Meaning of Default Clarified

A recent decision of the Technology and Construction Court will be of interest to any business dealing with Network Rail on their standard form “NR” contracts.  It revolved around the meaning of the word “default” as used in one of these contracts and while it was confined to an examination of NR12 which is a standard set of amendments to the ICE Conditions of Contract, Target Cost version, first edition, the conclusions of the court are likely to be referred to when interpreting the meaning of default in other NR contracts.

The dispute was between Network Rail Infrastructure Limited (Network Rail) and ABC Electrification Limited (ABC).  ABC is a joint venture between Alstom, Babcock Rail and Costain and was engaged by Network Rail to perform elements of the West Coast Power Supply Upgrade Project.  The work was completed very late and Network Rail sought to disallow over £13 million of costs due to the delay.

The NR 12 variations which had been incorporated into the contract with ABC (defined as the “Contractor”) stated that disallowed costs meant “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, sub-contractors or suppliers in their compliance with any of their respective obligations under their contracts with the Contractor.”

Network Rail successfully argued in court that “default” meant any failure by ABC to comply with its obligations under the contract.  They said that this was the plain and obvious meaning of the word i.e. a failure to fulfil a legal requirement or obligation.  ABC, while accepting this interpretation, argued that looking at the overall purpose of the contract which was a target cost contract and taking into account commercial common sense, “default” should have a narrower meaning attributed to it.  In this case, that it should mean a wilful and deliberate failure by ABC to comply with its contractual obligations.

The judgment was unequivocally in favour of Network Rail’s interpretation.  There is a line of well-established case law which requires the courts to start from the natural meaning of a contract provision and only depart from that if the meaning is unclear.  In this case it was not.

Businesses contracting with Network Rail might want to study this judgment carefully and consider addressing the meaning of “default” in contract negotiations where they are contracting on the basis of the NR suite of contracts.  While this decision is specific to NR12, it will doubtless be persuasive in the context of other NR contracts and clarification at the outset could well avoid the possibility of litigation further down the line.

Network Rail Infrastructure Ltd v ABC Electrification Ltd [2019] EWHC 1769 (TCC)