (at worst) to an almost unworkable mechanism. Without use of the words “wilful and deliberate” it was difficult to see how the Court could conclude that the parties nevertheless meant to give the word “default” such a restrictive and narrow meaning.   
  • Looking at the relevant clause in its context and against its background as a whole, there was no basis for concluding that the parties must have intended “default” to carry a different meaning from its ordinary and natural meaning.
  • This was not a situation where the Court was dealing with two conflicting interpretations in an ambiguous clause, where it may often be appropriate to adopt the interpretation which is most consistent with business common sense. If the parties had wished to limit “Disallowed Cost” to a particular level, they could have done so.   
  • Where the parties have used unambiguous language, the Court must apply it. The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties, is not a reason for departing from the natural meaning of the provision. A Court should be slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed to it.    

Comment

The judgment illustrates the importance of extremely careful drafting of contracts and when making amendments to standard form contracts. In this case, small changes made to the standard contract by the N12 Amendments, meant £13 million in deductions being made by the employer. The Court will give words used in a contract their natural and ordinary meaning, even if such interpretation works out badly for one of the parties. Here, the words used were clear and unambiguous and the Court could not find any basis to find that the parties must have intended the word “default” to carry a different meaning to its natural and ordinary one. If they had, they could have added additional words to that effect.