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|Judgments - Lafarge Redlands Aggregates Limited (Formerly Redland Aggregates Limited) v. Shephard Hill Civil Engineering Limited
HOUSE OF LORDS
Lord Hope of Craighead Lord Cooke of Thorndon Lord Clyde Lord Hobhouse of Wood-borough Lord Millett
OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT
IN THE CAUSE
LAFARGE REDLANDS AGGREGATES LIMITED (FORMERLY REDLAND AGGREGATES LIMITED)
SHEPHARD HILL CIVIL ENGINEERING LIMITED
ON 27 JULY 2000
LORD HOPE OF CRAIGHEAD
The framework within which work is carried out by participants in the construction industry is provided by the law of contract. They are assisted in their negotiations within this framework by the various standard forms of contract which are in current use. Among the matters provided for in these standard forms is a mechanism for the resolution of disputes between the parties to the contract. This invariably includes an arbitration clause which includes provision for the appointment of an arbitrator.
Arbitration is a means of dispute resolution which is widely practised within the construction industry. But it too depends on the law of contract. The arbitrator provides his services to the parties under the contract which he enters into with them when he is appointed to act as their arbitrator, and it is the agreement between the parties to the arbitration clause that renders the arbitrator's award enforceable. This contractual framework causes no difficulty where the dispute is of concern only to the parties to the contract which contains the arbitration clause. But it is not well adapted to the position which is commonplace throughout the construction industry where work which the contractor has undertaken to carry out for the employer under the main contract is executed on the contractor's behalf by a sub-contractor. The only contract which binds the employer is his contract with the contractor under the main contract. The only contract which binds the sub-contractor is his contract with the contractor under the sub-contract. The doctrine of privity of contract inhibits the formation of any kind of implied contractual relationship between the employer and the sub-contractor. This arrangement usually works well enough while the works are in progress, as the main contract and any sub-contracts entered into by the contractor are designed to operate independently as regards the execution, completion and maintenance of the contract or sub-contract works and the payments due to the contractor and to the sub-contractor respectively. Its limitations are thrown into sharp focus where a dispute arises which is of concern to all three parties and arbitration is the preferred means of resolving it.
The disputes which have arisen in the present case relate to the construction of the A133 Little Clacton and Weeley Heath Bypass. The main contract was entered into on 24 February 1993 between Essex County Council as employer and the appellant, Shephard Hill, as contractor. The works which were to be carried out under it consisted of the construction of approximately seven kilometres of carriageway together with associated side roads, bridges and culverts, drainage and accommodation works. It incorporated an amended form of the I.C.E. 5th Edition (June 1973) Standard form of Contract for Civil Engineering Works (Revised January 1979) (Reprinted January 1986) ("the I.C.E. Conditions"). The contract price was £7.7 million, to be measured and paid against a schedule of rates. By a contract dated 31 August 1993 the appellant entered into a sub-contract with the respondent, Lafarge Redland, for the work of supplying and laying the asphalt surfacing for the new carriageway. The sub-contract incorporated, with amendments, the F.C.E.C. Standard Form of Sub-Contract (September 1984 Edition) generally known as the Blue Form.
The commencement date of the main contract was 22 March 1993 and its completion date was 18 December 1994. This was a period of 91 weeks. The sub-contract works were to be carried out in accordance with the appellant's programmes and schedule of durations, the effect of which was that they were to be completed in 135 days. The main contract works commenced on 22 March 1993. The sub-contract works were scheduled to start in June 1993, but due to earlier delays the start was delayed until 1 October 1993. They were substantially completed on 17 January 1995. The engineer under the main contract certified that the main contract works were substantially completed on 19 February 1995. The effect of his decision was that there was a delay in the completion of the main contract works of 9 weeks as compared with the contractual completion date of 18 December 1994. Two interim extensions of time were granted to the appellant by the engineer under the main contract which amounted in total to 7.5 weeks. The effect of these decisions was that there was a period of 1.5 weeks for which no extension of time had been granted.
