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|Judgments - Beaufort Developments (NI) Limited v. Gilbert-Ash NI Limited and Others
Lord Nolan Lord Hoffmann Lord Hope of Craighead
LORD GOFF OF CHIEVELEY
I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Hoffmann. I find myself to be in complete agreement with his reasoning and his conclusion; and I too am satisfied that, with all respect to the distinguished members of the Court of Appeal who decided the case, Northern Regional Health Authority v. Derek Crouch Construction Co. Ltd.  Q.B. 644 was wrongly decided and must be overruled. I too would therefore allow the appeal--a conclusion which, I have no doubt, will be welcomed by the courts in Northern Ireland who would, if they had been free to do so, have wished to follow the same course. Like my noble and learned friend, I gladly acknowledge my debt to the writings of Mr. I.N. Duncan Wallace Q.C. on the subject.
LORD LLOYD OF BERWICK
Standard forms of building contract have often been criticised by the courts for being unnecessarily obscure and verbose. But in fairness one should add that it is sometimes the courts themselves who have added to the difficulty by treating building contracts as if they were subject to special rules of their own.
Two recent examples illustrate the point. In Dawnays Ltd. v. F.G. Minter Ltd. and Trollope & Colls Ltd.  1 W.L.R. 1205 the Court of Appeal held that when a sum is certified by an architect as due under a building contract (in that case the RIBA form) the employer has no right of set-off. The justification for this decision was said to be that cash flow is the life blood of the building trade: see Modern Engineering (Bristol) Ltd. v. Gilbert-Ash (Northern) Ltd. (1973) 71 L.G.R. 162 per Lord Denning at p. 167. The decision came as something of a surprise in the official referees' corridor. It was overruled a few years later when the Modern Engineering case reached the House:  A.C. 689. "It is not to be supposed" Lord Diplock said, at p. 718:
And so the House held, restoring the decision of His Honour Judge Edgar Fay Q.C., that the ordinary common law right of set-off, whereby a breach of warranty may be set up in diminution of the price, applies as much to building contracts as to contracts for the sale of goods.
In the meantime Dawnays' case had been followed in five other cases in the Court of Appeal. This is not surprising when one considers the pressure of litigation in this field. One erroneous decision of the Court of Appeal is bound to lead to others.
The same applies to the second example, although the intervening period has been somewhat longer. The arbitration clause in Northern Regional Health Authority v. Derek Crouch Construction Co. Ltd.  1 Q.B. 644 gave the arbitrator the power to "open up review and revise any certificate" of the architect, as does the arbitration clause in the present case. The Court of Appeal held this special power was confined to the arbitrator, on whom it had been conferred by the arbitration clause. It could not be exercised by the courts. Since it would have been unjust to the contractors to deprive them of the opportunity of challenging the architect's certificates in that case, the Court of Appeal held that the arbitrations (there were two of them) should go ahead.
As in Dawnays' case, it appears that the decision in the Crouch's case came as a surprise. Official referees had been opening up and revising certificates as a matter of course for many years without any objection from the parties.
It is clear from Pringle J.'s judgment in the present case, that but for the decision in Crouch, he would not have granted the defendant a stay of the plaintiffs' action under section 4 of the Arbitration Act (Northern Ireland) 1937, and the Court of Appeal would have upheld his decision. In my view they would have been right. So the question is whether the Crouch case was correctly decided.
In the present case we are concerned with clauses 30.9, 30.10 and 41.4. Clause 30.9 provides that the final certificate is to be conclusive evidence of the matter certified in accordance with the elaborate provisions set out in that clause. Clause 41.4, the arbitration clause, provides, as one would expect, that the arbitrator's powers to open up and revise certificates are subject to clause 30.9. So the arbitrator has no power to open up and revise the final certificate, save as provided by clause 30.9, and in particular by clause 30.9.3. But we are not here concerned with the final certificate. It has not yet been issued.
Nothing in clause 30.9 affects any certificate other than the final certificate. Indeed clause 30.10 specifically provides:
Interim certificates granted by the architect in the course of a building contract are an important part of the contractual machinery. But there is nothing in the present contract to make interim certificates conclusive; nor was there in the Crouch case. So there is no need for the contract to confer on the courts the power to open up and revise interim certificates. The power already exists, as part of the court's ordinary power to enforce the contract in accordance with its terms.
