Lafarge Redland Ltd v Shephard Hill Ltd

A contractor invoking a subcontract term which replaces the subcontractor’s independent arbitration right with joint resolution under the main contract must initiate and progress the substituted procedure within a reasonable time. Time spent pursuing negotiations with the employer cannot justify delaying that procedure. Failure to proceed in time deprives the contractor of the right to rely on the replacement mechanism.

Where linked disputes are to be dealt with jointly, the majority considered that the subcontractor must receive a fair opportunity to participate in the determination of its own dispute. If the contemplated joint procedure fails without the subcontractor’s default, the subcontractor may pursue the independent arbitration provided by the subcontract.

The contractor employed the subcontractor to supply and lay asphalt for a road project. The main contract and subcontract contained separate dispute-resolution provisions. Clause 18(1) of the subcontract provided for arbitration between the contractor and subcontractor. Clause 18(2) allowed the contractor to require a subcontract dispute touching the main contract works to be dealt with jointly with the main contract dispute under clause 66 of the main contract.

After disputes arose, the subcontractor sought arbitration under clause 18(1). The contractor served clause 18(2) notices but delayed invoking clause 66 while negotiating with the employer. The recorder upheld the notices. The Court of Appeal reversed that decision and declared that the subcontractor could pursue clause 18(1) arbitration.

The House considered the time within which the contractor had to invoke clause 66 and, although unnecessary to the disposition, the nature of the joint procedure contemplated by clause 18(2).

1. Appeal dismissed unanimously. Per Lord Hope of Craighead, with all members of the House agreeing on the dispositive issue, exercise of the clause 18(2) option deprived the subcontractor of control over the initiation of arbitration. The contractor therefore had an implied obligation to initiate and progress the clause 66 procedure within a reasonable time.

2. A reasonable time was the time reasonably required to carry out the substituted procedure. The contractor could negotiate with the employer after initiating that procedure, but time attributable to negotiations intended to avoid clause 66 had to be disregarded. Negotiation was distinct from submitting the dispute to the engineer or arbitrator and could not justify delay. The contractor had consequently lost its right to resist arbitration under clause 18(1).

3. Lord Hope, supported by Lord Clyde and, subject to the separate procedural issue, Lord Millett, regarded an intention to invoke clause 66 as an implied condition of exercising clause 18(2). Lord Cooke of Thorndon and Lord Hobhouse of Woodborough preferred an objective analysis: subjective intention mattered only as evidence of repudiation, anticipatory breach or inability to perform. The difference did not affect the result because all agreed that the contractor’s delay was fatal.

4. On the non-dispositive question of procedure, Lord Cooke, Lord Hobhouse and Lord Millett formed the majority. Clause 18(2) contemplated separate disputes under separate contracts being dealt with jointly, ordinarily before the same arbitrator through concurrent hearings under rule 7 of the Institution of Civil Engineers’ Arbitration Procedure 1983. The subcontractor had to receive a fair opportunity to present its case. If the joint procedure failed without its default, arbitration under clause 18(1) again became available.

5. Lord Hope, with Lord Clyde, preferred the view that clause 18(2) envisaged only the main-contract arbitration, with the contractor presenting the subcontractor’s materials and the resulting decision or award binding the subcontractor by contract. Both approaches recognised that an arbitrator’s jurisdiction was contractual and could not bind a third party without an appropriate contractual foundation.

1. House of Lords: Dismissed the contractor’s appeal unanimously and left intact the Court of Appeal’s declaration that the subcontractor could pursue arbitration under clause 18(1).

2. Court of Appeal: On 11 December 1998, Auld and Chadwick LJJ and Sir Christopher Staughton unanimously allowed the subcontractor’s appeal. It declared that the subcontractor was no longer obliged to participate in the clause 18(2) procedure and could request appointment of an arbitrator under clause 18(1).

3. Recorder: On 22 May 1997, B J Knight QC held that the clause 18(2) notices were valid and rejected the subcontractor’s alternative challenges.