Disputes arose between Essex County Council and the appellant and between the appellant and the respondent during and following completion of the main contract and the sub-contract works. These disputes related primarily to the causes of delay to the main contract and the sub-contract works. They raised questions as to entitlement to extensions of time, entitlement to additional remuneration as a result of delays to completion, the appellant's right to withhold from sums otherwise due to the respondent monies in respect of the loss which the appellant claimed to have incurred by reason of the respondent's alleged delay in completion of the sub-contract works, whether or not additional work was instructed and, to the extent that it was instructed, the value of the additional work. The respondent's claims against the appellant amounted in total to about £450,000 exclusive of VAT and interest. The appellant's claims against Essex County Council amounted to about £1.7 million.
The provisions for the settlement of disputes arising under the main contract are set out in an amended clause 66 to the I.C.E. Conditions. The relevant parts of this clause provide:
The provisions of this clause provide a system for the settlement of disputes between the contractor and the employer which derives its binding force from the contract which they have entered into. The decisions of the engineer are to be "final and binding" on the contractor and the employer unless either of them requires that the matter be referred to arbitration. If the matter is referred to arbitration the award of the arbitrator is to be "final and binding" on the parties to the contract between the contractor and the employer. No mention is made in the clause of any third party with whom either the employer or the contractor may be in dispute. Neither the engineer nor any arbitrator appointed under clause 66 has power to issue a decision or to make an award which is binding on any third party by virtue of the provisions of the main contract.
The sub-contract between the appellant and the respondent contains a preamble in which the following references are made to the main contract:
These provisions have an important bearing on the contractual relationship between the contractor and the sub-contractor. But it is not, and could not be, suggested that by entering into the sub-contract with the contractor the sub-contractor was entering into a contractual relationship of any kind with the employer. The system which the amended clause 66 of the I.C.E. Conditions provides for the resolution of disputes between the employer and the contractor under the main contract is not available for the resolution of disputes between the contractor and the sub-contractor. So the sub-contract contains its own system for the resolution of these disputes.
This system is set out in clause 18 of the standard form of sub-contract, which - as amended by the parties to the sub-contract by the substitution of the word "shall" for "may" where indicated - is in these terms:
The questions which are before your Lordships in this appeal relate to the meaning and effect of clause 18(2) of the sub-contract. They arise in the context of the following events, all of which occurred after the completion of the sub-contract works.
By letter dated 15 February 1995 the respondent gave notice to the appellant of its intention to refer disputes between them to arbitration under clause 18(1). This notice was followed by further notices to the same effect dated 21 March and 11 September 1995. On 20 February 1995 the respondent gave notice to the appellant to concur in the appointment of Mr. D.T. Simmonds, F.C.I.A., as sole arbitrator. In response to these initiatives the appellant replied that it considered the appointment of an arbitrator to be premature, that in its view the normal negotiating channels had not yet been exhausted and that it did not wish to escalate the disputes under the main contract at that stage. It then gave notice to the respondent by letter dated 6 March 1995 that it required the disputes to be dealt with jointly with disputes under the main contract under clause 18(2). Further notices to the same effect were given by the appellant to the respondent on 9 June, 17 July and 26 September 1995. On 20 March 1995 the respondent applied to the President of the Institution of Civil Engineers for the appointment of an arbitrator. On 3 April 1995 the appellant notified the respondent that it considered the application to the President premature and that it would challenge the jurisdiction of any arbitrator who was appointed in response to the respondent's request. On 6 April 1995 the appellant invited the President of the Institution of Civil Engineers to reject the respondent's request for the appointment of an arbitrator. On 13 April 1995 the respondent asked the President of the Institution of Civil Engineers to postpone the making of the appointment for the time being. On 12 September 1995, having on 11 September listed sixteen disputes which it required to be referred to arbitration, the respondent gave a further notice to the appellant to concur in the appointment of Mr. Simmonds as sole arbitrator. But on 26 September 1995 the appellant required that nearly all of the disputes be dealt with jointly with the disputes under the main contract and again notified the respondent that it considered the application to be premature and that it would challenge the appointment of any arbitrator appointed under clause 18(1).
