“This is an application by the defendant to stay these proceedings pursuant to section 9(1) of the Arbitration Act 1996 (“the 1996 Act”). However, that bland description does not accurately convey the plethora of issues and sub-issues which have arisen between the parties arising out of and connected with the stay application” (paragraph 1).

The court’s opening words in the quotation above give a succinct introduction to the complexities of this case which, at first sight, is simply a damages claim for nearly £6 million for remedial works resulting from the supply of defective concrete. However, the case actually raised a number of issues, including contract construction, course of dealings, whether there was an arbitration agreement and whether an adjudicator had jurisdiction to deal with the initial dispute. These complexities arose for the simple reason that the parties had incorporated two sets of conditions into the sub-contract in question, each of which contained a dispute resolution clause. When a dispute did arise, there was the additional complication of the parties failing to reach agreement as to which of the dispute resolution provisions applied.

Background

Costain (the “Claimant”) appointed Tarmac (the “Defendant”) to supply concrete for the construction of a safety barrier on a stretch of the M1 motorway in the East Midlands from junctions 28 to 31. The appointment was entered into via a sub-contract which incorporated the NEC3 Supply Short Contract conditions. The NEC3 Framework Agreement conditions also came into play by virtue of their incorporation into two framework agreements, out of which the sub-contract between the parties in this case arose. One of the framework agreements was set up by the Secretary of State for Transport (“SST”) for transport infrastructure projects and the Claimant became a party to this agreement in 2013 through a novation. The second framework agreement was set up by the SST (acting through the Highways Agency) in around March 2012 and was for the supply of concrete: the Defendant became a party to this agreement. When the SST appointed the Claimant for the M1 works, the Claimant in turn appointed the Defendant under a sub-contract to supply concrete for the works.

The sub-contract purportedly incorporated the NEC3 Framework Contract (2005) (the “Framework Agreement”) and the NEC3 Supply (Short) Contract (the “Supply Contract”) terms and conditions (both amended by “Z” clauses) together with additional contract documents. Clause Z21 (Appointment of Adjudicator) of the Framework Agreement gave either party the right to “refer a dispute to the Adjudicator at any time”. In contrast, clause 93.3(1) (Dispute Resolution) of the Supply Contract contained timescales for bringing and managing an adjudication, which included a time bar for bringing an adjudication. The Supply Contract also provided that the tribunal for resolving disputes that had not been settled through adjudication was arbitration. A dispute arose in relation to the carrying out and costs of remedial works required as a result of defective concrete. When the Claimant referred this dispute to adjudication, the adjudicator agreed with the Defendant that under clause 93.3 of the Supply Contract, the referral was out of time. Under clause 93.3, the next (and in fact final) stage in the dispute resolution mechanism was to take the dispute to arbitration. Contrary to clause 93.3, the Claimant responded by issuing proceedings in the TCC for a breach of contract claim for c. £6 million. The Defendant applied for a stay of the proceedings under section 9(1) of the Arbitration Act 1996 but the Claimant maintained that it had a case on the grounds that the sub-contract contained a further clause permitting adjudication “at any time”.

The first question for the court to consider was whether or not there was an arbitration agreement between the Claimant and the Defendant (i.e. did clause 93.3 of the Supply Contract apply). The court was quick to point out that “the burden is on the defendant to demonstrate the existence of such an agreement”. In its analysis, the court examined the body of case law on contract construction. Taking Rainy Sky[1] as its starting point, it held that a court should have regard to all of the relevant surrounding circumstances and where two conflicting constructions were presented, business common sense would prevail. In the subsequent case of Arnold v Britton[2], the court held that the language of the clause(s) in question should be carefully scrutinised as the parties had control over this aspect of the contract at the drafting stage. Further, commercial common sense could not be applied retrospectively to a contract – this was summarised as “the purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed”.

The court also extracted two principles for its analysis from cases which had considered contract construction where two or more inter-related sets of conditions came into play. In RWE N Power Renewables Limited v J N Bentley Limited[3], the court concluded that contract documents should complement not contradict each other and that only in the case of an extreme discrepancy should an order of precedence test be applied. The second principle was that of the “centre of gravity” from Trust Risk Group[4] in which the court held that where there are inter-related agreements, it is important to establish which agreement the dispute arises under in order to ascertain which clause applies to the claim.

