HEREFORDSHIRE Council is preparing for is biggest legal battle yet.

A multi million pound dispute between the council and former major contract partner Amey could go to the High Court if mediation can’t secure a solution.

The council has won the first round with adjudication awarding a substantial undisclosed sum in the authority’s favour.

But Amey isn’t paying.

Earlier this year, the Hereford Times revealed that a near £40 million sum was originally at stake in the “complex” contractual stand-off.

Today, the council confirmed that it had put “arrangements in place” for the authorisation of legal action  in relation to the disputes.

Mediation is the next step with the findings expected by early August.

Beyond that lies the High Court with the possibility of the case being heard next year.

Adjudicators have found in the council’s favour on two of the four disputed matters with the balance due to council described as substantial.

Amey has lodged a notice of dissatisfaction with the adjudicator’s decision in regard to one matter, and issued High Court proceedings seeking to quash that decision.

In the circumstances, the council is entitled to respond to these proceedings and start enforcement action – at the High Court.

Meantime, the balance due to the council remains unpaid.

Advice from legal counsel and technical experts supports the stance taken by the council over the disputed claims  which relate to pricing, quality of work, pensions, job evaluation, and contractual extension.

Though Amey and the council have agreed to non-binding mediation ahead of legal action, there is no certainty that a settlement can be reached.

As well as preparing for a court battle, the council also has a plan to borrow against its assets to cover costs in the case of a “substantial” adverse ruling

Should resolution go to litigation, the council concedes that related rulings could be at least another year away.

The dispute relates to  contracts  for “street scene” activities such as highways, parks and public rights of way maintenance and engineering/architectural consultancy services that ran from September 2003 to August 2013.

Over 30 separate areas of dispute existed between the council and Amey subsidiaries Amey Wye Valley Ltd and Amey Owen Williams Ltd.

Specifically, the issues involved are:

- Defective works that have not been rectified.

- Works that were not delivered.

- The price to be paid allowing for inflation.

- Changes in the scope of the works.

- Whether a contract extension was due.

 Most of the matters in dispute were raised during the contract term, with both the council and Amey working to a resolution process set out in the contract.

Where defective works or a failure to deliver the contracted levels of service have been identified, the council says it has given Amey the opportunity to take “corrective action.”

Contractual payments have been withheld where  Amey is said by the council not to have taken such action, or sought payment of sums that are not assessed by the council as due.

In January this year, Amey broke off long running negotiations with the council to go to adjudication.

So far, four related adjudications have been completed, two of which were found in the council’s favour.

As a result, Amey owes the council a substantial unspecified sum.

Two matters were decided in Amey’s favour on a specific technical point.

An adjudicator found one withholding notice issued by the council to be in part ineffective.

Withholding notices are issued when payment is to be withheld from the contractor and the notice in question covered 51 matters.

Amey challenged three of these matters; and were successful on two points where the sums to be withheld had not been specified.

The council says this was because the precise amount to be withheld had yet to be calculated.

Such sums had been included in all other withholding notices sent to Amey.

The adjudicator’s decision meant that the unspecified withheld sums in regards to two findings against the council points must be paid to Amey – with interest.

However, the other adjudication decision means Amey must pay the council a much larger sum.

The council intends to offset the smaller sum against the larger, awaiting the receipt of the balance.

But the adjudicator’s decision only related to the validity of the withholding notice and did not mean that the work in question was completed to the contract specification.

This remains a matter of dispute with the council seeking to recover all related sums.

Previously, the council has said that if it is in the “public interest” to go to litigation, then resolution could take at least another year – if not longer.

The alternative to incurring legal - and other - costs is paying Amey all sums applied for and accepting all shortfalls in performance.

This, the council says, far outweighs the cost of preparing for or  taking  legal action.

Though confident in its case, the council has signed off - at cabinet level - on the release of funds for the dispute from its £3.5 million risk mitigation reserve.

Behind the scenes there is concern at the extent of resources that could be needed to protect the council’s legal position.

Senior managers and political leaders have been warned of a “significant risk” that Amey’s claims could succeed by default without the deployment of appropriate resources.

A finding against the council by either an adjudicator of a judge would, dependant on the size of the payment, either be met through the council’s budget management processes and the use of the identified risk reserve.

 However, if the sum was especially substantial it would have to be met over a number of years by the council borrowing against its capital assets.

Capitalisation, as it called, would spread the impact of the immediate debt but would impact on service budgets.

The Hereford Times understands that Amey and the Council have been some way apart in their respective views on the disputed issues.

It is still possible that further Adjudication Notices or other legal proceedings may be issued by either party.

In 2013, the Hereford Times revealed that more than £3 million of “disputed items” remained to be resolved when the council ended its service provision contract with Amey.

Then, the council was warned of the potential risk these disputed items presented to budget planning.

Some of the impact, however, was identified for absorption  within the 2013-14 budgets managed by Amey through the managing agent contract agreement formed out of two contracts renegotiated in 2009.

In total, the council paid £38.5m to Amey Wye Valley over 2012-13 – up from £32m in 2011/12.

The disputed items risk was revealed in subsequent council budget papers

Following the adjudication of a sample of disputes earlier that year,  talks were underway between the council and Amey to evaluate the impact of this ruling.

Then, the council expected some £885,000 of income from Amey – for  which provision had been made in the previous years’ outturns – and an additional expectation of £166,000 for the five months to that August.

Earlier in 2013 Amey missed out on the council’s £200m public realm contract  covering highways, parks, street cleaning and street lighting.

The contract went to Balfour Beatty.

Public realm was one of the council’s first private sector partnership initiatives.

In 2003 the council entered into a contract with national construction and engineering firm Jarvis PLC for the provision of contract services worth around £13m a year over 10 years.

The contract involved establishing a joint venture company called Herefordshire Jarvis Services (HJS) with staff transferred over from the council’s former commercial services arm.

Just a year later Jarvis saw its share price plummet and started talking about breaking up the company to survive.

A proposed sale of HJS that all parties came to rely on fell through and the council had to prepare contingency plans to keep key services running until Amey agreed to buy the 80 per cent share Jarvis had in HJS with the council keeping its 20 per cent.

Amey Wye Valley took over the contract in August 2007 and soon had to cover much of the £2m plus HJS was found to owe sub-contractors, suppliers and other creditors, a debt that caused considerable tension within the county’s business community.

In 2009 elements of the council’s two contracts with Amey – the other entered into after a company providing the council with technical services was taken over by Amey – were re-negotiated to form a single managing agent contract through which  Amey Herefordshire would deliver highways, parks and public rights of way service plus a range of support services such as printing, catering and couriers.