Two of the disputes which had arisen under the main contract were then referred by the appellant to the engineer for his decision under clause 66 of the main contract. The engineer gave his decision on these disputes, and the appellant referred them to arbitration under that clause. By agreement between the appellant and the employer the arbitration proceedings in regard to these disputes were deferred. None of the other disputes between the appellant and the employer, and in particular none of the disputes which had arisen between the appellant and the respondent and were the subject of the clause 18(2) notices given to the respondent by the appellant under the sub-contract, were the subject of a request for a formal decision by the engineer under clause 66 of the main contract. The respondent then raised these proceedings against the appellant to challenge the validity of the clause 18(2) notices and for a declaration that the appellant was not entitled to rely upon them.
On 22 May 1997 the recorder, B.J. Knight Q.C., held that the notices which were given under clause 18(2) were valid notices, and he rejected the respondent's alternative arguments that the appellant was in breach of obligations imposed on it by clause 18(2), that it was estopped from relying upon that clause, that it had by its conduct frustrated the purpose of clause 18(2) and that it had repudiated the agreement for arbitration in clause 18(1). On 11 December 1998 the Court of Appeal (Auld and Chadwick, L.JJ. and Sir Christopher Staughton) allowed the respondent's appeal. It declared that the respondent was no longer obliged to take part in a tripartite arbitration under clause 18(2) and that it was entitled to call upon the President of the Institution of Civil Engineers to appoint an arbitrator on its disputes with the appellant under clause 18(1).
The following issues arise for decision in this appeal. Mr. Friedman for the appellant conceded that the effect of the serving of a notice on the sub-contractor under clause 18(2) was to oblige the contractor to initiate the procedure under clause 66 of the main contract within a reasonable time. The first issue relates to the question how that period is to be determined. In particular, is the effect of clause 18(2) that the contractor must have a present intention of invoking the clause 66 procedure at the time when it serves the notice under clause 18(2) and, if so, does it lack that intention if its intention is to invoke clause 66 only if and when negotiations between it and the employer fail? The second issue relates to the nature of the procedure that is envisaged by clause 18(2). Does it require a tripartite operation of the arbitration procedure provided for by clause 66 of the main contract? If, not, what form of procedure is required to achieve a decision which is binding as between the contractor and the sub-contractor in terms of clause 18(2)?
The reasonable period of time issue
The question as to what amounts to a reasonable time for the performance of an obligation is in almost every case a pure question of fact. But in this case an issue of law is involved. It arises because the reason which the appellant has given for not initiating arbitration proceedings under the main contract is its wish to negotiate a settlement of its disputes with the employer rather than obtain a formal decision from the engineer under clause 66 with a view to referring the matter to arbitration under that clause.
