Judgments - Lafarge Redlands Aggregates Limited (Formerly Redland Aggregates Limited) v. Shephard Hill Civil Engineering Limited

(back to preceding text)

    I would therefore hold that it is an implied condition of the exercise of the power under clause 18(2) that the contractor intends to invoke the procedure under clause 66 of the main contract. This means that it is no answer for the contractor, if challenged on the ground of its failure to invoke that procedure within a reasonable time, to attempt to explain the delay by referring to time which has elapsed due to negotiations entered into with the employer with a view to rendering that procedure unnecessary. My noble and learned friends Lord Cooke of Thorndon and Lord Hobhouse of Woodborough have indicated that they would prefer an objective approach to this matter rather than one which has regard to the subjective intent of the contractor. But I do not believe that the disagreement between us is on a point of any real substance. As my noble and learned friend Lord Hobhouse has observed, the subjective intent of the contractor may provide evidence of repudiation or anticipatory breach which will deprive it of the right to enforce clause 18(2) against the sub-contractor.

    I do not think that the recorder was in error when he held that the notices which the contractor gave to the sub-contractor under clause 18(2) were valid notices. In M.J. Gleeson Group Plc. v. Wyatt of Snetterton Limited [1994] 72 B.L.R. 15 the Court of Appeal rejected the sub-contractor's argument that a dispute between the contractor and the employer within the meaning of clause 18(2) can only arise when clause 66 is invoked. The court held that the word "dispute" in clause 18(2) must be given its ordinary meaning which, in the words of Steyn L.J. as he then was at p. 22, prima facie comprehends the case where a claim has been put forward and rejected. It seems to me that this approach is entirely consistent with the opening words of clause 18(2), and I did not understand Mr. Ramsay Q.C. for the respondent to contend otherwise.

    Where the recorder went wrong, in my opinion, was when he asked himself the question whether it was reasonable for the appellant to embark on negotiations with the employer once it had exercised its power under clause 18(2). That was a question which had no bearing on the question whether the contractor had performed its obligation to invoke the procedure within a reasonable time after service of the relevant notices. Once that question was left out of account, the appellant had no answer to the respondent's case that the contractor had failed to invoke the clause 66 procedure within a reasonable time and that for this reason it was no longer entitled to rely on the clause 18(2) notices.

The procedure required by clause 18(2)

    Although it is sufficient for a decision in this appeal to hold that the appellant was in breach of the obligation to invoke the clause 18(2) procedure within a reasonable time, I think it would be appropriate for your Lordships also to say something about the nature of the procedure that is envisaged by this clause. This is because of the views that were expressed in the Court of Appeal on this matter, and because the true meaning of the clause is of general interest and importance to the construction industry.

    Sir Christopher Staughton said in the Court of Appeal that in his judgment the plain wording of clause 18(2) contemplates a tripartite arbitration. He rejected the appellant's argument that what the clause contemplated was (1) an arbitration in which the contractor put forward the sub-contractor's claims, (2) two separate arbitrations by one arbitrator, who would be bound in the sub-contract arbitration by his findings in the main arbitration or (3) two separate arbitrations by different arbitrators, the sub-contact arbitrator being bound by the findings of the main contract arbitrator. He said that these alternatives were so unfair to sub-contractors that they could not be supposed to have agreed to it unless they had expressly said so. Nevertheless he recognised that it might well be that the employer could not be compelled to participate in a tripartite arbitration, and he was willing to accept that on his construction of clause 18(2) the appellant had agreed to a procedure which it might not be able to deliver. Chadwick L.J. also recognised that neither clause 66 nor any other provision in the main contract provided that the employer would be obliged to participate in a joint arbitration. He referred to various circumstances in which a joint arbitration might take place, but he accepted that it would not necessarily do so. However he too rejected the appellant's suggestions as to other possible constructions of clause 18(2) on the ground that they were so oppressive and unfair to sub-contractors as to be untenable.

