Background

Pursuant to a sub-contract Costain engaged Tarmac to supply concrete for a safety barrier on the M1 motorway. The sub-contract incorporated the NEC3 Supply Short Contract Conditions (the “Supply Conditions”) and the NEC3 Framework Contract Conditions (the “Framework Conditions”).

Each set of conditions related to a different aspect of the parties’ contractual relationship. The Supply Conditions related to the supply of concrete and the Framework Conditions related to the quotations received.

Both the Framework Conditions and the Supply Conditions had differing dispute resolution clauses. The Framework Conditions contained a dispute resolution provision that permitted adjudication “at any time”, a reference to the jurisdiction of the courts of England and Wales and was silent on arbitration.

The Supply Conditions contained a restricted right to adjudicate within a specified time frame and, if one or more parties were dissatisfied with the adjudicator’s decision, a right to arbitrate (clause 93.3).

Both the conditions of the Framework Conditions and the Supply Conditions included the requirement at clause 10.1 that the parties shall act “in a spirit of mutual trust and cooperation”.

It was common ground that the concrete was defective but there was a dispute between the parties as to the scope of the appropriate remedial works and the associated costs. Tarmac argued that because Costain failed to comply with the provisions of clause 93.3 it was time barred from making a claim for the additional monies relating to the remedial works. Costain disputed this.

The dispute was referred to adjudication and the adjudicator found in favour of Tarmac. By this stage, the parties had engaged the Pre-action Protocol. Costain then issued proceedings and sought to recover circa £6m for the remedial works.

Tarmac argued that the proceedings should be stayed on the basis the sub-contract included an arbitration agreement. Costain argued that there was no arbitration agreement, or in the alternative that the arbitration agreement was inoperative.

Decision

Taking each of the parties’ arguments in turn:

Tarmac’s argument

The sub-contract contained an arbitration agreement.

HHJ Coulson reaffirmed the usual rules relating to interpretation and construction of contracts. He considered the conflicting provisions of the Framework Conditions and the Supply Conditions and found that, although there were two sets of conflicting conditions, they worked to govern different aspects of the parties’ relationship. He said that only if there is an irreconcilable discrepancy is it necessary to resort to some sort of order of precedence in order to make sense of the contract. It is not appropriate for a court to construe a contract by picking through its terms; working out what might still be applicable at the date of the contract and what might relate to obligations which had been performed. Further a court will not correct a bad bargain.

The Framework Conditions related to the offer and acceptance of the quotation and the Supply Conditions related to the supply of concrete. The issue in dispute therefore determines which set of conditions apply. Here it related to the supply of defective concrete and therefore the dispute mechanism in the Supply Conditions applied. To that end, there was an arbitration agreement and the time bar was effective.

Costain’s alternative argument

The arbitration agreement was inoperative by either virtue of estoppel or abandonment.

Section 9(4) of the Arbitration Act states that an arbitration agreement would be inoperative if it has been repudiated, abandoned and both parties accept this, or else if the party is precluded by estoppel.

HHJ Coulson found that:

  • even though the parties engaged the Pre-action Protocol at no point did Tarmac abandon its rights to arbitrate
  • there was no case for estoppel either by representation or convention.

Costain further argued that even if Tarmac had not done anything which “crossed the line” so that estoppel could be relied upon, Tarmac was in breach of clause 10.1 of the sub-contract by failing to point out to Costain that it was going to be time barred from bringing the adjudication claim.

Importantly, Costain knew what the dispute resolution clause said and it knew of the time bar. Costain’s mistake was thinking it could rely on the Construction Act and its right to adjudicate at any time, not realising that the contract did not fall within the definition of a construction contract as it related to the supply of material.

HHJ Coulson considered what duty clause 10.1 imposed on Tarmac in this context. He drew parallels with a duty of good faith, and referred to Keating which says that parties must act in a way that is: “honest, fair and reasonable, and not attempt to improperly exploit the other.”

Taking each in turn Coulson was reluctant to define the term “fairly” saying that this was too subjective and would be difficult to police.

Coulson concluded that Tarmac had not breached clause 10.1, and in relation to the obligations imposed by clause 10.1 “at its highest” the obligation meant that:

“the defendant could not do or say anything which lulled the claimant into falsely believing that the time bar in clause 93 was either non-operative or would not be relied on in this case. For this purpose, I am also prepared to accept that this obligation would go further than the negative obligation not to do or say anything that might mislead; it would extend to a positive obligation on the part of the defendant to correct a false assumption obviously being made by the claimant, either that clause 93 was not going to be operated or that the time bar provision was not going to be relied upon. But beyond that, on my view of clause 10.1, there can have been no further obligation, because otherwise the provisions would have required the defendant to put aside its own self-interest. ”

Even though clause 10.1 of NEC3 is quite often overlooked (mostly because there is no definitive case law on what it means in practice), this case shows that the Courts have an expectation relating to the parties’ conduct in complying with this clause and it will be scrutinised accordingly. Although parties are not required to act against their own self-interest they must not do anything to mislead.