Judgment - Beaufort Developments (NI) Limited v. Gilbert-Ash NI Limited and Others  continued

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      In Taunton-Collins v. Cromie [1964] 1 W.L.R. 633, 636 Pearson L.J. said that in that case there was a conflict between two well established principles. One was that parties should normally be held to their contractual agreements. Where the parties have agreed that any dispute or difference between them should be referred to arbitration the court should be willing to say by its decision what the parties have already said by their contract. The other principle was that a multiplicity of proceedings was highly undesirable. In that case it was the principle of avoiding a multiplicity of proceedings which prevailed. The effect of the decision of the Court of Appeal in the Crouch case has been to reverse the result of balancing these two principles. But that case also, it may be said, involved the application of two well established principles. The first is that which was expressed by Browne-Wilkinson L.J. [1984] Q.B. 644, 667B in these terms:

     "In principle, in an action based on contract the court can only enforce the agreement between the parties: it has no power to modify that agreement in any way."

      The second, which was not referred to at all in the judgments in that case, is that which was described by Lord Diplock in Modern Engineering (Bristol) Ltd. v. Gilbert-Ash (Northern) Ltd. [1974] A.C. 689, 718E:

     "So when one is concerned with a building contract one starts with the presumption that each party is to be entitled to all those remedies for its breach as would arise by operation of law, including the remedy of setting up a breach of warranty in diminution or extinction of the price of material supplied or work executed under the contract. To rebut that presumption one must be able to find in the contract clear unequivocal words in which the parties have expressed their agreement that this remedy shall not be available in respect of breaches of that particular contract."

      The facts in the Crouch case can be stated quite shortly. There had been delays in the completion of the work under the main contract and by a nominated sub-contractor. An arbitrator had been appointed on a reference under the main contract between the contractor and the authority. The same arbitrator had been appointed in a reference under the subcontract in which the nominated sub-contractor was proceeding in the contractor's name in its arbitration with the authority. The arbitrator was empowered under clause 35(3) of the conditions under the main contract to open up, review and revise the architect's certificates, opinions, decisions, requirements or notices. There had been no final certificate. The question was whether the arbitration proceedings should be stayed. One of the issues raised in the case--although it was not necessary to decide this issue in order to dispose of the appeal--was whether the official referee in the High Court had the power to open up, review and revise the certificates, opinions, decisions, requirements or notices of the architect which had been given to the arbitrator by clause 35(3) of the main contract.

      Dunn L.J. said, at p. 663F that the court had been told that it was common practice for the official referee to open up and review certificates and other decisions of the architect and he observed that there were decisions of high authority either way as to whether this was competent. In his summary of the competing arguments he said that the authority had relied on obiter dicta of Lord Wilberforce in Hosier & Dickinson Ltd. v. P & M Kaye Ltd. [1972] 1 W.L.R. 146, 158 and of Viscount Dilhorne and Lord Cohen in East Ham Corporation v. Bernard Sunley & Sons Ltd. [1966] A.C. 406, 424 and 432. The other side had contended that in order to give business efficacy to the contract there must be an implied term that if the parties were to litigate rather than arbitrate the court was to have the same powers as the arbitrator. At p. 664D-E he went on:

     "In my judgment it is not necessary to imply the term suggested in clause 35. The contract gives the architect wide discretionary powers as to the supervision, evaluation and progress of the works. The parties have agreed that disputes as to anything left to the discretion of the architect should be referred to arbitration, and clause 35 gives wide powers to the arbitrator to review the exercise of the architect's discretion and to substitute his own views for those of the architect. Where parties have agreed on machinery of that kind for the resolution of disputes, it is not for the court to intervene and replace its own process for the contractual machinery agreed by the parties."

