Wheels within wheels

The complexities of framework agreements with linked subcontracts, often used in large infrastructure projects, can be fertile ground for equally complex disputes. The danger is that it is all too easy to end up having a dispute about how the contract works as opposed to the substance of the claim itself. The decision in Costain Limited vs Tarmac Holdings Limited, heard on 28 February this year in the Technology and Construction Court, provides a good example of this tendency.

At first sight this was an application by Tarmac to stay the court proceedings commenced by Costain pursuant to Section 9 of the Arbitration Act 1996. Section 9 states that if a contract contains a valid and operative arbitration clause then the dispute between parties must be resolved by arbitration and any existing court proceedings are stayed. As the judge pointed out, 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 concerned with the stay application”.

The dispute between the parties was actually about defective concrete supplied by Tarmac to Costain in relation to a new safety barrier between junctions 28 to 31 on the M1 motorway. This decision, however, was concerned solely with how the dispute resolution process operated. The issues arose out of what appeared to be contradictory dispute resolution provisions in the contract. Broadly, the contract comprised two documents: the NEC3 Framework Contact and the NEC3 Supply Short Contract. Tarmac contended that Costain had failed to comply with the time bar provisions in the supply contract. Consequently Costain was barred from making a claim for the difference between the cost of the remedial works which Tarmac had accepted and the cost of the more extensive remedial works proposed by Costain. Tarmac referred that issue to adjudication and the adjudicator agreed with Tarmac’s arguments and decided that Costain was out of time to pursue the claim.

The dispute was actually about defective concrete supplied by Tarmac to Costain. This decision, however, was concerned solely with how the dispute resolution process operated

Subsequently Costain issued proceedings in court seeking to recover a claim of just under £6,000,000 by way of damages for breach of contract. Tarmac sought to stay the court proceedings to arbitration on the basis that there was an arbitration provision in the supply contract. Costain resisted that application, pointing out that the contract included another clause (in the framework contract) which allowed for adjudication “at any time” and made no reference to arbitration. In addition, the framework contract contained a reference to the jurisdiction of the English courts. Consequently, Costain maintained that the dispute resolution provision in the supply contract did not actually apply at all to this dispute. Costain also raised issues about the course of dealing between the parties’ solicitors and about abandonment, repudiation and estoppel and, for good measure, argued that the arbitration agreement was in any event “null and void” because the adjudicator exceeded his jurisdiction and, without a valid adjudication decision, there was nothing to trigger the arbitration agreement.

The first point to consider was whether there was an arbitration agreement at all. Costain suggested that it was open to the parties either to adjudicate, arbitrate or litigate depending on which route they considered was most appropriate. Tarmac argued that there were two sets of contract conditions relating to two separate aspects of the relationship between the parties. The framework contract would relate to any issues that arose concerning the seeking of a quotation for work and the provision of that quotation, whereas any dispute as to the supply of the concrete itself would be governed by the adjudication/arbitration clause in the supply contract. The judge agreed with Tarmac’s approach. The two parts of the contract had been carefully drafted and the agreement itself expressly made plain that it incorporated two separate sets of terms and conditions. Consequently, there was an operative arbitration clause contained in the supply contract which would apply, after adjudication, to issues in relation to the supply of the concrete itself, which was in fact the real issue in dispute.

The complexities that arose in this case may be unavoidable, reflecting the reality of large infrastructure projects

The next question was whether the dispute was a matter which could be referred to arbitration. While the main issue between the parties was in relation to the defective concrete, the adjudicator’s initial decision had been about whether it was too late for Costain to make the claim at all. The judge decided that a dispute about the adjudicator’s decision, even if therefore about the process rather than the substance of the claim, should be referred to arbitration subject to confirmation as to whether the arbitration provision itself was operative. As to that point, having reviewed the relevant law in relation to Section 9(4) of the 1996 Arbitration Act (of which there is in fact very little) the court came to the conclusion that the arbitration agreement was valid and operative and that, accordingly, the current court proceedings should be stayed to arbitration to consider the issue of whether Costain was out of time in relation to its original adjudication.

The complexities that arose out of the contractual arrangements examined in Costain vs Tarmac may be unavoidable, reflecting as they do the reality of such large infrastructure projects. The decision is helpful, however, as a reminder that there is nothing inherently unworkable in having entirely separate dispute resolution procedures contained within one contract dealing with separate aspects of the parties’ working relationship.

Simon Lewis is a partner in the construction and engineering team at Bond Dickinson