Then can it be said that the jurisdiction of the courts to open up and revise interim certificates is impliedly excluded by the terms of the arbitration clause? I do not pause to consider whether such an ouster of the court's powers would be effective in law; on any view it would require the clearest of language. I can find no such language in clause 41.4. Since an arbitrator's powers, unlike the powers of the court, are derived ultimately from the contract under which he is appointed, it is by no means unusual to find his powers spelt out in longhand. Thus under the old law (until changed by section 30 of the Arbitration Act 1996) an arbitrator had no power to rule on his own jurisdiction. Since he could not pull himself up by his own boot straps, he could not decide whether a valid arbitration agreement had ever come into existence. But the High Court can rule on its own jurisdiction. Similarly an arbitrator could not rule on a question whether the contract ought to be rectified. So it is not surprising to find the parties conferring on the arbitrator an express power to rectify the contract. But it would be hopeless to argue that because the parties had by clause 41.4 conferred on the arbitrator an express power to rectify the contact, they had by implication curtailed the power of the court to rectify the contract. By the same token, the courts power to open up and revise interim certificates is not excluded by the express power to open up and revise certificates conferred on the arbitrator.
For these reasons, and those given by my noble and learned friend Lord Hoffmann and Lord Hope, with which I agree, I would hold that the Crouch case was wrongly decided, and, like them, would allow the appeal.
I confess to much sympathy with the very distinguished and experienced judges who have expressed or assented to the view that a clause such as clause 41.4 of the building contract giving the arbitrator power to "open up, review and revise any certificate, opinion, decision . . . requirement or notice . . ." confers upon him a discretion wider than that available to a court. The language used is not that of the Supreme Court Practice. It seems to suggest an informal and constructive approach to the resolution of problems occurring in the course of the building work, an approach appropriate to the work of an arbitrator who is chosen because he is an architect rather than a judge.
I am, however, persuaded by the arguments of Mr. Declan Morgan Q.C., and by the opinions of your Lordships whose speeches I have had the opportunity of reading in draft, that the Court of Appeal in Northern Regional Health Authority v. Derek Crouch Construction Co. Ltd.  Q.B. 644 placed a weight on clause 41.4 greater than it will bear. I am persuaded in particular that clause 41.4, read in the context of the contract as a whole, cannot properly be construed as giving an interim certificate (as distinct from a final certificate) any conclusive effect in litigation between the parties. Further, I am satisfied that the clause cannot be regarded as conferring upon the arbitrator the power to modify the contract. I find it difficult to conceive of a contract properly so called which conferred upon a third party the power to modify its terms.
The decision in the Crouch case has stood unchallenged, although not uncriticised, for 14 years. It has now been virtually superseded by section 9(4) of the Arbitration Act 1996, unless and until (if ever) section 86 of that Act is brought into operation. Yet on the view of the law which has prevailed in your Lordships' House the relevant dicta in the Crouch case must clearly be overruled, in justice to the appellants. Pringle J. and the Court of Appeal in Northern Ireland would plainly have refused a stay to the respondents, on the compelling ground that to grant it would lead to duplication of proceedings, had it not been for their reluctant acceptance of what was said in the Crouch case. The same objection to a stay did not, as it happens, arise in the Crouch case itself because all three of the parties concerned submitted to arbitration by the same arbitrator. Mr. Donnell Deeny Q.C., for the first named respondent, persuasively invited your Lordships to assume that the same consequence would follow if the stay were upheld in the present case, but the assumption was not one which Mr. Morgan was prepared to support.
I, too, would therefore allow the appeal.
The question before your Lordships is whether an arbitrator appointed to decide a dispute arising under a building contract in the JCT Standard Form has a power to review decisions and certificates of the architect which is not available to a court. The English Court of Appeal so held in Northern Regional Health Authority v. Derek Crouch Construction Co. Ltd.  Q.B. 644 but your Lordships are invited to say that they were wrong.
