|Judgments - Lafarge Redlands Aggregates Limited (Formerly Redland Aggregates Limited) v. Shephard Hill Civil Engineering Limited
The procedure contemplated by clause 18(2) might fail for various reasons. For instance, the employer is not bound by the subcontract and may not be willing to concur in a joint dealing with the disputes. Similarly the engineer might not be willing to determine the dispute between the contractor and the subcontractor. The contractor might negotiate a settlement with the employer only or might be content not to take an engineer's decision to arbitration. Again, the arbitrator under the main contract might be unwilling to determine a subcontract dispute or the power to order concurrent hearings might not be exercised. These illustrations are not exhaustive. If, for whatever reason, the joint procedure fails without default on the part of the subcontractor, the latter will be able to fall back on arbitration under clause 18(1).
The last sentence of clause 18(4) of the subcontract is a puzzling provision which in argument counsel could do little to elucidate. I am inclined to think that its intention was to impose on the subcontractor the same time limits regarding the reference of an engineer's decision to arbitration as apply to the contractor. This would be relevant, for instance, if the contractor were to accept the engineer's decision and only the subcontractor sought an arbitration. Be that as it may, the import of the last sentence of clause 18(4) is not clear enough, in my view, to affect the natural and ordinary meaning of clause 18(2).
In the Court of Appeal counsel for the contractor disclaimed the interpretation of clause 18(2) that it envisages an arbitration in which the contractor puts forward the subcontractor's claims. He described it as untenable. In this House he was nevertheless permitted to advance it; but I prefer his earlier position. As Lord Hope of Craighead points out, although the work under the main contract may be described as executed on the contractor's behalf by a subcontractor, the main contract and any subcontracts are designed to operate independently as regards the execution, completion and maintenance of the contract or subcontract works and the payments due to the contractor and to the subcontractor respectively. As my noble and learned friend also says, the likelihood of a conflict of interest is reduced - perhaps much reduced - by the fact that in a question with the employer the subcontract works will be regarded as the sole responsibility of the contractor. Even so, in an arbitration between the subcontractor and the contractor it would be incongruous - perhaps it is not too much to say grotesque - that the contractor should be responsible for presenting the arguments against himself. And the incongruity is not diminished by the circumstance that the same arbitrator is dealing jointly with a dispute between the contractor and the employer. It may be added that, according to a standard work, " . . . it is only rarely that a sub-contractor's entitlement or liability will correspond exactly with the main contractor's corresponding rights or liabilities in the main contract" (Hudson's Building and Engineering Contracts 11th ed. (1995) vol. 2, para. 18-16).
Accordingly I agree with the unanimous opinion of the Court of Appeal that clause 18(2) envisages that disputes under the different contracts will be dealt with jointly; and that it would be neither consistent with the terms of clause 18(2) nor fair to the subcontractor to treat the subcontractor's claims against the contractor as merely subsumed within the contractor's claims against the employer.
I have had the advantage of reading in draft the speech of my noble and learned friend, Lord Hope of Craighead. I agree with it, and for the reasons he gives I too would dismiss the appeal.
I should add, in light of the evident divergence of views about the operation of clause 18(2), that I agree with the view expressed by my noble and learned friend Lord Hope of Craighead. The last words of the clause seem to me to point to the conclusion that what is envisaged is an arbitration to which the employer and the contractor are the only formal parties. But, since the clause is clearly open to differences in interpretation, it would certainly seem desirable that consideration should be given to a revision of its terms, and, if a joint arbitration is thought to be the fair and proper course, then the clause should provide the machinery for that to be achieved.
LORD HOBHOUSE OF WOODBOROUGH
This appeal concerns the marriage of the arbitration provisions of respectively a sub-contract on the FCEC Standard Form, 1984 edition (the 'Blue Form') and a main contract on the ICE Standard Form (1979) revised 5th edition (the 'ICE Conditions'). The parties to the appeal are the contractor and one of the sub-contractors. The sub-contractor is only a party to the sub-contract and it is with the construction and correct understanding of this contract that the appeal is primarily concerned. The employer is not a party to the sub-contract and is not a party to the present proceedings.