      Browne-Wilkinson L.J. began his discussion of this point at p. 667B with the statement of principle that the court had power only to enforce the contract, not to modify it in any way. He went on to say that, if the parties have agreed on a specified machinery for establishing their obligations, the court cannot substitute a different machinery. He then distinguished the powers of the court from those of the arbitrator. The parties had agreed that certain rights were to be determined by the certificate or opinion of the architect. In no circumstances would the court have power to revise such certificate or opinion solely on the ground that it would have reached a different conclusion, as to do so would be to interfere with that agreement. But the powers conferred on the arbitrator were different. He had been given power to modify the contractual rights by varying the architect's certificates and opinions if he disagreed with them and to substitute his own discretion for that of the architect. He summed the matter up at pp. 667H-668A with these words:

     "Therefore as a matter of principle I reach the conclusion that if this matter were to be litigated in the High Court (whether before the official referee or a judge) the court would not have power to open up, review and revise certificates or opinions as it thought fit since so to do would be to modify the contractual obligations of the parties. The limit of the court's jurisdiction would be to declare inoperative any certificate or opinion given by the architect if the architect had no power to give such certificate or opinion or had otherwise erred in law in giving it. The court could not (as an arbitrator could) substitute its own discretion for that of the architect."

      Sir John Donaldson M.R., at pp. 671-673 also drew a distinction between the power of the court and those which had been conferred on the arbitrator. He said that the powers conferred on the arbitrator seemed to him to involve the exercise of a completely novel jurisdiction which was quite different from the function of the court. He described the court's function as being to determine facts and to enforce the contractual rights of the parties. The arbitrator had that function also, but he also had the right and duty which the court did not possess to review the architect's decisions and, if appropriate, to substitute his own. He also found support for his opinion that the court would not be able to exercise the power to open up and review which clause 35 of the JCT contract had given to the arbitrator in the dicta to which Dunn LJ had referred in the East Ham case [1966] A.C. 406 and in what Lord Wilberforce had said, in the Hosier & Dickinson case [1972] 1 W.L.R. 146, 158.

      The statement of principle with which Browne-Wilkinson L.J. began his discussion of this point seems to me, with respect, to be both relevant and accurate. I do not think that it can be doubted that in a case which has been based on contract the court's function is to enforce the agreement of the parties, not to modify their agreement in any way. But I have the impression that in the discussion which follows, and in the remarks which were made by the other judges, two other important points were overlooked and that the description of the arbitrator's powers as including a power to modify the contract, for what it is worth, is less than accurate.

      The first point is that there is a difference between an agreement that machinery is to be used to implement or to give effect to the contract and an agreement that the parties' rights are to be determined solely by means of that machinery. An agreement which falls into the first category will be needed in almost every building or engineering contract. Some method has to be laid down for dealing with such matters as variations to the contract works and the making of interim payments to the contractor as the work proceeds. But an agreement of that kind does not imply any limitation on the ordinary powers of the court. Nor does it confer any powers on the architect or engineer, or in his turn on the arbitrator, which restrict the power of the court, in the event of litigation, to conduct its own inquiry into the facts. Its purpose is simply to enable the contract to be worked out upon the agreed terms to achieve the result to which it was directed. The purpose of an agreement which falls into the second category, on the other hand, is to exclude the point at issue from being determined by the court. If the parties have agreed that a dispute between them is to be determined conclusively by the architect or engineer, or in the event of dispute by an arbitrator, the sole function of the court is to give effect to the agreement which they have made. Its jurisdiction is to enforce the contract. Its duty is to ensure that the decision of the architect or the engineer or, in his turn, of the arbitrator is given the conclusive effect which has been agreed. But none of the judges in the Crouch case addressed the question whether the certificates or opinions of the architect which the arbitrator had power to open up, review and revise were agreed by the parties to the contract to have effect as conclusive evidence.

