Contract: interpretation of standard form of sub contract

Citation

Lee, R. and Waterson, G. (2001), "Contract: interpretation of standard form of sub contract", Property Management, Vol. 19 No. 1. https://doi.org/10.1108/pm.2001.11319aab.002

Contract: interpretation of standard form of sub contract

Contract: interpretation of standard form of sub contract

Lafarge Redland Aggregates Ltd v. Shephard Hill Civil Engineering Ltd, The Times, 11 August 2000 HL

There were two main issues in this appeal. First the right of a sub contractor to invoke the procedure in Clause 18(1) of the Federation of Civil Engineering Contractors' Standard Form of Sub Contract (Sept. 1984 edition) once the main contractor had already invoked clause 18(2) of the same standard form contract. Second, the proper construction of clause 18(2) of this standard form contract.

Clause 18(1) of the Federation of Civil Engineering Contractors' Standard Form of Sub Contract provides for the sub contractor to give notice to the main contractor of its intention to refer disputes between them to arbitration.

Clause 18(2) of the same contract provides that where a dispute in the main contract also concerns the sub contractor's works the contractor may give notice to the sub contractor requiring that the sub contract dispute be dealt with jointly with the dispute under the main contract in accordance with the provisions of Clause 66 of the Civil Engineers Standard Form Contract for Civil Engineering Works (5th Edition January 1979 revision).

Clause 66 of the Civil Engineers Standard Form contract provides for disputes arising out of the main contract between the employer and the contractor to be settled by the engineer. Any party dissatisfied with the decision having the right to refer the matter to arbitration.

In this case main contractor, Shephard Hill Civil Engineering Ltd gave notice under clause 18(2) of its intention to have both its dispute on the main contract and its dispute with Lafarge Redland Aggregates Ltd under the sub contract, referred to arbitration. The effect of serving a clause 18(2) notice was to oblige the contractor to initiate the clause 66 procedure of the Civil Engineers Standard Form Contract within a reasonable time. When the sub contractor felt that a more than reasonable time had elapsed it gave notice under clause 18(1) of its intention to refer their dispute with Shephard to arbitration independently.

The delay in taking both disputes to arbitration had arisen because Shephard wanted to delay arbitration proceedings whilst it tried to negotiate a settlement of its dispute with the employer. Shephard's view was that once it had invoked the clause 18(2) procedure the subcontractor was debarred from invoking clause 18(1). This argument was successful before the Official Referee but was reversed by the Court of Appeal. The contractors appealed to the House of Lords.

The appeal was dismissed on the ground that although attempts by the contractor to settle a dispute by negotiation were laudable, any resulting delay must be taken into account when considering whether or not the contractor had invoked the procedure in clause 66 to resolve the disputes within a reasonable time. If it had failed to do so then it was no longer entitled to rely on the clause 18(2) notice. Thus the sub contractor was entitled to invoke clause 18(1) to have its dispute with the main contractor settled independently.

Having settled the appeal their Lordships went on to consider the proper construction of clause 18(2). Lords Hope and Clyde believed that although less than ideal, the procedure envisaged by clause 18(2) was that only the employer and the main contractor were formal parties to the arbitration. The main contractor was to represent the interest of the sub contractor. This would necessarily mean that in the interests of fairness the main contractor must keep the sub contractor informed about the progress of the arbitration and give the sub contractor a reasonable opportunity to provide the information needed for its arguments to be presented to the engineer and the arbitrator.

Lords Cooke, Hobhouse and Millett disagreed as to the construction of clause 18(2). They felt that what was envisaged by the clause was that disputes under the different contracts were to be dealt with jointly under the procedure specified in clause 66. Any arbitration was to be by way of concurrent hearings of the kind referred to by rule 7 of the Institute of Civil engineers' Arbitration Procedure 1983. If that could not or should not be done the contractor was no longer able to invoke clause 18(2) and the sub contractor would be free to pursue a separate arbitration with the contractor under clause 18(1).

Lord Clyde observed that since clause 18(2) was clearly subject to different interpretations consideration should be given to a revision of its terms.