The sub-contract has however to be construed having regard to the surrounding circumstances in which it was made and the references to the commercial and contractual structure of which it forms a part. The sub-contract, as one would expect, makes numerous references to the main contract and many of its provisions are expressed in terms of the main contract and its provisions. The sub-contract recites that the contractor has entered into the main contract and that the sub-contractor has "been afforded the opportunity to read and note the provisions of the main contract" except for the prices. The arbitration provision in the sub-contract (clause 18), as does that in the main contract (clause 66), refers to the "ICE Arbitration Procedure 1983" (and any amendment or modification of it in force at the time of the appointment of the arbitrator). This procedure is something to which all the relevant persons have agreed and to which I will have to refer again later in this speech
The circumstances surrounding the making of the sub-contract were normal for those involved in the construction industry. No special surrounding circumstances are relied on. Thus it is contemplated that the performance and completion of the main contract works will involve a number of other sub-contractors besides the parties to this particular sub-contract. It must also be contemplated that both external factors and the performance of other sub-contractors may affect the performance of the sub-contract by the sub-contractor, as indeed may the performance of the contractor of any part of the works which he has reserved for himself. Variations may be ordered. Any of these things may affect the cost to the sub-contractor of doing the sub-contract work, the time it takes and its extent. Likewise these things may affect the remuneration to which the sub-contractor is entitled from the contractor and any liability of the sub-contractor to the contractor (and vice versa).
The financial consequences may involve any of a number of conflicts of interest and various combinations of them. A delay may be attributed to one sub-contractor or another; the contractor may or may not be neutral. One sub-contractor may be blaming the contractor who may be blaming the employer who may be blaming (factually) another sub-contractor who may be blaming, say, soil conditions. A disputed method of measuring or pricing the work may be advantageous to one sub-contractor but not to another, or to a sub-contractor and the employer but not to the contractor. Major construction works are complex operations. It is easy to approach contracts as if the parties to them were the only persons involved whereas the sub-contract is merely one of a number of interlocking contracts and the parties are merely two of a considerable number of participants in a project performing their tasks in relation to one another.
In such a situation, any dispute is capable of affecting a number of participants and affecting them in a different way. Making provision for dispute resolution becomes correspondingly complex. Where the resolution is left to the court, the procedures of the court can and do accommodate this complexity. But where the resolution is to be by hostile arbitration the problems are greater. Commercial arbitration is a contractual concept originating from the law of agency. The arbitrator derives his jurisdiction to decide a dispute from the authority given to him by the parties to that dispute. Unless he has been appointed ad hoc, he will derive his authority from an appointment made under an antecedent contractual provision which will bind only those bound by that contract. Accordingly an appointment under the main contract will only confer jurisdiction on the arbitrator as between the employer and the contractor and an appointment under the sub-contract will only do so as between the contractor and the sub-contractor. All this is elementary.
But practical and legal problems arise. Some additional agreement is required where it is wished to authorise an arbitrator to decide a dispute as between the parties to more than one contract. This is not a problem which is peculiar to the construction industry. It is to be found in other fields as well, for example, shipping and charters and sub-charters. The problem exists at two levels. There is the capacity of the arbitrator to make an award binding upon a given person. There is also the capacity of an arbitrator, otherwise than by the express consent of all those involved, to hold a joint hearing at which all the interested parties have a right to adduce evidence and be heard in relation to any issue relevant to the issue of an award binding upon them. In the absence of specific agreement, each arbitration must be kept distinct; only the parties to the dispute to be decided by the award and who have given the arbitrator the authority to make that award may be present at and take part in the arbitration hearing. Thus, other things being equal, each sub-contract dispute must be arbitrated and decided independently of the arbitration and decision of a dispute under the main contract or another sub-contract. Again, this is elementary and the Arbitration Act 1996, unlike the rules of court, does not provide the answer.