      The second point is this. The powers which the court ordinarily has to determine and give effect to the rights and obligations of the parties to a contract differ from the additional powers which, in the typical building or engineering contract, are given to the architect or the engineer and, in the event of any dispute about their exercise, to the arbitrator. The purpose of these additional powers is not to deprive the court of its ordinary powers to determine their rights and obligations under the contract. Their purpose is to enable the architect or engineer, and in the event of a dispute about their exercise the arbitrator, to do things in the course of the execution of the contract which the court could not do. This point was well expressed by Piers Ashworth Q.C., sitting as a Deputy High Court judge, in National Coal Board v. William Neill & Son (St. Helens) Ltd. [1985] Q.B. 300, 309C-F, where he said:

     "I have heard much argument on the effect of arbitration clauses. I cannot help feeling that a certain unjustified mystique has been attributed to them. In general an arbitration clause does no more that provide an alternative method of resolving disputes. It is hoped that it is simpler, quicker and cheaper than resorting to a court of law. In building contracts an arbitrator is frequently given additional powers which would not otherwise be open to him and are not open to a judge to exercise. For example, by clause 15 of this contract the contractor is required to proceed with the work in accordance with the instructions of the engineer. By sub-clause (b) he is entitled to dispute any such instruction and to refer to arbitration. Were it not for this sub-clause, clearly the contractor would have no right to dispute or litigate about any such instruction and, even within sub-clause (b), he cannot dispute such an instruction before a court. In this respect, it is right to say the arbitrator has additional powers to a court. But in general, as I have said, arbitration is simply an alternative way of resolving disputes."

      So there is this difference between the the provision of an agreed machinery for giving effect to the contract and the taking of decisions or the expressions of opinion which may be necessary from time to time to its exercise. Where the parties have conferred additional powers on the architect, the engineer or the arbitrator, the function of the court is to give effect to the agreement of the parties as to the use of that machinery. The court cannot give the instructions or issue the certificates. But the fact that decisions are taken or opinions are expressed in the course of the working out of that machinery does not, of itself, affect the ordinary powers of the court if litigation becomes necessary. That would only be so if the parties had agreed that that those decisions or opinions were to receive effect as conclusive evidence.

      Then there is the question whether it was accurate for the court in the Crouch case to describe the power which was given by the conditions in the JCT contract to the arbitrator to open up, review and revise certificates and opinions of the architect as a power to modify the contract. It was primarily on this ground that the distinction was drawn between the powers of the arbitrator and those of the court. In my opinion the correct analysis is that the power which is given to the arbitrator in the event of a dispute about the exercise of his powers by the architect is a power to give effect to the contract, not to modify it.

      In Modern Engineering (Bristol) Ltd. v. Gilbert-Ash (Northern) Ltd. [1974] A.C. 689, 717B Lord Diplock said that a building contract is an entire contract for the sale of goods and work and labour for a lump sum price payable by instalments as the goods are delivered and the work is done. Decisions have to be taken from time to time about such essential matters as the making of variation orders, the expenditure of provisional and prime cost sums and the extension of time for carrying out the works under the contract. Decisions also have to be taken from time to time as to the adjustments which may have to be made to the contract sum on account of these matters and on the amounts to be paid to the contractor by way of instalments towards a final settlement of the sums to which he is entitled under the contract. But in taking their decisions on all these matters the duty of the architect or the arbitrator is to give effect to the contract, not to alter or modify it. Variations can only be made to the contract within the limits which the parties themselves have agreed. From time to time in order to exercise these functions the architect or the arbitrator must apply the provisions of the contract to the facts. But in this regard their position in the resolution of disputes between the parties is no different from that enjoyed in the exercise of its ordinary powers by the court.

      For these reasons I consider that the Court of Appeal in Crouch, having started from the correct principle, fell into error in its application to the facts. Unlike both East Ham and Hosier & Dickinson it was not a case in which there had been a final certificate. There was no issue between the parties as to whether any of the certificates which had been issued had been agreed to be conclusive evidence of the facts stated in them. In East Ham it was held that the effect of the relevant provisions of the building contract was that the final certificate was conclusive evidence and that it could not be re- opened even by the arbitrator. In the Hosier & Dickinson case Lord Morris of Borth-y-Gest explained, at p. 153B-C that the fact that the parties had agreed to the conclusiveness of a certificate as a matter of evidence did not involve any ouster of the jurisdiction of the court. Lord Wilberforce said, at p. 157D that to describe it as doing so would be to misdescribe the effect attributed to it by the contract. There was no discussion of any of these points in the Crouch case. But the effect of the decision was to confer a similar status on the certificates and opinions of the architect, subject only to their review by an arbitrator, without having identified any provision in the contract which removed these matters from the ordinary jurisdiction of the court.