    I would be unwilling to place a construction on clause 18(2) which had the result of committing the contractor to a procedure which it plainly could not deliver if the employer declined to agree to modify the procedure laid down in clause 66 of the main contract in order to accommodate it. It is clear that the context in which the words are used in clause 18(2) is one in which the contractor is party to two entirely separate contracts - one with the employer and the other with the sub-contractor. The purpose of clause 18(2) is to enable the contractor to avoid the risk of inconsistent findings as a result of the use of the independent dispute resolution machinery provided for in each contract. The draftsman must have had in the forefront of his mind the fact that the dispute resolution machinery provided for in each contract was binding only on the parties to that contract. And both parties to the sub-contract must be taken to have known perfectly well when they entered into it that nothing that was said in clause 18(2) about the provisions of clause 66 of the main contract would bind the employer. Yet there is nothing in clause 18(2) to indicate that its operation is conditional on the contractor being able to secure the agreement of the employer to implement it. These considerations suggest strongly that the clause should be read in such a way that it is capable of being operated without the employer's agreement.

    A further consideration supports this view. That is the position of the arbitrator appointed under clause 66. He derives his authority to pronounce decisions which bind the parties to the arbitration purely and solely from the agreement by virtue of which he has been appointed. This is so whether his appointment was by agreement between the parties to the contract which contains the arbitration clause or was by the use of the agreed appointment machinery. He has no jurisdiction of any kind over any other party, as the entire procedure on which he is engaged depends upon contract. For example, the only parties who are liable for the payment of his fees and expenses are the parties to the contract by which he was appointed: see section 28 of the Arbitration Act 1996. Accordingly when clause 18(2) refers to the dispute under the sub-contract being dealt with "jointly with the dispute under the main contract in accordance with the provisions of clause 66" it must be taken to have in view the fact that what clause 66 envisages, once the dispute has left the engineer, is an arbitration in which the arbitrator derives his authority to issue a binding award solely from the contract which the contractor and the employer have entered into. No provision is made in clause 18(2) for securing the appointment of an arbitrator in which all three parties have participated either by agreeing to his appointment as their arbitrator or by agreeing to the machinery by which he has been appointed. Indeed the person who is to act as arbitrator under clause 66 may already have been agreed or appointed before the contractor gives notice to the sub-contractor under clause 18(2).

    I do not think that there can be such a thing as a tripartite arbitration that does not have as its starting point a tripartite method of conferring jurisdiction on the arbitrator. Clause 18(2) does not address this difficulty. I would conclude that, whatever else it has in mind, it is not a tripartite arbitration in the sense of an arbitration in which the employer, the contractor and the sub-contractor are all engaged as parties to the proceedings before the clause 66 arbitrator. In this situation some other meaning must be found for the expression "to be dealt with jointly with the dispute under the main contract" in clause 18(2).

    One possibility lies in the fact that both clause 66 of the main contract and clause 18(1) of the sub-contract refer to the Institution of Civil Engineers' Arbitration Procedure (1983). This, as I understand it, is the argument which has found favour with my noble and learned friends Lord Cooke and Lord Hobhouse. Clause 66(5)(a) of the I.C.E. conditions provides that any reference to arbitration under that clause "shall" be conducted in accordance with the procedure. In the amended form of clause 66 which was adopted for the purposes of the main contract the word "shall" has been replaced by the word "may". Conversely, while clause 18(1) of the F.C.E.C. standard form provides that any reference to arbitration under that clause "may" be conducted in accordance with the 1983 Procedure, the clause as amended for the purposes of the sub-contract has replaced the word "may" with the word "shall". Rule 7 of the 1983 Procedure provides:

    "Rule 7. Power to order concurrent Hearings

7.1

    Where disputes or differences have arisen under two or more contracts each concerned wholly or mainly with the same subject matter and the resulting arbitrations have been referred to the same arbitrator he may with the agreement of all the parties concerned or upon the application of one of the parties being a party to all the contracts involved order that the whole or any part of the matters at issue shall be heard together upon such terms or conditions as the arbitrator thinks fit.

7.2

    Where an order for concurrent hearings has been made under Rule 7.1 the arbitrator shall nevertheless make and publish separate awards unless the parties otherwise agree but the arbitrator may if he thinks fit prepare one combined set of reasons to cover all the awards."

A revised version of the Procedure was issued in 1997 in which this rule appears in almost identical terms as rule 9. As the reference in the contracts with which your Lordships are concerned in this case was to the 1983 Procedure, I propose to base my observations on the terms of rule 7 of that version of the Procedure.