The recorder dealt with the matter as a pure question of fact. He said that he did not think that it was unreasonable for the appellant to have embarked on negotiations with the employer. He accepted that they might not have proceeded at a pace acceptable to the respondent, but he did not consider that they had been unreasonably protracted. In the Court of Appeal Sir Christopher Staughton also dealt with the question as one of fact. He said that the obligation on the contractor was to set up and conduct the procedure contemplated by clause 18(2) of the sub-contract with all deliberate speed. He summed the matter up in this way:
But Chadwick L.J. said that it seemed to him that the requiremet to which the exercise of the power under clause 18(2) gave rise, that the sub-contract dispute be dealt with "jointly with the dispute under the main contract" gave rise to two further conditions on the exercise of the power, which he described in these terms:
I agree with Chadwick L.J. that there is more to this matter than an implied obligation on the contractor to initiate the procedure within a reasonable time. The assumption on which clause 18(2) proceeds is that a dispute has arisen in connection with or arising out of the sub-contract or the carrying out of the sub-contract works which would otherwise fall to be resolved by arbitration under clause 18(1) of the sub-contract. In the typical case a dispute of that kind involves a request by the sub-contractor for payment of money which the contractor has declined to pay under the terms of the sub-contract, and it will normally be in the best interests of the sub-contractor that the dispute between them be resolved as quickly as possible. The effect of the exercise of the power under clause 18(2) is to remove from the sub-contractor the power to take the initiative by referring the dispute to arbitration under clause 18(1). A different dispute resolution procedure is to be substituted, over the timing of which the sub-contractor has no control as it is not a party to the main contract. But the procedure which clause 66 of the main contract describes is a procedure for the resolution of disputes by means of a decision of the engineer which failing that of an arbitrator. A process of negotiation whose purpose is to avoid the necessity of referring the matter for the decision of the engineer whom failing of an arbitrator is a quite different procedure. It is an informal procedure which is conducted without regard to the mechanism for the resolution of disputes set out in the contract. It is not mentioned anywhere in clause 66 of the main contract, nor is it mentioned in clause 18(2) of the sub-contract.
Clause 18(2) of the sub-contract provides that the sub-contractor is to be bound in like manner as the contractor by any decision of the engineer or any award by an arbitrator. But there is nothing in the clause which makes an agreement which results from negotiations between the contractor and the employer binding on the sub-contractor. The result of these negotiations, in which the sub-contractor has no right under its contract with the contractor to participate, may be unacceptable to the sub-contractor. In that event its dispute with the contractor, which would otherwise have gone to arbitration under clause 18(1), will remain unresolved. That plainly is not a situation which sub-clause 18(2) contemplates. The purpose of clause 18(2) is to avoid the risk of inconsistent findings on matters which arise in connection with the main contract and touch on or concern the works under the sub-contract. The risk of negotiations with the employer resulting in an agreement between the contractor and the employer which is unacceptable to the sub-contractor is not within the mischief that clause 18(2) seeks to avoid. Negotiation is the antithesis of submitting the dispute for the decision of the engineer or an award by an arbitrator.
I would readily accept that it may well be in the best interests of the parties to a dispute to attempt to settle their dispute by negotiation and agreement rather than embarking upon a process of litigation with a view to its resolution by means of an award by an arbitrator. The expense and delay which is inevitable in litigation has the effect of putting up costs and increasing overheads. The hardening of attitudes which results is not good for continuing business relationships. Everyone would agree that it is sensible to avoid those consequences by negotiation wherever possible. But a contractor who seeks to take advantage of the power under clause 18(2) is not entitled to have regard only to its own interests in selecting a means of resolving its dispute with the employer. It must have regard also to the interests of the sub-contractor, which is being deprived of its power to make use of the procedure set out in clause 18(1).
The meaning and effect of clause 18(2) was considered in Erith Contractors Limited v. Costain Civil Engineering Limited  A.D.R.L.J. 123. In that case His Honour John Lloyd Q.C., sitting as an official referee, said that it was axiomatic that if the contractor requires the sub-contract dispute to be dealt with jointly with the main contract dispute with the employer in accordance with the provisions of clause 66 of the main contract, he is under an obligation to take the necessary steps to have the two disputes dealt with in accordance with clause 66. I agree. Clause 18(2) of the sub-contract does not give the contractor the right to deprive the sub-contractor of the benefit of the procedure in clause 18(1) while he attempts to settle the main contract dispute by negotiation with the employer. There is nothing in either clause 66 or in clause 18(2) to prevent the contractor from attempting to settle the dispute under the main contract by negotiation once it has initiated the procedure that clause 18(2) contemplates. But any delay which is attributable to the negotiation process must be left out of account when consideration is being given to the question whether the contractor has fulfilled its obligation to the sub-contractor to have the dispute which has arisen under the sub-contract resolved within a reasonable time under clause 66.