It is for the commercial parties to provide the answer, if they wish to do so, by making the appropriate contracts. The ICE has laid the ground for them to do so in its 'Arbitration Procedure'. As previously observed, the version relevant to this appeal is that of 1983. We understand that there are later versions which may or may not resolve some of the matters presently under discussion. Rule 26 provides that the procedure shall apply where the parties have at any time so agreed or the president of the ICE so directs when making an appointment or the arbitrator so stipulates at the time of his appointment. (If the arbitrator does so stipulate, both parties can within 14 days agree otherwise and terminate his appointment.) The Procedure does not apply to arbitrations under the law of Scotland.
Rule 7 has already been quoted by my noble and learned friend Lord Hope and I will not set it out again. It applies where there are disputes which arise under more than one contract and which are concerned wholly or mainly with the same subject matter and the same arbitrator has been appointed. That arbitrator may, either with the agreement of all the parties concerned or on the application of one of those parties being a party who is a party to all of the contracts under which the dispute has arisen and the arbitrator has been appointed, order that the whole or part of the matters in issue shall be heard together. The arbitrator is given a wide discretion as to the terms on which he does this. The arbitrator still has (unless otherwise agreed) to make separate awards in respect of each dispute but can give a single set of reasons.
Rule 7 provides a sensible scheme for hearing related arbitration disputes. The only substantial precondition is that the parties must procure that the same arbitrator is appointed in all the arbitrations. Thereafter the arbitrator is given adequate powers to make arrangements for the hearing which are appropriate to arrive at a just outcome for all concerned without causing any undue expense delay or inconvenience to any particular party. The arbitrator's awards will (or should) provide consistency in the decision of related issues. It is therefore not surprising that both the main contract and the sub-contract make express use of the Procedure. The use if any that is made of rule 7 is in the discretion of the arbitrator. If he decides to exercise his discretion no party has the right to gainsay him.
Clause 66 of the main contract was reworded by the parties. It is a suitably detailed arbitration provision of a type which is fully familiar to those involved with construction contracts. It has already been quoted by my noble and learned friend; it did not fully follow the wording of the 1979 form. The use of the Procedure by the arbitrator is not mandatory but he is authorised to use it; therefore, for present purposes the alteration makes no difference. The clause provides for any dispute or difference to proceed through various stages in accordance with a time-table and imposes certain limits (irrelevant in the present case) upon the ability to refer disputes to arbitration before completion. The involvement of the engineer in the earlier stages of the dispute could in theory affect the involvement of a sub-contractor in the earlier stages but, if it be relevant, not in practice.
My Lords, with this somewhat lengthy but necessary introduction, I come to clause 18 of the sub-contract. Again, I will not re-quote it. Paragraph 2 gives the contractor an option. I agree that the contractor was here entitled to serve a paragraph 2 notice. There was a dispute of the requisite character and no arbitrator had been appointed under paragraph 1. It is the contractor's choice whether or not he chooses to exercise the option. In making up his mind he need not consult any commercial interest but his own. Where a contractual option is given to a party it is his to exercise in his own interest unless the contract (expressly, impliedly or by inference) provides otherwise. But having chosen to exercise it he must perform the obligations attached to that choice as well as take the benefit. The effect of the exercise of the option is to displace the arbitration procedure provided for in paragraph 1 and replace it with that in paragraph 2 (or 3). In my judgment there are certain implied obligations arising from the exercise of the option under paragraph 2 and it is a condition of the contractor's right to proceed under paragraph 2 and not paragraph 1 that the contractor perform those obligations. If the contractor fails to perform the obligations or evinces an intention not to or demonstrates an unwillingness or inability to do so, he can no longer rely on and enforce paragraph 2 and must accept a paragraph 1 arbitration. The principles which apply are those governing the performance of an obligation and the loss of the right to enforce a contractual obligation (cf. repudiation and anticipatory breach). The subjective intent of the contractor is not relevant except in so far as it may provide evidence to support one of the above conclusions. On this point I must, like my noble and learned friend Lord Cooke of Thorndon, respectfully disagree with my noble and learned friend Lord Hope.
