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Interplay between dispute provisions of NEC3 framework and supply contracts considered

It may not be the most snazzy title, but how best to described the intricacies of Coulson J’s judgment in Costain Ltd v Tarmac Holdings Ltd?

I could say it was all about Tarmac’s application to stay court proceedings to arbitration (under section 9 of the Arbitration Act 1996), or that the case turned on whether the grounds in section 9(4) (that the arbitration agreement was “null and void, inoperative, or incapable of being performed”) were made out. Either way, there is a lot in the 140 odd paragraphs to talk about.

Costain Ltd v Tarmac Holdings Ltd

In simple terms, Tarmac supplied the concrete for the safety barrier between junctions 28 and 31 of the M1 motorway. Costain was responsible for constructing the safety barrier (along with other infrastructure works on that stretch of the motorway), work that it sub-contracted to a specialist, Extrudakerb.

In October 2014, a defect was identified in the concrete. Thereafter, the parties spent much of 2015 discussing what to do about the defect and the scope of the remedial works. It culminated in Costain’s solicitor sending a pre-action protocol letter on 12 October 2015 and Tarmac’s solicitor sending a substantive reply on 26 November 2015. Prior to this reply, on 19 October 2015, Tarmac had offered to pay the reasonable costs of implementing “its own proposal for remedial work”.

It was in the letter of 26 November that Tarmac raised the issue of time and, more particularly, the fact that Costain was out of time under clause 93. I’ll come back to clause 93 in a moment.

Taking the time-bar point seemed to come as a surprise to Costain’s solicitor, who argued that under clause Z21, a dispute could be referred to adjudication “at any time“.

As the parties disagreed on this point, Tarmac referred the question to adjudication. In his decision dated 5 February 2016, Mr Hough agreed with Tarmac. Clause 93 applied and Costain was out of time because the dispute had arisen on 19 October 2015 and Costain only had four weeks to refer the dispute thereafter, which it had not done.

Framework agreements and the sub-contract

Tarmac and Costain had each entered into a framework agreement:

  • Costain’s framework agreement was with the Secretary of State for Transport and Serco. It was dated February 2010 and incorporated the NEC3 Framework Contract (FC) conditions, as amended by certain Z clauses.
  • Tarmac’s framework agreement was also with the Secretary of State for Transport, acting through the Highways Agency. It was dated March 2012 and also incorporated the NEC3 FC conditions, as amended by certain Z clauses.

In September 2013, Costain was appointed to carry out the M1 motorway works and, in February 2014, it entered into a sub-contract with Tarmac. That sub-contract incorporated the NEC3 FC and the NEC3 Supply Short Contract (SSC) conditions.

Dispute resolution clauses

The framework agreement included clause Z6.4, which gave the parties a right to adjudicate, and clause Z21, which dealt with the appointment of an adjudicator. The ICE was named as the ANB and a dispute could be referred “at any time”.

Clause 93 of the NEC3 SSC (which was unamended) dealt with disputes. Either party could refer a dispute to the adjudicator provided that (under clause 93.3(1)):

“… the Party notified the other Party of the dispute within four weeks of becoming aware of it and between two and four further weeks have passed since the notification.”

Importantly, that clause also contained a proviso:

“If a disputed matter is not notified and referred within the times set out in this contract, neither Party may subsequently refer it to the Adjudicator or the tribunal.”

The sub-contract also named the ICE as the ANB and arbitration as the “tribunal”, using the ICE Arbitration Procedure 2006.

Clause 93.4 dealt with when a dispute could be referred to the “tribunal”. Importantly:

“… neither Party may refer a dispute to the tribunal unless they have notified the other Party of their intention to do so not more than four weeks after the end of the time allowed for the Adjudicator’s decision.”

So, that sets the scene. There were two framework agreements, a main contract and one sub-contract incorporating two sets of contract conditions, including two sets of dispute resolution clauses. One allowed for disputes to be referred to adjudication at any time (clauses Z6.4 and  Z21), the other didn’t (clause 93).

At first blush, this looks like it may confuse parties. It certainly has the potential to do so. Perhaps that is why, when it came to construing what the parties had agreed, the judgment deals with it under a heading of “Different clauses dealing with a similar topic”.

