Disallowed Costs, Definitions and Default

Background

In ABC v Network Rail, costs amounting to £13.4 million following delays to the upgrade of a major railway line drew the clauses of a Target Cost Contract into sharp focus for both parties.

The contract in question was the ICE Target Costs Contract, subject to a set of amendments which are standard across the rail industry. The salient features of the contract were as follows:

• For carrying out the works ABC would receive its fee and a sum for its “Total Costs”, equating to total costs incurred minus “Disallowed costs” and costs covered by the fee.
• “Disallowed Costs” was defined in the contract to include “any cost due to negligence or default on the part of the Contractor”.
• ‘Default’, however, was not explicitly defined in the Contract.

Defining ‘default’ as any failure to comply with contractual obligations, Network Rail sought to categorise £13.4 million of delay-related costs as ‘Disallowed Costs’. ABC argued that this definition was too broad and that, like negligence, ‘default’ pertained to an element of blame or culpability. They further argued that this was a pre-requisite for categorising Disallowed Costs under a proper construction of the contract and was in-keeping with the gain/pain ‘ethos’ of the agreement

Decision / Comment

Emphasising the importance of giving words their ‘natural and ordinary meaning’, the appeal judges agreed with Network Rail that ‘default’ should be defined as a failure to fulfil an obligation. Disallowed Costs, therefore, included costs incurred due to ABC’s failure to comply with its contractual obligations.

From the perspective of both Employer and Contractor, this case underscores the importance of defining key terms with clarity and concision. To learn from ABC’s mistakes, parties should resist relying on the underlying ‘ethos’ of a standard form contract – especially where there have been amendments – rather than defining key terms, particularly where those terms otherwise have a natural and ordinary meaning.

Clare Mendelle is a Professional Support Lawyer and James Goldthorpe is a Paralegal at Sharpe Pritchard LLP

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