The clause which is said to give the arbitrator these exceptional powers is 41.4, of which the relevant parts are as follows:
The words particularly relied upon are those which confer a power to "to open up, review and revise any certificate, opinion, decision . . . requirement or notice" and determine matters in dispute as if they had not been given. The Court of Appeal in the Crouch case said that these were special powers conferred exclusively upon the arbitrator. Browne-Wilkinson L.J. said, at p. 667 that in an action "questioning the validity of an architect's certificate or opinion," the jurisdiction of the court would be limited to deciding whether or not the certificate or opinion was invalid for bad faith or excess of power. It could not revise the certificate on the ground that the court thought it was wrong. A clause such as 41.4, on the other hand, gave the arbitrator "power not only to enforce the contractual obligations but to modify them." Sir John Donaldson M.R. also said that the arbitrator could vary the certificates to create new rights and obligations which would not otherwise arise from the contract. Dunn L.J. said that one could not imply a term that if the dispute was litigated instead of arbitrated, the court should have a similar power.
My Lords, I have no doubt that it is open to the parties to enter into an agreement of the kind described by the Court of Appeal in the Crouch case. I put aside the purely theoretical question of whether it is right to speak of the architect or arbitrator having power to modify the contractual obligations of the parties. I find this a strange concept. The powers of the architect or arbitrator, whatever they may be, are conferred by the contract. It seems to me more accurate to say that the parties have agreed that their contractual obligations are to be whatever the architect or arbitrator interprets them to be. In such a case, the opinion of the court or anyone else as to what the contract requires is simply irrelevant. To enforce such an interpretation of the contract would be something different from what the parties had agreed. Provisions of this kind are common in contracts for the sale of property at a valuation or goods which comply with a specified description. The contract may say that the value of the property or the question of whether the goods comply with the description shall be determined by a named person as an expert. In such a case, the agreement is to sell at what the expert considers to be the value or to buy goods which the expert considers to be in accordance with the description. The court's view on these questions is irrelevant.
It is less usual, though certainly theoretically possible, to add a second tier to arrangements of this kind, and to provide that a party who is dissatisfied with the view of one expert shall be entitled to call for the opinion of another, which shall then be final and binding. From the point of view of the court, the final outcome is no different from that in the case of a single expert. The contractual obligations of the parties depend upon the opinion of the one expert or the other and not upon its own view of the matter.
It is this two-tier arrangement which the Court of Appeal in the Crouch case considered that the JCT contract had created; what Sir John Donaldson M.R. afterwards called, cryptically but vividly, an "internal arbitration": see Benstrete Construction Ltd. v. Angus Hill (1987) 38 B.L.R. 115, 118. It is internal in the sense that it does not adjudicate upon the rights and duties of the parties but is part of the machinery for determining what they are. The court appears to have considered that in the absence of a second tier power of the arbitrator to open up, review and revise the architect's certificates, they would (if given in good faith and within the ambit of the relevant contractual provisions) be binding upon the parties. So the critical question is whether, upon the true construction of the contract, such certificates are binding. Unless they are, there is no need for any special second-tier arrangement. They will be open to review by any tribunal called upon the determine the rights of the parties, whether arbitral or judicial.
The judgments of the Court of Appeal contain no very detailed analysis of the provisions of the contract which are said to confer upon the architect this power to issue binding certificates. Although none of the judges say so expressly, there is an implied suggestion that one can infer such a power from the very fact that the arbitrator is given a power to "open up, review and revise." This is the argument from redundancy; the parties are presumed not to say anything unnecessarily and unless the decisions of the architect were binding, there would be no need to confer upon the arbitrator an express power open up, review and revise them. The later judgment of Sir John Donaldson M.R. in Benstrete Construction Ltd. v. Angus Hill (1987) 38 B.L.R. 115, in which he distinguished Crouch on the ground that the contract in the latter case did not have a similar arbitration clause, tends to support the view that he had adopted this form of reasoning.