    It is plain that one of the pre-conditions for the operation of rule 7 is the fact that disputes have arisen under two or more contracts which have resulted in a reference of these disputes to the same arbitrator. It is conceivable that this precondition will have been satisfied in a case where a reference of a dispute to arbitration under clause 66 of the main contract has been accompanied by a reference of a dispute to arbitration under clause 18(1) of the sub-contract. But in the situation to which clause 18(2) applies no arbitrator will have been agreed or appointed under clause 18(1). Nor does clause 18(2) provide for the appointment of an arbitrator for the purposes of resolving the dispute between the contractor and the sub-contractor which is the subject of the notice given under that clause. The reference at the end of clause 18(2) to "any decision of the engineer or any award by an arbitrator" is to a decision of the engineer or an award by the arbitrator agreed or appointed under clause 66 of the main contract. The absence of any machinery in clause 18(2) for the reference of the dispute between the contractor and the sub-contractor to an arbitrator agreed or appointed under the sub-contract means that clause 18(2) has been drafted on the assumption that there will be only one arbitration and only one arbitrator - that is to say, the arbitrator agreed or appointed under clause 66 of the main contract. The assumption is not that the arbitrator will make an award against the sub-contractor - he could not do that unless the sub-contractor was a party to his appointment as arbitrator - but that the arbitrator's award against the contractor will be binding on the sub-contractor under the contractual arrangement between the contractor and the sub-contractor which is set out in clause 18(2) of the sub-contract. In this situation I do not see how rule 7 of the 1983 Procedure as to concurrent hearings can have any application.

    My noble and learned friend Lord Hobhouse states that the contractor must "procure" that the arbitrator for the purposes of clause 18(2) is the same as that for the purposes of clause 66. If he can achieve this result then, of course, everything will fall into place and the system which he and Lord Cooke have described will be able to operate. But neither the main contract nor the sub-contract nor the 1983 Procedure provide any mechanism by which the contractor may procure such an appointment if the employer or the clause 66 arbitrator are unwilling to agree to it. Unless they will co-operate with him in setting up this procedure - which neither is obliged to do and which may have an effect on the smooth running of an arbitration under clause 66 which they may find objectionable - there is nothing the contractor can do about it.

    A further difficulty about the 1983 Procedure in the present case is the fact that under the amended clause 66 the arbitrator is not obliged to conduct the arbitration under that clause under that Procedure. Even if he decides to do so, he is not bound by rule 7.1 to order that there shall be a concurrent hearing. He may be expected to do so if all the parties concerned agree that he should do so, but if the contractor's application is opposed by the employer the prospect of a concurrent hearing is much less certain. At best therefore the 1983 Procedure provides a facility which may or may not be available according to the circumstances and the position which the other parties wish to adopt when one of them wishes to make use of it. But my main reason for discounting this Procedure as a solution to the problem raised by clause 18(2) is that that clause envisages that there will be only one arbitration and only one arbitrator.

    Of the three possible solutions which were advanced in the Court of Appeal only one deserves further scrutiny. This is that the

    joint mechanism for the resolution of the dispute that clause 18(2) assumes is one which requires the contractor to represent the interests of the sub-contractor in the proceedings before the engineer and the arbitrator under the main contract.

    The use of the words "shall be dealt with jointly with the dispute under the main contract" clearly admit of this construction. No particular procedure is laid down, but the fact that the provisions of clause 66 of the main contract are to be used indicates that the mechanism for the resolution of the dispute is one in which the sub-contractor cannot participate directly as it is not a party to the main contract. At first sight it might appear that there must inevitably be a conflict of interest between the contractor and the sub-contractor which would make it impossible for the contractor to present the sub-contractor's argument jointly with its own argument. But the likelihood that such a conflict of interest will arise in practice is much reduced once one appreciates the consequences of the fact that the sub-contract works will always fall, in a question with the employer, to be regarded as the sole responsibility of the contractor under the main contract. Payment for works undertaken by the sub-contractor can only be obtained from the employer under the provisions of the main contract. And the financial consequences of any delay in the sub-contract works must also be worked out through the provisions of the main contract. The contractor's interest in disputes arising under the sub-contract will in many cases be confined to obtaining money from the employer which will enable it to settle such disputes and to retain for itself the appropriate percentage uplift on the rates and prices quoted by the sub-contractor for the carrying out of the sub-contract works.

