Lafarge Redlands Aggregates Limited v. Shephard Hill Civil Engineering Limited

This case concerns the construction of clause 18(2) of a standard form sub-contract (the "Blue Form") read with clause 66 of the main I.C.E. contract and the attendant arbitration machinery. The court held that, as an implied condition of relying on clause 18(2), the contractor must invoke the clause 66 procedure within a reasonable time and must not treat negotiations with the employer as a permissible reason to defer that invocation; time spent negotiating is to be excluded when assessing whether the contractor invoked the clause within a reasonable period. The House of Lords therefore dismissed the contractor's appeal because it had failed to take timely steps to invoke clause 66.

The Lords also considered the nature of the "joint" procedure envisaged by clause 18(2). There was a difference of view: some Lords accepted that clause 18(2) envisages a joint or tripartite resolution using the Institution of Civil Engineers Arbitration Procedure (rule 7 concurrent hearings) and thus a procedure in which the subcontractor can participate, while others preferred an interpretation under which the contractor must present the subcontractor's case within the main-contract procedure (the single-arbitrator approach). The decision on appeal rested on breach for delay rather than resolving that interpretative divergence finally.

Background and parties.

The main contract for construction of the A133 bypass was between Essex County Council (employer) and Shephard Hill (contractor) and contained an amended clause 66 (I.C.E. Conditions) providing for engineer determinations and, failing that, arbitration. The contractor sub-contracted asphalt works to Lafarge Redlands (sub-contractor) under a Blue Form sub-contract which included clause 18. Clause 18(1) provided for arbitration between contractor and sub-contractor; clause 18(2) gave the contractor a power to require disputes touching or concerning the sub-contract works to be dealt with "jointly with the dispute under the main contract in accordance with the provisions of clause 66".

Procedure and procedural history.

• The sub-contractor served notices under clause 18(1) seeking arbitration; the contractor served notices under clause 18(2) requiring joint dealing and said it wished to negotiate with the employer rather than invoke clause 66 immediately.

The recorder held the contractor's 18(2) notices valid. The Court of Appeal allowed the sub-contractor's appeal and held the sub-contractor free to pursue arbitration under clause 18(1). The contractor appealed to the House of Lords.

Nature of the claim and issues before the House of Lords.

(i) The remedy sought: the sub-contractor sought declarations that the contractor's clause 18(2) notices were invalid as the contractor had not proceeded to invoke clause 66 within a reasonable time and thus could not deprive the sub-contractor of the right to arbitrate under clause 18(1).

(ii) The issues framed: whether service of a clause 18(2) notice imports an implied obligation on the contractor (a) to have a present intention to invoke the clause 66 procedure and (b) to take timely steps to invoke the clause 66 procedure (i.e. within a reasonable time); and what is the nature of the procedure required by clause 18(2) (tripartite arbitration under the I.C.E. Procedure, a single arbitrator bound to apply findings, or the contractor representing the subcontractor's case before the main-contract machinery).

Court's reasoning.

The House of Lords concluded that it is an implied condition of the contractor's exercise of the option in clause 18(2) that the contractor intends and will invoke the clause 66 procedure. Time spent in negotiations aimed at avoiding clause 66/arbitration is not a proper justification for delay; such negotiation time must be excluded when assessing whether the contractor invoked clause 66 within a reasonable time. The question of what is a reasonable time is one of fact in each case. Because the contractor in this case allowed more than a reasonable time to elapse by deferring invocation while negotiating, it had no answer to the sub-contractor's case and the contractor could not rely on its clause 18(2) notices.

On the interpretative point, the Lords wrote at length. Some preferred an interpretation that clause 18(2) contemplates a single arbitration process in which the contractor presents the subcontractor's case to the main-contract engineer/arbitrator and keeps the subcontractor informed; others preferred that clause 18(2) envisages a genuinely joint or tripartite dealing (using the I.C.E. Arbitration Procedure's power to order concurrent hearings) so that the subcontractor can participate. The House did not need to resolve that divergence to dispose of the appeal.

Appeal dismissed. The House held that service of a notice under clause 18(2) carries an implied condition that the contractor will invoke and pursue the clause 66 procedure within a reasonable time; time spent negotiating to avoid clause 66 is not a permissible cause of delay. Because the contractor failed to invoke clause 66 within a reasonable time, it could not rely on its clause 18(2) notices. The Lords also provided authoritative commentary on the differing possible constructions of clause 18(2) (joint/tripartite arbitration under the I.C.E. Procedure versus contractor-led presentation to the main-contract machinery) but the decision turned on breach for delay.

Recorder (B.J. Knight Q.C.) 22 May 1997: held the contractor's clause 18(2) notices valid. Court of Appeal (Auld and Chadwick L.JJ. and Sir Christopher Staughton) 11 December 1998: allowed the respondent's appeal and declared the respondent entitled to require arbitration under clause 18(1). House of Lords (Appellate Committee) 27 July 2000: appeal dismissed ([2000] UKHL 46; [2000] 1 WLR 1621).