Secretary of State for Defence v Turner Estate Solutions Ltd

Under section 45 of the Arbitration Act 1996, the court may determine a contractual question of law arising in arbitration where the statutory conditions are satisfied. A failure to operate contractual change procedures contemporaneously does not, without clear words, extinguish the parties’ substantive pricing machinery. A bespoke contract must be construed as a whole, giving effect to all its provisions and preferring a commercially sensible construction. Where the contract makes the final price payable subject to a target-cost comparison and maximum-price cap, those provisions remain operative unless the contract clearly provides otherwise. Target-cost and price adjustments may be made retrospectively, using objective contractual criteria and the agreed dispute-resolution machinery.

The Secretary of State for Defence engaged Turner Estate Solutions Ltd under a maximum-price target-cost construction contract. During the works, the contractual change-proposal procedure ceased to be operated consistently. Turner argued in a related arbitration that the target-cost, maximum-price and pain/gain provisions had consequently become inoperable, leaving an entitlement to actual costs plus profit.

The Secretary of State applied under section 45 of the Arbitration Act 1996 for determination of two preliminary questions of law. The issues were whether the target cost could still be adjusted for changes not dealt with contemporaneously and how the final price payable was to be calculated.

1. Section 45 application. The application satisfied the statutory requirements. It concerned questions of law which substantially affected both parties’ rights; permission had been given by the arbitral tribunal; determination was likely to produce substantial savings in costs; and the application was made without delay. No disputed facts required resolution for the contractual questions to be answered (paras 7–24).
2. Construction of the contract. Applying the approach in Rainy Sky SA v Kookmin Bank and related authorities, the contract had to be construed as a whole and consistently with business common sense. Turner’s construction would convert a carefully calibrated maximum-price target-cost bargain into a cost-plus contract because of a procedural failure. That consequence was commercially irrational (paras 52–64).
3. Final price payable. Conditions 10.1 and 10.12–10.13 made the MPTC pricing provisions and the calculation of the final price payable mandatory. The final price had to be calculated under Condition 10.13 by reference to actual costs, the finally adjusted target cost and the finally adjusted maximum price. Condition 10.12 did not provide an alternative entitlement to actual costs and profit without those limits (paras 65–76).
4. Retrospective changes and dispute resolution. Condition 13 did not operate as a guillotine at practical completion. The contract contemplated post-completion adjustments, and the broad jurisdiction in Condition 29 enabled the DRB, and therefore the arbitral tribunal, to determine disputes concerning the existence and value of changes. Valuation was to be undertaken under the contract, principally by reference to the JEOIPS and MPTC breakdown, rather than by reconstructing a hypothetical agreement (paras 79–101).
5. Agreement to agree. Condition 13.5 formed part of a wider enforceable valuation process culminating, where necessary, in DRB determination. It was not an unenforceable agreement to agree. In any event, invalidity of that provision would not have removed the separate target-cost, maximum-price or final-price mechanisms (paras 102–108).
6. The answer to question 1 was Yes. Question 2 did not arise, but the court stated that the final price could only be calculated by applying Condition 10.13 (paras 109–111).