    The question whether this procedure is unfair and oppressive to the sub-contractor is, according to ordinary principles, a matter of judgment for the parties to take when they are entering into their contract. It is not for us to attempt to rewrite the contract for the parties according to our own conception of what is fair and unfair. In M. J. Gleeson Group Plc. v. Wyatt of Snetterton Limited [1994] 72 B.L.R. 15, 23 Steyn L.J. accepted that clause 18(2) was capable of causing serious financial difficulties for sub-contractors. But he insisted that it was not for the court to rewrite the sub-contract in order to substitute its judgment of what was commercially fair between the parties.

    That is not to say that the contractor is free to do what it likes when making use of the procedure under clause 18(2). The fact that the sub-contractor is unable to participate directly in the procedures laid down by clause 66 carries with it obligations which the law will imply in the interests of fairness. The contractor must observe these obligations if it wishes to enforce any decision of the engineer or any award of the arbitrator against the sub-contractor in terms of that clause. The sub-contractor must be kept informed about the progress of the procedure and must be given a reasonable opportunity to provide the contractor with the information which is needed to present the arguments that it wishes to present to the engineer and in his turn to the arbitrator.

    At the stage when the matter is before the engineer for his decision the practice is for the engineer to communicate only with the contractor. It is not the practice of the engineer to engage in tripartite discussions with the employer, the contractor and the various sub-contractors. In these circumstances the obligation on the contractor will normally involve placing before the engineer for his consideration all the relevant statements and documents on which the sub-contractor wishes to rely for the purposes of his dispute with the contractor. It will also involve providing copies to the sub-contractor of the submissions made on its behalf and of the decision of the engineer when it is known. The time limits imposed by clause 66 for requiring that the decision of the engineer be referred to arbitration is binding on the sub-contractor for the purposes of his dispute with the contractor in terms of clause 18(4) of the sub-contract. If contractor is content with the engineer's decision and the sub-contractor does not request that the matter be referred to arbitration within those time limits, the engineer's decision is final and binding upon the sub-contractor in terms of clause 18(2). If the sub-contractor intimates to the contractor that it wishes the matter to be referred to the arbitrator it is the duty of the contractor to initiate that procedure without delay under the provisions of clause 66 of the main contract.

    Clause 18(2) assumes that once an arbitrator has been appointed the contractor will deal with all the issues which the sub-contractor wishes to raise in the course of the presentation of its case to the arbitrator. The sub-contractor has no right to appear as a party to the arbitration between the employer and the contractor. So here again the contractor must keep the sub-contractor informed about progress and must take all reasonable steps to present the sub-contractor's case to the arbitrator. This will involve providing the sub-contractor with a reasonable opportunity to supply the contractor with the necessary evidence so that the contractor may then place that evidence before the arbitrator.

    I do not think that it can be suggested that the procedure which seems to me to have been envisaged by clause 18(2) is ideal for the resolution of these disputes. But, in the absence of prior agreement between the employer and the contractor that they will submit such disputes to a tripartite arbitration procedure, there is no way in which either the employer or the clause 66 arbitrator can be forced to submit to such procedure by an agreement entered into between the contractor and the sub-contractor. If the clause 18(2) procedure were to be operated in the way that I have described it would provide a reasonable solution to the problems caused by the contractual context which surrounds such disputes. In the end of the day the parties would require to exercise their own judgment before entering into a contract in these terms as to whether they wished to commit themselves to this procedure. However that may be, as my noble and learned friend Lord Clyde has said, the difference of view which has arisen between us as to the interpretation of the clause indicates that further thought should now be given to providing the machinery that is needed to ensure that a joint arbitration can be achieved by the contractor when he wishes to invoke clause 18(2) against the sub-contractor.

Conclusion

    I consider that the appellant was in breach of the implied obligation to initiate the procedure under clause 66 of the main contract within a reasonable time. What amounts to a reasonable time is a question of fact in each case, as to which no hard and fast rules can be laid down. But in this case time was allowed to elapse due to the appellant's wish to negotiate a settlement rather than to make use of the procedure which clause 66 provides for the resolution of disputes. This was an irrelevant consideration, as it had nothing to do with the procedure contemplated by clause 18(2). In these circumstances the appellant had no answer to the respondent's contention that, as more than a reasonable time had elapsed, it was no longer in a position to resist its demand for a reference of its dispute to arbitration under clause 18(1). I would dismiss the appeal.

