By Steve Nichol and Matthew Friedlander
At first glance, the Court of Appeal’s recent decision in ABC Electrification Ltd v Network Rail Infrastructure Ltd  EWCA Civ 1645 might look like the culmination of an exercise in legal hubris. This was, after all, a case focussed on the meaning of a single word in a contract; moreover, a word – “default” – that most of us in the legal profession might say has a well-established meaning.
And, after several hundred thousand pounds of legal fees no doubt well spent, the Court of Appeal told the world that the word “default” means exactly what we all thought it meant – a failure to fulfil an obligation.
However, there’s a clue in the fact that this case made it to the Court of Appeal that all is not quite as it seems here. The appellate courts get to choose whether they will hear a case, and will refuse to hear cases that lack merit, much like the US Supreme Court’s rejection of the State of Texas’s efforts to overturn the result of the US election (only usually with international fewer column inches arising). So the Court of Appeal must have seen something in this case that was worth their time.
What’s more, the party that commenced proceedings, Network Rail, was also the party that argued that “default” meant exactly what it said on the tin. Although that fact alone doesn’t tell the whole story it does suggest that there was a genuine issue here between the parties that needed an answer.
The judgment itself is very readable, and is worth a turn for those with the time and the inclination.
In brief, however, this quandary arose due to the insertion of the offending word into part of the definition of Disallowed Cost in a target cost contract.
Those familiar with target cost contracts will know that the idea is that the contractor is paid all (more or less) of the costs that he incurs during the course of the works, however they were incurred. At the end of the job the contractor’s total cost is measured against the predefined target cost; if the contractor’s cost is under the target he gets a reward, and if he’s over he takes a penalty.
The “more or less” bit is important though: there are of course limits on the contractor’s right to be paid all of his costs, and if (for example) the contractor claims costs that have nothing to do with the works, the employer is allowed to disallow those costs.
In any case, it appears that that, or something like it, is what ABC thought it was signing up to. However, Network Rail’s amendments to the standard form contract had added the word “default” to the following sub-clause of the definition of the term “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…”
Network Rail’s case was that the addition of that word “default” meant that it could disallow costs for any non-compliance with the terms of the contract. So, for example, if ABC was late in completing the works, Network Rail could refuse to pay any costs incurred after the date for planned completion on the basis that ABC was in default.
ABC, on the other hand, complained that that approach was inconsistent with the rest of the contract, and in particular the ethos of a target cost contract. It pointed to a number of clauses which it claimed were inconsistent with, or made redundant by, such a broad interpretation of the word “default”. Instead, ABC argued that the intention was that the word “default” should be confined to instances of blame or culpability on the part of ABC, similar to its neighbour word “negligence”.
Not such a spurious case then. In fact, one might even think it surprising that (on Network Rail’s case) a single word, hidden away in a sub-clause of a definition, might have the effect of materially undermining the principles that would otherwise have been applicable to the rest of the contract. But the Court of Appeal agreed with Network Rail and refused to narrow the meaning of “default”.
One suspects that this case is the tip of the iceberg for these two parties, as there will undoubtedly be underlying disputes as to whether a particular event constitutes a dispute, even on the Court’s definition, and in turn what costs (if any) have actually been incurred “due to” any default by ABC.
In the meantime, for the rest of us, we’re left with a salutary lesson in contract interpretation: just because it looks like a target cost contract, and smells like a target cost contract, doesn’t necessarily mean that it is entirely a target cost contract. So make sure that, before signing any contract, you read it for what it is, not what you think it ought to be.
And one little word can have some serious consequences