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Nuclear Submarines Project £93.6 Million Cost Over-Run

The Technology and Construction Court (TCC) has determined where liabilities should fall consequent upon a very substantial over-run in the cost of a Ministry of Defence (MoD) project to design and construct a nuclear submarines facility on the Clyde. Although the maximum target cost for the project had originally been projected at £89 million, later rising by agreement to £142.1 million, it is currently estimated that the final cost will be £235.7 million

The main contractor involved in the project did not dispute that it was liable for the first £50 million of the costs incurred in excess of the target cost. However, largely due to what the court described as ‘badly-worded’ contractual provisions, dispute arose between the contractor and the Secretary of State for Defence as to the extent of the former’s liability in respect of additional costs incurred over and above that £50 million cap.

An initial arbitration resulted in a ruling that liability to pay fell upon the MoD once the costs exceeded the maximum target price plus the £50 million cap but that such liability was limited to actual costs reasonably and properly incurred in excess of that figure. The contractor challenged the arbitrator’s decision before a disputes review board which, after considering the issues de novo, reached a similar conclusion by a majority.

On appeal to the TCC, the contractor argued that the dissenting view of one of the panel members – to the effect that the MoD should pay all costs in excess of the cap, however incurred – was correct. However, dismissing the appeal, the TCC ruled that such an interpretation of the contract would make the MoD liable to pay the costs incurred as a consequence of the contractor’s own breaches of contract.

Rejecting arguments that the conclusions of the majority of the review board were ‘obviously wrong’, the court ruled that the contractor’s arguments amounted to an attempt to rewrite the express terms of the contract. There was no basis either in commercial reality or construction principle that could lead to such a result, the TCC concluded.