LORD COOKE OF THORNDON

My Lords,

    I have had the advantage of reading in draft the speech prepared by my noble and learned friend Lord Hope of Craighead. For the reasons which he gives I would dismiss the appeal. But I have difficulties on two of the other matters with which my noble and learned friend deals; and, although it is unnecessary to do so for the purpose of disposing of the appeal, I think it right, like him, to say something about them as they are of general importance in the construction industry.

    First, I entirely agree that a contractor who wishes to invoke against a subcontractor the procedure under clause 18(2) of the subcontract is bound to initiate and progress the procedure under clause 66 of the main contract within reasonable times. In particular the contractor is not entitled to defer the main contract procedure while he negotiates with the employer. Of course there is nothing to prevent his negotiating, but he cannot delay for that purpose. It is common experience indeed that effective negotiation can be promoted by the pendency of hearings. This very case happens to provide an illustration. Your Lordships have been informed by the solicitors that when, soon after the hearing before your Lordships' Committee, the arbitration between the subcontractor and the contractor commenced at long last on 11 May 2000, their dispute was settled at the end of the first day.

    I agree, too, that what is a reasonable time is a question of fact. The contractor's duty under clause 18(2) with regard to the clause 66 procedure was therefore encapsulated happily by Sir Christopher Staughton as being to proceed with all deliberate speed. Balthazar's all convenient speed would not do. In this case the contractor manifestly did not fulfil that condition and so forfeited the benefit of clause 18(2), leaving clause 18(1) available to the subcontractor.

    A connected point on which I have some hesitation in agreeing with Lord Hope and Chadwick L.J. is whether it is necessary to identify as a further and separate condition that at the time when the power to invoke clause 18(2) is exercised the contractor must have a present intention of invoking clause 66. That would seem to entail a subjective inquiry of a kind not common in contract law. If the contractor does proceed within a reasonable time, that will normally be enough. On the other hand an unreasonable delay will normally be fatal. A proclaimed intention to delay, as here, will normally disqualify the contractor from relying on clause 18(2), but this is because a reasonable party in the shoes of the subcontractor will be justified in taking the contractor as having repudiated the obligation of reasonable speed. The test would seem to be objective. I acknowledge, however, that this point may seem something of a cavil.

    The second matter may be of more moment. I share the view of the Court of Appeal that clause 18(2) of the subcontract contemplates a tripartite arbitration in which the subcontractor can take part. Where clause 18(2) applies there will be at least two disputes. They will be linked because in the opinion of the contractor they both touch or concern the subcontract works. Clause 18(2) contemplates that they will be dealt with jointly under the procedure specified in clause 66 of the main contract. If this cannot be or is not done, the contractor will no longer be able to utilise clause 18(2) and the subcontractor will be free to pursue a separate arbitration with the contractor under clause 18(1), as eventually happened in this case.

    The question becomes what is a joint dealing with the disputes within the meaning of clause 18(2). As to the employer's engineer, in the ordinary course he is not bound to communicate directly with the subcontractor nor to give anything in the nature of a formal hearing. Provided that he acts even-handedly, it will no doubt usually satisfy clause 18(2) if he receives the subcontractor's claims and any supporting representations relayed through the contractor, and, after considering the contractor's representations also, determines the dispute between the contractor and the subcontractor as well as the dispute between the contractor and the employer.

    If there is an arbitration, clause 18(2) likewise contemplates a dealing with the disputes jointly. It is plain from the wording of the subclause that they remain different disputes between different parties, though linked in their subject-matter as they touch or concern the subcontract works. The power to order concurrent hearings conferred by rule 7 of the Civil Engineers' Arbitration Procedure (1983) or an equivalent present-day rule may be apt for such a case. I think it must be that kind of procedure which clause 18(2) contemplates.

    The foregoing approach requires no rewriting of the subcontract. It does no more than give realistic effect to the provisions of clause 18(2) by recognising that the parties to the subcontract have agreed that their dispute will be determined by the engineer acting under the main contract or an arbitrator appointed under the main contract, as the case may be. The last sentence of clause 18(2) is explicit that the subcontractor is to become bound thereby. It may well have been thought desirable to emphasise this, as only the contractor can take advantage of the subclause. The approach also gives full effect to the purpose of clause 18(2) in providing a machinery whereby the contractor may avoid inconsistent findings. The contrary view recognises that under clause 18(2) there may be an award of the arbitrator against the subcontractor. It is difficult to see how that can be so unless the subcontractor is a party to an arbitration before the arbitrator.

 
continue previous