1st Feb 2013
The claimant (X) challenged an arbitrator's award, pursuant to the Arbitration Act 1996 s.68, on the ground of "serious irregularity".
X, a construction company, entered into a contract with the respondent secretary of state for the maintenance of an area of the highways network. The work included the remedying of minor defects in road surfaces, including potholes, for which X was to be paid a lump sum over the period of the contract. Clause 60.1 of the contract provided for certain "compensation events" which would entitle X to additional payment over and above what the contract otherwise allowed for. In that regard, cl.60.1(11) referred to defects which were not evident and which, in terms of bullet point 4 of that provision, an experienced contractor "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". A dispute arose between the parties when X claimed that the prevalence of potholes on the network was significantly greater than anticipated, and that it was therefore entitled to additional payment pursuant to the compensation event provisions. The matter was referred to arbitration. The arbitrator held that an excess volume of potholes beyond what it was reasonable to allow in the contract was not capable of constituting a defect in the physical condition of the area network under cl.60.1(11).
X contended that there had been a serious irregularity within the meaning of s.68 because the arbitrator had not decided the issue of whether each pothole over and above the number which should have been allowed for by X was a compensation event.
(1) It was undisputed that potholes fell within the definition of "defects" for the purposes of the contract and were therefore capable of giving rise to a compensation event. However, there was nothing in the language of cl.60.1(11) which expressly suggested that the number of defects was a key element in the compensation event equation, and there was no commercial logic or common sense in interpreting the clause in that way. The requirement set out at bullet point 4 of that provision made it extremely difficult to conclude that an excess number of potholes over and above a reasonable maximum number which could be considered to have been allowed for could form the basis for establishing the encountering of one or more potholes above that number as one or more compensation events. By providing for a lump sum, the nature of the contract was such that the parties took a collective risk that the defects to be addressed would be more or less in number and in terms of expense than the contract lump sums might allow for. There was nothing commercially unfair in such a risk (see paras 26, 29, 32-33 of judgment). (2) "Serious irregularity" within the meaning of s.68 did not mean in itself an error of fact or law on the part of the arbitrator and was not to be used as a ground for challenging the factual findings or legal reasoning of an arbitrator, Petroships Pte Ltd of Singapore v Petec Trading & Investment Corp of Vietnam (The Petro Ranger)  2 Lloyd's Rep. 348 considered. Where the court was asked to determine whether an arbitrator had failed to deal with all the issues put to him within the meaning of s.68(2)(d) of the Act, there was no requirement to carry out a hypercritical or excessively syntactical analysis of what the arbitrator had written. The court could only intervene under s.68 where an irregularity had caused substantial injustice. In the instant case, the arbitrator was not wrong in his overall reasoning or conclusion. Accordingly, there was no substantial injustice even if an irregularity was established. However, it was clear that the arbitrator had looked in some detail at the requirement under bullet point 4 of cl.60.1(11) and had analysed whether the words used could sensibly relate to a foreseeable or allowable number of defects as being something upon which a claim could be based. Given that he had recognised the area of issue, analysed the wording, reviewed the commercial context and reached a decision, it was impossible to say that there had been any, let alone a serious, irregularity (paras 24, 36-39).
Where a contract for the remedying of minor defects in road surfaces provided for payment for that work by way of lump sums, the parties took a collective risk that the defects to be addressed would be more or less in number and in terms of expense than the contract lump sums might allow for. There was nothing commercially unfair in such a risk.