“Different clauses dealing with a similar topic”

Both parties argued that the two dispute resolution clauses could operate side-by-side, but they differed in how they worked in practice:

  • Costain said that, when read together, the clauses allowed the parties to adjudicate, arbitrate or litigate. A party could choose which forum it thought was the most suitable for the dispute that had arisen and the sub-contract’s mutual trust provision (in clause 10.1) meant that when a dispute arose, the parties would liaise and agree which route to adopt.
  • Tarmac argued that the two sets of conditions governed two different aspects of the relationship between the parties. The framework agreement covered issues about things like quotations, which would be governed by clause Z6.4, whereas disputes over the supply of concrete would be governed by clause 93.

Coulson J agreed with Tarmac’s submissions and suggested that the clauses complemented each other. This meant that a broad dispute resolution clause applied to the framework agreement and a more restrictive clause applied to the sub-contract. He went on to make a number of points, including that he:

  • Said that Costain’s interpretation was unworkable and would create uncertainty. He noted the suggestion that the parties would rely on clause 10.1 and agree which route to go, but queried what would happen if they couldn’t agree, for example if one party wanted to adjudicate and the other wanted to litigate. Would that result in parallel dispute resolution procedures before different tribunals? It would be a “recipe for uncertainty and confusion”, something that would not be lessened by including clause 10.1 in the contract.
  • Looked at what would happen if the framework agreement was allowed to “trump” the time bar in clause 93, suggesting that it would render clause 93 “nugatory” and would nullify its effect.
  • Noted that Costain wasn’t actually a party to Tarmac’s framework agreement (its “only role” was being named as a contracting body). That meant that Costain was relying on clauses (clauses Z6.4 and Z21) that were in a contract that it wasn’t a party to. As such, it would be “contrary to commercial common sense” if those provisions were allowed to take precedence over clause 93, which was in the parties’ sub-contract.

I’m sure that we have all wondered from time-to-time about how framework agreements and the contracts that sit under them interact. I think Coulson J has made it pretty clear in this judgment what role each contract plays and which contract governs the parties’ relationship and any disputes that may result. Clause 93 applied to disputes about the supply of concrete because that is what the parties’ sub-contract dealt with. Nothing more, nothing less.

The Construction Act 1996 and contractual adjudication

I also think there is an interesting element arising from this judgment that is easy to overlook. It gets a brief mention in paragraph 51 where Coulson J notes that:

“… the clause 93 time bar is clearly contrary to the statutory scheme.”

As we all know, the “delivery to site of… materials” is not a “construction operation” (section 105(2)(d)), so the contract for the supply of concrete could not be a “construction contract” (section 104) (there is no suggestion that Tarmac was doing more than delivering the concrete to site). In contrast, although we don’t know anything about the terms of Costain’s main contract with the Secretary of State to carry out infrastructure works on the M1 motorway, I’d be very surprised if it wasn’t carrying out “construction operations” within the meaning of section 105(1)(b).

So, although it may be “monstruous if ‘you lose your rights if you don’t use clause 93′”, as Costain argued, that is what the parties agreed in the sub-contract. Arguably, by including a contractual adjudication clause, the parties were agreeing to limit their rights to adjudicate and then arbitrate. They had shut out the courts entirely, which is their right.

Finally, the adjudicator decided when the parties’ dispute started (on 19 October 2015) and when the time bar kicked in, some four weeks later. Whether he got the dates right or not doesn’t matter, as he was answering the question he was asked to decide. Since Costain’s claim for £5.8 million has been stayed to arbitration, these will now be for the arbitrator to decide (when one is appointed).

I for one think that arbitration could be pretty interesting, as Coulson J said:

” I can see that there may be all sorts of potential arguments arising in respect of clause 93. Is it a condition precedent? What effect does it have on an ongoing dispute or ongoing defects? What is the link between the time bar and the precise formulation of a claim? These may all provide fertile ground for debate between the parties. But none of them is a matter for the court on this application.”

Perhaps I should check whether I’m on the ICE arbitrator panel…

MCMS Ltd Matt Molloy

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