I think, my Lords, that the argument from redundancy is seldom an entirely secure one. The fact is that even in legal documents (or, some might say, especially in legal documents) people often use superfluous words. Sometimes the draftsmanship is clumsy; more often the cause is a lawyer's desire to be certain that every conceivable point has been covered. One has only to read the covenants in a traditional lease to realise that draftsmen lack inhibition about using too many words. I have no wish to add to the anthology of adverse comments on the drafting of the JCT Standard Form Contract. In the case of a contract which has been periodically re-negotiated, amended and added to over many years, it is unreasonable to expect that there will be no redundancies or loose ends. It is therefore necessary to make a careful examination of the contract as a whole in order to discover whether upon its true construction it does confer binding power upon the decisions of the architect or whether there is some other explanation for the "open up, review and revise" power in clause 41.4. It is also important to have regard to the course of earlier judicial authority and practice on the construction of similar contracts. The evolution of standard forms is often the result of interaction between the draftsmen and the courts and the efforts of the draftsman cannot be properly understood without reference to the meaning which the judges have given to the language used by his predecessors.
The substantive provisions of the agreement state the principal obligations of the parties in clear and objective terms. The contractor is obliged by condition 2.1 to "carry out and complete the works in accordance with the contract documents, using materials and workmanship of the quality and standards therein specified." In the this particular contract, the preliminary articles defined the "Works" as the construction of a nine-storey office block as described in the contract documents. Condition 8.1.3 provides that all work is to be carried out in a proper and workmanlike manner and by condition 23.1.1 the contractor is to proceed "regularly and diligently" with the works and complete them on or before the completion date. The contract specified 14 January 1995 as the completion date and said that the contract price was to be £1,700,000.
This framework of carefully defined contractual obligation is not easily reconcilable with a broad discretion, said to be conferred in the first instance upon the architect and subject to review by an arbitrator, to vary or modify the rights of the parties or to have them conclusively determined by the judgment of one or the other. The parties have agreed that a particular building is to be constructed out of specified materials in a workmanlike manner and that the work should proceed regularly and diligently to completion by a specified date. No doubt within this framework there is room for judgment about what amounts to proper workmanship and diligent progress. But one would not ordinarily describe the exercise of such judgment as a power to modify the contractual rights. These are questions which require the application of objective standards and with which the courts are routinely familiar.
The contract provides for the issue by the architect of certificates or statements in writing as to his opinion on various matters. For present purposes, these documents may be treated as similar. As Devlin J. said in Minster Trust Ltd. v. Traps Tractors Ltd.  3 All E.R. 137, 142: "The mere use of the word 'certificate' is not decisive." In the absence of express words, the parties are highly unlikely to have intended that some of these statements of opinion should be binding and others not. I shall give a few examples. Clause 30 provides for the issue of interim certificates of the value of the work for which the contractor is from time to time entitled to payment. Clause 30.1.1 provides that the contractor is entitled to payment within 14 days after the issue of the certificate. Clause 25, which deals with extension of time, lists a number of "Relevant Events" such as force majeure or failure to provide instructions or information which the parties accept as capable of delaying completion beyond the completion date without breach of the contractor's primary obligation to proceed diligently with the works. By clause 25.3, if the architect is of opinion that a relevant event is likely to delay completion beyond the completion date, he must give the contractor an appropriate extension of time by a written notice fixing a new completion date. Clause 26 deals with claims for loss and expense caused by deferment of giving possession of the site or various matters such as provision of information for which the employer or architect is responsible. Here again, the architect is required to state his opinion that loss or expense has been caused, or is likely to be caused, by one of the specified matters, whereupon the amount is ascertained by the quantity surveyor and added to the contract price. Finally, clause 30.8 provides for the issue of a final certificate stating the balance due from employer to contractor or vice versa.
Clause 30.9 expressly makes the final certificate conclusive evidence as to various matters. But there is no other express provision which says that any certificate or expression of opinion is to be binding upon the parties in the same way as the determination of an expert. Clause 30.10, immediately after the provisions dealing with the final certificate, says:
This clause has itself been the subject of refined arguments of the inclusio unius, exclusio alterius variety. The clause refers to certificates, therefore it must have been intended that other statements of opinion by the architect should be conclusive. The clause refers only to works, materials and goods being in accordance with the contract, therefore it must have been intended that certificates as to other matters such as extensions of time should be conclusive. In a contract such as this, such arguments are just as dangerous as the argument from redundancy, of which they are in truth merely a variety. If arguments of this kind are to be pursued, what seems to me much more compelling is that the contract contains express and elaborate terms which provide for conclusiveness as to various matters for one certificate and one only, namely the final certificate.