Report on highways contract litigation costing county £20m+ criticises documentation

A report into Cumbria County Council’s termination of a highways maintenance contract and subsequent litigation that cost the local authority £26m between 2012 and 2017 has criticised the contract documentation.

In November 2016 Cumbria lost a lengthy legal battle with contractor Amey that arose after the council withheld payments at the end of the contract.

The judge found that both parties had some grounds in their favour, but overall he found in favour of Amey, which was demanding £39.2m.

The report, Lessons learned by Cumbria County Council from the events surrounding the procurement, operation and termination of the Amey Contract and associated litigation, was written by Assistant Director Transformation Paul Robinson. It contains 20 lessons learned and 27 associated recommendations.

On the issue of the contract documentation, the report concluded that this was “voluminous, complex and contained some gaps and inconsistencies that created interpretational uncertainty for all parties with poor performance, poor contract management and inconsistent relationship management examples later identified”.

It said Cumbria should have been more rigorous in its approach to ensure as far as possible that the best and most appropriate contract terms and conditions were in place and acted upon. “These could have included more robust risk transfer and / or risk sharing arrangements, appropriate performance indicators underpinning the contract, and any gaps, inconsistencies or content that might be open to interpretation being avoided or resolved.”

The report recommended that for major contracts of this size, complexity and value, and prior to contract documents being signed, the council needed to be assured that the contract terms and conditions were robust. “It may be appropriate in certain circumstances to consider the merits of engaging an additional independent peer with significant expertise in commercial contract documentation to review and challenge the rigour of the contract terms, conditions, specification and performance management arrangements to protect as far as possible the interests of the council.”

On the issue of contract monitoring and management, Robinson said there should have been greater clarity in relation to Capita’s role in acting as the council’s agent and overseeing the Amey contract on its behalf. Roles and responsibilities should have been clearer and Cumbria’s client side capacity and capability “should have been stronger to ensure the required performance and relationship management outcomes”.

There was limited documented evidence to give confidence that effective performance and data quality arrangements were in place between 2005 and 2012, he added. Key performance indicators were either not routinely used or not effective to drive improvement or to highlight contract performance issues in a timely and managed way.

The council should ensure that robust performance management arrangements are in place for all new contracts, and a set of mutually agreed KPIs should be in place for all significant contracts, the report recommended.

Robinson also highlighted "missed opportunities" to prevent the number of disputes and the value of those disputes accumulating during the lifetime of the contract. “When required, legal advice should have been sought at the earliest opportunity, not later in the process,” it said, recommending that significant disputes should be escalated and legal advice should be sourced promptly.

He noted how the decision to withhold payment from Amey was a major factor that contributed to the triggering of the litigation. “As the judge concluded, the council should not have withheld payment, and because it did, Amey were the net beneficiary at trial.”

The lessons learned process found no documented evidence that the totality of the risks and benefits of the option to withhold were considered and shared in full. It was “a significant omission” that the totality of the risks were not shared with senior elected members or all senior officers in full, Robinson concluded.

The review process also found no minutes of an executive decision to withhold payment, or written record of who made the final decision to deduct payment from the final account. The decision was an officer decision, not a decision made by Cumbria’s Cabinet.

The report recommended that the council should consider a review of its constitution so that governance arrangements regarding withholding or adjusting a payment to a contractor are clear. It also suggested that a revised scheme of officer delegation and associated training should be considered to make provision for decisions to withhold or adjust payments up to an agreed threshold.

Robinson suggested that if Cumbria were to face a similar challenge in the future, the strengths, weaknesses, opportunities and threats of litigating against a contractor should be fully considered, documented and peer challenged. Where possible and appropriate, confidential external peer advice from similar organisations should be sought.

The report noted how the council had been fully committed to settling the case and had had a clear strategy in place to do so. It had also been committed to the mediation, but that process found that both sides remained so far apart, there was little likelihood of agreement at the time to settlement.

However, Robinson added: “Although senior council officers were successful in resolving some claims, it should consider in future having a more flexible approach to settle. For example, given mediation can only achieve agreement if both parties want to resolve, this may need the council to have additional or different personalities, teams or skills to be available if required, and be willing to change approach or reconsider parameters if negotiations are not initially successful.”

Once Amey initiated the litigation process, the report said, the council established a dedicated internal project team with defined office space, senior manager oversight, and direction to support the external legal team and other experts to defend Amey’s claim and to establish its own counterclaims.

“With the benefit of hindsight, given the scale and complexity of the case, additional resources and in particular additional highways related subject matter capacity could have been beneficial to the project team," Robinson revealed.

However, he added: "The lessons learned process concluded the project team was made up of highly dedicated and committed staff who often worked long hours under challenging and pressing circumstances to strive for the best outcomes for the council and the Cumbria taxpayer. Overall the team provided a professional service to the best of their abilities.”

In relation to the preparation for trial, the report noted how the judge had been critical of some of the council’s witnesses. “In hindsight more work could have been invested to ensure more robust preparation and challenge of evidence before trial, accepting that this may add to the cost of trial preparation…..Effective processes should be in place to ensure evidence is robustly prepared and challenged before trial to ensure it stands up to cross-examination.”

The report acknowledged that being involved in major civil litigation of this scale was “a new and unprecedented experience” for the council.

After the unsuccessful attempt to resolve the dispute through mediation in 2014, it required a strong legal team, Robinson said. Prior to the appointment of the external legal representatives, the financial and non-financial benefits of different options for legal representation had been carefully considered. However, there was no documented record of a comprehensive options appraisal having been considered and challenged.

“It should be recognised that the council was faced with a rapidly developing situation at that time, however where significant external legal or expert representation is to be provided, their expertise and experience in relation to the nature of the specific dispute in question could have been more comprehensively assessed and recorded," the report suggested.

Robinson recommended that where external legal representation is to be procured for major projects such as this in the future, the council draws up a clear service specification with a documented options appraisal considered and recorded.

“Where external legal or expert representation is to be provided, their expertise and experience in relation to the nature of the specific dispute in question should be assessed internally and externally by discussing any proposed appointments with experienced counsel or solicitors who specialise in the subject-matter of the dispute,” it added.

“This will ensure the best overall value for money option is secured and recorded for the legal capacity, skills and subject matter experience required.”