      In the Crouch case [1984] Q.B. 644 both Dunn L.J. and Sir John Donaldson M.R., at pp. 663H and 673C relied on the dictum of Lord Wilberforce in Hosier & Dickinson Ltd. v. P. & M. Kaye Ltd [1972] 1 W.L.R. 146, 158A, where he said:

     "Had the matter gone to arbitration the position would no doubt have been different: this is because clause 35 of the contract confers very wide powers upon arbitrators to open up and review certificates which a court would not have."

      I agree that, at first sight, this dictum may be taken to suggest that the court can never open up and review certificates where such wide powers in that regard are given to the arbitrator. But I think that to read the dictum in this way would be to take it out of its context. The context is to be found in what Lord Wilberforce said, at p. 157E-H about the provisions of the contract which dealt with the effect of the final certificate. He said, at p. 157E that the court proceedings had raised the question whether the work done and the materials used were such as should have been done and used under the contract, and that an essential question was what standard was to be set for this. It was in that context that he examined the provisions about the final certificate. He concluded that there could be no objection to a clause which provided that it was the architect's standard which was to be relevant and that his final certificate was to be conclusive evidence. The only circumstances in which, by clause 30(7) of the conditions in that contract, the final certificate was not to be conclusive evidence were where there had been a written request by either party, within certain time limits, to concur in the appointment of an arbitrator.

      It seems to me that the discussion in the Hosier & Dickinson case put the matter on the correct basis. On the one hand there is the principle which was expressed by Lord Diplock in Modern Engineering (Bristol) Ltd. v. Gilbert-Ash (Northern) Ltd. [1974] A.C. 689, by which clear unequivocal words must be used to deprive a party to a contract of recourse to the court for the ordinary exercise of its powers and the granting of the ordinary remedies. On the other there is the principle that the court must give effect to the contract which the parties have made for themselves. If the contract provides that the sole means of establishing the facts is the expression of opinion in an architect's certificate, that provision must be given effect to by the court. But in all other respects, where a party comes to the court in the search of an ordinary remedy under the contract or for a remedy in respect of an alleged breach of it, the court is entitled to examine the facts and to form its own opinion upon them in the light of the evidence. The fact that the architect has formed an opinion on the matter will be part of the evidence. But, as it will not be conclusive evidence, the court can disregard his opinion if it does not agree with it.

      For these reasons I agree with my noble and learned friend Lord Hoffmann that the Crouch case was wrongly decided and should be overruled. I also consider that the answers which the Court of Appeal gave to the questions which were before it in Balfour Beatty Civil Engineering Ltd. v. Docklands Light Railway Ltd. (1996) 78 BLR 42 were the wrong answers. That was a case in which there was no arbitration clause, but there was no provision in the contract agreeing that the opinion of the employer's representative was to be conclusive evidence in the event of a dispute. The fact that the contract did not provide an agreed means of challenging the judgment of the employer's representative did not affect the power of the court to examine the issue and to form its own judgment in the light of the evidence.

      I can return now to the facts of this case. There has been no final certificate. No certificates or opinion have been issued or given which the parties have agreed shall be taken to provide conclusive evidence as to the matters which are in dispute. The court is thus in no different position in regard to such expressions of opinion as have been given as would be an arbitrator. It does not have the additional power which an arbitrator has under this contract to issue fresh certificates in place of those already issued by the architect. But it does not need that power in order to resolve the disputes which have arisen in this case. In these circumstances there would be no injustice to the contractor in refusing a stay. To grant a stay would be to risk conflicting decisions in the separate proceedings which would be needed to determine the respective responsibilities to the Employer of the Contractor and of the architect. I would therefore allow the appeal and refuse a stay of the proceedings in the High Court.


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