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Last edited 21 Oct 2020
Atkins v Secretary of State for Transport
In this case, Atkins sought to challenge the decision of an arbitrator who found in favour of the Secretary of State for Transport (“the authority”) in determining whether Atkins was entitled to claim additional payment for remedying an excessive number of potholes beyond the number it had included as part of its lump sum contract.
Atkins was appointed by the authority under a managing agent and contractor (MAC) contract on the basis of an amended form of NEC3 Engineering and Construction contract, an “Area 6 MAC contract” (“the contract”). It was a lump-sum highways maintenance contract for a term of five years to maintain roads in East Anglia. As part of its duties, Atkins was obliged to remedy defects in the roads, including potholes. It transpired that the actual number of potholes to be remedied exceeded the number Atkins had originally anticipated and priced and was now seeking additional payment for these extra potholes via the compensation event machinery in the contract. The compensation provisions in the contract were similar to the NEC3 compensation events’ clause and so this case provides a useful insight into the court’s approach to the interpretation of such clauses, which rarely see the light of day in court. Such is the nature of NEC contracts that they aim to tackle risks as they arise - viewed as a ‘project management’ tool, they are designed to identify risks early and manage them as the project proceeds.
The dispute centred on Atkins’ claim for additional payment under clause 60.1(11) of the contract under which it sought relief for remedying the additional potholes which it claimed constituted defects under that clause. The Authority disagreed. Clause 60.1 (11) contains four bullet points of which the fourth is the most relevant: “The provider [Atkins] encounters a defect in the physical condition of the area network which an experienced contractor or consultant would have judged at the contract date to have such a small chance of being present that it would have been unreasonable for him to have allowed for it."
The contract provided for adjudication and arbitration under the Arbitration Act 1996. The adjudicator found in Atkins’ favour but the arbitrator determined the dispute in favour of the authority. Atkins appealed to the court on the grounds of a serious irregularity of the arbitrator’s award. The matter came before Mr Justice Akenhead in the TCC (Technology and Construction Court) earlier this year who agreed with the arbitrator.
The judge found on an ordinary interpretation of clause 60.1 (11) that the excessive number of potholes argument advanced by Atkins did not fall within the terms of the clause nor was it compatible with the extensive notice and other requirements of the contract. On a commercial interpretation, the judge determined that the parties take a risk in accepting a lump-sum contract so that if the actual number of potholes was lower than anticipated Atkins would make a profit. Following Atkins’ reasoning, if it was allowed to claim compensation for the additional potholes it would be in a win/win situation. The risk in lump-sum contracts is in pricing for that risk and taking it on the chin should that pricing prove inadequate. As the judge noted: “The parties collectively take a risk that the defects to be addressed will be more or less in number and in terms of expense than the contract lump sums may allow for....... There is nothing commercially unfair or indeed unusual in the parties taking these sorts of risk.”
While no new law emerges from this case, it serves as a useful reminder of the commercial risks parties assume in adopting lump sum (as opposed to re-measure) contracts. Interpretation of NEC3 contracts is also welcome given their rare appearances before the courts, again reminding us that such contracts are designed to identify and tackle risks before they escalate into insurmountable problems requiring formal dispute resolution.
While critics of this form of contract are quick to point out its shortcomings in terms of legal niceties and language, the essential feature of these contracts as a risk management tool is clear for those projects armed with sufficient resources and know-how to understand and manage them effectively. Indeed NEC contracts are now used extensively in public sector procurement, such as the London Olympics, so it is important to appreciate how they, and the use of the Highways Agency’s MAC contracts’ compensation provisions, will be interpreted.
This article was created by construction lawyer --Najma Dunnett as part of an ongoing series of legal articles. Follow Najma on Twitter to keep up to date with the latest changes in construction law @NDunnett_Cons.
 Related articles on Designing Buildings Wiki
- Alternative Dispute Resolution legislation.
- Compensation event.
- Construction contract.
- Disallowed cost.
 External references
- BAILII: Atkins v Secretary of State for Transport  EWHC 139 (TCC).
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