Neutral citation: ABB Ltd v BAM Nuttall Ltd [2013] EWHC 1983 (TCC)

NEC contract topics:  Interpretation of NEC3 contract and bespoke amendments, deemed acceptance of compensation events

Form of contract: NEC3 Engineering and Construction Subcontract Option A.

Main areas of law: Adjudication, breaches of natural justice

 

ABB Ltd was appointed as a main contractor by London Underground Ltd (LUL) to undertake a substantial power upgrade on the London Underground. ABB, in turn, subcontracted Bam Nuttall to perform the removal of redundant cables and the design and installation of new distribution cables. The subcontract, dated 8 November 2009, was based on the NEC3 Engineering and Construction Subcontract (Option A), which included several bespoke amendments.

The amended subcontract made critical assumptions regarding the viability of cable routes as outlined in the Conceptual Design Statements (CDSs). If any such assumptions proved incorrect, compensation events could be triggered. In February 2010, Bam issued a notification that the assumptions underpinning the design were invalid, giving rise to a compensation event (CE002).

Following design development and submissions between 2010 and 2011, both parties agreed to a sum of £1.5 million for survey and design works. However, there was ambiguity over whether this sum covered all work or only work up to 31 January 2011. Bam contended that it was entitled to further compensation for post-January 2011 design works, referencing quotations CE002.2B issued in April 2012. ABB maintained that no such entitlement existed under the agreed terms.

Questions also arose as to whether ABB had effectively responded to Bam’s April 2012 compensation event quotation within the timeframes prescribed under the subcontract and whether silence on ABB’s part amounted to deemed acceptance of the quotation.

The dispute was referred to adjudication, centring on the interpretation of the agreement reached in December 2010, the contractual mechanisms for agreeing compensation events, and compliance with the NEC3 process. The case before the court was the enforceability of the adjudicator’s decision due to alleged material breaches of the rules of natural justice.

 

The key legal issue was whether the adjudicator had breached the rules of natural justice by relying on clause 11.1A, a clause that stipulated no amendment to the subcontract shall be effective unless in writing and signed by both parties. Clause 11.1A was a bespoke clause similar to the NEC standard clause 12.3. The clause was neither cited by the parties during the adjudication nor raised by the adjudicator for comment prior to his decision.

 

Mr Justice Akenhead found that the adjudicator had committed a material breach of natural justice. The breach arose because the adjudicator relied on clause 11.1A to conclude that no binding agreement existed between the parties as to the £1.5 million lump sum despite neither party raising this clause in their submissions and the adjudicator failing to provide an opportunity for comment on its implications.  The breach was deemed material because the adjudicator’s finding on Clause 11.1A directly influenced the outcome of the case. Had the clause not been applied, the adjudicator might have reached a different conclusion on the validity of the agreement and on ABB’s payment obligations. Consequently, the adjudicator’s award of £973,432 plus interest, VAT, and costs in favour of Bam was declared unenforceable, and ABB succeeded in its application for a declaration of invalidity.

The Court reaffirmed the principle that adjudicators must operate within the bounds of procedural fairness. Citing Cantillon Ltd v Urvasco Ltd (2008),  Mr Justice Akenhead emphasised that it is a breach of natural justice when an adjudicator decides material issues based on points not raised by the parties or on which the parties were not given a chance to respond. He stated that while adjudicators are not expected to be legally infallible, decisions must derive from a fair process.

 

This case provides valuable practical and legal insights for those working under NEC contracts, particularly the adjudication procedures and compensation events.  The decision highlights the importance of strictly adhering to the NEC3 contractual procedures, especially in relation to the implementation of compensation events.   It also serves as a reminder that no contractual amendments are valid unless documented in writing and signed by both parties. Verbal understandings or informal agreements, no matter how commercially convenient, will not hold if they bypass the formal amendment procedures.

The case also serves as a cautionary tale for both adjudicators and parties. It highlights the importance of due process: adjudicators must not introduce new arguments or clauses without offering parties the chance to respond. The failure to follow this fundamental principle undermines the integrity of adjudication as a fair and efficient dispute resolution mechanism.

Although the matter was not decided by the court, the case serves as a reminder of how silence or delays in responding to submitted quotations for compensation events can result in a deemed acceptance of those quotations.