Turning to the case at hand, the Claimant relied heavily on clause 10.1 of the NEC3 (included in both the Framework Agreement and the Supply Contract) which required the parties to act in a spirit of mutual trust and cooperation. The Claimant used this clause as a foundation for its argument that the provisions provided that the parties would agree on a case by case basis as to whether adjudication, arbitration or litigation would be the most appropriate dispute resolution mechanism.

The Defendant instead constructed an argument based on the “centre of gravity” principle and persuaded the court that any dispute in relation to the concrete would arise out of the Supply Contract. This view was upheld by the court which stated

“the defendant’s construction of the sub-contract agreement is the right one. It preserves the sub-contract agreement as a whole. It involves no artificial order of precedence or deletion of terms and […] produces a commercially sensible and workable result”.

The court confirmed that as the Claimant was not a party to the Framework Agreement it could not place any reliance on the clause contained within the same – this was a point of commercial common sense. The court was in no doubt that clause 93 was the correct dispute resolution clause meaning that the parties had the right to conclude the dispute via arbitration.

The Claimant attempted to persuade the court not to grant a stay of proceedings on the basis that clause 93 was “inoperative”, or in the alternative that the clause was “null and void”[5]. In its analysis, the court stated that “there is an unfettered right to a stay unless the party opposing the stay can bring itself within s.9(4)”. In the absence of much authority on section 9(4), the court shaped its analysis around the three reasons given in Russell on Arbitration, 24th Edition[6] which would render an arbitration agreement inoperative: (i) abandonment; (ii) repudiation; and (iii) estoppel.

The abandonment argument failed because the court considered that the parties had not agreed either expressly or impliedly to reject arbitration as a final mechanism for dispute resolution. The court did not find that the arbitration agreement had been repudiated because prior to the proceedings, the parties had acknowledged that arbitration was a form of dispute resolution open to them. Estoppel was also rejected by the court on the grounds that the parties did not reach a common understanding that they would not arbitrate, nor did the Defendant act in an unfair or underhand way so as to mislead the Claimant into thinking that it was waiving its right to rely on clause 93. On this basis, the court held that the arbitration agreement was not inoperative as none of the criteria were satisfied.

The court also decided that the arbitration agreement was not “null and void” for the purposes of section 9(4) of the 1996 Act. The Claimant presented the arguments that the adjudicator had not made a decision on costs in relation to the remedial works, lacked jurisdiction and was not properly appointed meaning that there was no trigger for arbitration. However, the court found that the adjudicator had been validly appointed both contractually and in terms of jurisdiction and had made a decision. Concluding its analysis, the court held that the arbitration agreement was not “null and void” and would not have been “null and void” even if the adjudicator had not returned a decision to the parties.

The court moved on to consider whether under the agreement, the claim in relation to the defective concrete should be referred to arbitration. A dispute had been referred to adjudication and although the adjudicator was still considering whether the referral was valid (because of the issue of the time bar), on a strict interpretation, the dispute had been referred which gave rise to the right to an arbitrator’s decision.

Decision

In summary, the four main issues decided by the court were as follows:

  • the arbitration agreement was valid within the meaning given in s.9(1) of the 1996 Act;
  • arbitration under s.9(1) of the 1996 Act was the correct dispute resolution mechanism for this claim;
  • the arbitration agreement was not inoperative pursuant to s.9(4) of the 1996 Act; and
  • the arbitration agreement was not “null and void” pursuant to s.9(4) of the 1996 Act.

Implications

Costain v Tarmac demonstrates the importance of drafting dispute resolution clauses in an explicit and unequivocal manner so as to ensure that the parties’ intentions are captured accurately. This extends to checking that dispute resolution clauses (and other clauses more widely) dovetail where more than one set of conditions are incorporated into a contract. The court on this occasion took the view that language and intention were as important as commercial common sense when it came to questions of contract construction and furthermore that commercial common sense should not be applied retrospectively. In its exploration of the “centre of gravity” principle, the court made the sensible point that in a suite of contracts where clauses are potentially at odds with each other, a dispute needed to be traced back to the contract from which it originated. In this way, the clause closest to the dispute will apply. The case also clarifies that even if an adjudicator does not make a valid decision due to lack of jurisdiction or a time bar, this will not preclude the parties from referring the dispute to a further tribunal such as arbitration if the dispute resolution mechanism if so permitted under the contract.