In the present case it is not in dispute that the contractors came under an obligation to proceed with the arbitration under paragraph 2 and failed to do so. The contractors argue that their time for doing so was open ended as they were engaged in negotiations with the employers and it was reasonable for them to do so. This argument was mistaken. The obligation is not to act reasonably but to carry out the obligation within a reasonable time. What is a reasonable time is the time reasonably required to carry out that obligation. (The time limits reiterated in paragraph 4 are not irrelevant.) I agree with my noble and learned friends that the Court of Appeal were right to reject the argument.
This conclusion suffices for the dismissal of the appeal. But, like your Lordships, I agree that it is useful that we should provide assistance by answering the other questions argued on this appeal concerning the meaning and effect of the second paragraph. On this I agree with my noble and learned friend Lord Cooke of Thorndon and must respectfully disagree with my noble and learned friend Lord Hope.
The second paragraph must be construed in conjunction with the remainder of the clause and the sub-contract and with clause 66 of the main contract as amended and the Procedure, in particular rule 7. When this is done I consider that the paragraph is tolerably clear. The contractor must procure that the arbitrator for the purpose of paragraph 2 is the same as that for the purpose of clause 66. This is borne out by the condition precedent that an arbitrator shall not already have been appointed under paragraph 1, the absence of any separate procedure for appointment under paragraph 2 and the terms of rule 7 - "have been referred to the same arbitrator".
Next, the contractor must procure that the arbitrator is willing to apply, and make an order under, rule 7. This is so that there can be an arbitration which deals "jointly" with the disputes under both the contracts. In the context of clause 18 and clause 66 of the main contract and the Procedure to which they both refer, "jointly" is a reference to the procedure authorised by rule 7. The resultant award will be one which will bind both the contractor and the sub-contractor. Anything less than the rule 7 procedure will not ensure natural justice to the sub-contractor. I agree with those who have expressed the view that it would be both uncommercial and unprincipled to construe paragraph 2 as requiring the sub-contractor to be bound by an arbitration from which he was excluded and to which the only parties were persons who might well both have a conflict of interest with him. Further, as will be apparent from what I have said earlier about the surrounding circumstances, in no way unusual, in which this contract was made, it does not remove these objections to suggest that the contractor could be relied upon to present the arguments and evidence of the sub-contractor or sub-contractors to the main contract arbitrator. It is also hard to visualise how the arbitrator would deal with this situation given that arbitration, like litigation, is essentially adversarial. One might just be driven to accept that the parties had agreed to some of these unlikely consequences if they had not also agreed, as they have (and as has the employer), to the Procedure and rule 7.
One minor points remains. Paragraph 2 also refers to the engineer and the sub-contractor being bound by his decisions. In the pre-arbitration stage all decisions are provisional in the sense that they can be challenged and reviewed provided the stipulated procedure is followed. This requirement is also to be found in paragraph 4. It is not one which need cause significant difficulties for the sub-contractor who probably can procure that his view is put before the engineer. The only addition that this makes is therefore that it gives rise to a further implied obligation of the contractor to give any requisite notices to protect the rights of the sub-contractor and keep open his right to challenge the engineer's decision in the arbitration. If the contractor fails to do this, he will have failed to preserve the position of the sub-contractor in the paragraph 2 arbitration and will have created a disparity which makes it no longer appropriate that the sub-contractor should be bound under paragraph 2.
I agree that the appeal should be dismissed.
I have had the advantage of reading in draft the speeches of my noble and learned friends Lord Cooke of Thorndon and Lord Hope of Craighead. On the procedure contemplated by Clause 18(2) of the contract I prefer Lord Cooke of Thorndon's reasoning, which appears to me to give full effect to the fact that the contract requires two separate arbitrations to be dealt with jointly. Subject to this point, I agree with the speech of Lord Hope of Craighead, and for the reasons he gives I too would dismiss the appeal.
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