Atkins v SoS for Transport (2013)
Neutral citation: Atkins Ltd v Secretary of State for Transport [2013] EWHC 139 (TCC)
NEC contract topics: Definition and scope of compensation events
Form of contract: NEC3 Engineering and Construction Contract June 2005 (with June 2006 amendments).
Main areas of law: Arbitration Act 1996, procedural fairness in arbitral proceedings
Background and the Dispute
The dispute arose out of a contract dated 26 February 2008 between Atkins Ltd (“Atkins”) and the Secretary of State for Transport (“the Authority”) for managing and maintaining trunk roads in Area 6 of the highways network, covering East Anglia. The form of contract used was based on the NEC3 Conditions, modified by the parties. Atkins was appointed as managing agent contractor under what was known as the Area 6 MAC contract, with responsibilities for routine and winter maintenance and scheme works.
Under the contract, routine and winter maintenance, including pothole repairs, were to be carried out by Atkins and paid for via a lump sum. Clause 20.1 of the NEC3 based contract required the Provider to provide the services in accordance with the Service Information.
Clause 60.1 of the contract defined compensation events, including a bespoke clause 60.1(11), which provided for a compensation event where:
“…the Provider encounters a defect in the physical condition of the Area Network that was not revealed or discoverable prior to the Contract Date and which an experienced contractor would have judged to have such a small chance of being present that it would have been unreasonable to allow for it.”
The bespoke clause 60.1(11) was based on the standard form “physical conditions clause 60.1(12).
Atkins contended that the volume of potholes (defects) encountered far exceeded what could reasonably have been anticipated, constituting a compensation event under Clause 60.1(11). The Authority disputed this, asserting that potholes were covered by the lump sum payment and that their frequency did not amount to a compensable event.
Following an adjudication in favour of Atkins, the Authority referred the matter to arbitration. The arbitrator, Professor John Uff QC, disagreed with the adjudicator's interpretation and found against Atkins. Atkins then challenged the arbitration award under Section 68 (serious irregularity) and sought permission to appeal under Section 69 (point of law) of the Arbitration Act 1996.
Legal Issues
The key legal issues for the court were:
- Whether the arbitrator failed to address a key issue presented (serious irregularity under s.68)
- Whether the arbitrator’s interpretation of Clause 60.1(11) was “obviously wrong” or at least “open to serious doubt” (s.69)
- Whether the number of potholes (defects) encountered during the course of a contract was more than what an experienced contractor would have judged at the Contract Date to have been present
Judgment
Mr Justice Akenhead held that there had been no serious irregularity under Section 68, finding that the arbitrator had understood and addressed the relevant issues. The court declined to interfere with the arbitrator’s interpretation and refused permission to appeal under Section 69.
The court upheld the arbitrator’s conclusion that Clause 60.1(11) did not accommodate a claim based solely on an unforeseen volume of potholes. It was not sufficient for a contractor to claim a compensation event for each pothole beyond a notional threshold. The judge noted that the clause uses the singular “a defect” and interpreted this to mean a specific physical condition, not an abstract aggregation of similar defects.
Justice Akenhead found that clause 60.1(11) required the contractor to show that the individual defect was one that had such a small chance of being present that it would have been unreasonable to allow for it. The judge endorsed the arbitrator’s view that the clause did not support an open-ended claim mechanism based on exceeding an implied number of defects, which would effectively convert the lump sum contract into a remeasurement model.
He added that compliance with the contractual notification and quotation procedures for each pothole or set of potholes would become unworkable if Atkins' interpretation were accepted.
NEC Contract Learning Points and Implications for the Construction Industry
In his judgment Mr Justice Akenhead, appearing to give support to the NEC3 conditions, stated that they are:
“… highly regarded in the sense that they are perceived by many as providing material support to assist the party in avoiding disputes and ultimately in resolving any disputes which do arise”.
However, he countered his praise by remarking:
“There are some siren or other voices which criticise these Conditions for some loose language, which is mostly in the present tense, which can give rise to confusion as to whether and to what extent actual obligations and liabilities actually arise.”
This judgment shows that courts will closely examine the language of the contract, particularly where it has been subject to bespoke amendments. The court emphasised that NEC contracts, while promoting collaboration, do not override the commercial structure of risk allocation inherent in a lump sum arrangement. When it comes to lump sum contracts, contractors must ensure that any pricing assumptions regarding volumes are explicitly stated; otherwise, they accept the risk of variation within the defined scope.
The ruling also serves to discourage parties from using Section 68 challenges as a backdoor appeal mechanism. The court reaffirmed that a serious irregularity must be something “so far removed” from the arbitral process as to justify judicial intervention and that mere dissatisfaction with the reasoning will not suffice.